27-Aug
(Casey Research)
http://albertpeia.com/caseysayseconomicreckoningnear.htm
It
is a deal with the devil: governments churn out more and more cash for the
promise of continued prosperity. But the day of reckoning is near, according to
Doug Casey, chairman of Casey Research and an expert on crisis investing. As
the epic battle between inflation and deflation continues, Casey discusses his
predictions for the new world market in this exclusive interview with The
Gold Report.
The Gold Report: There
will be a Casey Research Summit on "Navigating the Politicized Economy" in Carlsbad,
California in September. Investors from around the world look to these summits
as future road maps for investing pitfalls and opportunities.
The
thesis behind the Summit is that governments have made a Faustian bargain a
pact with the devil that saves the empire with overspending, but drives it to
the brink of collapse by creating fiat currencies.
Doug,
where in that story is the economy currently?
Doug Casey: It's
extremely late in the day. Since World War II, and especially since 1971 when
the link between the dollar and gold was broken, governments around the world
have accepted the Keynesian theory of economics, which boils down to a belief
that printing money can stimulate the economy and create prosperity. The result
has been to create huge amounts of individual and government debt. It has
become insupportable. All it has done is purchase a few extra years of
artificial prosperity, and we're heading deeper into a very real depression as
a result.
"We
have been consuming more than we have been producing and living above our
means."
Let
me define the word "depression." It's a period of time when most
people's standard of living declines significantly. It can also be defined as a
time when distortions and misallocations of capital things usually caused by
government intervention are liquidated.
We
have been consuming more than we have been producing and living above our
means. This has been made possible by: 1) borrowing against projected future
revenues and 2) using the savings of other people. The whole thing is going to
fall apart. A new monetary system of some type is going to have to necessarily
rise from the ashes. That's a major theme in the conference that's coming up.
TGR: Will more quantitative easing (QE) give us another
couple years of artificial prosperity?
DC: Most unlikely. We're
at the end of the story, not the beginning. More QE I hate to call it that
because it's really just printing money. I hate euphemisms, words that are
intended to make something sound better than it really is. Euphemisms, like
exaggerations, are the realm of politicians and comedians. Anyway, the next
round of money printing is going to result in radical and rapid retail price
rises. There is no prosperity possible from this; rather the opposite.
TGR: Last time we spoke, you
said that we are entering into a depression greater than in 1933. Can you
describe how it might be different?
DC: What we experienced
in the 1930s was a deflationary depression where billions of dollars were wiped
out with a stock market collapse, bond defaults, and bank failures.
Inflationary money that was created since the formation of the Federal Reserve
in 1913 was wiped out. Prices went down. This depression will be different
because governments have much more power. They'll try to keep uneconomic
operations from collapse; they'll prop them up, as we saw with Fannie Mae and
General Motors. They'll create more money to keep the dead men walking. They
won't allow the defaults of money market instruments. They will make efforts to
maintain the dollar mark on money market funds. They'll attempt to keep
building the pyramid higher. It's foolish, indeed idiotic. But that's what
they'll do.
TGR: Which they've been doing by printing money. The
first rounds of money printing have gone into the banking system, but the
banking system has not allowed it to trickle back out into bank loans. Does that
open the possibility of deflation if money is not moving out into the general
economy?
DC: That's right. The
government created trillions in currency to bail out the banks. The banks have
taken it in to shore up their balance sheets, but they haven't lent it out
because they're afraid to lend, and many people are afraid to borrow. That
currency is basically in Treasury securities at this point. Although money has
been created, it's not circulating.
"I
believe that governments have the power to create enough new currency to keep
prices from going down."
At
some point, it's going to move out. One consequence of this is that interest
rates have been artificially suppressed so that retail inflation is running
much higher than interest rates are compensating for it. At some point, rather
than sitting on hundreds of billions of dollars that are going to be inflated
from under them, the banks are going to do something with that money. It will
go out into the economy. Retail prices will start rising.
TGR: Do we need to see another round of money printing to
put us over the brink into a collapse? Or will it happen even if they don't
print more, because it's currently sitting in the banks?
DC: They actually don't
have to create more money. It's just a question of whether the banks start
lending it and people start borrowing it. Another possibility is that the
foreigners holding about $7 trillion outside the US get panicked and start
dumping them. I don't see any way around much higher levels of inflation
unless, of course, we have a catastrophic deflation, which we almost had with
the real estate collapse.
TGR: How much will Europe play into this? It seems its
governments are, at least according to the popular press, more exposed to
bankruptcy than the US government.
DC: Europe is a full
cycle ahead of the US. Its governments and its banks are both bankrupt. It's a
couple of drunks standing on the street corner holding each other up at this
point. Europe is in much worse shape than the US. It's highly regulated, highly
taxed, and much more socially unstable.
Europe
is going to be the epicenter of the coming storm. Japan is waiting in the
wings, as is China. This is going to be a worldwide phenomenon. Of course, the
US will be in it, too. We're going to see this all over the world.
TGR: If Europe finally does go over the brink, where it's
been headed for more than a year, would that also cause inflation in the US or
would you expect to get catastrophic deflation?
DC: This is an argument
that's been going on for at least 40 years. How is this all going to end:
catastrophic deflation or runaway inflation? The issue is still in doubt,
although I definitely lean toward the inflationary scenario. But will it start
in Europe? How will it start? These things only become obvious after they
happen.
TGR: When you say "lean," are you pretty
convinced it's going to be inflationary?
DC: I think it's going
to be inflationary; in the 1930s, it was a deflationary collapse. Governments
are vastly more powerful and much more involved in the economy now than they
were then. I believe that they have the power to create enough new currency to
keep prices from going down. Somehow, moronically, they've conflated higher
prices with prosperity.
"Investors
need to look for real, productive wealth and consistent growth."
If
we had a completely free market economy, prices would constantly be dropping.
That's a good thing, because as prices constantly drop, it means money becomes
more valuable. That induces people to save money. When people save, it means
that they are producing more than they are consuming that's a good thing. The
way governments have it structured today, however, prices are always going up.
That discourages people from saving because their money is constantly worth
less, which encourages them to borrow. Inflation induces people to try to
consume more than they produce, which is unsustainable over the long run.
TGR: You are saying that if the current value of your
money is higher than the future value, that encourages borrowing.
DC: Exactly. I don't see
any possible happy ending to this. We're approaching the hour of reckoning.
TGR: You have said that the titanic forces of inflation
and deflation are fighting an epic battle that leads to extreme market
volatility. But I am looking out there this summer and thinking it's pretty
calm. It seems like a very slow recovery. Gold is settling around $1,600/ounce.
The S&P 500 index is testing the 1,400 mark. Is this just a pause in the
epic battle?
DC: Nothing goes
straight up or straight down. I just took a cross-country car trip from
Florida, up the East Coast to New York, and then out to Colorado. It was
actually rather shocking that many times I had trouble getting a motel room
even in the middle of nowhere. The restaurants were full. The highways were
full of cars. It looked more like a boom than a depression. At the same time,
our real unemployment, figured the way they used to figure it in the early
1980s, is about 16-20%. People are living off their credit cards. I believe
it's the same in Europe.
TGR: It seems as if we haven't had much market volatility
other than the technical glitch at Knight Capital this month. Do you expect
market volatility to come back into play?
DC: On the one hand,
some people are going to go into the stock market when inflation reasserts
itself because at least it represents real value. They can invest in companies
that actually produce things and have real assets. On the other hand, the stock
market itself by any historic parameter is overvalued right now in terms of
dividend yields, price-to-book value, and price-to-earnings ratio.
I
have no interest in being in the broad stock market. I feel very confident that
the bond market, especially, is going to be very volatile. That's the one place
where it seems that there's a real bubble, and it's one of the biggest bubbles
in history. It's the worst possible place for capital right now. It's a triple
threat higher interest rates, default risk, and currency risk.
Even
reading the popular press, you can see investors in a desperate reach for
yield. They're only getting a fraction of a percent in their bank accounts. So,
to get some income, they are buying all kinds of bonds, even those of low
quality, just to get 2, 3, 4 or 5% in yield. The bond market is trading at
insane levels as a result of the government having driven interest rates down
close to zero in a vain effort to stimulate the economy.
The
bond market is much bigger than the stock market. When interest rates start
heading up, trillions in bond values will be wiped out, in addition to causing
a lot of corporate bankruptcies that's why deflation isn't completely out of
the question. In addition, higher rates could really further devastate the real
estate market, which has been making a mild recovery. And, of course, higher
interest rates are the enemy of high stock prices.
TGR: One of the keynote speakers at the upcoming Summit
is Thomas Barnett, author of The Pentagon's New Map: War and Peace in the
Twenty-First Century. He's going to be talking about geopolitics today and
tomorrow. From your viewpoint, in today's age of nationalism and conflicts
among nations, is it important for investors to know about geopolitics in order
to pick junior mining stocks?
DC: Most certainly. Very
few investors are putting any money into the junior mining stocks right now,
which tells me that it's a good time to start looking at them. However,
investors need to have a grip on geopolitics in order to intelligently assess
which companies to buy. There are 200 nation-states in the world, and they all
have different policies. Investors have to avoid putting money into a location
where a company will never be able to develop a mine even if it's lucky enough
to find an economic deposit.
TGR: As well as Thomas Barnett, there are some very
impressive speakers at the Summit, Doug 28 speakers at the event. Who should
be there for this event?
DC: As we get closer to
the day of reckoning, it becomes critical that those who have something to lose
meaning investors, savers, and homeowners are aware of what's happening and
also what they can do about it. We're heading into unchartered territory. I
think this is so important that we are also recording the Summit and making it available for download
as soon as possible after the summit.
TGR: You developed the concept of the "8 Ps"
for stock evaluation. Typically, you say that the people are the number-one
thing that you look at. Is politics starting to move up in importance as a
determining factor?
DC: People are still the
most important because good people who are running a company will choose an
intelligent jurisdiction to develop. It's also a question of whether the world
at large is becoming more stable or less stable. I think it's becoming less
stable, because all the governments in the Western world are really bankrupt
and are, therefore, going to be looking for more tax revenue. Mining companies
are going to be in its sights because mining companies can't move their assets;
they are the easiest thing in the world to tax. The good news is that makes
mining stocks very volatile, and sometimes extremely cheap. Volatility can be
your best friend.
But
economically, as things get tougher in the Western world, that will hurt the
developing world too, because it depends on marketing its raw materials. If the
Western world is using fewer raw materials, it's going to put pressure on those
developing countries.
TGR: Doug, you're talking a lot about geopolitical
unrest. The world is becoming less stable. In 2010, I heard a lot of discussion
about gold going into a mania stage, specifically for many of the reasons we're
talking about now. As we approach 2013, will we run into that discussion of
gold mania again?
DC: It's not likely to
happen until we reach much higher levels of inflation and we have something
approaching financial chaos but that's exactly where we're headed, and soon.
The mania is likely to be fear-driven much more than greed-driven. Gold is
still in the climbing-the-wall-of-worry stage. Mania is still in the future.
It's going to happen. I feel confident of that. There's going to be a rush to
gold.
TGR: One of the people you like to quote quite often is
Richard Russell. There's a specific quote I've heard you say a couple of times:
"In a depression, everybody loses. The winner is the guy who loses the
least." In order to be that guy who loses the least, is it a viable
strategy to stay out of the markets?
DC: It's almost
impossible to stay out of the markets, because practically everybody has a
pension program, an investment retirement account, or something of that nature.
You have to put the assets of that pension into something the stock market,
the bond market, or cash. Most people own real estate or their home. If the
real estate market gets hurt, you get hurt there. If you have wealth, what are
you going to do with it? It's not a good option to put $100 bills under your
bed. Even then, you're in the market for currency. That's one of the biggest
problems with inflation: It forces people to direct their attention to gambling
in the markets, as opposed to productive business.
There
has been way too much concentration on the financial markets over the last 50
years. This is shown by the fact that roughly 22% of the US economy is in
financial services, which is basically just moving money around. The financial
services business doesn't weave, spin, or sew; it doesn't produce anything. In
a sound economy, the financial services sector would be tiny just big enough
to facilitate transactions. It wouldn't be the mammoth that it is today. It
seems as if everybody is in the business of moving money around, but the money
they're moving around is just paper currency. It's quite nonproductive.
TGR: They are producing new financial instruments. In a
way, financial services companies are coming up with alternative methods to
build wealth.
DC: I question that.
Financial services don't actually build wealth. Real wealth is created by the
production of new technologies, food, metal, or products. Financial services
serve a purpose, of course, but it isn't a real wealth creator. Today the
sector is more of a moving-paper fantasy.
Even
what I do, which is advising people on where to allocate their wealth, has
always made me feel a little bit sheepish because I'm not actually building a
bridge or creating a new engine or technology. I'm just telling people how to
move things around. If the economy were sound, 90% of the people in my line of
work would be doing something else. A speculator, basically, is someone who
capitalizes on politically caused distortions in the market. If we had a sound
economy, the government wouldn't be causing these distortions and it would be
much harder to be a speculator.
Anyway,
the whole financial sector is bloated. By the time the bottom hits, the last
thing that people are going to want to hear about is the stock market, the bond
market, or where to put their money. They're not going to want to read
financial newsletters because they're going to be so sick at the very thought
of those things. People won't ask how the markets are doing; they won't even
care if they exist. They're going to get back to the basics. That is the
foundation for the next boom. But that time is a good many years in the future.
TGR: But you are still in the business of helping
investors move around assets. What would you say to investors now on how they
can protect or grow their wealth through the next phase of volatility?
DC: We need to learn how
to survive and profit in a market bogged down by crippling government
regulations, billion-dollar bailouts, excessive money printing, and cronyism; that's what the Summit is all about.
But
to be frank, it's very hard to be an investor in a highly politicized
environment. Investors need to look for real, productive wealth and consistent
growth. Speculators, on the other hand, try to capitalize on the chaos that is
caused by the myriad of destructive government regulations, taxes, and, of
course, currency inflation. That's why I look at all markets, in all countries.
But right now there are very few bargains. At some point, for instance, real
estate is going to be of interest again. Not right now because governments
everywhere are going to raise taxes on it.
TGR: Would you put things like technology, pharmaceuticals,
and health care in the category of real wealth?
DC: Very definitely.
That's why we have a technology letter. I've always been kind of a boy
scientist; technology interests me from an intellectual, as well as a
financial, point of view. Technology is the real mainspring of human progress.
No question about that.
The
problem with the medical industry is that it's being nationalized. It's very
hard to do anything with the US Food and Drug Administration (FDA) as it is. It
costs $1 billion to develop a new drug today. Developing medical devices can be
almost as expensive. Even if something is approved by the FDA, if something
goes wrong, count on being sued by the plaintiff bar. It's a very high-risk
business, which is a pity. Living longer and better physically is one of the
most important things there is; medical businesses should be encouraged, not
pilloried. I've always said that the FDA kills more people every year than the
Defense Department does in the typical decade. But Boobus americanus still
thinks it's protecting him. [Editor's note: Read more about investing in The Life Sciences Report.]
TGR: Are there other areas for real or productive wealth?
DC: I read science
magazines all the time. There are more scientists and engineers alive today
than in all the history of the world put together. Hopefully, with the
continued blossoming of India and China where students are generally going
into science and engineering as opposed to things like gender studies,
political science, and English literature, which students idiotically are doing
in the West there will be even more scientists and engineers 20 years from
now.
What
areas are they going into? Nanotechnology, microbiology, robotics these
things will blossom the way computers have over the last few decades. The
problem when it comes to investing in them is that they're increasingly highly
specialized. Investors need at least a sound layman's knowledge in order to
know if they're barking up the right tree or not, and that's hard. There's just
not enough time in the day to gain enough expertise for this type of thing. Of
course, that's the value of magazines and newsletters. The editors condense
information for readers to give them an intelligent layman's opinion.
TGR: Now we're back to the importance of people. You do
have to have some sense of the person who is doing that analysis for you. It
needs to be someone who's credible.
DC: Absolutely. That's
the advantage of having a newsletter over a magazine. In a magazine, you don't
always know what's going into the sausage that that writer of an article is
making. When you're dealing with a newsletter, you can get to know the editor,
what he's thinking, how expert he really is, and what is his psychology. You
can learn if you can trust his opinion. Although I read both magazines and
newsletters, newsletters are much more valuable.
TGR: To bring this full circle, I would imagine attending speeches summits and conferences where you meet
these newsletter writers or analysts face to face is also beneficial.
DC: Yes; it gives you a
smorgasbord of views. It's helpful in assessing the validity of the views to be
able to assess the personality of the writer and have a better understanding of
whether his views are actually credible. And it's a great opportunity to ask
questions.
TGR: Doug, you've given us quite a bit of your time. I
greatly appreciate it.
Even
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the Politicized Economy Summit, you can still benefit from the information
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