Chris and I have just taken our seats at the Casey Research Summit in Tucson. There are a lot of interesting minds here (Doug Casey, Jim Rickards, Mike Maloney, Rick Rule, to name just a few).
We thought we'd try live blogging the event today, to give our readers access to the insights being shared by today's speakers. If the feedback in the Comments suggests that this process is appreciated, we'll repeat it tomorrow and Sunday.
I'll be updating this page throughout the day, so come back to it from time to time, or hit the 'refresh' button on your browser to get the latest.
Up first is Doug Casey, founder of Casey Research and our host for the weekend.
Doug Casey – Will the U.S. Go the Way of Rome?
Much of the founding structure (politically, architecturally, militarily, etc.) of the U.S. was based on the Roman Empire.
Rome's expansion was defined by an increasing centralization of resource management. The U.S. began its path down this road in earnest post-WWII.
Casey sees the U.S. being in a full-blown crisis by 2016. Expects the military to have more influence in politics by that time, as an anxious populace looks for a strong hand.
U.S. Constitution only mentions three crimes by name: piracy, terrorism, and counterfeiting. Shows where their priorities lay.
In Rome, the "dole" (the bread & circus days) lasted for ~ 500 years. With over 50% of the U.S. populace dependent in some way on Federal support, he sees this trend increasing for many more years.
Wars destroyed Rome by making it less agrarian and more dependent on a stream of resources plundered by newly conquered peoples. Once it began running out of resource-rich countries to invade, it was unable to sustain its standard of living.
Similarly, wars in the U.S. are becoming exponentially more costly. Much more expensive to wage and the economic returns are much lower, increasingly quite negative. Our 20-year lead-time Defense industry is increasingly irrelevant against open-source warriors from non-sovereign entities. Lots of analogies here to Rome's challenges dealing with the unstructured barbarian hoards.
Deforestation, soil exhaustion and other forms of poor resource stewardship also contributed in no small way to Rome's inability to sustain itself.
As the Roman Empire began failing, the government made increasingly rapacious demands on the Roman citizenry. This coincided with the debasement of the currency (rapid declines in purchasing power). It got to the point where Romans began fleeing to live with the barbarians.
In Rome's ascendancy, it had a common culture. As it became more hybridized and religion became less of a uniting 'glue', its social cohesion weakened. The same is happening in U.S. and is more advanced in Europe today.
Big picture: Second Law of Thermodynamics – the more complex systems become, the more energy they need to maintain themselves, and the more prone they are to catastrophic breakdown. The Romans reached their limits resource-wise and their founding values were washed away. They reached their breaking point.
There are growing indicators that the developed world is hitting similar limits to expansion.
What the solution to declining empire? Less command ad control. Less legalization. Free markets. More entrepreneurship
But these aren't going to happen. There are immense institutions that will fight any serious challenge to the status quo. Self-preservation will drive them to fight this.
Civilizations grow according to the Peter Principle: They expand to the point at which they no longer can handle their own complexity.
Does it really matter if the U.S. declines? "No," because the America we long for is already gone. This is the course of history. It will get replaced, hopefully with something better.
What's the takeaway? Several possibilities:
1) Stay put and watch the barbarians take over (may be best option for most folks – just be wary. Local mileage will vary)
3) Be resilient – invest in things that will limit your exposure, find the opportunities. (This is the best, in Casey's opinion.)
Bud Conrad – The Investment Bubble and How the Next Big One Will Affect Us All
We are vastly more militarized than the original American leaders intended. The military industrial complex has created the "sorrows of empire": forever wars, loss of freedoms, and dishonesty.
Bud just inflated a balloon onstage with "BONDS" written on it. He blew it until it popped. "I hope I'm making a point…" (applause)
We live in a time of bubbles. First, 2000s dot-com bubble. Second, housing, caused by Fed's low interest rates. Third, bonds.
We're hurdling towards the bursting of that third bubble.
Central banks will continue expanding money supplies. There is no limit on this.
Federal debt is expanding at dizzying rate.
Exponentially-growing U.S. demands: interest servicing, social programs, and military. All at a time when the U.S. population is aging (becoming less productive).
Rising interest rates will sucker-punch economic growth prospects.
So the Fed is buying HUGE amounts of debt to keep rates low. Its balance sheet has ballooned since 2008, and no end to the expansion is in sight.
For much of the time since 2008, the more debt the Fed purchased, the lower interest rates went. But something has changed. Since the beginning of 2013, rates are beginning to move up. The key question: Is the Fed losing control?
Ponzi scheme: U.S. Treasury prints bonds. Fed prints money to buy those bonds. Fed earns interest on those bonds. Fed returns the interest payments to the Treasury.
Warning sign: The Fed is having to buy the lion's share of U.S. debt, as foreigners are no longer buying.
Trouble in the bond market is most destructive than trouble in the stock market, as the bond market is MUCH bigger.
If our credit rating is damaged again by another debt-ceiling debacle, that will raise interest rates and accelerate the collapse of the bond bubble.
Meanwhile, the employment rate has barely improved since 2009, showing that national productivity is not increasing the way it needs to grow the economy to keep up with the growth in interest payments.
History shows that currency crisis tend to happen once a generation in most countries (about 100 times worldwide in the past 100 years). The U.S. is overdue and very vulnerable.
Consider bond ETFs (but be aware that they follow different paths in response to the same data): e.g.,TLT. More aggressive investors can play directly in Treasury futures.
James Rickards – Where Are We Now? Inflation, Deflation & Debt in the International Monetary System
Today's markets are confusing to a lot of experienced minds. It's not a normal business cycle – has more in common with times during the 1970s, or, better, the 1930s.
We're in a tug of war between deflation from debt and de-leveraging and inflation from monetary policy. At first in tug of war, not much happens. But then one side begins winning out and the action speeds up from there.
Deflation *should* be the order of the day today. We are in a Depression. Which the Fed is fighting with inflationary monetary policy. Right now, they are offsetting each other.
Be warned, you can have recessions within a depression. In fact, we likely will see more recessions before this depression is over. Expect the next one in 2014.
Depressions are structural. If you don't have structural solutions – and we don't right now – they will persist. Rickards expects us to be in this painful economic territory for a long time.
But, with the government fighting deflation, it's hard to call exactly when it will break and in which way. In fact, you can get both: inflation followed by deflation.
The Fed has no exit here. It must increase the money supply and continue to do so. It can't taper.
But the money printing isn't having the intended effect of stimulating economic growth A big factor of this is that there's no money velocity right now. The Fed has essentially given up on sparking real growth, and they're now driving nominal growth in attempt to stay ahead of interest costs (debt rates are nominal).
As a result, real rates are negative (drives folks to borrow) and inflation expectations are high (drives people to spend money before their purchasing power erodes). These are helpful to the Fed's goals in the short term, but are destructive in the longer term.
Governments actually need inflation. Deflation is a big bogeyman. You can't tax deflation. Banks fail. Debt-to-nominal GDP increases.
For these reasons, you can always count on governments to pursue inflationary policies over time.
These days, Fed is hell-bent on pursuing 3% inflation (via QE, Operation Twist, nominal GDP targets, etc.). It's not working, but that doesn't mean it will stop. In fact, expect them to get more extreme in their tactics (cue helicopters…)
Rickards sees this coming as soon as 2014. Via tax cuts – bypassing the banks directly.
Why hasn't this happened already? Because political support isn't there yet. But if we sink into recession, that will likely change.
Of course, Rickards doubts this will help the Fed with its goals. Many of those funds will be used to de-leverage or save vs. drive growth-friendly consumption.
Rickards believes the Fed's models are wrong. Wrong for the problems they're trying to solve. And if you have bad models, you get bad results. Recent history shows this: The Feds forecasts have been chronically wrong, and wrong by a long shot.
Big concern: Fed is going to melt things down (crash markets, kill currency, etc.) through its misguided policies.
Rickards is showing lots of slides illustrating the immense complexity and interconnectedness of capital markets. You can see that the complexity has increased dramatically each year since 2003. But the record shows that the Fed is ignoring this hyper-complexity.
So what to expect? A burning of existing fiat currencies. Multiple reserve currencies and the push for SDRs to replace them (favored by the elites). The rise of gold as the true monetary backing standard.
Expect SDRs to happen. They may not work well, but expect them to be tried. (The only clean balance sheet left in the world is the IMF.)
In the end, gold may likely be the only practical way to restore confidence in a reserve currency. Rickards is predicting $7,000/oz gold (in certain circumstances, he sees potential for gold prices as high as $44,000/oz!)
Sadly, sees collapse of markets and social order as quite possible as this unfolds. "We return to a gold standard by a messy process vs. a calm one".
Lacy Hunt – How Debt Induced Monetary and Fiscal Policies are Undermining the U.S. Economic Prosperity
The ratio of employment to population is the single best indicator of the health of the employment market and the well-being of the U.S. economy. It has dropped precipitously since 2008 and is now flat-lined.
Of what employment we have, the quality is dropping. The percent of part-time work with low pay/no benefits/no career path is quickly rising.
And the much-touted decline in the unemployment rate is almost entirely due to the drop in the participation rate (those who are looking for work). We are amassing unproductive, dispirited, dependent citizens, but acting as if this is a good development.
On the productivity side, nominal U.S. GDP sluggish, at best. In Hunt's opinion, it is now decelerating and will decelerate further from here.
Compounding this will be the implementation of the Affordable Care Act. It essentially is a huge incremental tax on the American citizenry. And it is accelerating the rise of part-time work as small employers attempt to avoid its constraints.
Meanwhile, the Fed reflationary efforts are not working. GDP is mired, the job market is not expanding – and while asset prices are higher, all that is doing is further expanding the dangerous wealth gap between the affluent and everyone else.
But the big problem here is our level of over-indebtedness.
If you look at private+public debt for the world's largest countries, it has been growing fast – it's now about 30% higher since 2008. This number doesn't include emerging market debt, which has doubled since 2008.
The key takeaway here? The problem of debt constraining economic growth is worldwide. And moving fast in the wrong direction.
The private sector looks grim, too. Corporate profits, which have been elevated for several years due to stimulus policy, are now decelerating. Investment in capital expenditures is down (nearly negative now). Combined with the employment trends mentioned earlier, it's clear we are not investing for expansion of future production.
Imports are coming down because consumers are buying less. Exports are decelerating as the economic situation worsens in the rest of the world.
Real median household income is now back down to levels last seen in 1995. The personal savings rate is no lower than when we entered any economic contraction since 1929.
Regarding the Fed, Hunt is citing research that shows when it comes to policy: If you go "all-in", if you're wrong, there are tremendous exit costs. He also discussed the "imperious immediacy of interest" bias that affects policymakers. Essentially, this is the condition where policymakers are unable/unwilling to see that their plans are not working as intended. Hunt says this applies to the Fed in spades.
Dominick Graziano – Prepare to Be Wrong: Especially When You KNOW You Are Right
The threats our brains are wired to address are mostly from our species' days on the African savanna thousands of years ago. They're not arranged for dealing with the much more amorphous risks we face today.
When you make an investment decision, you should plan your exit strategy at the same time. Because as soon as you make it, your wiring is going to kick in and oftentimes influence you to make bad choices.
It's extremely important to set a limit on how much you're willing to lose. As losses mount, the probability of recouping them declines exponentially. So putting yourself in a position to minimize large losses has great value.
There was a lot of data that indicated back in 2012 that the price of gold was topping. Many were unwilling to see the data and held tighter as losses mounted. Was it better to hold (he's mostly talking about paper investments here: ETFs, miners)? Or sell, planning to buy back in at a later date at lower prices?
Graziano sees a lot of data that suggests the commodity bull market cycle may be over. And that we may be poised for a new bull market in stocks, powering them much higher. He realizes this contradicts much of what the previous speakers have said. He's just looking at the data, as a trader does. He will revise this opinion if the S&P falls back into the 1500s.
He thinks money is now flowing out of bonds and into stocks. But he concludes with a quote of Socrates: "The only thing we know is that we know nothing."
Andy Miller – Real Estate
You can historically expect a 3% free and clear yield on single-family homes. A huge number of single-family homes are now being purchased by private investors like hedge funds.
Miller agrees that the scale of inventory being purchased is unmanageable by investors, which will eat into this expected 3% yield. Add to that the recent rise in rates, and he sees we could be in for a dangerous period where rates keep rising (making mortgages less affordable) and investors start trying to unload inventory. This will place a lot of downward pressure on prices.
Also, as Treasury rates rise, investors begin to find they can get more attractive and "safer" returns by owning Treasurys vs. owning homes with all their associated risks.
Multi-family homes are also growing as a percentage of new housing development. This will cannibalize single-family home prices.
Miller is pessimistic about home sales across the country. The Fed has been able to stabilize things, but its returns are diminishing and its failure risk is growing. He expects prices to largely head downward over the next few years.
Miller is buying multi-family homes in small cities with agriculture and colleges. He's found about 250 of these markets.
Rick Rule – Bear Market Lessons for Bull Market Profits
We're seeing a cyclical decline in commodities within a bull market. This is a good time for investors, as all things are on sale.
Natural resources have grown 100-fold over the past 21 [when?].
In natural resources, you are either a contrarian or a victim.
Bear markets allow you to buy reality. In a bull market, there's a lot of hype and optimism that adds premiums to price. In a bear market, what matters are management competence, balance sheets, and cash flows.
In resources, you have to seek huge returns to justify the risks because you will lose money on most of your bets. Your returns must be "scalable" to cover your losses.
In the resources space, the best companies in this bear market have bottomed, for all practical purposes. The rest of the companies are going to go down further (and likely die). It's going to take about another two years to clear out the jetsam. But once the market clears, it's going to be a positive time for investors as the survivors thrive.
Mike Maloney – Hidden Secrets of Money
Mike is about to show us a new chapter from his 'Hidden Secrets of Money' video. It will debut to the public online on Oct 15.
He just started the video…
Video over. It's a pretty excellent visualization of the money creation process and how it benefits the government, banks, and Federal Reserve at the expense of the rest of us. And why the "debt ceiling" will always get raised until the currency system collapses. (It simply must be, given the way our money system is structured.) I highly recommend watching it when it gets released. It will definitely make you mad. (And will make you understand why it's good to be a bank.)
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