The All-Important Question
by
David Galland
Casey
Research
Recently
by David Galland: Is
the US Monetary System on the Verge of Collapse?
For pretty
much everyone, no matter where they are located in the economic
strata, few if any questions are more germane to making plans for
the future than whether the US and other major global economies
are in recovery.
Getting the
answer to that question right is of special importance to investors
and businesses.
Stating the
obvious, if the broader economy really is in recovery, then investors
would be well served by investing in the equities of solid companies
positioned to take advantage. Similarly, those very same solid companies
would be rewarded by increasing their productive capacity through
investments in the plants and people necessary to meeting growing
demand.
On the same
side of the ledger, bond investors would want to begin shorting
up their durations or leaving the bubbly bond market altogether,
in anticipation that the flood of funds into fixed income would
reverse, sending rates higher (and bond prices lower).
Conversely,
if the recovery is a head fake, then an entirely different course
of action is called for. For instance, one would want to adopt a
cautious attitude about common stocks. And because of the nature
of the crisis – crushing levels of sovereign debt – one would want
to take advantage of pullbacks in precious metals to buy more, along
with other so-called “tangibles.” That way they would have some
measure of protection against the inflation that fiat-currency powers
make all but a certainty.
In addition,
reducing personal and business spending in order to conserve rainy-day
cash would be advised.
And what about
US bonds in the no-recovery scenario? A sound case can be made for
including them in a portfolio as that puts you in lockstep with
the government’s desperate need to keep interest rates down – or,
better yet, have them fall further still. Given the highly politicized
nature of our economy, that seems reasonable – and anyone who has
been long bonds over the last few years has done very well, indeed.
While you’ll
have to make your own call on bonds, my own enthusiasm is curbed
by looking at the charts of the upwards-spiking interest rates on
the bonds of Spain, Greece, Italy, and so forth. When Mr. Market
ultimately becomes disenchanted with the fiscal excesses of the
sovereign deadbeats, he can express his ire most energetically.
When the current bond bubble here in the US ultimately bursts, as
it must, it’s going to be a bloodbath.
Of course,
there is much, much more at stake to coming to the correct answer
on the recovery, or lack thereof, than that.
For instance,
poor economies make for poor reelection odds for political incumbents.
And when it comes to maintaining a civil society, the lack of jobs
inherent in poor economies often leads to a breakdown in civility.
On that note, overall unemployment in Spain is now running at depression
levels of almost 25%, and youth unemployment at close to 50%. How
long do you think it will be before the citizens of this prominent
member of the PIIGS will refuse being led to the slaughter and start
taking out their anger on the swine (governmental and private) seen
as bearing some responsibility for the malaise?
Meanwhile,
back here in the United States, the commander-in-chief is striding
around the deck of the ship of state trying to look like the right
man for the job in the upcoming election, despite the gaping hole
of unemployment just under the economic water line. His future prospects
are very much entangled with this question of recovery.
So, what’s
it going to be? Recovery… no recovery… or worse, maybe even a crash?
We all have
a lot riding on getting the answer right.
The
Quest for Confidence
Ultimately,
the purpose of searching for the truth about the recovery isn’t
about either fear or greed. It’s about confidence.
If you really
knew what’s coming, then the right moves to make become obvious.
You could then make those moves with the calmness of spirit that
comes from certain knowledge and get on with your life. While others
struggle or miss an opportunity by betting on the wrong future,
you’d have set up your affairs to survive and prosper.
Of course,
given that we are talking about a complex system – the economy –
total certainty is never completely possible. But for reasons I’ll
share, the nature of the current crisis paradoxically allows for
more certainty than would normally be the case.
And so I want
to share my conclusion about how I believe things will unfold from
here, followed with some support for that conclusion.
While, as readers
of any duration are well aware, we at Casey Research foresaw the
current crisis years in advance and have remained firm in our conviction
that the recovery is a charade… based on my own readings, and after
spending the last two weeks in the company of a couple dozen very
plugged-in economists, top-performing money managers, and top financial
analysts, my conclusion is thus:
The
world’s largest economies, including the US, Europe, Japan, and
China are speeding for the equivalent of a brick wall. In short,
I believe that before this crisis is over, we will experience the
Greater Depression my dear friend and business partner Doug Casey
has long anticipated.
In case that
conclusion fails to communicate my current view sufficiently clearly,
I will condense it as follows:
The
world’s largest economies are screwed.
And I will
even set my conclusion to music, in the form of the song Somebody
That I Used to Know by Gotye, which seems appropriate because
the economy that we used to know won’t be back again for many years
to come.
Trust me, stating
an opinion on the direction of the economy in such unequivocal terms
troubles me. For starters, I wish my conclusion could be otherwise
because no one likes to be a harbinger of doom. Mostly, however,
I have long resisted adopting a set-in-cement position on something
as wiggly as the future. In my experience, anyone who absolutely,
totally buys into a particular future is almost always proven wrong
by time.
Yet, as my
quest for certainty unfolded, I could come to no other conclusion
than that the world as we know it is headed for an economic catastrophe.
Allow me to
explain.
The quest started
with our Casey
Research Recovery Reality Check Summit,
April 27-29, in Weston, Florida. We took our mandate of getting
to the bottom of this matter of recovery seriously, including faculty
members with a variety of perspectives to see if an overarching
conclusion about the recovery could be ascertained.
In addition
to our own team of Doug Casey, Bud Conrad, Terry Coxon,
Louis James, Marin Katusa and Jeff Clark,
included in the faculty were: Lacy Hunt, former
economist with the Dallas Fed and the world’s most successful bond
manager; Jim Rickards, money manager and author
of Currency
Crisis; John Mauldin, best-selling author
of Endgame
and the just-released The
Little Book of Bull’s Eye Investing; John Williams
of ShadowStats fame; Porter Stansberry, founder
of Stansberry Research; Michael Lewitt, editor
of The Credit Strategist; Gordon Chang,
China analyst; Harry Dent, author of The
Great Crash Ahead (who also debated James Rickards on the
question of inflation or deflation); Andy Miller
on real estate; Greg Weldon of the Weldon Report;
John Hathaway of the Tocqueville Funds; resource
market guru Rick Rule of Sprott Asset Management;
Caesar Bryan, a senior portfolio manager for the
Gabelli Fund group; and David Stockman, the head
of the Office of Management and Budget during the Reagan administration.
(Plus, on the
taking-action front, there was a special panel on international
diversification as well as panels where a dozen or so experts on
everything from gold stocks to uranium, to rare earths, to graphite,
to technology, to energy gave their best picks.)
In other words,
a full program.
Then, immediately
following the conclusion of our summit, Olivier Garret, Casey Research
CEO and partner, and I climbed on a plane for California and John
Mauldin’s Strategic
Investment Conference.
John’s event
was geared more for hedge fund and very-high-net-worth investors
and, as such, included a more mainstream slate of speakers, but
what a slate it was.
For the better
part of three days, Olivier and I hunkered down to hear presentations
and meet with the likes of: David Rosenberg, the
star analyst of Gluskin Sheff; H. “Woody” Brock,
an economist with some of the deepest credentials in the business
(you can Google any of these guys for bio info); economic historian
and best-selling author Niall Ferguson; Marc
Faber of the Gloom, Doom and Boom Report; David
McWilliams, the popular and very erudite Irish economist;
David Harding of Winton Capital Management; Jeffrey
Gundlach of DoubleLine Capital; Lacy Hunt
again… and my favorite for this conference, Mohamed El-Erian
of PIMCO fame.
In other words,
for the better part of two weeks, I was immersed in presentations
and one-on-one discussions with truly some of the smartest, best-studied
people in the world today on economics and investment markets –
with the primary topic being whether the so-called recovery is real,
and the consequences if it falters.
While the speakers
used a variety of methodologies to approach the topic, when all
was said, the only conclusion that could be reached was that the
world is headed for a very challenging period.
That conclusion
was for the most part derived from three aspects of the many presentations:
- Hard
data. Tallying up all the charts and tables I viewed
and heard discussed over the last couple of weeks, if such a thing
were possible, would produce a number well in excess of 1,000.
While there were some that dealt in forward-looking projections,
the vast majority dealt with the here and now, as well as the
historical context of how we got here.
 - What
wasn’t said. For business reasons, many of the
big-name money managers couldn’t come right out and say that we
were heading for a crash, but they all took pains to communicate
in not so subtle ways that this was a likely outcome. Tellingly,
not a single speaker over the entire two-week period – at either
event – came out and said that we could expect a normal business-cycle
recovery to continue.
 - The
complete lack of practical discussion about how the world can
avoid hitting the wall. While the pessimism was palpable,
even among the usually perma-bull Wall Street types, at no point
did anyone espouse a politically feasible solution to avoid the
coming crash. The few who even attempted to point to a solution,
at best, mumbled platitudes about the politicians finding the
spine to adopt fiscal-austerity measures. One of the speakers
– something of a gas bag, it must be admitted – pronounced in
all seriousness that the only solution to the economic malaise
was for everyone in America to rush out and read his book.As an aside, over the course of lunch with that same gas bag,
we had a discussion that went something like this:
[Me]
“All of the speakers, you included, point to the current trend of
higher debts and deficits and say they are untenable, and so the
big economies will hit a wall in the not-too-distant future. Yet
hardly anyone actually then defines what hitting the wall will look
like.”
[Him]
“Yes, well, things will likely get a bit messy if the politicians
can’t pull together to address the structural problems in the economy.”
“But
wouldn’t you agree that, given the nature of our democracy, the
odds of the politicians taking action before we hit the wall are
almost nil?”
“Not
at all. If everyone in this country would read my new book, they
would understand the situation and rise up to force their elected
representatives to take the right action.”
“Seriously?
The only way to avoid the next leg down is if everyone in the US
reads your book? That’s it?”
At
which point – I kid you not – he picked up his plate and changed
tables. (There’s a reason I am only rarely allowed out in public.)
But
the fact remains that other than perhaps Doug Casey and a small
handful of other presenters at our conference, almost no one even
attempted to anticipate just what happens when the crisis swells
up to its full height and then comes crashing down.
Or,
specifically, what the consequences are likely to be when the world’s
largest economies all hit the wall at more or less the same time.
For the record, I have compiled a list of the ten largest economies
in the world, and a reasonable assessment of their current situation
follows in descending order by size of GDP:
United
States – screwed
China
– really screwed
Japan
– massively screwed
Germany
– pretty screwed, especially in that export economies take a big
hit in a crisis
France
– le screwed!
Brazil
– somewhat screwed
United
Kingdom – blimey, screwed too
Italy
– properly screwed
Russia
– hardly screwed at all (lots of resources and next to no government
debt)
Canada
– pretty screwed, eh?
As concerning
as it is to see how many of the world’s largest economies are in
trouble, the biggest problem of all is that the central bank reserves
of virtually every country in the world are stuffed with US government
IOUs masquerading as tangible assets.
So, what happens
when the world’s reserve currency enters collapse and the dollar
turns into a hot potato? Don’t know, but I’m pretty sure we’ll find
out in the not-so-distant future.
If you want
your portfolio to be prepared for what’s ahead in the not-so-distant
future, you’ll want to have the insights –including specific stock
recommendations – the 31 speakers at the Casey Research Recovery
Reality Check Summit gave. And you can have them: the
Summit Audio Collection is available in either instantly downloadable
MP3 format or CDs.
May 17, 2012
David Galland
is the managing editor of Casey
Research.
Copyright
© 2012 Casey
Research