Submitted by Doug Hornig of Casey Research
How to Navigate An Economy Weighed Down By Government Meddling and Cronyism
If you wanted to sum up the just-concluded Casey Research/Sprott Inc. Summit titled Navigating the Politicized Economy, you could say "The situation is hopeless but not serious."
More than 20 speakers – many of them world-renowned financial experts and best-selling authors – gathered in Carlsbad, CA, from September 7 to 9 to ascertain exactly how hopeless, and what investors can do to protect themselves.
Casey Chief Economist Bud Conrad reconfirmed – with a blizzard of charts and graphs – that the ship of state is still heading for a fiscal iceberg… and that iceberg looms closer by the day.
The US national debt has far outpaced the government's ability to pay it off. It's unsustainable – and made continuously worse by the Federal Reserve, which pushes more and more debt onto its balance sheet, blowing up an ever-bigger bubble. And with the recent announcement of QE3 – read "money-printing without any limits" – Conrad thinks the resulting pop! will be one that will make the entire globe's ears ring.
Eric Sprott, founder and CEO of Sprott Asset Management and one of the most highly regarded asset managers in Canada, reminded Summit attendees of the difference between "liquidation" and "bailout." The last liquidation event on Wall Street was the collapse of Lehman Brothers; since then, bailouts have been the order of the day. That says as much about the health of the financial sector as it does about the banks' friendly relations with Washington, D.C.
Sprott is convinced that the real death knell for the current financial system just may have been sounded by the emergence of NIRP (Negative Interest Rate Policy). In July, the German government was able to sell bonds with a negative interest rate – in other words, when the bonds reach maturity in two years, investors will get 0.06% less than they put in. They're ironclad guaranteed to lose money.
And yet people have gobbled up those "investments," content to park cash in German bonds that will lose less (or so they believe) than the bonds of other, shakier Eurozone countries with a high positive coupon rate. Or alternatively, they may be betting on the collapse of the euro and subsequent settling of their bonds in more stable, new Deutsche marks. In either event, NIRP is not a healthy sign for the Eurozone.
Consequently, Sprott is highly invested in gold and in what he terms the investment of the coming decade – silver.
Another speaker with no love lost for the government and Federal Reserve is G. Edward Griffin, author of The Creature from Jekyll Island, an exposé of the Federal Reserve that became an instant classic.
Griffin believes that rather than being a failure, the Federal Reserve has been vastly successful. The problem is, he said, that the American public has no idea what it actually is that the Fed set out to do. Its mandate is not, said Griffin, to ensure currency stability nor to keep the US economy afloat. Instead, since its inception, the Fed has only had one purpose: to serve its member banks.
Griffin made no secret of his conviction that the Fed is a criminal organization engaged in the legalized plunder of the American population. Through excessive money-printing and the ensuing inflation, the Fed is basically imposing a massive tax. It's a stealth tax, said Griffin – but as old Will so aptly stated, "A rose is still a rose by any other name."
Americans, Griffin asserted, have been completely hoodwinked as to what's happening, namely that they are being robbed on a massive scale. Since the gold standard was abandoned in 1971, the dollar has lost 80% of its value. If this kind of larceny had been done out in the open – say, by the government imposing an 80% income tax for 40 years – we would have had another "Off with their heads" French Revolution in D.C. a long time ago.
If Griffin's arguments left any shreds of trust in the US government, they were swept away by the Hoover Institute's Peter Schweizer. Schweizer, author of the instant best-seller Throw Them All Out, demonstrated how members of Congress can arrive in Washington as middle-class citizens and leave a few years later with millions in the bank. Their "secret of success": due to convenient loopholes, it is perfectly legal for our nation's finest to act and trade on insider information they hear in closed-door meetings. Accordingly, the crash of 2008 that nearly bankrupted many ordinary investors, said Schweizer, made a lot of legislators from both sides of the aisle a fortune.
After all those eye-opening and rather dismal revelations, several speakers were asked by the audience how much of their portfolio should be devoted to the ultimate crisis hedge of precious metals. Bud Conrad's answer: 50%. G. Edward Griffin: 51%. Eric Sprott: "I'm all in."
But far from just presenting the problems, the Summit's blue-ribbon faculty also came up with solutions for investors – how to protect their assets and how to profit even in the toughest of times.
"Be afraid when people are brave; be brave when people are afraid," advised Rick Rule, founder and CEO of Global Resource Investments.
Investing necessarily involves a series of hits and misses, said Rick, and whoever claims that they correctly anticipated all of the market turns of the past thirty years is simply lying: "No one has a system that turns out uniformly positive results. If they did, everyone would be using it."
Rick said the best lesson to learn from our mistakes is that we will continue to make them. "The trick is not to be right all the time," he says, "it's to be right more often than you're wrong." And to position yourself ahead of trends that are unstoppable, then to wait for the market to come to you. That takes patience, the courage to buy when others are selling, and the discipline to sell into a market that is roaring higher.
As an example, he bought uranium mining stocks at a time "when you could hardly give them away," during the depths of a bear market in the sector. While most pundits declared nuclear power dead, Rick knew its resurrection was inevitable (which, as he often points out, doesn't mean it's imminent). And he did have to wait for it for five years, but in the end he had the last laugh.
He mentioned Paladin, a uranium miner that looked like a bargain at $0.10 a share. It promptly fell to $0.01, a 90% decline that drove most speculators straight to the exits. But those who toughed it out or even added to their positions on the nosedive, were more than amply rewarded when the stock subsequently soared to $10… for a whopping 9,900% gain.
Rick said he's quite optimistic, even though the junior resource sector in which he specializes has suffered through a lengthy bear market. The remedy for the investment blues, he suggested, is to be secure in the knowledge that all bear markets end and to muster the intestinal fortitude to wait them out.
John Mauldin, head of Mauldin Economics and best-selling author of Endgame: The End of the Debt Supercycle and How It Changed Everything, was optimistic as well. While he sees an economic catastrophe approaching next year that is unavoidable if Washington, D.C. keeps digging itself into the debt ditch we're currently in, he doesn't think it's inevitable, provided that the political class takes a few simple steps to deal with the five most pressing problems we have – namely, in order: the deficit; the deficit; the deficit; the deficit; and, yes, the deficit.
John believes that if the federal government can manage to cut it by at least 1% per year for the next five years, the economic ship of state could stay afloat, and that it will happen: "Those in power get it; they know that tax revenues will have to go up and that spending will have to be trimmed."
They also know, he said, that doing these things will cause recession and bring a world of hurt to a lot of people. But he asserted that they also understand that to put the needed changes off any longer will precipitate a crackup that'll have Americans pining for the salad days of the 1930s.
Another of the most dynamic and optimistic Summit speakers was Casey Research's Chief Technology Investment Strategist Alex Daley, who detailed some of the technological developments that have marked 2012 as the year of the breakthrough.
A lot is happening in the tech field, but Alex's larger point was that change is coming at an increasing rate and a plummeting cost. Just for one example, Alex pointed out that it took 13 years and billions of dollars to successfully sequence the first human genome. Eleven years later, we can do it in 24 hours at a price that will soon drop below a thousand dollars.
With today's rapid advances in nanotechnology, robotics, gene-based therapies, 3D printing, and the digitization of just about everything, the future's so bright that even the most dire pessimist must find something to be hopeful about.
In the same spirit, Dr. Thomas Barnett, author of The Pentagon's New Map: War and Peace in the Twenty-First Century, electrified the audience with his after-dinner keynote speech. For the better part of an hour, he held everyone spellbound with words and stunning graphics depicting the changes – demographic, cultural, religious, political, economic – that he sees coming over the next 40 years. And he is quite the optimist.
Much of what he predicted runs counter to commonly held views. Taking China, for instance, he said that we are not entering "China's Century," as so many have written in the popular press. He believes China's ascendancy will last only about 15 years before the country hits several inevitable walls, and that the rest of the 2000s will belong, once again, to America. He also projected that the Muslim world will be more at war with itself than the West.