Doug Casey on Profiting from Government Stupidity

Interviewed by Louis James, Editor, International Speculator

Recently by Doug Casey: The Fourth Estate

Shortly after the conclusion of the Casey Research/Sprott, Inc. Navigating the Politicized Economy investor summit, Louis James sat down with Doug Casey to assess the conference and provide insights on how investors can win in today's distorted marketplace.

Even if you didn't attend the Navigating the Politicized Economy Summit, you can still profit from the plethora of actionable investment advice given there with the Summit Audio Collection.

TRANSCRIPT

Interviewed by Louis James, Chief Metal & Mining Investment Strategist, Casey Research

Louis James: Ladies and gentlemen, thanks for tuning in. We're in Carlsbad, California, with Doug Casey at our recently concluded Summit on Navigating the Politicized Economy.

So Doug, did you come out with any new ideas, or did your guru sense tune in on any new trends as a result of the input you had?

Doug Casey: It was one of our more interesting conferences, actually, though there was nothing that I didn't know and haven't thought about, to tell the truth. But putting these big arrows on a map with the people flowing and so forth, it kind of reminded me of the maps that they had in classrooms when I was in high school, showing the waves of Goths invading this way and Huns invading that way into Europe. These movements have been going on for thousands of years, and they will continue to go on, and the colors of the map on the wall are going to continue flowing.

L: That was Thomas Barnett's presentation, which I also found very interesting. But I wonder about it. On the one hand, his argument seemed to rely heavily on demographics, which I know you look at. So I thought of similarities between your thoughts and his in that way. On the other hand, he was making all these rather specific projections – decades out – and I wonder how much credence one can put on such projections.

Doug: Well, yes, and there were two things that were quite interesting but wrong in his presentation. He didn't take any consideration of economics. It was like when he talked about US military power – of which he's a great fan – that would continue. I wonder if, 25 years ago, he was thinking that Soviet military power would continue. But the US is heading for a brick wall economically, just as the Soviet Union did. All of these F-22s and B-2s and aircraft carrier groups and so forth, they are really just unaffordable. He never mentioned the fact that the US is running – even if you use cash accounting; forget about accrual accounting, which is much worse – a $1.5-trillion deficit per year. And it's going up, not down. And there's no way it can go down at this point, because Americans are not going to cut their military. In fact, Romney wants to spend more on military.

Americans love their military. It seems to be the only part of the government that at least has the faηade of being competent and honest. Of course, it's actually not that competent – it's about as competent as a heavily armed version of the post office. And is it honest? Well, maybe the average soldier is, but once you get up to the supply-sergeant level, not very much; and once you get up to the Pentagon level, not at all.

So he missed that part entirely, and the other part that he missed was he assumed that the nation-state would continue to exist. He did point out – which is a point I always like to make – that all of these countries in Africa and in Asia, certainly in the Middle East, are just arbitrary lines drawn on maps in boardrooms in Europe. They're going to come apart.

L: I did notice that. I remembered our conversation on Africa, when he was pointing out how the lines on the map don't match the ethnic lines and so on.

Doug: Well, did he steal if from me, or is he going to accuse me of stealing it from him? [Chuckles] I don't know, but it's just a fact. But I think that what he missed there is that the nation-state as an entity is actually on its way out. It doesn't serve a useful purpose.

L: Okay, that stimulates lots of thoughts. Any other key highlights that you want to zoom in on? Who really wowed you at the podium?

Doug: Well, there was nobody that I disagreed with at the podium that I can think of. Can you think of anybody that was really unsound other than –

L: I wouldn't say unsound.

Doug: – who has obviously spent just a wee bit too much time circulating around the Washington beltway talking to those types.

L: Karl Denninger has a different way of looking at things. I thought his take was very interesting. He focused on problems that we would agree with are problems, but his way of looking at them was quite different – much more mainstream – than ours.

Doug: What are you thinking?

L: His focus on medical expenses and how that's bankrupting the country, and on the housing situation not having been really cleared out yet. I would probably agree with both of those, but I would look more fundamentally, at things like the government running the printing press – why did the Fed cause the housing bubble? – and such, rather than the more mainstream view that these things happen.

Doug: That's right. I hate to make such a sweeping, seemingly overreaching statement, but almost all of the problems that we have in society are caused by the government. In the case of medical expenses, which he brought up, it seems pretty clear to me that absent government intervention, medical technology would be like computer technology – or for that matter almost any kind of technology – and costs would be going down.

L: Moore's Law.

Doug: Yes, Moore's Law would apply.

L: And he would agree with that. He says it's government law that is preventing that from happening.

Doug: He pointed out that there was something called EMTALA passed in 1986, that made it a law that anybody anywhere that's put in an ambulance has to be taken to the closest place and has to be treated, regardless of cost or consequences. That's a kind of free medical care that's reflected in costs. I remember there were times when I had to visit the emergency room during the '70s. I had a skydiving accident once… It wasn't the kind of skydiving accident where, well, it's usually more serious than an accident, but I hurt myself.

L: You're right here, so it can't have been the usual skydiving accident.

Doug: No. [Chuckles] But I went to the emergency room just outside of D.C. I was the only person there. You do that today, you've got an eight-hour wait, and you've got to cut your way through people that are using it. That's because of that law. Most people are unaware of it. They think it's just the way things are.

L: So Doug Casey's telling us the government is the problem. Big surprise. But it's good to hear that other people are seeing these things too. Now, how do we navigate through this, though? The theme of the conference was "navigating the politicized economy." How do we survive? How do we invest?

Doug: Well, at the next conference we have, I'm going to put together a new speech. Since I'm an amateur student of classical antiquity in general and the Roman Empire in particular, my speech will ask how much like Rome is the US? Which is to say, does what we are going through now resemble what Rome went through when it declined and fell?

L: How close to Nero are we?

Doug: [Laughs] Oh, I think we're past Nero at this point. And it does amuse me that Americans are – well, I don't think any Americans are really enthusiastic about this election. How can you enthusiastically support Obama or Romney? They're both empty suits. It's embarrassing, but it's pretty much like I always say about the Romans. They were so happy when Tiberius died; they figured things couldn't get worse, but then they got Caligula. And it kept going downhill more or less from there on. Well, there were a few upticks along the way, but that's where we're at today. It's a question of "choose your poison" as far as I'm concerned, from this point forward.

L: Okay, so again, having realized that we live in a politicized economy, it's not a free market, how does one navigate, how does one stay afloat?

Doug: Well, the way I see it, you've got to take advantage of the fact that it's a politicized economy. It's a very bad thing to have a politicized economy, because it's destructive of capital. It generally reduces the standard of living. It's a horrible thing. But you always have to look at the bright side; the government is going to create tremendous distortions and misallocations of capital by the very fact that it's involved, and that does present opportunities. It's not a time to be an investor, because an investor is somebody who allocates capital to create more capital, to grow wealth. That's what investing is all about. Speculation doesn't imply that at all. It's very different; speculation implies capitalizing on politically caused distortions in the marketplace.

And one giant one that we have right now – though a bit tricky to capitalize on – is the current bond bubble. First the Fed created a stock-market bubble in the late '90s, which collapsed in 2000. Then they blew up a real-estate bubble, which is still collapsing. I think both the stock market and the real-estate market are still overpriced, even though they've come down a lot. But the biggest bubble of all, and the most dangerous one, is the current bond bubble.

They've driven interest rates to basically zero levels – actually negative levels in some European countries, which is pretty unbelievable. I learn something new every day; I thought that negative interest rates were almost cosmically impossible, but I've learned different in recent months. This is creating huge distortions in the way people react and so forth. And of course, the biggest one of all is the bond market, which is going to collapse at some point. The time to have bought bonds was in the early '80s, when they were yielding 12, even 15%. Now they are yielding 0%, and everybody's buying them. It's unbelievable.

L: But that's really a sign of fear, which leads to the next bubble, the probable gold bubble. Or certain gold bubble?

Doug: I'd say it's a certain gold bubble. Looking at the bright side of the government doing all these stupid things, they will create other bubbles. It seems inevitable to me that gold and silver are going to be among them, because they are the only financial assets – and that's what they are, financial assets – that are not simultaneously somebody else's liability.

This is totally untrue of bonds. Bonds are a triple threat to your welfare. You've got the interest-rate threat. Interest rates could only go up at this point since they're at zero. You've got the credit-risk threat. Will they be able to pay back the dollars, or euros, or yen, or whatever that they are in? And you've got the currency threat. Will the yen or dollars or euros or whatever be worth anything, even if they pay them back to you? I don't see why, but everybody's buying bonds. Institutions are buying them, the average guy is buying them – trying to reach for 2% in yield when real inflation is probably running 5-6% per year. Who knows what it really is – the US is becoming like Argentina, where they disguise these numbers and don't admit the reality.

L: These are examples of the speculator's principle we've described to people. Speculators think about Ben Bernanke and his helicopters – government distortions. The idea is to figure out where the helicopter is going to go, where the wind is going to blow. The speculator asks: "Where is the money going to go as a result of government stupidity?", and stands there with a big net.

Doug: That's right, and I've got to put my finger on the precious metals. I've got to also put my finger on gold and silver stocks. I'm not very interested in base metals at this point, because I don't see the economies doing very well, and that's not going to help base metals. I wouldn't touch an iron-ore stock, for instance, at this point. But the gold and silver stocks are another thing, and they are actually quite cheap as we speak. It's very hard to find bargains in the investment world today. Everything's been inflated, but the gold and silver mining stocks are, I think, bouncing along the bottom.

L: Okay, well, words to the wise. Thank you very much, Doug.

September 21, 2012

Doug Casey (send him mail) is a best-selling author and chairman of Casey Research, LLC., publishers of Casey’s International Speculator.

Copyright © 2012 Casey Research

The Best of Doug Casey