Great Depression Online Archive Issue:

The "Eye of the Storm" Strategy

Great Depression Online
Long Beach, CA
December 22, 2009

Inside This Issue You Will Discover…

*** Financial Contagion in Europe?
*** A Strange and Peculiar Place
*** The Eye of the Storm
*** And More

Financial Contagion in Europe

Last week the Prime Minister of Greece, George Papandreou, took a big bite of a hummus covered pita, and then vowed to cut the deficit from 12.7 percent of GDP to 3 percent in 2013.  Several days later Standard & Poor’s called Papandreou’s bluff…and downgraded his country’s debt rating to BBB+ from A-. 

Greek debt and equities had already taken a beating following Fitch Ratings debt rating cut the week before.  But that’s not all…the euro was feeling the heat too…falling 4.9 percent against the dollar over the last two weeks.

Here’s why…

Greece has the lowest credit rating of the European Union.  They’re running an enormous deficit and have a history of being unable – or unwilling – to control spending.  But what about other high deficit countries like Ireland, Span, and Portugal?  Who will be downgraded next?

~~~~~~Secret Gold Investment~~~~~~

Toronto’s Secret Gold Investment returns 1,739% after gold prices rise.  Gold is up 70% in the past three years — but a secret investment from Toronto can return 10 times as much after gold prices rise.  Last time conditions were this good, it returned 1,739%.  That's why The New York Times recently told American investors to “pay attention to Canada.”

Secret Gold Investment

~~~~~~~~~~~~~~~~~~~~~~~~~

That the question was being asked in the first place implied concerns of financial contagion across Europe.  If Greece were to default on their debt, how would that impact other European countries?

A Strange and Peculiar Place

At first glance, Greece looks as reckless as a middle-school kid taking the family wagon for a late night joyride.  Deficits of 12.7 percent of GDP are practically suicidal; deficits above 6 or 7 percent of GDP are traditionally when foreign creditors jump ship.

For example, in 1994 Mexico was running a deficit that was 7-percent of GDP.  Everything was wonderful, until suddenly it wasn’t.  One day, late in the year, foreign investors panicked.  They dumped their holdings and the peso crashed in spectacular fashion.  In the space of one week the peso fell 44-percent against the dollar.  Mexico’s economy crashed too.

Yet in 2009 the world is a strange and peculiar place.  For what were once deficit levels reserved for governments of the southern hemisphere are now commonplace in Europe and the United States.  In fact, for 2009 the United Kingdom’s running a deficit of 12.6 percent of GDP and the United States is running a deficit of 12.9 percent of GDP.  Note these deficits are in the same neighborhood of that which Greece was just punished for.

What will it take for the rating agencies to downgrade Britain and the United States?  And even if the rating agencies don’t have the fortitude to do it, when do investors begin dumping their bond holdings?

While the dollar got a little lift from the potential financial fallout of a Greek debt default on the rest of Europe, it hardly appears to be a safe haven asset of last resort.  At the same time gold, even with its recent pullback, appears – in nominal terms – to be an expensive place to stash your money.

With uncertainties like these, what’s an honest man to do?

For an answer to this question – and more…read on.  In today’s guest essay you’ll get a front row seat at a recent Casey Research meeting of the minds.

Enjoy,

M.N. Gordon
Great Depression Online

---

The Eye of the Storm
By Louis James, Senior Analyst/Editor
Casey’s International Speculator

At a recent Casey Research editors’ meeting, the team took on the question of whether the somewhat steady recovery since last February’s washout bottom in the broader markets had any of us thinking that the recession might be over.  The gathering of minds included: Doug Casey, Managing Director David Galland, CEO Olivier Garret, Casey Chief Economist Bud Conrad, Senior Energy Analyst Marin Katusa (my counterpart on the energy side), myself heading the metals division, and several other editors.

Doug’s guru-vision remains locked on the disaster channel.  The U.S. economic problems, he says, remain so profound and, if anything, have been worsened by the government’s actions, that Americans are headed for a significant lowering of their standard of living.

As this reality unfolds, it will send out shock waves that will impact much of the world: the Greater Depression.

And the next step, Doug believes, will be a change in interest rates.  The Bright Boys in DC will resist doing this, but while they seem willing to let the dollar slide to ease their mounting debts, they don’t want it to crash.  They may soon be forced to raise interest rates.  When that happens, Wall Street usually moves in the opposite direction – which could be the end of the “Things Aren’t as Bad as We Thought” rally of 2009.

~~~~~~Opportunity~~~~~~

These companies are small.  They are volatile.  And they are completely overlooked by the average investor.  That’s going to change.  There’s an opportunity before you today that you will probably never have again in your lifetime.

Opportunity of a Lifetime

~~~~~~~~~~~~~~~~~~~~~~~~~

Bud Conrad – in proper, responsible chief economist-style – considered the question carefully and conceded that there do indeed seem to be many “green shoots” now, but still concluded that conditions will continue deteriorating.  He sees the government deficits in the driver’s seat, the main variable to keep a watch on.

As the U.S. government persists with its spending spree, valiantly dousing the deficit fire with more debt-gasoline, it will continue destroying the dollar, and that will push ever more people into gold.

A year ago, Bud predicted that gold would top $1,150 by year-end 2009. His call was bolder than most forecasters’ – but he was right.  Looking at the numbers today, Bud’s new baseline 2010 forecast is for gold to top $1,450.  He sees a “possibility of further international instability or currency debasement as adding to that baseline.”  In plain language, Bud’s confident that resource stocks of all sorts will, on average, benefit greatly from the demise of the U.S. dollar.

Somehow, I can’t shake the image of Bud singing Don’t Fear The Reaper with Blue Öyster Cult for back-up… but that’s really more like something Marin would do.

Speaking of Marin Katusa, he commented that there is money to be made in the current rebound environment, but speculators should be extremely cautious: “You should know you’re dancing with the devil in the pale moonlight.  You need to make sure you know the dance steps: get in early and exit before you get the dip by the devil at the end of the song.”  (Marin not only has made huge amounts of money for our subscribers, he sings in a rock band, so he knows what he’s talking about.)

My own thinking has evolved into seeing 2009 as being like the eye of a monstrous storm.

The sky has cleared substantially, and the sea looks amazingly calm, given what we’ve just been through.  But it’s not over yet; the trailing edge of the storm always delivers the most damage, and that’s yet to come.  Anyone fooled into abandoning shelter is taking a terrible risk.

This doesn't mean we should stay huddled in our huts, however – it makes more sense to go out, restock supplies, repair what damage we can, and get ready for the deluge to come.  The renewed fury of the storm will sink many more ships, but it will also make vast fortunes for those who invest in the ships that survive and even thrive in the tumult.

Essential strategy: For the near term, buy only an initial “tranche” (portion of your desired position) in the most storm-proof (cash-rich) companies you can find – ideally with great discovery or development stories that will deliver exciting news regardless of market conditions – and hold a good chunk of cash in reserve for the next big buying opportunity.

Nothing goes up in a straight line, as share prices over the last month have amply demonstrated.  There are some great picks that have been heading up all year that are now paused in their advances.  Any more correction in precious metals could put them on sale, temporarily, offering great buying opportunities with a lot of the technical (e.g., discovery) risk removed from the plays.  You’ll kick yourself if you don’t have any cash on hand to take advantage of them – and kick twice as hard if you paid too much for a large whack of something that goes on sale.

Worried about sitting on cash with the U.S. dollar in a death spiral?  Remember: gold is also cash, highly liquid, and with terrific speculative upside to boot.

With gold having just corrected sharply (as I predicted it would in Casey’s International Speculator), gold is unquestionably the best investment we can recommend right now – fluctuations aside, it has nowhere to go but up for quite some time.  Perhaps as long as a decade.

That, plus our essential “eye of the storm” strategy as above is what we’re recommending to all our subscribers – and indeed to all investors around the world who want to not only survive the trailing edge of the financial storm still to come, but thrive because of it.

Sincerely,

Louis James, Senior Analyst/Editor
Casey’s International Speculator

P.S.  While gold has gone up 38% since last December, junior gold stocks can provide even greater gains than the yellow metal itself.  Currently, for example, Louis is following eight juniors that have all the right conditions to become takeover targets by gold majors… which would drive share prices through the roof.  If you want to get in early, this is the time: with our special holiday offer, you’ll save $400 on a one-year subscription of Casey’s International Speculator – but only until midnight, January 4.  Hurry up and click here to learn more.

 

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