Weekend Edition

Welcome to the weekend edition of Casey's Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.

Speaking of Hyperinflation

For reasons I have recently discussed, I’m skeptical about the notion that the U.S. dollar is in imminent risk of losing its reserve status. Yet I’d flip to the opposite view in a heartbeat if it looked like the U.S. dollar were sliding into a serious monetary crisis.

On that topic, Jeff Clark of our Gold & Resource Report sent along a reference from the pessimistically titled site www.bearishnews.com, quoting an October report from Hayman advisors.

There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money.

In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceeds 40% of its expenditures. Guess what? The U.S. will hit the 40% mark in 2009.”

You can read the full text of the post here.

Meanwhile, here’s a snapshot of the steep slide in the dollar index so far this year. The next major psychological support comes in at the 70 level. If the dollar starts to fall toward that level in a hurry, the U.S. government may be forced to stop talking about a strong dollar and begin taking active measures to shore up the greenback. Namely by increasing interest rates.
Definitely something to watch.

(Getting positioned early – now – in inverse interest rate instruments as a way of playing the coming run-up in U.S. rates remains one of Doug Casey and Bud Conrad’s favorite power trends. Read all about this trend, and the others we’re now following, in the pages of The Casey Report. More here.)

Buffaloes Are Back!

By Jeff Clark

You may recall the U.S. Mint stopped producing the American Gold Buffalo coin late last year when demand for all things gold and silver skyrocketed and they couldn’t keep up. I was personally disappointed, because I love that coin.

Well, I’m glad to report it’s back on sale! Beginning this Thursday, October 22, you can once again buy the 2009 Gold Buffalo. The U.S. Mint is officially releasing the coin for sale that day, and you can purchase them from the Mint directly or from any dealer who’s got them available.

What many people don’t know is that the Gold Buffalo is the only U.S.-minted 24-karat gold coin. Wait, you’re saying, isn’t the American Eagle 24 karats? Nope, it’s a 23-karat coin; it contains one ounce of gold, but it also contains an alloy, about 10%, presumably to make it sturdier. The Buffalo contains no alloy and is thus the purest form of gold you can buy.

If you’d like to own a Buffalo, I’d suggest calling Asset Strategies International (1-800-831-0007). Why? Even though you can’t buy it today, they’ll take your name and number now and then call you on Thursday to lock in a price. They’ve also got the best price I’ve seen: they’re currently asking a 6% premium (or lower for larger orders).

This is a better deal than Kitco, for example, because they’re not taking orders yet and also said their premium is likely to be at least 8.25%. Keep in mind, though, that premiums could easily be forced up if the demand, like last time, is strong. I suspect it will be for this popular coin.

If you think the gold price is going to fall and could thus get it cheaper, I’ll mention that the U.S. Mint projects they’ll produce enough coins to keep up with demand. This doesn’t mean your dealer couldn’t run out, but hopefully the mint’s calculations are correct and there will still be plenty of coins available at later times. No guarantees, though, and premiums will certainly fluctuate.

[Not all precious metal dealers are created equal. Want to know whom we trust to buy our gold and silver from? Check out our archived issues by subscribing to the new Casey’s Gold & Resource Report for just $39. Click here to learn more.]

Download on Net Neutrality

By Alex Daley, Casey’s Extraordinary Technology

David here. On Thursday, October 22, the FCC voted to move forward with formalizing "net neutrality" guidelines. What to make of it all? For help on that front, we turn to our own Alex Daley, former top tech exec at Microsoft and now the editor of our Casey’s Extraordinary Technology service. Here’s Alex…

I am not a big net neutrality fan. But as a free market guy, it cuts both ways for me. To start, net neutrality (as a concept, not as legislation) is an important component of why the Internet works as well as it does. If I am on a Road Runner cable modem, or a FiOS connection, or my iPhone, I can access the same sites no matter which ISP I choose and expect roughly the same quality of service, relative to the amount of bandwidth on my connection. That is because if I bring up http://failblog.org/, they are paying their ISP to serve up the pages, I am paying my ISP to let me download it, and these two providers agree to distribute each other's content. Each side gets paid by only the party on their end, and thus neither has any control over what can and cannot pass over the network.

But of course the ISPs hate that arrangement. It effectively kills their business model. Lately ISPs, especially cable companies, which are used to having near unlimited control over their own networks, have been hemming and hawing that they want to start charging content providers for the right to send data to their customers. For example, by making Google pay Comcast (and Time Warner Cable and Cablevision, etc...) some indeterminate fee for the right to deliver their content to the customers of those ISPs.

Right now, for instance, when you get Cable TV, Comcast gets paid both by you for delivering a television network, and by the network themselves for the privilege of being carried. The cable company also gets a share of the network’s advertising inventory to sell on to local advertisers.

If, however, I watch a show on Hulu.com, Comcast gets paid just by me. Hulu doesn't have to pay Comcast -- they only have to pay their own ISP wherever they originate their content (which allows them to shop around for the best place to put their datacenter and get a good bulk price on bandwidth). And Hulu gets to sell all its own ads. It flips the whole model of a cable company upside down, transforming them from a powerful intermediary that controls access to a market of millions to a dumb pipe – easily substituted by any other faster or cheaper dumb pipe – through which flows any content you want, and they have no control over it any longer. Of course they want to resist that.

Cable companies and phone companies have a lot more competition these days, even off the web, in the local video market. But make no mistake, they are still in large part government-sponsored oligopolies. For instance, local municipalities control whether or not more than one company can operate within their territory. As further proof, consider the war being fought in order for FiOS to get rights to build out in this city or that.

Verizon has been lobbying for states to be able to control franchise rights, instead of individual counties and cities – and of course cable has been lobbying against it, rallying individual municipalities to fight state-level franchising. The reason they can do this, of course, is that the cable companies pay significant fees to municipalities in exchange for the right to use public poles to run their wires. Local governments don't want to lose that revenue, but states want a bigger share and more control of it. Even so, the tide has begun to shift. Between satellite, fiber optic, IPTV from legacy telephone providers, and the world wide web, video is quickly becoming a commodity business.

If I were a shareholder in a cable company, I would want management to fight tooth and nail against the trend of becoming a substitutable commodity. And I would want the company to cut its costs to the bone and recognize that the trend is a virtually unstoppable force – all it can do is delay it a bit and scramble to find a new business model.

All of this, from the onslaught of competition from more video providers, to the way the Internet flips the business model of the cable companies on its head, is causing these companies to flail around desperately for new ways to add growth or even just stem the bleeding. This is why Comcast is trying to buy NBC. And why it is producing unique content – the Golf Channel, G4, Versus, and lots of other niche programming – that is only available through the Comcast service.

Net neutrality legislation – which requires the cable companies and ISPs to treat all content the same, as opposed to actively blocking or slowing down the delivery of some content, in favor of content that they are paid to carry or give preference to – is the final nail in the coffin of the cable business model, which is a dead man walking regardless. It won’t happen overnight, and it make take decades for the cable companies to succumb, but with the legislation, it will be completely inevitable.

So, is net neutrality the government compelling a specific business model? Sure. But so was the entire cable and phone industry to begin with. At least with this business model, there is no party with enough power to charge every side of the market, raise its rates at twice the rate of inflation every year for over a decade, and exercise a large amount of discretionary control over what kind of media you can and cannot have access to.

So, why do I have a problem with it, then? Well, the cable companies have been doing a fine job destroying themselves and don't need government help to accelerate the process. As a free-market kind of guy, I say, "Go ahead Comcast – make Google pay to get on your service. Keep raising my rates with no improvement to my service. Stop innovating again like for the first 30 years or so." It won't destroy the Internet. I'll just switch to using my wireless carrier as an ISP, or to Clearwire, or to FiOS. And even if it does, something even better will pop up to replace it. After all, the Internet – and IPTV, and the digital video recorder, etc. – was born in an age where cable and phone monopolies were even more powerful. The government granted them monopolies and the market took them away from them. With net neutrality, the government is taking away some of that monopoly power, but it is also granting a bit of it to the Internet and its largest players. The well-connected Google, for instance.

The problem with net neutrality legislation is, it assumes that it doesn't get any better than this and tries to keep things the way they are today. I say, let the companies fight it out, destroy each other, destroy themselves. Deregulate more, not less. Let the market come up with an even better invention than the Internet.

[For the latest developments in technology and how to position yourself to profit, check out Casey’s Extraordinary Technology – which combines a monthly overview with specific in-between-editions Alerts to keep you ahead of the crowd in the single most important sector of the U.S. economy. Check out our risk-free three-month trial subscription by clicking here. ]
 

They’re Coming

The skyrocketing interest of U.S. investors in gold, silver, oil, and other tangible commodities, and the falling dollar that makes international assets even more appealing, should translate into an increasing number of U.S. brokerage firms trying to get in on the action by building global trading platforms for their customers. Scottrade has already done so, as has E-Trade, though both offerings are still relatively rudimentary.

At first glance, it appears that the new international trading service announced by Fidelity Investments Wednesday takes things to a new and improved level, opening the door for their millions of customers to join the worldwide party.

In addition to allowing stock trades in 12 foreign markets and eight currencies, the new Fidelity platform also allows you to decide whether you want to settle your foreign trades in U.S. dollars or the local currencies.

It is, of course, the Canadian market that interests us the most – as that is where many of the best resource companies are found. The physical proximity of the Canadian market, its homogeneity with the U.S., and its heavy weighting on gold and energy companies will make it especially attractive to the new wave of U.S. resource investors – especially now that they have increasingly more efficient and easy ways to trade the shares.

Of course, the size of the Canadian market vis-à-vis potential U.S. investment demand could create a situation akin to trying to force Niagara Falls through a garden hose. The total value of the Canadian equities market, where many of our favorite resource companies are to be found, is estimated to be about $2 trillion. By comparison, the U.S. equities markets ring in somewhere around $18 trillion.

In making the announcement of its new trading service, Fidelity reaffirmed its recommendation that clients should have 30% of their portfolios invested in foreign issues. Fidelity currently has on the order of $2.9 trillion under management -- a lot of smackers, to use an industry term.

If this trend toward buying international issues remains in motion, as we very much expect it to, it can only help to improve liquidity and to push up the values of the resource companies subscribers to the International Speculator are already well positioned in.

Lessons Not Learned

Friday morning, Steve Hanke, professor of Applied Economics at John Hopkins University and a senior fellow at the Cato Institute, sent me his latest article for GlobeAsia, titled “Hu vs. Sarkozy.” In it, he contrasts the socialist president of France with the rather more capitalist attitude of China’s leader.

His theme – that the more a government meddles, the more it retards economic recovery – will strike no new chords with you, dear reader. Yet his concise language and clarity of thought in setting the historical context for where we are in the current crisis is well worth a quick read. And I quote:

Just reflect for a moment on the most frequently repeated lessons drawn from the Great Depression (1929-33). According to most accounts, the stock market crash of October 1929 was the spark that sent the economy spiraling downward. How could this be? After all, by November 1929, the stock market had started to recover, and by mid-April 1930, it had reached its pre-crash level. Contrary to the received wisdom, massive government failure – not the stock market crash – pushed the United States into the Great Depression. It was the Federal Reserve that ushered in that terrible nightmare. During the course of the Great Depression, the money supply contracted by 25%. This sent the economy into a deflationary death spiral, with the price level falling 25%.

The Federal Reserve was not the only culprit. In the name of saving jobs, the Smoot-Hawley trade bill became law in June 1930. That intervention increased U.S. tariffs by over 50%. It was quickly followed by the imposition of retaliatory tariffs in 60 other countries. In consequence, world trade collapsed and the unemployment rate in the U.S. surged from 7.8% in June 1930 to 24.7% in 1933.

In addition to the Smoot-Hawley tariff wedge, the Hoover administration and the Democratic Congress imposed the largest tax increase in U.S. history, with the top tax rate on income jumping from 25% to 63% in 1932. If these government policies weren’t destructive enough, the Roosevelt administration’s New Deal created regime uncertainty because major policies were being changed so rapidly. As a result, investors were afraid to commit funds to new projects and private investment collapsed.

Far from saving the patient, government intervention came close to killing it. But you wouldn’t know it from listening to the current discourse about the Panic of 2008-09. Indeed, politicians and pundits throughout the world have unfortunately dialed back to the Great Depression and drawn on the false lessons of history for policy guidance and justifications for their mega-interventions.

David again. With that history lesson in mind, let’s do a quick tally of how things now stand, shall we?

The Fed. Once again, the Fed is right in the middle of things – but this time around energetically expanding the monetary base in the hope that it will fix all that ails.

As you look at the chart of the monetary base just below, you’ll see that after an initial round of explosive growth, the Fed slowed things down a bit. Interestingly, however, the latest data show the resumption of a steep upwards trajectory. This can be attributed to the Fed attempting to keep mortgage rates down -- and therefore the housing market from a final smack-down -- through accelerated purchasing of massive quantities of mortgage-backed securities. Regardless, whichever way you look at it, this is intervention writ large.

 

Taxes. Even without the slate of new and proposed taxes already in the works, simply allowing the Bush tax cuts to expire next year represents one of the largest tax increases in U.S. history. According to the Heritage Foundation, the resulting increase in tax bills will ring in at $2.4 trillion. Have a nice day, because next year the taxes on all your nice days are going up.

Trade Wars. To date, the administration has poured cement into the free-trade bucket through the “Buy American” provisions of the stimulus package and, more recently, tariffs on Chinese products. And, by doing so, it has set an easy-to-understand example for the world to emulate.

Far more potentially damaging, however, has been the deliberate decision to sacrifice the dollar in an effort to avoid the crash-bang-value discovery that would have occurred had the market been allowed its hard crash. As things now stand, we have the Chinese matching our dollar decline step by step, causing other export-reliant countries to follow suit or to begin making angry noises about fair play and the need to level the playing field.

In short, the U.S. government’s competitive currency devaluation is moving the world briskly down the road toward the same raising of trade barricades engendered by Mssrs. Smoot and Hawley.

Legislative Limbo. From trying to kick-start a dying, union-dominated, heavy manufacturing industry… to padding the nests of some Wall Street brights while stripping those of others… to micro-adjusting bank fees… to playing doctor… to trying to legislate global climate… to… to… it becomes near impossible for even the most attentive investor to know where things stand and therefore, how to invest.

Sell my coal stocks? Buy nuclear? Or sell nuclear and buy ethanol? Invest in car companies, or steer clear because without Uncle Sam they’ll fail anyway? But what if the good uncle continues giving? Then again, how long can Uncle Sam keep giving? And where’s he going to get the money from? Buy real estate? But what if interest rates rise due to all the money being thrown about willy-nilly? Short commercial real estate? Or buy because the feds will step in, wallets open? Arrgh… ugh… gads!

I have, on occasion, been accused of being overly negative on the near-term outlook of the U.S. economy. I confess to that attitude, but only because unless and until the government stops pushing forward its latest round of economic “assistance,” topped off with a large dollop of regulatory “relief,” the way forward for the U.S. economy seems destined to first taking several steps back -- back to a point where the lessons of the Great Depression are once again learned.

In the meantime, we have to grab for what straws we can – prominently including precious metals, which will benefit as the dollar weakens, as it must, and which, held close to hand, have no counterparty liability. That and focusing on deep values in well-run companies, which, should you be unable to identify at any given moment, should leave you happy to remain liquid until such values again make themselves apparent.

And that, dear reader, is that for this week. See you soon!

 

David Galland
Managing Director
Casey Research