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For pretty much everyone, no matter where they are
located in the economic strata, few if any questions are more germane to
making plans for the future than whether the US and other major global economies
are in recovery.
Getting the answer to that question right is of special
importance to investors and businesses.
Stating the obvious, if the broader economy really is
in recovery, then investors would be well served by investing in the equities
of solid companies positioned to take advantage. Similarly, those very same
solid companies would be rewarded by increasing their productive capacity
through investments in the plants and people necessary to meeting growing
demand.
On the same side of the ledger, bond investors would
want to begin shorting up their durations or leaving the bubbly bond market
altogether, in anticipation that the flood of funds into fixed income would
reverse, sending rates higher (and bond prices lower).
Conversely, if the recovery is a head fake, then an
entirely different course of action is called for. For instance, one would
want to adopt a cautious attitude about common stocks. And because of the
nature of the crisis – crushing levels of sovereign debt – one
would want to take advantage of pullbacks in precious metals to buy more,
along with other so-called "tangibles." That way they would have
some measure of protection against the inflation that fiat-currency powers
make all but a certainty.
In addition, reducing personal and business spending in
order to conserve rainy-day cash would be advised.
And what about US bonds in the no-recovery scenario? A
sound case can be made for including them in a portfolio as that puts you in
lockstep with the government's desperate need to keep interest rates down
– or, better yet, have them fall further still. Given the highly
politicized nature of our economy, that seems reasonable – and anyone
who has been long bonds over the last few years has done very well, indeed.
While you'll have to make your own call on bonds, my
own enthusiasm is curbed by looking at the charts of the upwards-spiking
interest rates on the bonds of Spain, Greece, Italy, and so forth. When Mr.
Market ultimately becomes disenchanted with the fiscal excesses of the sovereign
deadbeats, he can express his ire most energetically. When the current bond
bubble here in the US ultimately bursts, as it must, it's going to be a
bloodbath.
Of course, there is much, much more at stake to coming
to the correct answer on the recovery, or lack thereof, than that.
For instance, poor economies make for poor reelection
odds for political incumbents. And when it comes to maintaining a civil
society, the lack of jobs inherent in poor economies often leads to a
breakdown in civility. On that note, overall unemployment in Spain is now
running at depression levels of almost 25%, and youth unemployment at close
to 50%. How long do you think it will be before the citizens of this
prominent member of the PIIGS will refuse being led to the slaughter and
start taking out their anger on the swine (governmental and private) seen as
bearing some responsibility for the malaise?
Meanwhile, back here in the United States, the
commander-in-chief is striding around the deck of the ship of state trying to
look like the right man for the job in the upcoming election, despite the
gaping hole of unemployment just under the economic water line. His future
prospects are very much entangled with this question of recovery.
So, what's it going to be? Recovery… no
recovery… or worse, maybe even a crash?
We all have a lot riding on getting the answer right.
The Quest for Confidence
Ultimately, the purpose of searching for the truth
about the recovery isn't about either fear or greed. It's about confidence.
If you really knew what's coming, then the right
moves to make become obvious. You could then make those moves with the
calmness of spirit that comes from certain knowledge and get on with your
life. While others struggle or miss an opportunity by betting on the wrong
future, you'd have set up your affairs to survive and prosper.
Of course, given that we are talking about a complex
system – the economy – total certainty is never completely
possible. But for reasons I'll share, the nature of the current crisis paradoxically
allows for more certainty than would normally be the case.
And so I want to share my conclusion about how I
believe things will unfold from here, followed with some support for that
conclusion.
While, as readers of any duration are well aware, we at
Casey Research foresaw the current crisis years in advance and have remained
firm in our conviction that the recovery is a charade… based on my own
readings, and after spending the last two weeks in the company of a couple
dozen very plugged-in economists, top-performing money managers, and top
financial analysts, my conclusion is thus:
The world's
largest economies, including the US, Europe, Japan, and China are speeding
for the equivalent of a brick wall. In short, I believe that before this
crisis is over, we will experience the Greater Depression my dear friend and
business partner Doug Casey has long anticipated.
In case that conclusion fails to communicate my current
view sufficiently clearly, I will condense it as follows:
The world's
largest economies are screwed.
And I will even set my conclusion to music, in the form
of the song Somebody That I Used to Know by Gotye,
which seems appropriate because the economy that we used to know won't be
back again for many years to come.
Trust me, stating an opinion on the direction of the
economy in such unequivocal terms troubles me. For starters, I wish my
conclusion could be otherwise because no one likes to be a harbinger of doom.
Mostly, however, I have long resisted adopting a set-in-cement position on
something as wiggly as the future. In my experience, anyone who absolutely,
totally buys into a particular future is almost always proven wrong by time.
Yet, as my quest for certainty unfolded, I could come
to no other conclusion than that the world as we know it is headed for an
economic catastrophe.
Allow me to explain.
The quest started with our Casey Research Recovery Reality Check Summit,
April 27-29, in Weston, Florida. We took our mandate of getting to the bottom
of this matter of recovery seriously, including faculty members with a variety
of perspectives to see if an overarching conclusion about the recovery could
be ascertained.
In addition to our own team of Doug Casey, Bud
Conrad, Terry Coxon, Louis James, Marin Katusa and Jeff Clark, included in the faculty
were: Lacy Hunt, former economist with the Dallas Fed and the world's
most successful bond manager; Jim Rickards,
money manager and author of Currency Crisis; John Mauldin,
best-selling author of Endgame and the just-released The Little Book of Bull's Eye Investing; John
Williams of ShadowStats fame; Porter Stansberry, founder of Stansberry
Research; Michael Lewitt, editor of The
Credit Strategist; Gordon Chang, China analyst; Harry Dent,
author of The Great Crash Ahead (who also debated James Rickards on the question of inflation or deflation); Andy
Miller on real estate; Greg Weldon of the Weldon Report; John
Hathaway of the Tocqueville Funds; resource market guru Rick Rule
of Sprott Asset Management; Caesar Bryan, a
senior portfolio manager for the Gabelli Fund
group; and David Stockman, the head of the Office of Management and
Budget during the Reagan administration.
(Plus, on the taking-action front, there was a special
panel on international diversification as well as panels where a dozen or so
experts on everything from gold stocks to uranium, to rare earths, to
graphite, to technology, to energy gave their best picks.)
In other words, a full program.
Then, immediately following the conclusion of our
summit, Olivier Garret, Casey Research CEO and partner, and I climbed on a
plane for California and John Mauldin's Strategic
Investment Conference.
John's event was geared more for hedge fund and
very-high-net-worth investors and, as such, included a more mainstream slate
of speakers, but what a slate it was.
For the better part of three days, Olivier and I
hunkered down to hear presentations and meet with the likes of: David
Rosenberg, the star analyst of Gluskin Sheff; H. "Woody" Brock, an economist
with some of the deepest credentials in the business (you can Google any of
these guys for bio info); economic historian and best-selling author Niall
Ferguson; Marc Faber of the Gloom, Doom and Boom Report; David
McWilliams, the popular and very erudite Irish economist; David
Harding of Winton Capital Management; Jeffrey Gundlach
of DoubleLine Capital; Lacy Hunt
again… and my favorite for this conference, Mohamed El-Erian of PIMCO fame.
In other words, for the better part of two weeks, I was
immersed in presentations and one-on-one discussions with truly some of the
smartest, best-studied people in the world today on economics and investment
markets – with the primary topic being whether the so-called recovery
is real, and the consequences if it falters.
While the speakers used a variety of methodologies to
approach the topic, when all was said, the only conclusion that could be
reached was that the world is headed for a very challenging period.
That conclusion was for the most part derived from
three aspects of the many presentations:
- Hard data. Tallying up all the charts and tables I viewed
and heard discussed over the last couple of weeks, if such a thing were
possible, would produce a number well in excess of 1,000. While there
were some that dealt in forward-looking projections, the vast majority
dealt with the here and now, as well as the historical context of how we
got here.
- What wasn't said. For business reasons, many of
the big-name money managers couldn't come right out and say that we were
heading for a crash, but they all took pains to communicate in not so
subtle ways that this was a likely outcome. Tellingly, not a single
speaker over the entire two-week period – at either event –
came out and said that we could expect a normal business-cycle recovery
to continue.
- The complete lack of practical discussion about how
the world can avoid hitting the wall. While the pessimism was palpable, even among the
usually perma-bull Wall Street types, at no
point did anyone espouse a politically feasible solution to avoid the
coming crash. The few who even attempted to point to a solution, at
best, mumbled platitudes about the politicians finding the spine to
adopt fiscal-austerity measures. One of the speakers – something
of a gas bag, it must be admitted – pronounced in all seriousness
that the only solution to the economic malaise was for everyone in
America to rush out and read his book.
As an aside, over the course of lunch with that same gas bag, we had a
discussion that went something like this:
[Me]
"All of the speakers, you included, point to the current trend of higher
debts and deficits and say they are untenable, and so the big economies will
hit a wall in the not-too-distant future. Yet hardly anyone actually then
defines what hitting the wall will look like."
[Him]
"Yes, well, things will likely get a bit messy if the politicians can't
pull together to address the structural problems in the economy."
"But
wouldn't you agree that, given the nature of our democracy, the odds of the
politicians taking action before we hit the wall are almost nil?"
"Not at
all. If everyone in this country would read my new book, they would
understand the situation and rise up to force their elected representatives
to take the right action."
"Seriously?
The only way to avoid the next leg down is if everyone in the US reads your
book? That's it?"
At which
point – I kid you not – he picked up his plate and changed
tables. (There's a reason I am only rarely allowed out in public.)
But the fact
remains that other than perhaps Doug Casey and a small handful of other
presenters at our conference, almost no one even attempted to anticipate just
what happens when the crisis swells up to its full height and then comes
crashing down.
Or,
specifically, what the consequences are likely to be when the world's largest
economies all hit the wall at more or less the same time. For the record, I
have compiled a list of the ten largest economies in the world, and a
reasonable assessment of their current situation follows in descending order
by size of GDP:
United States
– screwed
China –
really screwed
Japan –
massively screwed
Germany
– pretty screwed, especially in that export economies take a big hit in
a crisis
France
– le screwed!
Brazil
– somewhat screwed
United
Kingdom – blimey, screwed too
Italy –
properly screwed
Russia
– hardly screwed at all (lots of resources and next to no government
debt)
Canada
– pretty screwed, eh?
As concerning as it is to see how many of the world's
largest economies are in trouble, the biggest problem of all is that the
central bank reserves of virtually every country in the world are stuffed
with US government IOUs masquerading as tangible assets.
So, what happens when the world's reserve currency
enters collapse and the dollar turns into a hot potato? Don't know, but I'm
pretty sure we'll find out in the not-so-distant future.
[If you want your portfolio to be prepared for what's
ahead in the not-so-distant future, you'll want to have the insights
–including specific stock recommendations – the 31 speakers at
the Casey Research Recovery Reality Check Summit gave. And you can have
them: the Summit Audio Collection is available in either
instantly downloadable MP3 format or CDs.]
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