Thanks gwr1 for posting this column every day.

For those who haven’t read it yet, suggest Doug Casey’s article from today’s Ed Steer column is most enlightening.

http://www.caseyresearch.com/cwc/doug-casey-we-are-exiting-eye-storm

Snippet 1:

L: So what we’re looking at is not just a bump in the road. It’s going to change priorities and marching orders for market participants – and for those who interfere in the markets in various ways.

Doug: Yes. It’s the kind of thing that accelerates a negative spiral, in good part because everybody wants the government to “do something,” in the idiotic belief that it can improve things by doing more. Actually it can only help by doing less.

L: So… the economy slows more. Why can’t the government reanimate the corpse one more time, turning up the juice on the stimulus heart-shock paddles?

Doug: They’ve already created trillions more currency units. Most of these are currently sitting in banks rather than circulating. That’s partly because people are afraid to borrow and banks are afraid to lend, but also because the Fed is paying banks interest to keep what are considered to be excess reserves locked up. So these trillions of dollars that were created to bail the banks out are sitting there, but they’re not going to sit there forever. Once those dollars start circulating in the economy, prices will rise rapidly.

The other way for prices to really explode would be for the foreigners holding some six or seven trillion hot-potato dollars to start dumping them. With the U.S. government clearly unable to deal with its debt and the consequent credit rating downgrade – which was both inadequate and long overdue – those foreigners are getting pretty nervous holding dollars. Almost any sort of financial calamity could spook some central bank into exiting its dollar position wholesale. And once one of them starts, the race will be on, because no one is going to want to be left holding the bag.

These are two time bombs that are ticking away right now – the trillions of dollars outside the U.S. that could come pouring back in, and the trillions of dollars inside the U.S. that were created to paper over the leading edge of the storm. Either of those things could bring on the end of the dollar as we knew it, and both may well happen at once.

L: Okay … But the state has been very good at convincing people to pay no attention to the man behind the curtain. If the markets settle down, why can’t people go back to imagining that everything’s fine?

Doug: I’m not sure that many people really ever believed there was a recovery under way. Wall Street acted like there was – but only somewhat, since banks never started lending again. But unemployment has remained high; it’d actually be about twice the official 9% level, if it was calculated the same way it was 30 years ago. And outside of the price collapse of certain asset classes – like real estate – the cost of living has increased greatly for most people; the calculation of the government’s CPI is as corrupt as its unemployment numbers. I think it’s a mistake to talk about a double dip in the economy; we entered the Greater depression in 2007 and are still in it. A “jobless recovery” is not a recovery. The only thing that’s recovered is the stock market, to some degree. Aside from government hocus-pocus, the mirage of corporate earnings, and foolish investors wanting to believe it was safe to get back in the water, things have not gotten better. And they are about to get much worse.

L: That may be so, but the government, the press, and corporate America have all been talking about a recovery. With the Fed promising easy money, if the markets calm down, couldn’t the illusion of recovery be reestablished?

Doug: I don’t think so. The economy isn’t going to stay in the eye of the storm for much longer. The stab of panic we saw last week gave lie to the emperor’s new recovery clothes. It’s not just the losses on the stock market, but gold hitting significant new all-time highs in nominal terms, and Bernanke saying that the Fed would hold interest rates close to zero for another two years. That’s huge – and a huge mistake. It tells me that Bernanke has truly panicked. The impact this will have on the dollar cannot be overstated; it’s a guaranteed disaster. It assures that people will do all sorts of things they would not do without that artificially easy money.

L: Okay, but if they go into debt to buy houses and cars, they’ll create jobs and there will be more appearance of recovery, won’t there?

Doug: That’d just be digging the hole deeper at this point. What needs to be done is to let the market raise interest rates, to encourage savings – the accumulation of the capital needed to start moving forward on a solid basis. Instead of encouraging people to work, spend less than they make, and save the difference, these low interest rates encourage profligacy. They encourage people to liquidate savings and live above their means. As usual, the government isn’t just doing the wrong thing, it’s doing the exact opposite of the right thing.

L: Because...

Doug: Because of the false belief that printing money stimulates the economy. The artificially depressed interest rates of today will result in very high inflation and very high interest rates in the near future. A healthy economy gets naturally low interest rates as a result of a lot of savings, a lot of capital creation. A healthy economy has stable interest rates that relate to the amount of new wealth being created, typically just above the natural rate of inflation that results from real money – gold – being mined out of the ground. Artificially low interest rates stimulate malinvestment.

The Fed is also keeping rates low because of the government’s massive debt problem. The U.S. is already running trillion-dollar deficits – if interest rates go up, say, to 12% like back in the ‘70s, that would add another trillion to the deficit right there. Financing a $16 trillion debt at 12%, rather than 2%, equals another $1.6 trillion of spending – just for interest.

This really means they have no choice. The situation is completely out of control – the U.S. financial house of cards is irredeemable at this point, even with interest rates at close to zero. The whole financial structure is close to collapse, and that’s why I think we’re exiting the eye of the storm.

L: The Titanic has been struck, but Captain Obama just doesn’t yet realize how badly?

Snippet 2:

Other investment implications?

Doug: Gold mining stocks. Most good ones aren’t bargains, even though they’ve been lagging gold in recent trading, maybe because of the fear in the marketplace. But they’re going higher.

L: Of the two major forces that drive markets, greed and fear, which do you think will predominate going forward? Because there are different buying patterns, depending on whether it’s greed or fear in the driver’s seat…

Doug: You’re quite right. I think it will be a market driven primarily by fear for some time, and that will favor profitable producers, emerging, high-margin production stories, and maybe the best of the best explorers advancing projects with obvious merit towards production. Nobody buys the risky junior exploration plays when fear is driving the market.

L: Except a bottom fisher.

Doug: Except a bottom fisher, yes. There will be some fantastic opportunities in earlier-stage exploration companies that will get smashed because of fear. But speculators looking for those have to be patient. Many junior explorers will dry up and blow away during the fear-induced drought. Eventually, the best will come roaring back when the bubble inflates and the real mania phase of this bull market kicks in. Then, everything with “gold” in its name will trade at ridiculous premiums, even the crappiest juniors whose only gold is in their name.

L: How long before greed kicks back in?

Doug: There you go asking for a time as well as a prediction again. I don’t know, but it could be a while: A lot of greed has been washed out of the system with the big panic of 2008, the real estate collapse, and the stock market really going nowhere for the last ten years. Plus, when the bond market collapses, as I think it will, that will be the final blow. That’s really The Big One on the horizon these days – the bond market is three times the size of the stock market, so a major reversal there will cause enormous damage.

L: So, stay away from the junior explorers?

Doug: Just the crappy ones – and as you well know, 95% of explorers have nothing and never will have anything. But there are some which actually have gold or silver in the ground – or clear drill indications that they are close to being able to report having such assets – the kind you specialize in finding for the International Speculator. Those stocks are going to benefit from the flood of money hitting the precious metals sector. Remember, the whole gold market is trivial in size. It’s only a tiny fraction of the oil patch, and not even a rounding error compared to the global market. When the average investor wakes up to the need to own gold for safety and the potential profit from owning gold stocks for leverage to gold, it’s going to be like trying to fit the contents of the Hoover Dam through a garden hose. Prices will go ballistic, and there will be plenty of money hitting even the smaller juniors that have good stories.

L: Good reminder about safety.

Doug: And that’s another factor that will be driving the price of gold: It won’t just be speculation, it will be prudence – the flip side of fear. Prudence will drive people into buying more physical gold. Greed will drive people into gold stocks. I own a lot of physical gold already, but I’m still buying, even at these levels. And I own a lot of gold stocks, but I’m still accumulating those too, when we dig up good opportunities.

Comment:

I noticed in one of the photographs taken last week at the riots in London, that someone was wearing a “V for Vendetta” mask.

For those that are not history buffs, suggest you research November 5th (Guy Fawkes) and/or watch V for Vendetta.

I grew up celebrating? Guy Fawkes night and something tells me that history could repeat itself, albeit not exactly as per the events as written.

Quite fascinating.

Good Luck to all!