People, Doug Casey Has more GODDAMNED Financial Wisdom In His Little Finger than all of Washington, DC put together. Heed These Words!
L: So Doug, the world didn't end in 2012, so it's onward into another new year. It's time to tune in to your guru-vision and tell us what trends you see shaping up and what actions they imply taking.
Doug: Yes, it looks like the Mayans missed this one; perhaps they'll get another kick at the cat a few millennia from now when it's once more time to turn the page on their calendar. Better luck next time, Mayan astrologers! But although nothing seems to be happening on that front, it's appropriate that I'm speaking to you from Punta del Este in Uruguay, which is one of the most happening places in the world at this time of year – North American and European winter, South American summer. I went to a New Year's Eve party last night with some rather interesting temporary denizens of the place, and of course this was the subject of much conversation. None of them happened to be American, incidentally, and all but one – who is very involved in local politics – is extremely bearish on 2013.
Doug: All of the above. A "Mad Max" type outcome is definitely a possibility, as much as I hate to anticipate something really serious – as opposed to just a financial/economic meltdown. But the West has a huge amount of accumulated capital that it can still dissipate – a task the politicians are working on diligently. I expect the US will get a VAT, and/or an asset tax. Perhaps they'll take a page from Cristina Kirchner's book and nationalize everyone's pension – for the good of the government, as well as the safety of the pensioners, of course. In the near term, we're looking at increased tensions of every kind around the globe, and greater market volatility.
I'm not saying Uruguay is totally free, especially not economically – the president is actually a communist. But he's a surprisingly mellow communist, and not at all corrupt. Most unusual, actually. He lives on a small farm and drives an old car. Of course the things he's doing – raising welfare benefits, eliminating financial privacy, initiating an income tax, and letting petty thieves run wild, among many other things – are making the place much less desirable to hang out.
L: So, aside from economically stupid laws, they let people do pretty much as they will with their personal lives?
Doug: That's the good news. It's a quiet, unambitious, backward, bureaucratic little country. But they still pretty much leave you alone. And strange things can happen. At the party I mentioned, a friend who mostly lives in Argentina told me about what was in Sunday's El Pais, the national paper. It turns out that a top local politician – most of whom are socialists or ex-communists – just discovered Frederic Bastiat's book, The Law. He was so taken with the free-market ideas in it, he had the entirety of the book published as an insert in the paper, at his own expense. I don't know how many people will actually read it, and I doubt it will have much effect, but as a possible straw in the wind, it's pretty interesting. Shocking, actually.
L: A hundred years ago you might have seen a copy of The Communist Manifesto, so perhaps the pendulum will swing back in our direction in the next hundred years. A good reminder that it's important to internationalize both one's assets and one's lifestyle. It's hard to predict what will happen in any given country, although the trend is going from bad to worse just about everywhere.
Doug: Yes; as the Greater Depression deepens, governments all around the world are going to get increasingly desperate, take increasingly stupid measures, and the people on the bottom rungs of the ladder – the very ones the governments will claim to be helping – are going to get pushed off in greater and greater numbers. That's going to make for more social unrest, vandalism, and violence all around the world. It's wise to find a crib away from likely epicenters of turmoil. You still have to look at the world objectively, and prepare to be, or move to wherever there's the least trouble on the ground, among the places you actually enjoy being in. This is especially so for Europeans and their cousins in the US, where things are deteriorating fast.
L: So, what are your own reasons for bearishness?
Doug: I'm exceptionally bearish because we've been in the eye of this hurricane for going on three years. It seems to me that the bigger the eye of the storm, the bigger the storm must be. We are definitely heading for the trailing side of the hurricane soon. And it will be vastly bigger, and last much longer, and be much different than the leading edge.
I can't emphasize enough that all these trillions of currency units that governments all around the world are printing up by the truckload…
L: Or helicopter load.
Doug: [Chuckles] Yes, well, bank-wire load, as it were, these days. They no longer need to bother with the printing press; they can just create more out of nothing with the stroke of a key. All that cash in the US, the EU, Japan, and elsewhere is going to come out of the banks where it's sitting at some point, and the inflation that's been masked so far will kick into a much higher gear.
Take Uruguay, for instance, which is actually a very expensive country – to go out to dinner here in Punta del Este costs considerably more than in the US. When I first came here, things were very cheap. I've seen the same thing in New Zealand, Hong Kong, Spain, and other markets in which I've made a lot of money in real estate, based on the same trend. This is happening all over the world. The US has been so successful at exporting its inflation – abusing the reserve currency status of the US dollar – that it's become a relatively cheap place to live, at least among the more developed nations.
The local symptom of this global sickness is that here in Punta, very expensive condominium buildings are popping up all along the coast, spreading faster than dandelions in springtime. Nobody lives in most of them, though some are occupied for a month or two in the summer, and yet, year-round you have to pay maintenance and security costs of at least $2,000, and sometimes $3,000 or $4,000 per month. The only reason people would pay that kind of money to maintain empty condos, as far as I can see, is to hide money.
L: Why do they need to hide it?
Doug: Each will have his own reasons. Sadly, Uruguay is no longer the Switzerland of South America it once was. There was once no income tax here and financial privacy – which no longer exists anywhere. A government run by ex-communists destroyed all that. That was shooting themselves in the foot, of course. But real property rights are still pretty strong here, so people are building all these condos as a place to stash money in the form of bricks and mortar. Unfortunately, I don't think it will work out for them, because as the global Greater Depression deepens, people are going to have to start liquidating them, and the local market is going to crash. The monthly maintenance costs plus a need to retrieve the invested capital is going to result in a wave of selling. A lot of people are going to get burned. Not just here – almost everywhere. As my friend Richard Russell has said, in a depression everybody loses. The winner is the one who loses the least.
L: Maybe you can let us know when that happens – sounds like it will be a great contrarian buying opportunity at that time.
Doug: Sure. Most people will be too nervous to act, but I keep an eye on several real-estate markets for just that sort of contrarian opportunity. Meanwhile, I may just head for the exits now myself, not wanting to be unable to liquidate the real estate I've got in Uruguay later.
At any rate, I view this developing situation as an example of what's brewing in many markets all around the world.
L: Can you give us more specifics?
Doug: I think the most important thing to bear in mind is that we are approaching the absolute peak of the bond bubble, which has gotten vastly bigger than I ever imagined it could. Interest rates in the developed economies around the world are two percent, one percent, or even negative. This is fueling a bond bubble of truly catastrophic proportions. When it bursts, it will be an order of magnitude worse than the tech stock-market crash of 2001 or the real-estate bubble that burst in 2008.
When this one goes, it won't just wipe out the people who thought they were being prudent savers. Because it's a financial market, it will also hit stocks and real estate again, at least in Europe and the US. Here in Uruguay and places like Argentina, real estate is largely a pure cash market. But in the so-called more developed economies, real estate still floats on a sea of debt.
It amazes me that people in the US are elated because the real-estate market is supposed to be up 4.3%, as of the latest figures. Well, of course it is; you can borrow money for effectively zero, given where interest rates and inflation are.
L: Is that a sign of the bulging piles of money banks have been sitting starting to leak out into the economy?
Doug: Looks that way. And when interest rates start rising steeply, as they'll have to do once inflation sets in, rising to double digits as they were in the 1980s, it will crush real estate further and deeper than we've seen so far. It will do so all around the world, but the US will be hardest hit, I think.
There's no question in my mind: the bond bubble is by far the largest distortion we're facing in the economy today. Bonds are incredibly dangerous, insanely risky speculations today. They're reward-free risk. Bond owners are facing huge default risk, huge interest rate risk, and huge inflation risk. But nobody seems to see it or talk about it.
L: I understand. But honestly, Doug, you've been saying that for a while. What makes you think this will be the year the bond balloon finds the pin it's been searching for?
Doug: You're right – that particular bubble should have found its pin two or three years ago. I admit I thought it'd pop last year. It's like watching a clown over-inflate a balloon; the longer he inflates it, the more you wince, because you know it's going to blow up in his face. And the longer it takes, the closer the inevitable comes to being imminent – and the bigger the explosion becomes.
It would have been so much better if the idiots who run the US government had allowed the market to fully liquidate past mistakes and distortions back in 2008. If they'd let all the big banks, brokers, hedge funds, and corporate welfare junkies fail, it would have been very unpleasant, but the country could have survived it, and come out stronger and with a healthier balance sheet as a result. The real wealth – buildings, farms, technologies, the skills of workers – would still be there. And the financial elite would have been wiped out – which would have been a good thing. But instead, they've ensured that the rich have gotten even richer, guaranteed by the government. They tried to drown a fire with a flood of gasoline, and it's going to burn the country down.
You know the old saw about not predicting both an event and its timing, but I don't see how this thing can go beyond 2013.
L: Well, you were right about the politicians in Washington preferring to compromise than to allow the fiscal cliff to hit the fan, so maybe you're right about this one too.
So, we should beware of the bond bubble bursting. Beware of real estate getting crushed when interest rates go up. What about stocks? Wouldn't a lot of money fleeing falling bonds go into the stock market?
Doug: Yes, a lot would, but a lot of companies would be failing as well, so I'm ambivalent about equities in general. Earnings could collapse. Companies with many millions – or even billions – in cash on their balance sheets could still get hit fast and furious by high inflation. P/E ratios are not low these days; Wall Street is not a bargain. So I'm generally neutral to bearish and therefore out of the stock market. That's the best policy when you can make an equally compelling case for something going up or down.
L: That's exactly how I see copper and the other base metals these days. But gold is another matter.
Doug: Of course. And even though gold has hit new highs in nominal dollar prices, gold has still not matched its previous peak in inflation-adjusted dollars. Really, in practical terms, nobody knows or cares about gold yet. The average guy doesn't even know it exists – and the average guy on Wall Street thinks it's only good for paperweights, of which the world already has a surplus.
L: Gold is cheap at $1,670?
Doug: No. But it's got to go higher. The fact is that precious metals are the only financial assets that are not simultaneously somebody else's liability. The huge counterparty liability in today's markets has yet to make itself evident, but it will – it's in the hundreds of trillions. That's what the derivatives that Buffett has been talking about for a decade are all about.
That makes the best single speculation I can think of today gold and silver mining stocks. For the last two years, gold stocks have been getting cheaper, even though gold has continued rising, year-on-year. That makes these stocks a better deal than they've been for many years.
And it's such a tiny little market, the upside when the larger world catches on will be breathtaking. My sense, based on watching these markets for 40 years, is that we're coming up on an explosion of resource stock prices of historic proportions. The kind of stocks you and Jeff cover are absolutely the place to be.
[Ed. Note: Doug is talking about the BIG GOLD and Casey International Speculator portfolios.]
L: The data support you on that. If you adjust for inflation by looking at the price of gold stocks in terms of gold, they are selling for less than they have for years – almost as low as during the crash of 2008, or even back in 2001, before this bull cycle for metals got going.
Doug: They are now extremely high-potential and relatively low-risk speculations – despite mining being a crappy, 19th-century choo-choo-train industry.
L: [Laughs] I used that phrase of yours in the International Speculator coming out Thursday and make the same point.
Doug: You provide a shopping list?
L: Of course. Jeff's got one in BG too.
Doug: Good. This may be the last chance for people late to this bull market to get in at prices similar to what they could have paid before it got going. And as a matter of fact, gold was cheaper in real terms back in 2001 than it was at $35 per ounce back in 1971. People seem to have forgotten that these are the most volatile stocks on the planet. There have been a half-dozen markets I've personally seen over the years where junior miners and explorers went up 1,000% as a group.
Perversely, people are afraid to buy these stocks now –
L: The very reason they should; you have to be a contrarian to buy low and sell high.
Doug: – at precisely the time when they should. I promise you, when the Mania Phase of this gold market kicks in, everyone will be piling in, and it will drive share prices not just through the roof, but to the moon. Then they'll collapse 95% later, of course, the way they always do. But now is the time to buy them. However, since there are several thousand of them, it's critical to be highly selective.
L: Well, if speculating when others dare not were easy, everyone would do it, and there would be no speculative opportunity, so of course I agree.
But back to 2013 – if you don't think the global economy will collapse this year, can you say when?
Doug: As I said last time, 2013 is going to be ugly, but it will just be a warmup for 2014. Back at the New Year's party I went to here in Punta del Este, I asked my best friend down here the same question. He's very rich and very shrewd. He's of the opinion that the world will see catastrophic events of historic proportions – not just one, but several – over the next ten years.
I think he's right, and that brings us back to another point we started with: I cannot stress strongly enough that anyone who hopes to survive financially, and perhaps even physically, needs to internationalize.
L: There's the Mr. Cheerful we all know and love.
Doug: Hey, I'm looking at the bright side...