Finding Investment Opportunities by Tracking Global Market Trends PROFITING FROM THE WORLD’S ECONOMIC CRISIS BUD CONRAD CONRAD PROFITING FROM THE WORLD’S ECONOMIC CRISIS In Profi ting from the World’s Economic Crisis, author Bud Conrad, Chief Economist for Casey Research, predicts a rough road ahead for us—due to economic imbalances that have built up over the past decade—but reveals how you can prosper during these diffi cult times by tracking global market trends and fi nding investment opportunities that match those trends. With this book, Conrad outlines the long-term direction of our economy as driven by increasing U.S. government and trade defi cits, oil prices, Social Security and Medicare obligations for baby boomers, the credit crisis, and the weakening dollar. He also examines why some of the government’s actions—such as bailing out banks and curbing interest rates—fail to address more serious, long- term issues such as too much debt. The crisis we have entered is not a typical business recession, but, instead, a major deleveraging which is the biggest shift since the Great Depression. The stagfl ation of the U.S. economy will present great challenges on a global scale. And since no market travels in a straight line, you need to be positioned correctly, with the right investments, to protect yourself and profi t from the twists and turns you’ll inevitably face in today’s turbulent economic environment. Profi ting from the World’s Economic Crisis deftly addresses how to gain your fi nancial footing during these diffi cult times by highlighting global investment opportunities—such as gold, interest rates, currency, and commodities—that are likely to help you profi t in the coming years. BUD CONRAD is the Chief E conomist at Casey Resear ch and has been a futures investor for twenty- fi ve years, as well as a full-time investor for more than a decade. He holds an MBA from Harvard and an electrical engineering degree from Yale. Conrad has held positions with IBM, CDC, Amdahl, and Tandem. His comprehensive picture of the world’s economy, based on a career of using long-term fundamental analysis, enables him to explain how this crisis arose and where it will evolve to. He uses insights learned from his engineering training to interpret how investment cycles affect our economy. He served as a local board member of the National Association for Business Economics and taught graduate courses in investing at Golden Gate University. A popular speaker, Conrad has delivered talks in New Zealand, Dubai, New York, Vancouver, Denver, Phoenix, Las Vegas, San Francisco, Los Angeles, and Chicago. He has appeared on CNBC, Fox Business News, New Zealand 3news, and has commented in many publications from the Wall Street Journal to Reuters. Visit www.caseyresearch.com Jacket Images: (parched ground) © Jupiter Images (flower currency) © Corbis Praise for PROFITING FROM THE WORLD’S ECONOMIC CRISIS $27.95 USA / $33.95 CAN “Someone is going to make money in the next decade. Perhaps Bud will help you fi nd your way.” — JIM ROGERS, cofounder, Quantum Fund; author, A Gift to My Children “Where everyone today has an opinion on everything, much of it gleaned from a blog, Bud Conrad's constant mantra is ‘What does the data say?’ And then he rolls up his sleeves and works almost around the clock for as many days as it takes to get to a defensible answer. In other words, there are those who talk, and those who do. Bud does. In Profi ting from the World’s Economic Crisis, Bud tells you what the data shows about the risks and opportunities just ahead. You'll want to pay attention.” — DAVID GALLAND, Managing Editor, The Casey Report “Bud Conrad’s book is a brutally honest journey into the future. Honest because Bud builds on facts, not popular opinion; brutal as he illustrates the logical consequences as global dynamics play out. You can't afford not to read this book.” — AXEL MERK, President and Chief Investment Offi cer, Merk Mutual Funds; author, Sustainable Wealth “This book could not be better timed, as the government and Wall Street do their best to convince the public that the fi nancial storm has passed. Bud Conrad begs to differ and using his unique ability to take complex data and distill it into straightforward charts, he not only explains how the hurricane developed, but why it’s far from over. He then goes on to show investors not just how to survive the storm’s resurgence, but how to prosper.” — STEVE HENNINGSEN, Chief Financial Strategist, The Wealth Conservancy “Right now you may be asking yourself ‘What’s going to happen to the economy, why is it happening, and what can I do to profi t from it?’ As far as I’m concerned, Bud has the correct answers to these questions. Among other things, this book will become ‘the’ reference book for data and charts that economists and investors will go to for years to come. I urge you to read this book—now—and act on its advice.” — DOUG CASEY, Chairman, Casey Research, bestselling author, Crisis Investing P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford ii P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford Profiting from the World’s Economic Crisis i P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford ii P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford Profiting from the World’s Economic Crisis Finding Investment Opportunities by Tracking Global Market Trends Bud Conrad John Wiley & Sons, Inc. iii P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford Copyright C  2010 by Albert G. Conrad Jr. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley .com/go/permissions. 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For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Conrad, Bud. Profiting from the world’s economic crisis : finding investment opportunities by tracking global market trends / Bud Conrad. p. cm. Includes index. ISBN 978-0-470-46035-1 (cloth) 1. Financial crises–United States. 2. United States–Economic conditions–21st century. 3. United States–Economic policy–2009- I. Title. HB3722.C686 2010 330.973–dc22 2009051050 Printed in the United States of America 10987654321 iv P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford To my children Darlene Friedley and Daniel Conrad. v P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford vi P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford Contents Acknowledgments ix Introduction xi PART ONE ECONOMIC FORCES 1 Chapter 1 The Budget Deficit Drives the Growth of All Debt 3 Chapter 2 The Trade Deficit and U.S. Dependency on Foreign Investments 27 Chapter 3 The Big Costs of Health Care, Social Security, and the Military 63 PART TWO FINANCIAL CRISIS RESPONSE 75 Chapter 4 The Federal Reserve Prints Our Money (Stop the Presses!) 77 vii P1: KNP/ P2: fm JWBT261-Conrad March 6, 2010 11:51 Printer Name: Courier/Westford viii CONTENTS Chapter 5 The Importance of Debt for Predicting Our Economy 115 Chapter 6 The Big-Picture Model of Our Economy 139 PART THREE RECESSION OR DEPRESSION? 157 Chapter 7 What Can the 1929 Great Depression Teach Us about Today’s Crisis? 159 Chapter 8 What the United States Can Learn from Japan’s Lost Decade(s): 1989–2009 183 Chapter 9 What the United States Can Learn from German and Other European Hyperinflations, and from China Today 211 PART FOUR INVESTMENT OPPORTUNITIES 227 Chapter 10 The Stock Market May Be Dead for Another Decade 229 Chapter 11 Energy in the 21st Century: The End of the Petroleum Age 241 Chapter 12 Food, Grain Trading 261 Chapter 13 The Demise of the Dollar 273 Chapter 14 Interest Rates: The Trade of the Decade 299 Chapter 15 Gold Is the Only Real Money 325 PART FIVE PUTTING IT ALL TOGETHER 367 Chapter 16 Forecast for the Future 369 Chapter 17 Looking Over the Horizon to See the Best Investments 385 List of Tables and Figures 421 About the Author 429 Index 431 [...]... roadmap of the interconnected chapters of this book I’ve divided the book into five parts as listed on the left side Chapters are identified in boxes with the number following the name Figure I.2 Structure of the Book Profiting from the World’s Economic Crisis Introduction xvii The arrows give the logical flow of the intellectual thread through the chapters For example: the budget deficits lead to the trade... for themselves by paying new money to their special-interest supporters When they do so, they decrease the wealth of others Printing money does not change the value of the planet and the things in it But the claims on those things change, and those who control the bigger share of those resources do change Even casual observers know that something is up, and their discomfort is justified They know they... worth only the paper it is printed on This is the book’s fundamental thesis: that the paper dollar will collapse in my lifetime, eventually requiring the issuance of a new currency The financial collapse we are now experiencing is far from over It will become the largest financial crisis the United States has ever faced Because the United States is at the center of the world economy, this crisis is affecting... benefits is used to buy the government debt That is the portion of Figure 1.7 identified as Agencies and Trusts The Social Security Trust 12 ECONOMIC FORCES surplus decreases the amount of the deficit and the amount borrowed from the public Ahead of the onslaught of the retirement payouts, these trusts have built up funds in excess of their immediate spending requirements That will change as the large wave of... passing day The Budget Reflects the State of the Nation Every year, the president and Congress go through an elaborate budget process to decide how much the government will spend and tax The Congressional Budget Office (CBO) analyzes the president’s proposal and gives its own estimate of its financial impact Figure 1.3 shows the CBO’s long-term estimates for the ratio of government debt to the size of the economy... quantities—money that originated from a The Budget Deficit Drives the Growth of All Debt r r 11 consumption-mad U.S public and recycled through the foreign suppliers back to the Treasury—it began spending with both hands The Federal Reserve System: The Fed is another regular buyer of U.S government debt Although this is traditionally small in comparison to the other sources of funding, the Fed’s Treasury purchases... I was able to predict the current crisis Introduction xiii back in 2006 And at the beginning of 2009 I predicted that gold would go to $1,150; that crude oil, then trading at $45, would go to $80; and that the 10-year Treasury would go from 2.2 percent to 4 percent—all of which happened—along with a number of other economic measures like the budget and trade deficit The key to the future is really quite... down these accounts in earnest—at which point the government will find itself faced with yet another huge demand on funds it doesn’t have The Total Public Debt of the government is $12.5 trillion Not including these Trust Funds leaves the amount of Federal Debt Held by the Public at about $7.5 trillion When the government runs a deficit of $1.5 trillion, that is added to the Debt Held by the public If the. .. notably the Chinese, Japanese, Russians, and Indians (among others), have openly announced their decision to cut back on further purchases and their existing holdings of U.S government debt Further, the source of funds previously allocated to their purchases—trade surpluses—have fallen sharply with the recession As a consequence, The Budget Deficit Drives the Growth of All Debt 13 Figure 1.8 How the Total... collect the funds to build these reserves These reserves are considered obligations of the government, owed to the government, to be tapped as necessary to provide the considerable—and eventually overwhelming—entitlements due under Social Security and Medicare The problem is that the funds supposedly being set aside for retirees are not there! Sure, the trust funds are there, but the money is already spent . Market Trends PROFITING FROM THE WORLD’S ECONOMIC CRISIS BUD CONRAD CONRAD PROFITING FROM THE WORLD’S ECONOMIC CRISIS In Profi ting from the World’s Economic Crisis, author Bud Conrad, Chief. the book into five parts as listed on the left side. Chap- ters are identified in boxes with the number following the name. Figure I.2 Structure of the Book Profiting from the World’s Economic Crisis P1:. Cataloging-in-Publication Data: Conrad, Bud. Profiting from the world’s economic crisis : finding investment opportunities by tracking global market trends / Bud Conrad. p. cm. Includes index. ISBN 97 8-0 -4 7 0-4 603 5-1