The Global Economy Is Slowing: in This Month's Issue..

Volume V, Issue 11 / November 2012
Te Global Economy Is
Slowing
Dear Reader,
As we near the holiday season, let me be the frst
to give early thanks that the election is fnally over.
I didnt much care who won, because I regard the
diferences between the candidates as microscopic.
And I was sick of seeing either of them anytime I
looked at a screen.
But glancing at the fnancial markets, its clear that
Mr. Market cares a great deal about the winner, and
he is none too happy that Obama will reign for four
more years. Stocks are way down, along with almost
everything else. At least gold is unscathed. Take a look:
S& 300 -2.4
uCW -2.4
nasdaq -2.S
Cll -4.6
Cold +0.1
Just for fun, one industry did perform very well today.
Ill let you draw your own conclusions as to why.

SmlLh & Wesson +9.6
SLurm 8uger +6.8
But these daily returns are important only to day traders. Kneejerk reactions aside, what are the long-term
implications of this election for investors like us?
! #$%&'()*+ #,-.& /.-.,'0* 11# 2 34,5+*$'(6.7 8(-09$-5'. :'$*(;(+.7< 3-. $= 0$4+.4+ -5;>.0+ +$ +.'?- $= 5-. -+,+.7 $4 9,-+ %,).<
In Tis Months Issue...
Click on the link to jump directly to an article.

Introduction
Dan Steinhart sets the stage for this months edition

As the Global Economy Slows, Will Stocks Get
Clocked?
Yes and no, says Bud Conrad

After the Election
Doug Casey sees trouble ahead

Gold Standard Redux
Terry Coxon on what a return to a gold standard would
look like

How to Invest
An update on our recommended investments

Te Data Farm
A collection of data worth your attention

ObamaWatch A Lame-Duck Congress Teeters on
the Edge of the Fiscal Clif
Don Grove on the slim prospects of our leaders
reaching a solution

End Note
A closing comment by Doug Casey
THE CASEY REPORT NOVEMBER 2012 2
Im not sure there any. Were still on the same warfare/welfare/money printing path weve been on for the
past decade. And there isnt the faintest reason to believe that will change. Obamas victory demonstrates
that the majority is happy with the governments irresponsible borrowing, printing and spending. Te
election results solidify our thesis that the US government cannot and will not stop itself from destroying
the dollar.
Tough the presidential decision shouldnt impact our portfolios much, there are political decisions
approaching that do matter a great deal. Im referring, of course, to the fscal clif the menacing
combination of tax increases and spending cuts that will automatically kick in at the end of 2012. From an
investment standpoint, the fscal clif is a whole lot more important than the presidential election.
In most circumstances, gridlock is our friend; the more time politicians spend squabbling, the less time
they have to bother us. Not so in this case. If politicians dont act soon, burdensome income tax increases
automatically kick in for everyone, rich and poor alike. And even worse, taxes on investment income will
skyrocket: on dividends by 190% and on capital gains by 59%. Tat puts us in the unfamiliar position of
hoping the Republicans and Democrats can cooperate to avoid disastrous tax increases.
So try as we might to ignore the government and go about our business, thats just not possible this time
around. Te coming upheaval requires forethought and planning, and our friends at Mauldin Economics
are ofering a seminar on November 20 that addresses just that. Teyve assembled an impressive panel of
experts to discuss anything and everything fscal clif-related. And importantly, each experts views are far
enough outside the mainstream that we can take them seriously:
Mohamed El-Erian, CEO and co-CIO at trillion-dollar bond management frm PIMCO;
Gary Shilling, one of the most recognized market analysts of our time and publisher of the widely read
Insights letter; and
Barry Ritholtz, market strategist, author ofBailout Nation and editor ofTe Big Picture, which is among
the most widely read economics blogs with market insiders.
And of course, John Mauldin himself. Im looking forward to watching; as a primer on the fscal clif, you
cant do much better.
Moving on to this months issue, a recent slew of poor economic data confrms that the global economy
is slowing and many countries are dangerously close to contracting, with a few already in recession. In our
feature article this month, Casey Research Chief Economist Bud Conrad asks: As the Global Economy
Slows, Will Stocks Get Clocked? As is his specialty, Bud digs into the data to predict how global slowing
will impact our portfolios.
Next, in his article After the Election, Doug Casey shares his views on Americas future, along with what
you should do as an investor to prepare. Ten Terry Coxon explains exactly what a transition back to a gold
standard might look like in his thought-provoking article Gold Standard Redux.
Finally, fresh of Obamas victory, Casey Research Washington Correspondent Don Grove wonders
whether politicians will strike a much-needed bargain in ObamaWatch A Lame-Duck Congress Teeters
on the Edge of the Fiscal Clif. We also do some portfolio trimming in our How to Invest section, and we
ofer a collection of election-themed charts in the Data Farm.
A full issue this month, so lets get down to business. Tanks for subscribing!
Dan Steinhart
Managing Editor
Questions or comments? Send them to dan@caseyresearch.com

Back to Table of Contents
As the Global Economy Slows, Will Stocks Get
Clocked?
By Bud Conrad
Te world economies all crashed together in the 2008 credit crisis. Massive government bailouts and
support averted a new Great Depression, and a rebound ensued.
Today, I see world economies slowing as government stimulus loses its efectiveness. Te situation will
likely grow worse in the next year, and governments have already fred many of their stimulus bullets,
rendering those governments less prepared to fght a new crisis.
Te US is still the worlds largest economy, even though its share has declined since World War II. Chinas
surprising growth has catapulted them into second place ahead of Japan. Germany, the UK and France are
also important drivers of the world economy.

Te important thing to remember is that the global economy is highly integrated, and the problems of any
one of these large players afects all the others.
To set the stage, this chart illustrates the trend in global industrial production and trade:
Take note of the shape collapse, followed by recovery, followed by gradual deterioration until today. Most
of the specifc country charts that follow share this pattern. Tis is worrisome because economic activity in
many countries has declined to the point of zero growth, which puts them in or very close to recession.
A Quick Trip Around the World
Europe Is Slowing
Europe is the lead horse in the current downturn. Te peripheral countries require bigger bailouts than
the stronger countries can aford. While the PIIGS are at the bottom of the pile, France and Germany are
being dragged into the mud as well.
Te Purchasing Managers Index (PMI) is one of the best economic indicators. It measures manufacturing
activity using a wide range of data from surveys of purchasing managers on a slew of economic
measurements like shipments, exports, prices, inventories and deliveries. When the index is over 50, it
indicates economic growth, and below 50 contraction.
As you can see, the Eurozone is contracting.
I like the PMI because of its predictive power. It is a reliable leading indicator for GDP. In the next chart,
I picked out France to demonstrate this predictive power. As you can see, the French PMI and GDP move
in close unison, with the PMI slightly leading GDP. Te most recent French PMI reading suggests that the
next GDP reading will be negative.
Some individual countries like Italy and Greece are in even worse shape, according to their PMIs:
Whats worse still is that the PIIGS have little prospect of recovery. Interest rates have spiked to unpayable
levels, and the PIIGS are stuck in a vicious cycle: unafordable debt weakens their economies, and the weak
economies cannot generate income needed to pay of the debt, undermining confdence and spiking rates
further.
Bailouts are the only thing keeping Greece and the rest of the PIIGS afoat, and those bailouts cannot go
on forever. Cracks are beginning to form that show Germanys reluctance to continue giving money to
broke countries. For example, this week Cyprus asked for a $10 billion bailout, but a review of its fnances
revealed that the benefciaries would be Russian oligarchs with Cypriot bank accounts. Understandably,
Germans are none too happy about extending new credit to help rich Russians. Eventually, Germans
will no longer stand for these bailouts, and Germany will say no more money. At that point, Europes
recession could become a depression.
Te Eurozone employment situation is bad as well, with an average unemployment rate of 11.5% in
August. 18.5 million people are looking for work. Te lack of productive output from unemployed workers
feeds back on itself and slows GDP further.
For a more in-depth discussion of Europes problems, see my article Greece Is a Goner. Now What?
Asia Is Also Slowing
Most Asian countries also have weak PMIs, though not as weak as Europe. Of the leading Asian countries
charted below, only India is holding above the all-important 50 level that separates expansion from
contraction.
China faces big problems, perhaps the most severe of which is its real estate bubble. Demographic pressures
from the one-child policy do not help either. In addition, its once-a-decade transition of power is shifting
toward more conservative leaders. See my article Danger Ahead from the Excesses of Chinas Success for
more about Chinas problems.
Even so, the title of worst economic situation in Asia probably belongs to Japan. Japanese demographics are
terrible and getting worse: the population is aging while total population declines. Industrial production is
woeful:

But Japans most dire problem is that its export dominance is crumbling. Japan built its economy on
exports, which is how it has been able to maintain a strong yen despite being the most indebted developed
nation on earth (by far). Troublingly, Japans trade surplus has evaporated and is now a defcit. Te
Fukushima disaster requires the Japanese to import energy, further exacerbating the defcit:
I could go on with charts of weakening countries, but you get the picture. In my background research, I
also analyzed Taiwan, South Korea and Argentina, and their stories are the same; they are all slowing. Te
current economic downturn is truly worldwide.
Te US Is Slowing Too But Not as Severely
Below is another chart using the now familiar PMI index, this one of the US. I overlaid it with the annual
change in GDP since 1948. Again, you can see that the PMI is a very good predictor of GDP. You can also
see the cyclic nature of our economy with swings into and out of recession about every four years.
Zoom in on the last twelve years, and the slowing is more obvious. Remember a reading of 50 means zero
growth. We are perilously close to that important demarcation.
On the unemployment front, the US is much better of than Europe. But thats faint praise. Te USs 7.9%
unemployment rate doesnt sound so bad because its an improvement over the immediate past. But from a
historical standpoint, 7.9% is still a very high rate of unemployment.
Of course, that 7.9% is very questionable for a variety of reasons. For example, when people become
discouraged and are no longer looking for work, they no longer count as part of the unemployed or labor
pool. Naturally, there are many people who are rightfully excluded from unemployment numbers, such as
the very young and old. But from an economic-measurement standpoint, the fact is that working people
have to support the non-working people of the country, regardless of why theyre not working. In this
context, the fact that labor force dropouts can actually improve the unemployment percentage is silly.
For that reason, I prefer a simpler measure that is less prone to manipulation: the ratio of the number of
people working compared to the total population. As you can see below, our population is nowhere near as
productive as it could be. And we are actually much closer to stagnation than most government numbers
suggest.
Te real income of workers is another important measure of wealth. If purchasing power is not growing,
people will not have the money to purchase increased output. US companies have been sending middle-
class jobs overseas and using cheaper foreign labor; this increases profts, but it also undermines consumers
and inhibits demand, so the economy cant grow.
Finally, miles driven is a seldom used but important measure of economic activity. Simply, the more
economic activity going on, the more miles people drive.
Ive overlaid miles driven against GDP, and the contrast is quite remarkable. Te number of miles driven
has declined, while GDP has resumed its upward trajectory. Why the disconnect?
One reason is that government spending is part of GDP. So the government can borrow and spend money
to boost GDP without any actual beneft to the private economy. Another reason is that the governments
infation measure has been understated in recent years, so that when it is subtracted from nominal GDP to
get to real GDP, real GDP is overstated.
Bottom line: Im very skeptical of the governments proclamations that it has successfully spurred a
recovery.
What Does Tis Mean for Stocks?
Now that Ive set the stage by surveying the global economy, I return to the US to predict how the global
slowing will afect stocks. Te answer is less clear than you would think.
Leading Indicators Suggest Stocks Should Fall
GDP and stocks tend to move together, so the PMI indicator is also useful for predicting stock prices. Te
stock market performed well in 2012, but looks overpriced today compared to the declining index.
Te order backlog is a separate component of PMI that tends to lead other parts of the index, and it tells
the same story: that stocks are overvalued by about 20%.
CEO confdence is a survey of chief executive ofcers of companies. It tends to lead a bit more than other
measures. With caution about the lack of precision of such measures, stocks could fall 30% if the historical
correlation repeats itself.
Te Institute for Supply Management (ISM) surveys non-manufacturing businesses. Its predictive power is
not quite as strong, but it tells the same story: stocks are overvalued.
But Fundamental Analysis Says Stocks Are Fairly Valued
At the end of the day, the stock market isnt driven by its correlations to various surveys. Its driven by
earnings. Surprisingly, from this perspective, the stock market isnt overvalued. Te following chart plots
historical stock prices vs. earnings:
Based on present earnings, stocks are fairly valued. But to project where stock prices may go, we must
estimate stocks future earnings. Just before the 2008 crisis (which was the worst crisis for stocks since the
Great Depression), analysts were still expecting earnings to rise, shown by the dotted red line in the next
chart. As we know, those analysts were very wrong.
Since then, with the help of government spending and Fed stimulus, operating earnings have recovered and
surpassed old highs. Today, analysts are as optimistic as they were prior to 2008, represented by the green
dotted line.
Because of the global slowdown, I think analysts will be wrong again. For my downside estimate, I assume
that the weak earnings from Q4 2007 to Q3 2008 will repeat themselves in the next four quarters, shown
as the purple line. I did not factor in the huge drop in Q4 2008 when earnings went to zero, because I
doubt a situation that severe will occur again
Tat purple line is the frst input to my model, which well get to in a moment. Te second input is the
10-Year Treasury rate, which, to be conservative, I assume will rise by 0.5% per quarter over the next four
quarters, as shown in this chart:
Heres where it all comes together. Te basis of my model is that the yield of various investments should be
similar (for a comprehensive explanation, see my article in the May issue of Te Casey Report.) Using that
principle, I compare the earnings yield of stocks (earnings of the S&P 500 divided by its share price) to the
10-Year Treasury yield.
Te red line in the next chart is the price stocks would need to obtain to yield the same as the 10-year
Treasury. Because interest rates are at record lows and operating earnings are high, the price of the S&P
500 would need to be very high almost 6,000 to match the low yield of 10-year Treasuries. Tis
indicates that stocks are undervalued.
To the right of the graph is where my two negative projections come in. As you can see, even when I plug
in my very negative assumptions of plummeting earnings and rising rates, stocks are still fairly valued.
Tis outcome surprised me. I fully expected to fnd that stocks were overvalued when I began this analysis.
But this particular model paints a more positive picture, largely because the Fed has manipulated interest
rates so low.
We also cannot forget the impact of money printing on stock prices. Te efects of QE3 have not been felt
yet, but they will be. Tat could very well ignite price infation and push stocks even higher, even if only
nominally, as the value of the dollar declines.
My overall conclusion on stocks is one of caution. I dont think we are facing a crash scenario, but I do
think that earnings will surprise to the downside, and individual companies could get hit hard. As points of
comparison, the Japanese stock market dropped by 75% from its peak in 2009 and the Chinese Shanghai
Index dropped from 6,000 in 2008 to around 2,000. I dont mention these situations because I think either
will occur in the US, but rather to demonstrate that stocks are very difcult to predict in times of economic
decline, and the moves can be big. So holding stocks is risky.
Stocks vs. Oil and Gold
A quick look at recent history shows that despite the fnancial medias constant fawning over stocks, they
have been a poor investment. Tough the stock market did provide strong returns through the end of the
last century, it has since stagnated and has been a bad investment for over a decade.
Our favorite investment, gold, has outperformed stocks by a mile since 2000. Many other commodities
have as well, like crude oil, which also soundly beat stocks as an investment over the past 12 years.
Zooming in, the underperformance of stocks is even more apparent.
In dollar terms, gold has been relatively stagnant in the last year, probably because the Federal Reserve
slowed its easing policy starting in July 2011. With its announcement of QE3, gold should resume its rise.
As a little tangent, Germany recently said that it wants to audit its holdings of gold in New York, London
and France. Ecuador wants to repatriate its gold, too. If this trend continues, and a country discovers
that its gold has been leased, sold, given away or hypothecated (all distinct possibilities given the alleged
manipulation in the gold markets along with similar happenings at MF Global), it could ignite the price of
gold. Either way, gold has a bright future.
Conclusion
When I began this analysis, I fully expected all of the evidence to point toward a slowing economy and
declining stocks. But it isnt so clear.
Te frst part of my assumption proved correct: the global economy is slowing, led by Europe, which is
already in recession. A recessionary Europe imports fewer goods from Asia, and the efects will cascade to
other countries. Te mighty US is not immune and cannot be a lone standout or a safe haven forever. Te
world is intimately connected, and all countries will feel the efects of slowing global growth.
But the efect that this slowing will have on stocks is less clear. Tere are very few alternatives to stocks in
our zero-rate world. Earnings have recovered and are so strong that even with a substantial drop, stocks still
wouldnt be overvalued.
Subjectively, I think things are worse than the numbers suggest, and I think we are heading back into
a serious recession that will resemble the one during 1974, when we had a crisis of confdence in our
government during Nixons impeachment. I lived in Washington, DC during that time, and I remember
the atmosphere of distrust along with protests, arrests and tear gas canisters in the streets of Georgetown.
I see similar distrust of the government festering today. Te potential cover-up of the assassinated Libyan
ambassador is just one of many examples.
Obamas win may provide a false sense of short-term security, but the fundamental problems we face
are bigger than one leaders ability. Tere are no good solutions to our budget defcits and endless wars.
I predict a more serious recession ahead than the relatively buoyant markets suggest. Be careful.
Consider paring back your positions in companies that depend on strong consumer spending.
As for world governments, you can bet that theyll react as they always do: by printing money. Why
wouldnt they? In this new era in which all the worlds currencies can be created at the push of a computer
button, politicians will always take the easy way out.
Finally, as investors, we want assets that will rise as world governments debase their currencies. Our
physical commodity investments have been very successful, and I expect that to continue. In order of
attractiveness, I like gold and silver, other commodities like oil, housing, and stocks in selected areas
like technology and resources. And continue to stay far away from bonds.
After the Election
By Doug Casey
Lets talk for a moment about philosophy.
Te etymology tells you the word means love of wisdom. Wisdom entails seeing correctly how the
world works, why people do things and what is most important about being alive. Its most unfortunate
that philosophy (thanks largely to the eforts of leftist academics) has gained a reputation as a boring and
irrelevant study of the meaningless and the airy-fairy because, in fact, it deals with what is essential for
living well.
Im especially a fan of practical philosophy. Practical and applied philosophy amount to the study of religion
(how you deal with a possible spiritual reality) and the study of politics (how you deal with other humans
here and now).
My enthusiasm for philosophy is the reason I dont get invited to a lot of dinner parties in Aspen, where I
live during the northern summer. What are you supposed to talk about after youve done fve minutes on
the weather, sports and the state of the roads? I like to talk about ideas. But they say religion and politics
are the very two things youre never supposed to discuss in polite company. Tats why I fnd polite and
politically correct company boring and avoid it as assiduously as it avoids me.
Since this is, after all, election season, lets concentrate on politics. Some have asked me how I arrived at the
juncture where I currently fnd myself in efect, a philosophical/political outcast when Im in conventional
company. A Conehead.
Like almost everyone, I started out as a liberal. When I was about 7 or 8, I saw some slums in Chicago.
I was shocked to see people living so badly and asked my mom to type a letter to President Eisenhower
imploring him to do something. Perhaps he read my stupid little letter, because it was about then
that they started tearing down the slums and putting black people into the inhumanly degrading and
incomparably worse projects. Most people today, it would seem, have political views like those of an
ignorant eight-year-old.
I didnt do much political thinking for the next ten years except to realize that I didnt much care for the
idea of authority. My feelings about it were still somewhat inchoate, except to say I just didnt like people
telling me what to do. It was about then, at 18, that I dropped out of the popular cannibalistic death cult in
which I had grown up. Tat certainly had an efect on my political evolution; it broke one of the strongest
shackles of authority.
Soon after, in a search for meaning, I read Barry Goldwaters 1964 campaign book, Conscience of a
Conservative. I then thought I must be a conservative. As it became apparent to me that there were serious
and essential diferences between conservatives and liberals, I started to withdraw from a relationship
with my liberal girlfriend a good move. But while disliking liberals and being sympathetic with aspects
of conservatism, I didnt like conservatives seemingly refexive nationalism, militarism, religiosity and
conventional social values.
Ten I read Ayn Rands book, Te Virtue of Selfshness. I literally had to put it down after the frst page, in
shock that someone had crystallized concepts that had been fowing, unformulated, through my head for
many years. At that point, I thought I must be an Objectivist. But I later found, especially after meeting
Randites, that ironically, paradoxically and in confict with the essence of the philosophy Rands
followers tend to be dogmatic acolytes of a secular religion. Its much the way some Christians, instead of
simply following the wisdom of the man Jesus, transform themselves into Bible-thumping true believers.
Odd, really.
Next, while on a three-month-long treasure hunting expedition, I read Morris and Linda Tannehills
brilliant Te Market for Liberty, which explained, quite clearly and reasonably, how an anarchic modern
society would work although they never once used the dreaded A-word. It can be said that libertarian
anarchists believe there should only be two laws, as so well stated by my old friend Rick Maybury: Do
all that you say youre going to do and Dont aggress against other people or their property. Tat keeps
it simple. Everything that needs doing, everything that is needed or wanted by anyone in society, will be
provided by entrepreneurs seeking a proft. Im still comfortable with libertarian anarchism.
But that approach left me open to political arguments; anarchism scares people. And I found that while I
enjoy reasoned discussions, I hate arguments in general and political arguments in particular. Arguing tends
to only cement the participants in their respective positions, and it encourages them to make the other
person wrong in an attempt to win. It causes them to dramatize psychological aberrations that lie under
the surface, as they get angry with their opponent. I found arguing and debating serves little useful purpose,
and I therefore avoid them.
Tis attitude drew me to whats often called Discordianism. Tis isnt the time or place to discuss it, but
its very aligned with Taoism, the watercourse way of philosophy. Just as physicists want to describe the
universe with one united law of reality, I think the same can be done in the world of human action. To
wit, the whole of the law is: Do as thou wilt but be prepared to accept the consequences. Tat leads to a
sequence of thought more complex and evolved than any chess strategy. Its a world view that emphasizes
personal responsibility the opposite of the prevailing views, which encourage collective action, which in
turn encourages irresponsibility.
Tat said, I trust you can understand why I view the diference between Republicrats and Demopublicans
as less than that between Coke and Pepsi. I see it as an embarrassing triviality, as worthy of serious
consideration as the turf argument of two gangs of kids on a playground.
Te Democrats have a core philosophy of forceful collectivism and statism, full of thoughts handed down
from Marx and Keynes. Its a rotten and corrupt philosophy, but at least they have a philosophy; they
actually believe in something. People are drawn to something that sounds benevolent, even though it turns
out to be evil in efect.
Te Republicans, on the other hand, are typically either pragmatists or religionists. Pragmatists basically
believe in doing whatever seems like a good idea at the time; they value things like efciency and
common sense, which leads them to favor free-market solutions to a greater extent than the Democrats
but for all the wrong reasons, because they logically wind up accepting the situational ethics of a Dick
Cheney. Religionists, on the other hand, dont actually think for themselves, but seem to wind up relying on
the Book of Leviticus for guidance.
Republicans may call themselves conservatives, but conservatism today isnt at all the same thing it was
even under Taft or Goldwater. Today it just represents an atavistic reaction against the perfectly horrible
Democrats.
So of course this non-philosophy is intuitively held in contempt by thinking people. Even those who dont
think very deeply. A proof of that is the kind of people they put up for president the doddering Dole in
2004; the hostile, mildly demented McCain in 2008; and now the completely unprincipled empty suit,
Romney. Te only core belief these guys seem to have is that more money needs to be lavished on defense
contractors and that we need to start yet another war.
Up to Present Time
Since Im writing this on Guy Fawkes Day, the 5th of November, by the time you read this, the election
will have already occurred. Ive toyed with the possibility that Romney might win. Tats not because I have
my fnger on the pulse of Boobus americanus. I assure you, I dont have frst-hand knowledge of opinion in
the barrios, ghettos or trailer parks. I dont know what Gen-Xers and Yuppies are thinking in the suburbs,
nor what oldsters are emoting in their retirement enclaves, and I cant say I much care. Te mob can, and
does, change its views about as readily as the one in Shakespeares Rome at Caesars funeral, after frst
listening to Brutus, then to Anthony.
Ive changed my view basically because nobody who voted for Obama in 08 is more enthusiastic than they
were then (Hey, give the good-looking young black guy a chance what are you, a racist?). And a lot of
them are disillusioned. At the same time, its impossible to see ex-McCain voters now turning to Obama.
But the popular vote doesnt count; only the electoral vote. And, as Stalin said, its not who votes that
counts; its who counts the votes. Is that too cynical a view?
I think not. I well remember the day before the election in 1980, between Reagan and Carter, when I had
a full hour by myself on Donahue. Te audience alternately loved and hated me for instance, I was booed
when I said college, for almost everybody, was a misallocation of way too much money and four years of
time. What really set them of, though, was when I got as far as giving them four of the fve reasons that I
wasnt voting. Tey might have lynched me if Id fnished.
I found their reaction instructive. But I only really started to understand the gravity of the situation, how
little people understand about the simplest aspects of political economy, after I commented how the
taxpayers were being bankrupted by taxes. In response, a guy in the audience had a question/observation:
Why do the people have to pay for these things with taxes? Why cant the government pay? Te audience
clapped enthusiastically for the guys incisive reasoning. At that point I realized the situation wasnt just
hopeless, it was actually comedic. And that its futile and pointless to try to make political changes. Where
do you even begin with these people? Let those who have ears hear. But it gets worse.
As I indicated above, Im not a big fan of man-made laws. But I certainly acknowledge laws of nature.
One of them is Paretos Law, better known as the 80-20 rule e.g., 20% of your salesmen will make 80%
of your sales, 20% of the population will commit 80% of the crimes, etc. Tere are many variations and
permutations of Paretos Law. I would posit that one is that 80% of all people are basically decent. But 20%
are what might be called potential trouble sources, who will blow with the wind, have little moral fber and
can only be trusted under fair-weather conditions.
A real problem arises, however, with the 20% of that 20% (4%); they are active sociopaths. And, worse, the
20% of that 4% (0.8%) who are hardcore criminals. But, you may object, since 80% of the population are
basically good, isnt that cause for optimism? Teyre the large majority.
Heres the problem. Te US is increasingly oriented around the government. But the government is force;
its not about voluntarism, its about coercion. Tat said, there are two types of people: those who believe
in voluntary relations, and those who are drawn to use coercion and force. Te latter are naturally drawn to
government, and the stronger the government, the more they are drawn to it.
At some point, enough of them (the 20%, the 4%, the 0.8%) populate the government that they drive out
the 80% working for it who are basically decent. Once the bad guys get control, theres no going back: Tis
happened in Russia in the early 20s, Germany in the early 30s, China in the late 40s, and in lots of other
places before and since. Do you think the US is diferent? Yes, it used to be. But things never stay the same.
Te situation is made especially problematical, and perhaps inevitable, because of another natural law:
the 2nd Law of Termodynamics, which holds, among other things, that all systems degrade over time.
In the case of the US, one can argue its been politically downhill since the Declaration of Independence,
but certainly starting with the Alien and Sedition Acts of 1798, which would do Bush or Obama proud.
Te War Between the States established Washington as the focus of the country. Ten came the Spanish-
American War, which initiated an overseas empire and foreign adventures. Ten came income tax and the
founding of the Fed in 1913, conveniently followed by WW1. Even HL Mencken said nothing against
either WW1 or WW2, for fear of being lynched. Since then, we dont even declare war; we just invade
wherever.
Now, with the Forever War on Terror and the Bill of Rights totally and completely disregarded, its
becoming quite risky to say what you think. Do you think Im kidding? At the New Orleans Investment
Conference a few years ago, a friend overheard a couple of middle-aged men talking to each other after my
speech, wherein I made some comments about the military and the wars. One said: Yeah, we should turn
that Casey in to Homeland Security; he shouldnt be saying those things His pal agreed. Perhaps theyd
just come from Walmart, where they saw one of their See something, say something signs.
Notwithstanding all that, a high standard of living continues to disguise the negative trend. Until quite
recently the US was still the best place in the world to live, and everyone wanted to come here to improve
their state in life. But that geographical area of the continent is now best referred to as the US not
America. America was a concept, a unique and excellent one, which has been pretty well banished. Te US
is now just another of 200 nation-states and is rapidly losing its preeminence among them.
Te peak of American Civilization is pretty clear in retrospect; Id say it was the time between the 50s and
the late 60s 1959 Cadillacs, California girls and loads of personal freedom. It was a great place to prosper,
with ownership of 75% of the worlds economy. It was a place where opportunity-seekers focked; now its a
place from which theyre looking to escape. US workers earned 5, 10, 20 times or more what foreigners did
for the same work. Tose days are gone.
Now the state is in the ascendant, insinuated throughout society. People look to it for everything Social
Security when they retire, for phony disability payments, food stamps, unemployment benefts and scores
of other programs. And soon for all their medical care. One of the few accurate things Mitt has said in the
last few months is that 47% pay nothing and are free riders. Of course he backpedaled and tried to deny
it, further proof that he has neither principles nor backbone. But, atypically, he was almost correct with
his fgures. In fact, the bottom 50% pay 3% of taxes, the top 1% pay 38%. Invite two wolves and a sheep to
vote on what to have for dinner and see what happens. Regarding what happens to the assets of the 1%, its
going to be more like inviting 50 wolves and a sheep to vote on what to have for dinner. On the other hand,
so many of the rich especially in the fnancial world have made their money through political deals that
they deserve to be eaten. Its a bad situation either way.
Were still in the eye of the storm that started in 2007. Its been papered over with the creation of trillions
of new currency units. Right now theyre just sitting in the fnancial institutions where the government put
them to stave of a defationary collapse. Teyll inevitably disseminate throughout the economy, however,
leading to very high levels of infation. Its going to result in an economic, fnancial, political and social
earthquake. I spelled out some of the alternatives and consequences in the August issue of Te Casey
Report.
At this point, however, theres very little the government can do to undo several generations of increasingly
bad policy. And theres even less they will do. Even if Romney is elected, hes not someone to make serious
changes except, perhaps, to redouble the disastrous policies of the military abroad. If Romney is elected,
hell be blamed for the Greater Depression simply because its full force will hit on his watch. Free-market
rhetoric (forgetting the fact theres zero free-market reality) from the Republicans will be discredited for
decades. Ten, in 2016, well get Hillary, or perhaps a left-wing general. If Obama is elected, hell do all
the awful things youre afraid hes going to do during a crisis. Ten, in 2016, well get a right-wing general.
Americans, dont forget, just love their military these days and will, idiotically, presume a general will be
able to straighten out the mess.
But its going to be nearly impossible to straighten things out, except over a number of years, even if they
do the right things and theyll continue doing the wrong things. Tere will be more poor people than
ever but the poor always get by somehow. Perversely, the rich will be richer than ever, despite the fact the
rest of society will want to have them for dinner. Tey can hire the lawyers to direct benefts their way, they
can hire the accountants to minimize their taxes, they can hire the politicians to pass laws that allow them
to swill at the public trough a hundred diferent ways. Te middle class, however, is going to be eviscerated.
Teyre the ones who always try to produce more than they consume and save the diference which builds
capital. But most of them save with dollars, and when the dollars are destroyed, so will they be. Bernanke
should, in the interest of simple justice, be hung by his heels from a lamppost but, instead, hell retire and
will collect his $100 million in directors fees, speakers fees, book contracts and sweetheart deals.
How Tis Is Going to End
When times get tough, history tends to repeat itself. Take the French Revolution. Te French economy
was a disaster in 1789, and the people got rid of Louis XVI as a response, but then it got much worse with
the Assignat infation; then came Robespierre and the Directorate. Te Russian economy was a disaster in
1917, after three years of war; the country was bankrupt. Ten came Lenin and the Peoples Republic. Te
story of how the Weimar infation set the stage for Hitler is well known.
So whats going to happen in the US? It seems to me were looking at several serious eventualities. Here are
a few predictions.
War War unites the country around a leader which, for some reason, is seen as a good thing. When times
get tough, governments love to blame foreigners for the problems government has caused. Its those damn
Chinese who are unemploying American workers by flling Walmart with all those inexpensive goodies. Its
the damn Arabs who are keeping the price of oil too high. Its those damn Muslims who now threaten the
US the way the Soviets used to. With a gigantic military acting like the equivalent of a hammer, everything
starts to look like a nail. Te next confict is unlikely to be a sport war, like those in Iraq and Afghanistan; it
will be serious business.
FX and other people controls A major war will only exacerbate and hasten this inevitability. We already
have indirect foreign exchange controls, but they will become overt. Te government cant have people
subverting the value of the currency and the solvency of the banks by moving money out of the country.
Anyway, thats only something unpatriotic rich people do; the mob will approve. Gold and silver may not
be confscated, but purchases will likely be restricted and tracked.
Asset tax Many countries, especially in Europe, require reporting of everyones asset base annually. Ten,
after an exemption, a tax of perhaps 1% must be paid. Te average guy will love this, because it only hurts
the rich just like the income tax when it was frst enacted. You can count on this. Te government is
bankrupt, and this is an easy source of funds.
VAT Te US is actually one of the few developed countries that doesnt have a Value Added Tax,
tantamount to a national sales tax. In most places, its around 20%. It will be a tougher sale than the asset
tax, but it will likely be sold as a luxury tax on the rich to start only applicable to expensive cars, boats and
properties. Ten it will grow to cover nearly everything with a vast new bureaucracy of agents to enforce
it.
Its going to be ugly for the average guy. Its not just going to be bad. Its going to be worse than even I
think its going to be.
What Should You Do?
Specifc suggestions, of diferent types, occur monthly in all our publications. But allow me to summarize
and re-emphasize. Speculate and diversify politically.
I. Speculate
One thing is certain: As trillions more dollars are created, it will cause more bubbles. Te frst thing to
remember is that once a bubble bursts, it generally doesnt reinfate for close to a generation or more.
Te bubble in stocks burst in 2000. Stocks are still no bargain by any measure, and are likely to decline
in real terms dollar terms may be a diferent story as the economy declines and there is a massive
reorientation of consumption and production.
Te bubble in real estate burst in 2008. Since real estate foats on a sea of debt, and rates are at all-time
lows, its going to get hurt as rates go up. And its the most obvious thing to tax; with the bankruptcy of
local governments, taxes are going way up. People are going to again recognize that houses are depreciating
consumer goods, in the same class with toothbrushes, clothing or autos just a bit longer lived. Te current
enthusiasm is a classic dead-cat bounce.
Commodities. Not in a bubble, but way too expensive to own prudently.
Te biggest bubble in the world? Government bonds. Interest rates are at all-time lows, despite trillions
of new currency units being created worldwide. Actually, its because of them: the price of credit is interest,
and in the short run, increasing the supply of money drives down the price of credit. Bonds are a triple
threat to your capital: rising interest rates, falling exchange rates and default. Make a killing being short
bonds. Its taken a while, but this is the biggest bubble in world history.
Gold is the next bubble to be infated. Its not cheap now, but on the other hand, it was cheaper in real
terms in 2001, at $250, than it was at $35 in 1971. Its going much, much higher, largely due to central
bank buying. Tis bubble is going to be driven mainly by fear, which is a much stronger emotion than
greed. But it will be driven by prudence as well.
Gold shares will be a super-bubble. Most are junk, and mining is a horrible business. But relative to gold,
theyre at one of the cheapest levels in history. When both the public and pension funds start piling in as
they try to get out of bonds and currencies, it will be like getting the contents of Hoover Damn through a
garden hose.
II. Diversify Politically
Market risks are going to be huge. But this is all a politically caused problem. Terefore its critical that you
diversify politically. If you stay planted in your home country, like livestock, thats the way your government
will treat you. Certainly like a milk cow, but perhaps like a beef cow. Stop thinking and acting like a serf.
Its now hard to open a foreign fnancial account. Soon it will be impossible. Store gold abroad in a stable
country youd like to visit. Own property in a country where you would enjoy spending time. Tese are
perhaps the most important, and most prudent, things you can do for yourself and your family.
I dont consider myself an expert in the area, but it also makes sense that you set up an ofshore asset
protection trust. Tese structures have many advantages, but they may also provide you with some
insulation from the coming asset tax and foreign exchange controls.
I expect well go back into the hurricane next year and 2014, so remember, time is short.

Gold Standard Redux
By Terry Coxon
Many of us see hair-curling rates of price infation not too far down the road. Today infation is hardly
noticeable. But whats coming will be so painful and so disruptive that soaring prices will become the
voting publics number-one complaint. How will the politicians respond?
Tey will be responding to an audience for whom the idea of fat money (even with a picture of a dead
president on every bill) has been discredited. Te obvious alternative to fat money will be a return to a gold
standard, and its hard to imagine what competing proposals might get in the way. In such an environment,
being pro-gold will be politically smart. Championing the idea of re-linking the dollar to gold would serve
any politician nicely as an I-dare-you-to-disagree challenge to his competitors. And supporting such a
proposal would be a convenient way for politicians to distance themselves from the mistakes of the past.
I believe we are going to hear a lot of talk about a return to the gold standard. But none of the talkers
will be saying much unless he tells you what kind of gold standard he has in mind. Tere are diferent
ways to link the dollar to gold. Each of them involves an ofcial price for gold at which the government is
committed to transact with any and all comers. But there are important diferences.
Symmetric bullion standard. Te government sets an ofcial dollar price per ounce of gold. Ten (i) it
pledges to buy an unlimited amount of gold from the public and pay for it in paper dollars, and (ii) it
pledges to sell an unlimited amount of gold to the public and accept payment for the metal in paper dollars.
Asymmetric bullion standard. Te government sets an ofcial dollar price per ounce of gold. Ten it pledges
to sell an unlimited amount of gold to the public and accept payment for the gold in paper dollars. Te
asymmetric standard entails no commitment to buy gold; it is nothing more than the sell side of the
symmetric bullion standard.
Gold coin standard. Te government mints coins containing a fxed quantity of gold (e.g., one ounce per
coin) and carrying a fxed legal-tender value, which implies an ofcial price for gold. Ten (i) it pledges to
exchange an unlimited number of gold coins for the same quantity of gold bullion with anyone willing to
make the swap, which implies a pledge to buy an unlimited quantity of gold at the ofcial price; and (ii) it
pledges to sell an unlimited number of gold coins to the public and accept payment for the coins in paper
dollars.
Bi-metallic standard. Te government sets an ofcial dollar price per ounce of gold and an ofcial dollar
price per ounce of silver. Ten (i) it pledges to purchase unlimited amounts of either metal from the public;
and (ii) it pledges to sell unlimited amounts of its choice of either metal to the public and accept payment
for the metal in paper dollars.
Notice that every version of the gold standard involves a promise about paper money. In that respect, the
gold standard resembles the fat money system for which it is an alternative.Te diference is in the nature
of the promise and in how quickly the public will know if it is being broken.
With fat money, the promise is a soft one a pledge to protect the currencys value by exercising prudence
and restraint in printing more dollars. When the promise is broken, it may take years for that fact to
become obvious to much of the public. By then, the parties responsible for breaking the promise may have
moved on to other government positions or retired altogether or, in rare cases, moved on to honest work.
Tat leaves their successors nicely positioned to put on a show of dismay, anger, disgust or indignation
(every politician has his own theatrical specialty) at what his predecessors have wrought and then get on
with the business of renewing the pledge to protect the currency.
Under any version of the gold standard, life for politicians is far less convenient. Keeping the promise to
buy gold or silver (which is part of every version except the asymmetric bullion standard) is simple enough
just print however many dollars you need. Its keeping the promise to sell gold or silver to anyone who
presents paper money (i.e., redeemability) that is the hard part, and the printing press is no help at all.
Moreover, a failure to redeem is immediately and unambiguously obvious. And when such a failure occurs,
its likely that the responsible parties will still be on stage and standing within the delivery zone of tomato-
tossing voters.
Te pledge to sell unlimited quantities of gold or silver for paper money may seem like an empty one.
Obviously, neither the government nor anyone else has an unlimited quantity of metal. But there is a
way for the government to keep the promise, provided that it is at least minimally creditworthy. It can do
exactly what the government does from time to time when it leans toward protecting the value of the fat
dollar: it can reduce the supply of paper currency by selling Treasury securities. Under a gold standard,
doing so drains of excess dollars that the holders otherwise might have redeemed for gold and thus saves
the redeemability promise from being broken.
Setting the Price
Returning to a gold standard is a tricky business. Te difculty has little to do with how much gold the
government has on the day it makes the big move. Even if it had no gold at all, it could re-link the dollar
to gold by setting the ofcial price high enough to attract sellers. Te difculty is in determining an ofcial
price that wont leave instability in its wake.
Set the price too low, and gold will start fowing out of the Treasury. If the price is just a little too low, the
publics demand for gold (at the ofcial price) will eventually be satisfed and the outfow will end. But if
the ofcial price is much to the low side, the politicians will be stuck with an ugly choice. Either (i) stop
the gold outfow by contracting the publics supply of paper dollars (e.g., the Federal Reserve sells Treasury
securities to the public), which likely would produce an economic recession; or (ii) let the outfow continue
until it exhausts the governments gold holdings and then tell the next would-be dollar-redeemer, Sorry,
we fooled you again.
And on the other hand
Set the price too high, and gold will start fowing into the Treasury. If the price is just a little too high, the
public will sell what it cares to sell and then the infow will end. But if the ofcial price is much to the high
side, the politicians will get, for a while, what they enjoy so much an infationary boom, as the Treasury
prints more paper dollars to pay for the gold the public wants to sell. And like any infationary boom, it will
end in an ugly recession.
So how do you determine the Goldilocks price not too high, not too low? A tempting indication would
be the current open-market price. But that indicator isnt even close to being a sure thing. Consider two
extreme circumstances in which the return to a gold standard might occur.
Total surprise.Everyone goes home on Friday with fat dollars in their pocket. Over the weekend, Congress
passes the appropriate legislation, the president signs the bill on Sunday night, and on Monday morning
everyones dollars are convertible to gold at an ofcial price set close to the previous Fridays Comex spot
settlement price.
Would the ofcial price that comes out of such a lightning transition be too low or too high?
A return to a symmetric gold standard would increase the demand for dollars by making the dollar seem
less susceptible to loss of value through excess printing. It also would increase the demand for gold, since
the governments pledge to buy unlimited amounts of gold would put a foor under its price, thereby
eliminating golds biggest negative feature the risk of a price drop. Which efect would dominate? No one
knows (or if someone does know, he hasnt explained it to me). So relying on the Comex for price discovery
might lead to an ofcial price that is much too high or much too low. Te adoption of a gold coin standard
would entail the same quandary.
A sudden adoption of an asymmetric gold standard would increase the demand for dollars for the reason
just cited. But it wouldnt increase the demand for gold, since an asymmetric standard does nothing
to prevent the open-market price from falling. So at last Fridays Comex price, gold has been made
comparatively less attractive than the dollar. And that means that an ofcial price set to match the earlier
Comex price would be too high, and likely by a wide margin.
No surprise. We are treated to month after month of debate about a return to a gold standard of one kind
or another. Te political tide runs strongly toward re-linking the dollar to gold, and the argument gradually
shifts to one about the ofcial price. Gold traders, naturally, follow the debate closely. In response, the
Comex price gradually shifts from being an indication of the market-clearing price for the metal to being a
forecast of what the politicians are going to agree upon as the ofcial price. In that circumstance, regardless
of the type of gold standard, adopting the Comex price as the ofcial price would be an absurdity. Te
result could be very wide of the mark, perhaps drastically too high or drastically too low.
Embracing a bi-metallic standard wouldnt eliminate the price-setting puzzle. In fact, it might add to the
puzzle.
Figuring out where we should be and fguring out the right way to get there are two separate matters, each
with its own opportunities to be wrong. Even if you see the advocates of a gold standard as models of clear
thinking, there is no reliable way for them to be right about the price.
Given the growing recklessness with which the fat dollar is being managed (QE3 is truly unprecedented
a solemn, furrowed-brow pledge not to protect the dollars value), the gold standard is almost certainly
going to come riding back into town. By restraining the government from interfering in the capital
markets, it will lead to greater economic stability eventually. But the transition to a gold standard could be
a bumpy ride.

How to Invest
Our monthly look at ideas to keep your portfolio aligned with the bigger trends.
Trim and Raise Cash
With a variety of destabilizing catalysts looming (debt ceiling, the election aftermath, rising taxes), were in
something of an economic limbo right now. Its unclear whether QE3 will be strong enough in the interim
to ofset the clear slowdown in the global economy. For this reason, we want to hold a little bit more cash
than usual as we enter the fnal throes of 2012.
So were paring back a few of our positions; youll fnd a couple of changes to our recommendations below.
Also, be sure to check out Te Speculators Corner; weve devised an options trade to hedge against (and
proft from) any near- to mid-term volatility.
Sell Vanguard Energy ETF (VDE) for a gain of 10%
Were paring back our exposure to oil from three investments to two. Why didnt VDE make the cut? If oil
weakness materializes, we want companies with specifc and high-probability growth drivers, like National
Oilwell Varco and Black Diamond. As a cross section of the oil industry, VDE doesnt ft that bill: because
it holds so many companies, the relative merits and demerits of each constituent cancel each other out,
leaving a vehicle that is driven by the price of oil and not much else.
Right now, we dont want that diversity. We want companies that will plow ahead and continue investing
and executing their business plans despite economic weakness, so they can come out stronger on the other
side. NOV and BDI both ft that description, and VDE does not. Tats why were cutting it loose.
Sell AGL Resources (GAS) for a gain of 1%
Tis one is simple: wed rather have the cash right now. While GASs 4.5% dividend is nice, we want some
extra cash in our brokerage accounts to take advantage of the lower prices that may be forthcoming.
Take a Casey Free Ride on Hillenbrand (HI) for a gain of 18% (so far)
Hillenbrand announced this month that it will acquire Coperion Capital GmbH, a global leader in the
manufacture of compounding extrusion and bulk material handling equipment. Its part of Hillenbrands
strategy of transforming itself from a casket maker into a diversifed industrial powerhouse. Te market was
very pleased with the news, as shares jumped over 12% in the ensuing days.
So why the Free Ride? Hillenbrands core business of making and selling caskets is not really its core
business anymore. Te process equipment group now accounts for about 60% of HIs revenues, leaving its
high-margin casket-making business with a minority 40% share. Now that HI is primarily an industrial
company, it will be more susceptible to the ups and downs of the business cycle. Its risk profle has changed.
We have no doubts that HI management will successfully integrate Coperion and continue to run the
business well, which is why we want to maintain some exposure. By taking a Casey Free Ride, we get the
best of both worlds we eliminate our risk and ride the profts.
Heres the Free Ride formula: if you invested $5,000 in HI, your investment is now worth $5,900. Sell
$5,000 worth to recoup your original investment, and ride the $900 in profts.
Sell Brasil Foods (BRFS) for a loss of 7%
Similar to GAS, were selling BRFS because wed rather have the cash. BRFS still has impressive long-term
opportunities, but it has not executed upon those opportunities so far, and we see no indicators that it will
within the next 12 months. We might revisit BRFS in the future, but for now, were selling.
Buy PetroLogistics (PDH)
PDH released its Q3 results earlier this month, and it played out just as we anticipated. Te dividend came
in at 6.5% annualized a respectable number, but far short of the analyst consensus of 14%. As a result, the
price has fallen below $13 a nice entry point.
Te other event we were waiting for turned out to be a non-event. Te lockup period for PDHs shares
ended on October 30, 2012, and insider selling was nil. Needless to say, its a great sign that management is
keeping its money where its mouth is by remaining heavily invested in the company.
Were giving the green light; PDH is now a buy. Just remember this play is riskier than our typical
investments in Te Casey Report, so only allocate a small amount of capital to it. See last months original
recommendation for more details.
New Investment Recommendation
Schweitzer-Mauduit International (SWM)

Executive Summary: Schweitzer-Mauduit is a geographically diversifed cigarette paper
manufacturer. Te company is a market-leading pioneer in developing innovative products and is
one of the few to break into the Chinese cigarette market
Te Trade: Buy SWM at the market, ideally below $34. Price target of $42 in 12-18 months
CurrenL rlce $36.48 32-Week 8ange $30.39 - $36.69
MarkeL Cap $1.1 bllllon L1 uebL Lo LqulLy 37.8
8evenue (11M) $830.2 mllllon ro[ecLed ulvldend ?leld 1.72
11M LS (ulluLed) $2.83 lnLeresL Coverage 34.9
lorward /L 8auo 7.3 11M L8l1uA Margln 19.0
rlce-Lo-8ook value 2.4 11M 8eLurn on lnvesLed CaplLal 14.38
According to the US Centers for Disease Control, US smoking rates rose in 2008 for the frst time in over
a decade the same 2008 that brought the most abysmal depths of the great recession.
Can you name another product whose use often increases during recessions? We cant. People smoke to
deal with stress. Its a small, inexpensive outlet. Te tobacco industry is compelling precisely because of its
resiliency.
Global demographics are strong, too. Tere are 1.1 billion smokers worldwide, and that number is expected
to reach 1.6 billion by 2025. Most of this growth will come from developing countries: China and India
combined are expected to add 50 million new smokers over the next four years.
But for all these attractive qualities, theres one big, bad downfall: regulatory uncertainty. Calling the
tobacco laws onerous is a laughable understatement. Limits on advertising bans of favored tobacco
usurious taxes forced unattractive packaging limits on where people can smoke name an intrusive
regulation, and its probably been inficted upon the tobacco industry.
You could accept that risk and take the plunge with Philip Morris, which has managed to remain proftable
despite these burdensome regulations. Or you could fnd a company that transforms these regulations into
opportunities. We chose the latter.
Schweitzer-Mauduit International (SWM) is a cigarette paper manufacturer, and its a juggernaut in its
feld. Te company controls about 23% of the global cigarette paper market and supplies 80% of cigarette
paper used in the US.
SWM manufacturers three types of cigarette paper:
Rolling paper: wraps around the column
of tobacco in the cigarette
Plug wrap paper: forms the outer layer of a
cigarette flter and is used to hold the flter
materials in a cylindrical form.
Tipping paper: joins the flter element to
the tobacco flled column of the cigarette.
Te company sells this cigarette paper to the major tobacco brands, including Philip Morris, Altria Group,
Japan Tobacco and British American Tobacco. SWM is also one of the only companies able to secure a deal
with China National Tobacco Corporation (CNTC), the largest tobacco company in the world.
One Mans Trash
When you think paper industry, you think commodity. But SWM is no Dunder Mifin. SWM
has efectively rewritten the rules of the cigarette paper industry by pioneering a product known as
reconstituted tobacco leaf (RTL).
RTL is made from tobacco byproducts that would otherwise be wasted in the manufacturing process, such
as tobacco stems. Te byproducts are processed and formed into a malleable, paper-like tobacco material
that can be mixed directly with the virgin tobacco blend. Te best part (for cigarette makers and their
customers) is that it is easily customizable and can be tailored to customers specifc tastes, smoke delivery
profles and product signatures. RTL makes cigarettes cheaper to produce without harming any aspect of
quality.
It didnt take long for the tobacco industry to embrace RTL: According to the World Health Organization,
the amount of virgin tobacco per 1,000 cigarettes fell from 2.28 pounds in 1960 to 0.91 pounds in 1999.
Te virgin tobacco was largely replaced by reconstituted tobacco.
But RTL is only one of SWMs many innovations.
We Didnt Start the Fire
Tousands of people are killed each year from fres started by unattended cigarettes. In response, lawmakers
have pushed for fre-safe cigarette laws. Such laws have been passed in every US state and the European
Union, and they require cigarettes to self-extinguish when left unattended. Dubbed Lower Ignition
Propensity paper, or LIP paper for short, the special material slows the burn rate so that the cigarette will
go out if a person isnt drawing any air through it.
Simple enough, right? Not exactly. Smokers are notoriously picky about their cigarettes, and changing
anything about the paper risks damaging the taste. SWM recognized this early on and developed a water-
based LIP paper called Alginex that makes cigarettes LIP-compliant without harming the taste.
Alginex is the industry-leader in LIP paper, and SWM holds patents for it in over 60 countries, including
the US, Europe, Indonesia and China four of the most compelling cigarette markets. And though several
countries have already enacted LIP legislation, some of the biggest smoking regions like India, Latin
America and most East Asian countries have not. Tat makes for big opportunity.
A Finger in Every Pie
SWM is truly a global company. It has a foothold in every important market, developed and undeveloped
alike. Heres a breakdown of SWMs revenue mix:
Te US and Europe provide stable, predictable sales for SWM. But its the Asian piece of the pie thats
most important.
China is both the worlds largest producer and consumer of cigarettes, accounting for over 30% of global
cigarette consumption. Nearly one-third of Chinese people smoke. But the country is in a bit of a pickle.
Te Chinese government generated over $24 billion from its state-owned tobacco companies during the
frst half of 2012. However, 2 million Chinese people are expected to die from cigarettes by 2020 largely
because Chinese cigarette safety standards lag those in the developed world.
To make cigarettes safer without killing the golden goose, Chinese authorities have announced that they
will implement tar delivery limits in their cigarettes. SWM foresaw this development last decade and
partnered with China National Tobacco Corporation to build a $100 million state-of-the-art paper mill
that manufactures low-tar flters.
What We ll Be Watching For
Chinese growth. SWMs joint venture with China National Tobacco gives it the platform to reap the
rewards from Chinas transition to safer cigarettes. And China also ofers SWM the opportunity to expand
its RTL business, since RTL can be customized to ft low-tar cigarettes.
Were also looking for SWMs LIP paper to continue driving growth. As more countries adopt LIP
legislation, SWM is poised to leverage its strong market position to move into these new markets. At the
moment, the US, Canada, European Union and Australia have LIP regulations. However, India, Latin
America and much of East Asia have yet to follow suit. We believe its only a matter of time until they do.
Recommendation
With numerous global growth prospects, patent protection, a knack for timely innovations, and a recession-
resistant business model, SWM is a compelling investment. We recommend a buy at current market prices,
ideally under $34. Price target of $42 in 12-18 months.
Te Speculators Corner
PowerShares Deutsche Bank Agricultural Fund (DBA):(Click here for original recommendation)
Last month, we advised adding a stop to this position at $28.85. It was hit on October 15, so sell this
position if you havent already.
iShares Dow Jones Transportation Index ETF (IYT): (Click here for original recommendation)
Te transportation sector has consistently underperformed the broad market, but the broad market has
performed so well that its kept IYT afoat. Weve given this trade enough time to play out, and we dont
want to incur any more time decay on the puts. Exit this position by selling the IYT puts at a partial loss.
United States Gasoline Fund ETF (UGA): (Click here for original recommendation)
Our prediction of suppressed gasoline prices heading into the election turned out to be correct, but prices
fell even more than we thought they would, triggering our stop loss of $54.65. We still like the risk/reward
on this trade and believe gasoline is in for a post-Sandy bounce. If youre willing to try again, buy UGA
between $54.00 and $56.00, and set a stop loss at $53.44. Sell the position if UGA reaches $70.18, for a
risk/reward ratio of 1:5.4.
Hedging for an Election-Induced Volatility Spike
By Aaron Bedrick
Executive Summary: Volatility is near record lows. Its time to buy in anticipation of a volatility
spike in the next six months
Te Trade: Buy the April 2013 puts on TEX at the $20.00 strike price for $2.00 or below. Buy
half as many of the April 2013 calls on TEX at the $27.00 strike price for $1.90 or below. Exit
the entire position if TEX trades above $26.80 or below $16.00.
For most of 2012, the volatility index, known as the VIX, has been historically low. In fact, this years high
has been the lowest high since before the fnancial crisis. Te VIX today is at 17.59, only 4 points above its
post-fnancial-crisis lows.
To understand why, it helps to understand stock market behavior. When stocks are rising as they have
been since the beginning of 2012 its usually a slow, steady grind upward. Surprise spikes to the upside are
very rare, so uncertainty is low in these situations. For that reason, rising stocks = low volatility.
Contrast this to downtrends, in which surprises are the rule. When stocks go down, they often do so swiftly
and unexpectedly. Tats why uncertainty is high in a downtrend, and its why falling stocks = high volatility.
Were in a consistent upward grind right now, but history shows that these quiet periods never last long.
With a variety of triggers on the horizon the debt ceiling, the fscal clif, the aftermath of the elections
its time to hedge our equity risk. To do that, were buying volatility while its cheap.

Te VIX since 2007. Volatility is very cheap.
click to enlarge
Tere are several ways to buy volatility. Te easiest is to buy an ETF that tracks the VIX. But all volatility
ETFs share a serious faw: they must continuously roll over futures contracts, which is expensive. As a
result, these instruments decay fast and are dangerous to hold for more than the short term. In buying
them, youre basically sacrifcing performance for simplicity.
We have a better solution. But frst, lets lay the groundwork with a crash course in volatility. We already
know that volatility measures uncertainty. When uncertainty is high, options premiums are expensive,
because the underlying prices are more likely to move enough in either direction to push them into the
money. Terefore high volatility = expensive options.
Heres where the VIX comes in: the VIX is based on the implied volatility of options on the S&P 500
Index. It is nothing but a derivation of options prices. Tink of the VIX as a middleman that allows you to
purchase volatility without dabbling in options.
Were cutting that middle man out by buying options directly while their premiums are low, in anticipation
of a volatility spike. If we get that spike, our options prices will rise, and we will proft.
Our target in this trade is Terex Corp (TEX), an equipment manufacturer. We picked it by running a
screen for desirable volatility and risk characteristics. At the risk of oversimplifying, we picked TEX
because it is a highly volatile stock with relatively cheap options.
It also has a nice technical setup. TEX has been consolidating since August and is at the upper end of its
previous one-year range. It has broken its uptrend and has started to form lower highs, a bearish sign. With
a beta of 3.02, TEX is highly vulnerable to macro market action.
click to enlarge
Were using an options technique called a straddle, which means buying puts and calls simultaneously
on the same stock. Te puts are our proft driver: if volatility rises and the price of TEX falls as we
expect, we will proft. Te calls, on the other hand, are a hedge just in case money printing overruns the
fundamentals and stocks continue higher.
Buy the April 2013 puts at the $20.00 strike price for $2.00 or below. Buy half as many calls at the $27.00
strike price for $1.90 or below.
Exit the position for a gain if the stock trades to $16.00, at which point the puts should be worth
approximately $3.50 (plus the added volatility premium) and the calls should be worth about $0.60. At
this point, our proft would be at least $1.70, and likely more with the volatility premium factored in.
Exit the position for a loss if TEX trades above $26.80. Te calls, as a hedge, should be worth about
$3.50 in this situation. At this point, the puts should be trading at about $1.05, for an overall loss of
$0.30 on the position.
Be sure to buy and sell the puts and the calls at the same time so you dont expose your account to
unhedged losses. Overall, were risking $0.30 to make $1.70, for a risk/reward ratio of at least 1:5.6, not
counting the additional volatility premium. As always, this is a high-risk speculation, so only enter this
trade with capital you can aford to lose.
Happy speculating.
Te Casey Report Portfolio
1nL CASL kLCk1 Ck1ICLIC
1
INVLS1MLN1
kef.
Date
2
Symbo|
Current
kecommendanon
r|ce
at Issue
r|ce
11]6]12
r|ce
1arget
Ga|n ]
(Loss)
3
GCLD & SILVLk
8uy Cold - 8uy $937.30 $1,720.17 - 83
8uy Sllver - 8uy $17.36 $32.13 - 83
CenLral lund of Canada 10/3/2009
CLl
8uy
$12.98 $22.24 - 72
1.CLl.A $13.90 $22.10 - 39
MarkeL vecLors Cold Mlners
L1l
9/8/2011 Cux 8uy on Weakness $37.00 $30.34 - -11
4
Aer gold hlL 6-monLh hlghs on Lhe heels of Lhe led's new CLLernlLy program, gold and gold mlners have been consolldaung.
ln Lhe realm of Lechnlcal analysls, Lhls ls a posluve slgn, as lL lndlcaLes LhaL prlces are gearlng up for anoLher surge. Long-Lerm,
our vlew ls unchanged: gold mlners are golng hlgher. Connnue to buy GDk on weakness.
LNLkG LAS
vanguard Lnergy L1l 7/6/2010 vuL Se|| $97.17 $103.63 - 10
ACL 8esources lnc. 7/20/2011 CAS Se|| $41.28 $39.27 $30 1
8lack ulamond Croup 7/12/2012 8ul.1C 8uy $22.17 $20.42 $28 -7
no news for 8ul Lhls monLh. Connnue to buy 8DI.
Access MldsLream arLners,
L
9/13/2012 ACM 8uy $31.28 $34.69 $37 12
ACM's earnlngs and revenues were ln llne wlLh Lhe consensus esumaLe of $0.32 per share. 8evenue rose 11.4, malnly
on Lhe back of hlgher LhroughpuL volumes aL Lhe Marcellus and Mld-ConunenL shale plays. ManagemenL noLed LhaL ACM
connecLed 186 new wells durlng Lhe Lhlrd quarLer, up 27 year over year. ACM also ralsed Lhelr dlvldend payouL Lo $0.433
per share, up 3.3 slnce 2C12.

1hese resulLs are very encouraglng. 1hough low naLural gas prlces may depress drllllng acuvlLy ln Lhe shorL Lerm, ACM has
shown lLs sLraLeglc asseLs - malnly ln Lhe Marcellus and Mld-ConunenL reglon - make up for any losL volume. And, wlLh more
Mld-ConunenL asseLs comlng onllne by Lhe end of Lhe year, we should see Lhe volumes ln Lhe reglon acceleraLe.
Connnue to buy ACM.
LMLkGING 1kLNDS
Amerlcan WaLer Works
Company lnc.
8/11/2011 AWk no|d $31.16 $37.23 $38 - $42 23
AWk had a solld quarLer. 1he company exceeded consensus neL lncome and revenue pro[ecuons, whlch grew 20 and 9.3
year over year, respecuvely. 1he sales growLh was drlven by lncreased consumpuon ln LasLern and MldwesL markeLs as a
resulL of Lhe hoL and dry summer.

uurlng Lhe quarLer, AWk slgned Lwo agreemenLs wlLh x1C Lnergy Lo consLrucL plpellnes for supplylng waLer for shale gas
drllllng operauons ln ennsylvanla. Pydraullc fracLurlng requlres a loL of waLer, so we're pleased Lo see AWk pursulng growLh
opporLunlues ln Lhls arena.
Cverall, we're very happy wlLh AWk's resulLs. Connnue to ho|d.
8rasll loods SA (Au8) 10/13/2011 88lS Se|| $20.29 $18.38 $24-$28 -7
1nL CASL kLCk1 Ck1ICLIC
1
INVLS1MLN1
kef.
Date
2
Symbo|
Current
kecommendanon
r|ce
at Issue
r|ce
11]6]12
r|ce
1arget
Ga|n ]
(Loss)
3
nauonal Cllwell varco 3/10/2012 nCv 8uy $68.43 $72.98 $93 7
nCv had a busy monLh. 1he company maLched earnlngs esumaLes as proLs rose 13 and revenues lncreased across Lhe
board. As oll and gas producers conunue Lo updaLe Lhelr anuquaLed rlgs - a Lrend we've been followlng closely - nCv should
conunue Lo dellver superlor resulLs.

nCv also conunued lLs acqulsluon spree. Accordlng Lo energy lnvesLmenL bank Slmmons & Co., nCv has acqulred PousLon-
based llberspar Corp. for an undlsclosed sum. 1he company makes advanced spoolable composlLe plpellne producLs, whlch
are used by crude oll and naLural gas producers ln gaLherlng sysLems, plpellne remedlauon and ln[ecuon appllcauons. We're
sull walung for conrmauon from nCv, buL lf Lhe acqulsluon rumor ls Lrue, we Lhlnk LhaL Lhe acqulsluon complemenLs nCv's
8lg 1echnology segmenL and Ls wlLh Lhe company's aggresslve acqulsluon-based growLh sLraLegy. Connnue to buy NCV on
weakness.
Plllenbrand, lnc. 6/14/2012 Pl Casey Iree k|de $17.33 $20.43 $26 18
eLroLoglsucs, L 11/8/2012 uP 8uy $12.31 $12.31 - 0
GLC8AL DIVLkSIIICA1ICN
lShares MSCl Chlle
lnvesLable MarkeL lndex
lund
2/3/2011 LCP 8uy $70.83 $62.17 - -10
Clobal x l1SL norway 30
L1l
2/3/2011 nC8W 8uy $13.93 $13.13 - -3
Wlsdom1ree Lmerglng
MarkeLs LqulLy lncome lund
2/9/2012 uLM 8uy $37.63 $33.96 - -3
DIVLkSII CASn
norweglan krone 6/3/2010 nCk 8uy 0.1342 0.173 - 14
Canadlan uollar 6/3/2010 CAu no|d 0.9342 1.01 - 6
uesplLe Lhe led's besL eorLs Lo push down Lhe value of Lhe uS dollar relauve Lo oLher world currencles, Lhe dollar acLually
sLrengLhened relauve Lo Lhe Canadlan dollar and norweglan krone ln CcLober. We relLeraLe our recommendauon Lo dlverslfy
beLween Lhe norweglan krone, Canadlan dollar and uS dollar. Lver8ank World Currency Cus are Lhe besL way Lo do so.
1
1hls sheeL represenLs our currenL poruollo recommendauons and ls noL a comprehenslve Lrack record.
2
8eference daLe ls Lhe release daLe of Lhe publlcauon when Lhe recommendauon was orlglnally made ln 1he Casey 8eporL.
3
lncludes ulvldends
4
We also hold a free rlde posluon ln Cux, whlch we recommended for purchase on 1/14/2010 and recommended a free rlde
on 4/14/2011. We neued a 28 galn upon Laklng Lhe free rlde, whlch ls noL lncluded ln Cux's performance above.
*Portfolio Page Updates: Get the latest on your companies by regularly visiting the portfolio page on our
website, or click here.

Caseys Data Farm
A monthly recap of data worth paying attention to.
Elections Rarely Rock the Stock Market

Plenty of fnancial publications have discussed the daily return on the stock market after Election Day.
Lets frst review those results. As you can plainly see, the Election Day news does little to change the
market. Te one exception is the election of Barack Obama, but its hard to blame it all on him since the
markets were already crashing when the 2008 election happened. In this case, he did inherit a bad market
and couldnt do much about it. But besides the Obama election, no other date makes a huge splash.
Reagans frst term saw a nearly 2% jump; a nice spike, but hardly earth-shattering.
Beyond the daily returns, we threw in an extra twist by showing the Electoral College votes for each
candidate. Teoretically, if something is obvious to the market, it should already be refected in stock prices.
Hence, one would expect the market to react less to predictable elections.
Tere seems to be some truth to this. For example, in nearly all the closer races, the market swings over 1%,
including George W Bush in 2000 and 2004, and Carter 1976.
When one candidate blows the other away, the change is usually less than one percent with some
exceptions like Reagan in 1980, Clinton in 1996 and Obama in 2008. Its not set in stone, but more often
than not, a predictable election wont shake the market.
Monthly Returns Before the Election Ofer Another Perspective
Digging a little bit further, this chart shows stock performance for the month leading up to each election.
Using the same theory, if the market has already predicted the winner, the price should be refected in the
market long before the election date. Within a month of the vote, one can get a pretty good idea of who is
likely to win. For example, in the recent election, not much has changed in the past month since the frst
Romney/Obama debate.
But the data says otherwise when comparing this chart to the previous one. For example, Nixon in 1972
goes from a half-percent loss to a 4% gain. And while Reagans 1984 reelection is negative in the frst chart,
it leads the pack with a sizeable near 5% gain in the month leading up to it. Furthermore, Clintons frst
term fips from a loser to a winner.
Could it be that voters dont make up their minds until just before the election? Maybe. But we think
its more likely that the market doesnt care much about whether a Republican or Democrat takes ofce.
Which leads nicely into our next chart
Te Stock Market Rises No Matter Who Is President

Tis chart shows the S&P 500 across numerous administrations. While the media might make us feel like
the sky is falling with every election, the stock market tends to keep climbing higher no matter what. Even
during Obamas term, the market has performed well, albeit from depressed starting point. Unfortunately,
the same cant be said of the unemployment numbers.
So, what gives? We have to remember that the damage done from any one presidency isnt felt right away.
For example, our fscal defcits wont hurt much until they cause interest rates to rise. Tink of Greece: it
didnt have problems while it was spending extravagantly it had problems when the money and credit ran
out. Similarly, we will pay for the sins of past presidencies way down the road.
When US Treasuries are fnally considered risky, the impacts of the Obama administration, LBJ and nearly
every other irresponsible leader for the past hundred years will be felt all at once. Te market might be
doing all right today, but bad seeds are being sown for tomorrow.
Is a Major Down Trend Coming in Mining?

In the October employment situation report, mining lost 9,000 jobs, and it wasnt the frst month of losses
in the sector. But once we dug into the data, we found that oil & gas services are likely the problem, not
mining.
Most of the drop in jobs in the mining sector since May 2012 has come from the mining support services
group. But if you read the fne print, youll see that the mining support services group includes both
contractors for mines and oil feld services companies. It sure would be less confusing if the BLS separated
the two. But unfortunately, we have to live with their classifcation system.
In all likelihood, its the oil feld services companies that are cutting jobs. Since natural gas prices have been
low for an extended period of time, the rig counts for new well drilling are down. Furthermore, oil & gas
is one of the few sectors that could be impacted by the results of the election. Many companies may be
waiting for the results before starting new projects.
If you fnagle the calculation a little bit, it supports our thesis: by subtracting oil & gas and coal mining job
losses from overall mining job losses, the change in jobs nets to zero. So, while the headlines might scream
job losses in the mining sector, the reality is that they are from oil feld services and coal, not gold and
silver mining.
Foreign Treasury Purchases Strengthen Slightly

Tree months have passed since our last look at this chart. As we predicted, net foreign Treasury purchases
strengthened over the summer, excepting June, which registered a surprising negative.
Even though purchases were stronger in the summer than in the spring, they certainly arent making a
roaring recovery. In light of the problems in Europe, Treasury purchases should be much stronger. Tis
weak recovery could partially explain the very slight rise in rates over the past few months.

Obama Watch

A Lame-Duck Congress Teeters on the Edge of the Fiscal Clif
By Don Grove, Casey Research Washington Correspondent
Te 112th Congress is not long for this world. Its days are numbered. Te next Congress will take its
place on January 3, 2013. Te newly reelected president will be inaugurated on January 20 seventeen
days later. Politicians dont want to make hard decisions about the nations economy now, during this time
of transition, any more than they did when faced with raising the debt ceiling a little over a year ago, but
theres no escaping these hard decisions. Its getting harder and harder for them to kick the can down the
road.
Tis Congress has been at loggerheads for two years. We can expect even less from a lame-duck Congress
cluttered with retiring or defeated legislators who are less inspired than ever to solve the nations economic
ills. Congress reconvenes on November 13. As a rule, gridlock is our friend. Te less meddling by this band
of charlatans and thieves, the better.
We are presently in the awkward position, however, of needing them to fnally take action on hard decisions
they pushed of into the future when they arranged to raise the debt ceiling by $2.1 trillion to a new high
of $16.4 trillion back in August 2011. When they raised the debt ceiling, they said they would take care of
defcit problems before the end of 2012, lest bad things happen. Well, the future is now. Tis is the end of
2012, and those bad things are about to happen. We are precariously close to the fscal clif.
Te Fiscal Clif
Te Congressional Budget Ofce discusses the fscal clif in a May 2012 report titled Economic Efects
of Reducing the Fiscal Restraint Tat Is Scheduled to Occur in 2013. Te CBO projects a $607 billion
reduction in the federal budget defcit between fscal years 2012 and 2013. Two-thirds of the impact results
from tax increases, including expiration of the Bush tax cuts and the 2% payroll tax cut, and Obamacares
increased tax rates on earnings and investment income for high-income taxpayers. One-third results from
spending cuts, including expiration of extended emergency unemployment benefts, reduction in Medicares
payment rates for physicians and automatic enforcement procedures included in the Budget Control Act of
2011, which were designed to restrain both discretionary and mandatory spending. Te cuts are referred to
as the sequester and the whole package of tax increases and cuts as the fscal clif.
Tese defcit reduction measures weaken the economy, which counters defcit reduction. Te scheduled
fscal restraint will lower taxable incomes and thus reduce tax revenues. Further, the CBO projects
that some spending will go up, such as spending on unemployment insurance, presumably despite the
curtailment of temporary extended emergency benefts to the unemployed. Te CBO projects that these
countervailing forces will raise the federal defcit by $47 billion, leaving a net projected reduction in the
defcit of $560 billion between fscal years 2012 and 2013.
Te CBO has warned that unless Congress comes to an agreement, the spending cuts combined with the
burden of higher taxes will take us back into recession, with the economy contracting at an annual rate of
1.3 percent in the frst half of 2013. Senator Tom Coburn (R-Oklahoma) wrote that the CBO only got
it half right. It is tax increases, not spending cuts, that are a threat to our economy. Of course, many of us
would argue that we are already in a recession if not a depression. I guess it depends on your defnitions. In
any case, there is no recovery underway for the fscal clif to jeopardize.
Disagreements Abound
Te Joint Select Committee on Defcit Reduction (sometimes called the super committee) that was
created by the Budget Control Act of 2011 dissolved into a stalemate. It never managed to agree on defcit
reduction legislation to recommend to Congress. Instead, it issued a statement that after months of hard
work and intense deliberations, we have come to the conclusion today that it will not be possible to make
any bipartisan agreement available to the public before the committees deadline.
Instead of reining itself in after the 2011 debt ceiling crisis, the threat of sovereign default, and the
subsequent downgrade of federal debt by Standard & Poors, the federal government has continued to
borrow at a rate of roughly $4 billion per day. It is now likely to exceed the new debt limit sometime
around the end of this year conveniently after the election.
Both parties have sharply difering ideas about how to solve the defcit problem. Democrats want to raise
taxes, preferably on the rich. Republicans want to cut spending, particularly for entitlement programs, but
would prefer not to cut defense spending. Te Tea Party wants to rein in both parties with a constitutional
amendment to balance the budget. Te Tea Party hates taxes.
K Street lobbying frms are out in force calling for a reprieve from sequestration. Te US Chamber of
Commerce, a major lobbying force, opposes sequestration, because it cuts everything the same, and we
know all spending is not created equal. Te real problem is entitlement spending, and until we address that
issue, we will not address the problem of defcits and debt. Senator Tom Coburn, writing in Te Hill, said
that the Budget Control Acts across-the-board automatic spending cuts, instead of specifc, targeted cuts,
absolve politicians of the responsibility of leading and making real decisions.
If a deal is not made, we will see increases in the tax rates on income, capital gains, dividends and estates.
More than fve times as many people will fnd themselves paying the dreaded alternative minimum tax in
2013.
Te fscal clif is not just about taxing the rich, however. Te Brookings-Urban Institute Tax Policy Center,
a Washington research group, said 88 percent of US taxpayers will be impacted by higher taxes. Te
average marginal tax rate will increase by about 5%, and taxes will rise by almost $3,500 per household.
Everyone will feel the pain. For example, low-income earners would see the largest percentage increase in
the amount of their earnings that will go to taxes from 0.6% to 4.3%. Tese lower-income taxpayers will
feel the loss of expanded earned income tax credits and child tax credits from the American Recovery and
Reinvestment Act, Obamas 2009 stimulus. Presumably, in keeping with class warfare rhetoric from the
Obama administration, these lower-income taxpayers would get a reprieve and the rich would take up the
slack.
Te Obama administration wants to focus the increased tax burden on the rich, a group that includes
individuals making more than $200,000 per year or couples making $250,000. Its getting harder and
harder to classify these folks as rich, however. Moreover, the increased taxes on capital gains and dividends
actually increase the burden on rich and poor alike. Penalizing capital gains and dividends discourages
capital formation and ultimately leads to a lower gross national product and fewer jobs. Tere is a price to
be paid for feasting on the goose that lays the golden eggs.
A Grand Bargain
Te heads of 80 large US corporations signed a letter on October 25, 2012, noting the presidents failure
to strike a deal with Congress to avoid going over the fscal clif. Te letter called for a long-term defcit-
reduction deal that would encourage economic growth and ease the uncertainty that is holding back the US
economy. In their letter, these business leaders urged policy makers to acknowledge that our growing debt
is a serious threat to the economic well-being and security of the United States.
Senator Tom Coburn agreed, writing in Te Hill that our debt itself, which is 103 percent of gross
domestic product, is slowing our economy, just as leading economists have predicted. Wilbur Ross,
chairman and CEO of WL Ross & Co., said, they were trying collectively as business leaders to fll
the vacuum left by the political leadership of the president. Ross said, if he had exerted leadership, we
wouldnt have the fscal clif that we have now.
Te Campaign to Fix the Debt, as the group is known, counts among its leaders Erskine Bowles and Alan
Simpson, who co-chaired President Obamas 2010 National Commission on Fiscal Responsibility and
Reform (sometimes called the catfood commission). Te commissions recommendations for balancing
the budget by 2015 did not get enough votes to be sent on to Congress, and the president simply ignored
the recommendations of his own commission.

Alan Simpson and Erskine Bowles
Te latest problem-solving committee is the so-called Gang of Eight, a group of eight senators four
Republicans and four Democrats that is meeting in hopes of working out a bipartisan agreement that
utilizes both tax increases and spending cuts. As we draw perilously close to going over the fscal clif, let us
hope the Gang of Eight is more successful than its predecessors.
During the presidential debate on October 22, 2012, President Obama stated that sequestration is
something that Congress proposed. It will not happen. He may be right, at least for the short term. A
stopgap budget plan could be enacted during the lame-duck session of Congress that would give legislators
time to come up with the elusive grand bargain.
Romney suggested a series of separate bills instead of one grand bargain. He also urged putting of any
permanent solution until after the inauguration. Lets have a year of runway, or even six months of runway
after the new president is elected so that we can have the tax reform and the military spending plans and
the budget plans that are consistent with that individuals leadership and views.
Weve already had four years of runway with Obama. Shortly after his inauguration in February 2009,
President Obama said:
We cannot and will not sustain defcits like these without end. Contrary to the prevailing wisdom in
Washington these past few years, we cannot simply spend as we please and defer the consequences
to the next budget, the next administration or the next generation. We are paying the price for these
defcits right now.
In 2008 alone, we paid $250 billion in interest on our debt; that is more than three times what
we spent on education that year, more than seven times what we spent on VA healthcare. So if we
confront this crisis without also confronting the defcits that helped cause it, we risk sinking into
another crisis down the road as our interest payments rise, our obligations come due, confdence in our
economy erodes and our children and grandchildren are unable to pursue their dreams because they
are saddled with our debts.
Tats why today I am pledging to cut the defcit we inherited by half by the end of my frst term in
ofce. Tis will not be easy it will require us to make difcult decisions and face challenges we have
long neglected, but I refuse to leave our children with a debt they cannot repay. And that means taking
responsibility right now in this administration, for getting our spending under control.
Well said, Mr. President. Too bad things did not work out as you pledged.
Political Courage
Senator Coburn summed this situation up nicely: What Washington is lacking is not options for savings
but the political courage necessary to make specifc decisions. Millions of families and individuals in
America are already living in the world of hard decisions and priorities. Its long past time for Washington
politicians to join them.
End Note
A closing comment by Doug Casey
I trust that, whether or not you forgot about Election Day on Nov. 6, that you remembered to celebrate
Guy Fawkes Day on Nov. 5.
Guy was a professional soldier, born in 1570, who was recruited by fellow Catholics to detonate enough
gunpowder to blow up King James I, the Queen, government leaders and Parliamentarians, on Nov. 5,
1605. Te intention was to restore Catholicism to England. Unfortunately for the conspirators, they were
ratted out by someone they were attempting to get on board the plot. I make no case for his objective, but
certainly admire his sense of style and daring.
Guy was subsequently hanged, and other conspirators were drawn and quartered a particularly gruesome
way to be executed. It seems Guy was held in low regard for centuries, with efgies of him being burned.
But in recent decades his reputation has been reformed, and hes now recognized as the only man who
ever entered Parliament with honest intentions. Youll often now see people who advocate serious political
change, including young Ron Paul supporters, wearing Guy Fawkes masks at rallies. I myself use Guys
visage as an avatar for computer things.
Ive recommended you see the movie V for Vendetta before, and will do so again. It brings the legend of Guy
Fawkes up to present day; its an exciting fick with a great message. Anyway, see the movie and note this
little poem:
Remember, remember, the 5th of November
Te Gunpowder Treason and plot;
I see of no reason why Gunpowder Treason
Should ever be forgot.
Guy Fawkes, Guy Fawkes, twas his intent.
To blow up the King and the Parliament.
Tree score barrels of powder below.
Poor old England to overthrow.

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The Global Economy Is Slowing: in This Month's Issue..

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Volume V, Issue 11 / November 2012

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