Interest Rates

In today’s column, I will discuss the situation – both locally and internationally – as clearly and precisely as I can.

As a trained data analyst with a Ph. D. in Pure Mathematics and an M.Sc. in Computation from the University of Oxford, I approach the markets from a somewhat different angle than many of my fellow commentators. As you will maybe recall from my previous columns, I look for commentary from reliable sources – one reliable source is clearly worth a great deal more any number of unreliable sources.  Our aim at GSG (Gold Survival Guide) is to present you with timely and accurate information that you can use constructively to help you build a portfolio that will perform well during the troubled times that we see ahead.

The Local Scene

(1) New Zealand is not isolated from financial events abroad.

For example, if interest rates were to trend upward in the United States (see below) then interest rates would inexorably follow that trend here.  This is due to our requirement to continually borrow from abroad to stay financially afloat.

The business outlook here is grim. I have spoken to representatives across a number of different industries and most of them have agreed with this outlook. Commodity prices remain firm, and this should help us; however we import a lot of commodities ourselves, and this will hurt us.

(2) The property market is uncertain, to say the least.

I attended an Open Home a couple of Sundays ago in a desirable residential area, and I was the only person in attendance. At this juncture the market seems as if it could bifurcate; the folks who have jobs, low mortgages, or who have definite incomes that can sustain high mortgage repayments will be just fine. On the other hand, those with uncertain incomes, or who are possibly currently struggling to make mortgage payments, will have the market drop out from under them – until prices get low enough that bargain hunters emerge.

In any case, with the international outlook so uncertain, it would appear to be sensible to lock in interest rate repayments at fixed rates as far out as possible – thus fixing the outgoing sums to service the mortgage, with no nasty surprises if rates were to suddenly rise.

The International Scene

(1) The situation in the US and elsewhere.

Mr Alan Greenspan has announced that the US deficit is out of control. This is pretty rich, coming from the man who singlehandedly blew out the deficit over a couple of decades. Nevertheless, this statement is significant, because it indicates that the financial establishment is now concerned with this problem.  However, at present their hands are tied, because of the upcoming mid-term elections. As we all know, it’s  spend, spend, spend, and promise, promise, promise to woo electors. Hence rates will probably remain low (effectively zero) until after the elections. Since Japan and Ireland, to name two other countries, have announced huge stimulus packages, this seems to be an international trend.

When things have settled down, it seems likely that interest rates in the US will start to rise – and rise – and rise – to try and control the rate of increase in the deficit. However, because of structural weaknesses in the US economy – particularly the heavy duty weakness in both the residential and the commercial property markets, it seems likely that the rate of increase in rates will be gradual.

However, as we have noted above, our rates here will have to follow suit – they will also rise – and in any case, they will continue to stay above rates in the US.

Gold and Silver

Look for the USD price of gold to become increasingly volatile as another economic/financial crisis ensues. The old adage – buy low and sell high – applies in spades.

Whereas the price of gold has increased more than 50% above its nominal high, the price of silver is languishing far below its all-time nominal  high of approximately USD50 per ounce.
Look for silver to out-perform gold, but caution as to the time of purchase is warranted.

Lastly, I urge you to read the outlook below from Doug Casey interviewed this past weekend at the Daily Bell

Wild Bill.

Doug Casey on the Violence of the Storm, the Destruction of the Middle Class and the Coming Gold Standard

Sunday, October 10, 2010 – with  Ron Holland

Doug Casey on the Violence of the Storm, the Destruction of the Middle Class and the Coming Gold Standard

 

The Daily Bell is pleased to present an exclusive interview with Doug Casey (left).

 

Introduction: Doug Casey has appeared on hundreds of radio and TV shows, and has been the subject of articles in People, US, Time, Forbes, The Washington Post, and numerous other publications. For nearly three decades, Doug Casey and his team have been correctly predicting major budding trends in the overall economy and commodity markets.

Daily Bell: Have things improved with the economy since this summer?

Doug Casey: No, not fundamentally. The money they threw at the auto industry with the Cash for Clunkers program just stole sales from the future, and destroyed hundreds of thousands of serviceable vehicles. The tax rebates they offered to the people buying houses also stole sales from the future, but more importantly induced a bunch of people who couldn’t really afford houses to buy, and get in debt – this as the market heads lower. Some of the 100s of billions of dollars that they created in these, and other stimuli, have filtered down into the economy – although most of it has just enriched the bankers and made some people feel richer than they really are. But that’s exactly what’s caused the problem; it’s not a solution. These things only make people think they are richer than they really are, induce them to live above their means, and dig themselves into a bigger hole. Everything that the government has done is not just wrong; it’s exactly the opposite of the right thing. So the economy will get worse based on what the government has done.

Daily Bell: Are we still headed for a Greater Depression?

Doug Casey: There is no question about that as far as I am concerned. The Greater Depression has started in earnest. Let’s define the term. A depression is a period of time when most people’s standard of living drops significantly; that’s actually happening in the United States. Another definition of a depression is a period of time when distortions and misallocations of capital in the economy are liquidated – that happens largely through bankruptcies and unemployment. Both of those things are already high, and are going to increase significantly. Regrettably, and unnecessarily, the Greater Depression is going to last a long time. It was caused by government intervention in the economy, and the government is ensuring it will go on much longer than need be. We can’t talk about recovery in a matter of months or even in a couple of years. I’m afraid this is going to be quite dismal for a lot of people …

Daily Bell: You indicated we were in the eye of the storm in the summer. Are we emerging on the other side?

Doug Casey: I think as we come out the other side of the hurricane, it’s going to be much more violent and longer lasting and further reaching than it was in 2007 and 2008 when it was quite unpleasant, so hang on to your hat. They’ve likely averted a deflation but have almost guaranteed very high levels of inflation. But it’s not all gloom and doom. Many individuals will continue creating capital, and technology will continue advancing.

Daily Bell: Where is gold headed?

Doug Casey: I have been a gold bug philosophically for many, many years, but not always a gold bull. The higher something goes, generally, the less I like it. Although I always keep in mind that “the trend is your friend”, I’m essentially a value buyer, not a trend follower. But the fact of the matter is, I don’t know what else you can be in besides gold, and silver today. We are in a strange twilight zone right now, where there are no bargains in the world right now, everything seems to be over priced. Gold itself is not cheap anymore, the way it was 10 years ago. But on the other hand, the gold bull market is intact and I think it is going significantly higher for a lot of reasons. You’ve got to own gold. It’s the only financial asset that’s not simultaneously someone else’s liability. What’s really hard to understand are “dollar bugs”.

Daily Bell: What’s going to happen to the euro?

Doug Casey: As I said before the euro is an Esperanto currency, a completely artificial construct. All of these countries in Europe have very different cultures, they speak different languages; they have different financial structures. The euro can’t possibly last. It’s going to fall apart. Like all fiat currencies, it’s going to reach its intrinsic value.

Daily Bell: Are we closer to a break up of the EU?

Doug Casey: I think it’s inevitable that it will fall apart, it’s just a question of time. That trend is still underway. Europe’s history is one of constant wars and conflicts. Why should that change now? It’s likely that we’ll see more political entities evolve. Orwell was right in many ways, but we won’t see three or four “super states”, as he posited. It’s much more likely there will be more breakups – like Yugoslavia and the USSR.

Daily Bell: Is Britain out of the woods? Supposedly the downturn is over.

Doug Casey: That’s wishful thinking, propagated by fools who think everything will be fine if you just put on a happy face, and pretend. The new Prime Minister there is better than the old one but nothing fundamental has changed. He’s just making a few adjustments at the margin, when he ought to be hacking away at the state with a giant meat axe. This is not just a cyclical downturn; this is something really major. The only thing that can be done to improve the situation is to radically cut taxes, and much more radically cutting government spending, abolishing government agencies and regulations. But they are not doing that; they are doing exactly the opposite. So, there is no reason at all for optimism based on that.

Daily Bell: What about America? Can America dig itself out?

Doug Casey: America is somewhat better off. Europe is going to be the biggest loser in all of this. But things are not good in the US. The big winners of this are going to be the developing economies. Places like India in particular. China has it’s own problems. The business cycle exists in China just as it does in Europe and the US; China is in for some really tough times ahead. But let’s keep this in context. People forget that before the industrial revolution, India and China were much wealthier than Western Europe. It was only with the dawn of the Industrial Revolution that the West became wealthier. We are returning to the previous trend at this point. People in the Orient are saving money and building capital at this point, and that’s how you become wealthy – by individuals saving. That is not happening in the United States. People in the West still think they are supposed to be “consumers”. China has some problems but that’s where the future still lies.

Daily Bell: Update us on China. We think the inflation there is overwhelming.

Doug Casey: Well interest rates are suppressed all over the world by these governments who think that they need low interest rates to stimulate their economies. People want to save, but they’re afraid to save in the form of paper currency. So they get into stocks and real estate. The stock market fluctuates erratically in an environment like that, and stocks are really just paper, at least fro one point of view. So many people are more comfortable with real estate, in that it has use value. As a result there’s been massive construction in China, financed heavily with bank loans, and that’s going to be a disaster. The consequences for these banks and the Chinese national currency can’t be good. The two trillion dollars in foreign exchange reserves that they have could dry up and blow away if the government tries to bailout the real estate market. Assuming they’re not inflated out of existence by the US first … China has gone from nothing, literally, to fantastic development in just 30 years. That will continue; those people know they’re on to a good thing. But they’re in for a political revolution, since everyone knows the ruling Communist Party is just a corrupt scam. And I’ve touched on the economic problems … At some point I’ll be a big buyer of Chinese stocks. But only after the crisis.

Daily Bell: When does the bubble burst?

Doug Casey: I think the real estate bubble in China is peaking and don’t know what the consequences of that will be. Scores of millions of really angry people, for openers. I’ve watched, and been involved in the Hong Kong property market since the mid-80s, and I can tell you prices are simply out of control. It’s time to hit the bid.

Daily Bell: What about the war in Afghanistan? How is that doing?

Doug Casey: The war is going badly. The American and NATO troops don’t understand the culture, the religion, and they don’t speak the language. The Afghan’s don’t want foreign soldiers in their country any more than Americans and European’s would want a bunch of heavily-armed, angry young Muslim soldiers running around, breaking down doors in the middle of the night. All that war will do is encourage terrorism – which is just a military tactic. But it’s a very viable tactic for a poor society with lots of jobless young people to use against rich ones. They spend a few thousand dollars to destroy stuff – tanks, planes, buildings, infrastructure, and expensively trained and equipped soldiers – worth many millions. In response the Americans spend billions more to blow up a bunch of sand, and kill jihadis who are replaced like the heads of a hydra. It is amazing to me that Western governments are still over there trying to do what they are doing. It’s actually completely insane, and completely counter-productive. Of course, from a historical point of view, it’s just a continuation of the Crusades, and the long war between Islam and Christendom, that’s been going on well over a thousand years now.

Daily Bell: Has Barack Obama begun doing a better job?

Doug Casey: I can only think about two good things about Barack Obama. #1 he’s a smoker and #2 he’s a one-term president. He has a high IQ, true, but how did a minor league ward heeler from Chicago ever get to be president? Where do they get these people? As bad as he is, though, the people he has around him who are worse – uniformly hard-core collectivists and statists. None of them have ever had a real job. They’re all academics and political hacks. But there’s humor in this farce. Timothy Geithner, for instance, bears an uncanny resemblance to Beavis, of that cartoon series from the 90’s “Beavis and Butthead”.

Daily Bell: There’s been some talk Obama was supported by American intel – like the CIA. Is there any truth to that?

Doug Casey: I guess we have reached the stage where people can come out of nowhere to be President. Who knows? I mean really, how does that happen? Perhaps we’ve already reached the stage of Rome, where the emperor was basically installed by the Praetorians.

Daily Bell: What are your thoughts on this November?

Doug Casey: Well I just did a conversation on the Tea Party Movement – click here to read – that speaks to that. But I don’t consider myself a very good handicapper of American elections. First of all, I am not in the US a great deal these days, though I usually tend to expect the worst because now about half of Americans are direct recipients of benefits from the government, and only 50% of them pay any income tax, and that tends to corrupt the way they vote in elections. But it could be the Republicans are going to be hurt by Tea Party candidates—not that I’m in any way a fan of Republicans, who tend to be nothing but gutless hypocrites. Neither am I favorably inclined towards the Tea Party people, however, simply because they don’t believe in anything. They know things are wrong but they don’t know how to make them right. This reminds me of France before 1789.

Daily Bell: Where do people turn now? Is gold a good buy?

Doug Casey: Like I said before, the question is: what are the alternatives? The higher anything goes, whether it’s a stock, a commodity, or a piece of real estate, the less I want to own it. In the United States and Canada, you can’t buy real estate. Canada is a bubble. The bubble is going to burst. In the US the bubble has burst and going to go a lot lower. So you have to forget about real estate in North America. You have to forget about bonds, which are another big financial disaster waiting in the wings, perhaps the biggest of all; when interest rates go from their present all-time lows to new all-time highs – which they will – the pension funds and insurers that own them are going to be in huge trouble.

Daily Bell: How about silver?

Doug Casey: Silver could be better than gold because gold has gotten so expensive. It is the poor man’s gold. But it’s also a hi-tech metal with increasing uses. Of the 92 elements, it’s the most reflective and conductive. I continue to be a bull on silver. Back in 2000 I commissioned an artist friend of mine to make a solid silver Buddha for me from 1000 ounces of the stuff, because it was so cheap. Now I’ll buy more, but only in coin form.

Daily Bell: How about stocks? Will the American stock market continue to go up as it did in September?

Doug Casey: I don’t want any part of the stock market, anything could happen to it. Sure, it could go up but I am not interested in gambling at this point. Fundamentally, it’s way overpriced. And not only are earnings likely to collapse, but P/E ratios are likely to fall; we’re in a major bear market. In a depression the most important thing is to keep what you have.

You can’t be in the stock market today because earnings could collapse and the stock market is not cheap by any parameter. So where are you going to put your money and your assets? Gold is no longer cheap but in relative terms it’s the cheapest thing that I can think of out there. I am anxious to trade my gold for common stocks, but I doubt I’ll pull the trigger until I can get good companies for 8-10% dividend yields—which could well be when gold goes into a mania, and hits $5,000. So it’s not that I am planning to hold gold forever but it’s still the best place I can think of.

But I am accumulating certain junior mining stocks.

Daily Bell: Will the Fed and other central banks continue to print large volumes of money even though quantitative easing is not working?

Doug Casey: There is nothing else that they know how to do. If they don’t continue printing money they’re going to bring on a credit collapse. Of course ultimately that’s the best thing that could happen. But these fools don’t think of ultimate consequences, they only think of immediate consequences. They think if they can keep putting things off into the future, magic might occur. So they will keep printing money.

Daily Bell: Could we end up with a commodities bubble – even a bubble in gold or silver?

Doug Casey: Oh, especially a bubble in gold and silver. One consequence of all this money being created is that other bubbles will appear. I feel confident that one of the bubbles will be in precious metals; it will be driven by both fear and greed, but also by prudence. That’s a powerful combination. With a little bit of luck it’s going to appear in the precious metals stocks as well, but we are not there yet. I don’t doubt that before this thing is over that gold is going to be moving up a $100 per day.

I’ve long specialized in small mining exploration companies. They’re the most volatile class of securities in the world, cyclically running up 1000% – with leaders going 10,000% – then losing 95% or more. They’re in a position now that I think we could see a giant bubble, a real mania, in them. Let me just caution people to do some real research and look at them very hard. Most of them are just burning matches – although that fact won’t have much to do with how high they go if a real mania hits.

Daily Bell: What about war? Is the US headed into a war with Pakistan?

Doug Casey: It is starting to look that way. If I was in the Pakistani military I would take umbrage at having the US do what ever they want in my air space and basically killing who ever they want across the border. It seems anything is possible these days. The US has turned into a “national security” state, where it has literally 100 agencies involved in this type of thing. And even though the US is bankrupting itself by spending more than all the rest of the countries in the world combined on “security”, the average American still wants what he thinks is a “strong defense.” They don’t realize that having a giant military is like having a really nice hammer: after a while everything starts looking like a nail. It’s very provocative to people that can be hammered. The thing is when the going gets tough, these governments like to blame somebody else for their problems and that often leads to war. It’s hard to predict but a dust-up with Pakistan is just one of the wars that could come up.

Daily Bell: How about Iran?

Doug Casey: This is momentarily out of the news, over shadowed by Pakistan. A war with Iran would just be a terrible disaster, and maybe the Israelis will start one for us. The thing to remember is we are part of history and major wars have happened all the time and they usually happen when there are economic hard times, so why should this be any different?

Daily Bell: Are we back to the crusades as you just mentioned?

Doug Casey: I think what amounts to a war against Islam is continuing to build momentum, at least until something happens with China.

Daily Bell: How about Iraq? Will there be a successful coalition government in Iraq?

Doug Casey: No, that is completely out of the question, because Iraq isn’t even one country. Almost all the countries in Asia and Africa are completely artificial constructs. It should be at least three countries or more like five countries. The only purpose the government serves is to enrich the people who get control of it. It’s a vehicle for theft and revenge, something you get control of, and once you are in it, you can steal, direct favors toward your buddies, and punish your enemies. Iraq isn’t going to last as a country.

Daily Bell: What is the point of all the above? Is there any plan to what’s going on? Is there a power elite of influential people who are making a mess of things? Or are they trying to destroy the middle class, if they exist.

Doug Casey: The middle class is being destroyed. Taxes are going up. All these governments are bankrupt, and a government should not be conflated with the country, or “the people.” It’s an entity with its own interests, and will always put it’s own interest first. It treats its subjects as milk cows and if it has to it will treat them as beef cows. In any event, the middle class is being ground by taxes and unemployment, and productive members of the middle class who have saved their money are going to be destroyed by inflation in the future. It’s not a good scene for the middle class at all. They can’t get the legal advice and accounting advice they increasingly need in today’s highly politicized environment. Nor can they generally afford proper investment advice – assuming such a thing really exists in a world where markets are going to go up and down like an elevator with a lunatic at the controls. The middle class is in big trouble in developed countries.

Daily Bell: Are they attempting to create a one-world currency? Where does it end, as we asked you before? A new political order? A new currency? What or who is behind it?

Doug Casey: The next currency is going to be gold. That’s because none of these governments can trust each other, or their fiat currencies. That being the case, they are going to stop accepting each other’s paper, so what are they going to use? SDRs from the IMF? The IMF is going to disappear over the next generation – one of the good things to come out of The Greater Depression. So, yes, the world is going to go back to using gold as it’s currency and it’s not because of any kind of magic, it’s simply because of all the naturally occurring elements, it is the one that is best suited for use as money. Just like aluminum is bested suited for building airplanes, steel is best suited for building bridges, gold is best used, and is, primarily a currency. It is a great store of value and great medium of exchange. So that’s what is going to happen. The only question is, what’s the price of gold going to be relative to other things? What’s it going to be relative to the stock market? Automobiles? Real estate? And so forth. It’s got to go higher.

Daily Bell: What is your best advice to savers and investors now?

Doug Casey: I think you have to continue buying gold and buy a position in silver. I hate to make it sound so simple. The other thing to remember is that there will be other bubbles ignited with the trillions of currency units that most of the governments of the world are creating. Overall that’s disastrous, but it does create the potential for making gigantic real gains in wealth. But let me make another comment on gold, especially at these levels. It’s not something to make money, it is something to preserve the wealth you have – that is most important thing people should be considering. I have also said this is going to be a speculators delight in the years to come.

Daily Bell: How are things in Argentina going?

Doug Casey: Our Argentina project at Cafayate (cafayateliving.com) is doing very well. The last part of the infra structure and amenities are under construction. The 18-hole golf course is completed. If you visit a year from now, the 40km of hiking, biking, jogging trails will be completed. The lap pool, the Gold’s class gym, the library, billiards room, the parcours, the skeet course, the polo fields – everything you could possibly want, and it’s in the right location. So, I suggest people check it before we raise prices. It’s completely unique – nothing like it in the world that I’m aware of.

Daily Bell: Thanks for sitting down with us again. It is always a pleasure to hear your insightful opinions.

Daily Bell Afterthoughts

The trouble with interviewing Doug Casey is that there is usually very little we disagree with him on. This makes it difficult to write a commentary. We agree with him about the “greater depression” and about the economic demise of West generally, with its serial wars, paper money and political duopoly system of governance.

About the only place where we would depart from Doug Casey’s vision has to do with what is taking place thanks to the Internet. Casey sees what is going on as a kind of extension of what has happened before. Nothing wrong with that. He is one of the deepest thinkers we know when it comes to tracking such things. But nonetheless, this vision is one that could have been offered during the depression of the 1930s or the decade-long “recession” of the 1970s. It is different this time, in our view. The Internet itself, and its “truth-telling,” has changed everything.

Never in modern Western history has one been able to gain access at a keystroke to a full spectrum of sociopolitical and economic perspectives that are so different from mainstream perspectives as to be nearly unrecognizable. We have lived through, early in the 21st century, a virtual thought revolution that is as remarkable as it is forceful. Nothing like this has ever happened to humanity, not even during the era of the Gutenberg press.

The average young person of the libertarian persuasion, if he or she has been industrious, knows as much or more than the great constitutional leaders of the US revolution. Even the greatest sociopolitical thinkers such as Thomas Jefferson didn’t have the full panoply of Austrian economics – marginal utility and human action – to inform his thought.

One thinks back even to the 1990s and then looks at the comments left at the Daily Bell or at Mises (not that we are comparing ourselves to Mises) or Ron Paul’s various websites – actually the list is fairly endless. It is virtually the lifting of a Dark Age. People, young and old, living through what is increasingly evident as a new enlightenment don’t realize how much as changed. But just look behind you!

Those who pooh-pooh this phenomenon or believe it is not occurring are missing part of the larger story in our opinion. We are not prepared to say that human nature has changed or that the power elite that haunts the larger culture will subside or disappear. But it may have to take a step back as the 21st century unfolds and this new enlightenment continues.

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2 thoughts on “Interest Rates

  1. Rodney says:

    Casey says: “The next currency is going to be gold. That’s because none of these governments can trust each other, or their fiat currencies. That being the case, they are going to stop accepting each other’s paper, so what are they going to use? SDRs from the IMF? The IMF is going to disappear over the next generation – one of the good things to come out of The Greater Depression.”

    I’d like to know why he things the IMF will disappear…?

    It seems to me that SDR’s from the IMF are a possible solution to the worldwide failure of sovereign fiat currency’s – and a solution that the big states have far more control over than gold. Why would the IMF miss such an opportunity to form a global currency?

  2. admin says:

    Thanks for your comment Rodney.

    I believe Doug thinks the IMF will disappear because he has talked about the concept of the “Nation State” being defunct and he sees them actually disappearing in the coming years. People will group together with based upon like minds, ideals etc rather than just place of birth. And so with that the current global entities like the UN, the IMF, the World bank will cease to exist also.

    However the adage “never let a good crisis go to waste” does spring to mind and so it would make sense that the bankers would jump at the chance of creating a global currency.

    It could be that they manage to do this and this still fails as the SDR’s would likely only have a small link to gold, and so be open to plenty of expansion and fuel more bubbles and collapses. So Dougs theory of a complete “changing of the guard” then comes to pass. It will be interesting to watch and see…

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