Greetings from sunny Florida, where I have just spent the first day soaking up all of the information I can handle regarding what the experts believe about the state of our economy and so-called “recovery”.
The title of the conference is aptly named “Recovery Reality Check”, and it’s safe to say that exactly ZERO of the experts so far believe in our “recovery”…they all foresee a much darker future.
I’m going to jump right in as there is a lot to cover!
Doug Casey led things off with a rousing speech (he is always entertaining and educational—great combination!) about the total and complete bankruptcy of the U.S., which he believes is inevitable. (I love Doug—he doesn’t mince words and you never have to wonder what he thinks!) 🙂
Doug made the great point that there are some things more important than money, and that people want money for two reasons:
- To maintain a high standard of living
- To guarantee one’s personal freedom
Unfortunately, most people concentrate too much on #1, and not enough on #2.
In Doug’s view, your personal freedom is paramount and is seriously threatened today.
Doug didn’t get specific with investment recommendations, focusing instead on the importance of your personal freedom, which he believes is much more important than money.
In particular, Doug said that there are three actions you must take immediately if you have not already done so:
- You must get a foreign bank account and brokerage account and fund it mightily, and if you can, open up a foreign trust,
- You must physically have assets outside of the U.S. and/or Canada and/or wherever your home country is, particularly gold in a safe deposit box outside of your home country, and
- You must get another citizenship or passport outside of your home country.
He pointed to the fact that a bill was recently introduced in Congress where if you are accused of owing more than $50,000 to the IRS they can fail to issue you a U.S. passport OR they can cancel the one you already have! Therefore it is critical that you obtain another one.
Doug believes that a police state in the U.S. is inevitable, and he discussed at some length the gradual erosion of our personal liberties. (There is no parking, no speeding, no talking, no running, no diving, no smoking, no … a gigantic list of “no”’s!).
Unfortunately, he believes the “no”’s are going to get much, much worse before they get better, and urged us all to take the three action steps above.
Next up was Casey Research’s Chief Economist, Bud Conrad, who discussed the abysmal worldwide debt situation.
He plotted out all of the countries on a graph with general government gross debt on the vertical axis and current account balance on the horizontal axis, and sure enough, the countries in the worst shape are Greece, Spain, Portugal, and Italy, followed by France and the U.S. (and of course Japan).
Bud sees a possible opportunity in natural gas (as does Porter Stansberry—more on Porter next week), and said that gold is still good but gold stocks are cheaper.
He sees the following trends in store:
- The euro breaking up
- The Middle East conflict continuing
- Personal freedom continuing to be curtailed
- Incentives for printing money continue
- Crisis will not be fixed by adding more government debt
- Contagion will expand from Europe to Asia and to the U.S.
- Taxes are going up
Dr. Lacy Hunt
Next up after Bud was Dr. Lacy Hunt, an internationally known economist and executive vice president of Hoisington Investment Management Company, a firm that manages $5.8 billion for pension funds, endowments, insurance companies, and others. He’s also a well-known author and used to be chief US economist for the HSBC Group and senior economist for the Federal Reserve Bank of Dallas, in addition to running the top-performing fixed-income fund of the past 25 years.
Dr. Hunt knew his facts and gave an outstanding presentation. In most economic classes you are taught about equilibrium and transition, and much time is spent finding the “point” of equilibrium where the aggregate supply and demand curves intersect.
(Flashback to my oh-so-heinous economics experience many years ago…! I cringe remembering having to calculate so many integrals and derivatives…UGH!).
Dr. Hunt (I’m going to call him Lacy from here on out, as that is what everyone else called him) said the typical explanation of equilibrium and transitions uses an airplane metaphor—when the plane is on the ground it is in equilibrium, then it is in transition as it flies up to 30,000 ft, and once it levels out at 30,000 ft. or so it is then back in equilibrium again.
However, in the “real world” this is not how equilibrium and transitions work at all—transitions are never that short nor that smooth, and we spend most of our time in some sort of transition.
Currently, we are in a debt disequilibrium (transition).
We have too much debt-to-GDP and we are taking on more unproductive and counterproductive debt that does nothing other than finance our operating deficits, which really means we’re just financing our daily consumption and not creating any true economic growth whatsoever.
He pointed to the last few times in the past when our debt-to-GDP has been abysmal and talked about what had happened each time and how we “got out of it”:
We took on a lot of debt to build railroads all across America, and every single one of them failed except Great Northern (the only one privately financed). To get out of our massive debt we lived within our means (“austerity”) and paid down the debt, but it took almost twenty years to return back to “normal” (equilibrium).
After the Federal Reserve was created they pushed too much liquidity into the economy, causing massive speculations in real estate, equities, etc. (the “Roaring 20’s”). Many people believe that it was WWII that got us out of this massive debt after the Great Depression, but Lacy says it was again “austerity” and living within our means…the mandatory rationing of gasoline, sugar, and other essentials and the fact that our personal savings rate went to 25%.
In Japan, the “panic year” was 1989, when the Nikkei hit its all-time high. The Japanese government then embarked on their course of massive deficit spending—their total debt-to-GDP ratio at the beginning of this time period was 400%, and today it is 500%, but what is really interesting (and horrible) is that the GOVERNMENT portion of this debt went from 50% then to 200% today.
Japan has pumped debt into their economy, but into unproductive uses. Debt must produce income for it to be useful (just like for individuals…when you take on debt to buy crap / fund your consumer spending, it is bad, but if you take it on wisely to invest in an asset that pays you income on it, it is good).
Debt is the driving factor in the U.S. and in the world today.
Lacy also identified the point at which government debt begins to turn cancerous: when a country’s gross (total) debt rises above 90% of GDP. When this number is breached, median growth rates fall by 1% and average growth falls considerably more.
The U.S. total debt-to-GDP is 360%.
And then there is China…
He brought out a McKinsey Global Institute study on China with the following sobering numbers:
- Officially reported debt-to-GDP: 16.3%
- Hidden liabilities: 144.0%
- Total Debt including hidden liabilities: 160%
- Personal consumption expenditures as percentage of GDP: 30.0%
- Investment as a percentage of GDP: 70%
- China’s growth target for 2012: 7.5%…the slowest in 22 years
He encouraged all of us to read a book called Red Capitalism: The Fragile Financial Foundation of China’s Extrordinary Rise, by Carl E. Walter and Fraser JT Howie (which is where he obtained the numbers on China).
There are 4 archetypes of the de-leveraging process:
- Belt tightening — most common
- High inflation — in the absence of strong central banks, most commonly in emerging markets
- Massive default — often after a currency crisis
- Growing out of debt
Lacy pointed out that GDP measures spending, not prosperity. Income measures prosperity, and we need productivity to generate income.
In the first quarter of this year, we had a modest gain in GDP, but real disposable per capita income declined.
He also said that the velocity of money peaked in 1997, and when debt is rising but the velocity of money is falling, that is a sure sign of unproductive / counterproductive debt.
Echoing Doug, he said that the “bang point” for countries is when they realize this and can only spend what their tax revenues are (KFG note: imagine that— living within a budget! end-sarcasm) :)….which causes social panics.
Later in the day Lacy said something that rather echoes Doug again, but in slightly different words:
Income measures what you contribute to society.
Spending measures what you take from society.
This is what Doug is always referring to when he talks about producing more than you consume and saving the difference, and what I discussed last Friday about the importance of value creation…that point where you are contributing more to society than you are taking from it (when you are free of bad-debt). Obviously there are other measures of value in the world like love, gratitude, etc. (speaking as a former stay-at-home parent!) but in pure economic terms, this is a crucial concept!
I’m going to leave it there for today as my head is literally swimming and we are already well over 1500 words and enough doom and gloom for you to handle on a Friday as you roll into your weekend!
I’ll be back next week with many more updates and insights from the conference—including more from today from Rick Rule, Porter Stansberry, Jon Mauldin, and Michael Lewitt, plus a roundtable of four explorers (actually one is a producer): Exeter, Pretium, Great Panther Silver, and New Pacific Metals.
So much more to share! Thank you again for all of your great comments (I am behind in responding but will do so this weekend!) and for being a part of our Kung Fu Finance community! I am looking forward to meeting more of you in person soon!
I hope you have a wonderful weekend, and I’ll talk to you next week!
To your financial success,
— Kung Fu Girl