Breakfast is over, and Chris and I are sitting down for Day 2 of the Casey Research 2013 Conference in Tucson. Here's what we're hearing.
(To read what we heard on Day 1, click here)
Paul Brodsky – Value Is the Thing: Sovereign Shares
The traditional way to build wealth or stay wealthy is to produce something of value or to lend to someone who does. Over time, shares in productive businesses around the world are sovereign over cash and over governments.
Paul is a longtime Wall Street investor, mostly in the bond market. He laments the devolution of today's markets where financialization is masquerading as production.
Sees central banks as big bullies, pushing prices around to effect what they want – regardless of whether it's healthy for the market. Historical data shows that the Fed's primary concern is pushing asset prices higher because they're all debt-backed. If prices begin to falter (e.g., 2008), the Fed rushes in with more money to push them higher again.
We've been stuck in a prolonged era of negative real rates. In real terms, stocks and housing have been treading water for decades. Real performance looks much worse when using ShadowStats' inflation numbers.
We are going through an "inflationary de-leveraging" – we are de-leveraging the banks through the process of inflation.
Brodsky's firm calculates a shadow price for gold. He uses this to measure how badly the U.S. dollar is being devalued. This is not a prediction of where he thinks the gold price will go, necessarily. The shadow price has leapt from under $1,000 in the early 1970's to over $12,000 today.
We live in a fractional reserve lending banking system. (See Crash Course Chapter 7 for a refresher.) Most of the money created by this system is unreserved.
Some stats that reflect the extent of global leverage:
- Total global debt: $223 trillion
- Global bank deposits: $88 trillion
- Global base money: $12 trillion
- Global non-bank leverage: $135 trillion
- Global bank system leverage: $76 trillion
Margin debt seems to have pulled up stock prices since 2009. Data shows it's taking more and more debt to move the S&P higher these days (seeing diminishing returns).
U.S. commercial banks are using the Fed as their "bad bank". QE is taking bad assets/loans off of commercial bank balance sheets and dumping them onto the Fed. This allows the U.S. banks to keep their balance sheets valued at par.
Money velocity has absolutely tanked over the past decade. Data that supports the theory that the more central bank intervention, the less incentive for companies to invest in increased production and for investors to invest in the markets. (If it's a rigged game, why play?)
And as well, all can see that the real economy is struggling for the vast majority of employers and workers.
The U.S. has had it good since the petrodollar system kicked off in the early 1970s, but that system appears increasingly at risk.
Institutional investors have a herd mentality, in many cases, because they are bound to certain action by their fiduciary responsibilities. They can get sued if they stray too far from what is considered "conventional."
Monetary policy makers are not stupid, but constrained. Central banks worldwide will continue to devalue their currencies in hopes of increasing monetary velocity. Meaning: Expect the Fed to use the fear of inflation more overtly in the future (a la Japan) in order to boost velocity.
What is the investor to do? Sees emerging economies/BRICs as having become correlated with OECD countries, but with higher GDP growth rates. Sees manufacturers, farms, banks, energy plays in these countries as good productive assets to own. Obviously, homework needs to be done here, and goal is to build a diversified portfolio across these markets.
The end message here: As markets increasingly act in tandem, purchase productive international assets that are valued lower than their OECD counterparts.
Van Simmons – The Collectibles Universe
Why put collectibles into a portfolio?
Quiet way to pass wealth from one generation to the next. Diversification. Tend to do well during inflationary times. (Art and antiques are the biggest market, followed by coins, then cars.)
There's a tremendous amount of money looking for a place to go. Tends to go into collectibles for these reasons.
Liquidity
Coin market has the tightest spreads (4%-25%)
Art margins can be in the hundreds of percent
How to enter?
Best advice is to find something you like (e.g., Simmons has collected pocket knives his entire life). Buy the highest-grade examples. Take a long-term view of accumulation
Over time, pay attention to what's popular. That will always drive the premiums. (Example: GTO a very popular model. Much more expensive relative to most other models simply because of its mystique.)
Also, pay attention to the underpriced part of your niche. Premiums change over time, so accumulate when underappreciated and wait for the market to 'wake up'.
Don Coxe – Impact of Zero Interest Rates on the Future of Capitalism
ZIRP was adopted as an emergency measure. Coxe is describing his father's experience as an army medic to conclude that "ZIRP is monetary heroin."
Apple issued bonds this year to buy back stock and pay dividends. No value is being created. This new trend is very concerning, though not surprising given the emasculating impact of ZIRP. We are changing our productive companies into financialized zombies. We are losing the essence of capitalism (which is supposed to convert savings into productivity).
As bad as the U.S. is, the Eurozone is worse. The euro is based solely on a theory, and a broken one at that. Ironic that it's performing better than the dollar right now.
In recent quarters, Draghi has contracted EU's monetary base by about the same amount the Fed has expanded its own.
Coxe railing about no one going to jail in wake of 2008. He is angry about "too big to fail"/"too big to jail." Among other criticisms, he sees the big banks as leading the PR campaign to convince folks that the commodity super-cycle is dead. Don't be fooled, he warns.
ZIRP has convinced folks that inflation isn't coming back, because rates have remained low. This is a reason why the gold price has cooled. But, as many speakers have mentioned today, inflation will be higher in the future – when that dawns on the market (probably through more aggressive Fed inflationary messaging), the next up leg of the precious metals price will occur. When it hits, this shift in perception (that inflation is returning) will happen extremely quickly.
This movement will be very beneficial to the mining companies (that are still around and well managed).
There is a vast amount of liquidity looking for return. When the precious metals and miners come back into favor due to inflation concerns, there will be an unprecedented flood of capital rushing into these small markets. It will be epic.
Panel – The Myth of U.S. Energy Independence
(arrived at this late)
1 in every 5 homes in the U.S. is powered by nuclear energy. 1 in every 10 homes in the U.S is powered by Russian uranium.
Fracking in Europe. Will likely happen in Poland (lots of open land and big energy shortfall). Will happen less in the U.K. U.K. is embracing nuclear energy more, focused on building new plants.
The Germany energy system is troubled. Lots of inconsistencies in policies, which are driving prices higher. Fracking may happen there, but there is lots of populist resistance. Speaker thinks Germans could meet half of their domestic energy needs if they embrace fracking. Thinks resistance to fracking will decline as energy prices continue to rise in the country.
Saudi Arabia is investing in nuclear power. The Middle East is thinking practically: Oil will run out some day, plus global community wants green energy. So, they're diversifying. Lots of spending on building state-of-the-art nuclear plants to be domestically energy self-sufficient. The Middle East realizes that U.S. support of the region will decrease as the U.S. produces more of its own oil through fracking.
The Africa energy rush will be tapped by the Far East vs. Europe or the Middle East.
New speaker is expressing his confidence that Middle East oil reserves are lower than generally expected. Embraces "Twilight in the Desert." Also claims that shale oil will not be as big a miracle as is being touted.
Former Energy Secretary Spencer Abraham is being piped in via teleconference. Sees lots of opportunities for domestic production of energy in the U.S. Optimistic at how the percentage of U.S. oil imports have declined from 70% to under 50%. Sees a day when the U.S. talks about exporting its oil (crude).
Sees the future of coal in the U.S. as export-driven. Coal plants will be shut down over time by high costs, but raw coal will be exported to developing world. (Abraham is a bit of a cheerleader for the fossil energy industry.)
New topic. Shale oil is not cheap oil. Production costs are now $80/bbl. Where are oil prices headed?
We use a billion barrels of oil every day around the globe. 1,000 barrels a second. That demand is only going to go higher. $200/barrel oil is coming. Oil is going to price itself out of the market. If we use every bit of energy we can, we're going to come up short. Oil is the best transportation fuel we have – its going to be hard to supplant. Nuclear is probably the only fuel that could (eventually) replace oil.
Across Europe, Russia provides 25% of its energy. What is Europe doing to get away from high-price and high-risk Russian and Middle Eastern energy sources? It's a challenge. Exploring nuclear and offshore wind. E.U. needs a united energy policy – it doesn't have one. No clear, easy answers to this challenge.
What's the future of thorium? The moderator says "none." Good in theory; bad in practice. Seems he's lost money betting on thorium…
As Arctic ice melts, who is going after now-accessible deposits of fossil fuels? Very expensive. Better prospects in Greenland where ice has melted.
Spencer Abraham says that boosting domestic energy production is important for national security. Expect to hear this point tied more loudly to the shale story in the future.
Uranium prices are going to jump as Japan brings its 40-shuttered nuclear plants in the next 2(?) years. The country will switch abruptly from being a net seller to a net buyer of uranium. This will also cause prices in the energy sources Japan is currently importing, like natural gas.
Chris Martenson – QE and Your Prosperity
QE is a permanent feature: for economic reasons, political reasons, social reasons, and technical reasons.
Understanding the technical reasons will help us better understand why QE will continue until it implodes on itself.
QE = money printing. Banks and companies LOVE this. It's free money.
Fed has monetized 39% of new US Treasury issuances since 2009. Over the past year, this has grown to 60%. If you include the total amount of QE and Treasury purchases, it has put 130%(!) more money into the system than all U.S. new US Treasury issuances.
Think about taking money back from the banks. They HATE it. They may not have the $ to pay up, and they don't want the assets the Fed is forcing them to buy. If they do buy it, they will sell to quickly unload. This places downward pricing pressure on these assets. So you can expect massive and swift asset deflation in a QE-unwind process. In the case of bonds, this will instantly drive interest rates higher – undoing all of the years of the Fed's "hard work." The Fed just won't go down this road willingly.
Conclusions:
- You can't print your way to prosperity.
- We are living through the mother of all bubbles.
- This ends with the destruction of the international currency system, including the dollar.
But growth constraints don't just live in the economic sphere. There are also big constraints from the Energy and Environment spheres, as well (as any watcher of the Crash Course knows). In particular, high oil prices place a heavy headwind on future growth prospects.
Chris is now doing something very different from the rest of the speakers: He's broadening the definition of "investment" to include resilience. Let's see how it goes…
Verdict: It was received very well. Lots of interest from the audience; a mob gathered around Chris after the speech. I talked with a number of folks who hadn't known who Chris was beforehand, but found his message very compelling – and very refreshing in an event otherwise focused on dollar-based wealth.
I measure the success by the words of an older gentlemen who said the following: "It's a rare and pleasant experience to be surprised by someone who can take the words in your heart and speak them aloud."
(Chris and I have to break for a while to talk with folks and do an interview with RT.com. Back at 3pm PST.)
Catherine Austin Fitts – Your Investment Strategy: Avoiding Material Omissions
Starts with an anecdote of how the government confiscated the assets of a company she helped found.
We really don't know who's in charge. But we do know we've been witness to a massive centralization of power and our economy.
How many people can the Earth support? We don't know and aren't resolving this key question fast enough.
How is technology being used against us? We don't know, but the extent of the abuse is beginning to leak out.
We're entering a period where we either write down debt or "crash up" equities (by liquidity flooding into stocks). Fitts is bullish on new technologies.
[Frankly, I'm having a little trouble following Catherine's narrative here. Doing my best to capture the points I believe she's trying to make.]
Why don't we have local investment funds (an ETF for your county, a mutual fund that invests in your city, etc)? To date, regulation has made this hard, wants central management of capital in the Wall Street exchanges. But crowdfunding solutions (Kickstarter, etc.) may be beginning to disrupt this.
A lot of the money standing behind our retirement assets has been removed. The government took it. Retirees will be fighting for the remaining cents on the dollar. This will get exacerbated as more boomers retire. Don't be surprised if a sweeping change in how retirement accounts are administered/funded is sprung on the populace in the next few years.
Interest rates are likely to rise, so if you own bonds, focus on quality and short-term duration. High dividend equities will be popular. Own precious metals. PMs will continue to be very volatile, though.
Risk of greater taxes is enormous.
Panel Discussion – Gathering of all the Days Speakers
Expect doctors to be forced to participate in the government-controlled medical system. Happened in Canada, and looks like it's going to happen here.
Is there really no future for thorium-based reactors? Sounds like China is investing big-time. Response: maybe on the R&D side. Possibly does represent an opportunity in future decades, but be careful with thorium-related investments today.
What's the one investment you should make today?
Paul Brodsky: Invest in portfolio of unlevered productive, international companies today. Likes precious metals miners.
Amir Adnani: Brazil Resources and Uranium Energy Corp (which he is invested in). Gold projects are cheap to buy, uranium is totally on sale.
Elizabeth Vliet: Buy an international health insurance account.
Catherine Fitts: Investing in high-growth equities. Also invest in our own small and family businesses (with a focus on passing along to the next two generations).
Marin Katusa: Energy plays in certain European companies.
Keith Hill?: Oil & uranium. Both are very low-priced right now.
Marc Victor: Avoid attracting the attention of the central planners. Protect your freedom.
Chris: Vodka (laughs). Invest in yourself. Money is not everything; the highest possible return in difficult times is your resilience. Own tangible assets vs. paper. Direct claims.
Steve Belmont: Short sovereign debt (this is a very speculative play)
How long will the "Shale oil miracle" last?
Keith Hill? We're never going to run out of oil, but it will get more and more expensive until it's too costly to drill for. Substitutes will emerge, though they may well be less efficient. We are going to run short on energy, and it will be rationed.
Ron Paul
Opens with comments about the recent Capitol Hill shooting. Says don't worry about the Congress, they are very well protected. "I think the people should have the guns and take the guns away from the government." The Founders were pretty explicit about guns: the reason was, they feared tyranny.
No surprise, Washington is a mess. And it lies to us.
If you ever see a piece of legislation, look at the title. It will tell you everything you need to know if you just read it as the opposite of what it's named. (Lots of laughs about the "Affordable Care Act.")
The current shutdown is just drama and a charade. It looks likes there's two parties fighting, but it's actually just one party. Would be good to have a second party in there (laughs).
Our foreign policy is backwards and makes the world less safe for Americans and everyone else.
The process in America is owned and operated by moneyed interests: banking system, military industrial complex, health-care complex.
Default has already started. National debt hasn't budged in four months.
U.S. would be much better off without the Federal Reserve. Same goes for eliminating the income tax and the IRS (both instituted by the Fed). The principle behind income taxation is immoral.
This recession is not going to end anytime soon and will likely worsen, as the root causes still haven't been addressed.
Our current monetary system, which began in 1971, is a huge part of the problem. It's coming to an end – and that will be a good thing.
The 20th century has been a bad century for liberty (at least in developed countries). Creation of the Fed, emergence of the welfare state, departing from the gold standard were all key milestones in this process.
With the foreign and monetary policy failures all around us, it presents the opportunity for a void to be filled. People of good heart can play a role in making the future better than the past.
Bring ALL the troops home. This is a simple argument that has always fallen short in D.C.
The two most-doomed-to-fail arguments to make in D.C.: a moral argument or a Constitutional one (laughs).
Ron Paul didn't expect to get elected.
Why didn't he "play the game" and rise up to a committee chairmanship and then try to change monetary policy? Wouldn't have worked. He couldn't stomach the sins it would take to get there.
The banks, insurance, and pharmaceutical companies really wield the influence on Capitol Hill.
Ron Paul was a "strong no" when voting occurred on the Patriot Act. He personally knows congressman who voted for it because they felt pressure to "do something" after 9/11, even though they didn't read the bill.
The perpetual war we're now in was designed to influence the populace to hand over more of their freedom to the central government.
The purpose of government is not to make us safe and secure; it's to protect our liberties.
The people will need to decide what type of government they want. They can influence Washington. Syria is an example of this. The populace needs to assume its role of keeping government honest. It's not easy, but it's doable.
This whole idea that America can use force to prove its greatness discounts everything we should stand for.
Free society, equal justice under law, national defense, non-interventionist foreign policy, protection of liberty, sound economy – these are the foundational requirements of what we need.
We should stop the drug war. It's a war against the American people. Prisons are overflowing. We have more people incarcerated than any other country including China (and they're an authoritarian state with a bigger populace).
We could probably be just as safe and secure without the TSA. The private approach would be much better done without the cost (to liberty and otherwise) of a government solution.
Our real drug problem is the over-prescription of drugs for our kids, soldiers, and others.
Who is supposed to be responsible for resolving the problems we face? You, along with your families and local communities. What we don't need in almost all of these cases is the government handling them for us. The cost is too high, and the dangers, too.
Government limits on raw milk and industrial hemp make no sense. But there's always an angle being played by a special interest in respect to these prohibitions (e.g., cotton growers are concerned that hemp could eat into their market).
Society needs to be willing to accept responsibility for making these decisions and dealing with the repercussions. With that comes the agreement not to run to the government for a bailout if things don't go your way.
Funny that of all the colleges he speaks to, you'd expect he'd get the best reception at schools in Texas. Instead, his best reception was at Berkeley.
We have fascism and intervention, not free markets.
Ludwig von Mises was the greatest 20th century economist, in Ron Paul's opinion. Our current monetary system favors the wealthy. Poor getting poorer, middle class disappearing.
Current leadership thinks the problem is the solution. So we get more debt, more money printing, more regulation.
Ron Paul has always delivered the freedom message. Some call it Libertarian, some call it Constitutionalist. It follows:
- Non-aggression principle. Governments should restrain use of force. Should restrain counterfeiting. But instead they abuse both.
- Tolerance. A big tent movement requires this, and it's fair.
- Economic liberty is as important as personal freedom.
We have freedom of religion. Why don't we do this for social and economic matters, too?
We're in the middle of a revolution. The freedom message described above is important, because we need a replacement for the system we have now.
We're in a unique time in human history. So much of the technological development of the 20th century has been geared to war and killing. We need to take technology, power, and authority away from the government – because history shows it will always abuse it. Use technology instead to promote tolerance, non-aggression, and liberty.
When the collapse happens, we need to make sure the Fed doesn't evade responsibility.
Ideas have consequences. And a minority typically drives the creation of new ideas. Example: a minority has driven our terrible economic policy.
We need the smallest government conceivable.
If you're seeking something worthy in life, that's best done in a free environment. Liberty is the most important element, and it's relatively young in the world. We need to protect it. Young people are looking to step into a future defined by this.
Think of how much better the world would be if we just took care of ourselves. And we should do more than just that – it's in our self-interest to help others – but that should be at our choice.
Don't be despondent. No one knows what the future will bring. We should have fun. Work with like-minded people to create a better future. [Wow – sounds like he's been reading PeakProsperity.com!]
Everyone can play a role here.
Getting more people more knowledgeable is a great early step and very important.
In the last primaries, more military families sent money to Ron Paul's campaign than to all other candidates combined. Shows his foreign policy message resonated strongly with active duty soldiers.
If the goal is peace and prosperity, defend liberty. All else will come from that.
What was your greatest surprise about running for president?
The tremendous positive response from college campuses.
What's it like to be approached by the lobbyists?
"They never came to me." (laughter) They do roam the holes of Congress, but didn't waste their time on him.
Why is the U.S. government spending billions on ethanol?
To help the corn farmers and win the primaries in Iowa. Political lobbying for special interests.
For those pessimistic about the near-term future, how bad do you think it could get?
Everything's going to get a lot worse in the near term. Mal-investment and debt bubbles are worse than before. He thinks things are a lot worse than they admit (inflation, unemployment). The correct thing to do would be to simply let the needed market correction happen. It's going to keep getting worse until the dollar crashes; what we decide to do then will make all the difference in the world.
Who else in the U.S. leadership gets it?
There aren't a whole lot. Justin Amash and Thomas Massey. Jimmy Duncan. Dennis Kucinich gets a lot and worked with Ron Paul a lot.
End of Live Blog
Casey Research has recorded all of these presentations, as well as a number that I wasn't able to attend. If you're interested in seeing the video footage of these presentations, click here to order their DVD set of the conference.
by judy 
