It's All About Timing

The Daily Reckoning PRESENTS: What will the year ahead bring? Will it be prosperous? Will our economy falter in 2006? The first month of a new year always brings up those kinds of questions…and everyone has their own opinion. Today, we share with you International Speculator’s Doug Casey’s predictions for 2006…


What will 2006 be like? Let me set the mood with my favorite Einstein joke.

Einstein dies and goes to heaven. Since heaven, for obvious reasons, is a centrally planned economy, St. Peter sheepishly informs him that they have a temporary housing shortage. He’ll have to bunk with three other guys for a while.

Of course his new roomies are thrilled. The first one comes up to him and says: “Mr. Einstein, it’s an honor to meet you. But I’d like to get to know you better. I have an IQ of 130”. So Einstein says: “Great. After lunch, let’s bounce around some ideas on astrophysics I’ve been working on.”

Then the second one comes up to him, and says: “Mr. Einstein, it’s an honor. I’d also like to get to know you. I have an IQ of 100.” So Einstein says: “Fine. Let me put my grip away, and we’ll have a game of chess.”

Then the third one walks up, and says: “Hi, Mr. Einstein. I’d also like to get to know you. But I’m afraid I’m not as smart as those other guys; I’ve only got an IQ of 70.” Einstein says: “So where do you think interest rates are going?”

On the one hand, discussions of the economy and the markets should be for amusement purposes only. Since it’s impossible to know what the finances, motives, constraints, and desires of six billion people might be, it’s impossible to know what they’re going to do, or when. On the other hand, there is such a thing as human nature. Actions do have consequences. The madness of crowds exists. And both history and markets exhibit definite trends over time. Like many things in life, looking at the markets can lead you to paradox.

When establishment economists prognosticate, their guesses are typically gussied up with convoluted theories and complex mathematical formulae. Their predictions are overwhelmingly bullish, partly because they’re really just extrapolations of the prevailing trend, and partly because that’s the politically savvy view to hold. This is not to accuse most economists of being idiots, even though I think most of their theories and formulae are idiotic. On the contrary, it’s highly intelligent to be bullish – because throughout history things have always gotten better (albeit punctuated with setbacks, ranging in length and depth from the recent recession to the Dark Ages). Clearly, the longest trend in existence is the ascent of man, and it’s likely to continue. Indeed, despite my cynicism on the world as it is, I think the ascent will likely accelerate.

So, all this having been said, what do I think? As you know, I think the United States is riding for a serious fall; that opinion has historically constrained my ability to capitalize on domestic stock, bond, and property bull markets. At the same time, I like to play to the strong suits in any game. That has led me to the opinion that over time, some foreign countries will do better than the United States. And that it’s only common sense, considering the fate of the dollar, to keep a close eye on commodities in general and precious metals in particular.

It’s just a question of timing. In brief, the U.S. stock, bond, and property markets had a fantastic run from roughly 1980 to roughly 2000, with most of the gains made towards the end, as confidence built. Precious metals (notwithstanding some spectacular bear market rallies) did the opposite. I, and hopefully most subscribers, used those years to build large positions in metals and mining stocks. I don’t expect to liquidate these things wholesale for at least a few years. And at vastly higher prices.

Oh, I almost forgot. What about 2006? I rather expect to see gold well over $700, silver closing in on $20, oil at where it now is (but likely closer to $100). The stock market resuming the downtrend it started in 2000, interrupted since October 2003. Interest rates will be heading up decisively. And the U.S. property market is headed down decisively – along with the dollar. All of which should result in a quintuple whammy on Americans’ standard of living, which will likely be compounded by a turnaround in the balance of trade (fewer free goodies from abroad in exchange for paper money) and higher domestic inflation (as some of the trillions of dollars Americans have shipped abroad come home, to be redeemed for real goods). I’m not necessarily expecting the Greater Depression to be announced on CNN this year, but I’ll be surprised if the average American doesn’t become more concerned about his standard of living and financial future.

The big X factor, as always, remains the government. Frankly, I never expect anything good from government. And here I refer to the institution itself. How can you, considering that its main products are wars, pogroms, prosecutions, persecutions, taxation, regulation, inflation, and assorted idiocy. These aren’t just accidental characteristics; the actual essence of government is coercion, and coercion is not a good thing. Worse, the people drawn to “service” of the State aren’t the “best and brightest”, as their propagandists put out, but the worst and dullest; they’re people who believe in organized coercion. Who else could even consider working for such an organization? That’s why “throwing the bums out” is a pointless exercise in self-delusion.

America’s long slide towards authoritarianism has greatly accelerated since our version of the Reichstag fire on 9/11, and I see no prospect of it even slowing, much less reversing. It makes me nostalgic for the days of Reagan; even if the reality was two steps backward for one step forward, he at least seemed good-hearted. The Baby Bush, on the other hand, appears to be stupid, ignorant, stubborn, and mean-spirited. I don’t know whether or not to credit the reports that he’s hitting the bottle again and flies into fits of rage when his will is challenged. Is it possible Bush is also psychologically imbalanced? That is certainly possible, given his stated views on torture. But, looking to the bright side, at least he’s not Dick Cheney, who appears to be a genuinely degraded being.

What’s likely to happen with the wars they’ve started? My guess is that they’ll grow and spread. Maybe the catalyst will be another big event in the otherwise phony War on Terror. Maybe it will be some type of airstrike on Iran, because of their nuclear program. Certainly, the numbers of Iraqis and Afghans who join the guerrilla resistance movements will grow. It’s foolish to think they like foreign troops running around their countries any more than we’d like an Islamic army in the United States, however well intentioned.

Will the United States pull out? That’s the best case, of course, although it would result in some type of civil war in both countries. The United States will eventually leave, of course, but I don’t expect that to happen until it literally can no longer afford to stay.

The generational theory of history I outlined in the International Speculator seems to be developing fairly accurately, and truly titanic war would seem to be in the cards in the decade to come. Maybe with the Islamic world, more likely with the Chinese. Perhaps with some government, or group, that seems most unlikely right now. Who would have guessed, in 1941, that we’d be fighting the Koreans in 1951? And who would have guessed, in 1955, that we’d be fighting the Vietnamese in 1965? The current dust-up with Iraq was certainly off the radar screen back when Saddam was our ally. Fortunately, those were, and are, among the smallest and most backward countries in the world, even though the wars were quite unpleasant. In the next one, it might turn out we get into a tangle with somebody our own size.

I guess my bottom line prediction is that you should rig for stormy weather. But you’ll be well able to afford it with the profits you’ll make in selected gold and gold stocks in 2006. Which should be an excellent year for us, even if not the world at large.


Doug Casey
for The Daily Reckoning
January 11, 2006

Editor’s Note: For a short while, likely only six to twelve months, alert investors have the opportunity to accumulate carefully selected gold stocks at bargain basement prices – prices that all but guarantee the sort of spectacular returns Doug Casey is famous for.

His latest gold stock win just posted a 972% return. There’s still time for you to get in ahead of the clueless masses and make an investment fortune.

Get in Before it’s Too Late!

Another strong gust of imperial bluster came out of Washington yesterday. “China cautioned on trade gap,” was the headline from CNN Money.

Behind the story is a U.S. trade deficit that gets bigger and bigger, and a margin of error that gets smaller and smaller. Last year, China sold about $200 billion more to the United States than the United States sold to them, an increase of 25% over the year before. The Chinese-made goods appeared on retail shelves all over the nation – notably those of Wal-Mart, where “Everyday Low Prices” have helped the lower and middle classes make ends meet.

Senator Max Baucus of Montana, along with many others, think there is something wrong. It seems to them that China must be getting away with something. They’re not sure what it is that China is doing wrong, but they’re determined to put a stop to it. “Washington may take measures,” Baucus warned the Chinese, adding, “there’s not a lot of time left.”

Among the measures Washington may take is a trade tariff, which would increase the cost of Chinese exports by nearly 30%. Or, the Chinese could revalue their currency. Either way, Everyday Low Prices will not be as low as they used to be.

You, dear reader, may begin to connect the dots. Wait a minute, you may ask yourself: How does it do any good to increase the cost of living for people who are already being crushed between higher costs for energy, health care and housing, and lower real hourly wages? Someone should put the question to Senator Baucus. We’re all agog to hear the answer.

Oil is still over $60, with the price of gasoline up about a penny each day for the last week. Families that shop at Wal-Mart also spend a noticeable part of their budget on gasoline. The country was built on low energy prices. That is why people live in suburbs – where the only hope of provisions or entertainment includes a ride in the family car. And that’s why the family car itself is such a big thing: the energy required to move it around didn’t cost very much.

But now the Chinese want oil, too. And they’ve got the money to pay for it. So, America’s energy bills are going up. The days of cheap oil are over.

The days of cheap money may be over, too. Max Baucus is right there. Time is running out. The Fed has been taking little “baby steps” towards normalizing short-term interest rates. But even baby steps will get you where you need to go, if you take enough of them. In the three years – 2002-2005 – consumer credit and home-equity loans grew at greater than 30% per year. After January of 2005, however, rates of growth collapsed. Currently, consumer credit (credit cards, mostly) is growing at an annual rate of 6%. Home-equity loans are actually shrinking, at minus 2.5%. The house is no longer an ATM machine, in other words.

What are the poor lumpenhouseholders to do? They pay more for energy. They pay more for healthcare. Their house-as-ATM financing strategy is breaking down. And they earn less money than they did two years ago. About the only thing they have left are those Everyday Low Prices on manufactured goods from China. And now, along comes a U.S. senator with a plan to force prices up.

Where will it all end? We will see…we will see…

First, more news from our currency counselor…

Bill Bonner, back in London with more gratuitous opinions…

*** Addison writes:

“Hmmmn…Sometimes these radio interviews don’t go as planned. I’ve been known to predict World War III on occasion. And by accident. But this morning, on Doug McDowell’s program in Aberdene, Washington, I suggested that to get out of this mess, the United States is going to have to repeal the 16th Amendment and do away with the IRS, effectively taking the blank check out of the hands of Congress…because they aren’t responsible enough to handle it. And the Federal Reserve system will have to collapse in a similar fashion to what happened to the Bretton Woods exchange rate system.

“Who thinks these things up? Oy.”

[Ed. Note: Addison will have plenty of time to bounce his ideas on the abolishment of the IRS off of a real expert on that subject: Steve Forbes. Tomorrow, Addison will be interviewing Mr. Forbes about his latest book, Flat Tax Revolution: Using a Postcard to Abolish the IRS. Watch this space for the full details of the interview…]

*** We have written little about the Iraq conflagration. We saw no need.

The news seemed to speak for itself.

The only possibilities are victory or defeat, according to George W. Bush. “And we will settle for nothing less than complete victory,” he said. How one wins a complete victory in a place like Iraq has never been clarified. Who would sign the surrender document? Who is the enemy? How will he know when he’s whooped?

Defeat would be a better choice. Then, Americans could go home and get back to minding their own business. But the president has a tendency to over-simplify. What will probably happen is neither defeat nor victory, but a long, expensive, suppurating campaign…like a wound that never heals.

You are either with us or against us; we recall another of the president’s simplifications. In fact, we were never with, nor against the imperial adventure. We simply took a long, historical view. Every great empire needs to find a way to destroy itself. And every great empire seems to need to take Baghdad. The war against Iraq seemed to satisfy both imperatives at once. The result so far? Baghdad was taken quickly. The bleeding of the empire goes on.

Linda Bilmes, of Harvard, and Nobel winner Joseph E. Stiglitz, of Columbia, estimate that the war will ultimately cost between $1 trillion and $2 trillion dollars, which is far more than World War II. And it is a lot of money for an empire whose bread and circuses have already put it so deeply in debt it can never get out without stiffing someone.

Meanwhile, our own Byron King points out that America has already been fighting this war longer than it fought in WWII.

In other words, the war has meant huge sacrifices – not the least of which are the more than 2,000 soldiers who have died on the U.S. side, and many times that number of soldiers and civilians among the Iraqis.

Many Americans have begun to wonder why we ever got mired in such a colossal debacle.

The Daily Reckoning