Economic Predictions
Article: Doug Casey on 2013 Interviewed by Louis
James, Editor, International Speculator | January 4, 2013
L: So Doug, the world didn't
end in 2012, so it's onward into another new year. It's
time to tune in to your guru-vision and tell us what trends
you see shaping up and what actions they imply taking.
Doug: Yes, it looks like
the Mayans missed this one; perhaps they'll get another
kick at the cat a few millennia from now when it's once
more time to turn the page on their calendar. Better luck
next time, Mayan astrologers! But although nothing seems
to be happening on that front, it's appropriate that I'm
speaking to you from Punta del Este in Uruguay, which is
one of the most happening places in the world at this time
of year – North American and European winter, South
American summer. I went to a New Year's Eve party last night
with some rather interesting temporary denizens of the place,
and of course this was the subject of much conversation.
None of them happened to be American, incidentally, and
all but one – who is very involved in local politics
– is extremely bearish on 2013.
L: Do you mean bearish on the
global economy? Bearish on geopolitics? Or bearish on civilization
itself?
Doug: All of the above.
A "Mad Max" type outcome is definitely a possibility,
as much as I hate to anticipate something really serious
– as opposed to just a financial/economic meltdown.
But the West has a huge amount of accumulated capital that
it can still dissipate – a task the politicians are
working on diligently. I expect the US will get a VAT, and/or
an asset tax. Perhaps they'll take a page from Cristina
Kirchner's book and nationalize everyone's pension –
for the good of the government, as well as the safety of
the pensioners, of course. In the near term, we're looking
at increased tensions of every kind around the globe, and
greater market volatility.
By the way, we enjoyed a professional-grade
fireworks display put on by our host in his back yard. It
struck me that I was witnessing exactly the kind of freedom
that makes me like living down here so much, and makes me
dislike returning to the US. In the US, you'd have to be
a city to put on that kind of fireworks show, or go through
God-know-what sort of licensing to get the explosives involved.
The smell of gunpowder at midnight is most invigorating,
especially mixed with the smoke of Cuban cigars.
I'm not saying Uruguay is totally free,
especially not economically – the president is actually
a communist. But he's a surprisingly mellow communist, and
not at all corrupt. Most unusual, actually. He lives on
a small farm and drives an old car. Of course the things
he's doing – raising welfare benefits, eliminating
financial privacy, initiating an income tax, and letting
petty thieves run wild, among many other things –
are making the place much less desirable to hang out.
L: So, aside from economically
stupid laws, they let people do pretty much as they will
with their personal lives?
Doug: That's the good news.
It's a quiet, unambitious, backward, bureaucratic little
country. But they still pretty much leave you alone. And
strange things can happen. At the party I mentioned, a friend
who mostly lives in Argentina told me about what was in
Sunday's El Pais, the national paper. It turns out that
a top local politician – most of whom are socialists
or ex-communists – just discovered Frederic Bastiat's
book, The Law. He was so taken with the free-market ideas
in it, he had the entirety of the book published as an insert
in the paper, at his own expense. I don't know how many
people will actually read it, and I doubt it will have much
effect, but as a possible straw in the wind, it's pretty
interesting. Shocking, actually.
L: A hundred years ago you might
have seen a copy of The Communist Manifesto, so perhaps
the pendulum will swing back in our direction in the next
hundred years. A good reminder that it's important to internationalize
both one's assets and one's lifestyle. It's hard to predict
what will happen in any given country, although the trend
is going from bad to worse just about everywhere.
Doug: Yes; as the Greater
Depression deepens, governments all around the world are
going to get increasingly desperate, take increasingly stupid
measures, and the people on the bottom rungs of the ladder
– the very ones the governments will claim to be helping
– are going to get pushed off in greater and greater
numbers. That's going to make for more social unrest, vandalism,
and violence all around the world. It's wise to find a crib
away from likely epicenters of turmoil. You still have to
look at the world objectively, and prepare to be, or move
to wherever there's the least trouble on the ground, among
the places you actually enjoy being in. This is especially
so for Europeans and their cousins in the US, where things
are deteriorating fast.
L: So, what are your own reasons
for bearishness?
Doug: I'm exceptionally
bearish because we've been in the eye of this hurricane
for going on three years. It seems to me that the bigger
the eye of the storm, the bigger the storm must be. We are
definitely heading for the trailing side of the hurricane
soon. And it will be vastly bigger, and last much longer,
and be much different than the leading edge.
I can't emphasize enough that all these
trillions of currency units that governments all around
the world are printing up by the truckload…
L: Or helicopter load.
Doug: [Chuckles] Yes, well,
bank-wire load, as it were, these days. They no longer need
to bother with the printing press; they can just create
more out of nothing with the stroke of a key. All that cash
in the US, the EU, Japan, and elsewhere is going to come
out of the banks where it's sitting at some point, and the
inflation that's been masked so far will kick into a much
higher gear.
Take Uruguay, for instance, which is actually
a very expensive country – to go out to dinner here
in Punta del Este costs considerably more than in the US.
When I first came here, things were very cheap. I've seen
the same thing in New Zealand, Hong Kong, Spain, and other
markets in which I've made a lot of money in real estate,
based on the same trend. This is happening all over the
world. The US has been so successful at exporting its inflation
– abusing the reserve currency status of the US dollar
– that it's become a relatively cheap place to live,
at least among the more developed nations.
The local symptom of this global sickness
is that here in Punta, very expensive condominium buildings
are popping up all along the coast, spreading faster than
dandelions in springtime. Nobody lives in most of them,
though some are occupied for a month or two in the summer,
and yet, year-round you have to pay maintenance and security
costs of at least $2,000, and sometimes $3,000 or $4,000
per month. The only reason people would pay that kind of
money to maintain empty condos, as far as I can see, is
to hide money.
L: Why do they
need to hide it?
Doug: Each will have his
own reasons. Sadly, Uruguay is no longer the Switzerland
of South America it once was. There was once no income tax
here and financial privacy – which no longer exists
anywhere. A government run by ex-communists destroyed all
that. That was shooting themselves in the foot, of course.
But real property rights are still pretty strong here, so
people are building all these condos as a place to stash
money in the form of bricks and mortar. Unfortunately, I
don't think it will work out for them, because as the global
Greater Depression deepens, people are going to have to
start liquidating them, and the local market is going to
crash. The monthly maintenance costs plus a need to retrieve
the invested capital is going to result in a wave of selling.
A lot of people are going to get burned. Not just here –
almost everywhere. As my friend Richard Russell has said,
in a depression everybody loses. The winner is the one who
loses the least.
L: Maybe you can let us know
when that happens – sounds like it will be a great
contrarian buying opportunity at that time.
Doug: Sure. Most people
will be too nervous to act, but I keep an eye on several
real-estate markets for just that sort of contrarian opportunity.
Meanwhile, I may just head for the exits now myself, not
wanting to be unable to liquidate the real estate I've got
in Uruguay later.
At any rate, I view this developing situation
as an example of what's brewing in many markets all around
the world.
L: Can you give us more specifics?
Doug: I think the most
important thing to bear in mind is that we are approaching
the absolute peak of the bond bubble, which has gotten vastly
bigger than I ever imagined it could. Interest rates in
the developed economies around the world are two percent,
one percent, or even negative. This is fueling a bond bubble
of truly catastrophic proportions. When it bursts, it will
be an order of magnitude worse than the tech stock-market
crash of 2001 or the real-estate bubble that burst in 2008.
When this one goes, it won't just wipe out
the people who thought they were being prudent savers. Because
it's a financial market, it will also hit stocks and real
estate again, at least in Europe and the US. Here in Uruguay
and places like Argentina, real estate is largely a pure
cash market. But in the so-called more developed economies,
real estate still floats on a sea of debt.
It amazes me that people in the US are elated
because the real-estate market is supposed to be up 4.3%,
as of the latest figures. Well, of course it is; you can
borrow money for effectively zero, given where interest
rates and inflation are.
L: Is that a sign of the bulging
piles of money banks have been sitting starting to leak
out into the economy?
Doug: Looks that way. And
when interest rates start rising steeply, as they'll have
to do once inflation sets in, rising to double digits as
they were in the 1980s, it will crush real estate further
and deeper than we've seen so far. It will do so all around
the world, but the US will be hardest hit, I think.
There's no question in my mind: the bond
bubble is by far the largest distortion we're facing in
the economy today. Bonds are incredibly dangerous, insanely
risky speculations today. They're reward-free risk. Bond
owners are facing huge default risk, huge interest rate
risk, and huge inflation risk. But nobody seems to see it
or talk about it.
L: I understand. But honestly,
Doug, you've been saying that for a while. What makes you
think this will be the year the bond balloon finds the pin
it's been searching for?
Doug: You're right –
that particular bubble should have found its pin two or
three years ago. I admit I thought it'd pop last year. It's
like watching a clown over-inflate a balloon; the longer
he inflates it, the more you wince, because you know it's
going to blow up in his face. And the longer it takes, the
closer the inevitable comes to being imminent – and
the bigger the explosion becomes.
It would have been so much better if the
idiots who run the US government had allowed the market
to fully liquidate past mistakes and distortions back in
2008. If they'd let all the big banks, brokers, hedge funds,
and corporate welfare junkies fail, it would have been very
unpleasant, but the country could have survived it, and
come out stronger and with a healthier balance sheet as
a result. The real wealth – buildings, farms, technologies,
the skills of workers – would still be there. And
the financial elite would have been wiped out – which
would have been a good thing. But instead, they've ensured
that the rich have gotten even richer, guaranteed by the
government. They tried to drown a fire with a flood of gasoline,
and it's going to burn the country down.
You know the old saw about not predicting
both an event and its timing, but I don't see how this thing
can go beyond 2013.
L: Well, you were right about
the politicians in Washington preferring to compromise than
to allow the fiscal cliff to hit the fan, so maybe you're
right about this one too.
So, we should beware of the bond bubble
bursting. Beware of real estate getting crushed when interest
rates go up. What about stocks? Wouldn't a lot of money
fleeing falling bonds go into the stock market?
Doug: Yes, a lot would,
but a lot of companies would be failing as well, so I'm
ambivalent about equities in general. Earnings could collapse.
Companies with many millions – or even billions –
in cash on their balance sheets could still get hit fast
and furious by high inflation. P/E ratios are not low these
days; Wall Street is not a bargain. So I'm generally neutral
to bearish and therefore out of the stock market. That's
the best policy when you can make an equally compelling
case for something going up or down.
L: That's exactly how I see
copper and the other base metals these days. But gold is
another matter.
Doug: Of course. And even
though gold has hit new highs in nominal dollar prices,
gold has still not matched its previous peak in inflation-adjusted
dollars. Really, in practical terms, nobody knows or cares
about gold yet. The average guy doesn't even know it exists
– and the average guy on Wall Street thinks it's only
good for paperweights, of which the world already has a
surplus.
L: Gold is cheap at $1,670?
Doug: No. But it's got
to go higher. The fact is that precious metals are the only
financial assets that are not simultaneously somebody else's
liability. The huge counterparty liability in today's markets
has yet to make itself evident, but it will – it's
in the hundreds of trillions. That's what the derivatives
that Buffett has been talking about for a decade are all
about.
That makes the best single speculation I
can think of today gold and silver mining stocks. For the
last two years, gold stocks have been getting cheaper, even
though gold has continued rising, year-on-year. That makes
these stocks a better deal than they've been for many years.
And it's such a tiny little market, the
upside when the larger world catches on will be breathtaking.
My sense, based on watching these markets for 40 years,
is that we're coming up on an explosion of resource stock
prices of historic proportions. The kind of stocks you and
Jeff cover are absolutely the place to be.
L: The data support you on that.
If you adjust for inflation by looking at the price of gold
stocks in terms of gold, they are selling for less than
they have for years – almost as low as during the
crash of 2008, or even back in 2001, before this bull cycle
for metals got going.
Doug: They are now extremely
high-potential and relatively low-risk speculations –
despite mining being a crappy, 19th-century choo-choo-train
industry.
L: [Laughs] I used that phrase
of yours in the International Speculator coming out Thursday
and make the same point.
Doug: You provide a shopping
list?
L: Of course. Jeff's got one
in BG too.
Doug: Good. This may be
the last chance for people late to this bull market to get
in at prices similar to what they could have paid before
it got going. And as a matter of fact, gold was cheaper
in real terms back in 2001 than it was at $35 per ounce
back in 1971. People seem to have forgotten that these are
the most volatile stocks on the planet. There have been
a half-dozen markets I've personally seen over the years
where junior miners and explorers went up 1,000% as a group.
Perversely, people are afraid to buy these
stocks now –
L: The very reason they should;
you have to be a contrarian to buy low and sell high.
Doug: – at precisely
the time when they should. I promise you, when the Mania
Phase of this gold market kicks in, everyone will be piling
in, and it will drive share prices not just through the
roof, but to the moon. Then they'll collapse 95% later,
of course, the way they always do. But now is the time to
buy them. However, since there are several thousand of them,
it's critical to be highly selective.
L: Well, if speculating when
others dare not were easy, everyone would do it, and there
would be no speculative opportunity, so of course I agree.
But back to 2013 – if you don't think
the global economy will collapse this year, can you say
when?
Doug: As I said last time,
2013 is going to be ugly, but it will just be a warmup for
2014. Back at the New Year's party I went to here in Punta
del Este, I asked my best friend down here the same question.
He's very rich and very shrewd. He's of the opinion that
the world will see catastrophic events of historic proportions
– not just one, but several – over the next
ten years.
I think he's right, and that brings us back
to another point we started with: I cannot stress strongly
enough that anyone who hopes to survive financially, and
perhaps even physically, needs to internationalize.
L: There's the Mr. Cheerful
we all know and love.
Doug: Hey, I'm looking
at the bright side...
L: Okay then. Thanks, and we'll
talk again next week – and soon in person, in Vancouver.