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« Government Bailouts: A Comical View! | Main | Gold Prices Surge Through Second Key Resistance »
Thursday
Feb122009

Doug Casey on 2009

Bob Kirtley, Doug Casey, Sam Kirtley
Bob Kirtley, Doug Casey and Sam Kirtley


In their annual forecast edition, the editors of BIG GOLD asked Casey Research Chairman and contrarian investor Doug Casey to provide his predictions and thoughts on issues everyone’s thinking about these days. Read what he has to say on the economy, deficits, inflation, and gold

The $1.1 Trillion Budget Deficit

My reaction is that the people in the government are totally out of control. A poker player would say the government is “on tilt,” placing wild, desperate bets in the hope of getting rescued by good luck.

The things they’re doing are not only unproductive, they’re the exact opposite of what should be done. The country got into this mess by living beyond its means for more than a generation. That’s the message from the debt that’s burdening so many individuals; debt is proof that you’re living above your means. The solution is for people to significantly reduce their standard of living for a while and start building capital. That’s what saving is about, producing more than you consume. The government creating funny money – money out of nothing – doesn’t fix anything. All it does is prolong the problem and make it worse by destroying the currency.

Over several generations, huge distortions and misallocations of capital have been cranked into the economy, inviting levels of consumption that are unsustainable. In fact, Americans refer to themselves as consumers. That’s degrading and ridiculous. You should be first and foremost a producer, and a consumer only as a consequence.

In any event, the government is going to destroy the currency, which will be a mega-disaster. And they’re making the depression worse by holding interest rates at artificially low levels, which discourages savings – the exact opposite of what’s needed. They’re trying to prop up a bankrupt system. And, at this point, it’s not just economically bankrupt, but morally and intellectually bankrupt. What they should be doing is recognize that they’re bankrupt and then start rebuilding. But they’re not, so it’s going to be a disaster.

The U.S. Economy in 2009

My patented answer, when asked what it will be like, is that this is going to be so bad, it will be worse than even I think it’s going to be. I think all the surprises are going to be on the downside; don’t expect friendly aliens to land on the roof of the White House and present the government with a magic solution. We’re still very early in this thing. It’s not going to just blow away like other post-war recessions. One reason that it’s going to get worse is that the biggest shoe has yet to drop... interest rates are now at all-time lows, and the bond market is much, much bigger than the stock market. What’s inevitable is much higher interest rates. And when they go up, that will be the final nail in the coffins of the stock and real estate markets, and it will wipe out a huge amount of capital in the bond market. And higher interest rates will bring on more bankruptcies.

The bankruptcies will be painful, but a good thing, incidentally. We can’t hope to see the bottom until interest rates go high enough to encourage people to save. The way you become wealthy is by producing more than you consume, not consuming more than you produce.

Deflation vs. Inflation

First of all, deflation is a good thing. Its bad reputation is just one of the serious misunderstandings that most people have. In deflation, your money becomes worth more every year. It’s a good thing because it encourages people to save, it encourages thrift. I’m all for deflation. The current episode of necessary and beneficial deflation will, however, be cut short because Bernanke, as he’s so eloquently pointed out, has a printing press and will use it to create as many dollars as needed.

So at this point I would start preparing for inflation, and I wouldn’t worry too much about deflation. The only question is the timing.

It’s too early to buy real estate right now, although a fixed-rate mortgage could go a long way toward offsetting bad timing. It would let you make your money on the depreciation of the mortgage, as opposed to the appreciation of the asset. Still, I wouldn’t touch housing with a 10-foot pole – there’s been immense overbuilding, immense inventory. And people forget: a house isn’t an investment, it’s a consumer good. It’s like a toothbrush, suit of clothes, or a car; it just lasts a little bit longer. An investment – say, a factory – can create new wealth. Houses are strictly expense items. Forget about buying the things for the unpaid mortgage; before this is over, you’ll buy them for back taxes. But then you’ll have to figure out how to pay the utilities and maintenance. The housing bear market has a long way to run.

The U.S. Dollar and the Day of Reckoning

It’s very hard to predict the timing on these things. The financial markets and the economy itself are going up and down like an elevator with a lunatic at the controls. My feeling is that the fate of the dollar is sealed. People forget that there are 6 or 8 trillion dollars – who knows how many – outside of the United States, and they’re hot potatoes. Foreigners are going to recognize that the dollar is an unbacked smiley-face token of a bankrupt government. My advice is to get out of dollars. In fact, take advantage of the ultra-low interest rates; borrow as many dollars as you can long-term and at a fixed rate and put the money into something tangible, because the dollar is going to reach its intrinsic value.

The Recession

This isn’t a recession, it’s a depression. A depression is a period when most people’s standard of living falls significantly. It can also be defined as a time when distortions and misallocations of capital are liquidated, as well as a time when the business cycle climaxes. We don’t have time here, unfortunately, to explore all that in detail. But this is the real thing. And it’s going to drag on much longer than most people think. It will be called the Greater Depression, and it’s likely the most serious thing to happen to the country since its founding. And not just from an economic point of view, but political, sociological, and military.

For a number of reasons, wars usually occur in tough economic times. Governments always like to find foreigners to blame for their problems, and that includes other countries blaming the U.S. In the end, I wouldn’t be surprised to see violence, tax revolt, or even parts of the country trying to secede. I don’t think I can adequately emphasize how serious this thing is likely to get. Nothing is certain, but it seems to me the odds are very, very high for an absolutely world-class disaster.

Gold’s Performance in 2008

The big surprise to me is how low gold is right now. It’s well known that even if we use the government’s statistics, gold would have to reach $2,500 an ounce to match its 1980 high. I don’t necessarily buy the theories that the government and some bullion banks are suppressing the price of gold. Of course, with everything else going on, the last thing the powers-that-be want is a stampede into gold. That would be the equivalent of shooting a gun in a crowded theatre; it could set off a real panic. But at the same time, I don’t see how they can effectively suppress the price. Either way, the good news is that gold is about the cheapest thing out there. Remember, it’s the only financial asset that’s not simultaneously someone else’s liability. So I would take advantage of today’s price and buy more gold. I know I’m doing just that.

Gold Volatility

Gold will remain volatile but trend upward. I don’t pay attention to daily fluctuations, which can be caused by any number of trivial things. Gold is going to the moon in the next couple of years.

Gold Stocks

Last year, it seemed to me that we were still climbing the Wall of Worry and that the next stage would be the Mania. But what I failed to read was the public’s indirect involvement through the $2 trillion in hedge funds. On top of that, while the prices of gold stocks weren’t that high, the number of shares out and the number of companies were increasing dramatically. Finally, the costs of mining and exploration rose immensely, which limited their profitability.

The good news is that relative to the price of gold, gold stocks are at their cheapest level in history. I still have my gold stocks and the fact is, I’m buying more. I’m not selling, because I think we’re starting another bull market. And this one is going to be much steeper and much quicker than the last one. I’m not a perma-bull on any asset class, but in this case I’m forced to go into the gold stocks. They’re the cheapest asset class out there, and the one with the highest potential.

***

At a time when equities markets are tanking, 401(k)s and IRAs lose 20%-40% of their value, and Treasuries are the next bubble to burst, gold and gold stocks are safe-haven investments that can help prudent investors get through the economic crisis unscathed. For more on gold, major gold stocks, and other gold-related investments, check out BIG GOLD… our no-risk, 3-month trial subscription with 100% money-back guarantee makes it easy. Click here to find out more.

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Reader Comments (11)

Good story, I agree.

But one thing I don't get...when you said in the same sentence;

Get out of dollars...better buy more dollars at fixed rates!

What's that for unlogic strategy that really needs a good article on its own to underscore the potential meant?

February 13, 2009 | Unregistered Commenterde Graaf

What about silver?

February 13, 2009 | Unregistered Commentergary

De Graaf: he meant: use today's borrowed dollars to buy tangible assets (like gold) and then pay back the borrowed dollars in the not-distant future with dollars that have been devalued (and keep most of the tangible asset you bought as yours)

February 13, 2009 | Unregistered Commenterroger

Thank you for your reply, but I know what he meant.

My sarcasm didn't point out, that borrowing money (after the American consumer has borrowed enought already) is a crazy idea. Especially when I and you don't have guarantees for this kind of risky business the Casey's are implying...

I don't have any good words for this. Its crazy!

The fact that this points out Casey's utter belief that gold goes up and the dollar will come down, doesn't change the fact that Casey doesn't know what the market will do in the future. I recommend not to pursue this kind of 'margin' recommendations, as they will only lead to more debt and more delinquencies of normal citizens. We have seen enough speculation during the years on Wallstreet that are now eating out of your tax payer pot.

Playground for the rich.

February 13, 2009 | Unregistered Commenterde Graaf

de Graaf, You listen to CNBC far too closely. Casey has been studying and trading/buying gold long enough to be able to tell you, with certainty, what is going to happen. The timeing is the impossible thing for anyone to nail down.
If you will just become a student of history, you would not be hesitant to believe. You disbelieve at your peril, is my opinion.

February 13, 2009 | Unregistered CommenterWarren

No Warren, your completely wrong about that. I'm a believer, a moderate gold bug if you like.

I actually am a student of history and know what gold represents and I agree with it. Unfortunately for some of you, I'm a bit more sophisticated than others in not always agreeing with things that are being said. A contrarian.

Thorough arguments is what I look for. Not the simple talk from someone who is covered in 30 years of gold investments. Thereby biased.

There's more in the world that buying gold, you know ;)

February 14, 2009 | Unregistered Commenterde Graaf

By the way; CNBC??? Are you kidding me!

What is that, Barbie and Ken puppets round a table? C'mon

February 14, 2009 | Unregistered Commenterde Graaf

I don't know why I'm taking the time to debate someone as "sophisticated" as you are bound to be. People like you are going to "contrarian" themselves right on down to the soup lines by twenty-twelve or fifteen. I started buying gold and silver back in September of '03 when gold was $369.70. And I still own silver I bought in 1980 at less than $6.00. There's a bit of recent history to wrap your head around. The dollar is worth about 6 or 7% of its value when the Fed was allowed by congress in 1913. What do you think its value will be by the end of Obama's reign? Gold has never been worth zero.

February 14, 2009 | Unregistered CommenterWarren

Your deluding from my point Warren.

I focussed my effort on the borrowing (on margin) to buy gold. Don't make the mistake to relate that to investing in gold in general. Its the best investment around today.

Keep it clean mate

February 14, 2009 | Unregistered Commenterde Graaf

Great Article Doug and I really enjoy your straight talk.

I sent it on to number of people and got great feedback.

Thanks to Gold-prices.biz for providing it and I very much enjoy my subscription.

I got thinking about this and another article regarding a very big number and I tried to get my mind around all these Trillions being tossed around.

$2.5 Trillion...How Much Is That, Anyway?

$1Million looks like this in digits $1,000,000.00
And it would take a little over 11 days to count by the passing seconds to get to one million.

$1 Billion in digits $1,000,000,000.00 and it used to be considered a bunch, well, for that matter, so did $1Million, not that long ago.

Okay, keep counting by the second, and go for 33 years, 24 hours per day, 365 days per year, and you will get to $1Billion...or consider this...I was on a new Cruise Ship a few years ago and they said it cost $500,000,000.00 to build, that is $1/2Billion, so One Billion would be 2 Modern Cruise Ships in relative purchasing power.

Now $2.5 Trillion is $2,500,000,000,000.00...Forget counting, you will not live long enough...but that is 5000 Cruise Ships, and if each cruise ship averaged 1000 feet in length, then that is end-to-end Cruise Ships, from LA to Seattle, for a total distance of 950 miles, or a 16-hour non-stop drive at 60 miles per hour.

That is one long buffet, my friends.

This world has gone nuts!

February 15, 2009 | Unregistered CommenterChuck

Wonder if we could stretch Barney Frank that far?

February 15, 2009 | Unregistered CommenterWarren

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