The market for equities has enjoyed a monster 2013, with the benchmark indices closing time and again at record highs.
But while Wall Street has enjoyed the benefits of a sharp ramp-up in the bull market this year, it is hard to deny that there has been a feeling of uneasiness accompanying these gains. Indeed, while stocks seem to have charted an upward course, trading volume has been more anemic than the US economic recovery itself, leading some to the uncomfortable conclusion that the significant uptick in share buybacks has been one of the real drivers of the stock market.
All of this has happened against the backdrop of the Federal Reserve’s monetary stimulus program, otherwise known as quantitative easing. The $85 billion being injected on a monthly basis into the economy by way of bond and asset purchases has helped to keep interest rates at historic lows, and has in general reduced the perception of risk that usually accompanies stocks.
On December 18, however, the Fed finally announced what everyone knew to be inevitable. At the conclusion of its monthly board meeting, outgoing Chairman Ben Bernanke said that the central bank was finally ready to start its gradual drawdown of QE, by an initial amount of $10 billion per month.
The stock rally that followed could be interpreted as a sign of investor relief that the great taper was no longer a looming threat. But the fact that Bernanke coupled the announcement with reassurances that interest rates would stay low could just as easily be interpreted as a sign that there is still plenty of anxiety about how the Central Bank is going to take the training wheels off of the financial system.
Given the circumstances, many investors can and should be asking what to expect in the months and years ahead. What will be the consequences of the end of QE, and how best to protect one’s assets in the event that the worst-case scenarios are realized?
Those who have been struggling with these serious questions may find some answers in Doug Casey’s new book, Right on the Money. Mr. Casey should be a familiar figure to investors.
Casey has many accomplishments to his credit, including several best-selling books, countless television appearances, not to mention his long track-record as a contrarian investor, particularly in the natural resources space.
Right on the Money is structured as a collection of conversations on a wide range of topics, financial, political, and even social. While Casey elaborates on all these subjects with his characteristically unapologetic bluntness, one of the most important themes to recur throughout the book is without question the Fed’s QE regime: how it has already distorted the economy in ways that are not immediately visible, and more importantly, what can be done not only to protect one’s investments, but also to profit from this uncertain situation.
Equities.com had the opportunity to catch up with Mr. Casey shortly after the book’s official release, and spoke at length with him about the Fed’s unprecedented and potentially disastrous stimulus program, which he believes will one day inevitably lead to a hyperinflation scenario, and which areas of the commodities space will provide the safest and most profitable investments in the years to come.
Equities.com: Your new book Right on the Money has been out for about ten days, so I imagine it’s a bit difficult to judge the response at this point in time. Instead, I wanted to start by asking why this book, and why now?
Doug Casey: Well, it’s not an attempt to be timely so much as to be accurate—although it’s actually quite timely. This book pulls together all the financial and economic-related interviews that I’ve done since the crisis started in 2007, the start of what might become known as The Greater Depression. Things almost went over the edge during 2008-2009. That’s when we were in the leading edge of this gigantic financial hurricane that we are now in the eye of, and which has lasted much longer than I had ever thought, perhaps because the hurricane is much bigger than even I had thought. I think the chances are excellent that in 2014 we go into the trailing edge of the hurricane, and it’s going to be much more severe and much longer lasting than what we saw in 2008 and 2009.
So, since this book is focused on financial and economic matters, now seemed like an appropriate time to put it out-- while people can still do things to protect themselves, and even profit significantly, in a relatively calm environment. I guess that would be the answer.
EQ: The timing of our conversation couldn’t be much better, given Bernanke’s announcement yesterday that the great “taper” has begun. It seems this is the event we’ve been waiting for all year. But before we get into that, could you give our readers your thoughts on the Fed’s fiscal stimulus program and what is at stake with Quantitative Easing?
Casey: Since 2007, the government has been creating gigantic amounts of money that they’ve injected into the system. Their first objective, which started with what was called TARP, the “Troubled Asset Relief Program”, was to keep major banks, brokerage firms, and insurance companies from failing. So, that first $750 billion that they created was to the benefit of the moneyed classes that own and control those big financial institutions. Since then, they’ve had Quantitative Easing, which is a term that they’ve created, a very dishonest term. It’s really just another term for printing money, but it sounds better. Actually it’s very shameful that everyone uses their words, it’s allowed them to capture the language of the debate.
There’s been QE1, 2, 3, QE infinity. In the last year, perhaps recognizing that this can’t go on and keep accelerating forever, they’ve talked about dialing it back, which they call “tapering”. So, apparently they’ve done that, taking it from $80 billion monthly to $70 billion. Whatever the number, but I don’t think that’s going to last. They’re almost forced at this point to accelerate it. It’s like having a heroin addiction, you need more and more to get the same kick. The Fed is buying and monetizing all the government’s debt as this point; the Chinese and other foreigners want to get rid of what they have, not buy more. The Fed is now, in effect, the world’s biggest and most leveraged hedge fund.
There’s nothing that they can do when we go back into the hurricane, which I expect to happen this year. They’ve taken their shot. No matter what they do, or don’t do, at this point it’s going to end very badly.
Creating money out of nothing causes distortions in the way people act, it causes misallocations of capital, and we won’t really know how bad it is until after the collapse comes. But I think it’s going to be unbelievably ugly.
The best thing would be for the Federal Reserve to be abolished, along with the rest of the world’s central banks. Governments the world over are completely out of control. Among many other things, government should get 100 percent out of the money business. People have forgotten that money is just a means of exchange and a store of value. It shouldn’t also be a political football, or a form of taxation, which is one of the main purposes of it from their point of view.
EQ: That would make QE a sort of exercise in vocabulary, as well an experiment in monetary policy – the outcome of which we really won’t know until after its most disastrous effects are experienced.
Casey: One of its most disastrous effects of QE is to destroy the savings of the most prudent and hard-working people in the country. The ones that actually produce more than they consume and set aside the difference in savings, which most people do in dollars. As they rapidly destroy the value of the dollar, the middle class will get hurt the worst.
People on the top of society will be just fine—unless we have a revolution. They own all the assets, and they’ve got the best legal counsel, the best accountants, they’re politically connected, and so forth, so they can get around government action, and actually profit from it. The people at the bottom don’t have anything to save; it doesn’t really make much difference to them. They watch TV and collect food stamps as they’re cemented to the bottom of society. The middle class will be the big losers. It’s a pity.
EQ: As it is, the middle class has been on the decline for a number of years. Are you saying it’s building up to be something even worse for them?
Casey: I think Bernanke, Greenspan and Yellen, should all be hung up by lamp posts on 5th avenue. It would be much better to see them there than on TV or in a posh boardroom.
EQ: There seems to be quite a few people who feel the same way as you which leads nicely to my next question. One of the first things Bernanke stressed during his taper announcement was that interest rates will or at least could be made to stay low regardless. I’m going to guess that this strikes you as a case of having one’s cake and eating it too. How does the Fed think it is going to be able keep interest rates low?
Casey: Personally, I’m surprised at how low they’ve gone, and how long they’ve stayed at that low level, especially when you look at it from a long term point of view. Interest rates peaked in the early 1980’s in the range of 15 to 20 percent, and we’re talking evenfor US Treasury securities. So they’ve been going down for over 30 years—resulting in a very, very long bull market for bonds. We’re currently in the biggest bubble in world history—the 21stcentury bond bubble.
We’re at the cusp now. But I think the trend has finally reversed. Rates could have turned at any time in the last three years, but one thing for sure is that the longer the Fed does what it can to keep interest rates at the bottom, the more distortions it is going to create. The lower interest rates are, the more it encourages people to borrow, and the more it discourages them from saving. However you only get rich by saving, and you become impoverished by borrowing.
Actual inflation-- not the government’s fictional figure of about 2 percent per year-- but the actual general rise of prices across society, is probably in between 5 and 10 percent. You can’t trust US government figures at this point any more than you can trust Argentine government figures, and for the same reasons. Namely, they’re both bankrupt. But that’s true of most of the world’s governments.
All this money has been created by the Fed, and it’s basically just sitting in financial institutions now. It’s important to remember that although the Fed is at the root of all this, the actual multiplier of money is the banking system. Banks have to lend it out, and if it’s lent out, it’s re-deposited, which gives them more reserves to lend out again, which is what the fractional reserve system is all about. But at the moment, there’s not a lot of bank lending. The reason is that banks don’t want to lend to small businesses, they’re now too big for that. The kind of banker that Jimmy Stewart played in It’s a Wonderful Lifedoesn’t exist. Most of the banking industry in this country is now owned by six banks; they’re bankrupt, but continue growing like cancers even as the number of local independent banks is dropping radically. Consumers are already very indebted. Small business can’t expand in this stagnant environment. And sophisticated borrowers are afraid of rising interest rates. It’s much easier for banks to lend money to the government anyway. Why go through the risk and aggravation of dealing with the public? That’s the main reason why inflation hasn’t exploded—so far.
Let me point out one thing, though, that almost everybody overlooks: the US is still running a $600 or $700 billion per-year trade deficit. That means those dollars are being shipped out of the US, and are floating around elsewhere in the world. People accept them because they’re liquid and convenient, but they’re not under any legal obligation to do so. Eventually, people are going to get panicky and start dumping them, at which point they’ll all start coming back into the US in exchange for real goods, Boeings for instance, but also titles to land, companies, and so forth. This will serve to further impoverish the average American.
Also, when those dollars come back into the US, domestic inflation is going to explode, because you’re going to have that much more in the way of dollars, and that much less in the way of real wealth within the US. It’s going to be a real catastrophe, and the inevitable is becoming the imminent.
EQ: So, in other words, the much sought-after inflation is soon to come.
Casey: One other thing I’d mention on that topic is that the trade deficit in the US has been a wonderful thing for keeping inflation down below what it would otherwise would have been for a generation. Again, because we’re shipping out $600 billion of paper annually, while foreigners are shipping in $600 billion of real wealth. There are perhaps $8 trillion outside the US now, and they’re eventually all coming home…They won’t be welcome. You can expect foreign exchange controls.
EQ: There is so much that is out of the control of investors, such as the Fed’s decision-making process. Given the circumstances, what do you think are the best options currently available to those willing to follow a more contrarian path?
Casey: Well, in retrospect, I wish I’d jumped on Bitcoin. It was predictable, and I was promoted on it at $20 per coin, and I should have figured that it might catch fire in this environment. And it did; it went over $1,000. But, you know, you just can’t be everywhere and do everything. You can’t ride every train leaving the station. I’m not a computer jock, and that was an impediment for Bitcoin. Anyway I think that train has left. But I continue to buy gold and silver, the physicals, and put them away in a safe place. I buy them for safety and insurance. I hope gold goes lower; I like to buy things cheaply.
For the last year they’ve been bouncing along the bottom, and now is an ideal time to buy gold stocks. I think buying quality- and I know that sounds like contradiction in terms - junior mining and exploration stocks is a fantastic speculation. It should be very rewarding. Why? Because they’re extremely small-cap—picocap, actually-- and extremely volatile. The Fed will create other bubbles in other markets, and I think it’s an excellent bet that they’ll create a bubble in gold.
We’re not there now, by any means, but perhaps there will be a super-bubble in gold mining stocks, which nobody wants to touch right now. But I think the potential of getting 10 or 20 or even 50-1 on these stocks makes the tremendous risk of being in them more than worth it at this particular point, so I’d definitely do that. Nothing’s changed.
EQ: Other than gold and silver, what other commodities or commodities stocks should investors be looking at? Rick Rule, for instance, is very bullish on the future of platinum, palladium, and even uranium. How do you see it?
Casey: I think Rick is right about all three of those, and there are good fundamental reasons why all three should go higher. The same argument can be made for a number of the 92 naturally occurring elements on the periodic table. Everybody hates the mining business right now. Governments see it as something to be stopped. And then, if they can’t stop it, they try to tax and regulate it to death. There are also thousands of NGOs in the world that make it their business to get the locals excited and stop any mining. It would be a tough business even without those problems, however.
Most of the big deposits in the world, located in the easy to work in places, have actually already been discovered. There are many reasons why mining is a crappy 19th century choo-choo train business. Young people, understandably, don’t want to be involved in it.
But you need the produce of mines, at least if you want to live in an advanced civilization. So, things will have to change. You can make a very good argument for much higher prices for a number of these elements, and the companies that mine them.
But I’ll tell you what I like personally, and what I’m actually doing: I like the cattle business, for a lot of reasons.
One of them is that if you look at prices since 1971, when the dollar was devalued, the prices of cars and houses and clothes and so many things have gone up 800-900 percent, or more; that’s how much the dollar has deteriorated in that time. I was looking at a list of these things recently, about 30 or 40 items, and of all the things on the list, it turns out cattle had gone up the least in the last 40 years, only about 450 percent.
So cattle are very underpriced; nobody has made any money raising cows for decades. In the US, Canada, and actually Argentina too, cattle herds are at the lowest level they’ve been in 60 years, so there’s a real squeeze coming up here. They’re very cheap and herds are small, so I’m raising cattle here in Argentina. One nice thing about the business, if you can sustain the current losses, is that every year, a lot of mama cows will have baby cows. Two years later, assuming they are females, those baby cows have their own babies, and so on, so it’s a nice form of compound interest. You’ve got that going for you, and the fundamentals are fantastic.
EQ: This has been a fascinating conversation. What can our readers expect from you over the next year? Do you have any projects we should be looking out for in 2014?
Casey: Well, I hope the readers like this newest book, Right on the Money. But as we speak, I’m actually working on a sextet of novels. Very ambitious, actually, they’ll all be fat novels. The series follows our hero as he engages in six politically incorrect occupations. I thoroughly explain each occupation and everything around and about them, reforming their reputations. In sequence, they are: Speculator, Drug Lord, Assassin, Terrorist, Warlord, and AntiChrist. We show that you can be not only a good guy, but a great guy, as he succeeds in all of these occupations. I expect the first one will be out in six months.
EQ: That sounds intriguing, and I sincerely hope that we get to review the first installment for our readers here at Equities.com.
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