The Room 2/18/08

Dear Reader,

Foolishly, I now realize, I closed last week's column by announcing that I would endeavor to write today's entire missive without a single mention of... okay, well, just this once... government.

Some readers have suggested that I could meet the test simply by replacing that specific word with another, for instance, "Turnip." While the idea has merit, as does even that word (looks a lot tastier than it is), I believe that self-created rules are rules nonetheless and no cheating allowed.

But, given the deep influence of that particular form of human activity, the task of producing this edition of The Room is made all the more daunting by my admittedly childish challenge.

I suppose we could talk about the weather.

(Actually, we can! My wife, the chief science officer of our household, gives a dismissive sniff any time I mention the latest forecast from local news sources, then logs on to consult with, a geostationary satellite with a number of filters that, once you master it, provides all the intel you'll ever need about what's really coming next.)

Okay, well, that about covers the small talk.

But before we move on, I must make one small edit to the rules surrounding today's challenge... namely that, should I decide to quote someone else, that person will not be subject to the same constraint, because, well, they weren't aware of the rules in the first place.

Okay, now that we have the rules straight, I'm going to wander into the kitchen for a further consultation with my dear friend, Ms. Rancilio Espresso-Maker, and let our own Bud Conrad take over the reins for a few moments.

As you may recall, last week Bud commented on the obvious play to be had in lumber. In a similar vein, this week he looks at commodities as a sector play...

Commodities: Looking Beyond the News

By Bud Conrad

We have read Jim Rogers' comment on commodities in his new book and seen the price of gasoline when we fill up, but most of us get too distracted by some enticing traditional investment, like a stock in some extractive resource, to think beyond the obvious.

For a year and a half, I have been watching grains scream higher. With oil, gold and odd items like milk and butter rising, I start to ask what might be beyond the horizon.

First, to report the bedrock under the commodities, see how commodities have jumped. There's no deflation there.

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Here is a chart on Minneapolis wheat, from $5 to $18 since last summer:

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It has been said that the guys that made the most money in the gold rush were the suppliers that provided the tools to the miners. So, who are the guys that are making money providing tools to the commodity traders? Here is one measure of the jump in this vein: the price of a seat on the commodity exchange. It jumped from under $10,000 in 1971 to $725,000 at the end of 2007 in Kansas City. These seats are traded on the exchange, and can earn profits along the way by being leased out to institutions or rich individuals who want to place trades directly.

[click to enlarge]

And a seat on the Minneapolis Grain Exchange tells the same explosive commodity story, jumping from $16,000 as recently as 2004 to $280,000 now:

All this is obvious once someone points it out. What else should we be looking at?

David again. Care to take up Bud's challenge? Drop me your ideas via email:

(A possibly profitable trend pops into my own mind... I'll share it a bit later on. But first, this...)

The First Annual Casey Research Inflation Google

One of our core theses is that global price inflation is on an unstoppable upswing at this point. Supporting that contention are nearly daily reports from around the globe of rapidly escalating inflation emerging everywhere from Russia to Saudi Arabia... from Australia to China... and almost literally everywhere in between.

In fact, I have a rather eye-opening way to prove the point.

Simply enter the following search query into your favorite search engine, formatted as follows... except replace the "name of country" with the name of any country that pops to mind. Be sure to include the parentheses.

(name of country inflation 2008)
What you'll find, without exception, is a recent news story about local price inflation ratcheting up far more than previous expectations.

For example, I randomly googled Egypt... and here's what I found.

On February 8, the bank initiated a hike of 25 basis points, bringing its deposit rate to 9% and its lending rate to 11%. The decision came in the wake of news that inflation hit 11.5% in the year to January, reversing Egypt's disinflationary trend from the last quarter of 2007...

Okay, let's try another one. Throwing a mental dart at an invisible board, it lands on... Mauritania? Here's that story...

NOUAKCHOTT, Nov 15, 2007 (AFP) Mauritanian President Sidi Ould Cheikh Abdallahi ordered villages to stockpile food to help cushion the effect of rising inflation, his economic adviser said Thursday. The announcement came just days after the latest unrest over the crisis. Some six thousand tonnes of wheat had already been put aside for the stocks as part of a bid to stabilise prices, said Sidi Mohamed Ould Biye. The announcement [came] after a series of violent protests since last week over spiralling prices have left one person dead and 17 injured."

There are a number of reasons for this powerful upswing, but none more important than the fiat monetary regime that allows for a steady, unfettered flow of freshly minted paper and its electronic doppelgangers to enter the market. The most widely used and traded commodities, energy and food, are, like canaries in an old-fashioned coal mine, early warnings of what's coming.

This week, for instance, we have the news out of England that families there are now spending an extra £1,300 pounds a year (US$ 2,550) on household items, most notably food and fuel, which, according to an article in the Daily Telegraph, are rising at the briskest pace in 17 years.

As you can see by letting your eyes float back up the page to Bud's first chart, which shows the commodities index curve moving up more or less steadily since the U.S. dollar's link to gold was broken, the canary is now lying on its back, its cute little feet stretched upwards, a convulsive twitch the only indication of a weak spark of life.

Is there any force on earth that can stand in the way of commodities continuing to rise over the next thirty years and beyond? (With the inevitable short-term corrections along the way, of course.)

Absent a wholesale abandonment of the fiat monetary system, the answer is no. That many of these same commodities are concurrently getting harder and more expensive to find in any useful quantities only exacerbates the problem.

And, of course, as the cost of living goes up, so must wages and benefits, some of which are already pegged to automatic adjustments.

By now almost everyone is familiar with the concept of "tipping" points -- that point beyond which the inevitable also becomes the imminent. My favorite partner of all times, Doug Casey, is of the opinion that we are at that point.

I am finding it harder and harder to disagree.

Unless you are new to our services, you should, by now, be getting pretty chummy with the right side of this trend through investments in precious metals, energy commodities and other "stuff." Played right, these investments will assure you won't be one of those who, like our barely breathing canary, are caught by surprise by the unfolding monetary crisis. And you might even get rich... or richer than you already are.

These are topics we will, of course, continue to cover at greater length, and with far more specificity, in our various subscription services.

[ED. NOTE: If you're new to Casey Research and are looking for a good place to get started, take an inexpensive subscription to our BIG GOLD as that monthly newsletter offers simple and lower-risk ways to play the inflation trend. For more on BIG GOLD and its 3-month, 100% money-back satisfaction guarantee, click here.]

New Zealand Get-Together

At this time of year, Casey Research chairman and namesake Doug Casey likes to hang his spurs either in Salta, Argentina, or just outside of Auckland, New Zealand, where he is at this writing.

Given that I already correspond with a number of subscribers from New Zealand, I asked Doug if he might enjoy hosting an informal get-together for anyone in the area. You know, a couple of beers, a few laughs, that sort of thing. He said it would be his pleasure.

While we don't have anything yet in the way of a specific time or place, Auckland is the nearest big town to him, so it will be at a suitably equipped establishment (i.e., the presence of beer pulls and a decent wine list) there at some point in the next week or so.

If you are in the area and would like to meet up, just drop me a note at and I'll make sure you get the details.

Dispatches from the Front Lines of the Credit Crisis


Remember back when... when certain individuals associated with certain unnamed institutions were pontificating that the subprime losses would amount to no more than $100 billion to $150 billion? It turns out that said individuals were somewhat ill informed, a point made clear by the steady stream of blood-soaked dispatches coming back from the front of the credit crisis. Just this week...

  • Mortgage insurer MGIC announced yesterday it had a net loss of $1.47 billion, or $18 per share, mainly attributable to a $1.2 billion loss reserve. The company is now said be to urgently seeking new capital in order to avoid further rating downgrades.

  • It was announced Wednesday that between April and December 2007 alone, Japanese financial institutions have incurred losses of 600 billion yen (US$5.5 billion) from investments related to U.S. subprime mortgages. I have recently come across credible analysis that says the Japanese banks are scrambling behind the scenes to avoid fully disclosing the size of their subprime losses, but that it could run into many multiples of the number reported this week.

  • Bond insurer MBIA this week begged for relief from short-sellers and further, asked that the rules be changed about how bond insurers are assessed. Otherwise, they were at risk of going out of business by virtue of having done a spectacularly poor job and being punished for it with a ratings downgrade. Predictably, their argument revolves around the time-honored contention that they are too large to fail. Which is another way of saying that the burden of their losses should ultimately be shifted to taxpayers.

  • Warren Buffett seems to disagree, in effect, encouraging their collapse by offering to off-load the company's municipal bond liabilities (as well as those of the other bond insurers) at fire sale prices. Grasping at straws, the equity markets did a dead-cat bounce on the news based on the observation that, "Ah, Buffett is doing what JPMorgan did in 1907 to bail out the stock markets!" Not so fast, say us...

    Bud Conrad's take...

    "Buffett is no dummy. He isn't in this for the good of the U.S. economy: he's in it to make money. So I doubt he is paying more than the Muni insurance is worth. The sellers are up against the wall, having fire sales to stay afloat.

    "They would be selling off their only assets that are worth anything, leaving behind the toxic waste. This is not the bailout that will fix the overleveraged guarantees on $2.4T of bonds by these insurers; rather, it confirms that they are desperate, and even closer to worthless, in my opinion. If such a deal goes through, it shortens the life of the insurers unless a big government bailout emerges."

  • UBS, Europe's largest bank, announced this week a fourth-quarter subprime-related loss of almost $12 billion. And it's not over yet. According to Bloomberg, the bank's CEO said that 2008 would be another "difficult year."

  • Perhaps, like a child caught with its hand in the cookie jar and then tries to deflect attention by pointing to the chocolate-smeared face of a nearby sibling, UBS analyst Philip Finch issued a report today stating that, in his view, the world's banking sector as a whole could suffer another $203 billion in losses due to the credit meltdown.

A billion here, $200 billion there, this is beginning to add up to real money. Or is it? It's hard to say any more, thanks to the steady drumbeat of these large numbers. It is positively numbing.

Which begs the question...

What, Really, Is a Billion?

Some time ago, I did an article in which I tried to remind people just how much a billion dollars is.

As I can't find that article to republish here, I trolled into the internet, that source of all knowledge, to find a reference I recalled from speeches Ronald Reagan used to make on the topic.

Here it is, from a 1977 speech.

Does anyone realize how much a single billion is? A billion minutes ago Christ was walking on this earth. A billion hours ago our ancestors lived in caves, and it's questionable as to whether they'd discovered the use of fire.

A billion dollars ago was 19 hours in Washington, D.C. And it'll be another billion in the next 19 hours, and every 19 hours until they adopt a new budget at which time it'll be almost a billion and a half.

But let me really paint the picture for you. If you gentlemen sent your wives out on a shopping spree, and gave them each a billion dollars, and told them not to spend more than a thousand dollars a day, they won't be home for 3,000 years.

Of course, that was then, and this is now. Based on the 2008 budget, it no longer takes 19 hours for $1 billion of your tax dollars to go out the door, but just three.

Or, viewed another way, your tax dollars are being spent at a rate of $331 million each and every hour of each and every day... 365 days of the year.

And even at that frenetic pace, it still takes 125 days to spend a trillion. Using $100 bills as our unit of measure, we find that it would require a stack 670 miles high to add up to $1 trillion.

Gee, I'm not sure that helped.

The Solution to All That Ails the World
(But Don't Tell Anyone)!

By Doug Hornig

Last weekend's meeting of the G-7 finance ministers in Tokyo came and went without much publicity. Concern about the state of the world economy was expressed, but no momentous actions were taken. Yawn. Yet for those who were paying attention, some very revealing dialogue slipped out.

Now let it be said that honesty and transparency are uncharacteristic of government in general. If they were more common, the people might actually know what was going on behind the curtain. And that's the last thing governments want because, were the public not so dumbed down, it might respond appropriately, with torches and pitchforks.

Thus our surprise at the following:

One of the things G-7 officials discussed was the need for collective action to calm markets if price moves become irrational, Jean-Claude Juncker was quoted as saying.

Juncker, who chairs the Eurogroup -- the monthly meetings of Eurozone finance ministers and the European Central Bank -- said in an interview he's concerned about ongoing turbulence in the financial markets.

"We are not yet at the end of the crisis," Juncker said. "The corrections will drag on for a few weeks, months. We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets."

No big news there. Although we devoutly believe in free markets, we're not so naïve as to believe that's their actual state. Governments intervene, all the time. Always, of course, "for our own good."

But here's the kicker. When asked what form such collective calming action might take, Juncker said: "Whoever has a strategy, should not set it out. Otherwise it will lose its effect if it is explained."

Well, that exposes the man behind the curtain, doesn't it? What Juncker is admitting is that not only should governments intervene, but it's important that they do so in secret. A strategy explained might become ineffective. Or, in other words, if people knew what these guys were up to, they might not want to go along!

A remarkably candid moment that Juncker probably wishes he could take back.

[ED. NOTE:Doug Hornig is the editor of the Daily Resource Plus, our free daily e-letter on all the latest news related to resource markets. If you are not yet receiving this valuable, yet complimentary service, you can sign up by clicking here now. ]

An Unfolding Trend

Earlier in this edition, Bud challenged readers to come up with other trends and ways to play them profitably.

I have an early entrant. It is that over the next ten years, we are going to see a growing number of nations to ban the export of critical resources.

As I have commented on in the past, given that it has now been established that Mexico's massive Cantarell oil field is past its peak and at risk of becoming uneconomic within the next 10 years, how long do you think it will be before that country starts restricting oil exports to its northern neighbor?

In fact, oil imports from Mexico are already off by 21% just since December 2006. And they are expected, based on current trends, to drop by as much as another 1 million barrels a day over the next decade (from about 1.3 million bbl per day currently).

For the record, in addition to Mexico, the other largest oil exporters to the U.S. include Canada at the #1 spot, followed by Saudi Arabia and then Venezuela, at #3. Thus, when Hugo Chavez threatens to cut oil shipments, as he has done again recently, it is a threat actually worth paying attention to.

So, one entrant on a trend to profit from would be to buy the oil sands companies that have gotten beaten up. It is just a matter of time before Canadians see the wisdom of dropping a nuclear power plant over the oil sands, providing the energy required to extract the oil economically. This play could take awhile to unfold, but given how beat up many of the oil sands companies were, it's a play to keep an eye on.

But my big idea here is that, as the world's resources come under increasing pressure, you can expect to hear more and more calls for countries to limit exports -- the equivalent of hoarding on a national scale -- leading to massive economic dislocations and, one would assume, opportunities for the fleet of foot.

Lending support to this idea, Vietnam announced this week that it would immediately begin cutting back the amount of coal it will allow exported, and is thinking of stopping all exports by 2015. According to Bloomberg, Nguyen Khac Tho, vice director of the Ministry of Industry and Trade's energy and petroleum department, made the following comments in a phone interview:

Coal is a resource that can't be renewed. Our most important task is to meet domestic demand to ensure national energy security.

([ED. NOTE: I would be remiss on many levels if I didn't mention that we have been following the coal story closely in the Casey Energy Speculator... to learn more and take a trial subscription is as easy as clicking here.)

The Letter Bag

I received the following note from a subscriber, Daniel T. I thought you'd find the following excerpt of interest.

Dear David,

I want to convey something that may be of interest to you, with regard to what's happening in the ongoing saga of the big banks. About six weeks ago, a close friend told me that she had just gotten a letter from her mortgage lender informing her that her HELOC (Home Equity Line of Credit) is now frozen due to the "current financial climate" or some vague reason like that.

I immediately thought about my own HELOC and said to myself "They won't ever do that to me – I'm an accredited investor, never ever a late payment on anything, no credit card debt, no car loans, lots of equity in a higher-end home in a neighborhood that actually appreciated in the last year, great FICO score, etc."

My HELOC was for about $250,000, which I never touched and only thought of it as perhaps useful one day for some quick cash to bridge some investment opportunity, or whatever.

But because I believe Bud Conrad and all his brilliant analyses (not to mention you and the rest of the Casey crew), I decided to take all of my equity money out of the HELOC except for a few thousand, and put it into something that will return, at the very least, the cost of the interest payment and exceed even that for some profit. (That's not hard to do being a Casey Research subscriber).

Guess what? In less than a week, I got the same letter as my friend. It was from IndyMac Bank, one of the bigger banks, telling me that my HELOC was now frozen. From the contents of the letter, I could tell that it came from another department of IndyMac which had no idea I had just cleaned them out.

You better believe that I was very happy I got those $$$ out and put them to good use.

I tell you this so as to possibly warn others, especially those that are absolutely depending on their HELOC to carry them through rough times. We are going to see a lot more of this. If they would do this to someone with my financial profile, then, well... look out.

Just Google "banks freeze helocs" and have a look. One can only imagine what will happen when this becomes widespread and what will happen to people who utterly depend on their HELOC for survival. Scary. This could be the last straw for many.

I'm very much looking forward to seeing you again at the Crisis and Opportunity Summit in Scottsdale. The last one was great.


Daniel Trevor

Make no mistake, the credit crisis is far from over. In fact, it is spreading.


Foreigners Go Home... Many in the U.S. wish the illegal immigrants would get the hell out. Well, if you fall into that camp, you will be cheered to hear that you may be getting your wish. An unintended consequence, however, is that they may be taking some segments of the economy with them. Follow the link below for the story from the New York Times.

Click here to view.

Except Sovereign Wealth Funds... Here's a cool tool to look at the size and distribution of sovereign funds. Note that there are two tabs in the upper right-hand corner of the page the link leads to...

The Nature of Complexity... I have often commented on the fact that we live in a complex world. Which is why, no doubt, so many people are willing to let the mass media do their thinking for them. It is far easier to accept as truth the latest news burbling out of CNN, rather than puzzle things out for yourself. On that topic, earlier this week, Doug Casey forwarded me a link to an exceptional speech on that topic by author Michael Crichton.

If you are comfortably seated and have a bit of time, do yourself a big favor and give this a read. You might even want to pass it along to your family, friends and associates. Given the general dearth of critical thinking these days, the world can use all the help it can get.

Here's the link...

And that, dear readers, is it for this week's edition.

In review, I found that I sort of, but not quite, avoided references to the "Turnip" today. It is, I can assure you, no simple task given the deep roots that the Turnip has in all things, financial and otherwise.

A quick glance at the numbers shows that gold is holding, yet again, over $900 on the week, and the U.S. stock market is, once again, losing ground.

As always, I greatly appreciate you taking time out of your day to read, and for subscribing.



David Galland
Managing Director
Casey Research, LLC.

Posted 02-18-2008 8:00 AM by David Galland