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means 300-500 are returned each year with a doctorate in serious crime, issued after a few years in a US prison. That would make the criminals among the most educated folks in this largely illiterate land.

A logical question arises when you realize that the country has almost no industry or commercial agriculture whatsoever. How do they survive? They make Barbencourt rum, there's a cigarette factory and they assemble some clothing that's imported and then re-exported. And some artists peddle wares of varying quality. That's it. It used to be that most baseballs were made here, but that factory moved out. I can only assume it was because the government made them crazy, because you can't find cheaper labor and once labor is trained for a specialty like that, the last thing you want to do is move the operation and start all over again. So the country essentially creates nothing. Almost all the people outside the capital are subsistence farmers; but not only are there no food exports, the country imports everything except locally grown vegetables. Nobody even bothers exploring for minerals, despite prospective terrain.

Where does the money come from? The main answer is that there are about a million Haitians abroad, mostly in the US and Canada, supporting the 8 million Haitians in the country. The hope and salvation of every family is to get somebody to Miami, in order to survive. Of course, that makes it hard for any but the most extraordinary emigrant to save enough to really get anywhere himself.

In addition, up to $500 million a year comes in from various NGO's. Some of them actually do some good. Most, however, are just bureaucracies, sending their policy wonks to drive around in new Land Rovers, survey the poverty, and write largely worthless reports that nobody reads. Half of the relatively few people who get regular paychecks draw them from the government; most of them are laughingly referred to as "zombie workers" for obvious reasons. Fortunately, that no longer includes the army, because the army has been abolished, in recognition of the fact that, typical of Third World militaries, it's sole purpose was to intimidate potential dissidents. On the bright side, at least there's no direct aid to the Haitian government, due to the rare insight that it would mostly just get siphoned off to some people's foreign bank accounts.

The whole country is on welfare. It's like a rural Washington, D.C.

Of course, despising welfare, I'm also somewhat disinclined towards organized charities, as well. They tend to quickly become top-heavy vehicles for the politically correct to righteously play big shot with other people's money. At some point soon, I'll editorialize about the corruption charity often brings, and why those of you with plans along those lines may want to rethink it. So I was only marginally enthusiastic about the Foundation for Mercy and Sharing, founded by my friend Susie Krabacher, whom I accompanied on this trip. Susie is a legend in Haiti; everyone knows her. An ex-Playboy centerfold and cover girl, she's done well in the world, and truly wants to help other people in thanksgiving; she picked the right place. I've seen poverty, I promise you, but what goes on in Haiti is a whole other level and an excellent barometer of how far this place has fallen. Poor people regularly abandon children, already on death's door, they can't care for. What happens is that they're basically stacked up like firewood in an unrefrigerated morgue, before they die, and sometimes aren't buried for months after they die, because there's no money to dispose of them. It literally defies the imagination. In any event, Susie has set up, on a shoestring, an orphanage for about 1,600 kids, and it is impossible to find fault with the small organization. And I say that as someone who believes most charities aren't worth the powder it would take to blow them to hell.

If you're so inclined, you can contact her at haitikids@aol.com, or 970-925-1492.

Most Third World countries prohibit foreigners from owning islands, border lands and coastlines ostensibly for "security" reasons, probably stemming from a fear of invasion, or guerrillas. Needless to say, Haiti has laws of this type. In theory, the beachfront owned by the State is available for acquisition by citizens; it can be leased for five years for a nominal amount (about US$25 per hectare per year) and then, if development plans are approved, the legislature can grant title. I met several Haitians who've apparently done this. But, although it's simple in theory, it's exceedingly hard in practice. Hernan de Soto, the Peruvian student of why Third World countries tend to remain basket cases, points out that Haiti is especially perverse in this regard: He documents how it takes an average of 19 years and 176 bureaucratic procedures to legalize the purchase of private land in Haiti forget about getting it from the State.

And, unfortunately, the State probably (who really knows, since their records are a shambles) owns over half the land area of the country. That amounts to totally dead capital in a country that can't afford to waste a cent. In fact, it's worse than that. You can tell exactly where the border between the Dominican Republic and Haiti lies by flying over it at 10,000

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feet; the Haitian side has been totally deforested. People rarely do anything so stupid with their own property. But when it comes to State property, which is to say unowned property, anything goes. It's the Tragedy of the Commons come to the Caribbean.

Still, if I can get a few thousand idyllic, isolated acres for peanuts, I think there's some real opportunity. My feelers are out. But that's Plan B. My real attention is on Plan A.

As totally disastrous as the country is, it makes the days when the Duvalliers ran it as something of a private plantation look like a halcyon time. Some people say the Haitians are capable of no better and are best off under some type of (hopefully) benign dictatorship. That's complete rubbish.

The reason the country, the first in the Western Hemisphere after the US to go independent, is such a basket case is simply a lack of property rights, and an efficient legal system to enforce them.

Aristide realizes he has a tiger by the tail, that this poor and overpopualted country is a potential time bomb. But he's at once too ignorant, too weak and now too corrupt to do anything about it. A pity, because he's both intelligent and charismatic enough to transform the place. Naively, he appears to think that making plans to sell the airport, promoting the artistic talents of Haitians and getting more foreign aid will solve the problem.

I spent some time with one of his cabinet and closest advisors, presenting a radical plan for change. This is a country with terminal cancer; bandaids and gradualism are nonstarters. Out of 200 countries in the world, only about 25 are capital exporters. And out of the 175 importers Haiti is about the last on any capitalist's list.

What I proposed is a plan, which I've presented to autocrats running a half dozen similar basket cases, which would do three things:

1) Make him (and his cronies) legitimately wealthy. Even though he was once a priest ministering to the bottom of society, he's found that power corrupts. And money is the main reason people get into and around government anyway.

2) Put him on the front cover of every news magazine in the world in a favorable light for the next decade. No one likes being a pariah, or a laughing stock in charge of a country that's viewed as an embarrassment.

3) Make the country as wealthy in a generation as Hong Kong, Singapore, or Taiwan are today. After all, 50 years ago those places were as poor as Haiti. But today the world is much richer, and technology far more advanced.

This promise got his attention. "Tell me more," he said, which is the usual reaction. My plan basically contemplates the 100% elimination of all taxes and regula

tions; these things serve absolutely no useful purpose in any Third World country except to create sinecures for parasites. That part is simple, and obvious. The twist is to take all government assets and put them initially into one large corporation to facilitate distributing 70% of the shares, pro rata, to every citizen now living, 15% in trust for the next generation to be born over the next 21 years, 10% for the folks who allow it to happen, and 5% to be sold in the world's capital markets. The money raised thereby would mainly be used to promote the fact the country is open for business in a way no country in the world has ever been. And the people, not the government, would be the direct beneficiaries.

There's much, much more to it. But, in essence, it's possible to transform a hellhole like Haiti into the kind of place you'd want to move to, no matter where you now live, regardless of other considerations. If there were ever a true free market country, the place would be so overrun with rich people that workers now making $1 a day would be in demand at $15 an hour (what I have to pay my maid in Aspen in cash, thank you). Could it happen? Well, in case you're wondering what my other hobby, besides polo, is, it's pitching this plan to Third World governments. They've bought every cockamamie scheme that's come down the pike since the days of Karl Marx. Why shouldn't they go for something that actually makes sense? Well, I can think of lots of reasons, but that doesn't mean I'm about to quit.

If you have a connection to a troubled Head of State, I'd like to hear from you.

Notes

In a recent Doonesbury, Pierre Trudeau (probably inadvertently) put his finger on why the Republicans in general, and the Baby Bush in particular, are so worthy of disrespect. In the strip, we see the Baby Bush being interviewed. The interviewer says: "Sir, last year you said that a strong economy justified tax cuts But this year, you're saying that a slow economy justifies tax cuts: Which is it?" B.B.: "um.Is this a trick question?" "No, sir. But you'll need a trick answer."

Because Republicans lack any coherent principles, they're always shown up as hypocrites, and worse. Bush should have justified tax cuts in a strong economy as the return of stolen money to its owners. But either he doesn't believe that, or he doesn't have the courage to say it. Or both.

At least the Democrats have principles, even if they're uniformly bad ones.

Malaysia (see last month's IS) currently offers something called the Silver Hair program with some similarities to Costa Rica's defunct pensionado program. In essence, it allows you to reside there 12 months per year, which is an advantage if you need to show perma

Continued on page 7

Volume XXII, No. 6 - www.dougcasey.com - Page 4

The Markets

with the stock market that nobody is looking for it and nobody will care when it arrives.

Sure, it's a "market of stocks," not a stock market, which means you can always find great growth or value issues. But it's not easy, and even if your choices are correct, it's tough swimming upstream. Even as I say that, I'm looking at some old spec recommendations, made because I really liked what the company was doing, and am wondering whether they haven't already put in bottoms. Aura (AURA, US$.75), Starnet (SNMM, US$.92), Chartwell, (CWH.V, C$1.48), and Dragon (DRUG, US$1.73) are four that come to mind.

How long and deep will this bear market be? Nobody has a crystal ball. But the stock market fluctuates around a mean established by fundamental values, alternately going above and below the trendline. Based on how high it's run in recent years, I suspect we'll see something a lot more ugly and traumatic than just a bear market in stocks before it's over. Stocks, bonds, the dollar, and the economy itself are likely to get whacked in a way you see only once in a lifetime. If you're lucky. There's every chance we're looking at the Greater Depression, and I suspect it's going to be worse than even I think.

It occurs to me that the next few years may present a true test of the Austrian school of economic thought, of which I'm a proponent. One of its tenets is that a credit-driven boom must, inevitably, be followed by a roughly proportionate downturn. And we've certainly had a gigantic, credit-driven boom.

One other thought that's occurred to me recently is the utter intangibility of stocks. Unless you're getting dividends, all you've really got is a piece of paper, for which there may not even be a market. That thought will cross the minds of millions over the next few years.

Now Yr ago %chg

S&P 500 1255 1448 -13

DJIA 10911 10652 +1

CRB 209 223 -5

30-YR T-Bond 5.78% 6.14% -5

90-Day T-Bill 3.55% 5.56% -36

TED Spread 43 66 -34

Gold $265 $272 -2

Silver $4.41 $4.95 -11

M-1 $1,119 bil $1,127 bil

US Treas Debt $5,656 bil $5,663 bil

The TED (the difference between T-Bills, the most secure way to hold dollars, and Eurodollar deposits, among the riskiest) has stayed about the same over the last six months; its all-time high was a 600 point spread in the early 80s, and its lows were in the mid-40s earlier in this cycle. The TED is an indicator few watch, reflecting perceptions of systemic risk today's gigantic levels of debt, the possibility of a meltdown in

the stock market, a panic in the $100 trillion derivatives market, or a run on the dollar. For the moment the TED says the system is fairly liquid and stable.

T-Bonds continue to be perceived as a haven. I think of long term bonds as more of a roach motel, despite the fact the amount of official US government debt not counting contingent liabilities and off-balance sheet obligations has stopped growing in these best of times, and has actually decreased by $36 billion in the last year. Since about $100 billion of US tax receipts last year were capital gains, that may mean the government goes back into deficit, for that reason alone, when they don't materialize this year. Does it really make sense to lend dollars for 30 years at 3.5% to an essentially bankrupt entity? I think not. If you bought those bonds 24 months ago, at 5.0%, you'd be under water now. Bonds are a speculation, at best. If you want paper, hold T-Bills, or two year notes. The yield is currently lower, but there's much less risk from an interest rate spike.

The government is reporting a $237 billion surplus for 2000, after a $124 billion surplus for fiscal 99, and a $70 billion surplus for 98. These numbers are, of course, pure hogwash. The way to measure the deficit, at least on a cash basis, is by subtracting what was owed by the government last year from what's presently owed, and the number you see above is a $36 billion surplus. And that's when the economy is booming, tax dollars are rolling in (mostly from realized capital gains in the market), and interest rates are very low. If you used accrual accounting, which would be far more accurate, the deficit would already be off the scale. The difference is made up by cash theoretically allocated for the world's biggest and longest-running Ponzi scheme, Social Security. My guess is that even the cash deficit numbers will be in the $500-750 billion range in a few years. I sincerely hope I'm wrong.

Gold and silver remain excellent values; in fact, silver's lower than it was six months ago. There's every indication there are hundreds of millions more ounces that are still short in the gold market, so when the tide turns the resultant bull market may be as spectacular as that of the 70s. The bottom line is that it's been a long bear market since January 1980, but it's come to an end. It is, therefore, the best of all times to be accumulating, at least if you're a contrarian. I am. Anything can happen, as shown by the fact oil was going for $10 three years ago, and I'm ratholing gold coins more enthusiastically than ever. I think both metals aren't just going through the roof, they're going to the moon this cycle.

You'll notice M-1 actually dropped over the last year. M-3, however, a much broader measure of the money supply, exploded from $6,723 to $7,441 billions about a 12% increase. Of course, one of the problems of the "New Economy" is that nobody really knows what the money supply

The purpose of this (roughly) semiannual feature is to point out, in general terms, what appear to be the best places for your long term capital. Some of these positions are very volatile, others are stable and high yielding; almost all have been subjects of one or more feature articles, and I suggest you refer to those on the website to determine whether you agree with the rationale. You should view almost all these positions as long term holdings (i.e., a minimum of six months); unless you're a local on the floor of an exchange, trading is a sure way to whipsaw yourself into penury, especially after commission costs.Ask any ex-daytrader.

That said, I suggest you use stop-loss orders for most positions, put in at the time you initiate them; anything can and, especially in today's environment, probably will happen. When gains accrue, follow your stop-loss behind, to protect them. This bears real emphasis. If you lose 10% of capital, it takes only a subsequent 11% gain to get whole. A 20% loss requires only a 25% gain. But if you drop 50%, you need a double, and those aren't easy to come by. If you drop 80%, you need a five-bagger. Use a 10-20% stop in most cases, giving you protection, but enough running room to keep from being stopped out through a random fluctuation. Put it in at the same time you buy your position.

As I first pointed out three years ago, while we were in a full-blown mania with almost every warm body in the country watching stock quotes hourly, there were two strong main areas of the market: Internet stocks, and the very biggest companies. Since their peak in April 2000, the Internets have almost disappeared as an asset class, with scores already having gone out of business. My guess is only a couple dozen (like Ebay (EBAY, US$59)which is nonetheless still vastly overpriced, selling for 257 times relatively stagnant earnings) will still be left standing out of the many hundreds that were so recently the strongest part of the market. But the vast majority of stocks continue to lag and sag, which has been the case since the summer of 1998 when a stealth bear market began. From this point forward, although the Internet will continue to be a boon to all, Internet stocks will just be a sorry footnote to stock market history.

In the April IS I commented that since everyone, including myself, was getting pretty bearish, we were likely due for a nice strong rally which we've gotten. And now, with the NASDAQ having run from 1638 (April 4) to 2103 at present, people are again getting pretty optimistic. You've got to remember that we've had the largest bull market in history since the bottom in 1982; it's going to take years before the psychological expectations built up in all that time wash away. We're not likely to get the final bottom until everyone is so utterly fed-up

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really is anymore. For all anybody knows, maybe options on .com stocks were once part of it, since they were being used that way until very recently. I think gold will again be used as currency within a generation, solving the problem. But that's only likely to happen after the present monetary system collapses.

There's well over $1.5 trillion of consumer debt out there, an 10% increase from last year. Most of it is financed at around 18%. It will be tough to service if things get ugly.

Margin debt fell last year, from $278 billion to $165 billion. Figuring interest at 10%, it's hard to see how those people are going to make enough money to cover it. At the beginning of this market, I recall debit balances were only about $20 billion an eighth of today's numbers.

I've evinced incredulity and fear about this market for years, but have tried to restrain myself from calling for a top. Too often it turns into a humbling and unpleasant experience, somewhat akin to standing in front of a freight train. In the 10-99 edition of this report I said "But I feel forced to stick my neck out: The top has come, and gone." Heck, as a well-known permabear, I'd be sticking my neck out if I turned bullish. But no danger of that for at least a couple of years I think.

This is not to say I won't mention industrial stocks in the future; but it does mean that the story has to be exceptional to get my attention, because even the best stocks are going to be swimming upstream for the foreseeable future. And as the bear market grinds on, "upstream" is going to eventually resemble Victoria Falls. With the exception of a few special situations, I've had little to do with "the market" for a long time now. And certainly not with the common mutual fund. 90% of all the money in these things has entered since 1990; 75% just in the last four years. One thing that is new is the number of new mutual funds listed. It had been running about 30 new funds every week for years, recently the number dropped to around 5 or 6, but now, with the recent bounce, it's back up to the 10-15 area. Within the next year I'll guess you're going to see a weekly decrease in the number of funds. After all, with more than three times as many funds as there are stocks on the NYSE, how much easier it is to pick a good fund out of 12,000 choices than it is to pick a good stock? Especially when the funds eat into your capital at an average of 1.5% a year for expenses and fees? When the bear market really starts rolling, you'll find the number of funds decreasing by five, or ten, or more a week as managements wind them up.

Markets go from being very under-priced to very overpriced, and back again, in cycle, regularly exceeding even the wildest projections on both extremes. Let's look at the fundamentals for the S&P 400 Industri

als (at 1448), and you guess which extreme we might be looking at, even though they're down from 1815 this time last year. In fact, the numbers are still so out of whack, that it now seems really only worth recounting them as a curiosity:

1. Price to book value At 7.68 to 1 the number is so disconnected from historical reality that it's widely viewed as an anachronism but it is down from its all-time high of 9.5 last year. At market bottoms, P/BV ratios are normally around 1-1. Could the market melt down 90%? It wouldn't be the first time (it dropped 93% from 1929-1933) although it would be the first time in living memory. Which is one more reason it might.

2. Price to earnings At 29-1, it's in a truly rarified atmosphere, albeit down from 36-1 last year and an all-time high over 40. The $64 Question is which way they're headed from here; it's hard to envision a big rise at this point. Earnings have stayed strong, but a great deal of the increase in earnings over the last decade hasn't been due to more revenue, but streamlining. And stock buyback programs. Earnings can't rise faster than revenue forever. A P/E of 8-1 is typical of a market bottom. Can earnings collapse? They can unless recessions have been banished, spare the thought of the Greater Depression. I think we'll see some real earnings cuts over the next year or so. We're not even looking at the Nasdaq, with a PE of 288-1.

3. Dividend yield At 1.09% it seems headed up, from the lowest levels in history (about .90%). Yields are still about 1/6 of what is typical at market bottoms. At the 1974 bottom the Value Line Index including lots of stocks with no yields at all yielded around 7.8%. Even the DJIA is only yielding 1.2%, near its all-time low.

We're past the peak of a major, extended "blow off" top, similar to what happened in 1973, 1968, or 1929. Or Japan in 1989. It's the type of thing that happens only a couple times a century; by the time it ends it's a nightmare for most people. Personally, I wish the bull market would go on another decade and another 10,000 points. And there are popular books out there (although no longer quite so popular) saying the market is going to quadruple or even go 10-1 from here (an excellent indicator the top has already been put in). Good times are a lot more fun than bad times, and everybody gets hurt in a bear market. But you have to look at the bright side, namely that the function of a bear market is to return capital to its rightful owners. Of course, that's just the capital that's left, since most of it will have disappeared in the high living and foolish investments typical of a market top. Since anything can happen, some diversification makes sense. Hence the "long" positions mentioned here periodically. They've been a good idea so far, but there will be less and less listed here as time goes by at least for quite a while.

Any long positions should, ideally, be

offset by equal size short positions, which can be accomplished through the prudent use of futures or options in the case of major stocks. See below.

I suspect that many subscribers take that as an academic word of caution. But this is a time when preservation of capital is more important than augmentation. In other words, investors will soon be more concerned with the return of their capital than the return on their capital.

One set of numbers I plan on watching closely is the flow of money into equity mutual funds. The public was sending in $40-50 billion a month in January, February, and March 2000, but since the April sell-off, it's declined to $15-20 billion, and, after dipping to a $20 billion withdrawal rate at the intermediate bottom in April 2001, has gone back to a net of zero. Before the great bull market started in 1982 there were less than 1000 funds, and they were struggling with no net cash influx. At some point, fairly soon, I'll be surprised if the public doesn't withdraw billions each month. All bond and money market funds are already experiencing increasing net withdrawals.

Senior Golds The XAU Index, at 58, is really cheap Its tremendous volatility, at the bottom of the gold share market, means huge option premiums; the strategy I like remains the sale of puts. You can buy ABX, NEM or FCX (and FN in Canada) and sell a combination of out-of-the-money puts and calls for a 20% return on invested capital per quarter at the moment. I'd stick to the puts alone you don't want these stocks called away from you for many months. At these prices, I think you might even consider buying the calls something I rarely recommend. These stocks are now about 50% off the bottom, which doesn't bother me in that even these majors are likely, in my opinion, to go 500% in this cycle.

I've modified the list of stocks below to include just those that I own, or am looking to own. After all, since this letter is really just a running commentary on what I'm doing, it doesn't make sense to add things that I don't watch. So I'm putting my money where my mouth is with these stocks, as has long been the case with the smaller ones. But, regarding the majors, I don't follow them at all closely. I prefer the juniors, which offer vastly greater upside. Don't forget, however, that the juniors are mostly exploration driven; they're only indirectly affected by gold prices, since most don't have any gold. The shares of major gold mines, on the other hand, are largely a play on the gold price. Big mining companies, like all big companies, tend to be slow and dumb, run by bureaucrats who usually have little direct share ownership. Barrick, Franco, and FCX are all run by their founding entrepreneurs, however, and are certainly the best managed of the majors. This is also, most emphatically, true of Franco Nevada, which is as close to a "set-and-for

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you're pretty safe now), they'll all be redeemed for at least par, perhaps much more if the gold price runs. I'm listing these for your reference, without any particular endorsement.

Gold Convertibles

Name Price Cur

Yield

Newmont Pr 39.05 8.3%

Kinross 5.5% Deb 12/5/06 C$53.00 n/a

TVX 5% Notes 3/28/02 C$65.00 n/a

FrptMcCG pr. A 15.80 11.1%

FrptMcCG pr. D 9.30 5.8%

Placer pr. A 23.65 9.1%

Bonds I'm no fan of bonds. Bonds are no more than a speculation on interest rates, the value of the dollar, and the creditworthiness of issuers. And at this point, that means they're a triple threat to your capital. They're excellent speculative vehicles from time to time, but now isn't one of those times.

The best alternative to bonds (in addition to some of the high yield propositions recommended in this section) is a Swiss annuity. The government has severely compromised its tax advantages, but it still offers privacy advantages, liquidity, safety, and the advantage of holding a depressed currency that should do very well in the next few years. Everyone should have one for a meaningful amount, if only for diversification, as per the old saying "It's good to have money. But it must also be in Switzerland!" Contact JML Swiss Investment Counsellors Ltd. Baarerstrasse 53, 6304 Zug, Switzerland (011-41-41-726-55-00, fax 011-41-41-726-55-90). JML is a brokerage firm that works with all the major Swiss insurers.

Money Market Funds I continue to recommend only the Permanent Portfolio T-Bill Trust (800-531-5142), which holds only US T-Bills, and is unique in allowing you to defer taxes on your income indefinitely. This fund is where you should hold the majority of your liquid cash; there's no product that can compare to it, in my opinion. I am a consultant to the group.

See also Swiss annuities above, as a suitable alternative to a money market fund in a strong currency if you can park the cash for at least a year.

Speculative Hedges For the last several years, I've suggested speculations be made within the context of what I call my "10 for 1 Hedge Portfolio," which is intended as a balance against bad times. There are few conventional ways you can hedge against true economic calamities such as a collapse in the value of your home, the failure of your business, the evaporation of your pension fund, or the like. This portfolio, however, comes pretty close.

The portfolio divides your risk capital (ideally) into ten equal (important point) and unrelated (also important) segments, each of which has the potential to increase tenfold

get" play as you can find in precious metals stocks; it's my first choice in this area. Indeed, it's one of the best assets of any type you can own. Among the South Africans the best holding is Harmony; the most leveraged is Durban Deep. Mining companies are almost all running losses at these gold prices, certainly after amortization of capital. See the recent article on this in IS XXI/6.

As I've said before, in caps, NOW IS THE TIME TO BACK UP THE TRUCK. Sure, there will be severe sell-offs. But these are buying opportunities, unlike the sell-offs in the industrial market.

Name Sym Price Yield

Barrick ABX 17.01 1.2

Cambior CBJ 0.44

Durban Deep DROOY 1.11

FrptMcCG* FCX 15.71

Franco-Nevada FN.T C$19.79 1.4

Harmony HGMCY 5.35 2.2

Teck TEKb.T C$16.40 1.2

TVX Gold TVX 0.68

*split 2:1

Closed-End Funds If you want the diversification and management a mutual fund offers, you should almost always buy a closed-end, not the much more common open-end variety. When its portfolio is out of favor, it's usually possible to buy a closed-end at a substantial discount to assets. Then later, when its holdings are in favor, sell it at a substantial premium, thereby both decreasing risk and increasing potential. Oddly, however, that's not the way it's worked in this market, and the reasons why not are unclear. Perhaps Joe Sixpack, today's typical investor, just doesn't understand closed-ends. Perhaps he's,,distracted by their vastly more numerous open-end cousins. I'll monitor the small universe of closed-ends, and write something when opportunity seems to be knocking All types munis, corporates, bonds, world equities, you name it are selling at discounts of from 5-35%. That's generally an excellent time to bargain hunt. Should you bargain hunt? If you're a bull, the answer is yes, but I'm not.

This year has been a brutal one for country funds, between the strength of the US dollar, and the weakness of a lot of foreign markets. Examples? First Philippine (FPF, US$3.26), India Fund (IFN, US$10.68), Jakarta Growth (JGF,US$1.09), Japan OTC Equity (JOF, US$7.26), Korea Equity (KEF, US$2.93), Malaysia (MF, US$3.40), and Thai (TTF, US$3.69). Pretty brutal. But this group is up about 15% from when recommended in the last Open Positions. These are worth watching from the buy side, but, cheap as they are, I have trouble getting excited when I think of what will happen when the US trade deficit which is benefiting these countries greatly turns around.

Mutual Funds Mutual funds currently

have 5.1% of their assets in cash, up from 4% in January, which was near historic lows. The cash in funds is a good indicator of the tenor of the market. When managers are bullish, they have little cash. When they're bearish they have a lot, and during the 70s to as late as the early 90s 8-12% was more the norm. What's likely to happen from this point forward is the public is going to go from adding money to the funds to withdrawing it, at the same time managers are trying to build cash positions. So they'll be selling a lot of stock. The problem is: to whom, since mutual funds are (along with pension funds) the only entities large enough to buy blocks from the sellers. Pension funds will continue to get new contributions, but in a market like this, their managers will be increasing cash, and going to bonds.

The average mutual fund is down about 18% this year. Except the few remaining gold stock funds, which have hit bottom, and are rebounding.

Short Sales Almost everything is overpriced, but the most obvious offenders are stocks in the DJ and S&P indices, since they've been subjected to huge buying by index funds simply because they are part of an index.

But the worst offenders, as is always the case in a mania, are new issue "story stocks." The surviving Internet stocks have come off from their highs. I've been selling naked calls on them (at-the-money, with near term expiry) all the way down. Almost all of these things are burning matches, ripe for a 90%+ meltdown, even from current levels. But the lower they go, the more cautious I am. With Priceline at $5, I'm looking elsewhere for shorts.

Rather than try shorting individual stocks, you may want to sell naked calls, or buy puts. The longest of these options are called LEAPS, and go out about two years which should be plenty. Talk to a broker who specializes in options. Although it can show great returns in a market like this, it's a risky practice. Careful.

My favorite is Amazon, which although it's a cinch for Chapter 11 as a best case, has so many true believers that they keep buying the stock in belief it's a better bargain as it gets cheaper. And Cisco. Apart from any other problems, its $300 billion market cap gives it the liquidity institutions need when they're "hitting the bid."

My prime candidates remain Cisco (CSCO, $20), Amazon (AMZN, $17), IBM (IBM, $117), GE (GE, $65), and Merrill Lynch (MER, $65).

ConvertiblesConvertibles are always more secure, and almost always offer higher yield, lower commission costs, and almost as much upside as the common of a given company (this last depending on interest rates and the conversion premium).

There's excellent value in the gold stock convertibles at the moment. Assuming the companies don't go belly-up (and I think

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over the course of a business cycle. The rationale is that if you're only right on one segment, you'll preserve capital, even if the rest go to zero. At some point over the next few years, everything in this portfolio will be replaced by items to hedge against the return of good times; everything is cyclical. Obviously, the lists don't cover everything, nor should they; 90% of the time 90% of all markets are valued in a "reasonable" range. Speculative opportunity arises at extremes of valuation, but you should wait for the extremes. To use the analogy Warren Buffet is fond of, investing is like a baseball game with no called strikes; you can just wait for the perfect pitch.

There are now six items on the dance card:

1) Silver For years, every time it's poked its head up, it looks like the start of a new bull market and then it fails. The key has been to buy on weakness. Whether you sell on strength depends on whether you consider yourself a short-term trader, or a long-term investor. The metal has been in a major supply deficit for seven years; perhaps that's why Warren Buffet took a major position in it. I suggest continuing to accumulate $1,000 face value bags of pre-1965 silver coins. Use the COMEX for larger positions of bullion. The nearly 20-year bear market is history; it's just a question of when the bull market begins. My guess is that we could be ready for a run. A strong buy. Consider the Freeport silver indexed "D" preferred, as well.

Seriously consider buying silver calls, or just going long some contracts. The risk/reward hasn't been this good in a generation.

2) Junior Mining Stocks After turning bearish on this market in May 96, I'm again a bull. These stocks have now been whacked an average of 95%, their worst bear market in history. Gold now looks so attractive, and these stocks are so depressed (some still sell for less than cash), that you've got to take the plunge. As I've said for over a year, THIS IS THE BOTTOM. Break open the piggy bank for these stocks, as well as gold and silver themselves. Don't miss the first 300% move; it's the safest as well as the fastest.

3) Junior Oil Stocks It's likely we could be looking at another energy crisis in the near future, perhaps fueled by a collapse of the terminally corrupt Saudi regime; or perhaps the US military in the Gulf, and now Kosovo, will provoke something untoward. Consider the geological realities I covered in last month's letter. Oil has regained a price that looks like an equilibrium level, but if war breaks out the sky is the limit. I'm not listing specific oils; refer to a specialist broker, like Jeff Howard of Global Securities (800-477-7853) for details.

4) US Short Sales A good solution might be one of the two bear-oriented mutual funds. Prudent Bear (888-778-2327) and Rydex Ursa (800-820-0888.)

5) Agricultural Commodities Simply holding commodities the way you would prime real estate can be highly rewarding. Commodities have fairly collapsed, and this may be the best buying opportunity since 1970.

Practically everything is selling at, or below, production costs. Start looking to go long in earnest. Coffee, OJ, and copper are now cheap enough to add to the list.

Commodity Contract Price $ Value

Cocoa Mar 02 961/tne 9,610

Coffee Mar 02 68.00/lb 25,500

Copper Mar 02 78.05/lb 19,510

Cotton Mar 02 47.20/lb 23,600

Crude Oil Mar 02 28.86/bbl 28,860

Gold Jul 02 272/oz 27,200

Oats Dec 01 1.18/bu 5,900

Orange Juice Jan 02 87.85/lb 13,180

Silver Jul 02 4.56/oz 23,350

Soybeans Mar 02 4.48/bu 22,400

Sugar Mar 02 8.03/lb 8,990

Wheat Mar 02 3.03/bu 15,150

Equal dollar amounts of each (e.g., 3 sugar for each gold contract).

6)Uranium Stocks Cameco first appeared here at C$18; it about tripled before retreating to current levels. It remains the premier play on higher uranium prices, with a substantial gold kicker.

Strathmore, International Uranium, and Paladin Resources are the juniors in this group. I trust you read the October 1998 issue on uranium; it says it all. Call Rick Rule (800-477-7853) about them and to get the supplement I did on nuclear power.

I've always had some reservations about recommending money managers. I have no desire to manage others money myself, and think everyone is better off taking responsibility for this task personally. On the other hand, there can be some big advantages to specialization and division of labor. I currently am a paid consultant for Adrian Day, who I've known for 20 years, on this. Inquire with Adrian Day, Global Strategic Mgt., Box 6643, Annapolis, MD 21401, 410-224-2037, fax 410-224-8229.

Over the years, I've become cautious about recommending brokers. Sad to say, greed, laziness, dishonesty, stupidity, and incompetence, combined with a glib manner, are not strangers to the industry. All I can say is that I've known the following for years, and do business with them personally. They're knowledgeable about their areas, and their commissions are competitive, if you negotiate. An alternative is to use a deep discounter, but you'd better know what you want. It's usually a penny-wise, pound-foolish practice.

Resource-oriented securities Rick Rule, Jeff Howard and Paul van Eeden (800) 477-7853 or (760) 943-3939; Ben Johnson, (800) 547-4898, (503) 224-1234. Bruce Greene, (800) 819-3114; Commodities Bruce Greene, (800) 819-3114; Gold coins R.W. Bradford & Co. (888) 792-2646; David Hall, (714) 261-0509; Jefferson Coin & Bullion, (800) 593-2585, (504) 837-3033; and MONEX, (800) 949-4653 (949) 752-1400.

Continued from page 3

nent residence status outside your own country, but is otherwise of little practical value, in that you can live there on a tourist visa, just traveling abroad every quarter to renew it. And you don't need to deposit $40,000 in a local bank, show proof of health insurance, be 50 years old, or arrange for a local sponsor if you're a simple tourist. Perhaps I'm being too cynical, though. One real advantage of the program is that it allows you to buy residential property. See www.imi.gov.my. Or contact the Embassy of Malaysia, (202) 328-2700.

Speaking of Malaysia, here's an idle thought that may be worth a few million dollars a year to an entrepreneur. My second visit to KL was about 18 months ago when I was invited to speak by one of the several groups that run "offshore opportunity" seminars, mostly promoted to Australians and New Zealanders. It's a fascinating business. They charge US$5,000 to attend a three day conference, where attendees are exposed to the most appallingly inaccurate, misleading and outright fraudulent information I've ever seen purveyed in public: Ponzi schemes ("bank debentures" are a popular scam) paying 10-20% per month. Common law trusts and bogus Constitutional arguments convincing the naive that the State won't ruin their lives when they stop paying income taxes. Offshore commodity trading accounts claiming to regularly make 100%+ per year. Offshore IBC's for facilitating tax evasion. All these products, and many oth

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ers, are either outright swindles, or so overpriced that they might as well be.

After I realized what was going on, I devoted most of my second presentation to debunking them and disassociating myself from the scamsters. I was, therefore, disinvited from the closing panel for fear it might degenerate into an impromptu Jerry Springer show.

But the money the promoters make is rather incredible. One group rounded up 1,200 folks, paying US$5,000, to Fijigrossing $6 million (attendees pay all their own expenses). Another group just had two seminars back to back in Sabah, each with about 400 folks paying US$5,000.

Why do people attend, and why are they almost all from Oz and Kiwiland? Several reasons. One is they feel cut off from the opportunities they've heard about in the rest of the world (after all, it's at least a 10 hour plane ride to anywhere from Australia). Another is that they're dying for some way to cut their tax bills, but don't know enough to tell the good from the bad. But, mainly, it's that they're desperately looking for other people like themselves, namely freedom lovers and opportunity seekers.

If somebody put together a legitimate, properly organized seminar (the kind that typically go for a couple hundred bucks in the US), and promoted it down there and then took the show on the road to a dozen other places (China and Japan would both work), it would be a barn burner.

If you are in a position to make it happen, let me know (email is best). I've thought about it, but decided I just can't kiss all the girls. A man's got to know his limitations. No curiosity seekers or tire kickers, please.

A reminder of the innately stupid nature of government. And that war is the health of the State. And evidence of what kind of mind goes to work for the government.

The Herald Tribune, arguably the best US paper (if you don't read the editorials), recently recapped a few things from the year 1946. Here's one I liked:

"The three year-old style restrictions, which had banned "French cuffs" from women's and children's clothing were removed yesterday (April 7, 1946) by an amendment to the War-time Style Order. The Civilian Production Administration ended its ban on 25 inch women's coats. The original intent of prohibiting coats shorter than 33 inches was to prevent a new fashion from making existing apparel unstylish. The change also permits belts and belt loops on skirts and slacks."

Here's one for the Now-You-Tell-Us Department: James J. Cramer, co-founder of TheStreet.com recently said, referring to the late dot-com boom, "Stupid people running these companies. Stupid and stubborn and prideful. Makes me sick to my stomach."

Despite my bearishness on the market in general, I think Dragon Pharmacteuticals (DRUG $1.73: NASDAQ OTC BB) is poised to, once again, move much higher. Among other things, I've written an article on the company, which they've decided to use for promotional purposes. You should be able to establish a position now, at around $2. I expect the shares will be much higher by summer's end for several reasons which I won't go into here. Remember to use stops and keep a close eye on it, as biotech, especially micro-caps, can be volatile.

Endquotes

If Aristide had read Bakunin, and taken his words to heart, he perhaps wouldn't be the pariah he is today. I wonder if Lord Acton ("Power corrupts; absolute power corrupts absolutely") got some ideas from him.

"Nothing is more dangerous for man's private morality than the habit of command. The best man, the most intelligent, disinterested, generous, pure, will infallibly and always be spoiled at this trade. Two sentiments inherent in power never fail to produce this demoralization; they are: contempt for the masses and the overestimation of one's own merits."

Power Corrupts the Best Mikhail Bakunin, 1867

The problems of Haiti are only typical, in a magnified form, of those of all nation states the rich and poor alternately gain control of the government and use it to loot each other. Durant said it well:

"Forced to choose, the poor, like the rich, love money more than political liberty; and the only political freedom capable of enduring is one that is so pruned as to keep the rich from denuding the poor by ability or subtlety and the poor from robbing the rich by violence or votes."

Will Durant

Douglas R. Casey's International Speculator is published monthly by

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