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• Thu, 17 May 2012 19:13:14 +0000: Government's War on Vital Innovation - Casey's Daily Dispatch
  
  Synopsis: 

  A hidden tax buried in the bowels of "Obamacare" threatens thousands of medical-device manufacturer jobs – and millions of people's health.

  
  

  By Doug Hornig, Senior Editor

  We are unabashed technophiles here. Technology has improved the lives of people everywhere to an astonishing extent over the past hundred years, and the future is brighter than even we can imagine. We are also, as you know, friends of the inventor, the innovator, the entrepreneur – and the free market in which they get to test their ideas.

  There is little that ingenious men and women cannot accomplish when government stays out of the way.

  As we have written here and in Casey Extraordinary Technology, the field of medical devices has been particularly fertile ground, yielding a mind-boggling array of things that existed only in the realm of science fiction just a few years back. These are transformative technologies that have done so much good for so many.

  While the press loves devices of the super-high-tech variety like the da Vinci surgical robot or Mako's joint-replacement robotic arm (a CET portfolio pick, mind you, which did very well for our subscribers, more than doubling their investments from open to close), not all have been so headline-grabbing. Other, more modest advances also have notably enhanced our quality of life.

  For one, think of the squirming child who had to hold still for five minutes for a mercury thermometer to register an accurate temperature. Not to mention the hazard caused if that thermometer broke and spilled the mercury on the floor  –or worse, into the child's mouth. Under-the-tongue digital thermometers that work in less than a minute were a big improvement. And today, how much more convenient and safe it is to have a gadget that can accurately read body temperature from the eardrum in one second.

  Or consider the leaps forward (pun intended) that have been taken by modern artificial limbs. They're now so far from their wooden forebears that recipients can do almost anything the able-bodied can do, including running competitive races on legs of metal.

  With the perfection of lens transplants, cataracts – once a leading cause of blindness – can easily be eliminated.

  Insulin pumps have gone from being cumbersome backpacks just a few decades ago to tiny, 4-oz. boxes that can be clipped to a belt, freeing many diabetics from the necessity of carrying around syringes and vials of insulin.

  Our subscribers have made a solid return on the innovation of home hemodialysis machines, which enable renal-care patients to more frequently perform these critical treatments from the comfort of their own homes – an innovation which research has shown is more effective in improving quality of care and extending life than any drug has ever proven to be.

  The list, of course, is endless.

  But there's more as well. Beyond the physical benefits, many medical devices have also been the basis of outsized profits for investors. Just a few examples: Intuitive Surgical – inventor of the da Vinci robot – has been a market darling for the past decade, up 70% in just the last six months and up 4,500% since the beginning of 2003. Implant maker Stryker returned 1,570% between 1995 and 2007. And pacemaker manufacturer Medtronic rose a staggering 16,000% over a 15-year period.

  So, considering all of the amazing things medical-device inventors and companies have given us over the years, along with the spectacular amount of wealth they have created for investors and society, we couldn't help feeling dismay when we learned that the government is planning to pour cold water all over further innovation.

  Not overtly, of course. But effectively, to be sure.

  How do you stifle invention and kill job growth? One of the surest ways is to enact punitive new taxes that single out a particular sector for its success and put it at a disadvantage to the rest of the market. And that's exactly what Congress has in store for the medical-device industry.

  It all has to do with the Affordable Care Act, the law popularly dubbed "Obamacare." When our misrepresentatives were crafting that massive, convoluted chunk of legislation, they realized that it was going to be costly and that they had to dream up some fresh sources of revenue to help fund it. Well, when in doubt, tax somebody; and why not go after someone who's doing relatively well? The medical-device industry lost only 1.1% of its employees during 2007-2008, while the manufacturing sector as a whole was being reduced by 4.8%.

  So into the bill they inserted a new 2.3% tax on medical device companies' sales. Not profits, mind you – gross revenues. It is basically a royalty on innovation.

  What this translates to, as a general rule of thumb, is a 15% tax on profits, to be stacked atop the 35% federal corporate tax (already the world's highest) and whatever state and local taxes companies might pay. That's a very heavy burden, and although the tax doesn't kick in until next year, the mere anticipation of it is already having an effect.

  Stryker, for example, cited the new tax as one of the reasons it is laying off about a thousand of its workers. Surgical instrument maker Covidien did the same in announcing that it will shed 200 workers in the US and move production to Costa Rica and Mexico. Orthopedics giant Zimmer is laying off 450 and taking a $50 million charge against earnings. Medtronic has said it expects an annual charge against earnings of $175 million. And so on.

  As bad as these numbers are, an even worse result could be the dampening effect the law will have on future industry growth. Revenues from the tax are projected to come in at $20 billion next year. That's nearly double the industry's budget for R&D. And who can say how many small inventors with big ideas will have their enthusiasm snuffed out?

  "What on earth could Congress have been thinking?" you might ask. Good question. Personally, I've long since given up trying to deduce politicians' rationales from their actions. So here, from a Bloomberg article by Ramesh Ponnuru, is an explanation of why medical devices became a target: "The justification for this selectivity was that the legislation would be a boon for this sector. By expanding health coverage, the new law would increase demand for medical devices and thus, in effect, subsidize the industry. The tax was, therefore, a partial clawback of this subsidy."

  This explanation is nonsense, Ponnuru asserts. Stephen L. Ferguson, the chairman of the board of Cook Group, a privately held medical-device maker based in Bloomington, Indiana, argued  in support: "First, after enacting a similar law, Massachusetts saw no greater growth in sales than any other state. Second, a disproportionate number of the newly insured will be young people with low health risks, thus limiting the potential increase in sales. Third, in many cases pre-Obamacare law already requires hospitals to provide medical devices to uninsured people who need them."

  This potential disaster has not gone unnoticed. So far, nine Democrats have joined 216 Republicans in the House to sponsor Minnesota Representative Erik Paulsen's legislation to repeal this section of the Affordable Care Act. A companion bill in the Senate has been introduced by Utah's Orrin Hatch, but as yet no Democrats have crossed over in that chamber.

  That could change. Not only does current Republican Senator Scott Brown of Massachusetts want a repeal, so does liberal Elizabeth Warren, who's opposing him in the fall election. Now, it's not likely that Warren has suddenly been hit by a lightning strike of free-market sense. As a candidate grubbing for votes, she's acutely aware, as is Brown, that her state's medical-device industry employs 24,000 people and accounts for 13% of Massachusetts' exports.

  Nevertheless, since the message is often more important than the messenger, Warren did have this to say: "When Congress taxes the sale of a specific product through an excise tax … it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential."

  Well put.

  How this all plays out depends, of course, on whether the Supreme Court strikes down the entirety of the Affordable Care Act or just the parts it considers unconstitutional. Before that ruling is handed down, it is likely nothing will happen. But if the bulk of the law stands, it'll be up to Congress to rid it of this burdensome new tax. While you never want to bet on politicians doing the right thing, in this instance they just might. For the sake of technological advancement, we hope so, anyway.

  (Doug Hornig is not only senior editor at Casey Research, he's a prolific writer with over 10 book titles and countless articles to his credit.  Recently he wrote an editorial spotlighting the state of surveillance in the US.)

  
  Bits & Bytes

  Taking Flight (Economix)

  The new tax discussed above is not the only thing that has US citizens rankled. Increasing numbers of us are finding the whole tax situation intolerable, and we're giving up citizenship at the fastest rate in 15 years. That could mean a serious brain drain, as the best and brightest – like Facebook cofounder Eduardo Saverin – look elsewhere for future opportunities.

  Seriously Entangled Photons (Technology Review)

  We recently wrote about quantum computers in this space and described the phenomenon of "entanglement," a peculiar quality of atoms and photons that apparently allows for the instant teleportation of data. Now a team of Chinese physicists has demonstrated entanglement over a distance of 97 kilometers – a new record.

  Run Your Prius on Viral Power? (TechSpot)

  No, it's not going to happen anytime soon, but government researchers recently unveiled a device that generates energy using genetically engineered viruses. We'll have to trust that if they escape the lab and get into our bloodstreams, they won't electrocute us.

  And Then There's This Guy… (Mashable)

  So in love with his iPod that he, well… see for yourself. We're speechless. Be warned, however: if you faint at the sight of blood, do not watch the embedded video.

• Wed, 16 May 2012 16:44:25 +0000: Lacy Hunt: Curing Debt with Debt – Bad Things Will Happen - Casey's Daily Dispatch
  
  Synopsis: 

  A highly successful bond investor offers a simple, four-point plan for saving the economy from the "bang point."

  
  

  Dear Readers,

  Here is the next installment of the video conversations we recorded at our recent Recovery Reality Check Summit in Weston, Florida. In this interview, CET Editor Alex Daley converses with economist Lacy Hunt regarding the problems with the US economy and what should be done about them. Hunt is extraordinarily clear and makes a compelling case. I'd call for more huge spending cuts and no tax increases, rather than his balance of the two – but neither of us will get our wish anytime soon, so, as Hunt says: "Bad things will happen."

  This conversation is not, however, just an academic observation. There are clear investment implications, such as our team presents in The Casey Report. This is a call to action.

  Please note: due to the length of this interview, we are presenting it in two parts, with the first installment this week, and the second next week.

  Thanks for watching and reading.

  Sincerely,

  Louis James

  
  Senior Metals Investment Strategist
  Casey Research

  

  [Lacy Hunt gave a controversial presentation at our recent Summit, making a case for investing in government bonds. You can hear it, along with presentations from Doug Casey, former Director of the US Office of Management and Budget David Stockman, and 28 other financial experts, on the Summit Audio Collection.]

  Interviewed by Alex Daley, Editor, Casey Extraordinary Technology

  Alex Daley: Hello, I'm Alex Daley, and welcome to this edition of Conversations with Casey. Today we have with us Lacy Hunt, executive vice president of Hoisington Asset Management, one of the nation's top bond firms.

  Lacy Hunt: Alex, great to be with you.

  Alex: So, Lacy, what do you see as the major roadblocks to recovery in America?

  Lacy: The main problem is that the country is excessively indebted. We have got too much debt – public and private – relative to GDP, and an increasing portion of this debt is unproductive or even counterproductive, which means that we are not going to be able to generate income in the future to service the debt.

  It's already affecting us quite dramatically. In the last fifteen years, debt-to-GDP ratio has risen from roughly 250-260% to a hundred points higher, 360 today, and our standard of living is no higher. By "standard of living" I mean the median household income. It's really a tragic situation. We've taken on the debt, it's bought some gains in GDP, but it has not improved the welfare of the majority of our people.

  Alex: Hasn't the United States been here before? Haven't we seen periods where we have had excessive government debt, say in the 1800s or the early part of the 20^th century, and we've managed to climb out of that quite successfully and come out ahead?

  Lacy: Yes, this is really the fourth episode of extreme indebtedness. Now to my way of thinking, I am looking at public and private debt, so when I have a debt-to-GDP ratio, I am talking about $55 trillion of debt. Part of that's in the government, part's in the private sector. This is the fourth episode. They have occurred at very long, irregular intervals. That's one of the difficulties, that the people weren't alive at the time of the prior ones.

  The first occurred in the 1820s and the 1830s, when we were building the canals, the turnpikes, steamship lines. Initially, there were some good uses there, but then it was overdone and then credit was used to finance living beyond our means. The panic was 1838. The bubble burst, speculative prices collapsed in real estate, and a whole host of other things. The economy experienced a very difficult time all the way to the American Civil War, but we eventually saved, paid down the debt, and were able to recover.

  The next major episode was in the 1860s, which was the building of the railroads. Initially, good purpose, we built what was known as the central route. Then we built northern and southern routes, and a whole host of feeder lines. Real-estate speculation occurred… other types of assets, stock market speculation, lavish consumption, living beyond our means. All of the railroads failed except one, and it was the one that was not financed by the government. Government involvement was very great. In other words, that government created the incentives, but the private sector bet on the incentives, was one of the characteristics.

  Alex: So you're saying that in the previous two debt bubbles that we talked about, what we saw was effectively government-manipulated incentives which drove overinvestment in a particular area?

  Lacy: That's correct, and overconsumption, and overspeculation. Charles Kindleberger, in his great book Manias, Panics, and Crashes, called it "overtrading." In other words, people do things beyond their fundamentals, and for a time it is very enjoyable. Incomes are rising, prices are rising, people are being employed, but the process can go too far; and then Kindleberger said that you eventually move into what is called "discredit." Discredit is when a certain discerning minority starts pulling their money out. And then discredit leads to revulsion, when the general population realizes that there are a lot of core problems and they try to pull out, and then you have your crash.

  The crash years were 1838, then 1873 – then the 1920s. Here again, the incentive for the overspeculation was really the excessive liquidity of the Federal Reserve. The Federal Reserve did a very bad job. Now they were newly established at that time, had just come into existence in 1913. Interestingly, there were some Federal Reserve officials that were aware that the problem was out of control, but they were drowned out, because everybody was having too much of a good time, and so then we had a very difficult time period. And basically, the US economy didn't recover until we entered World War II.

  But the austerity of World War II and the inability to spend your paycheck, which was mainly driven by gains in exports to our allies who were in war-torn situations, pushed the saving rate up to 25%. We repaid the debt, and this laid the foundation for the post-World War II boom. So the 1920s was the third episode, and the fourth episode was the last 20 years.

  Again, the incentives came from the government sector, mainly the Federal Reserve, but the federal government played its hand through two government-sponsored corporations – Fanny Mae and Freddy Mac – that allowed the bundling and created the façade that the mortgage was secure regardless of how poor the fundamental characteristics of any individual loan were. Of course, that was a false notion, and so we have now had another very difficult time period and we are certainly not getting a normal recovery. The standard of living is continuing to fall, in spite of gains in GDP. We have a much more dramatic monetary and fiscal response, but therein lies the problem. We are not achieving a rise in the saving rate, the austerity that's needed.

  Alex: Excuse me. You keep going back to the rise in the savings rate. I thought that, and I think the common wisdom is that World War II helped spawn recovery of the economy because of the increase in government spending. The government was out stimulating the economy, building troop transports and tanks and shipping people across the Atlantic Ocean. Wasn't that the cause of the recovery?

  Lacy: There have been very substantial econometric studies by first-rate scholars: no. The thing that drove the expansion was really the exports. Robert Barro at Harvard University calculated the multipliers year by year. The largest increase in government spending ever was 1942, and government spending accounted for the largest share of GDP and the largest share of the gain. But when you look at the movements using very precise statistical measuring devices, the multiplier is only 0.6 in 1942, and it falls to 0.4 in 1943. And if you look at the longer time period, using all of the quarterly data up to recent times, Barro has found that the government expenditure multiplier is 0.01, but it has a negative sign in front of it.

  When Barro's findings were established, an outstanding European econometrician by the name of Roberto Perotti, who at the time was on leave at the European Central Bank, was funded to do a study. This allowed him to calculate the government multipliers – not only for the United States, in order to determine whether Barro's findings were correct or not – but for five other countries: the UK, Germany, Australia, Canada, and Japan. And what he learned was that the government-expenditure multiplier in all six cases was very close to zero. Not negative, as Barro found – slightly positive, but clearly there was no benefit from it.

  And so, here's the rub: if you are overindebted, and you try to cure the indebtedness problem by taking on more debt, you buy some transitory gains, which then makes the economy weaker in due course.

  Alex: That's a lot like a family taking on excess debt. If you have ten thousand dollars in credit-card debt, and you decide to solve that by paying those bills with another five thousand in credit-card debt, you can live pretty well in the short term.

  Lacy: In the short term. That is exactly right, said much better than I said.

  Alex: The historical corollaries here really strike me amazingly. You keep going back to the savings rate and the increase there, and so really it was about America was exporting to the world to help supply the war effort, to help supply the rebuilding efforts around the world, yet we couldn't spend our own money, which sort of –

  Lacy: Because of mandatory rationing.

  Alex: Yes, it was almost enforced household austerity...

  Lacy: That's correct, and our people understood it; and they were glad to do it. They supported the cause. And so when you got your paycheck from your export-driven gains, what people did is they either bought savings bonds or other types of liquid assets or paid down debt and so by, when World War II ended, a lot of the Keynesian economists thought we would go back into a slump. But they didn't understand that the cause for the problem in 1929 was excessive indebtedness, and we'd paid the debt down, so we had a very substantial recovery.

  The problem for us night now is that we are not restoring saving rates. This is exactly what Japan has done in the last – since 1989. Their saving rate was 25%. It is now zero. They are trying to continue to live beyond their means. They are not willing to correct the problem, and so if we try to cure the indebtedness with more debt, we buy a little bit of happiness for a short-term period, and then we add to the problems down the road. Bad things will happen.

  Alex: Interesting. I think Japan has a lot of lessons for the American government to take away, but where are we today relative to where we were in those other periods of time? How bad is our debt level, relative to, say, the 1930s or the 1860s?

  Lacy: We are much higher. I mean, the past high-water mark – we are more than sixty points higher. And if you use the reference point of 1928, which was when the debt buildup was essentially complete, we are more than 100 percentage points higher. We are very indebted.

  We are not as indebted today as Japan is. But take gross government debt – there is an alternative series privately held, but I think the gross is more important now – plus private debt. Then get the projections from the IMF – which will not be entirely correct, but they are impartial (they are trying to do a good job) – which have gross government debt rising sharply this year and next year. If you assume that private debt to GDP is stable, which is an optimistic assumption to say the least, the total debt levels rise in 2012 and further in 2013.

  Alex: So we're twice as bad off as we were in terms of leverage in the economy as we were in the great crash that brought on the Great Depression.

  Lacy: That's correct.

  Alex: And we're still increasing that debt at a very rapid rate.

  Lacy: That's correct.

  Alex: So something has to give.

  Lacy: Which suggests that the potential of another panic year is out there. In other words, yes, the 2008 panic year is behind us, but there may be another panic year ahead of us.

  Alex: So we have all this potential built up in the United States economy, yet it seems all the attention today is focused on Europe. Why is that?

  Lacy: Well, I think that the situation in Europe is even worse. I mean, we have about $55 trillion in debt and we have $15 trillion of GDP or a debt ratio of about 360. In the 17 countries that are in the euro, they have about $68 trillion of dollar-equivalent debt and only $14 trillion of GDP, so Europe is even more heavily indebted. Germany's in good shape, but most of the others are not. Spain, Portugal, Italy, the debt problems there are escalating much more than people are willing to admit, and even in France. And you have an ironic situation – it looks like after the French election, France is going to try more debt to cure its problem. That really won't work. So Europe is on a very unstable course, in my opinion.

  Alex: Now, all the governments are taking on more debt, because they are trying to boost liquidity in their economies. Doesn't increased liquidity increase investments, and doesn't increased investment increase productivity and ultimately help us get out of this situation?

  Lacy: Unfortunately, no. When the Fed expands its balance sheet or the European Central Bank expands their balance sheet, they inject liquidity into the system, and over the short run it will boost stock prices, it will boost commodity prices.

  If you think of, say, a fundamental demand and supply curve – and one of the short-term influences of demand is liquidity – so if the Fed comes in and pumps liquidity into the system, they'll shift the demand curve outward. But once they inject the liquidity into the system, they have no control over it. And what happened in QE2 and also in the stealth easing since December is that more of the liquidity went into sensitive commodities, particularly gasoline. Well, gasoline is important to cost of living.

  When the Fed began quantitative easing 2, in 2010, you had a situation where wages were rising two percent and prices were rising one. So at the end of the month, your modest and moderate income households were a little bit better off. The Fed expanded their balance sheet. Commodity prices shot up, and the inflation rate went up to four, but wages stayed at two. So what happened to real income? Real income declined, and the economy fell back.

  When the Fed began the stealth easing, which was an expansion of the balance sheet to aid the European Central Bank, wages were still rising at two and inflation was rising at two. It had come back off, because QE2 had ended. Then we saw speculation in commodities. The inflation rate went up to three but wages stayed at two. So in the first quarter, we had a decline in real per-capita disposable income. We had a small gain in GDP, but the standard of living did not improve.

  Alex: So the majority of Americans are becoming worse and worse off, progressively, as a result of these policies. These policies aren't necessarily getting us out of these problems, they are not increasing our productive economy. They are just sort of misaligning investments again. So what is the theory, why do Bernanke and the president continue to go after these? It didn't work in Japan, yet we're doing it here in the US, and they're doing it in Europe. What's the theory behind this, and why do they believe it will still work?

  Lacy: Well, I'm afraid the theory is very flawed. I mean, the classical economists were of the view that what creates prosperity is the hard work, creativity, and ingenuity of our people, and there has been a prevalent view in the US and Europe for a long time that you can create prosperity through financial transactions. And I am afraid that that's simply not correct. We have to do it the old-fashioned way, and if we use our borrowing capacity and channel it into more and more unproductive uses, then we are not going to get gains in output per hour, which are essential to rising real wages.

  Rising productivity, rising real wages are the key to an increasing standard of living. These types of policies, like the Federal Reserve's quantitative-easing operations, they do benefit some people. The stock market has recovered. There have been increases in wealth for some; but unfortunately, these types of policies have exacerbated what economists call the income or wealth divide. The majority of our people, their main resource is what they earn from their daily labor, and that's not generating a return, so we're skewing the distribution of income between those that are extremely well off and the majority of our people. The basic policies are, in my opinion, very hurtful, and counterproductive.

  Alex: So President Obama went out in election mode and said he was all for a transfer of wealth between classes. But it seems that his policies have actually been transferring the wealth from the average individual to the wealthiest Americans.

  Lacy: He has.

  Alex: That's an ironic conclusion, that he really didn't specify what side.

  Lacy: It is an ironic conclusion. He champions the little guy, but the little guy is considerably worse off. His rhetoric, of course, is that he's out to be their protector, but the net result – the decline in real disposable per capita income speaks for itself.

  Alex: Now it's easy for us to pick on Obama, because we are feeling the pinch of these problems today. But this is not a uniquely Democrat or Republican, nor an Obama-specific problem.

  Lacy: And I don't want to make it sound like that either, because one of the things that concerns me is that the simple solutions proposed by the Democrats and the Republicans are not going to solve the problem. It's going to require a great deal of shared sacrifice, and the Democrats are going to have to be willing to give, and the Republicans are going to have to be willing to give.

  And by the way, I aggravate them both when I say what I am about to say: We are going to have to reform Social Security and Medicare.

  We made promises that we cannot keep. If we can't do that, then we're not going to be able to get our house in order, because federal outlays without changes there – which are now 25% of GDP – are going to jump to 40% in just 25 years, which would mean we would have to transfer 15% of our GDP from our working households to our retired households. Well, that's not going to happen. Or we are going to have to borrow the money – and we can't borrow the money. So the process is going to come to an end. The debt levels are so high and the magnitude of the problem is so great that there are also going to have to be tax increases.

  Now, here we have two options. There is a very harmful type of tax increase, and then there is a considerably less harmful type of tax increase.

  On the tax side, we have marginal tax rates, and then we have what are called tax expenditures or "loopholes." Now, when you raise the marginal tax rates, you really hurt the economy. In fact, the studies show that if you raise the marginal tax rates by a dollar, you lower GDP between two and three dollars. You create a downward spiral. But we need shared sacrifice. In other words, we can't do it all on the spending side – the problem is too great. But what we could do is eliminate the loopholes.

  My feeling is that the multiplier on the loopholes is only about -0.5, and my main evidence for that is what happened in 1986. We had a revenue-neutral tax bill, result of the ingenuity of a Republican president and a Democratic senator from New Jersey, Bill Bradley. And what they did did not increase the deficit; they lowered the marginal tax rates, and they eliminated loopholes. And 10 years later the economy accelerated substantially. So what my solution would be is to reform Social Security and Medicare. If we can't do that, we might as well just trot along down the road until disaster hits.

  So that we can move forward, there has to be shared sacrifice. You try to hold the marginal tax rates where they are and eliminate the loopholes. You know, we have about 3,300-3,400 loopholes and they benefit individual groups. They're powerful in Washington. They protect themselves, but they are not benefitting the overall economy. And we are going to have to do one more thing – and I wish I did not have to say this, but I'm just trying to be realistic when I look at it. We are going to have to have some degree of a consumption-based tax, I would say probably only 4% or 5%, but that is preferable to raising the marginal tax rates.

  Thomas Jefferson and the other founders of our republic were very heavily influenced by a man by the name of Thomas Hobbes, a great 17^th-century thinker. He wrote a book called Leviathan, and he made a very valid point. He said that income measures what you contribute to society, and spending measures what you take from society. So your taxes, really – you don't want to tax what people are contributing, you want to tax what they're taking. So we're going to have to make wholesale changes, and it's going to require shared sacrifice on a lot of people's part, and it's going to require a bending of the simple but incorrect assumptions on both the Democrat and the Republican sides.

  We're going to have to reform Social Security and Medicare. We're going to have to eliminate loopholes – which would be a shared sacrifice for the taxpayer – hold the marginal tax rates, and have some modest consumption-based tax. Other than that we can't solve the problem. Now, what I've just described is a very tall order, and it may well be that we don't have the political will.

  Alex: I think a lot of Americans would agree that it seems neither party is going to step up to the plate and really talk about this…

  Lacy: In that case what we do is we move along the road until we hit what Ken Rogoff and Carmen Reinhart called the "bang point." I don't think that that's immediately at hand, but the bang point occurs at the point in time in which governments are no longer able to borrow funds. In other words, the marketplace concludes that the current level of debt cannot be repaid, so they're not going to lend them any more. Bang points are very disruptive, socially disruptive. We're seeing that in Europe. In the first six months in the current fiscal year, our federal government had 58 cents of tax revenues and 42 cents of borrowing. Well, think what would be the consequence if the federal government had to fall back to its revenue base.

  Alex: That means a 42% drop in federal spending.

  Lacy: That's right.

  Alex: Aren't we talking there about massive unemployment, a large number of people losing their jobs, and big federal government cuts in benefits?

  Lacy: Absolutely. And what has happened in Greece, what's happening in Spain, Italy? There's social unrest. So the real risk here is that because the magnitude of the problem is so great – and increasing – that we move along toward the bang point.

• Tue, 15 May 2012 18:01:39 +0000: Three Thoughts on My Mind - Casey's Daily Dispatch
  
  Synopsis: 

  Revealed: Why natural gas reserves –and prices – will plummet; the most important aspect of resource investing; and how a legendary investor helped a little-known oil company explode in value.

  
  

  By Marin Katusa, Chief Energy Investment Strategist

  This week's energy Dispatch is more of a musing. I've been on the road a lot lately, which always gives me lots of time to think, so here are three of the thoughts that have been running through my head.

  First off, I want to tell everyone a story that illustrates perfectly why Rick Rule is one of the best in our business. I'm lucky to have Rick as one of my mentors, but I'm even luckier to be able to call him my friend. The funny thing is, the more I get to know Rick and the more business deals we complete together, the more impressed I am with how smart he really is and how good he is at making great calls.

  This specific story started in late 2008, right smack in the middle of a horrible market. After completing his in-depth due diligence, Rick became one of the big financiers of Africa Oil (V.AOI) through an early 2009 fundraising. It just happened that I was a significant shareholder, alongside our subscribers, in a company called Turkana Energy; and I was involved in arranging the sale of the company to Africa Oil. Our subscribers in the Casey Energy Confidential and Casey Energy Report were both alerted to AOI's potential and were able to get in at the same price as Lukas Lundin, Keith Hill, and Rick.

  During the next three years Africa Oil needed to raise money several times, and Rick Rule was the first to write a big check each time to support the company through its growth phase. Fast-forward to March, 2012 – I meet with Rick and say, "Rick, we are up a lot on AOI. Maybe it's time you reduce your risk exposure at $2.40?" His response was, "Marin, my clients pay me to make investments that will change their lives, and my analysis tells me that Africa Oil has as good a possibility as any of doing just that, so I'm holding." Wow, was Rick ever right on that call. Within 60 days Africa Oil went from $2.40 a share to $8.50.

  That is precisely why Rick is one of the best in the business. If you are a new investor in the resource sector looking for a full-service broker, I highly recommend that you do your portfolio and your bank account a favor and set up an account with Rick's firm by calling (800) 477-7853 or +1 (760) 943 3939.

  As for how my AOI recommendations worked out, the three different calls I made were all sold for +100% gains. In hindsight I sold too early, and the gains could have been greater. It's never easy watching a stock run like Africa Oil has after you sell, even when you still more than doubled your money. But that leads me into my next thought: disciplined buying and selling.

  Currently one of my favorite stocks in both the Casey Energy Confidential and Casey Energy Report portfolios is one where we notched a gain of +60% in less than four months. At that point we recommended taking a "Casey Free Ride," which means selling enough shares to recoup your initial investment and holding on to the remaining shares for risk-free upside. A sharp gain like the one we experienced with this pick is often followed by a correction, and if the price fell like I thought it might I planned to buy more of the stock at lower prices, all the while still collecting a nice dividend from our original, risk-free shares. The price did swing downward, and at the most recent Casey conference this company was my top pick. Now my subscribers and I can buy more shares at a good price and play the game again.

  Risk mitigation is the most important aspect of disciplined resource investing. A gain is not a gain until you sell and lock it in, and even though it's hard to watch a stock continue to climb after you sell, it is even harder to watch a gain evaporate or turn into a loss before you actually add a penny to your bank account.

  As for the company in question, if you'd like to find out more I urge you to take us up on our ninety-day, risk-free trial subscription to the Casey Energy Report. You'll find out what company I'm talking about – it happens to be the single best way for your portfolio to profit from the fracking boom.

  My last thought for the day concerns natural gas. As I've discussed before in these pages, oil and gas reserves depend on the price of the commodity. A "resource" is an estimate of how much oil or gas exists in a particular reservoir; the reserve in that reservoir is the portion of the resource that has a good likelihood of being economic to recover using current technology. The word "economic" is very important here: it means the cost to produce the oil or gas must be less than the amount for which is can be sold. In short, the producer has to be able to make money producing the fuel, or else he's not going to bother.

  As such, reserve estimates depend on the price of natural gas. When gas prices are high, even reservoirs with tricky geology or limited regional infrastructure can become economic. When prices are low, like they are now, a whole bunch of reservoirs that would have turned a profit a few years ago become completely uneconomic.

  The thing is, a lot of these uneconomic reservoirs are still being listed as reserves. Gas producers across North America are inflating their reserve counts by including reservoirs that are nowhere close to economic at today's gas prices.

  This is happening for a somewhat legitimate reason. Reserves are generally calculated using the average gas price over the previous 12 months, which usually reflects current and future pricing reasonably well. Our current situation, however, is far from usual – the price of natural gas has fallen so dramatically in the last six months that the 12-month average price is far above the spot price. For example, in the benchmark Alberta AECO natural-gas exchange the 12-month strip price is still C$2.73 per MMBtu, while the spot price for June delivery is currently just C$1.905 per MMBtu. In the US, the Henry Hub spot price is US$2.36, while the 12-month strip is $3.09 per MMBtu.

  Since it is the convention, producers and analysts are continuing to use 12-month strip prices to calculate reserves counts. But at the moment those 12-month strip prices are 30 to 40% above the spot price! Moreover, the impact of suddenly delineating trillions of cubic feet of natural gas resources will not go away overnight – almost every player in the North-American natural-gas market agrees that prices will trade sideways and perhaps even slightly further down for the next 12 to 18 months because of the supply glut. As such there's even more reason than usual for producers and analysts to base their calculations on a price reflective of today and tomorrow, instead of one that reflects the stronger prices of yesterday.

  Yet analysts and producers continue to use the 12-month strip to calculate reserves. Adding to the inflation of natural gas reserves, companies only reassess their natural gas reserves annually. Companies that recalculated their reserves six months ago used a gas price of US$3.50 or even US$4.50 per MMBtu, since that was the strip price at the time. Now their reserves – which will remain on the books for at least another six months – are based on a gas price that's more than twice the current value! The situation is very misleading, but it will soon come to an end.

  Over the coming months, 12-month strip prices will fall, gradually coming into line with spot prices. As that happens, one gas producer after another will write down their reserves. The writedowns will eliminate 30 to 40% of each company's gas assets, and the market's reaction will be to pummel a sector that is already struggling.

  The end result is this: the worst is yet to come for natural gas. Prices have probably fallen almost as far as they will fall, but when these writedowns hit, natural-gas equities will bear the brunt of investor discontent. That being said, the phenomenon of shale gas introduced fundamental changes to the gas market in North America, and the impacts have to work their way through the whole system before the sector can continue its evolution.

  When I assess a gas company, I use a gas price of $1.50 per MMBtu. To me, that price is a fair if slightly conservative reflection of the value of natural gas in the short and medium term.

  I always say that the best cure for low prices is more low prices, and that's a lesson natural gas is learning the hard way.

  
  Additional Links and Reads

  Oil Falls, Hit by Greece, Eurozone Turmoil (Reuters)

  Oil prices fell to start the third week of May as Greece's inability to form a government and worries about a slowing Chinese economy stoked concerns about the outlook for petroleum demand. In the two weeks ending Friday, May 11, Brent crude oil futures were down 6.2% and US crude off 8.4%. Sentiment turned decidedly bearish for oil in the second week of May as hedge funds and large speculators made the biggest-ever cuts in their net long futures and options positions, and the weakening of the euro against the dollar has only made things even worse for oil.

  Oil Bulls Face Severe Test of Faith… and Pockets (Reuters)

  The collapse in oil prices since the start of May is posing a severe test for oil-market bulls, who must meet big margin calls to maintain their positions or close them out and accept their losses. Several big banks, including top oil-price forecaster for 2011 Goldman Sachs, recommended long positions in West Texas Intermediate crude oil as recently as February, expecting the reversal of the Seaway pipeline to ease the supply glut in Cushing and reduce the discount on WTI relative to Brent. The concept generated a near-record long position in WTI-linked futures and options, equivalent to some 300 million barrels of crude. But the idea was doubly flawed: WTI now carries an even bigger discount to Brent; and Brent prices have fallen $10 per barrel. As such, the long WTI futures positions are doubly underwater; and the week ending May 8 saw the largest one-week drawdown in hedge fund long WTI positions for more than five years. With oil prices still carrying downside momentum, the focus for most traders still holed in by long positions has shifted from maximizing gains to minimizing losses.

  Australia Says Shale Could Double Its Gas Resources (Financial Post)

  While North America's gas producers are facing looming reserve downgrades because of falling natural gas prices, Australia is looking to double its gas resources as strong prices for liquefied natural gas (LNG) render the country's shale resources economic. Australia is already the world's fourth-largest exporter of LNG and has 390 trillion cubic feet of gas resources. That count does not include shale resources, as shale gas exploration is still just getting started in the country, but a new government report estimates the country's shale gas potential at 400 trillion cubic feet.

  India's Foreign Mine Hunt Not Going Well (Wall Street Journal)

  One major stumbling block remains along India's path to growth: lack of raw materials. Industrial activity hinges on the availability of steel, aluminum, copper, and coal, but India's ability to increase production of these resources continues to be hampered by the country's complex and contentious mine-licensing system. Mining has a bad reputation across the country, derived from years of illegal and very damaging small-scale mining, and the government's system for allocating mines is opaque and notoriously corrupt. Tired of waiting for new domestic mines, a few years ago metals factories and power plants started looking overseas for iron ore and coal, but most of these efforts have failed as Indian companies, both private and state-run, were bested in their quests by international rivals or saw potential deals unravel in the face of resource nationalization in the targeted country.

  Cameco to Buy Uranium Broker for US$136M (Leader-Post)

  Cameco strengthened its diversified approach to the nuclear-fuel sector with the acquisition of Nukem Energy, a broker of nuclear fuel products and services, for US$136 million. Cameco is also assuming Nuken's net debt position of US$164 million, though the company expects to reduce that debt load substantially through ongoing activities before the deal closes. Nukem sold 12 million pounds of uranium in 2011 and expects to sell 10 to 15 million pounds in 2012. The company's assets also include uncommitted inventory and a portfolio of purchase and sales contracts.

  Does Sending Alberta's Oilsands Crude East Make More Sense? (CBC News)

  Former Bank of Canada Governor David Dodge has joined the small but growing chorus of voices advocating for pipelines to take oilsands crude east, not west. All of the proposed pipelines to take bitumen to the west coast have generated significant opposition, and it is unclear when any of them might actually be developed. In the meantime, refineries in Ontario and New Brunswick buy and process crude oil from across the Atlantic, which is more expensive than oilsands crude. The idea of sending bitumen eastward, rather than to a west-coast port for export to Asia, has been around for years. Now it seems some of the big players in Canada's oil and gas industry are starting to act on the idea by considering various plans to convert underutilized gas pipelines into oil lines.

• Mon, 14 May 2012 13:20:48 +0000: Strategies for Weary Gold Stock Investors - Casey's Daily Dispatch
  
  Synopsis: 

  A precious-metals analyst reveals six action steps for gold stockholders to take while they're waiting for the yellow metal to turn around.

  
  

  Dear Readers,

  As this edition goes live, I'll be in New York City at the New York Hard Assets investment conference, meeting with mineral exploration companies and giving a talk or two. It may be too late by the time you read this if you don't already happen to be in Manhattan, but if you are and would like to come to the show, I always like meeting readers in person.

  Meanwhile, back at the metals ranch, the whole suite has sold off over the last two weeks. Fears of further trouble in Europe and decreasing growth rates in China have copper, lead, zinc, aluminum, and other industrial minerals on the retreat, and the precious metals as well: gold, silver, platinum. But is this a problem or an opportunity?

  I'd guess you know my answer.

  Jeff Clark's take on gold stocks below is focused on just that one metal, and it's written with investors who are relatively new to the market and under water in their portfolios in mind. If that's not you, the article isn't for you, but if you're feeling anxious about the direction of the gold market and gold stocks, Jeff's article can still help.

  Sincerely,

  Louis James

  
  Senior Metals Investment Strategist
  Casey Research

  
  

  Rock & Stock Stats	Last	One Month Ago	One Year Ago
  Gold	1,578.78	1,658.52	1,501.01
  Silver	28.89	31.55	35.16
  Copper	3.65	3.64	3.90
  Oil	96.13	102.70	98.21
  Gold Producers (GDX)	42.42	46.49	54.91
  Gold Junior Stocks (GDXJ)	20.26	22.67	35.82
  Silver Stocks (SIL)	18.69	20.81	23.94
  TSX (Toronto Stock Exchange)	11,694.67	12,026.76	13,419.74
  TSX Venture	1,346.33	1,435.12	2,070.22

  
  Strategies for Weary Gold Stock Investors

  By Jeff Clark, Senior Precious Metals Analyst

  Which adjective best describes your feelings about gold stocks right now?

  • Confused
  • Scared
  • Excited
  • Angry
  • Impatient
  • Uncertain
  • All of the above

  The continual drubbing of gold stocks is enough to drive any man or woman mad.

  It's maddening because we're investing for all the right reasons: The big drivers for our sector are still in place, and even though gold stocks were cheap six months ago, they've managed to get a whole lot cheaper. Worst of all, no one can say for sure when the bottom will arrive.

  So what do we do? And if you're all in, is there really anything you can do? I think there is. Whether it be examining yourself or your holdings or taking specific actionable steps, see if you find some of these strategies useful while we wait for our sector to turn around – which we are sure it will.

  #1: Examine Your Core Beliefs about This Sector

  Why did you invest in gold? And precious-metals equities? Having a firm grasp of the specific reasons you invested in each asset is crucial. Why? Because if you invested in gold simply because it was going up, you may get impatient and sell early. If you bought gold because the dollar seemed to be falling against the euro, you may get spooked out for the wrong reasons. If you bought because someone else said it was a good idea, you may be too afraid to add to your holdings when you should.

  I initially bought gold because it runs in my blood, but I started buying in earnest and continue buying it now because I don't trust what governments are doing to our currencies. Plain and simple, if the Fed is going to print as much money as they please, then I'm not willing to bet my life and my savings and my future standard of living and my kids' college education and my retirement and my wife's IRA on the idea that that money won't somehow spill into the economy and cause inflation. If you want to believe Bernanke when he says he has "controls" in place and an "exit strategy" for all those trillions of dollars already added to the system, go right ahead. If you think other governments that are trying to keep their currencies "competitive" won't join the race to the bottom, be my guest. But I'm not willing to take that risk.

  I think more money printing in the US and around the world is highly likely, whether they call it "quantitative easing" or try to hide it under some other guise – especially if we get another deflationary scare. And if the dollars I work so hard for at Casey Research and through all my investments are likely to continue to be diluted and price inflation is a near-certainty, then I'm going to protect them by buying gold and silver.

  And let's not forget the monetary base that exceeds $2.6 trillion, the national debt that will conservatively reach $20 trillion by 2015, the $1.3-trillion US budget deficit, the approximately $4 trillion in US Treasuries held in foreign central banks, the vulnerable and propped-up economies around the globe, the still-unresolved European debt crisis, and the many negative real interest rates that show no sign of reversing course anytime soon. These are massive megatrends that ultimately won't be derailed by the minor fluctuations caused by pit traders selling gold stocks or some CNBC loon claiming the metal's in a bubble.

  I put my money where my mouth is: approximately 13% of my investable assets are invested in gold and silver bullion. My fear isn't that I have too much; it's that I may not have enough. You have to decide for yourself what your personal allocation should be, but keep in mind that mathematicians tell us anything less than a 5% exposure has a statistically insignificant impact on a portfolio.

  I say all this about gold because I think that is the key to gold stocks. If gold and silver are destined for higher levels, gold stocks will follow. I know they're not doing that right now, but I'm convinced we're simply in the middle of one chapter of a very long book (Kip has fallen in a well, but Lassie is on the way). The bottom line is this: Gold stocks do respond when gold goes higher – and gold is going higher because of completely unsustainable fiscal and monetary actions of governments all around the world.

  There's obviously a lot more that can be said on the topic, but the point for now is that it's important to take a moment and ask exactly why you've chosen the investments you have. And then make adjustments as necessary – that may mean some selling, it may mean some buying, it may mean doing nothing.

  For some investors, therapy may be in order – gold therapy, that is. If so, read this report on gold and watch this video calling a market bottom. The audio collection from our recent Recovery Reality Check conference would also be good therapy.

  But I suspect most investors just need to take a break from constantly checking their brokerage statement and to give things time to settle and turn around, however long that takes. If upon honest reflection this describes you, then go to the movies, learn Chinese, volunteer, pay more attention to your spouse or kids, or get a second source of income so that you produce more than you consume and save the difference.

  With that basic understanding in place, here are a few further steps to consider…

  #2: Be Picky

  For the current environment, we want to own only the best of the best. Now is the time to focus on those ships with the best crews and most seaworthy hulls. Buy companies with proven management teams, strong balance sheets, low political risk, and big growth. This gives us the best chance to succeed; the better companies will do well when things turn around and won't drop as far if the markets continue to falter. A good example is Yamana; gold stocks as a group are down 22% over the past year (as measured by GDX), but AUY is up 15%. The better companies will not only reduce risk but outperform the market when things turn around. And gold stocks will turn around.

  Take a look at your holdings and determine if they're among the best in the industry. Is some trimming and/or adding in order?

  #3: Build Cash

  Worried about another 2008-style crash? Having lots of green stuff in your account is your secret weapon.

  For those who don't have a lot of cash right now, let's say I deposit $50,000 into your brokerage account, and you log in and see that cash sitting there right beside your gold stocks… might you feel a little less gloomy? You still wouldn't like where gold stocks are, but you'd have the ammunition to not only stay alive but prosper when you felt ready to dip a toe in the water.

  Or to dive in… Louis James told us of more than one investor who profusely thanked him for recommending buying gold juniors in the fall of 2008 – which they were able to do because they had large cash reserves. Remember, to really be successful in any type of investing you need to have the 2 Cs: cash and courage. If you don't have those, the odds are heavily stacked against you. Those who followed Louis' advice made a bundle of money, and I specifically remember one who said his life was permanently changed for the better because of his ability to follow the two Cs at the time.

  If your brokerage account doesn't have much cash, ask yourself what you can do to raise more. Can you: a) sell a holding that maybe deserves to be sold? b) consolidate or refocus some of your holdings? c) save more every month, or start saving? d) look for a way to generate more cash?

  #4: Don't Ignore Dividends

  We devoted the April BIG GOLD to this idea and named the top dividend payer in the gold industry. The point here is that we can be paid to wait. And because of lower stock prices, we can lock in some mouthwatering yields right now. A few companies have their dividends tied to the gold price, too, meaning payouts will grow when gold resumes its uptrend.

  And here's something to consider: look at the growth in payouts in our industry.

  

  (Click on image to enlarge)

  In just two years, major gold producers have dramatically increased dividend payouts, with many doubling or more. If this trend continues – which I believe it will as gold rises – then our industry will become increasingly attractive to mainstream investors.

  Think of it this way: if our market goes sideways or even continues drifting down, non-dividend (or weaker-dividend) paying companies won't gain anything, while the strongest payers will let us build cash or buy more shares. Locking in some attractive yields now is a very sensible strategy for part of your portfolio.

  #5: Nibble

  No one knows if we're at the bottom, but keep in mind that eventually everything bottoms.

  With that in mind, buying some shares of the higher-quality companies at current levels is actually a smart move – and that will still be the case even if we get a further selloff. How can I say that? Because I know someone who bought GDX at around $30 in September 2008, thinking he was getting a good price; even though it dropped all the way to $17, he was back in the black by December and up 65% a year later.

  Remember what Doug Casey says: "You don't make money buying when you're optimistic. You have to actually run completely counter to your own emotional psychology." In other words, you have to buy when you least feel like doing so.

  If you haven't already, nibble. I think a year from now you'll be very glad you did.

  #6: Don't Give Up

  Even if you're convinced we've got it all wrong, I would encourage you not to sell now. You'd likely be selling many stocks at their low points, while simple reversion to the mean should put you back in the black and perhaps hand you some nice profits, depending on your cost basis. Pull up a 2009 chart of GDX and you'll see what I mean.

  And if you're all in? Then you have to be patient… though I would still be doing #3 above.

  If you're a weary gold stock investor, I hope you'll find some of these tactics useful. My advice is to view our current circumstances as an opportunity to take the necessary action so that when our sector turns around, you're in a position to profit, perhaps in a life-changing way.

  
  Gold and Silver HEADLINES

  Human-Resource Crisis for the Mining Sector Getting Worse (Mineweb)

  The lack of skilled workers has become one of the most acute issues dogging the mining industry. According to the article:

  Currently there is a "massive talent gap" that is going to get worse because the global mining industry is experiencing the biggest wave of workforce retirements in 70 years – the oldest baby boomers turned 65 years old in 2011. …

  A shortage of skilled workers was the second biggest business risk for mining in 2010, 2011 and is forecast to stay the number two risk (resource nationalism/country risk is the number one risk) for miners again in 2012.

  The problem is most prevalent in South Africa, Australia, Canada, and South America.

  Lack of skilled workers leads to halts or even cancellations of projects and increased costs as unions, aware of the labor deficits, demand higher wages and benefits for their members.

  Gold supply from mining has shown small but steady growth in recent years, but some experts predict a slowdown in the coming years. There are multiple reasons for that, with shortage of skilled people, mine depletion, and lack of new big discoveries among the most noticeable.

  What Do Americans Think about Gold? (Mining.com)

  A recent Gallup poll shows that gold leads investments as the one judged best for the long term. A full 28 percent of Americans think of gold as the best tool for long-term investing, while 20 percent selected real estate, 19 percent voted for paper investments, and only 8 percent preferred bonds.

  While gold is still the top pick, the percentage of Americans that viewed gold as the best investment actually declined 6 percent from last year.

  Ironically, gold ownership remains low on a historical basis: in April the United States Mint sold only 19,000 American Gold Eagles, the lowest amount since 2008. On an annual basis, gold purchases have declined from the first four months of 2011 (358,000 coins) to the same period of 2012 (181,000).

  Comparatively high hold prices could be responsible for the slowdown, though the current weakness opens up opportunities for investment both in physical metal and gold ETFs. As contrarians, we're using this disconnect in public perception to buy gold and gold stocks.

  
  This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

  International Speculator

  • One of our producing companies has been successfully replacing its depleting silver resource. Read our reflections on the company's newest resource estimate.
  • Two of our other producing companies released their financial results for the first quarter of 2012. Go to the IS portfolio page to read our analysis.

  BIG GOLD

  • Many BIG GOLD companies filed their quarterly reports over the past week. Get the latest results and our opinion on the portfolio page.
• Fri, 11 May 2012 20:45:33 +0000: Quest for Confidence - Casey's Daily Dispatch
  
  Synopsis: 

  Financial experts weigh in on pending economic doom, the evil influence of politics, the US budget surplus for April, and why banking shouldn't be left to the bankers.

  
  

  Dear Reader,

  Sorry to have been such a lousy correspondent of late. As I'll explain in a moment, over the last couple of weeks I've been on a quest for the truth about the economy. Much of today's missive revolves around what I discovered, though I also have some guest commentaries to share on a couple of seemingly important stories recently in the news.

  As my topic is rather large, let's get straight into it.

  The Big Question

  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 elections, 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, with that characteristically long-winded wind-up, 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 here 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 as 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 is geared more for hedge fund and very high net worth investors and, as such, includes 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 (great speaker, by the way); 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:

  1. 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. I will share a few of these charts with you momentarily, but to say the world is in uncharted and very precarious territory is a completely accurate statement.
      
  2. 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.
      
  3. 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.

  The Crux of the Problem

  Sorting though my notes for a few key pieces of support for my stark assessment of what the future holds, I find the following that should help make the point.

  The first is from Lacy Hunt, who was voted the most popular speaker at our summit (in addition to being very smart, he's also a very nice guy).

  

  (Click on image to enlarge)

  The takeaway from this chart is that the world's largest economy is in unchartered waters in terms of debt. This chart, or one telling much the same story, was used by a number of speakers. They used it for the simple reason that it points to a problem that is truly untenable –unfixable by any other methods than overt default or covert default through inflation.

  And the picture is much worse than that, because this doesn't show unfunded liabilities – for example, the trillions that aging Americans expect the government to fork over for Medicare and Social Security benefits. Toss those into the pot, and you are talking a total liability overhang of closer to $65 trillion.

  Of course, it's far from just here in the US… Lacy referenced a recent ECB study of the unfunded state-sponsored pension plan liabilities in 19 European Union countries and found that those liabilities came to five times the GDPs of those countries (actually a bit better than the situation here in the US).

  The always agreeable John Williams of ShadowStats and I had an on-stage discussion about the work he does to strip away the government's tampering and obfuscations when reporting economic data. The first chart here shows the government's rather encouraging picture of recovery in GDP.

  

  (Click on image to enlarge)

  Now, here's the same picture adjusted for actual inflation. Not quite so good.

  

  (Click on image to enlarge)

  How about housing starts? Recovery there? You tell me.

  

  (Click on image to enlarge)

  The all-important matter of unemployment? Ouch.

  

  (Click on image to enlarge)

  Because I am already running way behind on time, let me try to jump to some of my key takeaways from my two-week quest.

  1. The vast majority of the governments of the world's largest economies are in big trouble, simultaneously. They have taken on huge amounts of unpayable debts made worse by massive amounts of unfunded obligations to their citizenry. It is a mathematical impossibility that these liabilities can be paid off in currency units with anything near today's purchasing power.
      
  2. The world's biggest economy and the "shepherd" of its reserve currency is in among the worst shape. Interestingly, a couple of presenters – John Williams and James Rickards – were actually less pessimistic on the euro than the dollar. I might argue that point, in the short run – but in the medium to longer term, none of these currencies are going to survive in their current iteration, and the consequences of a failing dollar are far more serious.
      
  3. It isn't just the governments in debt. Harry Dent pointed out that while the US government debt totals about $14 trillion today, the debts of corporations and consumers add up to over $40 trillion. This puts a tremendous drag on the economy that will become a cement anchor when interest rates start up.
      
  4. The late-stage dog fight of degraded democracies. The political system of democracy is seen as laudable by most. You know, where everyone joins hands around the campfire, sings a few cheery songs, then lines up to cast their vote after which the popular will is acted on and everyone roasts marshmallows before heading back to home and hearth.
     
     At certain points in a democracy, it can function reasonably well… which is to say that most people will be mostly okay with the ways things run. In a late-stage democracy, however, things are rarely quite so tidy. To be more blunt, when you have a government that as a result of trying to suck up to "We the people" has expended all of its stolen capital and obligated the next ten generations to life as tax slaves, then the system quickly degrades into little more than a bunch of mongrel dogs fighting over scraps.
     
     We have entered a period with the worst possible set-up… with people demanding their state-sponsored giveaways from politicians acting on no principles higher than reelection who then jump through every hoop to continue the giveaways. As a consequence, the ballot box has become a tool for mob rule that supports institutionalized theft from the folks who just want to live their lives to the fullest by enjoying the fruits of their own production.

  In other words, the crisis we face isn't just that there is no mathematically possible way for the debts and obligations of the governments to be met… or that the population at large is struggling under its many debts (thanks in no small part to regular enticements by the government and banking sectors)… it is that the political systems in the larger economies structurally reward ever greater prolificacy in public finances.  

  Which means this train is speeding up toward the wall and won't stop until the crash.

  Earlier on I wrote that, paradoxically, predicting the future is easier than usual these days. That's because the major economies are so highly politicized. Thus, when you see the hard data that says things are broken beyond all politically tenable ways for them to be repaired, you can go one step further and ask, "What would a politician do?"

  And asking that question, you can be unusually confident we're headed for a wall. 

  Some, like Harry Dent, believe that the crash will come in the form of a massive deflation. This would occur if the politicians misgauged their many interventions in the economy and the deflationary pressures from debt deleveraging in the private sector were able to outstrip the inflationary actions of the government.
  
  On the other side of the argument, many analysts including those of us here at Casey Research, believe the grand finale will be highly inflationary in nature because in a fiat system, the waves of money printing can just keep rolling in.

  That said, a good case can be made that we will see a period of deflation, followed by the blowout inflation that brings the crisis to its tumultuous end.

  The important thing, at least to my way of thinking, is to recognize that we are speeding for a wall. That will put you well ahead of the average person who has literally no idea and so will be caught unawares.

  Timing?

  While we can see that the crisis is not over and is headed into a very dangerous period, other than in general terms, the matter of timing is almost impossible to pin down.

  The reason is that while we can see cascading structural problems looming just ahead, we can't anticipate how the governments around the world are going to attempt to deal with these problems.

  For example, we can only guess at how the US government will be able to keep funding itself as well as rolling over trillions of government bonds over the next year.

  Or how Congress will deal with the triple witching hour of another approaching debt ceiling, along with the mandated sequestering of funds resulting from the political wrangling around the last debt ceiling fiasco, compounded by the scheduled year-end expiration of the Bush tax cuts, all of which together promise to suck trillions out of the economy.

  Thus, while the crisis should come to a head before the end of next year, that assessment assumes that some form of "standard" for government action exists. In other words, that the government will stay within predictable boundaries when dealing with economic setbacks. Because it doesn't, it's literally anyone's guess just how far it will be willing to go before finally allowing the free markets to once again operate and things are resolved.

  For instance, many people now think that quantitative easing is the final word in the government's economic meddling. In contrast, I take the view that QE may be the last in the category loosely defined as "warm and fuzzy" options used by the government to try and retain power by fixing the unfixable, but it's a far cry from how draconian they can get. 

  History has shown us the far fuller slate of options available to the state, including exchange controls, confiscation, nationalization, punitive taxation, wage and price controls, war and even assuming dictatorial powers.

  Simply, the morally and economically bankrupt super-powers haven't even begun to fight, and so this crisis could drag out for years to come.

  Now, as to how to protect yourself. 

  First and foremost, while it may seem a shameless tout, I would highly recommend you buy the CDs from our just concluded Recovery Realty Check Summit. In addition to everything you need to make your own confident assessment about where things are headed (invaluable), you will also hear a lot of solid, specific ideas on how to position your investment portfolio to preserve your wealth and even profit through the challenging times ahead.

  More information and details on the CDs from the recently concluded Casey Research Recovery Reality Check Summit can be found by clicking here.

  We will, of course, continue to share our thoughts on the continuing crisis in our various publications so that, together, we will get through this. Before moving on, I would mention, however, that even Lacy Hunt, bond bull that he is, admitted to making regular purchases of gold.

  And now, with the clock running down, I will turn to a couple of contributions in our Casey Research constellation of contributors. I'll then be back with some closing thoughts and my latest (actually entertaining) experience with our friends at the TSA.

  Our first contribution returns us to the topic of degrading democracies.

  
  What We Always Knew About Politics, But Couldn't Prove

  By Paul Rosenberg

  Politics makes people mean.

  We always knew that, but if ever we said it, people passed it off as a trite complaint about one political party or the other. But now, thanks to a couple of researchers at the University of Michigan, we can prove it.

  This new study was very cleverly set up so that the researchers could measure the empathy of Republicans and Democrats for each other, without using political questions. Here's how they did it:

  In their first experiment, the researchers recruited subjects on a cold winter day (some of them were outside, waiting at a freezing bus stop). They said that the test was on reading comprehension.

  In one version of the test, they gave the subject a story to read about a left-wing, pro-gay-rights Democrat. This Democrat was, in the story, hiking through the woods on a cold winter day. In the other version the story was the same, except that it was about a  right-wing, anti-gay-rights Republican. Only after the experiment did they ask the political leanings of the subjects.

  In the second experiment they did the same thing, but they used thirst instead of cold. They fed the subjects salty foods and gave them no water; then they told a story about a man walking across a parched desert. Again, one version of the story featured a Democrat and the other a Republican.

  You'd think that a thirsty guy would feel some level of sympathy for another thirsty guy, right? And normally, that would almost always be true, but it turned out that politics killed that natural sympathy.

  Democrats felt sympathy for a Democrat in the story 100% of the time. Republicans felt sympathy for a Republican protagonist 96% of the time.

  But when the freezing or thirsty person in the story was from the other party, sympathy died almost completely: The sympathy of Democrats fell to 0% and the sympathy of Republicans fell to 9.5%.

  WORSE THAN MEAN... EVEN MONSTROUS

  Mean is a non-specific word. Even though it always refers to something negative, it can refer to many different types of negative things: grumpiness, outbursts or malice, for example.

  The meanness uncovered in this experiment was of a specific type: the killing of empathy. And that is a very dangerous thing.

  Empathy is the root of morality and cooperation. People without empathy are called sociopaths, and they are by far the most dangerous people on the planet. Every genocide features sociopaths; every mass atrocity and every continued abuse requires them. So, when a study shows empathy being almost entirely crushed, it should be jarring. To put it clearly and simply, this study showed something very scary, which is this:

  When people are under the influence of politics, they turn into sociopaths.

  That is not hyperbole. Go back and re-read the explanation above. If you think I might be over-stating things, read through the study for yourself.

  Such people do not become permanent sociopaths, of course – they are able to experience empathy in other situations. But when politics comes to their minds, they lose all empathy for someone of the opposite party. And that is a very dangerous thing – especially considering that politics is the obsession of the age, the mass addiction of our age.

  This is no longer a subject of debate; it is fact.

  We always knew that politics made people mean. This study showed us how completely politics crushes empathy... and shows us how toxic the political obsession really is.

  The crack addict needs to walk away from his pipe; the alcoholic from his bottle; it's time for us to start walking away from politics.

  Paul Rosenberg, a periodic contributor on cyber-security to InternationalMan.com, writes the Freeman's Perspective newsletter. He is also the author of many books, including the highly regarded A Lodging of Wayfaring Men. When not reading or writing on history, philosophy or science, Paul is the CEO of Cryptohippie USA, a company that provides the crucial link in online security: protecting your Internet traffic. What's the point of protecting your computer with a firewall if you send all of that data, unprotected, through the thieves' paradise that is the modern Internet? 

  
  The Inflated Surplus

  By Adam Crawford, Casey Research

  Earlier this week, it was announced with no small amount of pride by the government that the US budget had returned to surplus for the first time since 2008. Here's our own Adam Crawford's notes on that announcement. 

  David

  

  (Click on image to enlarge)

  The US government reported a $59 billion surplus for the month of April. For those who are counting, that's the first surplus in 42 months (I guess 1 out of 42 ain't bad). This is seemingly positive news for an ailing economy. However, a quick glance at the fine print in the CBO report reveals the news isn't so great after all.

  • April's tax receipts almost always exceed the norm because many people put off paying Uncle Sam until the last possible minute. This creates a spike in revenue resulting in a budget surplus. Given the market's stellar performance of late, it is likely an additional revenue windfall came from the capital gains tax as well. Before April 2009, the last deficit in April was in 1988.
     
  • Timing shifts for certain payments amplified the surplus. For example, tax refunds fell in April because portions of the refunds were allocated to a different month. This can create an unexpectedly grandiose one-month surplus at the expense of an expected multi-month gawd-awful deficit. The former will be front-page news, and the latter will be buried on page six.
     
  • One should also note that, after payment shifts are taken into account, spending didn't actually decrease, and revenue collected came in below estimates.
     
  • All told, payment shifts enhanced the surplus by roughly $32 billion, leaving the US with a real monthly surplus of $27 billion. This number is actually an $8 billion disappointment when compared to the average estimate.

  The bottom line is, an April surplus is rather common, and this particular April surplus is rather inflated. The fact remains the US will likely run another trillion-dollar-plus deficit this year, which will add to the multi-trillion-dollar total debt. This means a month in the black will be soon be overshadowed by another year in the red.

  
  A Comment on the JP Morgan Loss

  By Michael Lewitt, The Credit Strategist

  Michael Lewitt, a first-time faculty member at our Florida Summit, does exhaustive analysis of credit markets and the derivatives that have become such a large gorilla in those markets. When the news broke last night about JPMorgan losing $2 billion and still being trapped in a trade gone wrong, I reached out to Michael for some quick comments. Those comments follow. 

  David

  When you are sitting on $71 trillion of derivatives, it is probably best not to argue for the relaxation of regulatory oversight over your business. Yet that is precisely what JPMorgan's Jamie Dimon has been doing in recent months. What occurred yesterday, however, may cause him to think twice the next time the subject of bank regulation is raised in polite conversation. It will also certainly cause investors to think twice about investing in the shares of any of the large US banks, which by traditional-value investing principles appear to be cheap.

  Yesterday, after the market close, JPMorgan announced that a series of synthetic credit trades done by its Chief Investment Office had gone terribly wrong and caused a $2 billion loss.

  A "synthetic" trade is another name for a derivative trade, most likely some type of credit default swap. The bank claims that this Chief Investment Office's job is to hedge the bank's overall credit exposures, but that can't be all that it was doing. This office had to be making huge bets on the market in what is nothing more or less than a form of proprietary trading.

  This is exactly the type of activity that the Volcker Rule is supposed to ban, but apparently Mr. Dimon didn't get the memo. Investors who have been bidding up the bank's shares since last November have gotten another lesson in the risks that can be created virtually overnight on the balance sheets of large financial institutions. And it would be surprising if the losses stopped at $2 billion. Counterpart use will now be piling on.

  In recent weeks, a JPMorgan trader in London, Bruno Michel Iksil, was reported to be making massive credit trades. Mr. Iksil (why is it always a Frenchman?) had gained the moniker of the "London Whale," and it appears that at least part of the losses are related to his activities.  

  While it would not be surprising if the London Whale had been harpooned, it is troubling that JPMorgan has been so reckless with its capital. This is "only" a $0.30/share loss but shows that even a manager as highly regarded as Mr. Dimon can't reasonably have a handle on all of such a massive bank's activities. That is why a $71 trillion derivatives book should worry everyone.

  Mr. Dimon said that the Chief Investment Office's losses were "self-inflicted" and "egregious." Those may sound like harsh words, but coming four years after 2008, they fail to capture just how inexcusable this type of risk-taking is by an institution of such systemic importance as JPMorgan. Investors have learned once again that leaving banking to the bankers is very dangerous.

  This episode will no doubt renew calls for a stronger Volcker Rule. But the real lesson here is that nothing can replace humility and competence, and both were sorely missing at JPMorgan. Everyone should remember that the next time the banks come hat in hand to the government for a bailout.

  

  (Click on image to enlarge)

  
  Airport Insecurity

  Okay, I'm back. As I have related in a past edition of these musings, I am an unrepentant diarist, constantly scribbling notes and observations in the full expectation that most of them will go unread by anyone, ever.

  The following, however, is worth sharing because it touches on a couple of issues related to the intrusive (and mostly unnecessary and ineffective) security protocols the public is now forced to endure… at least if they want to take advantage of the modern convenience of air flight…

  While waiting sheepfully in line for my turn through security screening precedent to boarding the first of two flights to get me from Florida to California, I had time to read the sign advising me that the Ft. Lauderdale airport was in possession of "Back Scatter X-Rays," the better to see through my clothing for any suspicious items.

  Now, I don't know much, but I do know that X-rays are not a highly recommended source of daily nutrition. In fact, most people would go one bridge further to say that excessive dosing with X-rays is actually pretty bad for you, especially if you are a frequent traveler. And so, having arrived early for the flight, I decided to try my luck with my first ever "Opt Out" of the X-ray machine, an action that most people consider anti-social and even unpatriotic.

  On notifying the closest TSA operative that I wished not to be irradiated, he notified another TSA colleague standing idly nearby (a description that fits most of them) who in turn opened a small door to the side of the machine and asked me to step through. After ensuring that my feet were planted just so on a mat provided for that specific purpose (I know because it was helpfully imprinted with the outline of feet so I'd know just where to stand), he used his radio to hail another TSA operative with the code words, "Opt out, opt out."

  A minute or so later, a surprisingly presentable young man arrived and, after gathering up my gear from the conveyor belt, led me to a semi-private area for my pat-down during which the following exchange took place.

  "I travel a fair amount, so I came to the conclusion that regular X-rays might not be the best idea," I said in a pleasant voice.

  "I don't blame you," he answered in an equally congenial tone.

  "Is it true that your union is concerned about the X-ray machines?"

  "Absolutely. We're trying to get them removed. I mean, can you imagine what's going to happen to the guys who have to stand around those machines all day?"

  "Nope, but I guess we'll find out in another ten years or so."

  Since at this point he and I had become intimate, in the literal sense that he had been groping me throughout our exchange, I felt secure in asking him a question I had been yearning to ask a TSA agent for some time, but previously hadn't found the right opportunity.

  "So, what did you do before you took this job?"

  "I was a bartender."

  "Really? That seems quite the change?"

  "I guess, though there are some similarities between the two jobs. You talk to a lot of people, for example."

  "Ah, but as a bartender people actually want to talk to you, while in the airport, they are forced to."

  "So true, so true."

  I then gave him my elevator pitch for how he could escape his current job, namely by studying something he loves one hour a day in his spare time, a suggestion he warmly thanked me for before we parted company.

  On the way back from California, I once again opted out and had a nice chat with a former computer salesman who expressed exactly the same sentiments about the risks of the X-rays, and a similar level of what seemed to be genuine appreciation for my sharing the secret to successfully finding a more satisfying line of work.

  All of which once again reaffirmed to me the importance of stepping off the beaten track now and again, or in this case out of the line, to experience new facets of life and to meet new people.

  In this case, the reward was that I got a different perspective on the X-ray machines and finally got to ask the burning question I had wanted to ask since this nonsense began... which is where did they find all these people to paw through people's underwear and grope grannies and toddlers. And now I know – they are regular folks, "just doing their job."

  
  Weekend Musings

  • The Money Trap for Americans Is Closing. Earlier in this edition, I mentioned that the deadbeat governments can be expected to take any number of measures to retain power. As an example of that contention, the United States government has recently put the final pieces in place on its initiative to effectively (very effectively) keep the money of its citizens trapped in the US. And by doing so, ensure it will be close to hand when the time comes to tax it or confiscate it. Here's the story.
     
  • Ron Paul vs. the Fed. Vedran Vuk, who so kindly (and competently) covers for me when I'm on the road, sent over a video link to another hearing on the Fed in which Ron Paul again tries to get to the bottom of their obscure agenda. Here's the link.
     
  • Obama's Achilles Heel in the Upcoming Election? A friend who is savvy in matters of politics is of the opinion that Obama has handed the Republican candidate a smoking gun in the form of a comment that the Big O made to then-Russian President Medvedev when he didn't know the microphones were on. My friend thinks that if the Republicans use the clip in much the same ways that the Republicans did the infamous Howard Dean "scream," then a new party may be moving into the White House come January. Subsequently, another friend sent along a video with the Obama/Medvedev "secret" exchange that, while somewhat tongue in cheek, suggests that we'll be seeing a lot more of this thing as the campaign heats up… much to the president's chagrin. Here's the link.

  And with that, I will hastily sign off for the week by thanking you for reading and for being a Casey Research subscriber!

  

  David Galland
  Managing Director
  Casey Research