December 14, 2011; Father/Son Powwow in Hawaii: Don and David McAlvany Strategize on Current Observations

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany – and Don McAlvany today. David, every year, a couple of times a year, you and your dad try to get away, sometimes to the furthest place away from everything else on earth, so that you guys can strategize, you can regroup, you can banter about, maybe argue about China, and then maybe agree about Europe. Why don’t you guys tell everybody where you are right now?

David: We are spending a couple of days in Hawaii, and as you say, looking at the world from a different perspective. We try to take the aerial view, if you will, and both look at the details and the big picture, and see where we have compatible ideas, and where we disagree, in our views, sort of iron sharpening iron, in an effort to better understand the world and bring that big picture to our clients.

Kevin: And Don, it’s good to talk to you again. You’ve been gone for about four months. You’ve been in Asia, I know you’ve been in the Philippines, you’ve been in Europe, so you’re coming around from the other side of the world and sort of meeting David coming from the this side.

David: Yes, it’s good that we can have these more or less international rendezvous. Kevin, we spent about six weeks in
Europe, in Greece, in Belgium, Switzerland, France, England, and a few other places. We did talk to financial leaders and leaders in the precious metals industry and got some interesting perspectives from Europe, and then went on down through India, Singapore, Indonesia, the Philippines, Hong Kong, and so forth, and got some interesting, sometimes contrasting views, from leaders in Asia.

I would say the one conclusion I would make from my last four months of travel is that the world is changing very, very, very rapidly, and I would say, for the most part, it is deteriorating in a lot of ways.

David: Dad, as we noted in last Friday’s commentary, there were several U.S. economic statistics which were positive for October and November, so good news may, in fact, keep markets stable through the year end, and this is an important point to make, because we have both Wall Street and Washington, looking forward to looking back, if you will, at 2011, as a positive event. As a note, where we held it together, we saw Europe in flames, and here in the U.S. we made all the right policy decisions. Can you see it now? The Dow was up 5% for the year, or if we can certainly finish above the 12,000 level, it will be positive for the year, and they will be able to pat themselves on the back.

Frankly, we see it a little bit differentially. Retail sales climbed less than forecast. We saw electronics close, and autos – those were the areas that were bought here in the most recent couple of months, while people actually were cutting back on eating out at restaurants, probably no surprise following Thanksgiving (laughter), and they are even scrimping on groceries. So what we look at is this reallocation of limited resources, not the huge increase which pundits were looking for.

Again, on the micro note, looking at the last couple of months, coming into the end of the year, there are some good things to talk about, some positive notes, and that is what you are going to find, certainly, coming into the end of the year, to make sure that the Dow finishes on a high note. That serves both the political purpose next year, as well as Wall Street year-end gaming that will help them with the performance numbers and legitimize the fees that they are charging.

Don: And of course, I think the present administration would like to take credit for all the great rebound, and so forth, which we think is a joke. It’s interesting, coming from a perspective, looking at America from the outside back in, as opposed to from the inside looking out, and certainly being in a very, very financially and economically unstable region over the last few months in England, U.K., Europe, and so forth, and then going over to an area of extreme high growth over in Asia, we see things a little different, maybe.

I would say that what we are looking at is a short-term rebound in the U.S. economy, perhaps, and I would say very short term, if it is a rebound at all, because you can’t trust any of the government numbers, from unemployment, to GDP, to inflation, etc. But if you take the longer view, looking out over the next 3, 6, 9, 12, 15 months, the humongous debt bubble that overhangs America has not gone away, just as we see it now causing a major crisis throughout Europe, and what is a major financial, economic crisis in Europe today, I think will be a major financial, economic crisis in America within the next 6-12 months.

David: And what we are seeing in terms of a global economy slowing down in concert, sort of debunking that idea of decoupling, wherein the emerging markets would lead us into recovery and into sort of the brave new world – we have the global purchasing managers’ indexes, which are all moving down, with two exceptions, the U.S. and Russia, where manufacturing is holding its own. But whether it is China, or whether it is Germany, very important, and Brazil, and a number of others, we are seeing a contraction in manufacturing, and we already see China out in front of this with a response, cutting reserve requirements and loosening its monetary policy to accommodate and perpetuate that growth.

We do see 2012 as a period of global economic recession, if not depression, and that is going to be fought with the two main tools that they have to draw upon – fiscal and monetary solutions. We are already seeing the experiment with the fiscal side in Europe, and it is not working very well, because it is not popular. People don’t like paying the price, in terms of austerity. In terms of the government stepping up spending, then it’s a question of who you are spending the money on, and who is enfranchised, and this is really critical coming into 2012. As we have noted in the past commentaries, we have over 50% of the G20 changing leadership next year. So with that being said, how you spend money, how your fiscal authorities are out spending money – that’s really important – who is enfranchised, and who is disenfranchised in the process.

We look back at the wars that have been fought in Europe over the last 100-150 years and we see that, yes, there was a political thematic, but behind the political thematic was an economic thematic. This is something that we look at, even in terms of a very big picture view, as being something to consider, or being an ingredient which will allow governments to spend an infinite amount of money without disenfranchising particular constituency groups. That’s the problem with democracy. Unlimited government spending is a real challenge. It’s not so much a question of how it’s being spent, but whom it’s being spent on. Something that the chief economist at Nomura Securities in Japan, Richard Koo, has pointed out, is that it is only in wartime that governments can spend any amount that they want on whatever they want, with no electoral backlash, and we are moving into this period of extreme political change, and this is concerning to us.

Don: David, history repeats itself. We’ve been here before. The Great Depression was ended by World War II, and of course, in any war, you have to have viable enemies, you have to have acceptance that the war is really the real deal by the peoples and all the nations involved, and because I think we are moving into a global recession, and I think it’s going to be a global depression – what do we do about that? Could the powers that be, indeed, be planning a war, and if so, who would the war be with? Who would be the enemy? Who is a viable enemy for the western powers, which would be America, the U.K., and Europe? Who can we fight? We don’t want to have a war with Russia, they’ve got nukes. We don’t want to have a war with China, they have nukes. Who is a viable enemy?

Here’s what I believe. I think our planners are longer-term planners than sometimes we think, and I think they know that none of the financial, fiscal, debt-piling-up things that they are doing are going to work. So where is a viable enemy if we want to have a war to solve this global depression? I think the viable enemy is in the Middle East, and I think this is the answer behind why America, Great Britain, and France have been in, and have been destabilizing the Middle East, by helping to overthrow governments throughout the Middle East, such as the Libyan government, and Mubarak. We have seen Tunisia, Syria may go next, and we’ve seen Yemen, and so forth.

What’s happening here? We are taking governments that are effectively neutral toward America, or in the case of Mubarak in Egypt, who was even friendly toward America, and we are destabilizing them. We are pushing those governments from power, and in behind them will come the Muslim Brotherhood and radical fundamentalists that will look much more like Iran. So what’s happening is that the whole Middle East is being fundamentalized, if I could use that word, it is being radicalized, and the governments of stable, friendly-to-America, friendly-to-the-West governments, are being pushed from power, and radical governments which are going to align with Iran and the Muslim Brotherhood, are coming to power. We are consolidating an enemy in the Middle East and I think this is why America, Great Britain, and the U.K., have been destabilizing the Middle East and those who look like our friends, and we are pushing them from power. I think we are creating the next enemy for the next major war, which is going to solve the depression that we are now finding ourselves in.

David: Dad, as we have talked about for the last 4-5 years, there is this step sequence between a financial crisis, in which just a few institutions are implicated because of running their businesses very poorly, or taking on too much leverage or what not, that morphing into an economic crisis where actual economies, not just one or two, but now we have a global economic crisis, and that ultimately creates a political crisis. So the step sequence of the financial to the economic, to the political – that’s where we are now. Front and center, 2012, 2013, with a change in leadership globally within the G20, we have a political crisis in which politicians are choosing winners and losers. Is it going to be the poor, is it going to be the middle class, is it going to the rich, that pay the price? And ultimately, when they find that their fiscal and monetary solutions don’t work, and just choosing winners and losers is not adequate, that is when they do push the nasty red button and go to war. So we end up with a geopolitical world political crisis in which we are scapegoating and blaming someone else for the problem, or just using conflict as a diversionary tactic. This is pretty commonplace if you are a student of history and seeing war as something that unites people, war as something that allows for that infinite spending of capital toward a “positive” end.

As you look at the ECB, they are finally joining the Fed, the Bank of Japan, the People’s Bank of China, the Bank of England, and the Swiss National Bank, in currency debasement, because they are a lot closer now to everyone else. In spite of a philosophical predisposition toward conservatism, they now have the same problem that all these other central banks have. They are running out of options. So currency debasement is one of the last options, and we are seeing that globally. Following currency debasement, constituency groups begin to turn around and say, “Our government is screwing us, and we don’t approve of our government.” Again, there has to be a reason to turn and say, “No, it’s not us, it’s someone else.”

Don: Dave, I saw some things that I found very troubling when I was in Europe over the last few months. The governments of Europe are, I think, in a panicky stage, and as they are panicking, what they are doing is taking their socialism and ratcheting it up, and they are strangling the people with more and more socialist control, they are moving toward currency controls, capital controls. They are imposing regulations more and more on the people, and so they are stifling the people because they are terrified that a massive amount of money is going to start exiting Europe, and indeed, that has begun.

I’ve been a great fan of Switzerland for many years, but even in Switzerland, you now have the Swiss government under pressure from the EU and from the American government, and is now beginning to collect taxes for people from Great Britain and Germany – they are withholding 30% taxes from their accounts. Eleven banks, now, have said that they will report American depositors back to the U.S. government.

One of the things I have observed over the last 10, 15, 20 years is that there has been a movement from socialist countries, of personal, private and business assets, into Switzerland. Now, assets are beginning to move from Switzerland and Europe, and they are beginning to move over to Asia, to Singapore and to Hong Kong, primarily. There is a movement of funds out of Europe, and there is a perception around the world, whether it is accurate or not, I do not know, but there is a perception that Europe, and I think you could probably include the U.K. and America with it, is now the new socialist region or area, if you want, and the more free market region, with less restrictions, more entrepreneurship, more freedom, is out in Asia.

Indeed, we are also seeing a movement of gold from the West to Asia, and the central banks and the IMF, and as the West has been selling gold in recent years, it is all being accumulated in Asia. The Chinese Central Bank is now accumulating 40-60 tons of gold per month, which is going into their reserves because they eventually plan to have a gold-backed reserve currency. There is kind of an interesting thing. The conservative money is beginning to exit Europe now and move over to Asia. Where it goes after Asia, I don’t know. But there are just huge changes that are taking place, and I have found that the new restrictions and the new freedom-strangling regulations that we are now seeing across Europe – I have found that to be very, very ominous. I was quite troubled but what I saw in Europe.

David: Following that same theme, at the same time we find central bank purchases of gold steadily increasing. It’s not just in China. In the third quarter, central banks were increasing their holdings into the third of this year. There was a net increase of 148.4 tons. Those are the largest purchases in any one quarter, according to the World Gold Council, in 40 years. It was twice last quarter’s purchases and nearly a seven times increase from a year ago.

Don: The wave of the future is gold. Whether it is Europe, or whether it is Asia, the wave of the future seems to be gold.

David: But what that also says is that the wave of the future is currency instability, in which central bankers, and this is primarily in the developing countries where they have had surpluses in past years, are taking some of their excess capital and putting it into metal. We are talking about Asia, we are talking about Central Asia, we are talking about even Latin America, and European demands. This is non-central bank demand, but European demand. This is investors, savers – they are steadily increasing.

Again, according to the World Gold Council, in the third quarter of this last year, European demand for gold increased to 118 tons. We previously mentioned the limited availability and the high premiums and prices paid on physical metals throughout the continent, because we have operations in Europe, but these numbers do explain why consumers, investors, savers – all of them are concerned about the combination of fiscal and monetary options being considered, whether it is by the ECB, or frankly, by the U.S., and they are saying, “This is a time in which we want to opt out. We will just have to choose something else.”

So, is it a pro-gold concern, or is it an anti-fiat concern? Are they are just saying, “Hey, I’m not sure that anybody with a Ph.D. is going to be making the best possible decision?” This is ironic, because those are the only people making decisions in Europe today – the technocrats with Ph.D.s, no real-world experience, but certainly, a degree, and certain reports that they have published through the years, that legitimize their presence as decision-makers today. I think savers and investors are right to say, (laughter) “Not on your life, I don’t put confidence in them. Largely, it was the Ph.D.s that got us into this problem. How are these same Ph.D.s going to get us out?”

Don: David, they used to say all roads lead to Rome. Well, in my opinion, almost all scenarios lead to a much higher price of gold. Whether we have a sovereign debt collapse or a collapse of the European Monetary Union, or simply an exodus of a number of countries, it spells instability. People will go into gold. If it is a deflationary scenario, if it’s a massive inflationary scenario where they devalue all the currencies in Europe, in order to fight back, all roads lead to gold. People will go into gold. If it’s the war scenario that follows the economic recession/depression, whether it is an inflationary or deflationary depression, people will go into gold.

So I see all these very, very unstable scenarios. None of us knows exactly how they are going to work their way through, but they all lead to much, much higher prices of gold over the next few years, notwithstanding a correction that has been taking place in recent months in the price of gold. I think that the thinking people of the world who understand the times and understand the gross instability, economically, politically, financially, all over the world – they are going to go to the number one safe haven, and it’s not going to be the dollar. It’s not going to be the euro. It’s going to be gold. I have never seen a scenario, in my 40+ years in the financial world, and in the metals markets, that is more bullish for gold, and probably more bearish for the overall world economy.

The real game-changer in the gold market comes when the bond market, U.S., as well as European, or German bonds – when sovereign paper, regardless of the country in question, is viewed as a risk asset. At that point, when those investors who had assumed that they made the right bet, the safe bet, the conservative bet, all of a sudden have to reconsider what risk actually is? Yes, that’s where differentiation will be made and gold, as a currency alternative, will stand out – not only against other currencies, and against other safe haven plays like the U.S. Treasury market, but clearly as its old definition as a currency, not as a commodity.

We would suggest that at this time, because of a slowdown coming into 2012 in the global economy, general commodities should be avoided. If you look at the CCI, it continues to weaken in lockstep with copper and other industrial metals. Again, if you just follow the trail back, we have consumer retrenchment, both in the U.S. and in Europe. That consumer retrenchment means that manufacturing demand for raw materials is going to decrease to match that end-user purchasing. So any sort of inflationary “repricing” within the commodities complex is still a very future event. Be very cautious with the general commodities market, gold and silver being a real standout.

Don: To speak of silver – what do you think about silver? Silver has taken a pretty hard hit in recent months. What is your take on the silver market now, David?

David: I think the worst is largely behind us, but that doesn’t mean we couldn’t have another 10-15% downside. I think the 26-28 range would be the worst-case scenario, with the Dow shedding 1000 or 2000 points, with concerns over a deleveraging or a deflationary unwind, and gold taking a hit, silver taking a hit even more than gold. But I think what we are setting ourselves up for is a major boom in both metals. I think this is where clients and other thinking people have to look beyond the noise of the market action in a day, in a week, or even in a month, and see that some of these trends which will ultimately take silver to $150-200 an ounce, and gold to over $3000, $4000, $5000 an ounce – the pump is being primed, even as we speak.

Again, a game-changer in the bond market where sovereign paper, today viewed as a riskless asset, will be viewed as it should be, in more accurate historical context, as the only asset which offers return-free risk, if that makes sense – you are getting nothing, and you are taking risk. That’s the state that you are in, as a Treasury buyer today, as a German bond buyer today. As people realize that, actually, there are no fiscal solutions, there are no monetary solutions, there just is a restart which has to occur at some point. I think that reappraisal ultimately drives gold and silver to mind-numbing numbers – numbers that, actually, are not justifiable with the information we have today.

Don: David, you have an interesting perspective, in that you have been in the precious metals business, effectively, all of your life, and you are also a money manager with your McAlvany Wealth Management company, so clearly, you and your clients are buying gold and silver. And we will see banks and countries, like China, like India, and so forth, accumulating gold for reserves, and so forth. I get to see the world from a slightly different viewpoint. I just spent a large amount of time in India, and also I was just in China last week, about ten days ago, and also in Singapore, and throughout Asia. My observation is that the man-on-the-street in Asia, even poor people in Asia – and by the way, in Asia, we know that they save an incredible amount of money, having savings rates of 10, 15, 20, 30, 40% – I mean people, individuals, save money. They don’t necessarily put it in the bank, but they save money.

Those kinds of individuals, the man-on-the-street in India, and throughout Asia, as I observed, is buying gold and silver like there is no tomorrow. We think of institutions, and in effect, you are an institution, because you are a money manager, but I’m looking at the man-on-the-street out in Asia, and they love gold and silver. They think it is really great. We save money and we put it in banks, or IRAs, or wherever, and make a very low return, but when they save money in Asia and India, in China and Singapore, and in Hong Kong, they put it into gold and silver. It is a huge difference. I know some of that is happening in Europe, and I think it is also happening in the Middle East, but I see it happening throughout Asia, and I marvel and think, “Boy, in the next 10-15 years, they are going to own a lot of gold and silver, and what is that going to do to the price of gold and silver?” It’s going to be very helpful, I think.

David: On a relative basis, again, looking at equities, we would like to see the year finish 5-7% above where it started, and it is likely to do that if we can get people to fixate on these skewed data points, again, through the October/November economic data points, which have been positive. The relative comparison, however, still stands in stark contrast. Everyone looks at gold and says, well it is significantly off its peak, but it is still up 18½% since the beginning of the year. If we ended the year today, we would be up $260 from where we began. That is 18½% compared to a current 5% on the Dow. If we are looking at the transports, it is actually negative for the year. But again, on a relative basis, silver, with the collapse from $50 to its current price, is still 7% up for the year, even outperforming the Dow, so we are seeing the metals get a bad rap, to some degree, as we come into year-end. But if you step back from the trees to see the forest, this has been one heck of a year. With all the things that have been happening globally, with the concerns that have been happening from deflationary basis, it is actually quite impressive.

Don: David, I have observed over the last few weeks, a lot of the pundits on Wall Street, the people who, unfortunately, a lot of the masses like to follow, have been saying, “Oh, gold is a bubble. Gold has burst. Gold and silver – it’s all over.” Now, these are the people that, when gold was at $253 and silver was down at $4, said,
“By no means buy any gold.” And throughout the entire rise, silver from $4 to almost $50, and gold to I guess around $1900 from $250, they said, “Don’t buy gold and silver, don’t buy gold and silver, don’t buy gold and silver.” Now those same people are saying, and you see them in the press all the time, “Ah, see, we told you so, we told you so. The bubble has burst. Gold and silver are all over.” How do you answer those people?

David: I think this comes back around to, again, what is gold but an anti-currency play, or an anti-fiat play? And fiat money depends solely on one variable – confidence and trust – basically, the same thing. So to the degree that you have confidence in fiat money, the currency with zero backing to it, then there is no reason to own gold. But it is in periods of time when confidence is waning, again, as a result of poor fiscal and monetary policies, that people begin to lose confidence and trust.

Here’s the problem with confidence being lost: It generally takes a generation to regain that confidence. We aren’t talking about, confidence is gone today, and it will be right back tomorrow. We are talking about a change in the currency regimes that we have known in the post World War II/Bretton Woods era. This is what is radical about what is happening today. No one has an adequate imagination for this trickle becoming a flood, not into gold, but out of fiat currencies, on the basis of this breakdown in confidence, a breakdown in confidence in the people that we had assumed had all the answers. These are the folks in Washington, these are the folks in London, these are the folks in Tokyo. These are folks who travel through the world’s capitols. They are supposed to have it together, they are supposed to be making the best decisions. When it turns out that they are a bunch of dolts, guess what happens? Individuals say, “I can’t believe I was taken,” and confidence is broken, not to return for many, many years, if not decades.

Don: David, I’ve got a question for you. This is something I have pondered as I’ve traveled around the world. People in Asia, I think the Middle East, as well, and to a certain extent, at least with thinking people, in Europe, tend to invest fairly large percentages of their portfolios in the precious metals. And as I said, out in Asia, and there are many people in India, and so forth, whose entire savings are in precious metals. It has been my observation in the States that it is much less so. I don’t know what the percentage is, but I would guess that 1-2% of the American people, though maybe it is higher now, have invested in precious metals. It is still a pretty low percentage, as opposed to many other parts of the world, and I think it is significant that this bull market is not an American bull market. It is not being driven by America, although there is a lot of manipulation in the paper gold market, on the part of Wall Street, and so forth. But at what point do the Americans finally join the Asians and the people in the Middle East and say, “My gosh, we need to be in precious metals, the currencies are failing us,” and start going into the precious metals en masse, and much larger numbers of people and the larger percentages of net worth. At what point does that happen, and what does that look like? What does that look like, if and when it does happen?

David: To some degree, we have a very uneducated populace that is solely dependent on current media for any information that they have, so whatever the media bias is, that is the taint, if you will, or the residual feeling that we are going to see in the marketplace. Whatever CNBC, whatever Bloomberg, whatever MSNBC – all of these news agencies, if they have a bias, which they clearly do, whatever that bias is, that is going to be what is felt by the average person, as if that is reality, as if that defines reality. Confidence in the U.S. dollar, confidence in the U.S. economy, is going to be there, probably longer than it should be.

Don: David, are the American people going to miss this bull market in gold and silver? Good grief, when we see silver go from $4 to $50, it is back up now, and gold go from $253 to $1900, and so forth, and the American people have largely missed this bull market because they have listened to their trusted leaders on Wall Street, did they miss the market completely? Is it possible that this bull market will go for the next how many years, and the American people never really do get in?

David: I think any American who will participate, like any thinking person around the world who has participated, or will participate in the future, it will be on the basis of them doing their own analysis and their own decision-making. To the degree that they have deferred that out to someone else, either to do the heavy lifting for them intellectually, and think through these things for them, or make those decisions, the critical financial decisions that individuals and families need to be making to preserve capital – if that has been deferred, I am afraid that they will be left out completely.

The few people who have participated in the U.S. market, and the many, many who have globally, these are people who do their own thinking, do their own research, and do their own homework. They are constantly curious and asking questions, and are always trying to overturn rocks for tidbits of information that will help them make wise decisions, because at the end of the day, they have to make those choices. Those people will, as they have already, do incredibly well in the coming years, in the context of a precious metals bull market, whether that is two years, whether that is three years, whether that is seven or ten years.

The one issue that I have in looking at this bull market, distinct from the 1970s, and coming into 1980 and 1982, is that we are talking about a monetary regime change on a global basis – not just the U.S. dollar, but the way fiat money is looked at, globally. That is in flux right now, and I don’t know that we are going to have the boom-to-bust cycle in the precious metals, where things get out of control on the price side, and then collapse on the other side.

We may, in fact, have an out-of-control move, and the restabilization of all fiat, by this plateau of a price peg at whatever number that is, whether it’s $5000, $10,000, or $15,000 – whatever the number is, to sort of balance the national account, so to say, and this is something that the IMF, the Bank of International Settlements, the World Bank, will be very involved in, in terms of the decision-making of how gold is re-integrated into the monetary system – it’s going to happen, to some degree. We don’t know to what degree, but it’s going to happen. As the currencies are delegitimized, we are going to see gold and silver, gold specifically, remonetized as a means for re-legitimizing fiat currency.

Don: David, taking a lead on that, whether you are a believer that China is going to be very strong in the future or not, China and the Chinese government and central bank are accumulating gold at such a rapid rate, the information we get from financial people we talk to out in Asia, is that they really do believe that one day they could have a world reserve currency, a gold-backed reserve currency, and they are buying this gold at an unprecedented rate. They have tripled their gold purchasing over the last four months, versus what it was the year before. So they believe that gold is going to be back in the monetary system and I think they visualize, rightly or wrongly, that they are going to play a leading role in that world monetary system, with their own gold-backed currency.

David: Let’s go back to your point earlier about there being a solution which is neither monetary nor fiscal in nature, but military in nature. If Western Europe, the U.S., and the U.K., are embroiled in a conflict in the Middle East, what side do the Chinese take?

Don: Oh, that’s the really scary question. I believe that the Chinese come in on the side of the Middle East, the Middle Eastern powers. I believe that Russia will too, and mostly what we call the former communist countries. I call it the new axis. We know who the old axis was in World War II – Germany, Japan, Italy, Spain, and so forth – but the new axis, I believe, which will be aligned against the western powers – some people tend to call them the New World Order powers – the U.S., the U.K., and Europe, and the new axis on the other side they think will be the Middle Eastern powers, Russia, China, and so forth.

I don’t know if the powers that be in America and the West understand that this is how it could go. I do believe that they are intentionally setting the stage for a war, which may bail them out of this emerging depression. I don’t think they have calculated what happens in that scenario. If two major nuclear powers, Russia and China, come in on the side of the designated enemy, which is the Middle East, that could turn very, very ugly, indeed, and a world war that is a very programmed, manageable world war, kind of a minor regional war, if you will, suddenly gets out of hand and turns, literally, into a full-blown world war – only in the nuclear age. That’s a very negative scenario. It’s a little ominous.

David: The only thing I think I would probably disagree with on that, in terms of my opinion, would be the ties that Europe has to Russia, and the revenues that Russia gains from that economic compatibility with Europe, I think would probably tie their interests financially, in something that is more Western oriented than Eastern oriented, if you will.

Don: I respect your opinion on that, but I would counter with the fact that I think the Russians love Europe – and would love to merge with Europe. In fact, I think they would still love to rule Europe. But they hate America, and herein lies the problem. America and Europe are allied together. We do know that Russia is very closely allied with the Middle Eastern powers. Indeed, most of the major weapons that are going into Iran now are coming from Russia, some from China, some from North Korea, and so forth, and what I have observed, geopolitically speaking, over the years, and let me change hats now, is that anyone who is America’s enemy is Russia’s friend. I don’t think that has changed since the alleged fall of communism in 1991. I think Russia is still our enemy and will do anything in their power, especially under someone like Putin, to undermine America and our interests. I still believe that Marxists will go with Marxists, and therefore Russia and China will be in the same camp. I think they always have been in same camp, as a matter of fact.

David: We have a change in leadership in China this next year, we have a change with the Russians, and we have a change here in the United States. Let’s finish with a political insight coming into 2012. Before the tone and tenor of the race, and the specific people involved become the dominant theme, what are your thoughts in terms of the election, Republicans versus Democrats, if you had to speculate and place a bet on who wins and why, what would you guess?

Don: I think you, and no one else, will like my answer, and I hope this opinion is wrong, but I believe Obama will be re-elected. I believe he will be re-elected because he has massive, massive money in his campaign chest. George Soros, I think, has already kicked in a billion dollars, so there is no lack of funds. I think the media is about 98% tilted toward the Democrats and toward President Obama. I think the Republicans have been systematically killing each other off in the primaries and those who would have been conservatives that I would have supported, or could have maybe supported, have, in fact, been sliced and diced by the media, and by the political left. The only one left standing is Ron Paul, who is a great man and a good friend. They couldn’t slice and dice him because he is too clean, so they basically have just tried to kill him off by ignoring him.

So now they have narrowed it down to Romney, who is a liberal, and an establishment person, and Newt Gingrich, who is a liberal and an establishment person, and it looks like Newt Gingrich could get the nomination, but as Nancy Pelosi has already said, they will tear him apart and they will come out and reveal all of his background. He was fined $300,000 while he was Speaker of the House for unethical behavior, and he quickly resigned from the House of Representatives. That is pretty unusual when a Speaker of the House suddenly resigns, as he did. And of course, he has had a lot of marital infidelity, affair-type problems, that have been very public, and so the Democrats will become very, very righteous. (laughter) They will put on their righteous hats and they, I believe, will tear him to pieces.

So just as the Republicans managed to pick up the weakest candidate possible in John McCain in the last election, I think they are likely to do this again. I think Herman Cain would have had a reasonable chance again Obama, as he is a black man, he is a businessman, pretty conservative, pretty knowledgeable – I think he would have had a good chance. Michelle Bachman was certainly conservative. Ron Paul would be tremendous, and they just ignored him. So systematically, I think the establishment has eliminated everybody but their designated choices.

In my opinion, which I have stated in my newsletter, David, on a number of occasions, I think the establishment basically picks a designated winner and loser, somebody on both sides, the Republican and Democrat side, who are acceptable to them. “If our designated loser happens to win, it’s okay, because he was pretty sympathetic to us.” I think when a lot of Newt Gingrich’s CFR background and the fact that he was created, almost from the dust of the earth, like Adam, by David Rockefeller and the Rockefeller family many years ago – when all that surfaces, there is going to be lukewarm support for him. I think if you put all these things together, in spite of the fact that the economy is very much against Obama, and he is a president that can control events, that can control many, many things, if I had to bet money, I would reluctantly place my bet on Obama, and say that he will probably be re-elected next year.

David: Here is the interesting thing. If we are right, and the 2014-2016 time frame is where we begin to see an intensification of events from a financial and economic standpoint, where there may, in fact, be some resolution, and an opportunity to re-enter the equity markets because the worst is, at that point, behind us, which would imply that there is a lot more still ahead of us, that represents downside – then guess what? Whoever takes the election in 2012, the probability of that party coming back to office within a generation is very, very low. So the Republicans, if they get hung with the cross, so to say, in this election, they may win, and they will lose for a generation. If the Democrats win, they may win, and they may lose for a generation. What happens over the next 3-4 years is likely to be something that a generation cannot and will not forget.

David: I can’t disagree with anything you just said. I would simply say, if the present powers that be remain the powers that be, I fear what they will do to the Constitution, and many, many of our freedoms, in a second term, and that is a great concern to me. I hear what you say, that yes, if there is a great depression, and it falls on their watch, then yes, they can be discredited for years, but there is the issue of the Constitution, freedom, regulations, control, and so forth. I think they have been accelerating in the wrong direction under the present regime and I think will accelerate even faster if they get a second term. I look at the long-term political considerations, as well as the economic and financial. I would just say, we need to pray for our country. We’re really a big mess.

I know we are running out of time here, David, but I would just say, do what you can for the country. Do what you can and be really thoughtful about who you support in this election, if they give you a choice. In the meantime, as I have written a lot in the last six months in my own newsletter, make your own personal preparations – family, financial, economic preparations, as if we were going into tough times, as if you were on the gulf coast of Texas and you knew the hurricane was coming, you saw it coming, but you had advance warning, you were able to batten down the hatches and move to higher ground, and take defensive actions to protect yourself.

I think this is what you need to do, and in the remaining 6, 12, 18 months of stability, if we have that much, I would say, to make the preparations financially, to position yourself to go through a longer-term period of instability, so that you have protected your assets and are one of the people who are able to come out the other side and help rebuild the country, because you have protected and preserved your own assets.

Kevin: David and Don, I really appreciate you letting us just sort of eavesdrop in on the conversation. Don, your newsletter was really excellent, every newsletter is, but the December newsletter is something that we can offer the listeners if they would like to call in.