Casey's Chief Economist on The Eye of the Storm

(Interviewed by Louis James, Editor, Conversations with Casey

These Conversations with Casey have been the "All Doug, All the Time" channel for almost a year, and Doug Casey's unique way of looking at the world will remain their focus. Fear not. That said, there are other members of the Casey team who have important ideas to contribute, and there are other thinkers in the world Doug would like to hear from. So, we're expanding the scope of these interviews to encompass all things of interest to Doug, whether they spring from his mind or the minds of others he finds insightful and worth probing.

For our first foray into the deeper regions of someone else's mind, we've decided to have a talk with our chief economist, Bud Conrad. That's in part because Bud's thinking is a critical ingredient in the analysis that drives our investment decision-making here at Casey Research. It's also, quite frankly, because Bud has just published a book that we think is a must-read for anyone trying to come to realistic grips with today's tumultuous economy. We may be biased, but we think Bud's book is an important resource for understanding and investing.

After reading this interview, you can decide for yourself if you agree.

L: I'm sitting in Las Vegas, Nevada, with Casey Research Chief Economist Bud Conrad, who's just delivered a spellbinding talk, the opening salvo of our first 2010 Crisis and Opportunity Summit. But, oddly enough, Bud is an engineer by training… So, the first question is, Bud, how the heck did you wind up being our chief economist?

Bud: Thanks, Louis, it's great to be speaking with you here at a conference where so many interesting and important ideas are being discussed. But yes, let's start with an introduction. My background was in electrical engineering, the undergraduate degree I got from Yale. I worked a whole career in the computer industry. So my approach to the way the world works, in terms of systems and analysis, is what you might call highly analytical. I mean that in the sense of starting with the data and trying to figure out how all the parts and pieces fit together into a system.

L: It's a deeply empirical approach. You're always saying, "What do the numbers say?"

Bud: Yes, and it's quite different from the traditional way most economists are trained, right up through the top levels of Ph.D. economists. I think that tradition is intellectually bankrupt. It's why economists have, for the most part, been unable to foresee the big inflection points in the economy and why they seem unable to do anything but predict a return to the way things were before any major turning points.

So I think I have something to bring to the economics community. That's why I took a year and a half to work on and publish my book, which is full of my ideas on how the world economy works. Being based on my electrical systems analyst approach, it's full of things like feedback loops and other factors that cause systems to move beyond equilibrium and cycle back and forth in a more dynamic process that's not unlike what electrical circuits do.

L: Okay, but let's come back to the book later. How did an electrical engineer become an economist?

Bud: Well, I've always had an interest in investing, and I've always had a fundamental interest in how things work. As early as 1978, I looked at the financial system of the United States and thought that it would fall apart. At one point, I worked for TRW and was told to go look at X company to acquire, and that company was providing a new thing: online charts. I asked the owner, who was considering selling the company to TRW, if he made a lot of money selling his charts. He said, "No, I make money by using the charts to find ways to invest in silver."

L: [Laughs] I begin to see the connection.

Bud: So I asked him how he invested in silver, and he explained commodities futures to me. I invested about $2,000 and made about $100,000 during the precious metals bubble of 1980.

L: Wow! You realized that?

Bud: Yes, and I've been hooked, watching the markets you specialize in, ever since, even though my career was in computers. I've spent the whole time since then watching and learning, and trying to figure out how to predict these big economic events that impact our investments so strongly.

L: That explains a lot. I remember when you first started with us. You met Doug Casey at a conference in San Francisco and gave him some interesting charts – so interesting, we couldn't ignore them. You were the "chart guy." And anyone who's been to one of your presentations knows you like to pack about 100 charts into 50 minutes. Now it all makes sense; you got started with a big chart-based success. No wonder you value charts as tools so highly.

Bud: Sure, but charts are just a way of presenting data to make it easily digestible. It's about the numbers. I'm not a chartist in the sense of what technical analysts do. I consider myself a much more fundamental analyst. The focus is not on looking for trends in charts, but on trying to understand how systems work, in order to predict what they will do in the future.

L: And like a typical engineer, you had to take it apart and tinker with it. That makes perfect sense – we're glad to have you with us, Bud. Your perspective really adds value to our organization, and your work has been an essential tool in our efforts to look forward. So, let's talk about that. Where are we going? What's the big picture your systems analysis paints for the future?

Bud: I start by looking at society's growth – and decline. I look at our situation today and try to look for parallels with other societies, to see if they can give us any ideas on where we may go. I think the most important historical comparison is to the Roman Empire; it lasted many generations, grew to great strength in its day, and then declined. I see parallels between that and the growth and decline of Western civilization, which appears to be headed for the wings as Asia prepares to take over the mantle.

L: Asian barbarians at the gates… Hm. So, where do we stand? Where in this cycle are we?

Bud: I think we've just about peaked. That's sad to me, being a product of Western civilization, but I think it's an important perspective to keep in mind as we look at the size of the problems we face. It tells me the current situation is a much bigger and longer-term problem than most economists believe or are willing to say. We did not just experience a typical business cycle bust period such as we've had many times since World War II. I think we're into a major change, handing off the baton of new economic growth to Asia.

L: Evidence?

Bud: There are some parallels that, though simplistic, seem to apply. American culture has changed from what it was for my father's generation. He told me: "Work like hell, and be honest with all your associates." Kids today ask only what the latest thing on the iPod is. It's a very different society. It's not one that has faced scarcity and values work and production. Today's America is all about enjoyment; the focus is partying, friends, self-indulgence. Las Vegas didn't exist in my father's day as it does today.

You see the same transition in Roman history, with the society starting out close to its agrarian roots, working hard to build their empire, but then changing to debauchery in the later years, with the famous Roman orgies and throwing people to the lions in the circus for sport. It was horrific and brutal, and the empire ended up being torn apart by endless internal warfare, which left it vulnerable to its barbarian attackers.