Most of our subscribers to The Casey Report appear to be libertarians or classical liberals – i.e., people who believe in a maximum of both social and economic freedom for the individual. The next largest group are “conservatives.” It’s a bit harder to define a conservative. Is it someone who atavistically just wants to conserve the existing order of things (either now, or perhaps as they perceived them 50, or 100, or 200, or however many years ago)? Or is a conservative someone who believes in limiting social freedoms (generally that means suppressing things like sex, drugs, outré clothing and customs, and bad-mouthing the government) while claiming to support economic freedoms (although with considerable caveats and exceptions)? It’s unclear to me what, if any, philosophical foundation conservatism, by whatever definition, rests on.

Which leads me to the question: Why do conservatives seem to have this warm and fuzzy feeling for George W. Bush? I can only speculate it’s because Bush liked to talk a lot about freedom and traditional American values, and did so in such an ungrammatical way that it made him seem sincere. Bush’s tendency to fumble words and concepts contrasted to Clinton’s eloquence, which made him look “slick.”

I’m forced to the conclusion that what “conservatives” like about Bush is his style, such as it was. Because the only good thing I can recall that Bush ever did was to shepherd through some tax cuts. But even these were targeted and piecemeal, tossing bones to favored interests, rather than any principled abolition of any levies or a wholesale cut in rates.

Is it possible that Bush was actually the worst president ever? I’d say he’s a strong contender. He started out with a gigantic lie – that he would cut the size of government, reduce taxes, and stay out of foreign wars – and things got much worse from there. Let’s look at just some of the highpoints in the catalog of disasters the Bush regime created.

• No Child Left Behind. Forget about abolishing the Department of Education. Bush made the federal government a much more intrusive and costly part of local schools.

• Project Safe Neighborhoods. A draconian law that further guts the 2nd Amendment, like 20,000 other unconstitutional gun laws before it.

• Medicare Prescription Drug Benefit. This the largest expansion of the welfare state since LBJ and will cost the already bankrupt Medicare system trillions more.

• Sarbanes-Oxley Act. Possibly the most expensive and restrictive change to the securities laws since the ’30s. A major reason why companies will either stay private or go public outside the US.

• Katrina. A total disaster of bureaucratic mismanagement, featuring martial law.

• Ownership Society. The immediate root of the current financial crisis lies in Bush’s encouragement of easy credit to everybody and inflating the housing market.

• Nationalizations and Bailouts. In response to the crisis he created, he nationalized Fannie Mae and Freddie Mac and passed by far the largest bailouts in US history (until OBAMA!).

• Free-Speech Zones. Originally a device for keeping war protesters away when Bush appeared on camera, they’re now used to herd.

• The Patriot Act. This 132-page bill, presented for passage only 45 days after 9/11 (how is it possible to write something of that size and complexity in only 45 days?) basically allows the government to do whatever it wishes with its subjects. Warrantless searches. All kinds of communications monitoring. Greatly expanded asset forfeiture provisions.

• The War on Terror. The scope of the War on Drugs (which Bush also expanded) is exceeded only by the war on nobody in particular but on a tactic. It’s become a cause of mass hysteria and an excuse for the government doing anything.

• Invasions of Afghanistan and Iraq. Bush started two completely pointless, counterproductive, and immensely expensive wars, neither of which has any prospect of ending anytime soon.

• Dept. of Homeland Security. This is the largest and most dangerous of all agencies, now with its own gigantic campus in Washington, DC. It will never go away and centralizes the functions of a police state.

• Guantanamo. Hundreds of individuals, most of them (like the Uighurs recently in the news) guilty only of being in the wrong place at the wrong time, are incarcerated for years. A precedent is set for anyone who is accused of being an “enemy combatant” to be completely deprived of any rights at all.

• Abu Ghraib and Torture. After imprisoning scores of thousands of foreign nationals, Bush made it a US policy to use torture to extract information, based on a suspicion or nothing but a guard’s whim. This is certainly one of the most damaging things to the reputation of the US ever. It says to the world, “We stand for nothing.”

• The No-Fly List. His administration has placed the names of over a million people on this list, and it’s still growing at about 20,000 a month. I promise it will be used for other purposes in the future…

• The TSA. Somehow the Bush cabal found 50,000 middle-aged people who were willing to go through their fellow citizens’ dirty laundry and take themselves quite seriously. God forbid you’re not polite to them…

• Farm Subsidies. Farm subsidies are the antithesis of the free market. Rather than trying to abolish or cut them back, Bush signed a record $190 billion farm bill.

• Legislative Free Ride. And he vetoed less of what Congress did than any other president in history.

The only reason I can imagine why a person who is not “evil” (to use a word he favored), completely uninformed, or thoughtless would favor Bush is because he wasn’t a Democrat. Not that there’s any real difference between the two parties anymore…

As disastrous as he was, I rather hate to put him in competition for “worst president” in the company of Lincoln, McKinley, Wilson, the two Roosevelts, Truman, Johnson, and Nixon. He is simply too small a character – psychologically aberrant, ignorant, unintelligent, shallow, duplicitous, small-minded – to merit inclusion in any list. On second thought, looking over that list of his personal characteristics, he’s probably most like FDR, except he lacked FDR’s polish and rhetorical skills. I suspect he’ll just fade away as a non-entity, recognized as an embarrassment. Not even worth the trouble of hanging by his heels from a lamppost, although Americans aren’t (yet) accustomed to doing that to their leaders. Those who once supported him will, at least if they have any circumspection and intellectual honesty, feel shame at how dim they were to have been duped by a nobody.

The worst shame of Bush – worse than the spending, the new agencies, the torture, or the wars – is that he used so much pro-liberty and pro-free-market rhetoric in the very process of destroying those institutions. That makes his actions ten times worse than if an avowed socialist had done the same thing. People will blame the full suite of disasters Bush caused on the free market simply because Bush constantly said he believed in it.

And he’s left OBAMA! with a fantastic starting point for what I expect to be even greater intrusions into your life and finances. Eventually, the Bush era will look like The Good Old Days. But only in the way that the Romans looked back with nostalgia on Tiberius and Claudius after they got Caligula. And then Nero. And then the first of many imperial coups and civil wars.

Regards,

Doug Casey
for The Daily Reckoning

Baby Bush: The Worst President in History? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

In 1986, as the U.S. Mint began issuing gold coins for the first time since 1933, a tax rule against holding “collectibles” in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin. The easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE).

The only stipulation is that all bars and all coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. Numismatic coins are also impermissible for an IRA.

The procedure for putting gold into an IRA is somewhat more complicated than with paper assets, but the requirements aren’t onerous.

To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Don’t look to your discount broker or a fund family like Vanguard; they won’t touch the stuff. Instead, you’ll need a specialist like the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust. These are the most respected names in the business. An Internet search will turn up others, and if you do your due diligence on them, you might find one that works for you.

But remember that it’s especially important to choose a custodian with a solid reputation, because your gold will be stored at a location twice removed from you. A firm such as GoldStar or Sterling would be merely your IRA’s legal custodian; for vaulting your IRA gold, it will employ a certified depository, likely either HSBC Bank USA (which is also a COMEX gold depository) or Delaware Depository Services.

So chances are you’ll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy. (Dropping in coins you already own is against the rules – a “prohibited transaction.”) And if you want to mix in some paper – for example, to consolidate your gold, ETF, and mining stock holdings into one account – that’s fine, too.

The custodian will charge either a fixed annual fee or a percentage of the IRA’s value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.

You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000, or a “catch-up” limit of $6,000 for those 50 and over. Custodians generally set their minimum initial investment at that $5,000 mark but will accept smaller subsequent contributions.

When the time comes to withdraw from your gold IRA, you don’t get any coins or bars, alas. You get cash. The custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA.

That takes care of the how-to. The trickier part is whether it’s a good idea. For most readers, the answer is likely no. Here’s why.

The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5K or $6K. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.

Physical gold, of course, doesn’t generate income. So you might be wasting part of your IRA’s tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.

Does that mean it never makes sense to have physical gold in an IRA? No. There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold.

No-income portfolio. If you’ve decided that the outlook for bonds and dividend-paying stocks is so bleak that you don’t want any at all, then putting gold into your IRA won’t crowd out any income-earning investments.

Strategic switching. Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.

IRA Only. If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to buy gold may be the only way for you to hold it.

In researching this, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.

He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight to quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.

Making the move is simple if the pension fund is already an IRA. You’re free to transfer funds from an IRA that’s invested in stocks or anything else directly into a gold IRA.

Or if the pension fund is run by your employer, when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.

Regards,

The Editors of BIG GOLD
for The Daily Reckoning

Should You Put Gold Into Your IRA? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The $1.1 Trillion Budget Deficit

My reaction is that the people in the government are totally out of control. A poker player would say the government is “on tilt,” placing wild, desperate bets in the hope of getting rescued by good luck.

The things they’re doing are not only unproductive, they’re the exact opposite of what should be done. The country got into this mess by living beyond its means for more than a generation. That’s the message from the debt that’s burdening so many individuals; debt is proof that you’re living above your means. The solution is for people to significantly reduce their standard of living for a while and start building capital. That’s what saving is about, producing more than you consume. The government creating funny money – money out of nothing – doesn’t fix anything. All it does is prolong the problem and make it worse by destroying the currency.

Over several generations, huge distortions and misallocations of capital have been cranked into the economy, inviting levels of consumption that are unsustainable. In fact, Americans refer to themselves as consumers. That’s degrading and ridiculous. You should be first and foremost a producer, and a consumer only as a consequence.

In any event, the government is going to destroy the currency, which will be a mega-disaster. And they’re making the depression worse by holding interest rates at artificially low levels, which discourages savings – the exact opposite of what’s needed. They’re trying to prop up a bankrupt system. And, at this point, it’s not just economically bankrupt, but morally and intellectually bankrupt. What they should be doing is recognize that they’re bankrupt and then start rebuilding. But they’re not, so it’s going to be a disaster.

The U.S. Economy in 2009

My patented answer, when asked what it will be like, is that this is going to be so bad, it will be worse than even I think it’s going to be. I think all the surprises are going to be on the downside; don’t expect friendly aliens to land on the roof of the White House and present the government with a magic solution. We’re still very early in this thing. It’s not going to just blow away like other post-war recessions. One reason that it’s going to get worse is that the biggest shoe has yet to drop… interest rates are now at all-time lows, and the bond market is much, much bigger than the stock market. What’s inevitable is much higher interest rates. And when they go up, that will be the final nail in the coffins of the stock and real estate markets, and it will wipe out a huge amount of capital in the bond market. And higher interest rates will bring on more bankruptcies.

The bankruptcies will be painful, but a good thing, incidentally. We can’t hope to see the bottom until interest rates go high enough to encourage people to save. The way you become wealthy is by producing more than you consume, not consuming more than you produce.

Deflation vs. Inflation

First of all, deflation is a good thing. Its bad reputation is just one of the serious misunderstandings that most people have. In deflation, your money becomes worth more every year. It’s a good thing because it encourages people to save, it encourages thrift. I’m all for deflation. The current episode of necessary and beneficial deflation will, however, be cut short because Bernanke, as he’s so eloquently pointed out, has a printing press and will use it to create as many dollars as needed.

So at this point I would start preparing for inflation, and I wouldn’t worry too much about deflation. The only question is the timing.

It’s too early to buy real estate right now, although a fixed-rate mortgage could go a long way toward offsetting bad timing. It would let you make your money on the depreciation of the mortgage, as opposed to the appreciation of the asset. Still, I wouldn’t touch housing with a 10-foot pole – there’s been immense overbuilding, immense inventory. And people forget: a house isn’t an investment, it’s a consumer good. It’s like a toothbrush, suit of clothes, or a car; it just lasts a little bit longer. An investment – say, a factory – can create new wealth. Houses are strictly expense items. Forget about buying the things for the unpaid mortgage; before this is over, you’ll buy them for back taxes. But then you’ll have to figure out how to pay the utilities and maintenance. The housing bear market has a long way to run.

The U.S. Dollar and the Day of Reckoning

It’s very hard to predict the timing on these things. The financial markets and the economy itself are going up and down like an elevator with a lunatic at the controls. My feeling is that the fate of the dollar is sealed. People forget that there are 6 or 8 trillion dollars – who knows how many – outside of the United States, and they’re hot potatoes. Foreigners are going to recognize that the dollar is an unbacked smiley-face token of a bankrupt government. My advice is to get out of dollars. In fact, take advantage of the ultra-low interest rates; borrow as many dollars as you can long-term and at a fixed rate and put the money into something tangible, because the dollar is going to reach its intrinsic value.

The Recession

This isn’t a recession, it’s a depression. A depression is a period when most people’s standard of living falls significantly. It can also be defined as a time when distortions and misallocations of capital are liquidated, as well as a time when the business cycle climaxes. We don’t have time here, unfortunately, to explore all that in detail. But this is the real thing. And it’s going to drag on much longer than most people think. It will be called the Greater Depression, and it’s likely the most serious thing to happen to the country since its founding. And not just from an economic point of view, but political, sociological, and military.

For a number of reasons, wars usually occur in tough economic times. Governments always like to find foreigners to blame for their problems, and that includes other countries blaming the U.S. In the end, I wouldn’t be surprised to see violence, tax revolt, or even parts of the country trying to secede. I don’t think I can adequately emphasize how serious this thing is likely to get. Nothing is certain, but it seems to me the odds are very, very high for an absolutely world-class disaster.

Gold’s Performance in 2008

The big surprise to me is how low gold is right now. It’s well known that even if we use the government’s statistics, gold would have to reach $2,500 an ounce to match its 1980 high. I don’t necessarily buy the theories that the government and some bullion banks are suppressing the price of gold. Of course, with everything else going on, the last thing the powers-that-be want is a stampede into gold. That would be the equivalent of shooting a gun in a crowded theatre; it could set off a real panic. But at the same time, I don’t see how they can effectively suppress the price. Either way, the good news is that gold is about the cheapest thing out there. Remember, it’s the only financial asset that’s not simultaneously someone else’s liability. So I would take advantage of today’s price and buy more gold. I know I’m doing just that.

Gold Volatility

Gold will remain volatile but trend upward. I don’t pay attention to daily fluctuations, which can be caused by any number of trivial things. Gold is going to the moon in the next couple of years.

Gold Stocks

Last year, it seemed to me that we were still climbing the Wall of Worry and that the next stage would be the Mania. But what I failed to read was the public’s indirect involvement through the $2 trillion in hedge funds. On top of that, while the prices of gold stocks weren’t that high, the number of shares out and the number of companies were increasing dramatically. Finally, the costs of mining and exploration rose immensely, which limited their profitability.

The good news is that relative to the price of gold, gold stocks are at their cheapest level in history. I still have my gold stocks and the fact is, I’m buying more. I’m not selling, because I think we’re starting another bull market. And this one is going to be much steeper and much quicker than the last one. I’m not a perma-bull on any asset class, but in this case I’m forced to go into the gold stocks. They’re the cheapest asset class out there, and the one with the highest potential.

2009: Another Year of Shock and Awe originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

I believe in the existence of the business cycle. That’s partly because almost everything in life is cyclical, which has been recognized at least since the tale about Joseph and the seven fat years and seven lean years. The Austrian school of economic thinking explains why the business cycle keeps coming around and does so without relying on a soothsayer to interpret your dreams. I urge you to read the appropriate chapters in either Crisis Investing for the Rest of the 90’s or Strategic Investing for a full explanation. But, in a nutshell, government intervention in the economy – through taxes, regulation and, most importantly, currency inflation – causes distortions and misallocations of capital that must eventually be unwound. The distortions degrade the general standard of living, and the economy goes into a recession (call that an incomplete cleansing). Or it goes into a depression – wherein the entire sickly structure comes unglued.

The last real depression took place in the 1930s. The economy very nearly went over the edge again in the early ’70s and again in the early ’80s. Both times massive re-inflation of the currency papered the problems over (but at a cost). Meanwhile, most importantly, continuing technological innovation and increased savings (motivated by the fear of bad times) led to recovery. Since then we’ve had 25 years of what Herman Kahn predicted would be "The Long Boom."

Unfortunately, much, much more severe taxes, regulations, and inflation have caused much, much more severe distortions in the economy – especially over the last 15 years. And the boom was financed largely by debt, which made everybody feel and act much wealthier than they really were. It’s as though you borrowed a million dollars and spent it all on wine, song and high living. For a while, you’d have a high standard of living and perhaps have a lot of fun. But eventually, when you either paid the money back with interest or were forced into bankruptcy, your standard of living would take a painful drop. The U.S., in particular, has been living far above its means, burning up its own capital and trillions more borrowed from abroad.

This isn’t news to readers of International Speculator or even the intelligent layman who follows the news. Oddly enough, there’s one glaringly obvious thing that is not in the news today at all. That’s the fact that interest rates – nominal rates too, but especially "real," after-inflation rates – are close to their lowest levels in history. And in today’s extraordinarily risky environment, they’re artificially low. This, and the reasons for it, should be headlines.

All over the world, but especially in the U.S., currencies are being inflated radically; M3 is rising at about 18% per year. Without exception, interest rates eventually reflect inflation. Therefore interest rates are going to rise radically. Governments are currently suppressing rates by lending money cheaply and promiscuously, to keep both borrowers and commercial lenders from going under. But rates are soon going to explode -especially long-term rates. My guess is that we’ll see at least the levels of the early ’80s, which would mean 15%+ for long-term Treasury bonds. And I’ll say that’s coming within a couple or three years at the outside.

The government wants low rates, obviously, because low rates make it a lot easier for homeowners to pay their mortgages, among other things. But they forget that low rates also discourage saving – which is the one thing that can actually bring down real rates. Officialdom is between a rock and a hard place, and they’re choosing to inflate the currency, hoping to stave off an epidemic of bankruptcy among consumers who borrowed and among the financial institutions that did the lending. The effort will fail and both groups will go bankrupt, simply because the whole society has been living above its means. That will result in large-scale commercial bankruptcies and unemployment.

Higher interest rates will absolutely hammer the economy.

It seems to me a near certainty that we’re about to enter something I have long called "The Greater Depression." I suspect it will be inflationary (in the direction of what Germany underwent in the early ’20s, or Zimbabwe today), rather than what the U.S. had in the ’30s. I should somehow trademark the term "Greater Depression," except that I’m sure Boobus americanus would then blame me for it.

Here I’d like to pinpoint my prime candidate for the Decline and Fall of the Roman Empire, since it almost seems America has been reading pages from their playbook since day one. Many reasons have been evoked for the fall: moral turpitude, immigration, barbarian invasion, Christianity, lead pipes, etc., etc. My candidate is economic stagnation brought on by taxes, regulation and inflation. I’d love to discuss that assertion in detail, but that’s not what this article is about.

What should you do?

Reduce your standard of living now (while the situation is still under control), greatly increase your savings (in gold, which is real money) and rig for greatly changed patterns of production, consumption, employment and business for a considerable time. The hurricane that’s just starting to hit the economy will both trigger and worsen problems in other areas. Starting with politics, because nearly everyone today believes the ridiculous notion that the government should guide the economy.

Regards,

Doug Casey
for The Daily Reckoning
July 1, 2008

Doug Casey is a best-selling author and chairman of Casey Research, LLC, publishers of a variety of subscription-based advisories for independent-minded investors. The above article is an extract from the International Speculator, now in its 28th year.

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There’s a house on my block
That’s abandoned and cold
Folks moved out of it a
Long time ago
And they took all their things
And they never came back
Looks like it’s haunted
With the windows all cracked
And everyone call it
The house, the house where
Nobody lives

Once it held laughter
Once it held dreams
Did they throw it away
Did they know what it means
Did someone’s heartbreak
Or did someone do somebody wrong?
– Tom Waits, "House Where Nobody Lives"

This just in… Bloomberg reports that Americans continue to fall further and further behind on their mortgage payments.

Unemployment is rising. And now, carpenters, plumbers and even granite countertop installers are getting jobs with the banks. They’re finding work maintaining foreclosed houses.

Today, we’re still waiting for a bounce in the stock market, following last week’s big drop. But there was little change in the Dow. Nor was there any change in the oil market. The price per barrel stayed right where we left it last week – at $140.

No change in the dollar either – at $1.57 per euro. And gold? It stayed where it was too – at $927 per ounce.

Alan Greenspan was back in the news. He said, "risk was heavily underpriced," last summer. Shame he waited a year to mention it.

As you know, dear reader, we think Mr. Greenspan did somebody wrong. He did the whole nation wrong – by handing out money and credit far too freely for far too long.

But Mr. Greenspan is retired. No point in criticizing him. He went on to say that housing remains a "critical problem." Of course, housing is not a problem at all. It’s becoming more affordable. It’s only a problem for people who mistook the roof over their heads for a speculative investment. They thought it was something it wasn’t. Even for them, the current sell-off in the housing market is a good thing; it brings their feet back to terra firma.

The problem is that the correction in the housing market creates other problems. America is becoming a country of houses where nobody lives. Foreclosed and abandoned houses, and "see through" houses that never heard laughter and never knew dreams, are everywhere. Police say they are becoming a nuisance. Squatters move in. Transients. Drug users. Criminals and bums. Then, the houses become an even bigger problem for neighbors.

(We’re surprised. More people, as a percentage of the population, are behind bars in American than in any other country; it’s amazing there are even any jaywalkers or litterers still at liberty.)

Aside from that, the fall in housing values undermines the spending power of the typical American consumer. As Dear Readers know so well, Americans had become accustomed to spending money they hadn’t yet earned. They just used the rising value of their houses as collateral.

But he who spends what isn’t his’n,

Pays it back or goes to prison

You’d expect that they’d now have to become accustomed to NOT spending what they actually have earned. Debts have to be paid. Accounts have to be settled. Mistakes have to be reckoned with.

But heck this is the 21st century. There’s a report in today’s Financial Times that "consumers fail to save despite the gloom." How do you like those consumers? Are they dumb…or what? We don’t know. People think there’s some magic, sweet spot in the universe where the old rules no longer apply. Many seem to think they will never have to pay back what they’ve borrowed. They think the government will bail them out.

Good luck to them…

*** "One Rebate Not Enough," is the headline of an article written by Robert Shiller, appearing in the New York Times. Shiller says the feds’ attempt to bail out consumers with tax rebates is too puny to do much good. Besides, he says, much of it ends up stimulating others peoples’ economies.

You’ll remember our explanation of the world money system. The Fed is no longer America’s central bank. Now, it’s the world’s central bank. But it’s a funny old world. The Fed provides money – currently at less than half the rate of consumer price inflation – in order to stimulate the economy. And it does stimulate the economy…the Chinese economy! And the Russian economy! And the Iranian economy (the fourth largest oil exporter in the world)! And the economies of every sandy oil producer in the Arab world!

So do the feds’ ‘tax rebates.’ Americans spend the money on gasoline and other imports. Rebates were intended to be a "booster shot," for the U.S. economy, said President George W. Bush. But it’s the foreigners, not Americans, who are getting the boost. The foreigners build sparkling cities. They throw up huge factories. They roll more automobiles off the assembly lines…build more railways…pave more highways.

Yes…and even store more food. Comes an article in today’s International Herald Tribune that tells us the foreigners are "hoarding" food…and that his is pushing up food prices even more.

Meanwhile, in the U.S. of A., hearts break…and the lonely wind blows through empty houses.

*** Even the houses of disrepute are feeling a little abandoned. According to an item in the European press, "Credit Crunch Pinches Prostitutes." Brothels in Nevada say their revenues have been cut in half as truckers can’t afford the gasoline to make a detour.

What is this country coming to? We don’t know. But we don’t like the looks of it.

Still, what can we do? The subject came up this weekend. School has finally ended for summer. One son is back from Boston. Two others have finished their tests in France. We took them with us to Normandy for the weekend, so we could all work at painting the windows and doors of our old house, barns and stables. The nice thing about painting is that it is an invitation to conversation.

"Dad, what are you investing in?" one of the boys wanted to know.

We explained that we had put the family money in a variety of things.

"I’m not really an investor – except in the business," we began our explanation. "But I know some people who are good at it. They do research on individual companies – like Warren Buffett. And if they’re good, and if they’re lucky, they do a bit better than the market itself. In a single year, it wouldn’t matter very much. But over a very long time, it adds up. So, I gave them some of the family money.

"Emerging markets, for example. I don’t know about next year. Or even 5 years out, but it seems a reasonable bet that 10 or 20 years from now, those investments in emerging markets will have done better than putting the money into U.S. stocks. And if you have someone you trust on the case, you can take a long view, spread out among several different markets, and not worry about it."

"You mean, you put all the money into emerging markets?"

"No…no… only about a quarter of it. The rest is in gold, natural resources, and European stocks – same thing there, I have someone I trust making very long-term investments. I don’t know if gold is going up in the short run. But over the very long run, there’s never been anything better as a way to store wealth. And I think also that over the long run natural resources will be a good place to be – if you’ve got someone you trust making the choices. I’m in a very privileged position in that I get to see so many different people trying so many different ways to make money. In my business, I see them…I meet them…I study their theories and see their results. Most of them are a waste of time. Worse than that, they’re a danger to your money. But a few are real pros…people you can trust…and people who will do a good job for you."

"Yeah Dad, I’ve been reading The Daily Reckoning. My thinking is probably getting warped by it. Because I’m putting the money I save this summer into gold too. But Dad, what if gold goes down like it did in the ’90s…and what if those managers lose the money? What are you going to do? Shouldn’t you have a lot of money in the bank to retire on?"

"Nah…I’m not going to retire. And when I get too old to work…just ship me out to the ranch and let me dry up and blow away."

"Okay Dad…sounds like a plan."

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Greater Depression and What You Should do About It originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

BIG GOLD: Gold has passed its 1980 nominal high. Why do you think it’s breaking out now?

Doug Casey: The fact that gold has moved above its 1980 high is meaningful only in an academic way; today’s dollar is worth only a fraction of a 1980 dollar. From here on, it’s best to avoid thinking about anything just in terms of dollars. What’s developing now is likely to be the biggest monetary crisis of the past 100 years, potentially the biggest since the U.S. Civil War. This isn’t a prediction, just an appraisal of the tumultuous possibilities that are opening up. Americans are going to have to learn to think more like Argentines: if an Argentine tried to keep track of value in the local peso, he’d be bankrupt in 5 years.

BG: There are those who agree with you about a possible crisis but believe we’ll see deflation instead of inflation, or at least deflation before inflation.

DC: What we’re facing is a monumental monetary crisis that can take one of two forms. It can be deflationary, where billions and billions of dollars are wiped out through bankruptcies and defaults, and the remaining dollars become worth more as a result. Or it can be inflationary, where the world’s central banks keep dollar assets from being wiped out by supporting the issuance of debt – which is what they’re currently doing, by propping up failing banks and homeowners who can’t pay their mortgages. Those are your two alternatives. You can have either one – it’s really a flip of the coin as to which you get.

It’s also possible you can have both at the same time. You could have deflation in some areas of the economy, such as real estate, which is happening now, and inflation in other areas of the economy, where prices are going up, as with food and oil.

I’m of the opinion that government is so big and so powerful now, and the average person – idiotically – relies on it so heavily, that much higher inflation is inevitable. They’re certainly going to do their very best to keep a deflationary collapse from happening, because they all remember what it was like in the U.S. in the 1930s. Yet not too many people think about Germany’s inflationary collapse in the 1920s. It was much more unpleasant.

Inflation is the enemy of the person who works, saves and invests. But it’s the friend of the speculator.

BG: Why do you think gold stocks have lagged while gold has taken off?

DC: Gold stocks are a play on gold. But they’re also stocks. The best environment for them is when both gold and the general market are moving up, and lately the stock market has been problematical. People are going to panic into gold, because it’s cash – money in the most basic form. Gold stocks are not money; they’re speculative vehicles. And despite the strength in gold, the costs and risks of finding and building mines have gone up just as fast in the last couple of years. There’s no necessity for them to move in lockstep with gold itself. That said, I think gold stocks are really going to howl as gold goes into the Mania stage.

BG: The water in the pot is definitely getting hotter. Where do you think gold is going this year?

DC: Gold has been in a bull market since 2001. It’s gone up, on average, about 25% per year compounded, and there’s absolutely no reason the bull market should stop now. On the contrary, there’s every reason to believe that the gold bull market, having gone through its Stealth stage and still being in its Wall of Worry stage, is going to hit the Mania stage. To sell now would be to leave the big money on the table.

My best advice is, be right and sit tight. And that means staying long until you see a golden bull tearing apart the New York Stock Exchange on the front cover of Newsweek magazine, at which point it will be time to sell.

BG: What price do you think gold will hit in 2008?

DC: Strictly gazing through a crystal ball, I think it’s going over $1,200, no problem.

BG: What about the long-term price for gold?

DC: Just to reach its previous high in purchasing power, gold will have to go over $2,500 – probably more like $3,000 after you discount the phoniness in the government’s CPI numbers. But because this crisis is much more serious than the one in the late 1970s and early ’80s and much more far-ranging, $3,000 is actually a fairly conservative number. I’ll say it again: gold is not just going through the roof, it’s going to the moon.

BG: What advice would you give to readers of Big Gold about how to invest in gold and gold stocks in the coming environment?

DC: The first thing is, you’ve got to have a lot of physical gold in the form of gold coins. Second, make sure a large chunk of those coins is outside the political jurisdiction where you live. If you live in the U.S., they’ve got to be outside the U.S. If you live in Canada, they’ve got to be outside Canada, and so forth. Third, gold stocks are definitely going to howl, so you definitely should have a good position in them.

As important as gold and gold stocks are, though, I suspect we’re going to see foreign exchange controls of some type or description in the years to come. That means if you don’t have assets outside your native country, you’re going to be caught like a lobster in a trap. I think it’s very important to diversify internationally. Buying foreign real estate is one prudent way to do so because, even though there’s been a worldwide property mania, there are still some places where property is very cheap, leaving plenty of upside. In addition, if you pick a locale where you’d like to live, you’ll have a comfortable place to wait things out – which is a serious plus, because I think things in the U.S. are going to get really ugly in the years to come. And most important, the government can’t make you repatriate foreign real estate.

BG: What if I don’t have the ability to buy real estate outside the country I live? I know you can have a foreign bank account and a safe deposit box, but I have to report those, so how does that help me?

DC: You have to report a bank account, but you don’t have to report a safe deposit box.

BG: What if I have over $10,000 of coins in that box?

DC: It doesn’t matter. It’s just like having a million dollars of foreign real estate – not reportable. Of course they can change these arbitrary laws – probably to make them more restrictive and invasive – at any time.

BG: Thanks, Doug, for the practical advice. Anything else you’d like to say to Big Gold readers?

DC: Hold on to your hat; you’re in for the ride of your life.

BIG GOLD is a monthly advisory from Casey Research, one of the nation’s oldest and most respected organizations providing unbiased research on natural resource investments.

BIG GOLD is designed for conservative investors looking for an easy and lower-risk way to participate in gold markets through producing and near-production precious metals companies, ETFs and mutual funds you can buy and sell through your favorite discount broker.

What a remarkable day! We never thought we’d see the likes of it.

First, Ben Bernanke appeared in the U.S. Senate, with former Fed governor Paul Volcker by his side, and announced an incredible turnaround in Fed policy. Yes, he said, he and his fellow Fed governors were very concerned about weakness in the financial sector. And yes, they were very sympathetic to all those people who had high mortgage payments to make and all those people who had bought shares in Bear Stearns and other high-flying investment firms. But he went on to say that the Fed’s primary mission was not to protect people from the consequences of their own mistakes; it was to protect the nation’s money and its credit.

Bernanke went on to hint strongly that there would be no further rate cuts. Instead, Fed policy has turned back to its more traditional role of fighting inflation, he said. The Fed has become serious about stabilizing the value of the dollar.

“We can no longer ignore the economic consequences of price increases in fundamental resources, such as oil, wheat and iron ore,” he said. “These price increases not only cause suffering on the part of average citizens who now pay an average of $3.23 for a gallon of gas. They also cause huge distortions and malinvestments in the whole world economy.”

While he was still speaking, prices of stocks began to fall – in anticipation of higher interest rates – with the Dow closing down 535 points. The dollar rose against all foreign currencies; the euro dropped back to $1.30. A shop owner in Paris was heard to say that he actually liked Americans. Commodities fell, and the price of gold dropped to $750 an ounce.

That was just the beginning. At 11AM a group of corporate executives, present and former – including Stan O’Neal, Richard Fuld, Ray Irani, John Mack, Barry Diller and William Foley – appeared at a press conference in New York. The spokesman for the group startled reporters when he announced the group’s intention to return a considerable part of its earnings to the shareholders for whom they worked.

“We’ve thought long and hard about this,” said Mr. Fuld. “And we’ve come to realize that these salaries are just absurdly high. None of us can think of anything we’ve done anytime in the last ten years to warrant a salary of even half of what we get paid – much less the $38 million Stan got or the $322 million Ray got. Speaking for myself, I spent practically all of last year attending meetings, parties, and ceremonies – and frankly I can’t recall what any of them was about. None of them needed me. And I’ll tell you something else, when I attend those board meetings, half the time I don’t even know what the accountants and lawyers are [there] talking about. We got together this morning and asked each other how those CDSs work, for example. None of us had any idea. And apparently, believe it or not, between us, we’ve got billions of them on our books.”

As we’ve been saying here at The Daily Reckoning, executive salaries are preposterous. But we never thought we’d see the day when executives would admit it.

But the day wasn’t over.

Hedge funds have had the worst quarter since they’ve been keeping records. Fifty of them went broke last year. About 8,000 more to go, by our estimate.

What is remarkable is the hedgies response. According to the American Hedge Fund Association, managers are reversing their typical “2 and 20″ compensation package, to make up for their lost income. Instead of charging 2% of capital and 20% of performance (usually over a benchmark), they’re charging 20% of capital and a 2% performance fee.

An article in the Financial Times demonstrated recently how the previous fee structure worked. Managers were encouraged to take risks, knowing that “heads I win, tails I lose someone else’s money.” Taking a big chunk of the gains, while not participating in the losses, gradually transfers ownership of the capital from the investor to the manager. This new system of fees merely speeds up the process.

Finally, Alan Greenspan himself stepped up to the microphones yesterday.

“I think it is time for me to apologize,” said the former head man at the Fed. “This crisis in the financial markets; it’s really my fault. It was on my watch that the bubble in residential real estate developed. It was while I was at the Fed, too, that the huge parallel banking system grew to its monstrous size – with trillions of dollars worth of CDSs, SIVs, MBSs, and all the other crazy alphabet derivatives, that are causing so much trouble.

“I knew all along that the only real money is money backed by gold. And I knew that there would be Hell to pay when people got carried away with the cheap paper-dollar credit that I was helping to make available. I remember that I said at the time that the growth in sophisticated investment vehicles helped spread out the risk. And I also told homebuyers that they should take advantage of those ARMS that they now regret.

“I am truly sorry for what I have done.”

What a day!

*** In addition to the financial news, the political news was also worthy of comment. The little town of Ashford, Tennessee, held a special election yesterday, after its mayor died in a freak poker accident. He was playing poker with friends in an abandoned warehouse when the roof collapsed, killing him, the chief of police, the coroner, and the town’s leading brothel owner, Ray Borvis.

The resulting election to replace the mayor and police chief pitted democrats against republicans in a bitter battle for control of Ashford. Here we see democracy in its purest form. This the actual transcript of a public debate held at the James Earl Ray Memorial Hall yesterday.

“I have every respect for my opponent in this race,” said the democrat, Liddell Fulsom, a stout man who was said to sweat a lot. “It is just that I don’t think he shares the values of Ashford and its people.”

“What values are you talking about?” replied Myron Byer, the republican. “The values of the previous administration are nothing to be proud of.”

“What? Are you casting dispersions on the town and its people? I know I am very proud to be from Ashford. We’re number one in the state in supporting the U.S. government…why, we have more flags flying in Ashford than in any other city in the country…per capita, of course.”

“Yes, but that’s because you got a special deal on the flags, made in China, of course…and then you sold them to the city government so they could put them up all over town. And you made $5 on each one of them…didn’t you?”

“Are you opposed to free enterprise, Mr. Byer? Would you like to tell the people of Ashford why? It’s because you were – and probably still are – a radical, a draft dodger and a subversive.”

“Are you kidding? I was a student during the Vietnam War…I had a student deferment. And then I got a high number in the lottery. I was just lucky.”

“And I guess you’d say that those of us who served our country were unlucky? I spent 18 months fighting for Ol’ Glory in the swamps and jungles of Southeast Asia, and you know, those are the proudest moments of my life. I feel very lucky that I had the honor to defend this great country.”

“And what about killing those women and children…remember, you were court-martialed for it? Are you proud of that too?”

“Wait a minute…that’s hitting below the belt…they were armed Vietcong…I was railroaded by communists and the peaceniks… And at least I wasn’t spending my time up at the university fooling around with thespians.”

“You don’t even know what a thespian is…”

“And I don’t want to know…I’m a married man with four upstanding children…”

“No, you’re a racist, a bigot and a moron.”

“Hold on, you piece of sh**. Or I’ll come over there and punch your lights out. Let’s face it, Myrie, you don’t have a prayer in this election. You’re desperate.”

“Oh yeah, I’ve already announced my plan to build a new senior center. All this town’s got are seniors. And they’re behind me.”

“How do you think you’re going to pay for this thing?”

“I’m going to raise taxes on that stupid store of yours.”

Until tomorrow,

Bill Bonner
The Daily Reckoning
April 1, 2008

Gold is Going to the Moon originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

CR: Why would the typical American, who gets far more from government than he or she pays, even consider voting for Ron Paul?

RP: Even those Americans who receive a higher nominal amount in transfer payments than they pay in income taxes suffer from Big Government. Their standard of living is eroded by inflation, their wages are garnished by income and payroll taxes, their civil liberties are under constant assault, and their economic prospects are limited because of the drag the welfare-warfare state places on the economy. Furthermore, unless we reverse course quickly, future generations will suffer a declining standard of living and loss of liberty. Thus, I expect many Americans to vote for me not only out of concern for their own well-being, but out of concern for their children.

CR: What is your outlook for the U.S. dollar, absent any significant change in the current course of things?

RP: Unless we return to a sensible monetary policy and rein in government spending, I expect the value of the dollar to continue to fall.

CR: Do you think we could see currency or capital controls being implemented?

RP: History shows that governments tend to react to economic crises by increasing government control over the free market, so, yes, it is quite possible that the U.S. Government will respond to a future economic downturn with currency and capital controls.

CR: We have seen the other presidential candidates perform all sorts of linguistic gymnastics when asked how they would handle the looming fiscal problems of Social Security and Medicare. While the solutions will obviously not be quick or easy, where would you start?

RP: I would transfer some of the money saved by my cuts in foreign programs and unconstitutional domestic bureaucracies into the entitlements programs to keep the promises to those relying on the system. I would then work to transition to a market system, phasing in an option for younger workers to opt out of Social Security and Medicare taxes in return for agreeing to provide for their own retirement and health care needs without participating in a government entitlement program.

CR: Further on domestic issues, just what do you think the role of the federal government should be?

RP: Ideally, it should be limited to providing protection from foreign threats, securing the borders and ensuring free trade among the states.

CR: By what % would you estimate that federal government spending could be cut without causing any great hardship? Which agencies would you cut first?

RP: I don’t have an exact percentage, but I am confident that if the welfare state were cut, along with a corresponding reduction in taxes, private charities would quickly step up to help the truly needy – and do so in a much more effective and compassionate way than government bureaucracies. I would cut the Iraq war, foreign aid and all foreign commitments immediately. Domestically, I would work to shut down the Departments of Education, Energy, and Commerce. I would also work to eliminate all forms of corporate welfare and business subsidies.

CR: Any idea how much of the total federal debt could be paid off if the government sold all the land, buildings, equipment and other assets it doesn’t need for activities authorized by the Constitution?

RP: I do not have an estimate on that, but it is definitely something I would pursue.

CR: There is much talk about the Chinese deliberately keeping their currency cheap in order to undercut U.S. and European manufacturers. And we are increasingly hearing discussions about layering on more tariffs aimed at the Chinese. We assume you are anti-tariff, so do you do anything at all about “unfair” competition or just let the global marketplace sort things out over time?

RP: The United States does not have the authority to tell China, or any other country, what to do with their currencies. The values of currencies should be set by the market. Instead of worrying about the speck in China’s eye, I would focus on the beam in our eye by reducing the national debt, restoring a market in currency by repealing the legal tender laws and ending the continued debasement of the American currency.

CR: Much of the politicking this campaign season has certain religious overtones. Are you a believer in a strict separation of church and state?

RP: Yes. However, I believe state and local communities have the right to adopt policies such as school prayer without interference from the Federal Judiciary or any other branch of the federal government.

Doug Casey,
Daily Reckoning
December 18, 2007

Every day a new day. Every day a new battle. Every day along comes a new humbug.

Today’s most fascinating struggle is between the forces of inflation and deflation. Finally, it’s made the front page. The International Herald Tribune sees it this way:

“World economy faces double threat of recession and inflation,” says yesterday’s paper.

And yesterday, deflation delivered another head-butt. The Dow fell 172 points.

Today, in a TV interview, we were asked what we see ahead for the U.S. dollar.

“Not much,” was our reply. “It’s almost impossible to get much near-term visibility on the dollar,” we explained. “Because it is in this no-man’s-land between the opposing forces of inflation and deflation. On the one side, rising prices mean a falling dollar. On the other, falling prices mean the dollar is going up. We’re pretty sure the greenback is going to get shot to pieces…but we’re not sure by which side.”

Prices of assets – stocks and houses – are probably going down in the year ahead. And when they go down, the people who hold these assets feel a little poorer. Naturally, they’ll be less eager to part with the dollars they have left. So, they cut back on their spending. Soon, you have an economic slump…and you could even have a Japan-like slump, with falling consumer prices as well as falling asset prices. This is a classic deflationary situation, in which dollars become more valuable.

But that’s not all that is going on. Every central bank in the world is determined to prevent falling prices. They’re all joining hands to try to make sure prices continue to rise – by lowering interest rates, and making credit more easily available. Ben Bernanke says he’ll drop money from helicopters, if necessary, to keep the cash moving. Ultimately, all this extra cash and credit is going to have an effect…but maybe not right away.

And there’s another thing driving up prices – the China Effect.

Here’s an article sent to us yesterday describing China’s remarkable effect on world commodity prices, especially food (the following comes a recent issue of Mother Jones):

“Per-capita income in China is less than 1/10 of America’s and its per-capita greenhouse gas emission is less than 1/5 of ours. But if 1.3 billion Chinese were to consume at the level Americans do, we’d need several more Earths. China’s effect on world resources, quantified:

China is:

• The world’s largest consumer of coal, grain, fertilizer, cell phones, refrigerators, and televisions
• The leading importer of iron ore, steel, copper, tin, zinc, aluminum, and nickel
• The top producer of coal, steel, cement, and 10 kinds of metal
• The No. 1 importer of illegally logged wood
• The third-largest producer of cars after Japan and the United States; by 2015, it could be the world’s largest car producer. By 2020, there could be 130 million cars on its roads, compared to 33 million now.

More Facts:

• China produces half of the world’s cameras, 1/3 of its television sets, and 1/3 of all the planet’s garbage.
• There are towns in China that make 60% of the world’s button supply, 1/2 of all silk neckties, and 1/2 of all fireworks.
• China uses half of the world’s steel and concrete and will probably construct half of the world’s new buildings over the next decade.
• Some Chinese factories can fit as many as 200,000 workers.
• China used 2.5 billion tons of coal in 2006, more than the next three highest-consuming nations-Russia, India, and the United States-combined.
• It has more than 2,000 coal-fired power plants and puts a new one into operation every 4 to 7 days.
• Between 2003 and 2006, worldwide coal consumption increased as much as it did in the 23 years before that. China was responsible for 90% of the increase.
• China became the world’s top carbon dioxide emitter in 2006, overtaking the United States.
• Russia is China’s largest timber supplier; half of all logging there is illegal. In Indonesia, another timber supplier to China, up to 80% of all logging takes place illegally.
• 90% of all wood products made in China are consumed in the country, including 45 billion pairs of wooden chopsticks each year.
• The value of China’s timber-product exports exceeds $17 billion. About 40 percent go to the United States.
• More than 3/4 of China’s forests have disappeared; 1/4 of the country’s land mass is now desert.
• Until recently, China was losing a Rhode Island-sized parcel of land to desertification each year.
• 80% of the Himalayan glaciers that feed Chinese rivers could melt by 2035.
• In 2005, China’s sulfur-dioxide emissions were nearly twice those of the United States.
• Acid rain caused by air pollution now affects 1/3 of China’s land.
• Each year, at least 400,000 Chinese die prematurely of air-pollution-linked respiratory illnesses or diseases.
• A quarter of a million people die because of motor-vehicle traffic each year-6 times as many as in the United States, even though Americans have 18 times as many cars.
• Of the world’s 20 most polluted cities, 16 are in China.
• Half of China’s population-600 to 700 million people-drinks water contaminated with human and animal waste. A billion tons of untreated sewage is dumped into the Yangtze each year.
• 4/5 of China’s rivers are too polluted to support fish.
• The Mi Yun reservoir, Beijing’s last remaining reliable source of drinking water, has dropped more than 50 feet since 1993.
• Overuse of groundwater has caused land subsidence that cost Shanghai alone $12.9 billion in economic losses.
• Dust storms used to occur once a year. Now, they happen at least 20 times a year.
• Chinese dust storms can cause haziness and boost particulate matter in the United States, all the way over to Maine.
• In 2001, a huge Chinese storm dumped 50,000 metric tons of dust on the United States. That’s 2.5 times as much as what U.S. sources produce in a typical day.
• Currently, up to 36 percent of man-made mercury emissions settling on America originated in Asia.
• Particulate matter from Asia accounts for nearly half of California’s annual pollution limit.
• Environmental damage reportedly costs China 10 percent of its GDP. Pollution-related death and disability heath care costs alone are estimated at up to 4 percent of GDP.
• In 2005, there were 50,000 pollution-related disputes and protests in China.
• China’s middle class is expected to jump from 100 million people today to 700 million people by 2020.

These statistics are drawn from “The Last Empire: Can the world survive China’s rush to emulate the American way of life?” in the current issue of Mother Jones.

Gobble, gobble, gobble – the Chinese are eating up the worlds resources, putting huge upward pressure on prices.

“But wait,” said our interviewer, “if it is true that Americans are the world’s champion consumers…and if it is true that China imports much of its commodities for the purpose of making stuff for Americans…won’t Chinese demand go down with U.S. consumption? And won’t commodity prices crash rather than soar?”

“Yes…probably…maybe…” was all we could say. We are sorry to be so wishy- washy…but we are definitely, certainly, absolutely unsure. Most likely, a collapse in demand from the United States will lead to a collapse in commodity prices. Most likely, the collapse will be only temporary. Domestic demand from Asia will eventually make up for the shortfall from Asia.

But why pretend to see that far ahead? Let’s look at the near term. Next year, we expect a recession in the United States…a bear market in stocks…and further decline in house prices. As reported here yesterday, Lehman Bros. (NYSE:LEH) expects more than a million foreclosures next year…three times as many foreclosures next year as in 2007. What that means is simple: more people with less money in their pockets. Less money, need we remind you, is deflation.

But how much of it – for how long? We wish we could tell you…

What we can do, however, is advise you to be as well-informed as possible. No one has a crystal ball…we can’t tell you which way the market is going to go – but Agora Financial’s financial experts and market analysts can make sure that you are positioned to profit and that you portfolio is protected…no matter what the market does.

And for a limited time, you don’t have to choose which investment advisory you want – you can get all 15 of Agora Financial’s best research services – for life, with the Agora Financial Reserve. But act fast…once we close the doors to this elite service, we won’t open them again until June of next year.

*** Here’s today’s humbug:

“$45 Trillion gap seen in US benefits,” reports Yahoo Finance. The story line is very simple. Americans now expect to receive much more in Social Security, Medicare and other benefits than the government can possibly afford.

So, when the feds decide to fight deflation by making more cash and credit available, we have to ask – where does this money come from? If it is real…it must come from somewhere. It must come from the money that was slated to pay Social Security benefits…or pay for houses…or fund retirement plans…or one of millions of other uses. But all of that money is already fully committed. In fact, there is already a shortage of it.

So, the money must be unreal…it must be a kind of phantom money…the same kind of phony-baloney money that caused the credit bubble in the first place.

*** And here’s another question that came up in our interview: After U.S. consumers stop spending so much, who will take up the slack? The Chinese…or maybe the Indians?

There is no way Asian buying is going to replace U.S. spending in the near term. What’s more, China is probably more a cause for concern than comfort. The place is a giant Humpty Dumpty itself, waiting to fall off the wall. Its manufacturing sector depends on exports to people who can’t pay up. And its banking sector is jury-rigged by government regulators and stuffed with non-performing loans. Even when a banking system is run by capitalists it is still prone to booms and busts. But only a few years ago, China’s banking regulators were wearing those silly Mao jackets and waiving copies of his Little Red Book in the air. What will they do when the system blows up? It is bound to be entertaining…but hardly reassuring.

“China is the ‘29 economy,” we pointed out. “It is the big growth story of the 21st century, just as the United States was the big growth story of the early 20th century. But it is also the biggest threat to world financial stability. When China blows up…the blast is going to be heard all over the globe.”

*** And finally, a note from our old friend Doug Casey:

“There are very few political figures for whom I have any respect. One exception is Congressman Ron Paul (R-TX). Ron has been a personal friend of mine for many years. I can assure you that he’s a ’stand up guy,’ who has voted ‘no’ more times in Congress not just more than any other member, but more than the rest of that august body combined. He’s often called ‘Dr. No.’

“The fact that he has managed to get reelected numerous times – in Texas, of all places – in spite of his outspoken stands against the so-called ‘War on Drugs,’ the ‘War on Terror’ and other popular stupidities is one of the few things that make me think all is not absolutely lost in America.

“How does he do it? Ron’s an almost archetypical country doctor; he simply radiates honesty and sound principles. He’s about the last person you’d expect to see in Congress. The voters may not agree with everything Ron believes in, but they know they can trust him to do what he says he’ll d always vote for lower taxes, less regulation and, in fact, against absolutely anything not specifically authorized in the U.S. Constitution.

“His campaign for the U.S. presidency on the Republican ticket – once laughed at by mainstream apparatchiks from both parties – has generated a huge groundswell of national support. Recently, his campaign broke the record for the most funds raised online in a single day. That, in itself, raised a lot of eyebrows – and the money has since been put into high-profile ad campaigns libertarian-minded candidates could previously only dream of.

“Ron is famous for his principled rejection of fiat currency, and advocacy of hard money – the gold standard. That’s a matter of particular interest to us, with obvious investment implications. We thought, therefore, we’d get an update from Ron, to see if his thinking has changed any.”

Read on, below, for the full text of the interview.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The China Effect originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

How extraordinary? While an extreme example, on the back of the Eskay Creek discovery Consolidated Stikine Resources went from 10 cents per share in 1988 up to a high of $73 in 1990, a stunning 70,000% gain!

These stocks do well during periods of crisis for several reasons, but mainly because they are such a small sub-set of the financial landscape that even a fractional increase in interest sends them soaring. And this time around, I think we are going to see the high end of the range that these stocks are capable of, for the following reasons:

Increase in Equity Accounts
Thanks in no small part to the dot-com boom, never before have more North American households been involved in equity markets.

As the gold stock story filters through to them, they’ll find it highly appealing and he’ll have the ability to act immediately. Furthermore, such people are trend followers; they know nothing except to buy stocks that have a positive chart. For the first time since the Internet bubble burst, they’re going to have a real tiger by the tail. In other words, for the very first time in their history, gold stocks are going to have not only the cognoscenti but the unwashed masses piling in. The bull market will be breathtaking when this gets underway.

Meteoric Rise in Hedge Funds
In a similar vein, we now have the whole new phenomenon of hedge funds, which have grown like kudzu all over the financial tree. They were a non-factor in earlier bull markets, but now number over 12,000 and manage on the order of $1 trillion. Moreover, the majority of these funds are run by twenty- and thirty-somethings with little experience in a real bear market and are herd-like and aggressive to boot. Gold is increasingly finding favor as an asset class with the hedgers.

The Rise of the AIM
Thanks in no small part to the incessant meddling by U.S. regulators, London’s AIM is increasingly becoming the “go to” market for resource companies, offering these companies exposure to a wider audience than the less trafficked Canadian markets which have traditionally been home to the junior exploration companies.

Convergence of Higher Gold Prices and Discoveries
Perhaps most important is that, for the first time ever, we should witness a round of economic mineral discoveries against the backdrop of a major bull market in gold (and silver) prices.

The trickle of financings for precious metals exploration that began soon after gold’s 20-year bear market came to an end in April of 2001 has turned into a small flood. In fact, according to the Metals Economic Group, in 2006 the amount of money raised for exploration topped $7.6 billion, the fourth year in a row that there has been an increase, and the highest total since they began tracking the numbers in 1989.

All that money, much of it in the hands of teams headed by experienced pros let go by the large gold companies during the long bear market, has set off a massive number of new and fast-moving exploration initiatives, using the latest technology and squarely focused on the world’s most prospective geological addresses. It is not a matter of “if” there will be significant discoveries, but “when.”

If all unfolds as it can, and likely will, for the first time ever, we’ll benefit from a concurrence of a discovery market with much higher precious metals prices. Toss in a lot of investors with a lot of cash, nervous about the outlook for global financial markets and looking for a trend to fall in love with, and you have all the elements necessary for you and me as early investors in the resource sector to pull down truly extraordinary gains.

Don’t get overly greedy, and don’t mortgage the house to buy gold stocks. But do make sure that you move toward being fully invested… which, depending on your willingness and ability and level of risk tolerance, might take you up to 20% – 25% of your portfolio.

You’re going to find good reason to love gold stocks. But I hope you won’t fall in love with them. Although I’m a philosophical gold bug, I’m not always a gold bull. I always keep in the back of my mind that gold shares aren’t heirlooms, they’re burning matches. And while I still think this market will see gold’s biggest run in history, when it’s over these stocks will lose 90% of their value… as does any class of stocks when a mania ends. But the good news is that the mania hasn’t even begun.

Editor’s Note: Doug Casey is the author of Crisis Investing, one of the few financial books that made it on the New York Times Best-Seller list…and spent 26 weeks there, ranking number one. Due to his contrarian views, Doug is a well-known and popular speaker at investment conferences. He is also the editor and publisher of the Casey Energy Speculator, a publication dedicated to junior exploration stocks in the energy sector – stocks with the very real potential to deliver gains of 100% or more within 12 to 24 months.

Gold Stocks in a Rising Gold Market originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

While the future for uranium metal looks bright, the outlook for many of the stocks is less certain. To be blunt, most of today’s uranium issues are overhyped and overpriced, exposing investors to the ever-growing risk of a pullback in share prices.

This dichotomy – great commodity, so-so stocks – presents a significant investment challenge. Simply put, investors looking to profit from the outpouring of interest in yellowcake today must be far more creative than previously if they hope to uncover sub-sectors of the uranium space that haven’t already been overinflated by the hurricane wind of promotion. A tall order to be sure, but one that we at the Casey Energy Speculator have been digging deep on for several months.

Below, we discuss three areas where investors can still find value largely unrecognized by the lumpeninvestoriat – the kind of potential that can lead to double- and even triple-digit gains once those beyond the leading edge of the bell curve catch on and start piling in.

#1: Basement-hosted Deposits

Every uranium investor is probably already aware of the flooding problems at the Cigar Lake mine in northern Saskatchewan. The mine – which was slated to produce 16% of world mined uranium supply – was plunged into doubt in October 2006 after water began gushing into the underground workings.

The problem is that the Cigar Lake ore is hosted in sandstone – a rock type through which water flows easily, to the detriment of engineers. But not all deposits in Saskatchewan’s prolific Athabasca Basin are sandstone-hosted. Some uranium occurs in so-called "basement" rocks – more competent, drier layers beneath the sandstone. The problem is that many basement deposits are deep, which increases mining costs.

But it’s a lesser-known fact that more accessible basement ores are found outside of the Athabasca Basin proper. In these outlying areas, the sandstone that once covered the basement has been eroded, making deposits easier to get at. In fact, one of the Basin’s largest mines – Key Lake – was found in such a setting.

But while basement deposits are extremely prospective, they have been largely ignored by investors, who focus more on those companies working the thick of things in the middle of the Basin. The basement deposits have been ignored largely because most of the recent mines have been found underneath the sandstone and so exploration has tended to focus there. In addition, until recently, scientific understanding of basement deposits was also poor, but considerable advancements have been made over the past 20 years, since the last uranium cycle. Therein lies the opportunity. Many companies with prospective basement deposits have none of this upside factored into their share price, meaning we can take a low-cost ride on the potential of such plays.

#2: Low Grade Makes a Comeback

For years, low uranium prices meant that exploration companies searched mainly for high-grade ores – the type of deposits that all but guarantee a profit even during downturns in the market. But with prices rising, the industry is now realizing that lower-grade deposits may be important sources of yellowcake. After all, such ores are very profitable with uranium at multi-year price highs.

In fact, one of the world’s largest uranium mines – Rossing, Namibia – works a bulk tonnage target at grades less than 0.1% U3O8. It’s no wonder that a number of companies are now quietly looking for the next Rossing. Where might such a mega-deposit be found? Perhaps very close to home. The province of Quebec has long been known to host so-called pegmatite uranium deposits – similar to the geology of Rossing.

A few explorers have been catching our attention with potentially high-impact targets in this region. For example, Uracan Resources (URC. TSX-V) has assembled a prospective land package in southern Quebec, with trenching yielding results of 0.2% U3O8 over as much as 40 meters. The company will be drilling aggressively in 2007 to prove up a resource, which shows signs of being sizeable.

And the coming year may see the discovery of a completely new Rossing-type deposit in northern Quebec. Quebec experts Azimut Exploration (AZM.TSX-V) along with partner Northwestern Mineral Ventures (NWT.TSX-V) spotted the potential in the area a few years ago, confirming their hypothesis through sampling in 2006 at the North Rae project which yielded assays of up to 0.5% U3O8 – ten times the average grade at the Rossing deposit. And like Rossing, the North Rae mineralized system appears to extend over several tens of kilometers, giving it potential for huge ore reserves.

The initial drill program on the target will be completed during the coming season, possibly representing a turning point and driving home to investors that Quebec has the potential to host a world-class deposit. (We’ll be paying very close attention to the progress of the drill program in the pages of the Casey Energy Speculator).

#3: Go Where No Company Has Gone Before

The recent uranium boom has led the new crop of explorers to nearly every country on the planet. Wherever there are available yellowcake deposits, junior companies have lined up to stake land, swing scintillometers and Swiss-cheese the ground with drill holes.

The key word being available. While many nations are open to uranium exploration, there are several localities where authorities have been less inviting. Two of the most significant are India and Brazil. Both have known deposits of significant scale – in fact, Indian drills have cut high-grade uranium up to 10% U3O8.

And yet officials in these countries have not been granting exploration licenses. At least not yet. In recent conversations with Indian government officials, we’ve learned that the country may soon be opening up to exploration, with talks already underway with several companies already well positioned to lead the charge into India’s high-grade basins.

Another emerging district we are keeping an eye on is the African island of Madagascar. Although the nation’s geology is extremely prospective for uranium, the country was effectively closed to exploration for much of the past century due to an oppressive dictatorship. But with the changes in that country’s government over the last decade, we are starting to see permits being granted. Already a number of companies have accumulated significant land packages and we expect the news to start flowing sooner rather than later.

Regards,

Doug Casey

for The Daily Reckoning

April 10, 2007

P.S. While there is no question that the easy profits in uranium have been made, the big money is yet to come… you just need to know where to look. And if you sign up for a trial subscription to the Casey Energy Speculator right now, Doug will send you a special report containing the research he’s done on 5 Uranium Winners he thinks have the potential to deliver big gains.

The Casey Energy Speculator is one of the nation’s most respected monthly publications dedicated entirely to providing unbiased information on unique opportunities in uranium, oil and gas with the very real potential to double or better in the next 12 to 24 months. For information on a six-month risk-free trial and to have your free special report "5 Uranium Winners" rushed to you immediately, click here:

5 Uranium Winners

Our favorite precious metal made headlines today…gold has risen to a nine-month high of $688.64 in February.

We’ve often pointed out that investors hold gold as a hedge against a weakening dollar…and wouldn’t you know it, the dollar is close to a two-year low against the euro.

"The U.S. dollar continues to weaken and we are now looking for gold to break through $700 an ounce this year," said John Meyer, an analyst at Numis Securities Ltd. in London.

The yellow metal could go even higher than $700…

There’s another metal on our radar that’s been seeing surging prices lately: Uranium. Because of the possible global warming/fossil fuel connection, not to mention an increasing effort to find a viable alternative for oil and natural gas, the focus has naturally moved to this fuel used in nuclear power plants.

The team over at Casey Research sends us this note:

"Back in 1998, uranium was off most investor’s radar screens, and trading in the single digits. Now look at it. Today, uranium prices have exploded up to $113/lb, and appear that they will go even higher as growing global demand for nuclear power taxes an already tight supply of yellowcake. Almost ten years ago there were less than 10 publicly traded companies exploring for uranium. Today – by many estimates – there are hundreds.

"Yet, while the future for uranium metal looks bright, the outlook for many of the stocks is less certain. To be blunt, most of today’s uranium issues are overhyped and overpriced, exposing investors to the ever-growing risk of a pullback in share prices."

More from Doug Casey, et al, below. Let’s see what else is going on…

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Dave Gonigan, reporting from The Daily Reckoning blog:

"Three months ago we had an intriguing post about the positioning of U.S. aircraft carriers, and what it might portend for a possible attack on Iran. Time for an update…"

See the full story at the Daily Reckoning.

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Short Fuse, back in Charm City…

*** Surprise, surprise… "Mortgage Delinquencies Hit Record High in First Quarter" reads a headline on CNBC.com.

CNBC’s Steve Liesman (there’s a name you can trust) reports, "Delinquency rates are up in 44 of the 50 states."

An analyst for Moody’s Economy.com thinks that we are nowhere near the bottom of this housing free-fall – especially as the subprime and Alt-A loans reset at higher rates this year and next year.

"I think credit conditions are going to weaken considerably more," he said. "The good news, economy-wide, is that the job market is strong. As long as the job market hangs tough, I think we’ll be okay outside of housing."

*** A ’strong’ job market, eh? Well, it would certainly seem that way, according to the report the Bureau of Labor and Statistics released on Friday. Apparently, the United States created 180K jobs in March – and the jobless rate fell 0.17%.

Chuck Butler, who monitors these reports (which he refers to as the ‘Jobs Jamboree’) very closely, generally views the BLS data as a load of…well…BS, had this to say:

"While the 180K jobs created looks good on the outside, you know that I would look further into the numbers to see the devil in the details, right? Of course! First of all, the manufacturing sector took another hit and lost 16K jobs in March. So, where did the 196K jobs come from?

"A simple check of the BLS website tells us that of the 180K so-called jobs created, 128K were added via the birth/death model…what I call ‘ghost jobs.’

"My trusty calculator tells me that 128K is 71% of the total. No wonder the media keeps asking the question, ‘Why isn’t the economy growing when the jobs market seems so tight?’ BECAUSE IT ISN’T! I truly wish someone in the media would get their head out of the ‘feel-good sand’ and talk about this discrepancy!"

Of course, this will never be reported on in the press because these government agencies will never fess up to these discrepancies. It’s for this reason that one gentleman that Chris Mayer and Addison recently met has made it his life’s work to show the truth behind the government’s falsified statistics.

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Stealth Uranium Investments originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

“IT’S THE END OF THE WORLD AS WE KNOW IT”

…”And I feel fine.”

That’s not just the title of an R.E.M. song. It’s how today’s gold and silver investors feel every time they get a reminder from a newspaper or news program.

They see what you see, and anyone paying even a little attention can’t help but notice the stunning array of problems that are menacing the global economy and threatening traditional investments. In fact, I can’t say I’ve experienced the like of it before. And that’s saying something, considering I’ve made crisis (and how to profit from it) the focus of my life’s work.

This time around, the unfolding crisis carries several especially dangerous features – and a locked-in profit opportunity available to anyone even moderately fleet of foot.

First, the intractability of the situation. That’s the word Paul Volcker, former Chairman of the Fed, used to describe things, and it’s a perfectly good word meaning, simply, that the underlying problems can’t be fixed.

In the Middle East, for example, even if we pull all our troops out today, the situation won’t settle down for years… or maybe even decades. And each day of turmoil will cost the U.S. more tens of millions in direct and indirect costs – and keep the global economy in a state of chronic worry over energy supplies. Then there’s the collapsing housing bubble. For years a galloping real estate market was the primary driver of our economy. Now real estate is hobbling on three legs and has become the primary driver of personal and corporate bankruptcies.

Even more serious is the 6 trillion or so U.S. dollars in increasingly twitchy foreign hands. Hardly a day goes by without some government or another announcing plans to diversify out of the dollar. And no wonder, given the record levels of personal and government debt in the U.S.

And even more debt is baked in the cake. We have a freshly-elected slate of Democrat law makers looking to “do something”… from universal health care, to global warming, to confronting the “unfair” trade practices of China and Japan (the very people who own much of the above mentioned $6 trillion). Those projects are just for starters, of course. Congress’s “must-do” list goes on and on, and for politicians, “do something” never means “do something cheaply.”

So far, so bad.

But it gets worse. Much worse. Over 20% of the U.S. population – the baby boomers – are now beginning to retire, and most of them have nowhere near enough savings to enjoy their senior years. So they’ll be absolutely dependent on the Social Security and Medicare promises they’ve been hearing all their lives. Politically, those promises are impossible to renege on. Financially, they’re impossible to pay. And along with the government’s other unfunded entitlement programs, they add up to $50 trillion of off-the-books debt.

Mr.Volker spoke well. Intractable is the word.

There’s more, but that’s enough. We’re in a box canyon with a floor of quicksand, and the only exit is blocked by a landslide. Investors who take a business-as-usual attitude are not going to have a nice day.

In case that litany of problems isn’t enough to get the sweat beading on your forehead, ponder derivatives. While these hybrids have been around for decades, the rocket-shot rise of hedge funds and the advances in financial modeling techniques have spawned something of a competition among the so-called best and brightest to find ever-more-complex ways of skimming pennies from very large piles of money.

The collective result is that our financial system has been wired up to $370 trillion dollars of privately negotiated investment contracts. They’re usually written to shift risk from one bank, pension fund, insurance company or brokerage firm to another. And many are linked together in long chains, with each contract providing collateral for the next.

It’s all very clever, but layering the enormous size- $370 trillion dollars, far more than the net worth of all the financial institutions in the world – on top of all that complexity is downright scary. In simpler times, a home loan going bad would affect only the particular lender. Enough defaults would put the lender out of business. And that would be the end of it. But today a wave of defaults can send a shock through the portfolios of financial institutions around the globe, including hedge funds, banks and pension funds far removed from the troubled borrowers.

Imagine an electrical circuit with thousands of connections. No one designed it. No one tested it. No one has a diagram for it. It just grew. Now, because of its size and power and pervasiveness, everything depends upon it. So what happens when one of those thousands of connections burns out? No one really knows, but I say it’s a circuit you should disconnect from before the world learns the answer.

If you are relying on traditional investments to pad your nest for the future, the problems stalking the world economy should be a matter of serious concern.

Especially given that as bad as we think things are about to get, there remains the potential for things to spin entirely and un-recoverably out of control. That’s because so many wildcards are now in play. A war in Iran? New York hit by a freelance nuke? A worldwide panic exodus out of the dollar? Traditional investments would be the first casualty.

The $2 trillion or so loss in stock market valuations during the recent correction is a precursor of what’s to come… in a best case. The worse case is… much, much worse.

Working apart from the investment multitudes, a very small minority of investors over the past few years have been building portfolios of precious metals and Canadian precious metals stocks. It’s a minority I’m happy to be a part of, as it allows me peace of mind and the considerable advantage of viewing these crises somewhat dispassionately.

That doesn’t mean I’ll enjoy standing on the sidelines and watching the impact of a monetary crisis on the lives of the unprepared. Of course not. Yet I would be a fool, having recognized a crisis shaping up, not to take the fairly obvious steps to profit.

Which brings me to the opportunity that the crisis is carrying on its back.

For any number of reasons, but first and foremost its use as money in all the world’s cultures, throughout all recorded history, gold has begun to find renewed favor with in-the-know investors as the currency of last resort.

Make no mistake, despite gold’s rise from its $255 low in April of 2001 to over $650 as I write, so far, only the thinnest of trickles, a minor fraction of global capital, has made it into gold. When the flight to safety really heats up, the real fun will begin, and the price of gold won’t just add dollars, it will add digits.

If that sounds like hyperbole, remember that, unlike the U.S. dollar, which can be created at the speed of light, the available supply of gold is finite and is painfully slow to change.

You can’t print gold the way you print paper money. And you can’t just build a gold mine the same way you might build a Starbucks almost anywhere and on short notice. Instead, you first have to find a promising ore body – which is, without exaggeration, like finding a needle in a haystack… a haystack buried “somewhere” in the earth’s crust.

Then you need to go through the immensely complex and expensive exercise of confirming that the ore body is economically viable. Then, years after you started exploring, you can start the even more time consuming and expensive process of actually building your mine. That entails finding a labor force, bringing in power, roads, mills, etc., etc… with every step hindered by environmentalists waving court injunctions.

The long and short is that there are hardly any gold mines of size scheduled to come on stream… and we are not talking about just over the next year or two, but ever. Most people in the know see annual gold production falling from here on.

For proof, there was news recently out of South Africa, the most world’s prolific gold producer. Despite the loud incentive of higher gold prices, South African gold production in 2006 dropped to the lowest level since 1922.

And, above ground, there just isn’t much gold to go around either. The U.S. government, for example, possesses the world’s largest gold reserves…and those reserves amount to only about $170 billion at today’s prices…not even a rounding error on the trillions of dollars in debt the government has guaranteed.

Put simply, the amount of gold available to investors and central banks is like the number of beachfront home sites at Malibu – it’s not going to change much. As a result, when the rush for the lifeboats begins in earnest, the upward pressure on gold will be unimaginable. As will be the profits for anyone who acts now, ahead of the crowd.

If you haven’t yet started accumulating precious metals, you still have time. Start by picking up some bullion coins from a reputable dealer (silver should do as well as gold).

Then build a portfolio of the better small companies exploring for new deposits – the ones with the best management teams, working on the best projects, in the best geology. These stocks are the true profit gems – in part because of an accident of recent history.

During the long bear market that ended in 2001, the large mining companies all but eliminated their exploration departments. Now they urgently need new deposits to restock their declining ore reserves. But rather then scouring the world themselves, the majors let the more agile and entrepreneurial junior explorers – often Canadian firms, due to the resource orientation of that country’s economy – invest the capital and sweat needed to find a new deposit. Then, when a junior company’s project seems ripe, the majors compete to buy the deposit or to acquire the junior explorer itself – and they pay up in a most serious way.

Pick your companies right, and you can pay pennies today for shares in a junior exploration company that history has shown again and again will sell, with a little success, for $10, $20 or more when the market gets rocking and investors at large rush into all things gold.

While there’s no such thing as a sure thing, there are times – like now – when the deck is heavily, massively, stacked in your favor.

You are, therefore, left with a relatively simple choice. Do nothing and hope that all the world’s troubles just drift away-and risk personal financial disaster if they don’t. Or take action, if even with a modest share of your portfolio, and position yourself for extreme profits.

Regards,

Doug Casey
for The Daily Reckoning
March 28, 2007

[Editor's note: Doug Casey is the author of the New York Times Best-Seller, Crisis Investing, and Chairman of Casey Research, LLC., publisher of the highly respected International Speculator newsletter, now in its 27th year. International Speculator is the most profitable source of unbiased research on investments with the real potential to double or better in the coming year, with a focus on the best managed junior gold and silver exploration companies.

Now, we turn to the news for more details on the fabulous offer by the Blackstone Group. We say 'fabulous' because it is the stuff of fable…a morality tale telling itself.

The facts: The Blackstone Group is the largest private equity firm in the world. According to the report in the Financial Times, Blackstone's assets have grown from $14 billion to $78 billion in less than six years. That is, it has multiplied its assets under management more than five times in six years.

Even more remarkable has been the incredible profitability of the firm. Its annual rate of return is better than Warren Buffett's. Since 1987 it has averaged 23% a year, while Buffett's rate of return has been 22% - though over a much longer time. Blackstone's real estate holdings have done even better - up 29% per year since 1991.

How does it make so much money? We turned to our colleague Eric Fry, who was sitting next to us, for an explanation:

"Private equity can mean a number of things. But what a company like Blackstone does, typically, is to buy a company from the public, reorganize it and sell it back to the public. Or, sometimes it will buy a private company and sell it to the public. The paper almost always ends up with the public."

We have commented on private equity before. It is the hottest thing on Wall Street. Here's why:

Profits in 2006 reached $2.27 billion, more than double that of the previous year.

"That means," says the FT, "each of its 770 workers produced an average of $2.95 million in net income. By comparison, employees at Goldman Sachs Group Inc. - the largest U.S. investment bank - each averaged about $360,000 for the company in 2006."

And now cometh these über money shufflers with an offer to shuffle some money to the public.

Or from it?

Blackstone, this fabulously successful firm of private equity investors, will now offer 10% of its shares to the public for $4 billion. Earlier in the week, we asked, "Why?!"

Today, we just stop to marvel at the chutzpah of it.

The Associated Press describes the deal:

"Consider this: Blackstone is a great firm. Going public will bring even greater riches to those at the top. That said, great riches have already been captured by those up and down the management hierarchy. This is not the case of a go-go high-technology firm that generates little free cash flow and requires an IPO or a sale to [crystallize] value for its shareholders. Blackstone has been, and will continue to be, a cash machine that can distribute substantial sums to its minions every year. Therefore, either an IPO or a leveraging of the balance sheet is simply a means of extracting even more cash from the business. Given the friendly nature of today’s equity markets, going public offers the best risk/reward decision for Blackstone’s existing shareholders. This is an opportunistic step driven by the state of today’s equity markets and other considerations such as the state of the private equity market.”

Yes, but what does it mean?

The Financial Times comments:

“These self-motivated, intelligent individuals are trying to tell us something important. The question is: Do we have the ability to look beyond their words and actions and intuit motivation? Greed, uncertainty and fear. What are the implications? That the equity markets are in trouble? That the credit markets are on the verge of a sharp sell-off? That we are at the dangerous stage of a private equity bubble?”

There is no magic to the Blackstone Group or other private equity firms. The genius of private equity prime capital is no different from the genius of subprime credit. When liquidity rises…both ride high.

But money and credit are no different from bananas or lovers: The more you have, the more will go bad on you. This is what economists call the Law of Marginal Utility. Each additional increment, of whatever it is, is less valuable than the one that came before.

We find in the Fed statistics that the total credit market debt has been increasing five times as fast as GDP for the entire 21st century, or what we have seen of it so far. Subprime lenders had so much money to lend that they gave it away to people who couldn’t possibly pay it back. There are only so many good borrowers. And there are only so many good private equity deals. And a credit bubble lasts only so long.

AP again:

“What will happen when the debt markets grow less friendly and additional equity is required to get deals done? Returns will fall. What will happen to those who have invested in private equity funds? They will not be happy. And those who have invested in common shares of the private equity management company? Unhappier still.”

More news:

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Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“Yes, the pull back in consumer spending would be a short term negative for the U.S. economy, but the borrow and spend tradition of our consumers has landed us into the predicament that we now face: An economy with way too much debt…”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

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And more views…

*** From our resident Maniac Trader, Kevin Kerr:

“Freemasons would be considered a fairly open society compared to floor traders. While there are no secret handshakes or strange passwords, the world of the exchanges is one unto itself. Maybe not as much today as 20 or 30 years ago, but the veil of secrecy still exists. No, I don’t mean shady dealings or crooked schemes; I mean the secrets of how much money can be made trading commodities and how easy it can be to do it.

“So you may be asking, “Why would they want to keep it a secret?” Obviously, the fewer people that figure out what a good place the markets are to make money the more there is for fewer players. By keeping secrets they exclude the masses from the riches to be made. In the past, the floor traders rarely hired “outsiders”; normally they would hire family and friends to work in their floor operations.

“Back when I started, the only way you could get a job down there was if you had a father, an uncle, a brother, a cousin, or a very best friend who considered you a brother (this may sound sexist, but there it is); that’s how I started. Today the attitude on the trading floor is much more open and in fact, nowadays even CNBC cameras are on the trading floor occasionally! We see a younger generation of floor traders, past and present (yours truly included), opening up and actually welcoming investors to understand and use these markets.

“The commodities markets are continually evolving, and have stripped away much of the old secrecy from days gone by that, in my opinion, kept many investors at arm’s length, which was not a positive thing for the markets long-term.”

More from Kevin tomorrow…

*** Well, the fire alarm works.

We were sleeping soundly last night…at about 3AM. All of a sudden, we became a victim of modern technology. A fire alarm interrupted our dreams. Was the place on fire? It didn’t seem likely. But we couldn’t sleep with the screeching alarm going off…so we dressed and went downstairs.

It is one thing to turn on an alarm. It is another to turn it off.

Pierre was already at the control panel when we got downstairs. He was pushing buttons. But the noise continued for another 10 minutes – until everyone was wide-awake. What could we do, but open another bottle of wine?

*** Well, we don’t have any more views… We’re attending a conference today. We need to pay attention; maybe we’ll learn something.

We know we left you on the edge of your chair with our theory of modern politics. Why has collectivism triumphed everywhere? More tomorrow, dear reader…

“It’s the End of the World As We Know It” originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

It’s no secret that based on my analysis of the U.S. economy, I’m a dedicated, even determined, gold bull just now.

But as much as I like gold, I like the higher-quality gold shares – especially the Canadian-traded junior explorers – even more. For the simple reason that history and the brokerage statements of subscribers to our monthly International Speculator newsletter attest, when gold runs, the junior gold shares howl.

Given my strongly held views, the inevitable pullbacks in gold and gold shares amount to nothing more than yet another buying opportunity…which, I can assure you, I take full advantage of.

But for many investors, especially those new to the sector, the tottering U.S. stock market and the corresponding swings in gold of late, may give rise to the question, “Just how well will gold shares hold up in a steep sell-off of broader equity markets?”

David Galland, Managing Editor of our International Speculator, concisely answers that question below. In addition to reassuring those of you with an interest in gold, his findings should serve as an important reminder that the really big returns will come to those willing to be bold when everyone else is timid…and, in time, timid when everyone else is bold.

- Doug Casey

Gold, like all the major financial markets, has been on something of a wild ride recently.

While here at Casey Research, we remain extremely bullish on gold, it is important, even critical, to keep in mind that bull markets make anyone on the right side of the trade think they are smarter than they actually are.

Consequently, it is when things are really going in your favor – as they have been these many years now for anyone early into gold – that you have to be most on guard, because pride really does come before the fall. For proof of that contention, just think of those people you know who were profitably early into the dotcom bubble but failed to sell when the selling was good.

So, being on guard, I thought it worth revisiting the question of how gold stocks perform in a broader stock market crash.

As you can see from the chart below, while gold stocks and the broader markets, represented by the S&P 500, can move together, they can also move in distinctly different directions.

Look especially at the time period around the last big stock market meltdown in 2000.

While there were spikes in the volatility of gold stocks during the period, the general trend for gold stocks was solidly up…at the same time that the general trend in broader stock indices was decidedly down.

It is also worth noting that while the market suffered a solid thwapping (a technical term meaning a hard slap up the side of the head) during this period, the thwapping was not related to a monetary crisis, nor even any particularly dire economic fundamentals, but rather the panicked unwinding of a speculative bubble in dotcom stocks.

By contrast, the crisis now closing in on us is all about a monetary meltdown…a set-up that can only favor gold. Even so, the picture above paints a pretty clear picture of gold’s – and gold stocks’ – role in a market crisis.

Sit tight, and you’ll be more than alright.

- David Galland

Editor’s Note: Doug Casey is the author of Crisis Investing, one of the few financial books that made it on the New York Times Best-Seller list…and spent 26 weeks there, ranking number one. Due to his contrarian views, Doug is a well-known and popular speaker at investment conferences. He is also the editor and publisher of the Casey Energy Speculator, a publication dedicated to junior exploration stocks in the energy sector – stocks with the very real potential to deliver gains of 100% or more within 12 to 24 months.

Editor’s Note: David Galland is the managing editor of Doug Casey’s International Speculator newsletter, now in its 27th year, dedicated to bringing investors unbiased research on investments with the potential for 100% or better returns over the coming 12-month period.

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Gold Shares in a Volatile Stock Market originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.