Dear Reader,
This edition of The Room consists mainly of items that have washed up on the desktop this week that I felt worthy of your attention. We also have a guest article by correspondent Hans Fredrick Hansen on the topic of how long the US economy will be able to continue trudging forward under the heavy load of its unproductive debt.
But before we get down to the harder stuff of economics, let's take a quick look under the hood at the naked intentions of the unindicted co-conspirators otherwise known as the political class.
A Steaming Stream of Tweet
This week I was sent a link to a Twitter feed from an organization closely aligned with the Great Leader and his cohorts in Congress. So close is the alignment, in fact, that the website URL is www.barackobama.com and the President, the "White House" and Democrat luminaries such as Harry Reid regularly contribute tweets to the Twitter feed featured on the site.
Reviewing said Twitter feed, I was struck by the philosophies inherent in the no-more-than-140- character messages flowing like septic effluence onto the page and into the public domain.
Here's a sampling from the first page or two of the fatuous feed, along with a quick reaction on my part. As these things always sound cooler when they're branded, I think I'll brand my counter-feed "BITTER," and instead of calling my postings tweets, I'll call them "beats."
Beat: Yippee! Not only is Obama handing out medical care for nothing, he's going to top us off with some hard cash, too. I love this guy, man. (#wasthattoosarcastic? Good.)
Beat: So, just to be clear, the USG wants to force American companies to spend more on labor, on top of forcing them to spend more on the health coverage mandated by ObamaCare? Can you say "command economy?"
Beat: Where do I sign up? And while we're on it, why not require those greedy bloodsucking companies to also provide all employees with at least one square meal a day? And ping pong tables at work, too! (#Of course, most companies will just pass the increased labor costs onto the consumers, or move their factories elsewhere, or just replace people with robots… the slippery bastards.)
Beat: Which politicians would it be that are failing to take action? Oh, yes, it must be anyone advocating for some semblance of fiscal responsibility. And I didn't realize the government was responsible for researching life-saving treatments for everyone (#except, maybe, the people who are refusing to sign off on the unrestrained money spending… they can all die!)
Beat: Hear! Hear! Rather than digging holes and refilling them to jack up the GDP figures, spending time writing emails and tweets "calling out" people who believe in science seems a great use of your time.
Beat: Well now, here's something we might be able to agree with. Except that instead of just opening the borders to well-intentioned individuals who can prove they aren't criminals, any so-called reform will end up as a massive new government bureaucracy, skewed to create a new class of Democrat voters who quickly settle in as net recipients of government largess.
Beat: Here's a thought: If insurance companies are actually just arbitrarily ripping off women, maybe some enterprising entrepreneur could get a leg up on the competition by announcing gender-neutral pricing. That's how the free market works. Then again, perhaps there are legitimate reasons for the difference in pricing? In which case, the government's new dictate will only serve to shift the costs from the beneficiaries on to the backs of men… you know, just because.
Beat: Never trust government statistics… ever.
Beat: See what I mean! Who comes up with this crap? 97%? Seriously? Here's one for you: 97.9% of people who tweet that climate change is real are functional idiots. Hey, don't get angry at me—I'm just stating the data (after twisting it around like a Gumby doll).
Beat: "Economic opportunities?" You mean kind of like Solari or Fisker?
Beat: I'd rather claw my eyes out.
Beat: Funny, no one called me out.
Beat: I didn't know the climate alarmists had been entertaining "deniers." I must have missed the party invite.
But enough of that.
As you can see for yourself if you follow the link at the top of this article, the steaming stream of tweets drone on and on in the same self-righteous finger-wagging tone for page after page.
In addition to causing gas, the tweets shout from the rooftops that these people remain true believers in the notion that government must guide us mere mortals toward the promised land of a better, cleaner, fairer and more organized existence.
And if we fail to fall in line, we must be ordered, mandated, legislated, bribed or strong-armed into accepting the ivory-tower solutions our great leaders proffer from on high.
Missing from the calculations of the perfect-worlders is that we humans are a messy lot and studiously resist all attempts at falling in line. The minute some incentive is spotted across the room, people will make a dash for it, regardless of whether it is politically sanctioned. Furthermore, while you can certainly fool large segments of the population most of the time, the access to hard data offered by the Internet makes it a fool's game to try to build policy on a shaky scientific foundation.
Thus, over time, the climate change alarmists are going to increasingly wake up to reality and sheepishly fade into the firmament. In support of that contention, consider that the entire movement used to be about manmade global warming, or AGW (the A standing for "anthropogenic"). But as the data just don't support that contention, the Gumby twisters rebranded the movement into "climate change."
Perhaps they calculated that that term would be more readily adopted. After all, even I can't deny there's climate change. Just yesterday in these parts it was raining. But today, it's partly cloudy—climate change in action.
Speaking more seriously, there is much to be concerned with in the administration's steaming stream of tweets. It shows zero appreciation of the fact that the country has reached this precarious place largely because of the sort of meddlesome government policies they are still so ardently advocating.
"But the financial crisis was the fault of the greedy banks," tweets the free-market deniers.
"The hell it was," I beat back. "What banker worth his tweed would make a loan to a person without any documentation confirming his ability to repay said loan? The answer is none."
On the other hand, if you have a government willing to buy, sight unseen, hundreds of billions of "liar loans" originated as part of an initiative designed to provide every American with a house in which to cook their potted chicken, then the banksters were certainly ready, willing and able to answer the call.
Continuing with the attempt to further burden businesses with ill-conceived climate change initiatives when the US is sitting on enough clean-burning natural gas to keep the lights on for a hundred years is not just a disconnect, it's borderline criminality.
I could go on, easily and at length. However, lots and lots of other duties call (unfortunately, none of them having to do with trying to improve my golf game), and so I will cut things short.
Before running to other topics, however, I would like to ask you to reflect on what this country is going to look like after Hillary's first term, a near certainty in my opinion. Based on her track record of "public service" to date, I fully expect her to take the government's manipulations, meddling and outright deceits to entirely new and disturbing levels.
And finally, just because it's so funny, out of curiosity I clicked on one of the "expand" tabs under Harry Reid's tweet about calling out the climate skeptics and was pleasantly surprised to see that the American spirit may be dampened, but it's not dead.
Here are just a smattering of the beats posted in response to Reid's tweet. For those of you with delicate sensibilities, my apologies for the language used by one responder; it was just so priceless I had to include it.
To which we have the following sampling of responses:
(It degrades from there. If you are morbidly inclined, here's a link to the "conversation.")
A Peak at the Future?
As is no secret, I love Argentina. Pretty much all of it: the culture, the diet, the weather, the people, the wide open spaces and the sheer natural abundance of the place.
However, it's also no secret that I don't much care for the "Italian style" government that manages to run the place in to the ground about once every ten years.
As you might expect, given their long experience with the boom-and-bust nature of their economy, the Argentine people are fatalistic about the future. They expect their governments to cause the economy to periodically spiral downhill, but they equally expect the economy to then experience a rebirth and a recovery… that will last until then next bad government comes into power about ten years later. Meanwhile, they go about their lives.
As a litmus test of where things now stand, the following map showing the results from the just-concluded Argentine primary elections says a million words about how far down the current regime has fallen. You don't need to speak Spanish to get an idea of the monumental beating the party of President Cristina Kirchner just took.
While there is much nuance in Argentine politics (mainly because the opposition is not unified), the results from the primary—as well as the regular million-plus turnouts for peaceful demonstrations against the government—are powerful indications that the people have pretty much reached the limits of their famous patience for Cristina Kirchner's meddlesome, dysfunctional policies.
If these primary results hold up in the October elections and the ruling party in Argentina is shunted aside, the place will be poised for a major revaluation, and the next ten years could be spectacular.
What's this? As I was typing, the latest Gallup poll materialized and shows that while Team Obama was busy tweeting nonsense, his approval rating on handling the economy fell off a cliff… dropping 17% in the last two months alone.
Earlier in this missive, I mentioned that one should never put faith in government statistics. With that in mind, riddle me why—if the US economy is on the mend as the government and media like to tell us it is—Obama's rating on the economy is plummeting?
Hmm. Maybe the US is also due for a rebirth and renewal? While I'm not holding my breath, I will be a bit more hopeful.
(On the topic of Argentina, there are still a limited number of spaces remaining for an exclusive new program being offered for anyone interested in visiting Doug Casey's upscale bolt-hole, La Estancia de Cafayate, this October/November.
The lucky few who get in will enjoy an immersive experience in the quaint wine-growing town of Cafayate where Doug and I now both have homes, staying on site at the brand new Grace Resort & Villas. It should be a LOT of fun, with full run of the amenities, leisurely lunches and dinners al fresco, spa time and much, much more. For full details and an itinerary, drop Chris Leverich a note at VIPConnect@LaEst.com. Do it soon, as space is filling up fast.)
Debt Excess and the Liquidation Process in a Historical Context
By Hans Fredrik Hansen
While some people believe there is no such thing as "good debt," any more than there is "good cancer," we disagree.
That's because pooling resources to invest in capital-intensive projects is an essential component to economic growth. Under most circumstances, an economy without debt would be both poor and stagnant.
One contributor to the misconception about debt has to do with the Keynesian aggregate—the idea that all that matters in economic analysis is the sum of individual actions, not the individual actions themselves—as it fails to distinguish between various types of debt. Yet one kind of debt is self-sustainable, in that it produces more capital than it consumes. By contrast, unproductive debt consumes capital without the prospect of producing a future return.
If such debt becomes excessive relative to the underlying productive capacity, it will inevitably trigger a massive reallocation of resources. That's because it drains capital from the economy, requiring companies and people to sell assets or reduce expenses in an effort to meet current obligations.
If the misallocation of resources is allowed to be resolved through normal market actions, the process—as painful as it may be—will typically take only a year or two. On the other hand, if the government steps in and takes extraordinary efforts to avoid reckoning day, the consequences can be decades of economic underperformance such as has been seen in Japan. In the worst case, it can lead to the sort of collapse experienced by the Soviet Union.
Simply put, systems based on human behavior need constant volatility in order to remain viable and vibrant.
Nassim Taleb's new book Antifragile discusses this point in some detail, explaining that every act taken to manufacture economic stability exponentially increases its fragility.
The idea that central bankers can create eternal bliss by targeting an arbitrarily compiled index of price is the height of hubris. Gordon Brown, Chancellor of the Exchequer for 10 years under New Labour, went so far as to announce the end of boom and bust cycles because of the clever interventions of the Bank of England.
The situation could be compared with two continental plates that push against each other for hundreds of years. On the surface everything seems fine. The ground is literally rock solid, but brewing underneath is latent capriciousness. All of a sudden something gives, and the system goes from perfect tranquility to massive volatility.
This is why economies need to adjust every single day and relative prices must be allowed to perform their function. Which is very much not the case in today's world.
Which begs the question, "How long can the status quo be maintained in an economy with an excess of unproductive debt?"
In the case of Greece, the country's government was able to kick the can down the road for the better part of 20 years before suffering seismic collapse.
For capital-rich societies such as the United States, excesses in unproductive debt can go on for decades before the system breaks down. That's because, in addition to the stock of capital in place that allows for massive capital consumption, the creditworthiness built up during the expansion phase allows the country to continue attract lenders who believe the country will always honor accumulated obligations.
As they will ultimately learn to their chagrin, at the end of a debt cycle credit is allocated increasingly to consumption, which will at some point exhaust the system's ability to maintain the status quo... after which, the manufactured stability comes crashing down.
Various Forms of Debt
Trying to answer the question of "how long," we find it constructive to divide debt into three categories based on the criteria of capital consumption.
We'll start with liabilities taken on with the intent of making a subsequent sale at a profit: in other words, debt that increases the capital base, such as business loans. We call this "good" debt.
In the second category, we have mortgages, financial sector loans and foreign debt, all of which are classified as "bad" debt. It may make sense to take on a mortgage to buy a house closer to work, but the process does not create additional capital. On the contrary, it is consumptive in nature. Such debt can be detrimental to prosperity if capital allocation into "bad" debt becomes systematic, as witnessed during the housing bubble.
In the third and last category, we have debt that allows pure capital consumption, such as consumer credit and government debt. This kind of debt decouples the process of production from consumption, and is parasitic on the productive structure. We label it "destructive."
It should be obvious that consumptive debt cannot exceed productive debt for an indefinite period of time. At some point, production must be allowed to outstrip consumption for society to grow. At a minimum, production and consumption must equal each other to avoid collapse.
However, a system that coercively allocates debt into consumption to maintain the semblance of prosperity, such as seen in fiat money systems, will be prone to booms and busts.
Which brings us to the present. Looking at debt aggregates based on our definitions, and studying the US in the post-WWII era brings us to a shocking conclusion. The debt buildup has been exclusively in the "bad" and "destructive" categories, while "good" debt has remained relatively constant as a share of GDP.
Even worse, when markets tried to cleanse society of bad debt in 2008, the government took action and used destructive debt to bail out the defaulting bad debt.
Sources: Federal Reserve Flow of Funds Accounts; Bureau of Economic Analysis; own calculations
So How Long Can Excess Debt Be Sustained?
To answer the question, we started by putting debt cycles into a historical perspective by searching for long-enough time series of total credit market debt to allow proper study.
Unfortunately, private debt data prior to 1916 does not exist, so we made a proxy based on various balance sheet items from the banking industry. Still, it is impossible to make the classification based on our three debt categories pre-1916, so we rely on economics 101, telling us that the incremental capital-output ratio will drop for a marginal increase in debt. In other words, as leverage exceeds a certain point, it is fair to say that the proportion of bad and destructive debt rises relatively to good debt.
In our data series, we find that the US Civil War collapsed private credit to such a magnitude that, despite rapidly rising public debt levels, overall leverage fell to only 50% of GDP. After the war ended, leverage rose virtually without interruption for almost 70 years until the 1930s, peaking at an unsustainable three times GDP, thus making the subsequent resource reallocation inevitable.
Total leverage then fell for almost 20 years, until it reached 1.3 times GDP in 1951. From trough to trough, the cycle lasted close to 90 years.
As you can see in the chart below, the current cycle—which kicked off in the 1950s—is similar in duration, as it took almost 60 years to reach peak leverage levels; but this time the peak was 3.8 times GDP!
In terms of deleveraging, we are only three years into the cycle. Over that brief period, only 20 percentage points' reduction in the total debt ratio has been achieved. In the 1930s, the same ratio fell more than 80 percentage points over an equal period.
Sources: Historical Statistics of the United States, Colonial Times to 1970; This Time Is Different: Eight Centuries of Financial Folly; Federal Reserve Flow of Funds Accounts; Bureau of Economic Analysis; own calculations
Our second chart shows a clear negative correlation—and we dare say causation—between leverage and growth. When credit is flowing to self-sustainable projects, growth is high due to a low level of capital waste.
However, as leverage rises, the marginal efficiency is bound to drop ever lower until it becomes a drag on the productive parts of the economy. When credit allows people to go on vacation or enables government boondoggles, scarce capital is wasted, and growth will be affected.
We note that the US economy seems to work well on a leverage ratio between 1.2 and 1.6 times GDP. The late 1800s and mid 1900s were periods of high growth, while the early and late 1900s, where the leverage ratio was high, were characterized by low growth.
This is easy to understand. When the leverage ratio increases, the composition of debt becomes increasingly unproductive, which drags growth down. Since productive projects must not only fund themselves, but also help fund the unsustainable capital consumption emanating from unproductive projects, capital waste increases.
Sources: Historical Statistics of the United States, Colonial Times to 1970; This Time Is Different: Eight Centuries of Financial Folly; Federal Reserve Flow of Funds Accounts; Bureau of Economic Analysis; own calculations
In light of the recent debacle around Reinhart and Rogoff's claim that growth is adversely affected by government indebtedness, we suggest a look at total credit will be more fruitful. It does not matter if the government consumes capital or if it is the private individual—what matters is the level of capital consumption relative to production.
If we create a system with explicit bailout facilities that allow debt to be allocated into unproductive economic activity, we must not be surprised when the very same system implodes in a wave of volatility. The very act of collectively guaranteeing and consequently bailing out unsustainable debt in the name of preserving a flawed system and suppressing volatility exacerbates capital consumption, which inevitably leads to cataclysmic results.
When leverage rises above, say, 1.6 times GDP, the additional debt becomes a drag on economic growth. However, the share of productive debt will still be able to maintain the unproductive part, but growth is increasingly jeopardized. If leverage is allowed to continue even higher, it will lead to outright retardation, as a parasitic capital structure will eventually kill its host. This is the ultimate cost of a managed system!
Investment Implications
With the debt-to-GDP ratio currently upwards of 3.5, the idea that we are on the precipice of a 20-year-long debt-deflation period certainly gives credit to the many pundits predicting deflation. In the decade following 1929, consumer prices in the US fell by an average of 1.7% annually, and leverage levels did not rise again until 1951.
Are we not facing the same situation today? Once again we have witnessed a massive buildup in debt which will have to be liquidated, akin to the situation in the 1930s. How do we get down to a sound leverage ratio without facing massive deflation? Remember, credit and debt is money; and if credit and debt contracts, it follows that money also contracts, which of course is the very definition of a deflation.
The major difference, of course, is the changed role of the Federal Reserve. In the 1930s, the Federal Reserve was a reactive organization which would lend money against good collateral at a penalty to avoid a liquidity crunch. Today, on the other hand, the Federal Reserve is a proactive organization tasked with managing the economy. Specifically, the Federal Reserve is mandated to avoid deflation at all cost.
This means that all outstanding financial liabilities with a negative NPV must be monetized in order to elude a cascading debt deflation that would occur were the market left to itself.
In the 1930s, the mainly fiscal and regulatory policy responses stopped the economy from correcting excesses. Today, policy makers are leaning much more toward an activist monetary policy to sort out the mess. The buildup was similar; the response by the Fed is different.
While we see the merit in both schools of thought, until we see some semblance of evidence to the contrary, we believe the Federal Reserve will err on the side of too much inflation that at some point will spin out of control.
Conclusion
The idea that a social system should be deprived of volatility creates perverted incentives which firmly place the system on a path to self-destruction. In terms of leverage levels, it allows extremes to be reached.
We are currently at the peak of a 60-year-old debt supercycle that is imploding before our eyes. The question we need to ask ourselves is what this implosion will look like. When a system is managed to the extent it is today, a free float of market forces would undoubtedly lead to a massive liquidation of outstanding debt.
However, a proactive central bank coupled with a political elite that find it expedient to rely on monetary manipulation rather than structural reforms is historically a well-trodden path toward rampant inflation.
It all comes down to this: Do you think the Federal Reserve has the political will to monetize trillions in bad debt? If yes, then you need to invest for inflation, i.e., buy precious metals, real estate and other hard assets. On the other hand, if you think the Federal Reserve will stand by and allow the undeniable deflationary force to get the upper hand, you should be long cash and bonds.
We find it fitting to end today's missive with a quote from the great Austrian economist Ludwig von Mises (Human Action, page 572):
"The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Hans Fredrik Hansen is a young economist and analyst with a deep appreciation and understanding of Austrian economics. He is currently working out of the US for a globally diversified oil company as an oil market analyst and economist. He holds a master's degree from the Norwegian School of Economics (NHH, Bergen) and Warsaw School of Economics (SGH, Warsaw).
David again.
In what can only be taken as a bale of straw in the wind that the end of the bond bubble might be at an end, the latest Treasury International Capital data (TIC) was released; it shows that the foreign investors which were so critical in supporting US government deficits for years—by always stepping up to the plate to buy Treasuries and other government bond offerings—are bailing out in droves.
The following is from the good folks at Zero Hedge…
"As the just released TIC data report indicates, in June foreigners, both private and official, were hitting every bid they could find. Literally. For the first month ever, every single security class was sold off: Corporate stocks: sold – $26.8 billion; Corporate Bonds – sold $5.0 billion; Agencies – sold $5.2 billion, and, perhaps the culprit of it all, Treasuries, saw the biggest dump ever, as foreigners sold an epic $40.8 billion! Adding across the various asset classes, the consolidated foreign sale in June 2013 was worse than Lehman and the month after it.
Somehow to foreigners, Bernanke's Taper Tantrum was a more shocking event than the biggest bankruptcy filing in history (one which launched the global central bank scramble to buy up everything that is not nailed down).
The exit of foreigners from US debt (and stocks, for that matter) has led to rates rising—today the 10-year Treasury rate hit 2.75%, the highest in two years. Here's more on that from Zero Hedge.
As our own Bud Conrad put it, "This has the seeds of a bond bubble burst, with bigger implications of a new and bigger crisis."
Meanwhile, gold and gold stocks are performing just as they should… as a hedge against monetary chaos. And, per our often stated position and Hansen's article above, monetary chaos is all but a certainty at this point.
Don't forget to duck… in to gold.
Friday Funnies
These outstanding insults are from an era before the English language got boiled down to four-letter words.
A member of Parliament to Disraeli: "Sir, you will either die on the gallows or of some unspeakable disease."
"That depends, Sir," said Disraeli, "whether I embrace your policies or your mistress."
"He had delusions of adequacy."—Walter Kerr
"He has all the virtues I dislike and none of the vices I admire."—Winston Churchill
"I have never killed a man, but I have read many obituaries with great pleasure."—Clarence Darrow
"He has never been known to use a word that might send a reader to the dictionary."—William Faulkner (about Ernest Hemingway).
"Thank you for sending me a copy of your book; I'll waste no time reading it."—Moses Hadas
"I didn't attend the funeral, but I sent a nice letter saying I approved of it."—Mark Twain
"He has no enemies, but is intensely disliked by his friends."—Oscar Wilde
"I am enclosing two tickets to the first night of my new play; bring a friend, if you have one."—George Bernard Shaw to Winston Churchill
"Cannot possibly attend first night, will attend second ... if there is one."—Winston Churchill, in response.
"I feel so miserable without you; it's almost like having you here."—Stephen Bishop
"He is a self-made man and worships his creator."—John Bright
"I've just learned about his illness. Let's hope it's nothing trivial."—Irvin S. Cobb
"He is not only dull himself; he is the cause of dullness in others."—Samuel Johnson
"He is simply a shiver looking for a spine to run up."—Paul Keating
"In order to avoid being called a flirt, she always yielded easily."—Charles, Count Talleyrand
"He loves nature in spite of what it did to him."—Forrest Tucker
"Why do you sit there looking like an envelope without any address on it?"—Mark Twain
"His mother should have thrown him away and kept the stork."—Mae West
"Some cause happiness wherever they go; others, whenever they go."—Oscar Wilde
"He uses statistics as a drunken man uses lamp-posts... for support rather than illumination."—Andrew Lang
"He has Van Gogh's ear for music."—Billy Wilder
"I've had a perfectly wonderful evening. But this wasn't it."—Groucho Marx
Food for Thought
Drone Wars. There was an important story out this week that was characteristically ignored by the mainstream media here in the US. In a nutshell, for what I think is the first time ever, another country besides the US—Israel—used a drone to kill people in another country. Here's the story.
I could be wrong, but this sure feels like the opening salvo in a whole new paradigm. Until recently, a bomber from one nation flying over the borders of another in order to unleash explosive weaponry on its public would be considered an act of war with all the attendant consequences.
Now, however, thanks to the Pandora's box opened by the steady drone attacks of the US, cross-border bombings have apparently sunk to a level barely warranting a back-page mention.
Where this goes next is anybody's guess, but I suspect that we haven't even begun to see the consequences and that, once the Drone Wars heat up, they are going to stay hot for many years into the future.
From Deflation to Inflation. In another important story out this week, well known deflationist and all-around smart fellow David Rosenberg of Gluskin Sheff has come around to our point of view on where things are headed: inflation. Moreover, he is actively rearranging his clients' portfolios to line up with that view. That is a very public move, and he wouldn't be making it unless he was pretty sure he was right. Here's the story.
The World's Next Monster Energy Play? A couple of weeks ago, Marin Katusa, the head of the Casey Research energy division, asked me to give him a second opinion on a small company that a fund we are investors in helped provide seed financing for when it was just an idea. Since that time, the company has positioned itself on what appears to be a monster oil field.
Though my other responsibilities don't allow for it very much any more, I've always enjoyed doing in-depth company research, and so I readily agreed.
I then spent the better part of three days digging through the research, then joined Marin and other team members on a 90-minute call with management, during which I got to ask them a long list of questions.
The bottom line: I fully concur with Marin's opinion that this company may very well be on the verge of announcing it has uncovered an oil play even more exciting than the now legendary Bakken deposit. Importantly, the company's extremely professional management team has deep experience with the geology, having been there at the beginning of the Bakken. So not only do they know what they are dealing with, but they have the expertise to take full advantage of it.
The story gets even better, as the small company has quietly locked up a concession of over 2 million acres covering the new oil play. Management is so confident that it's about to shake up the energy industry that they have invested millions of dollars of their own money to finance the company and the drill program now under way, which they believe will confirm their hypothesis.
Intrigued, I asked if we could be on site as the drills reach the target pay zone. Not only was I interested in seeing the company's operational efficiency firsthand (it's something the team is well-known for), but Marin and I wanted to be on hand when the initial drill results came in so we could report to the subscribers of our Casey Energy Report. The company agreed, and we set about making the international flight arrangements.
However, as we were packing our bags, the company's lawyers called a time-out. Concerned that regulators would look dimly at our being on site—that it would give our subscribers an unfair advantage—they canceled the trip and imposed a communications blackout on the current drill program.
While disappointed that we couldn't travel to the well site, I understand the reasoning. Having done all the hard work identifying the monster opportunity, even the remote potential that regulators could throw a monkey wrench into the works at the last minute was simply not worth the risk.
That said, our team gets paid to do the hard research necessary to uncover this sort of opportunity (and opportunities this big are extremely rare), and we are not about to let that research go to waste.
Therefore, upon regrouping, we have decided to release our complete report on the company immediately after the company ends its communication blackout and releases the results from the initial well that, based on our research, we are convinced is going to confirm that they are sitting on a monster.
Based on the last communication sent before the lawyers imposed the blackout and our own assessment of the drill program and the subsequent flow-testing, we believe the company's news will be released on or about Monday, September 16.
While that date is conjecture on our part and therefore may be off by as much as a week (or more), no matter when the news is released (even in the middle of the night), everyone who is a paid-up subscriber to the Casey Energy Report will receive an alert with our analysis and all the details on what could very well be the "next Bakken."
If you'd like to join the fun—and hopefully the profit party (we won't know just how serious this opportunity is until the well test results are released)—you'll want to be a subscriber to the Casey Energy Report well before September 16.
While I realize this is all very promotional, every word is true—as is the scale of the potential opportunity. In fact, Marin and I both think this is the most exciting speculation we've seen in years.
We'll be sending around more information and a special offer to join us as a Casey Energy Report subscriber next week. Watch your mail… this could be a real winner.
And with that, I will sign off for the week by thanking you wholeheartedly for reading and for being a subscriber to a Casey Research publication. It is nice to note, as I bid you farewell for the week, that gold is playing its time-honored role as a contrary investment—up almost $30 as I write, while the stock market struggles to stay afloat on the bubble of Fed funny money.
We live in interesting times, no question.
David Galland
Managing Director
Casey Research
