If We Play Our Cards Right...

It’s two weeks after the election, and the madness is finally starting to die down. Nonetheless, the question still remains: What is going to happen to the United States in the next four years? Although he doesn’t have all the answers, Doug Casey tries to soothe our frazzled nerves…

I must admit that, on election night, I was hoping one of two things would happen: Either no one would turn out to vote, thereby de-legitimizing our rulers in D.C., or, more realistically, that one party would dominate the Congress, while the other took the Presidency. The latter would, ideally, have resulted in gridlock for the next four years, thereby limiting the damage the government could do to the country. At least a Democratic sweep would have put an end to the reign of the neocons. And since most votes for Kerry were really just votes against Bush, it wouldn’t have given the socialist from Massachusetts much of a mandate. But the Republicans won the Presidency, and increased their majorities in both houses of Congress.

Unless you attribute the Republican victory to a vote fraud of unprecedented magnitude, the reality is that Americans thoroughly endorsed what Baby Bush stands for. So let’s play the cards the way they’ve been dealt. And, perpetual optimist that I am, I think the next four years stand to be among the most profitable of a lifetime for a minority of properly positioned investors and speculators.

Unloading Dollars: Reaping the Whirlwind

I’m not talking about the average American. Having sown the wind, Boobus americanus is going to reap the whirlwind. As Patriot 2 becomes law, what little is left of civil liberties and the Bill of Rights is going to disappear. The gigantic deficits the government will run to fund both the war and domestic programs (don’t forget that Bush is the only president since the 1820’s who never vetoed a bill), will take interest rates to levels we haven’t seen for a generation. That will crush the current mania in real estate, and likely cause the stock market collapse, that began in 2000, to resume. Unemployment will rise. The dollar will accelerate its collapse, as foreigners, from Central Banks, to the man on the street; unload their dollars, causing the price of imports to skyrocket. The American standard of living will nosedive. I expect we’re looking at what will amount to a much more severe version of what happened to Americans in the 70’s. And that’s only if the current adventure in Iraq doesn’t mutate into World War III.

But, as I said earlier, I prefer to look at the bright side. Higher levels of inflation won’t only drive capital from the dollar and conventional investments; it will drive capital into gold. It bears repeating that gold is the only financial asset that’s not simultaneously someone else’s liability. And that’s why, as fear and uncertainties increasingly stalk the world, the world will increasingly turn to gold. Bush believes that it doesn’t matter what foreigners think about the United States. But, he’ll find that once countries start holding their reserves in euros and gold, the dollar will become a hot potato. It’s a minor straw in the wind, but Cuba is unloading its dollars, in preference for the euro, simply because most of its tourists – the mainstay of what passes for an economy on the island – come from euro bloc countries. Could that have been a catalyst for Bush remarking that a regime change is in store for Cuba over the next four years? And why was Iraq pricing oil in euros before the invasion?

The way I see it, the dollar is on the way to reaching its intrinsic value. This is a catastrophe for the average American, but boon for those who follow the trend. I fully expect to see gold trading well over $1000 before Bush’s term is over.

Unloading Dollars: Stock-Crazy

But the really big gains will be in mining exploration stocks. The American public is still stock-crazy, not having figured out that the unprecedented 20-year bull market is over. They’re still looking for the next sector to get into. When the gold stocks start to move, people will try to get in – but it will be like trying to drain the contents of Hoover Dam through a garden hose, because the market is too small to absorb any serious buying. The gold stocks will go into a bull run wilder than anything we saw with the Internet issues.

There will be an immense transfer of wealth in the years to come from those who don’t own gold, to those who do. A lot of that is almost guaranteed by Bush’s profligate foreign and domestic policies. Best of all, the gains in store for us will be subject to the low capital gains taxes Bush is promising – one part of his policies I agree with.

What’s to be done about the problems in the United States? Don’t look to Bush for a solution. But you should be able to insulate yourself from most of them with the money you make in the incipient gold and commodities bull market. Use part of your gains to buy a nice condo in Singapore or Sydney, so you can watch the chaos on your wide screen TV, instead of out your front window here in the United States.


Doug Casey
for The Daily Reckoning
November 11, 2004

It is the day the Great War ended. At 11 am on this, the 11th day of the 11th month, all of Europe is supposed to stop in its tracks – and then the bells toll. They toll for as many as 20 million people who died in the War…and millions more who were wounded or mutilated.

But those who lived through the World War I, and those who fought in it, are almost all dead. In their graves, with them lie the memories of Europe’s most costly war. And looking through today’s press, it seems that only we, here at the Daily Reckoning, remember it at all. There is nothing in the Times of London. And nothing in the International Herald Tribune.

Why, we wonder?

More below…

In today’s financial news, we note that the Fed did as expected – raising the key rate by a quarter of a point. Now at 2%, it is almost exactly equal to the CPI inflation rate. So, it still costs nothing to borrow from the Fed.

But Alan Greenspan is still a master of wit and wisdom. The key man, at the nation’s key bank, told members of Congress that they were making a mistake by not cutting back federal borrowing. This is the same Alan Greenspan who has made borrowing a national pastime, by offering credit at extremely attractive rates. It is as if a sub-prime mortgage lender gave away an SUV with every mobile home, and then warned the borrowers that they were imprudent to take it!

"If you get into that sort of debt maelstrom, it’s a very different issue to get out of it," said the world’s best-known civil servant.

We can only guess the Mr. Greenspan is thinking of his reputation or maybe his eulogy.

"It’s all wishful thinking…" said our friend Arild Eide at a financial roundtable meeting last week, "that you can actually get out of this without pain. You can’t."

The U.S. fiscal deficit is hit a new record this year – $413 billion. Federal spending is rising at twice the rate of the GDP and three times the rate of inflation. In September, the trade deficit fell from the previous month, but still came in at its 3rd highest level ever – $51.3 billion.

And for every quarter the U.S. consumer earns, he spends 26 cents.

There will be no painless way out. Those who spend too much one day, must spend too little the next. Spending too much is, of course, pleasant. Spending not enough is painful. But at least Mr. Greenspan has warned us.

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Manhattan…

"Resource stock investors are the true romantics of the investment world…They understand that the same ‘true love’ who does the financial equivalent of a pole-dance one moment, might be hurling verbal abuse and wine-glasses – financially speaking – the next moment…"


Bill Bonner, back in London:

***More notes from Bermuda…

Bermuda has a long history of being a place for hiding things. During the American Revolution, it was a convenient repository for British gunpowder.
With George Washington’s forces in need, Bermudans, under the cover of darkness, made off with 100 barrels of British gunpowder from Fort William and sent it to America (not for free, I might add).

Turnabout is fair play, however. During the War of 1812, Bermuda harbored the ships filled with British troops that would eventually find their way to Washington, DC, and burn the White House to the ground.

Today, Bermuda may hold other secrets – of the financial kind, we hope. I am in Bermuda with colleague Dan Ferris of Extreme Value, looking for hidden values in one of the world’s great financial centers – home to billions of dollars of capital nestled in the balance sheets of insurers, banks and others.

In the entire world, you may never find a larger pot of money in so small a space as Bermuda (barely 22 square miles). By year-end 2003, Bermuda’s insurance industry had $164 billion in assets, capital of more than $60 billion and collected $48 billion in gross insurance premiums.

Yet, for all that, Bermudan money seems to like lying low. Maybe this comes from knowing that their prosperous situation is unpopular with certain people in certain places. Because of that, perhaps, they guard their reputations closely and view prying outsiders with some skepticism. Nonetheless, we have managed to make some inroads and we have learned a lot; more to come in our respective letters.

My publishers may flinch at my expense report. I have enjoyed Bermuda’s pubs and bars. The great New Yorker writer A. J. Liebling once wrote that bars are the "habitat of wisdom and inspiration." I’ll try that line, if need be.

*** We wait for the tolling of the bells. Here, it is Remembrance Day. We had to check our calendar to be sure, for there is no mention in the press. We wonder whether the bell ringers will remember.

The Great War began as a gigantic farce and ended as a monumental tragedy. No one could quite figure out what it was all about. But politicians on all sides soon had everyone’s blood up. Victors write the history books. In the West, we are used to hearing that somehow Germany was at fault. But both France and Russia declared war on Germany before the Huns had done a thing. The Germans saw themselves faced with war on two-fronts. Their only hope, they thought, was to knock France out of the war quickly. They might have done this, except for the decision by General von Kluck who decided to chase French troops down the Marne instead of attacking Paris directly. He thought the French were beaten. He was just going to deliver the coup de grace. But when an army is beaten, it typically breaks up. Attackers usually find themselves with thousands of demoralized prisoners. General
von Kluck’s subordinates wondered: Where were the prisoners? There were but few prisoners, because the French weren’t really beaten at all; they were merely retreating in good order.

It as at this point, the entire history of the 20th century took a terrible turn. The old French general, Gallieni, called back from retirement to defend Paris, noticed the Germans advancing, not on the city, but adjacent to it, along the Marne. He turned to his staff and remarked: "Gentlemen, they offer us their flank."

The Battle of the Marne drove the Germans back. From that point forward, the war was a long pointless slaughter.
By 1916, the European powers were exhausted and disgusted. But then, along came Woodrow Wilson with an idea. He believed he could give the war meaning, by turning it into a struggle "to make the world safe for democracy." All he had to do, he thought, was to prevent an early settlement of the war…giving him time to help the French and English win a total victory rather than a negotiated peace. Then, he believed, he would be the true victor. He could come to Europe like an archangel at a Catholic-school picnic. He would then impose his "14 Points" on the world as if they were written on clay tablets and had been handed to him by God himself.

Wilson’s meddling was disastrous from practically every point of view. The war continued for another 2 years. Millions more died. Not a single major government in Europe survived. And in the wreckage of European civilization a hardy new menaces emerged – first in Russia, then in Italy and Germany.

After the fighting was over, the French and English laughed at Wilson and ignored the 14 points whenever they conflicted with their own interests. The American president was so appalled and humiliated; he suffered a stroke and never recovered.

Instead of making the world safe for bourgeois democracy, Wilson had made it more dangerous than ever.

*** A last minute note:

11AM came. Over the intercom came an announcement precisely on the hour: "We remind you to observe Remembrance Day with two-minutes of silence."

The phones stopped ringing. People stopped talking. Even the patter of keyboards ceased. In the distance, we heard bells tolling.

The Daily Reckoning