Casey research

28th Aug 2009

Dear Reader,

I increasingly feel like a gum shoe detective staring down at an awkwardly sprawling corpse, but being told by the boss that I’m wrong. In fact, that the corpse has a bright and promising future.

“Why, look!” The boss says, hauling the corpse to its feet and waving its stiffening arms about like a dancer in a disco. “See, no problem at all, he’s shovel-ready.”

It’s enough to make me wonder if we haven’t already made the transition into the world of Orwell, or “V” (as in “Vendetta”). A world where no official data or pronouncement are to be trusted, and the mainstream media has devolved into little more than a willing mouthpiece for officialdom.

In a call last week with the research team, Doug Casey repeated his view that “There’s no way out for the U.S. economy,” an opinion seconded by Casey Research Chief Economist Bud Conrad, whose beliefs are based on almost non-stop crunching of the hard data. (Samples of Bud’s work appear in this service now and again, and you find his deeper analysis and recommendations in our paid Casey Report).

Yet, seemingly everywhere you turn lately, the official pronouncements are sunny, or at least sunnier. Housing, consumer spending, manufacturing activity are all up, we are told. And look at the stock market!

“See here, he can even tap dance,” the boss says, placing the corpse’s feet on top of his own and shuffling around.

“Hold on. You’re propping the poor stiff up!” we argue, with Cash for Clunkers and untold billions in other bailouts popping to mind. “What happens when you stop?”

Ignoring the question, the boss and corpse execute a clumsy pirouette, finishing up with a self-satisfied “Ta-dah!”

We are not the only ones looking behind the cheery headlines to the hard facts of the real economy and finding ourselves unconvinced that the economy is in the process of bouncing back to the better days of the recent past.

Howard Davidowitz runs a company that makes money by consulting for large retailers. He’s also a plain-speaking and thoughtful critic of the idea that the all-important U.S. consumer is being reanimated. Among the views Davidowitz shared on Yahoo Finance’s TechTicker this week…

“The retail business is terrible… It’s almost all negative.”

“We’re going to close hundreds of thousands of stores.”

On the consumer:

“They’re still overleveraged, they’re losing jobs, their credit has been cut back.”

On America:

“We are in the tank forever. As a country, we are out of control, we’re in a death spiral.”

On the stock market:

“We’re in terrible shape. That’s what the fundamentals tell me. I can’t explain the stock market.”

You can (and should) watch the Davidowitz interview here, because the words above don’t properly communicate the depth of his passion about just how bad conditions on the ground in the retail sector are.

Yesterday, one dear reader and regular correspondent wrote in with the following. I think it does a good job of summing up the unease that many now feel as they observe the disconnect between what their own eyes see and what the government tells them they should be seeing.

David,

I’m thinking that the USA will implode, much in the same way that the USSR did “suddenly” … there will be a threat coming from some event(s) and before you know it, like a building that has been detonated, poof, the USA as we have known her is gone … and likely this will happen during or just after Obama has rammed the USA into the heights of debt and printed the last $0.004 dollar!

Going after tax havens and looking to increase taxes … will speed up the exit of the wealthy and the leader class, leaving the middle class to collapse under the burden of having bailed out the scammers and white-collar thieves of Wall Street … Obama is either guilty of not seeing the forest for the trees or extremely misguided, perhaps insane and/or suffering from a split personality with both Eastern/Western values and has the unenviable role of leading the USA’s national suicide…

Could the almighty U.S. implode almost overnight as the weight of reality overruns the ramparts of a fictional recovery in the economy – an economy that is hampered at every turn by an overextended, overreacting, and overreaching government?

History is clear and unequivocal on this point. Yes.

It has happened to every empire that has come before.

(That reference brought to mind one of the most intensely personal and powerful songs I’ve heard, Hurtby Johnny Cash, in which he mentions his “empire of dirt.” It is also oddly analogous to what has become of the American empire. You can watch it here. http://www.youtube.com/watch?v=hNt6hHYlmR0)

And it’s not just the economy where we are deceived, the whole global warming fantasy providing a classic example. A million deaths from swine flu? Sorry, not buying it.

Earlier this week I commented that I’m not a believer in conspiracies, a comment that brought the following from another regular correspondent…

Hitler was in power and was crazed enough to despicably burn the Parliament building in pre-war Germany in order to fortify his reign over his “subjects” (which worked fabulously).

I would be foolish to say, without any evidence, that 9/11 was an inside job, but it certainly got the already prepared Patriot Act passed with flying colors, which has tapped into a number of our freedoms. It also was handily used as an excuse to get us into the Iraqi war, which was the wrong way to handle that situation, has helped break the country financially,and has served no real purpose. I suppose it could have been an inside job for all that it accomplished for those in power here in the USA. Maybe just a coincidence?

I don’t think that Revelation, Gog, or Magog were to blame for any of the atrocities in the past couple hundred years, but there were a number of “crazed” men in power that would stop at nothing to accomplish their goals. Stalin… 20 million dead. Hitler… 6 million Jews dead, plus all the millions of the armed forces from all the countries who died in WW2. Crazed? Yes. In power? Yes, and no one tapped them on the shoulder and led them away.

I do not profess to be a conspiracy theorist either, but there do seem to be some strange coincidences now and then.

The reader is right, of course; throughout history, the power hungry have resorted to outright deception, scapegoating, and even started wars in order to advance their interests. I think we’re already well into the deception and scapegoating phases at this point, but can only hope we stop short of starting a war of convenience on some pretense or another. (Or, more correctly, “another” war of convenience – we are already engaged in two.)

So, what’s an investor to do? The best approach right now is to trust your eyes and instincts and continue to err on the side of being fiscally conservative for the bulk of your portfolio. You might miss out on some temporary upside, but is that so bad when you consider the very real potential that the government won’t be able to prop the economy up much longer? And what might happen when the trading programs flip from green to red, from buy to sell?

A comment on that front from Bud Conrad…

A key question is “Will we have a market drop this fall?”

I am more concerned than usual, because I see inflated earnings from the financial institutions that were not writing their assets to book value. The quantity of program trading and the corrupt high-frequency trading with front running the trades by the big banks add to my concerns that we could have something like the dynamic hedging that exacerbated the 1987 crash.

Dynamic hedging was taking shorts in the futures market to protect positions long in the stock market. When panic set in, there was no support. The Plunge Protection Team had to provide liquidity to be able to open the market. A recent weekly report from the New York Stock Exchange showed program trading at 48% of total trading. Goldman Sachs is at the top of these traders.

I think there is no sensibility to an exchange that is dominated by computers trading in 30 milliseconds without sensible valuation. When the signals say sell, there won’t be any buyers, as the computers will all be trying to get out before the other computers.

That’s not to say that you should do nothing, because opportunities abound in every crisis. Government overreaction is an overarching theme of the current crisis. As the pendulum swings back in the wrong direction and embeds itself in the wall, you can make good money betting that the government will unleash a new wave of stimulus.

That gives rise to opportunities in natural resources, including energy, that are tangible and priced in dollars, and so will rise – and strongly so – as inflation inevitably kicks in. And in counter-dollar plays, including playing rising interest rates – the biggest opportunity in generations, in our view.

Meanwhile, Chinese state-controlled companies – charged with helping to unload that nation’s massive reserves of dollars – are heavily focused on buying up resource companies. They will soon be joined by the investing masses, hopping onto the resource train in earnest as the inflation builds steam. Getting in front of that buying with selective investments in publicly traded resource companies will deliver investment fortunes.

(At the risk of speaking immodestly, no one knows more about the world’s best resource companies than our team. More here.)

So, there is much you can do, and should do, as an investor. Starting by trusting your eyes. Corpses can’t dance – at least not without being propped up. In time, when the government’s resources are utterly depleted, and that point is approaching, the government is going to have to let the corpse fall. Don’t let it fall on you.