THE GREATER DEPRESSION IS UPON US

 

David Galland, Managing Director
Casey Research

July 22, 2011 

The phrase “Greater Depression” was coined by Doug Casey a decade or so back as a way of describing the economic crisis he foresaw as inevitable, and which is now materializing.

Because I think it is important for every organization to constantly challenge its own assumptions, I’ve long acted as something of a devil’s advocate here at Casey Research. By constantly pushing our analysts to revisit their assumptions and calculations, it is my firm intention for us to spot the fork in the road that indicates it is time to shift strategies away from investments designed to do well in the face of a currency debasement and to something else.

Being attentive to that fork in the road is hugely important, because even though we urge our subscribers not to overdo their exposure to inflation hedges, we recognize that many do. Many a good person had their clocks cleaned in the early 1980s solely because they had become overly enamored of their precious metals ~ so much so that they stopped thinking of them as an asset class and began thinking of them more in the terms one might associate with an amorous dinner date. Thus these investors were utterly unprepared when said date stood up and broke a dinner plate over their heads.

With that brief setup, I want to make our views clear: While we correctly anticipated the recent correction in precious metals, this correction is but a blip in a secular bull market that is very much intact.

Doug Casey has often said that the unfolding crisis is going to be even worse than he expects (which is saying something), and the longer the rest of us at Casey Research study the tea leaves, it is hard to disagree that the Greater Depression is still ahead.

Consider:

A) The eurozone is growing increasingly desperate.

Watching the heads of Europe dither and debate over further bailouts to the unhappy Greeks and other troubled PIIGS ~ before ultimately reaching back into the pockets of the equally unhappy citizens in Germany and the decreasing number of still-functioning economies in the eurozone ~ reminds me of a down-on-his-luck blackjack player.

He’s mortgaged his home to play the game but is now down to his last chips. He doesn’t want to risk his remaining resources but has no choice, because to walk away now will mean taking up residence in a cardboard box. And so, reluctantly, he shoves across another pile. The problem is that the game is rigged ~ and not in his favor. As the PIIGS start to default and either leave the eurozone entirely or are shunted off into some sort of sidecar organization, there will be great volatility in the euro and in the European markets.

B) The U.S. debt situation is far worse than anyone in Washington is willing to admit. 

We keep hearing calls for more, not less debt creation. But if people would stop kidding themselves and tally up all the many demands the U.S. government has against it, the actual debt-to-GDP ratio rises to something on the order of 400% ~ and even that is likely understating things.

The fundamental flaws in the U.S. monetary system ~ flaws that have given license to the bureaucrats to smash the limousine of state straight into a wall ~ have required a remaking every 20 to 30 years or so. The problem is that there is pretty much nothing else that can be done to save the status quo at this point, and so the monetary system is likely to collapse. That means big changes ahead, including ~ or perhaps starting with ~ a poisonous ratcheting up of interest rates.

C) China’s miracle mirage. 

While having aspects of a free market, the hard truth is that China is run as a command economy by a cadre of communist holdovers. This is apparent in the cities that have been built for no purpose other than creating jobs and boosting GDP. It is also apparent in the growing inflation in China ~ the inevitable knock-on of the government’s decision to yank on the levers of money creation harder than any other nation at the onset of the Greater Depression.

Meanwhile, signs of social unrest crop up here and there. Though so far they have been swiftly put down, there is no question that the ruling elite has to walk a very fine line. If the Chinese economy stumbles seriously, all bets are off. That we are talking about the world’s second-largest economy means this is not of small consequence.

D) Japan is essentially offline.

Reports from friends in Japan ~ including one who was initially skeptical about the scale of the problems at Fukushima ~ have now changed in tone by 180 degrees. You can almost feel the growing sense of desperation as the already massively indebted nation begins to slide toward an abyss. There is little standing in the way of the world’s third-largest economy’s slide.

E) The Middle East is in flames. 

This, too, is far from settled. As usual, the U.S. government has been hopping here and there in an attempt to maintain its influence, but at this point pretty much everything is up for grabs. The odds of the U.S. retaining the same level of influence in the region that it has enjoyed over the last century are slim to none, especially now that even the Saudis are shipping more of their oil to China than to the U.S. Again, big changes are ahead.

I’m convinced that nearly everything about today’s world is going to change over the coming decade… much of it for the worse.

But that doesn’t mean that people ~ you ~ can’t come through this in more or less good shape, just as our parents and grandparents made it intact through the last Great Depression. Pay attention and take action, and you’ll do far, far better than most.

SOME INVESTMENT IDEAS…

First and foremost, protect yourself against the collapse of the U.S. monetary system. It is not as simple as ducking into the nearest coin store and loading up, though that should certainly be one part of your strategy. Between now and the endgame that leads into what we can only hope will be a new money based on something tangible, there will periodically be opportunities to make big moves with your portfolio.

I could give you a big pitch for our precious-metals-oriented services here, but won’t.

As Doug also likes to say, you should do whatever you want in this world, as long as you are willing to accept the consequences. If you are willing to risk going down with the ship, then do nothing.

Some other investible ideas…

Everyday essentials. Energy is the classic essential. Sure, energy use and prices will ebb and flow with the economy, but ultimately everyone uses energy every day, and the people in emerging markets want to use a lot more of it. Carefully thought-out investments in energy, ideally bought on the dips, belong in everyone’s long-term portfolio.

Breakthroughs to a brighter future. Throughout modern history, companies that make significant technological advances transcend bad economic times. Do you think that the company that finds a cure for a common variety of cancer will be weighed down, even by a stock market crash? Hardly. In cautious amounts, these sorts of potential breakthrough stocks belong in your portfolio.

Investing in the inevitable. A ton of charts and data point to just how unusual and unsustainable today’s low, low U.S. interest rates are. When these sorts of baseline trends eventually change direction, they tend to move in the new direction for years, and even decades. No one can pick the bottom, but anyone who is paying even a little attention can and should be getting positioned to profit from a sea change in U.S. interest rates while they still can.

One foot over the border. History has shown that having even one foot over the border can make the difference between losing everything and coming out just fine. Internationalizing your assets is not always easy or convenient, but that doesn’t make it any less urgent that you do so.

As for crisis investments, no one has been focused on that longer or better than Doug Casey and the team here.

The bottom line is that while the scale of the crisis is beginning to become more widely apparent, and reading and thinking about it can become fatiguing for those of us who have been on this story from the beginning, the base case for a Greater Depression is fully intact. 

We need to gird our loins and continue to take active measures to prepare ~ with the caveat that even in this base case, there are prudent measures you can take to ensure that not all your eggs are in one basket.

[Gold and silver are still the best protection for any portfolio… especially now that China and other countries are getting ready to dump the U.S. dollar. Read more on how dangerous the situation is, and how you can come out ahead – free report here.]