Thursday, April 30, 2009

WSJ: US Now Swimming in Natural Gas

Natural gas prices have hit their lowest levels since 2002, because, well, there's just an awfully lot of it available right now.

The Wall Street Journal reports that years of higher natural gas prices this decade has spurred more drilling and innovation, resulting in a production rise of 11% over the past two years in natural gas.  Amazing how "smart" markets can be when they're given the chance.

Just as the cure for high prices is high prices, we try to remind ourselves that the opposite is true as well, as low prices are now causing producers to scale back their efforts to bring new demand online.  

Natural gas prices are hovering just below the important $3.50 mark, which is widely regarded at the "shut in" price for "The Natty" - the point at which drillers are better off going home than drilling for more gas.

How long will the current glut last?  I've read smart views and people on both sides of the debate - some think natural gas will continue to slump, others believe a pop is a decent specualtion.  

Remember that demand is 1/2 of the supply/demand equation, so a lot of the natural gas friendly initiatives described in the WSJ piece could certainly be bullish for prices if they come to fruition.

Source: Wall Street Journal

Wednesday, April 29, 2009

Jim Rogers Interviewed by GoldSeek Radio

Legendary investor Jim Rogers was interviewed by Chris Waltzek of GoldSeek Radio a few days ago.  Here's a link to the audio interview, and it's also available on iTunes.

Jim begins on hour #2.

My notes from items that caught my ear:
  • The producers of "real goods" are going to rule the world for the next couple of decades (farmers, etc)
  • Has sold all of his emerging markets except for China
  • If the world gets better, commodities will be the leaders - and if it doesn't, hard assets are still the place to be, because governments are printing money
  • Still waiting to short the long-term US bond - it's the "last bubble" he sees
  • Predicts double-digit interest rates in the future for US
More recent Jim Rogers coverage:

Well Capitalized Banks? What a Bunch of BS

So the banks are saying they are all well capitalized, healthy, and raring to go for a new bull market.  And if you believe that, we've got some great swampland in Florida to sell you.  Casey Research's Olivier Garret reads between the lines, and the story reads about as you'd expect - more BS coming from our government and the banks.

Are Banks Going Bankrupt? "NO!", say banks
By Olivier Garret, CEO, Casey Research


On April 21, Treasury Secretary Timothy Geithner said the “vast majority” of U.S. banks have more capital than needed.

“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said in testimony to a congressional oversight panel on the government’s financial rescue program.

Geithner’s remarks come on the heels of a surge in reported quarterly profits by the big banks.

One of these banks, Bank of America (BAC), the world’s second largest in terms of market capitalization, booked a first-quarter net income of $4.247 billion – 6% more than it made in all of 2008.

So is this the turnaround Geithner et al. have been willing to beggar our nation’s future for?

Before calling your broker and placing a big order for bank stocks based on all this “good” news, it might be prudent to answer a couple questions first.

For starters, just where did all this income come from? And has credit quality really improved?

The answers to both can be found buried in a company press release bearing the encouraging title “Bank of America Earns $4.2 Billion in First Quarter.”

I’d like to draw your attention to the four most telling excerpts from this release.
  1. “Equity investment income includes a $1.9 billion pretax gain on the sale of China Construction Bank (CCB) shares.”

  2. “Noninterest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.”

  3. “Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened.”

  4. Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.”
Now we see that out of its $4.2 billion in profits, a total of $4.1 billion came from a one-time sale of CCB stock and marking up Merrill’s book of mortgages. If you subtract these one-time gains from net income and include preferred dividends, Bank of America actually lost $1.286 billion.

As far as credit quality goes, I think number 3 above makes the situation as clear as can be.

Importantly, Bank of America is not the only big bank engaged in accounting sleight of hand.

As The New York Times article “Bank Profits Appear Out of Thin Air” by Andrew Ross Sorkin points out:

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JP Morgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

So what’s the takeaway?

When the Treasury secretary tells you banks are well capitalized and you read in the press that financial institutions have turned a corner, don’t buy it. And don’t buy the stocks of these companies either.

These days, smart investors are well advised to carefully watch the investment as well as the political landscape... because Washington’s movers and shakers’ influence on the markets has never been greater. The Casey Report investigates and analyzes those influences and trends – to find the best investing opportunities with maximum gains. You can try it completely risk-free – check out our 3-month trial with 100% money-back guarantee. Click here to learn more.

Tuesday, April 28, 2009

Even Polish Leader Piling on UK for Wreckless Spending

Donald Tusk, Prime Minister of the historical bastion of economic and personal freedom in Europe - Poland - told Gordon Brown that he can't spend his way out of the UK's economic downturn.

"All I can say is that the Polish government, at a time of financial crisis, behaved with full responsibility in terms of public funds and the level of budgetary deficit," said Tusk.  "The assumption that we adopted as the method to fight against the financial crisis is not to multiply expenditures but rather to increase responsibility for public funds," he said.

What a novel assumption Tusk makes - one that could only come from a country that was mired in communism for much of the 20th century.  And so one of the largest trends in economics continues - that of communist or formerly communist nations teaching Anglo Saxon countries how capitalism actually works

Tusk is not alone in laying the smackdown on Gordon Brown - if you haven't seen it already, check out this video of Conservative Brit Daniel Hannan laying the smack down on Brown.

Enjoy reading articles about Gordon Brown's economic incompetence?  Here are a few more gems for you:

Doug Casey on Government Motors

Great essay by Doug Casey, as he muses on the debacle that is Government Motors.  Here's the start of his piece, and the rest can be found on DailyWealth.com, which republished the piece over the weekend.


An Inside Look at One of the Biggest Scams in America
By Doug Casey

I don't feel I've said enough about the class of professional American corporate executives in the past, partly because it's impossible to say enough about this generally despicable class of empty suits.

Once upon a time, most large companies were run by the men who founded them, and those men were almost always the controlling shareholders. Their interests were aligned with those of the other shareholders.

Few, if any, of today's execs in big corporations have major share positions (and if they do, it's strictly because they were granted cheap options), and few, if any, have actual technical expertise with the products their companies produce.

Take Rick Wagoner, the ex-CEO of GM. This suit basically has zero interest in cars; he's an expert mainly in the infighting and bootlicking it takes to climb a corporate ladder. He's a political hack, like all the managers that preceded him for the last 40 years. And he's typical of top management in most large public companies.

Read the rest of Casey's article here.


Also from Doug Casey:

Monday, April 27, 2009

Ayn Rand Spinning In Her Grave; Book Sales Skyrocket

Ayn Rand, were she with us today, likely would not be a fan of the increasing creep of socialism through society at large.  

Though maybe she wouldn't completely mind, as her book sales have taken off through the roof, and that must have Rand, a capitalist's capitalist, smiling from ear to ear.

CNN reports that 2009 sales of Atlas Shrugged, Rand's most famous novel, have already topped sales for the entire 2008 year.  I can imagine that anyone with a libertarian bone in their body, who has not yet read Rand's classic work, is scrambling to see what eventually becomes of the socialist scoundrels and libertarian heros in Rand's classic.  

If you haven't yet read Atlas Shrugged - you should.  Rand does a masterful job of painting a vivid picture of why capitalism works, why regulation weights it down, and what happens when the regulators begin to outweigh the productive folks.  And in today's environment, where you can't turn on the news without seeing some political schmuck who could pass for one of Rand's antiheroes, this type of perspective is invaluable.

The novel is quite lengthy at about 1,100 pages, and I did find myself wanting the pace to pick up at times, but I tell anyone who asks me if they should read it...yes, it really is a must read for anyone who believes in hard work, entrepreneurship, and freedom.

So I leave you with one question...

Who is John Galt?


Sunday, April 26, 2009

Jim Rogers in BusinessWeek - April 14, 2009

Our favorite investor, Jim Rogers, was recently interviewed by BusinessWeek magazine - he's been in the media quite a bit recently, plugging his new book A Gift to My Children: A Father's Lessons for Life and Investing, which is scheduled to be released this Tuesday, April 28.

Here are a few of my favorite excerpts below - and you can read the whole piece on BusinessWeek.com.

On diversification:

"Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued [for making bad investment choices for clients]. Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket."

On commodities:

"If the world economy is going to revive, commodities are going to lead it back up. If the world economy is not going to revive, commodities are still the place to be—especially with governments printing so much money. Look at the 1970s. The world economy was in the tank, but commodities did very well. We have supply constraints. Oil production is declining."

"The prices historically are still very depressed, compared with most other commodities. I bought all commodities recently, but I probably bought more agriculture than anything else."


More recent coverage of Jim Rogers:
Receive our Jim Rogers updates on Twitter: https://twitter.com/commoditybull

How Economic Data Suprises Can Influence the Stock Market

William Hester from Hussman Funds put together an excellent analysis about how surprises in key economic data can drive the stock market - both up and down.

As you might think, the stock market goes up when economic data comes in better - or in the current case, less bad - than expected.  And vice versa.

The most interesting takeaway for me was the lack of trending in these economic data suprises.  According to Hester, expectation levels are adjusted quickly, leaving a lot of room for disappointment (and investment losses) when, say, economic suprises to the upside do not continue to delight.

Hester concludes that the major risk for investors in the current environment is when the broader market is overbought, and follow up economic data is not able to support the generally supported rosy outlook.

If you think, as we do, that this is just a bear market rally, be very careful with your long positions, and don't be afraid to get out of positions on rallies.  This is not a time nor place to buy and hold.

China Admits It's Been Secretly Stockpiling Gold

On Friday, China admitted to something it's long been suspected of - secretly stockpiling gold. 

Of the countries that disclose their gold holdings, China is now ranked fifth in the world, ahead of the Swiss, the former beacon of a solid currency.

Since 2003, China has increased it's gold holdings by 75%.  Over the same time period, the Chinese have been gradually moving their foreign reserves out of US assets.

I can't think of any reason why these trends would reverse themselves anytime soon.  And apparently, neither can traders, as they bid gold back up above $900 on the news.

There's probably a decent chance any gold the IMF sells will never hit the market, as the Chinese may be waiting to gobble it up.

Sugar Futures Rally, OJ Takes a Breather - This Week In Commodities

Sugar Futures Surge to a 6-Month High

Sugar futures rallied nearly 4% on Friday, over half a cent, to close the week at 14.18.  Looks like we've got a new breakout to the upside!

Sugar futures continue their steady climb.  (Source: Barchart.com)

The market continued to focus on the news that India may turn into a net importer of sugar this year.  Indian production is falling to a 4-year low, which, surprise surprise, is spurring prices up.  Don't worry though, Indian politicians are on the scene, with rhetoric and threats of banning futures trading to "halt" this price rise - ha!  

Also bullish for sugar is continued strength in oil prices, which means Brazil will use more of its sugar for fuel.  Last report I recall reading had Brazilian ethanol profitable at roughly $50 oil, so that's the number I keep an eye on.

Finally demand for sugar is still projected to outpace supply this year, so we've got some strong underpinnings for a sustained rise in sugar in the months to come.  


OJ Takes a Breather

Orange juice futures took a bit of a breather this week.  Appears to be just a technical correction and profit taking, as I was not able to find any fundamental news to challenge our initial hypothesis for going long OJ.

Orange juice cooled off this week.

Other Commodity and Economic News

Current Futures Positions

Rolled the May contract over to July earlier in the week.  Other than that, not much new. 

Thinking about adding to OJ, sugar positions on further strength.

Date Position Qty Month/Yr Contract Entry Last Profit
04/08/09  Long  1 JUL 09 Orange Juice 81.95 85.00 $457.50
02/27/09  Long  1 JUL 09  Sugar #11     13.79  14.12 ($672.00)

Net Profit/Loss On Open Positions $1,286.30

Current Account Value: $26,020.69

Cashed out: $20,000.00
Total value: $46,020.69
Weekly return: 0.1%
2009 YTD return: -48.8% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Saturday, April 25, 2009

The Snowball Effect of Agricultural Subsidies in America

The folks at Reason TV recently put together an excellent 8-minute video about agricultural subsidies in America, from their roots in the Great Depression, to their effects today on commodity prices and economies around the world.

As a commodities trader and/or investor, it's extremely important for you to be familiar with these subsidies.

I should warn that you may get a little riled up and enraged in exploring the absurdity of these subsidies, and the collective ignorance of the politicians who allow them to continue.  



Just be sure to regather your personal Zen before trading reopens on Monday. While agricultural subsidies are obviously complete bullshit, their existence, and more importantly, future changes to them, can have drastic effects on commodity prices, and hence our trading. So it's important that we anticipate their effects with a clear head.

For example, if there was a real chance that cotton subsidies could be reduced or eliminated in the US, you can believe that the futures markets would quickly take this fact into account, and you'd see cotton futures prices start to really take off.

And if you want some cocktail party fodder for riling up any liberals in your life - higher cotton prices would indeed help many poor Africa nations, whose farmers are not cost competitive today because they don't have a government behind them printing money and subsidizing their farming.  So there you go - we can profit by speculating on cotton, and also help the poor kids in Africa.  

Yes we can!

Friday, April 24, 2009

Dennis Gartman's Thoughts on China

Legendary trader Dennis Gartman shares his latest thoughts on the Chinese economy, as he commends the Chinese government for getting out of the way of the private sector, cutting taxes, and letting entrepreneurs do their thing.

Contrast this with Washington's socialist policies, and you may start to look longingly across the Pacific. How ironic - the "commies" have become the capitalists.

This Gartman piece is courtesy of The Daily Crux, a website I'd highly recommend you check out. It's put together by the sharp investment guys at Stansberry & Associates, who I quote in this space quite a bit.

Ed. Note - I just came across Dennis Gartman's Rules of Trading over at Market Folly, an excellent blog/resource.

How to Detect Counterfeit Gold Coins

The race is on to acquire gold bullion while the governments of the world unite to print money as fast as they can.  But unfortunately all bullion is not created equal.  You need to take the necessary steps to protect yourself from being duped with counterfeit gold - so please check out this informative piece, courtesy of Casey Research's Doug Hornig, on how you can take the necessary precautions to assure your gold is indeed real.

All That Glitters is NOT Gold – the truth about counterfeit gold

By Doug Hornig, Editor, BIG GOLD

The Chinese Fake It

You probably remember movies about the Old West, wherein a shady-looking character would offer to exchange a gold coin for a horse, and the seller would bite down on the coin to verify its authenticity. That was about all you could do if you lacked proper assaying equipment and had to make a snap judgment: depend on your teeth to tell you whether the metal in your hand was sufficiently soft to be genuine gold.

The bite test is actually a pretty good one since gold, despite being among the heaviest metals, is also very soft. If you chomp down and shatter a tooth, it ain’t gold. But before you go munching on your coin collection, you might want to ask yourself, why bother?

Well, because of the Internet. While the Net has become an indispensable resource and we’d never want to return to the days when basic research meant a long day in the library, it also has the ability to stir up a hornet’s nest of concern at the drop of a stick.

One such hornet release followed the recent publication of a three-part series by Coin World, dealing with the subject of coin counterfeiting in China, where it’s quasi-legal. Instantly, the Web was buzzing with the worries of bloggers and eBay shoppers, and the pontifications of pundits about this dire threat.

Before we got too worked up about it, first thing we did was carefully read the source material. Yes, the Coin World articles raise the issue, and they feature an in-depth interview with one Chinese counterfeiter, although that’s not what he calls himself. He’s a proud artisan who produces replicas.

Of what? As it turns out, it’s primarily copies of ancient Chinese coins, which are sold to tourists. A few fake U.S. silver dollars are put up each week on eBay, but they are required to carry a Replica stamp.

Do all Chinese counterfeiters abide by this regulation? Perhaps not. But eBay has always been a place where caveat emptor rules, so the best policy would probably be simply to avoid coin purchases from China.

Problem Areas

Next, we consulted with our favorite dealer, asking if they come across many fake bullion coins, such as Eagles or Maple Leafs. The answer was no. They’ve only seen a handful during their thirty years in business.

Not that it’s hard to do. With modern 3-D laser imaging, a die can be created that mimics the real thing in perfect detail. The good news is that it’s impractical. The difficulty is that any counterfeit bullion coin would likely have to be gold in order to pass. If it were pure, then the profit margin would be too small to make the deal worthwhile. And if the counterfeiter skimped on the gold content, the coin’s weight would be a dead giveaway.

The only alternative would be to gold-plate a coin made out of some other metal. But again, getting the weight right while preserving the correct size would be a challenge.

Which brings us to the areas where counterfeiting can be a real problem. The most significant is rare coins. These can be made with the proper gold (or silver) content, then artificially aged so that only an experienced numismatist could pick them out. Because of the premium they command, rare coins made with real gold would be highly profitable where a bullion coin would not.

This is one of the reasons (disinterested grading is the other) why many collectors will only trade coins graded and slabbed by third-party specialists like Professional Coin Grading Service (PCGS) or Numismatic Guaranty Corp. (NGC).

Ominously, though, some counterfeit coins are turning up inside phony slabs. If you collect rare coins and have any reason to suspect them, it’s pretty easy to sort the real slabs from the fakes. Coin World provides illustrations on just how to do that here. (http://www.coinworldonline.com/articles/ChineseCounterfeit/Diags.aspx)

Gold bars are a different matter. Fakes do show up in the market from time to time, and they’re hard to identify. Generally speaking, counterfeiters don’t bother with the smaller ones, which are stamped, numbered, and sealed. They concentrate, our dealers tell us, on 1-kilogram or larger sizes. These are poured, rather than stamped, and can be easily adulterated or even hollowed out and filled with lead or some other metal. Compounding the problem is a lack of standard weights, even among good delivery gold bars. The “400-ounce” bar, for example, can vary anywhere from 390 ounces to 420.

How to Protect Yourself

As noted, we don’t believe that there is a serious issue with counterfeit bullion coins at the moment. But that doesn’t mean that they don’t exist, nor does it mean that evolving technology might not make them more profitable in the future than they are now.

The best precaution is the simplest: deal with someone you trust. Establish a relationship with a coin dealer who has built a strong reputation, preferably over a matter of decades, such as the dealers we recommend in BIG GOLD. Buy from them, even if you stumble across some mail order supplier who is charging less of a premium.

For small bars, purchase only those that carry the stamp of one of the known, trustworthy refiners, such as PAMP, Credit Suisse, or Johnson Matthey. For bigger orders, ask your dealer if they do assays. Reputable outfits generally assay bars that are a kilogram or larger. If you want a 100-ounce bar, consider buying direct from the Comex, which will also vault it for you. That removes the assay requirement when you buy, but remember that if you take physical delivery of a large bar, you’ll need an assay when you sell. Do not, under any circumstances, buy a larger gold bar on the Internet or from a private seller you don’t personally know.

If you’re still worried about a coin, there are tests you can perform to check it out.
  • For gold, you can bite it, although you may not want to mar the surface of the real thing. Silver coins you can drop on the floor and they will ring; alloys won’t. The ring test is less useful with gold, since 24-karat gold doesn’t ring; less than 22 karats does, but so does brass.
  • Size and weight are good measures. Make a list of the diameters of genuine coins for comparison purposes. Get a scale calibrated to hundredths of a gram. If a bullion coin weighs light (or, possibly, heavy), it’s bogus. Here’s a handy list of gold coins with all weights, diameters and thicknesses: http://www.onlygold.com/TutorialPages/Coin_specsFulScreenVersion.htm
  • A good counterfeiter may be able to get all other aspects of an adulterated coin right, but he won’t be able to fake density. Gold has a higher specific gravity than other metals, and you can test for that. Many Internet reference sites will tell you how.
  • You could buy a commercial counterfeit detector. They aren’t cheap, but will quickly and easily test for weight, thickness, and diameter.
  • If you happen to have some nitric acid and are a very careful person, you can drop your coin into a beakerful. Base metals will react, gold won’t.
  • Rare coins are more of a challenge. If that’s where your interest lies, look for specimens that have been graded and slabbed. Otherwise, there’s no substitute for experience. Examine coins with a magnifying glass, heft them in your hand. Get to know what the real deal looks and feels like. Read up on the kinds of imperfections that characterize the phonies. Become your own expert.
Precious metals are going to be attractive to con artists, just like anything else of real value. But there are some decent safeguards already built into the system. Supplement them with your own knowledge and common sense, and it shouldn’t be difficult to avoid becoming a victim.

Good thing you don’t really have to worry about purchasing fake bullion coins… because it’s the best time to buy gold, and maybe one of the last chances you get to buy at $800+ levels. Read our report on why ultra-low interest rates could make gold rise to $1,500 (and higher) in the near future – and how you can profit: Click here to learn more.

More articles from Doug Hornig:

Thursday, April 23, 2009

Gordon Brown Tosses Final Nail in Coffin of UK Economy

Gordon Brown appears to now have fulfilled his destiny as one of the worst leaders in the UK's illustrious history, as he tossed the final nail in the coffin of a wheezing economy, courtesy of a budget that would make one of Ayn Rand's villains blush.

Brown, like most politicians, appears to have read few if any history books, as he plans to tax top wage earners at 50%.  Those who believe that budgets can be balanced by soaking the rich are naive - capital, like water, flows downhill, according to the path of least resistance.  The exodus of capital from the UK will only accelerate as a result of these socialist taxation rates, and the UK will continue it's slide into oblivion.

Don't laugh too hard, fellow Americans, we're not far behind.

To top it off, the UK's budget plan is based on projections that have no chance in hell of coming true - calling for economic growth of 1.25% in 2010 and 3.5% in 2011.  I'll parlay the under on those two picks, thank you very much.

One guy entitled to say "told ya so" is Daniel Hannan, the Brit who layed the smack down on Brown in Parliament a few months back.  Classic clip.

Other lowlights of Brown's career, now that we're piling on?  How about his massive sale of 60% of Britain's gold between 1999 and 2002, essentially calling the absolute 20-year bottom for gold!  Earning him the hilarious nickname from the Casey Research folks "Goldfinger Brown."

Brown's party is almost a shoe-in to get voted out of office next year.  In the meantime, we'll leave with this parting shot - the collapse of the British Pound under his watch.  Gordon, we hardly knew ye.  Please remember to write us often.




Wednesday, April 22, 2009

Is Oil Supply Shrinking Faster Than Demand?

It appears so - as you can see from the chart here, oil supply is projected to shrink by a significant amount each quarter of 2009:

This chart is courtesy of Frank Holmes, who writes on his blog:

It’s also important to point out that it is much cheaper and easier to cut supply than to bring that same supply back on line. Demand for commodities will likely be hastened by the trillions in stimulus spending by the United States, China, Europe and others. When that happens, there’s a good chance of a supply shortage.

Frank is the CEO of US Global Investors, a commodity focused fund, and one smart dude when it comes to commodities.  Definitely worth reading his entire blog post here.

Tuesday, April 21, 2009

Food Shortages Discussed at G8 Summit

On Saturday, agricultural ministers from the world's (roughly) eight most industrialized nations, met in Italy to discuss the looming threat of food shortages and a global food crisis.

America's agricultural secretary warned that unless many countries take substantative steps to increase food production, there will be increasing shortages and social unrest around the world.

For more details, you can click here to listen to Stratfor's short podcast summary of the event.

Are you also skeptical these world improvers will be able to have their way?  Me too - and I think the day will soon come again when us "evil speculators" can profit from skyrocketing food prices...muhahahahaha.


Is Natural Gas As Low As It Can Go?

May Natural Gas futures currently sit a shade above $3.50 - their lowest point since 2002!  Check out this chart...can you spot the trend?

Source: BarChart.com

Jeff Clark writes that $3.50 is widely regarded as the "shut in" price for natural gas - the price where drillers are better off closing the well than continuing to operate it.

When the price of a commodity drops below the cost of production, that is music to our ears.  After all, the best cure for low prices is low prices.  Keep an eye on the natty, because something has to give, sooner or later.

Looking for an easy way to invest in natural gas?  Check out UNG, a fund that tracks the price of the natty - it's a simple way to speculate on natural gas prices from the comfort of your stock trading account.

How Bad Will The Financial Crisis Get?

How bad can the current financial crisis get, and how long will it last?  Casey Research's Chief Economist, Bud Conrad, tackles this question, crunching the numbers produced by two leading economists who took a broad sampling of banking crises.  The information is presented in an insightful and informative way as only Bud can.  I hope this helps round out your thought process about the depth of the current crisis.


Bad, Worse, or Worst?
An assessment how serious the current crisis is likely to get

By Bud Conrad, Chief Economist, The Casey Report

It’s time to call the global crisis what it is: the worst financial collapse since 1929. That’s no surprise to subscribers of The Casey Report, who have been amply warned over the last five years. But now even government officials, after trying to ignore the facts on the ground for the last couple of years, are admitting the truth of the matter.

Now that it’s here, we turn our attention to trying to discern, “How bad can it get?” and “How long can it last?”

While such questions can never be answered with anything approaching absolute certainty, there are methods that can be used to assess what may lurk over the horizon. With that goal in mind, this article focuses on – and then expands upon – the recent work of two economists who painstakingly analyzed a substantial number of previous banking and currency crises in an attempt to derive potentially useful lessons. I have then taken their data and applied them to the current circumstances to see where we are, relative to those other experiences.


The Data

The data are from a study called “The Aftermath of Financial Crises” by Carmen M. Reinhart of University of Maryland and Kenneth S. Rogoff of Harvard University. In their study, the authors summarize the results of a broad sampling of banking crises, with between 13 to 22 crises analyzed for each of the variables.

The Reinhart/Rogoff study is based, in turn, on data extracted from an even more comprehensive study of events in 66 countries, titled “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises,” by the same authors.

I’ve summarized the findings from the latest study in the table below:



The economic measures in the left column show how far the U.S. situation has deteriorated so far. The next columns show the average historical deterioration and the worst case of the crisis analyzed.

I then applied these data to calculate the levels that the U.S. could reach if it followed the path of the historical examples. The projected level is based on the measure analyzed, either from the peak prior to the downturn (e.g., the S&P 500) or from the bottom prior to the downturn (e.g., the lows in unemployment). Thus, as you can see in the table here, the S&P 500 has already dropped from its October 2007 peak of 1565 down to 766. If this crisis were to end up being only “average,” then it would drop to 690.

If, however, the worst case of a 90% drop were to occur, as it did in Iceland last year, then the S&P 500 would trade down to the shocking level of 157. For further reference, if the current crisis were to cause the stock market to fall as sharply as in the Great Depression, the S&P would touch 469.


Duration of Crisis

As you can see in the summary table below, it took 3.4 years, on average, for the stock market to fall from the peak to the bottom. In the worst case, it took five years. With the recent peak in the S&P 500 occurring in October 2007 – just one and a half years ago – the crisis is likely to have some time to go before reaching even an average duration. More specifically, if this crisis turns out to be just “average,” we would not expect to see the low before the first quarter of 2011.


Crisis Horizon: Some Conclusions

The global economic situation continues to deteriorate on all fronts (see charts below).









Housing prices are down 28% from their bubble peak in 2006 but still have a ways down to go to get back to their pre-bubble levels. Even an average downturn will mean that housing remains a problem for several more years. Unless, of course, the government steps in to stave off those resets… a “solution” that carries with it a separate set of problems, making things worse. We continue to expect very serious problems in the commercial real estate sector.

The stock market is approaching a 50% decline, the average of what has been observed in past crises. Further slowing in U.S. corporate activities and profits means additional increases in unemployment, establishing a negative feedback loop that pushes corporate profits – and stock prices – even lower.

The only growth trend at this point is in government bailouts, which are in high gear, indicating we’ll experience the serious growth of outstanding debt seen in other crises. The elevated levels of government borrowing required to fund that spending are absorbing all available credit from foreigners, directly competing with business in need of the new financing that will be required to expand the economy. The combination of declining business activity, coupled with declining levels of household income, will result in declining tax revenues, increasing the budget deficit beyond the size of the new bailout programs. State and municipal governments across the nation are already being confronted with large shortfalls in their budgets, shortfalls that will only widen as the crisis worsens.

The combined business slowing and jobs contraction assure that the GDP will decline. Components of GDP having to do with necessities like food and shelter will continue to bump along regardless of the economic conditions, but the lack of growth in GDP could extend for years as it did in Japan and as it did after the 1929 stock crash.


Inflation/Deflation

Given that we are currently in a deflationary phase, it is easy to dismiss the case for inflation – and many do. We think that is a mistake. Even a summary tabulation of the unprecedented increases in government debt at this relatively early stage in the crisis make a compelling case for higher inflation, if for no other reason than that it shows clear intent on the part of the government to spend “whatever it takes” to offset the deflationary forces now stalking the land.

The research paints a dismal story of years of economic stagnation. In our view, the trend is now firmly established for dollar debasement, a debasement that will eventually overwhelm the deflationary pressures from collapsing asset values. Therefore, don’t listen to the happy faces on CNBC spouting off, for the umpteenth time since this crisis began, that now is the time to jump back in and buy stocks. It isn’t.

Be extremely skeptical when you hear some pundit pronouncing that this piece of short-term good news or another is an “all clear” signal. Until we start seeing a systematic improvement in the economic fundamentals – for example, an upward movement in consumer confidence – the only signal the economy will be hearing is that of a runaway train coming straight at it.

The numbers paint a dark picture… but it is in crises like today’s where unusually good opportunities arise for investors. Take our investors, for example, who made money shorting financials over the last year. The Casey Report focuses on recognizing and analyzing market trends way ahead of the investing crowd – a strategy that has already provided its subscribers with up to four-digit returns. The latest edition includes an update on the analysis you’ve read above. Try it risk-free for 3 full months, with our 100% money-back guarantee: click here to learn more.


Also by Bud Conrad:

Monday, April 20, 2009

Crude Oil Drops Over 7% Today

Seems like the same old theme - when the stock market gets slammed, so does crude oil.

Crude oil closed the day below $49/barrel. 

(Chart source: BarChart.com)

When crude is up on days like today, that's when we'll take a hard look at going long crude.  

The only bright spots today?  Gold, Silver, US Treasuries, and the US Dollar.

Sunday, April 19, 2009

Donald Coxe Still a Commodity Bull

Famous investor Donald Coxe took a real bath in 2008 (along with the rest of us commodity bulls) - he was heavily overweighted in commodities, and, though bearish on the overall economy, he still believed commodities were the place to be.  Hmmmmm, sounds a little familiar.

Despite the huge setbacks last year, Coxe still believes commodities are the place to be for the medium to long term, citing his belief that rising middle classes in India and China will drive demand to new heights.  Coxe is especially bullish on agriculture.

Andy Kessler: Bernanke Should Spell Out Plans to Combat Hyperinflation

Andy Kessler, famed hedge fund manager, investor, author, and one of my favorite guys to listen to live, writes that Ben Bernanke needs to spell out very soon how he plans to combat hyperinflation.

With all the extra money being created (printed, via "quantitative easing") shloshing around, Kessler believes, as we do, that this could get out of hand real fast if and when the economy starts to pick up again.

I have no idea how Bernanke is going to do it - my guess is that he won't.  I don't believe there's ever been a time in history where this amount of rapid money creation has not led to severe inflation.  If anyone can correct me, please drop a comment below.

Click here for more recent articles from Andy Kessler.

Three Soft Commodities Poised to Rally - OJ, Sugar, and Cotton

For a few weeks now, we've been watching the commodity markets with rapt attention, asking ourselves: "Has the next commodity bull market officially begun?"

From the charts, it looks like broader commodity indeces may have finally formed a bottom.


Source: BarChart.com

So if the wind is indeed once again at the back of us commodity investors, which commodities hold the most promise right now? Let's dive in and review three very intriguing soft commodity opportunities.


Orange Juice

Orange juice futures continued their recent rally this week, with July OJ breaking out to 6-month highs this week, closing at 88.25.

Last week we were drooling over OJ, citing potential bullish catalysts of:
  • Dry conditions in Florida that could hurt supply
  • Reports of a weaker orange crop in Brazil
  • A favorable technical back drop
Also my commodity broker gave me a ring on Thursday, recommending some summer OJ calls - he also likes the bullish setup, and mentioned that OJ is seasonally strong in the summertime.


Orange juice, after a long drop, appears to be showing some signs of life.

Florida did get some rain this week, which set prices back temporarily midweek, but this proved temporary as OJ surged ahead on technical buying and traders starting to pile in.

Bottom line: OJ's rally looks poised to continue, and we're looking to add to our exisiting position on further strength.


Sugar

On February 27, we went long one May sugar contract (which reminds me - I need to roll that baby over tomorrow 1st thing! The wife would not be pleased if we took delivery on that contract!).

At the time, we cited these bullish fundamental factors:
  • The global sugar deficit is expected to rise this year
  • India, the world's 2nd largest producer of sugar (after Brazil), will have lower output than forecasted, and may be forced to import sugar this year

Sugar has been rangebound.

Since then, sugar has been rangebound, failing to break up or down. I've read many traders recommending short positions on sugar in the short term, though sugar has not yet broken down in the short term as these folks have expected.

Bullish supply news came out this week, with India's sugar industry reporting that this year's production will fall 8.4% below previous estimates.

We're holding our exising position until the market gives us a clear signal on which way sugar is heading.


Cotton

Cotton futures have been slammed since the financial collapse, as significant cotton demand from India and China has evaporated overnight.

This demand and price wipeout has accelarated the decline in farm acreage devoted to cotton - this year's US cotton acreage is projected to be 7% below last year, and the lowest total amount since 1983, due to high production costs and low prices.

Although supply is coming offline significantly, thus far demand has dropped faster than supply. This may not last for long though, as the best cure for low prices is often low prices.


Has cotton formed a double bottom?

As you can see from the chart above, cotton has put in a double bottom of sorts, and is approaching an upward resistance point in the low 50's. 

Cotton futures have rallied to a 10-week high on continued strength in soybean futures, which surged to 6-month highs themselves.  Because cotton and soybeans compete for acreage, high soybean prices make it more likely that farmers will switch acreage from cotton to beans.

We're watching closely to see which way the price breaks from here, as a breakout to the upside could have some room to run, given the tight supply conditions. A small rebound in demand could set prices off to the races.


Current Futures Positions

No changes this week. Thinking about adding another OJ contract on further strength.

Date Position Qty Month/Yr Contract Entry Last Profit
04/08/09 Long 1 JUL 09 Orange Juice 81.95 88.40 $967.50
02/27/09 Long 1 MAY 09 Sugar #11 13.79 13.19 ($672.00)

Net Profit/Loss On Open Positions $295.50

Current Account Value: $26,005.31

Cashed out: $20,000.00
Total value: $46,005.31
Weekly return: 3.6%
2009 YTD return: -48.8% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Saturday, April 18, 2009

Jim Rogers Prefers Oil Over Gold Right Now

Jim Rogers told Bloomberg News earlier this week that he prefers oil over gold right now, because of the potential supply overhang of the IMF threat to sell it's gold.

“The IMF is trying to sell its gold,” Rogers, chairman of Singapore-based Rogers Holdings, said in an interview with Bloomberg Television. “The IMF is one of the largest holders of gold so you’ve got this huge supply overhang.”

Further reading - more recent Jim Rogers coverage:

WSJ: Leading Investors Who Survived the Great Depression

The Wall Street Journal published an insightful article earlier this week, profiling 3 investors who survivied the Great Depression, and continue to actively invest and manage funds today.

For what it's worth, all 3 seem to scoff at the idea that we are in for a repeat of the Great Depression today.  One guy sites the diversity of today's US economy, compared with a small handful of industries that drove most of the economy during the Depression, as a big difference.

My favorite profile is the first guy, who still goes into the office everyday at the ripe young age of 103.  

Man, and I got sick of office life at the age of 25! 

Income Tax Facts That Will Drive You Nuts

Nice video put together by the folks at Reason TV about the clusterf*ck of a tax code we have here in the US.

The scariest stat to me is that the bottom 50% pays less than 3% of total taxes - especially scary because we live in a democracy, where all votes count equally.  

Wednesday, April 15, 2009

Cotton Ready to Bounce off its "Double Bottom"?

Cotton put in a strong effort today - up 1.21, on a day when many of the softs were down - so I perused the short and long term charts for May futures.

Looks like cotton definitely has put in a double bottom, which is usually seen as a bullish indicator, and is rallying off its lows.  If cotton breaks above its highs from earlier this year, we'll be very interested in potentially taking a position here.


Source: BarChart.com

Tuesday, April 14, 2009

Singapore Quits on its Currency, Too

Is ANYONE going to defend their currency?  Chuck Butler writes in the Daily Pfennig that Singapore is now the latest to throw in the towel on theirs:

A couple of weeks ago, when Chris was writing the Pfennig for me, he wrote about Singapore, and how the Monetary Authority of Singapore (MAS) had indicated it might push the Sing dollar lower. In fact, here's what he had to say in the Pfennig, March 30th, "Another currency you may want to consider exiting is the Singapore dollar. According to a story I read on Bloomberg this morning, the Monetary Authority of Singapore may devalue their currency and allow it to drop 4 percent against the US dollar in the next few months."

Well... Last night, the MAS announced a downward re-centering of the Sing dollar trading band while maintaining the width of the trading band and the policy of zero appreciation. OK... There it is... Forget all the trade widening and so on, and center on the "policy of zero appreciation"... That does not bode well for the Sing dollar... And for Chris' statement on March 30th? Bang On! Timely!

The thing I can't get out of head, is the fact that Singapore needs to keep its currency in line (value VS the dollar and euro) with the other currencies in Asia in order to keep its exports competitive... I guess, the MAS is thinking there aren't going to be any exports! And the ones that are there, they (Singapore) will have a "cheaper currency" and an advantage!

At least the MAS didn't devalue the currency, as these types of small countries tend to do to tilt the playing field toward them! And believe or don't... The Sing dollar rallied on the news that the MAS didn't devalue the currency... So... This is like manna from heaven for anyone trying to switch out of Sing dollars and into something else... The currency rallied overnight!

Just another reason to buy gold - it can't be "quantitatively eased" by any government.

Monday, April 13, 2009

George Soros Interview: Fallout of Collapse Will Linger

Just came across this interview George Soros gave for Yahoo Tech Ticker.

Soros says the real danger of economic collapse has passed - but goes onto say that we did not succeed in recapitalizing the banks, and the rebuilding effort will take a long time.  He believes the fallout will linger, because we have zombie banks that are alive but have too much junk on their balance sheets.

Soros seemed sharp and on point in this interview, a nice rebound from his January efforts, when we openly asked Has George Soros Lost His Mind?

China Sold Bonds Heavily in Jan, Feb

The New York Times reports that the Chinese government was an aggressive seller of foreign debt - including US Treasuries - in January and February, before reversing course in March.

All in all, China's foreign reserve growth in Q1 was its slowest in eight years - indicating that China may be losing it's appetite for US debt.

If this trend continues to accelerate, I anticipate the US Federal Reserve will have no choice but to print more money in order to finance it's long term debt obligations.  This is risky business, no doubt, as I am not aware of a historical instance where a government printed money this quickly, and did not experience serious inflation.

Folks, this is not meant to be doom and gloom - these are just the facts as I see them.  Now the question we must ask ourselves is: "How can we profit from these anticipated moves?"  There's nothing we can do to save our government from it's own stupidity, but there's a lot we can do to protect ourselves, and even profit handsomely.

Some "money printing" protection positions to consider:
  • Shorting long term US debt (like Jim Rogers)
  • Buy gold and other precious metals
  • Buy commodities, especially agriculture - historically agriculture is quite cheap, and the world is not about to stop eating
Any other suggested trades?  

Sunday, April 12, 2009

Time to Invest in Orange Juice? - Weekly Commodities Review

Have Orange Juice futures finally found a bottom?  May Orange Juice futures gained nearly 10% this week, on speculation that drought conditions in Florida could damper yields.

As you can see, OJ has been in free fall over the past 14 months, dropping roughly in half from peak to trough.


Prices appear to have been forming a bottom since the beginning of the year, and in surging past the 85 cents-a-pound level, May Orange Juice futures hit four-month highs.


So is it time to buy?  Let's break it down.

Bullish factors for OJ:
  • Renewed weakness in the US dollar could buoy commodity prices
  • Dry conditions in Florida could hurt supply
  • There are reports of a weaker orange crop in Brazil
  • The technical setup looks quite good
Bearish factors for OJ:
  • The deflationary environment that sent almost every asset down 50% last year may still be in place
  • Good news on the Florida crop could cause this rally to quickly reverse course
  • OJ may be overbought and due for a short term pullbck
OJ futures are quite volatile, so proceed with caution if you're new to trading them.  Contract sizes for OJ futures are smaller than most other softs, so I'd recommend starting with a light position and keeping wide stops to ride out potential swings.

BOTTOM LINE: At current price levels - which are historically cheap - the risk/reward of a long position in Orange Juice looks quite attractive.  We've been watching all of the softs closely, and OJ looks the best right now from a technical and fundamental standpoint.  We're buying this 3-month breakout.

Editor's Note: This article was just published by Seeking Alpha.


Current Futures Positions

On Wednesday, we picked up a July Orange Juice contract at 81.95.

Date Position Qty Month/Yr Contract Entry Last Profit
04/08/09 Long   1 JUL 09 Orange Juice 81.95 85.60 $547.50
02/27/09 Long  MAY 09  Sugar #11  13.79  12.75  ($1,164.80)

Net Profit/Loss On Open Positions ($617.30)

Current Account Value: $25,092.51

Cashed out: $20,000.00
Total value: $45,092.51
Weekly return: 2.4%
2009 YTD return: -50.6%

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Saturday, April 11, 2009

Ben Bernanke Musical Tribute

Courtesy of YouTube: Columbia Business School's Dean Glenn Hubbard sings about wanting Alan Greenspan's job that went instead to New Fed Chair Ben Bernanke. Parody created by Columbia Business School students.

Hope you enjoy - I found this hysterical!

Friday, April 10, 2009

What if...There Had Been No Government Bailouts?

Oh what a wonderful economic world it may be right now, had the government not felt the compelling need to "do something."  Casey Research's Terry Coxon reviews the government's "helpful" actions over the past couple of years, and asks the question - what would have happened if they had done nothing?

Nothing
By Terry Coxon, Editor, The Casey Report

We don’t yet know how many trillions will be swallowed up by the government’s rapidly breeding herd of stimulus-bailout-help!help! measures. But additional bold steps are sure to come, some already in R&D and others to be invented on the fly to answer each new wave of bad news. Expect price tags suitable for proving how serious and determined the authors are.

The doubts that meet each new plan – does it really need to be that big... hasn’t something like that been tried before... is it smart to keep wrong-headed decision makers in high places... isn’t too much debt at the heart of the problem... if you don’t know what causes inflation, are you sure you know what causes babies – are all answered with the same rhetorical question: “We can’t just do nothing, can we?”

Yes, we can. But we won’t, because the decisions about our wealth and our freedom are being made by career politicians, for whom stepping aside is the only truly unacceptable plan. Nonetheless, even though the idea of government doing nothing in the face of credit crisis, bank insolvencies, and recession has been reduced to a hypothetical, such a policy deserves a little exploring, since it can tell us something about where all the big-dollar solutions coming out of Washington are likely to lead.


Background

It’s possible to train people to be crazy. If you’re acquainted with a psychotherapist (socially, of course), ask him to explain how it’s done. Training people to be crazy wasn’t what the U.S. government set out to do when it ended the dollar’s convertibility to gold in 1973. But it turned out to be one of the results.

Untethered from the gold standard, the Federal Reserve was free to create new dollars whenever it saw fit. But the policy it drifted into wasn’t steady inflation, day in and day out, it was rescue inflation. The Fed would step up the expansion of the money supply whenever it saw a risk of widespread defaults in credit markets. The unintended effect was to train both lenders and borrowers, by repeatedly rescuing them from damaging defaults, to appraise financial risk unrealistically and to regard what is in fact a source of danger as a manageable nuisance. It made the managers of financial institutions functionally crazy, and the longer rescue inflation continued, the worse they got. (When you read about investment bankers running a business with 30-to-1 leverage and tell yourself, “Those people must be crazy,” you’ve got it about right. But they weren’t born that way. They were trained.)

That’s how the credit crisis was nurtured. And here is what the government has done about it so far.

August 2007. The credit crisis is just going public. Commercial banks, investment banks, and other financial institutions are waking up to the reason they were getting such great returns on junk paper – it really is junk. To ease the shock, the Federal Reserve begins a vast and unprecedented program of swapping out Treasury securities from its own sizeable (nearly $1 trillion) investment portfolio in exchange for the embarrassing and worrisome securities that seem to be paralyzing the lending departments of the banks that own them. A novel approach, and not really inflationary, since no new cash is produced.

September 2008. Lehman Brothers informs the Federal Reserve that the novel approach, admirable though its inventiveness might be, isn’t working and drops dead in front of Ben Bernanke’s desk. The Fed abandons the hope of a non-inflationary remedy and begins a vast and unprecedented program of expanding the monetary base (buying Treasury securities and other IOUs in the open market with brand-new dollars).

October 2008. President Bush signs a vast ($700 billion) and unprecedented bailout bill. It has been sold to Congress as a measure to help banks survive and keep lending, but the details are vague in the extreme, leaving the secretary of the Treasury with the authority to use the money for almost anything, including, if he should find it advisable, “for carrying on an undertaking of great advantage; but nobody to know what it is.”

Other vast and unprecedented programs have followed, including tens of billions for any car company willing to drive (not fly) to the teller window, hundreds of billions to get messy home mortgages house-trained, and unspecified mega-billions for Timothy Geithner’s proposal to unburden banks of bad assets through a plan of great advantage but nobody to know what it is.

And today, 21 months after the doctors started scribbling prescriptions, most markets continue down, the economy is still shrinking, and worries are still growing.

Now roll the tape back to August 2007. What would have happened if the U.S. government had simply kept its long-standing commitments (in particular, protecting FDIC-insured deposits and preventing the money supply from shrinking) and otherwise had done nothing? No good-asset-for-bad-asset swaps, no wild expansion in the monetary base, no bailouts, no arranged marriages with taxpayer-financed dowries for failing institutions.

Nothing.

If that sounds extreme, perhaps you’ll find it a little more acceptable if I put it this way: what would have happened if George Bush, Ben Bernanke, Nancy Pelosi, Harry Reid, Barney Frank, and Barack Obama had done nothing?

It would have been spectacular, a mass die-off of the incautious. Bear Stearns, Morgan Stanley, and other practitioners of ultra leverage, including perhaps Merrill Lynch, would have folded. When you borrow to carry $30 of investments for each $1 of company capital, it only takes a 3.4% drop in the prices of your assets to put you under water. And when you’re getting that 30-to-1 leverage through overnight borrowing, even a whiff of doubt can make it impossible to roll over your financing from one day to the next. Either way, you’re out of business.

From there, the trouble would have fanned out. The firms just pronounced dead were counterparties to trillions of dollars in derivatives. The investors on the other side of all those deals (largely banks, insurance companies, and other brokers) would have been left holding the bag. Some of them would have failed, and all that survived would have been left weakened and living in fear.

Growing mortgage losses would have forced Fannie and Freddie (and also Countrywide Financial) into bankruptcy, which would have turned their trillions in outstanding bonds into junk debt, doing great injury to the banks, insurance companies, and other investors that held them. Citibank and Wachovia would have gone under. And with Fannie, Freddie, and Countrywide gone, the biggest sources of mortgage money would be unavailable, which would have turned the housing market from a corpse into a mutilated corpse. AIG, which had turned itself into a sink of follies by insuring other companies against losses on junk debt, would also have joined the departed – and the companies that had been depending on AIG credit insurance would have gotten sorted out between the failed and the merely damaged.

Bank of America, having been spared the irresistible invitations to acquire Countrywide and Merrill Lynch, might be in much better shape than it is today.

With a hundred-car pile-up in the financial sector, lending to businesses and consumers would have shriveled, and the rest of the economy would have slipped into a depression. No more General Motors. No more Chrysler. Ford maybe.

And those are just the big names. Tens of thousands of other companies would have gone out of business. Most others would have laid off workers. The unemployment rate would have moved deep into double digits. With so many companies cutting inventories to raise cash for survival, the wholesale price index would have gone off a cliff, and the consumer price index also would have slumped.

It’s an ugly picture, with pain and hardship for millions of people and grave worries for the rest. But before you start preparing thank-you notes for the good people in Washington who’ve acted so boldly, consider this:

If they had done nothing, the whole sorry business might be over by now. Without the promise of rescue and blow-softening, events would have moved quickly. The collapse of the overleveraged financial companies would have started soon after credit market jitters began in August 2007. (Leverage built on overnight borrowing invites swift justice.) The disaster in the financial sector might have been over by the end of that year or soon after. The year 2008 would have seen the wave of layoffs and bankruptcies in operating companies and the fall in wholesale and consumer prices.

A simple process would have brought the contraction to an end. With the prices of most things falling, the real value of the money in everyone’s pocket would be rising. That would continue until large segments of the population came to feel cash rich and started spending. Dollars appreciated in value, not dollars newly printed, would finance the recovery.

And it would be a thoroughly healthy recovery, because the bankruptcy proceedings that came before it would remove the billion-dollar bunglers of recent years from positions where they can make expensive mistakes. Decision making about the allocation of capital would fall to the survivors, who, by their survival, had proven their ability and readiness to decide wisely.

There is precedent for this. In the depression of 1920-1921, for example, wholesale prices fell by nearly one half, and most of that fall occurred in a period of just six months. It was a violent experience, with widespread bankruptcies, but it was over in a year and a half. It ran fast because the government did so little to try to stop it. Nancy Pelosi hadn’t been born yet.

So much for the hypothetical. Instead, with all the government efforts to make things right, we have:
  • An economy that continues to contract;
  • A continuing mystery as to which banks are solvent and which are not;
  • Financial institutions still under the control of individuals who’ve proven they should be doing something else;
  • Car companies on apparently permanent life-support at taxpayer expense;
  • A retarded decline in housing prices that is extending, by years, uncertainty as to how severe mortgage losses are going to be;
  • A flock of new government programs that will continue to soak up billions of dollars per year long after the recession is over;
  • A vast and unprecedented (that again) increase in the basic money supply, which is jet fuel for price inflation;
  • A vast and unprecedented increase in peacetime government borrowing, which, when the recovery begins, will trap the government in a choice between letting interest rates rise (and risk choking off the recovery) and continuing to inflate the money supply (and kiss runaway price inflation on the mouth).
Yes, it does seem cruel to do nothing when disaster is unfolding. But consider the likely consequences of the alternative.

Doing nothing might be appropriate for Washington at this point in time… but it is not what you should do as an investor. Making the trend your friend is the strategy that will get you through tough economic times like this and provide you double- and triple-digit returns.

The Casey Report focuses on emerging trends to profit from even in highly volatile markets – whether it’s shorting stocks squarely in the way of the accelerating economic avalanche or investing in commodities that stand to gain big in the coming months. Test it now risk-free with our 3-month, 100% money-back trial… click here to learn more.

Most Popular Articles This Month