Crisis Investing for the Rest of the '90s by Douglas Casey - Excerpts

Crisis Investing for the Rest of the '90s. Douglas Casey. 1995. ISBN-13: 978-0806516127

EXCERPTS

At a minimum we're headed for a financial collapse. A financial collapse does not mean that any real assets disappear. It means that assets change ownership. The buildings, factories, machines, and technology that were created during good times do not vanish just because the stocks, bonds, and bank accounts that represent them are devalued or dishonored. Nor does the desire of people to create and produce vanish when their finances go bad; instead they may become even more motivated.

My belief ... is that when this business cycle peaks and the market distortions and the misallocations of capital forced by the government's intervention in the economy are finally unwound, the consequences will probably reach far beyond the economic sphere.

Why should a depression occur now? A depression could have materialized out of any of the credit crunches in the last three decades, including the financial squeezes of 1962, 1966, 1970, 1974, 1980 and 1982. With each episode inflation went higher, interest rates rose, unemployment increased, and the bankruptcies were bigger. Near bankruptcies (such as Lockheed, New York City, Chrysler, Continental Bank) became more numerous and dangerous and more likely to demand a government rescue. But each time we experienced just a recession that the government ended before the underlying distortions in the economy had been eliminated. And each time the authorities succeeded in preventing a financial collapse, the system became more carelessly confident of government doing so the next time.

The depression of the 1930s was deepened , and was prolonged for years, by Hoover's and Roosevelt's interventionist policies. The Work Projects Administration (WPA), the National Recovery Administration (NRA), the Tennessee Valley Authority (TVA), the Federal Deposit Insurance Corporation (FDIC) and numerous other New Deal creations not only prevented the economy from cleansing itself, they also produced new distortions in the economy. Roosevelt's "solutions" to the depression were almost identical to Hoover's, but Roosevelt's public relations was far superior, enabling him to position himself as the savior of capitalism even while he lengthened the depression.

Socialism is not a serious intellectual challenge. It persists because it expresses so well and underlying set of spiritual and psychological problems. Few reasonable people who have actually looked at the historic results of socialism honestly believe government intervention is the solution to economic problems, rather than the cause. But how someone reacts to economic ideas is much more a question of values and psychology than of intelligence and knowledge.

In fact, most "economists" turn out to be merely political apologists. They prescribe the way they would like the world to work and tailor their theories to help politicians demonstrate the virtue and necessity of their quest for more power.

Politics deals with who decides who gets what, how, why, and when. It deals with how men cooperate with, and compete against, one another in the process not of producing wealth, but of taking it.

Confidence is considered a critical commodity today, because the dollar and the economy itself rest on confidence alone. Yet confidence can vanish like a pile of feathers in a hurricane, once the extent of our problems becomes clear. Confidence in the economy is a very shaky foundation upon which to build your future. I suggest you lose that confidence now and beat the last-minute rush.

Every thinking person must be his own economist, simply because everyone needs a worldview to deal with reality. You can't delegate it to an "expert" any more than you can delegate the formulation of your personal philosophy and ethics to someone else. You need to decide whether we're to experience prosperity or a depression, and how you want to prepare.

A depression is an economic crisis with both danger and opportunity. Everyone will feel the danger, but those who see the opportunity will profit from the crisis. After all, one function of a depression is to return wealth to its rightful owners ... Disaster-caused depressions destroy wealth and make it harder to produce more. Economically caused depressions, through regulations, make it impossible, or at least unprofitable, for the average person to produce wealth.

A real estate collapse doesn't mean the buildings will tumble. But their prices will and their owners may change. A corporation's bankruptcy doesn't mean that the factories or technology it owned will vanish; they will become the property of a different corporation. A government default on its bonds doesn't mean the country (which is not at all the same thing as the government) is bankrupt. It just means that those who held the bonds are poorer and those who otherwise would have been taxed to pay the bonds are richer. In other words, all the real wealth will still be there, but its ownership will change. And some commodities will become more (or less) valuable relative to other commodities.

Because the banks have just taken in billions of dollars, courtesy of the government, they have plenty of money to lend, and at very low rates. "Interest" is the rental price of money, and with money in such ample supply, the price drops. Like any other business with excess capacity, the bankers have a "special" on money.

A recession follows an inflationary boom when the market tries to readjust to normal patterns of supply and demand. It's a painful period when the free market corrects the misallocation of resources encouraged by government inflation. People have more of some consumer products than ever, and there is more plant capacity to produce those products, but few people are as well off as they were before the inflation. They're actually less well off than if the government had only taxed them.

The contraction will be called a recession if the government acts quickly and reinflates the money supply in time to prevent complete collapse. It will be called a depression if the government decides not to act, acts too late, or acts with too little reinflation. In other words, it will be a depression if the government allows the economy to cleanse itself of the distortions that have occurred due to earlier government intervention and inflation; it will be a recession if the government steps in before the liquidation is complete.

At some point, the economy is no longer controlled by individual citizens in the marketplace but by government "planners", who find they have only one of two alternatives: stop "stimulating" and permit a full-scale credit collapse, or continue stimulating until the dollar loses all value and society breaks down. Depending on which they choose, we will have a depression characterized by deflation or by hyperinflation.

"Inflation" occurs when the creation of currency outruns the creation of real wealth it can bid for. It isn't caused by price increases; rather it causes price increases. Inflation is not caused by the butcher, the baker, or the auto maker, although they usually get the blame. On the contrary, by producing real wealth, they fight the effects of inflation. Inflation is the work of the government alone, since government alone controls the creation of dollars.

If taxation is the expropriation of wealth by force, then inflation is its expropriation by fraud.

Money is the means by which all other material goods are valued. It represents, in an objective way, the hours of one's life spent in acquiring it. And if enough money allows one to live life as one wishes, it represents freedom as well. It represents all the good things one hopes to have, do, and provide for others. Money is life concentrated.

Only the rich can afford the legal counsel it takes to weave and dodge through the laws that restrict the masses. The rich can afford the accountants to chart a path through loopholes in the tax law. The rich have the credit to borrow and thereby profit from inflation. The rich can pay to influence how the government distorts the economy, so that the distortions are profitable to them.

Always, and without exception, the most socialistic, or centrally planned, economies have the most unequal distribution of wealth. In those societies the unprincipled become rich, and the rich stay that way, through political power.

At any given moment a fixed amount of capital in the world is available for borrowing. The government is considered the most creditworthy borrower, since it has what amounts to a 100 percent lien on all the wealth in its bailiwick, so it can borrow all it wants, and at the lowest rates. Why should anyone lend to a business, which could go bankrupt, when the government is available? The ultimate result is "crowding out". The potential for real problems first arose in the middle of the 1970s; as of 1991, the government consumed approximately 79 percent of all new credit.

A better term for the underground economy might be the "alternative economy", since "underground" has acquired a somewhat pejorative connotation. The alternative economy, which includes everything from barter of services to the millions who don't file tax returns, obey regulations, or purchase licenses to do business, is simply the untaxed, unregulated free market in action. It runs the way business did in the early part of the century, before the income tax, the Federal Reserve, and most regulatory agencies. In the alternative economy, the sellers earn more, the buyers pay less, and the State is shut out. Everyone wins, except those who are fed by the government.

Being on the wrong side of a bear market is somewhat comparable to the progressive stages of people when they discover they have contracted a terminal disease. First comes denial, then anger and blame, then false hope and grasping at straws, then finally acceptance and resignation. Only then is the market really dead and ready for reincarnation.

Big companies have always had an edge when it comes to manipulating and gaining from the government's regulations and tax rules. In fact, they have often been strong proponents of government intervention, because it can help the established companies stave off new competition. Large corporations have an innate advantage in getting government contracts and otherwise feeding at the public trough. It's much easier for Big Government to deal with Big Business and Big Labor on Big Deals. But the tenor of the times has turned against them; only government has continued to grow, because it alone has the legal power to coerce. Like a cancer, it's reaching its largest size at the very time its host, the Mass Economy, is dying.

Small business is stagnating for several reasons. First, loan capital is tough to come by, even with interest rates very low ... Second, regulatory hassles - everything from sexual harassment liability to making the premises accessible to the handicapped to zero-tolerance environmental policy - have driven the costs, and liability, of doing business beyond the level small outfits can handle ... Third, the associated costs of starting a new business - taxes, license fees, legal fees, medical and other insurance - are far higher than in the past ... All these problems stem from the government. Perversely, they're all likely to get much worse as the malaise of the Greater Depression deepens.

The main reason for shorting stocks is the reason you are in the stock market in the first place: personal profit. There are, of course, risks peculiar to shorting, and I'll cover them below. But on the whole, this is perhaps the single, most-profitable thing you can do in the market year in and year out, in good times and bad.

If "everyone" owns a stock, then all the potential buyers have already bought; and there's only one thing they can do: sell. Perversely, they'll all sell at once.

People invest in mutual funds because they believe the funds relieve them of need to be cautious. They hope the funds will beat the market, which a lot of mutual fund advertising seems to promise. The industry as a whole, however, underperforms the market; that was, you will recall, one of the reasons for the creation of index funds.

When an institution sells, the only likely buyer is another fun; but they'll all be selling together, for the same reasons. That kind of thing can put a market into freefall. Vacuums could develop under stocks with heavy institutional ownership. Their chart patterns would resemble the glide path of an ICBM on re-entry. Index funds will likely lead the way.

Short-term U.S. Treasuries - It's hard to conceive of them defaulting unless there's a domestic revolution or the government loses a major war. That they are redeemable only in paper dollars, which have no intrinsic worth, is beside the point. In today's moving paper fantasy, you must pretend U.S. Treasuries are "good as gold", since they are, by far, the safest way to own dollars.

Bonds should be viewed as vehicles for speculation on the direction of long-term rates, not something for those investors who want safety and capital conservation. They are political footballs that will be passed dozens of times in the years to come by the intellectuals making a game out of "fine tuning" the economy. You can bet that the ball is going to be dropped at some point.

... brokers like to keep things simple rather than risk confusing a customer; they're in sales, not the education business.

Smart places to live might be Nevada or Washington, close to the Oregon border, or in Wyoming, close to the Montana line. You would pay no income tax where you live, but could make all your purchases where no sales tax is levied.

Political jurisdictions compete to provide a favorable environment for corporations. Sound good? It's not, unless you naively think that what's good for management is good for the shareholders. Management prefers jurisdictions where the law keeps the owners from becoming a nuisance. That is why most corporations are headquartered in Delaware; laws in that state make it easy for management to get its way, as opposed to guarding the rights of shareholders. Delaware receives about 20 percent of its budget from the corporation business, and its officials know what side their bread is buttered on.

Most companies subject to takeovers are vulnerable only because their stock price is low relative to their assets. And that happens when the assets are being misallocated and the market has no confidence in management's abilities to correct the error. In fact, a company can usually be acquired only if management owns no more than a token care of stock. And if the managers are not also owners, why should they care what the business is worth, as long as they keep their jobs? Most managers of big corporations own very little stock in them; arguably, that is because they can see it's a poor long-term investment.

Unlike currency, gold cannot lose value because of government mismanagement. On the contrary, it tends to gain value because of government mismanagement.

Gold ... is a matchless crisis hedge. It's the only financial asset that's completely invisible and private. There are no social security numbers stamped on gold coins, and they leave no paper trail when they change hands. Unlike real estate, for instance, a government cannot easily find gold to tax or confiscate. Unlike stocks, gold doesn't represent a value that can be dissipated or mismanaged. Unlike bonds, gold cannot default. And unlike currency, gold cannot be inflated away. There are not many low-risk places for wealth to hide today. But plenty of wealth exists and, as the world's greatest coward, capital will look for a place to hide when things get scary. Gold is the perfect financial asset in times of uncertainty.

The art of investing emphasizes inaction as much as it does action. Success is a long-term proposition, and most of your time should be spent patiently hunting for the fattest prizes, not frenetically chasing after every mangy stray. Given transaction costs and the vagaries of your own mind set, an even-odds bet is inevitably a fool's bet. You want anomalies where risk and reward are heavily weighted in your favor, where the arguments that you'll be right are so compelling that you are almost forced to act.

The most important question about any investment is: What is the downside?

Government quotas, subsidies, supports, taxes, and marketing regulations are the greatest cause of commodities' volatility; they alternatively cause disruptive shortages and wasteful surpluses. Government intervention gives the appearance of stability over the short-run, but at great cost to both the producer and consumer in the long-run. This offers great opportunities to speculators.

Rather than just deregulate, it would be more in character for the powers that be to create the conditions for a famine in order to get prices up to subsidize inefficient farmers. You may think I'm stretching the point. But the U.S. government cause the slaughter and burial of whole herds of livestock, and poured tons of milk in the gutter during the '30s in a futile attempt to raise prices, even while many people couldn't afford to eat.

The world may still be on a honeymoon following the collapse of communism, but it's hardly the end of history. The fundamental cause of war and revolution still exists, namely, politics. And, to a lesser extent, just plain geography.

Most people do not want to hear the bearish argument for real estate, since by far their largest asset is their house. For the average American family a house is much more than a home; it's a combination investment, savings program, tax shelter, and retirement program. A crash in housing prices would be more devaluating than a stock market crash, not only financially but psychologically.

Real estate has traditionally been the most debt-leveraged of all markets. In the United States, few people can buy real estate, and few people can sell, without borrowing money. Getting a mortgage has always been integral to buying a house except for the very rich. The easy availability of cheap mortgages is the most important single reason that real estate prices increased faster than consumer prices from the '50s through the '70s. U.S. real estate prices are built on a pyramid of long-term mortgage money.

You can't hide real estate, which makes it the most taxable of all investments. Many local governments are in deep financial trouble, and property taxes are excellent candidates for "revenue enhancement". Property taxes also suit the envy-driven, tax-the-rich hysteria that is likely to grow as the average person's standard of living declines.

Taxes, like every form of government action, cause distortions and misallocations of capital. Taxes induce people to act in ways they otherwise would not. And, in what will become a desperate quest for revenue, the government will unwind the tax breaks that have favored real estate over many decades. As a result the distortions those breaks caused will also come apart. Artificially high property prices will tumble.

It's one thing to arrive at a conclusion that U.S. property has entered on a long-term bear market. But it is priced in dollars, and it seems an even surer bet that dollars are eventually going to zero. Instead of seeing the mortgage as a means to buy property, it might be a better idea to view a mortgage as a way to short sell the dollar. It's convenient for borrowers, therefore, that the fixed rate mortgage is still available. I don't like the idea of paying interest. I would rather collect it. Nor do I like the idea of being in debt; it limits your options and puts at risk. But fixed-interest debt remains an excellent defense against a collapsing currency.

The speculator provides a public service by offering a bid when otherwise none is available. A speculator simply gives people what they want most of the time. When prices are high and everyone seeks property, he endeavors to keep prices from going even higher by providing a supply. And when prices are low and everyone desperately needs cash, he once again bows to the will of the market. Buying low and selling high is helpful to people when they need cash more than land.

Foreign aid might accurately be described as a transfer from poor people in rich countries to rich people in poor countries.

When going to a place like Mozambique is suggested to most people, their first reaction is they would feel safer in Miami when they want warm weather. But those who buy a dumpy studio apartment in Miami will someday wonder why they didn't go for a large farm on the African coast instead. The reason, of course, is that they are provincial and not very imaginative and probably, alas, belong in Miami.

The failure of Credit Anstalt in Austria, a bank few Americans knew of, sparked the 1929 depression.

Despite recent large sell-offs, Japan's stock and property markets are not cheap. Prices continue to reflect the good times of the last few decades. The next few years will probably be grim enough to shake up price perceptions; views ingrained over many years do not turn on a dime. As with most historic events, Japan's crisis will not bottom out until the collapse of its financial markets is the headline in every magazine and newspaper around the world.

A collapse in Tokyo, therefore, wouldn't just be a story on the evening news; it could be the signal for a worldwide financial and economic catastrophe. There is no rule that says a depression in America has to be made here; everything is imported these days.

Every nation is insufferably nationalistic. Unfortunately, the Japanese and the Americans are two of the worst offenders and believe that anyone who is not one of them is genetically disadvantaged. Moreover, they are radically different cultures, leaving plenty of room for miscommunication, or worse.

The weapons business is the biggest in the world, bigger even than illegal drugs, and the Japanese have almost no participation there. With their tremendous abilities to produce to high standards and innovate, the Japanese should surpass the American, Russian, British, French, and other arms manufacturers as easily as they did the automakers. Arms will, before the end of the decade, be a perfect area to pick up the slack created by dropping consumer goods exports.

As bad as things were in the United States in the '30s, people still had businesses, savings, and farms - and incentives to rebuild. And the system allowed them to start anew. The Russians have none of that. They own little; the state owns everything. And since the state already owns everything, it has nothing to tax.

We're still paying for the Vietnam War, since it was fought with 100 percent borrowed money. $160 billion over about twenty years at about 8 percent compounded is already $640 billion, and growing at about $50 billion a year. The bill for the instant gratification in Iraq will also grow for years.

Military prowess is a poor substitute for the real roots of greatness, or even for economic power, as the Russians have just discovered and as the Germans and Japanese learned in World War II or the Romans found in the late empire. War is the most unpredictable of human activities, has unintended consequences, and can take on a life of its own.

In a just society, law concerns itself with only two matters: contracts (have you done all that you agreed to do?) and torts ( have you encroached upon another's person or property?). There are encompassed by "common law". Common law, determining right and wrong, is based on principles of justice that can be considered universal in societies. That is vastly different from "legislation" or "political law", which is arbitrarily constructed by officials. Legislation mostly deals with what have come to be known as "victimless crimes".

The U.N. Convention against Illicit Traffic in Narcotic Drugs defines money laundering as "the concealment or disguise of the true nature, source, disposition, movement, or ownership of proceeds and includes the movement or conversion of proceeds by electronic transmission." The treaty does not specify that the proceeds need be from any illegal activity; the simple act of protecting your financial privacy leaves you open to sanctions. About seventy nations, including the United States since 1990, are signatories to this treaty, and treaties have the effect of law within the United States.

Some Americans simplistically believe an opposition to the war on drugs amounts to an endorsement of drugs and an unwillingness to see their destructive effects on society eliminated. I see drug use as a debilitating at best and tend to eschew the company of those who use them. But destroying liberty isn't an even remotely acceptable method to discourage drug addiction. Nor is it effective.

Government sponsors untold waste, criminality, and inequality, in every sphere of life it touches, giving little of value in return. Its contributions to the commonweal are wars, pogroms, confiscations, persecutions, taxation, regulation, and inflation. And it's not just some governments of which that's true, although some are clearly much worse than others. It's an inherent characteristic of all government.

Force is the essence of government. But the possession of a monopoly on force almost inevitably requires a territory, and maintaining control of territory is considered the test of a "successful" government. Would any "terrorist" organization be more "legitimate" if it had its own country? Absolutely. Would it be any less vicious or predatory by that fact? No, just as most governments today (the ex-Communist countries and the kleptocracies of the Third World being the best examples), demonstrate. Governments can be much more dangerous than the mobs that gave them birth.

In general, government judicial systems are far more concerned about crimes against the state than crimes against the individual. In China, as the Tiananmen Square revolt demonstrated, the gravest crime consists of agitation for democracy; in the United States, it consists of nonsupport of the government by refusing to pay taxes or obey regulations. And in all cases a show of humility, a respectful attitude, and the renunciation of politically incorrect ideas are required.

In the perverse "real world" of today ... the police, courts, and the military are among the least significant parts of government; moreover, government fails to produce quality products in any other worthwhile area it pursues, such as education. Indeed, its main products are taxation, regulation, inflation, and wealth redistribution, which all eventually destroy their supposed beneficiaries as surely as they do those who are taxed overtly.

Politics is the theory and practice of government. It concerns itself with how force should be applied in controlling people, which is to say, in restricting their freedom. It should be analyzed on that basis.

QUOTATIONS

Bakunin, Michael
Ever since States came into existence, the political world has always been and still continues to be the state for high knavery and unsurpassed brigandage – brigandage and knavery which are held in high honor, since they are ordained by patriotism, by transcendent morality, and by the supreme interest of the State. This explains to us why all the history of ancient and modern States is nothing more than a series of revolting crimes; why present and past kings and ministers of all times and all countries – statesmen, diplomats, bureaucrats, and warriors – if judged from the point of view of simple morality and human justice, deserve a thousand times the gallows or penal servitude. For there is no terror, cruelty, sacrilege, perjury, imposture, infamous transaction, cynical theft, brazen robbery, or foul treason which has not been and is not still being committed daily by representatives of the State.

Lord Byron
Ready money is Aladdin's Lamp.

Edwards, Bo
The Bill of Rights applies to criminal cases. For example, the right to have a lawyer, the right to a trial by jury, and the government must prove its case beyond a reasonable doubt. None of those rights apply in a civil case where the government is bringing a civil forfeiture case against your property.

O'Rourke, P.J.
Every government is a parliament of whores. The trouble is, in a democracy, the whores are us.

Jean-Francois Revel
Authoritarian socialism has failed almost everywhere, but you will not find a single Marxist who will say it has failed because it was wrong or impractical. He will say it has failed because nobody went far enough with it. So failure never proves a myth is wrong.

Nathan Rothschild
Buy when blood is running in the streets.

Paul Samuelson (Nobel laureate, in 1989)
What really counts is results, and there can be no doubt that the Soviet planning system has been a powerful engine for economic growth

Paul Samuelson (Nobel laureate, in 1989)
The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.

Mark Skousen
Taxation is the price we pay for failing to build a civilized society. The higher the tax level, the greater the failure. A centrally planned totalitarian state is a complete failure of civilization, while a totally voluntary society is its ultimate success.

Gore Vidal
Free enterprise ended in the United States a good many years ago. Big oil, big steel, big agriculture avoid the open marketplace.