Gold & Mount St. Helens

We kept the number of predictions small here at News Kontent but we have always been gold and silver bulls and generally secular equity bears. The news out of Dubai is bad for equities and another issue for a dollar anchored by a ME dollar peg and the implied dollar/oil convertability. Jim Willie's hyperbole is starting to sound reasonable.



Not in the last few years have conditions been aligned for a truly explosive upward move in the gold & silver prices. A confluence of factors simply could not be more bullish, promising, and powerful. The psychology has also been raised in awareness on a global basis, as financial centers, media networks, and common folks have coordinated their recognition of the gold bull. They comprehend perhaps two or three of the main factors why gold is rising, out my stated list in a recent article "13 Reasons For a Major Gold Breakout" in September. The trio of fundamentals, psychology, and technical chart constitute the trifecta that will push gold & silver to extreme heights, and crush the silly shorts with their myopic half-baked tactics that are certain to make them roadkill, then someone else's lunch. The factors overlooked by most for the precious metals breakout run pertain to the broken monetary system, the Paradigm Shift away from the USDollar on both financial reserves management and commercial trade settlement, failure of the central bank franchise system, recognition of a criminal syndicate in charge of USGovt financial operations, the Black Hole of severe endless losses by firms taken under the USGovt aegis (AIG, Fannie Mae, and Wall Street firms), the hemorrhage of USGovt deficits, and lastly the dishonor of financial contract law, chronic lapses in financial market integrity, and constant intervention in those financial markets.

FALLACY IN THE DOW STOCK RALLY

The investment community rejoices when the USDollar slides further, since they have learned like a shallow minded Pavlov Dog that stocks gain. One anchor asked on Monday a basic question, "Gee, what happens if the USDollar heads toward zero, but the Dow charges ahead toward 30,000? Where does that leave us?" What a good question! The financial news networks have begun to openly wonder about the Dollar-Stock relationship and its endurance, but not yet what it means. They overlook how the S&P500 has fallen by 80% in the last several years in terms of its gold value. This is a stock bear market fully disguised, made hard to notice since the value of US money is falling fast. The stock market is rising from very easy money. One usage of the free money offered is investment in the US stock indexes. Others are Gold, Crude Oil, German Govt bonds, and commodity funds. in the Dollar Carry Trade, identified by borrowing free money and buying rising assets.

Like Wiley Coyote, a realization will soon come of a position over the canyon without footing for the stock investors. They are not prepared for a Double Dip recession, nor recognition of a recession that never ended. The common consensus belief is that the sharply lower USDollar will revitalize the USEconomy, will give a huge boost to export trade, will prevent the ravages of price deflation, will encourage foreign investment, will revive the labor market, and more baseless analytic rubbish best described as propaganda. Chalk it up to creative rationalizations and fantasy entries to the latest chapter of American Economic Mythology, and endless series of wrongful notions that has gutted the nation, enabled by the big banker parasites. Credit to Darryl Schoon for the fine image of blood sucking and targets, consistent with the Matt Taibbi comparison of Goldman Sachs to a vampire squid that extends its blood funnel into anything smelling like money across the entire planet. Their reputation is finally seeing a spot of smear. Their plants like Geithner at Treasury Secy as finally suffering some disrespect as anger is shown.



Actually, this misguided belief of perking the USEconomy from a cheaper USDollar is not only horrendously incorrect, but it is backwards. The lower value of the USDollar has numerous extremely damaging effects, will cripple the United States further, and will eventually lead the nation to a place that is best described as a Third World nation. Let's examine each claim, each plank from the positive spin, then dismiss them all.

#1. A cheaper USDollar will give a huge boost to export trade. In normal times, the effect is direct and immediate, provided the USEconomy has a critical mass of an industrial base. The 1980 and 1990 decade sent almost the entire technology manufacturing factory base to Japan and the Pacific Rim. In the years 2000 to 2004, the US corporations invested heavily in China. Recall the 'Low Cost Solutions' that resulted in lost American jobs, burgeoning Chinese trade surpluses, and a climax in tension from a broadening trade war. The trade war was forecasted three years ago here. The USEconomy surely has some export businesses, but nothing to claim as broad. Moreover, the restrictions on computer and telecommunications export remain. The Chinese cannot purchase them, so they steal their designs left unprotected on the internet websites (see Sandia Labs). The above claim (#1) has no basis, as the gain in export business will show good growth, but its base will be too small to provide much significance. From an export trade standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

#2. A cheaper USDollar will prevent the ravages of price deflation. Such a belief requires a shallow broad view with no distinction of various markets at all from a price perspective. The effect so far from the lower US$ has been higher crude oil price, higher industrial metal price, higher sugar price, and high prices for many other commodities. The effect shows up as a higher entire cost structure, enough to cause great strain. The scourge of the USDollar powerful relentless ongoing decline is the effect of commodity costs, something the investment community and bank leadership prefers to avoid in discussions. The above claim (#2) has no basis, as the entire cost structure of the USEconomy is in the process of rising. Notice higher costs with lower wages and shrinking corporate profit margins. These are hallmarks of an inflationary recession, hardly a positive development, and surely not a recovery. From prevented price deflation standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

#3. A cheaper USDollar will encourage foreign investment. In normal times, the effect is direct and immediate, provided the USGovt and state governments create the right environment, and provided foreign corporations trust the skill level of American workers. Neither condition exists. Business regulations and taxes prohibit foreign firms from even considering much investment and expansion onto US shores. The United States continually ranks near the bottom in attractive for business environment in which to invest. As for their observation on American workers, they regard them as hard working but not blessed with sufficient skills or education. Asians have a big advantage on math and science skills. Increasingly, Americans are finding themselves unemployable, or else skilled in areas that serve as extensions to bubble economy businesses like home construction and mortgage finance. A nasty red herring exists on the foreign investment notion. The foreign corporate chieftains sense a looming risk of martial law, growing social chaos, and widening grassroot movements in opposition to the government and bankers. The above claim (#3) has no basis, as almost every single aspect gives off big warning signals or delivers roadblocks. From a foreign investment standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

#4. A cheaper USDollar will revive the labor market. The USGovt and Wall Street each claim that interest rates must remain down since all the excess capacity in the system provides too much slack, thus a dampened price effect. Nowhere is that more clear that with wages, as workers continue to be shed in massive numbers. The ravages of price deflation has a continued effect on the labor market, keep wages down. Thus, the parade of continued home foreclosures. Furthermore, the shrinking profit margins inhibit expansion by US corporations. Just the opposite. They respond by reducing the workforce for the firms. The lack of incremental foreign investment, for reasons described above, also results in less revival of the US labor market. Please show me some big news items of foreign firms setting up shop in the Untied States, with a couple thousand new jobs that provide a nice shot in the arm for the labor market. The above claim (#4) has no basis, as the labor market will stick out as the grand contradiction to any claimed USEconomic recovery. The so-called Jobless Recovery is more like a Job-Loss Recovery. From a revived labor standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

OFFICIAL RESPONSE: MORE DEFICITS, MORE MONETIZATION

The USGovt executive branch, the UDept Treasury ministry, and the USFed central bank are all desperate. The USEconomy has deteriorated to a great extent, and will degrade more. The incoming revenues to the USGovt are way down, another contradiction to recovery claims. Credit growth has gone into reverse. Foreign dependence for credit supply has turned acute. The federal debt limit is soon to be breached. The Obama Admin seems on a mission to force a USTreasury debt explosion and default. Integrity of the Wall Street capital market system had been extremely downgraded. Now comes the reports (none denied by ranking sources) of tungsten gold bars, the climax of national fraud by US bankers. The response on the official government and banker side has been more monetization. Also, no interest rate hike for as far as the eye can see. Today JPMorgan announced a new 162 Euro currency target, and stated its belief of no USFed rate hike until 2012. They should know, since they are the USFed, at least their administrative side for following through on market actions. They openly recognize the Dollar Carry Trade, a surprise even to my eyes.

The USTreasury auctions receive some of the least scrutiny and investigation in memory. The rapid move to Permanent Open Market Action that buys all the official bond dealer inventory renders the process to be indirect delayed monetization. The printing pre$$ payouts for foreign USAgency Mortgage Bonds enables foreign central banks to purchase USTreasurys at auction also renders the process to be indirect immediate monetization. Before long, the entire official auction process will be an exercise in direct recognized open monetization, deemed necessary due to abandonment by foreign creditors and disgust. That will be the turning point for a rapid shocking USDollar decline and the introduction to hyper-inflation within the US shores.

BREAKDOWNS LEAD TO GOLD PRICE ADVANCE

The most recent development is clearly the exposure of the tungsten gold bars. Some extremely naive analysts and editors alike will be the last to know what is happening, as they deny the story. One editor has a military intelligence background, which accounts for myopia. He also shows only disrespect for the Gold Anti-Trust Action committee (GATA). Their charges of USGovt conspiracy to fix and suppress the gold price have been admitted by Greenspan himself. Cannot the naysayers see the pattern of fraudulent money, fraudulent coins (ok, so pre-1964 silver was copper core -- my bad), fraudulent Fannie Mae bonds, fraudulent mortgage backed bonds, fraudulent municipal bonds, counterfeited USTreasury Bonds, naked shorting of bank stocks, flash trading (the Goldman Sachs front running of NYSE), and constant Plunge Protection Team interventions? The natural climax is tungsten bars given a gold plating. Leave following the trails to others, but one could guess they match the narco pathways.

Anyone who steps forward with actual data, evidence, documents, and hard facts worthy of investigation and high level prosecution is subject to being murdered. So the way this plays out is more likely to be a cratering, a dismantling, a breakdown in the gold metals exchange. The weak link, as claimed by both GATA and hard charging analysts like Jim Sinclair with Dan Norcini, is the lack of physical gold. The metals exchanges have been running a criminal shell game for years. They do not require collateral properly placed, like 80% on short sales. In London they are digging from the 50 and 60 year old barrels to produce gold bars for delivery. In London they are hastily seeking gold bars from the Bank of England and European Union central banks in order to avert delivery defaults. The strain was evident last spring when Deutsche Bank was caught without sufficient gold, rescued by the Euro Central Bank in the nick of time. The strain was repeated in early October when London borrowed central bank gold bullion in the nick of time. Word has it that all delivery demands were met, and all were from Asia, predominantly from China. The strain will repeat by the end of this November month. The strain will again reach critical levels in March, and if the system holds together after the upcoming demands for gold delivery are handled, or not managed, whatever, we will see events reaching climax next March and the spring months heading into June.

Review some indirect evidence serving as confirmation of the tungsten gold bar story. This is inductive reasoning, at the basic level. The London and New York metals exchanges cannot complete delivery of any order over one metric tonne without fresh assay reports. Trust has been shattered. This was never required before, but is now. Why is that? Could it be that Hong Kong's revelation of 5600 tungsten bars (fake gold) was true, verified, and spread via a global alert? Yes, clearly! Assayers the world over are unavailable. They are all tied up as bullion bankers, sovereign wealth fund managers, lesser central banks, and individual billionaires are scrambling to verify their gold holdings. The assayers were entirely available two months ago, but not now. Why is that? Could it be that Hong Kong's revelation of 5600 tungsten bars (fake gold) were true, verified, and spread via a global alert? Yes, clearly!

The Canadian Mint has released information that admits to 17.5 thousand troy ounces of gold and other precious metals missing, whose estimated value is $15.3 million. No credible explanation has been offered for the missing inventory. These are not lamps, boxes of paper, crates of machine tools, floor tile, stereo sets, or power tools sitting in inventory. These are gold bars. Or were they tungsten bars? Permit the Jackass to surmise that the Canadian Mint were interrupted in their coin production process. They poured what they thought were gold bars into a cauldron, but since tungsten melts at 8000 degrees, and gold melts at 2200 degrees, the cauldron soup was lumpy with tungsten cheese. Instead of admitting they held and discovered 17.5 thousand ounces of tungsten, sure to rile the Wall Street boys, sure to turn the gold market upside down more than already, sure to invite severe scrutiny to many bankers who already face criticism (but not prosecution) over mortgage bond fraud, THEY JUST SAY IT IS MISSING !!! Just where did it go, Ottawa? Did some high level bankers (surely not Goldman Sachs) borrow it or steal it? Maybe it went to an industrial supplier that specializes in zinc, tin, copper, lead, and tungsten!!! See the National Post article (CLICK HERE). It seems the B.S. story of lost gold invites the least criticism, scrutiny, and follow through, amazingly. Theft and fraud is rampant, and the name of the game. Of course, incompetence, and clumsiness are more acceptable than corruption and collusion.

The end result of all the extra authentication processes, the absence of available assayers. the missing gold at mints, and the scattered reports of tungsten gold that have this week extended to at least on European bank location in addition to Hong Kong, is less actual verifiable gold bullion in the hands of people that trade it. In other words, THE GOLD SHORTAGE IS MORE REVEALED AND EXPOSED. Notice lastly, the no Hong Kong banker denied the story of discovering tungsten bars with gold plating. Instead, the story proliferated to a global examining of gold inventory. Notice also that no Depositor bullion bank invited investigators inside for a closer look at inventory, after doubt and lost confidence within the system occurred. These are all tell-tale coincident signs, indirect evidence in support of the tungsten salted bars and the entire story. One has to be with a military intelligence background not to see it.

GOLD EXPLOSION COMING

Gold continues to log new highs. The market forces are powerful. The corrupt cords are being severed. The bottom of the barrels are being scoured for physical gold. Investors and investment firms want some real assets instead of mountains of paper assets. Paper piles are burning. A gold price explosion is coming. They cannot stop the gold locomotive. Monday this week was gold futures options expiration. The expiry was met the previous Thursday and Friday last week with gold closing at the highs for the day, and on Monday with a 12-15 point upward thrust. Pain is being felt in a big way with the gold cartel from their suppression game that backfires. Those two days ending last week formed daily bullish hammers, very bullish signals, identified by a high open, intraday prices much lower, but with a strong high close. Hey London, Hey New York: Open vise, insert nether stones, squeeze, and invite the dogs to feed off the floor. The pressure is on. The lack of real gold is palpable. the price rises. Heads will soon roll.

Exchange officials of middle rank will be the first led away in handcuffs, not by the FBI, not by the CFTC, but by state authorities and perhaps federal marshalls. The federales are part of the syndicate (lack of) law enforcement. Why middle level guys? Because they will offer evidence and testimony against the targeted higher level officials. Many people like myself wish for a much broader exposure of criminal behavior, some prosecutions, some justice, and an end to the Age of Impunity in the Untied States that comes with the Fascist Business Model. We will find little satisfaction, except for the breakdown of the Gold-Dollar balance beam in progress. The gold & silver prices might be the main satisfaction felt. The USDollar decline might be another satisfaction. Look for strange and misleading inaccurate stories to come from the metals exchanges as they break down. Also look for something to pop up with all those guys from last August who appealed for asylum in Europe, bearing boxes of Wall Street fraud evidence. That is saved for the Hat Trick Letter reports.



Predicting the gold price at this point accurately is difficult. The Powerz are losing control. The price advances are actually occurring in a welcome manner to the Chinese. They are the primary parties in accumulation. They will push the price higher only when gold supply at the current price is no longer available, their new Modus Operandi. A gradual rise in gold price actually works the best to crush the nether stones of the corrupted metals exchanges. Few big corrections are likely to come. The price rise is being managed in much the same way as the suppression was managed. The risk is for an accident that releases control of the gold price. In that case we will see a repeat of the Mt St Helens. A 1300 price is the next target, but it is just a target. It could be easily passed. When it is passed, the next target will be something like 1500 or 2000. The shorts will be crushed, of all types, who get in the way. We are in global redesign and restructure that removes the US & UK players from the helm. They are only left with viruses to distribute after bond fraud and gold counterfeit. The USDollar is slowly suffering a death. Few in the Untied States can recognize it, since they reside inside the Dome of Perception.



Copyright © 2009 Jim Willie, CB
Editorial Archive

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.

Jim Willie CB is the editor of the “HAT TRICK LETTER” Use the below link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.



http://www.financialsense.com/fsu/editorials/willie/2009/1124.html

Recession Will Return ~ Meredith Whitney

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.


"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."
Click Here to Watch Interview

In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:
She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.
The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."

The banking sector is not adequately capitalized and will need to raise more capital in the coming year.

The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

"I don't know what's going on in the market right now because it makes no sense to me," she said.

"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."
© 2009 CNBC.com

URL: http://www.cnbc.com/id/33972133/
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Other Peoples Money ~A correction is due.

At the risk of getting ahead of myself prior to being able to confirm the turn, I am suggesting stock market action over the past week bears the distinct odor of a bull trap, with even informed technicians still waiting for a push to 50% retracements on the indexes. In this respect then, you should realize the context of such a bull trap would be profound in that we are talking about the March lows being tested and violated, meaning for example the S&P 500 (SPX) could be on its way down to test its namesake at 500 before this next sequence is all over. You will remember from previous discussions, and in framing context correctly here, it's possible we could be looking at a Supercycle Degree Affair lower in global stock markets directly ahead, implying 500 on the SPX would be an optimistic target for a low.

It will be important to watch what happens after quarter-end Wednesday, because if the funds cannot jam stocks higher for a window dressing related payday, we will have a good indication that at least the intermediate term direction has turned for stocks, where we will be looking to confirm this with the penetration of key supports in stock indices that will be discussed below. Further to this, and to continue framing what the future could hold correctly, I bring to your attention the latest undertakings from two market observers that appear timely in this regard, both sticking to their guns as deflationists moving forward from here. The first is from Doug Noland discussing Jim Grant's recent defection from the bear / deflationist camp. And the second is from Mish, who amongst other things also touches on Jim Grant's change of heart, characterizing it as a contrary indicator.

If you know me, it should come as no surprise I could not agree more in this regard. What's more, and as discussed at length previously in the full body of my work, although I am not a deflationist, or any variety of permanent 'flationist' for that matter, based on the evidence before us today I do think the 'deflationists' finally have it right. Moreover, and to continue drawing on the compelling case in this regard, one should take a few minutes to view this video by Steve Keen, the link for which I am also borrowing from Mish, who appears to have is ducks in the appropriate row as well. Here, Steve correctly points out that collectively the global population is past 'peak debt', and that although private debt and credit creation do not play into some people's definitions of money supply, anyway one wishes to count it, when we are contracting in this regard so will the economy at large, government stimulus or not.

Hold the presses. Apparently we have a landslide victory for Angela Merkel in the German national election, providing her with an opportunity to create a right of center coalition. This will undoubtedly be viewed as a very good excuse to rally the markets, so who knows, we may yet get that squeeze into month's end after all. Be that as it may, it will of course not matter in the larger scheme of things, as neither does the German economy have a meaningful impact globally, nor will it negate the trend towards deleveraging in the larger economy. And that's all that matters at the margin, which is the primary point in Steve Keen's presentation, attached above. In the meantime it does in fact appear will get a window dressing related jam job into month's end however, providing traders / investors with yet another opportunity to get short / lighten up on equities, which is a sentiment we recommend you take very seriously at this time.

Of course the bulls could give you a plethora of wrongheaded arguments on why such thinking is crazy, as crazy as the gibberish you hear on CNBC day in and day out as they continually promote the gaming of stocks higher at the behest of their corporate sponsors. Here, the better arguments would point to the inventories that need replacing, and the 'new normal' when it comes to perceiving largely worsening news. Less bad, history doesn't matter this time around - you name it, these bozos are never lacking for words - only conscience and common sense. Thankfully, this is the sentiment that's required to put an end to the games however, with the degree of the short squeeze this time around commensurate with the tops in stocks witnessed in 2000, and 2007. So again, be very careful moving forward from here because not many are, not even some veterans who should know better.

In this regard I find it surprising just how few market commentators and investors have it right in terms of the big picture considering just how critical the situation is, which is why I think an important top in stocks is in the making here. What's worse is those who do know, and have attempted to protect themselves by hedging or speculating on the short side, have had their heads handed to them and will likely not be back during what is traditionally a period of seasonal strength directly ahead, spelling potential trouble for equities. As you should know from reading these pages previously, that's the mechanism that keeps our faulty and fraudulent markets moving in directions the consensus is not expecting. This is the mechanism, when combined with generous liquidity, that keeps stocks going up when they should be going down until both the bulls and bears become exhausted, allowing for the whole shooting match to collapse at this point.

And that's where we are in my opinion, very closed to the point where both the bulls and bears become exhausted, marked by what is the annual period of seasonal strength in stocks, which should see a cessation of shorting / put buying, thus enabling our faulty and fraudulent (and seriously overbought) markets to fall. Or in other words, the bears will finally be exhausted, joining the bulls in the financially strapped department after getting creamed since March. That's what a good mania does - first it financially destroys the bulls, and then the bears within the wild reactions to the eventual crashes. In terms of important technical points in the indices to watch for, let's take a look at the same charts that we used a few weeks back because they tell us everything we need to know in terms of measuring / identifying the end to this reaction higher since March.

http://www.safehaven.com/article-14725.htm

DEEP THOUGHTS FROM RICHARD RUSSELL

Regular readers know that I am a huge fan of Richard Russell’s work. For those who aren’t familiar with Russell, he is the author of The Dow Theory letters. Obviously, he is a student of Dow Theory (perhaps professor is more appropriate). Most importantly though Russell is about as experienced an investor as you’ll find on the planet. He has lived through cycles that no one else can even remember.

I like to think that the market works on a different clock from the rest of the world. Economic cycles are often long and drawn out. It can be hard for humans to comprehend economic cycles because the length of an economic cycle is not based in years or months. It can literally work on its own clock. The current deleveraging cycle is particularly frustrating for investors because these types of recessions tend to be long and drawn out unlike your average 8-16 month recession. A full economic cycle can be anywhere from 5 years to 25 years from peak to trough. Humans, particularly investors, have trouble seeing past the next 5 to 25 minutes. It’s safe to say that Mr. Russell has seen more cycles than anyone and his educational and priceless commentary is evidence of this. I’ve included some of his notes from this latest week and highly recommend his newsletter. His ability to grasp the big picture is truly unmatched:

Question — Russell, you seem to think this is going to be a world-class bear market. Why do you think that?

Answer — The US and its people have been borrowing and leveraging for decades or ever since WW II. There’s never been a true correction in the economy, although there have been corrections in the stock market (1973-74 and 1957-58). Consumer buying makes up 70% of the Gross National Product of the US. For the first time in decades, US consumers are dealing with massive unemployment. This is scaring them and causing them to cut back in their buying and now they are actually saving. Fear is the strongest of all human emotions, and US consumers are finally dealing with naked fear. I believe this fear will bring on years of saving and a long period of debt contraction. This will thwart all the administration’s efforts to inspire consumers to spend again. Today, if you give the Average American money, he’ll save it or use it to pay off debt. For the first time since the Great Depression, debt has again become a “dirty word.”

I think the stock market and consumer pessimism will feed on each other. This bear market, like all others before it, will only end in exhaustion. And with exhaustion we will see stock values that this generation has never seen or imagined before.

Question — Why do you take the potential break-up of the rally that started on March 9 so seriously?

Answer — The public has been led to believe that the recession is about over. Moreover, they believe the stock market rally since March 9 is the market’s way of celebrating the forthcoming end of the recession. If this rally falls apart (as I think it will) and the March 9 lows are violated, the investing public is going to be more disillusioned and disappointed than ever. All the bulls that have been promising that the “worst is over” will be distrusted and even hated.

Question — Russell, why do you think this market is fated to fall apart?

Answer – Because the administration and the Treasury and the Fed has fought the primary trend of the market for so long and with such massive weapons. “The bigger they come, the harder the fall.” When the greatest attack on a primary bear market fails, the results are fated to be cataclysmic. The Administration will have shot all its ammunition. In fact, they may be OUT of ammo. And then what?

Question – Is there something different about this latest decline that began on June 12

Answer — Yes, there certainly is. Most market’s when they decline gradually become oversold. But this decline looks progressively worse as it continues. I’ve said that the span in Lowry’s Buying Power Index and their Selling Pressure Index is continuing to widen. Thus, instead of becoming oversold as the market sinks, the market is simply looking worse. On yesterday’s sell-off, the span between the two Lowry’s Indices widened to its greatest span in history — 790 points. Amazing — and bearish.

Depressing Comment — What’s so ominous about this market is that as it sinks lower, the internal statistics get worse! Normally, as a market descends it becomes increasingly oversold. Not this market. As this market heads lower, the Lowry’s statistics get worse.

“So how will this work out?” I ask myself. The market could just continue to sink with very little in the way of rallying ability, until the March 9 lows are tested and violated. The damn trouble with this market (from the bulls’ standpoint) is that it shows no signs of becoming oversold, the Selling Pressure Index just keeps creeping higher, and the Buying Power Index continues to deteriorate. This is one nasty bear market if there ever was one.

If you’re holding a fat portfolio of stocks, you’re literally standing on the tracks with the train heading towards you at 70 MPH. My advice — get the hell off the tracks.

That does it for Tuesday,

Your buddy from the golden West,

Russell

If you can’t respect and love that kind of writing from an 85 year old trader with more experience than most of the TPC readers combined then it’s time to have your head checked. Great stuff Mr. Russell!

Global Crisis ‘Vastly Worse’ Than 1930s, Taleb Says

May 7 (Bloomberg) -- The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.

“This is the most difficult period of humanity that we’re going through today because governments have no control,” Taleb, 49, told a conference in Singapore today. “Navigating the world is much harder than in the 1930s.”

The International Monetary Fund last month slashed its world economic growth forecasts and said the global recession will be deeper than previously predicted as financial markets take longer to stabilize. Nouriel Roubini, 51, the New York University professor who predicted the crisis, told Bloomberg News yesterday that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic.”

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” Roubini said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

Federal Reserve Chairman Ben S. Bernanke told lawmakers May 5 that the central bank expects U.S. economic activity “to bottom out, then to turn up later this year.” Another shock to the financial system would undercut that forecast, he added.

‘Big Deflation’

The global economy is facing “big deflation,” though the risks of inflation are also increasing as governments print more money, Taleb told the conference organized by Bank of America- Merrill Lynch. Gold and copper may “rally massively” as a result, he added.

Taleb, a professor of risk engineering at New York University and adviser to Santa Monica, California-based Universa Investments LP, said the current global slump is the worst since the Great Depression that followed Wall Street’s 1929 crash.

The Great Depression saw an increase in global trade barriers and was only overcome after President Franklin D. Roosevelt’s New Deal policies helped revive the U.S. economy.

The world’s largest economy may need additional fiscal stimulus to emerge from its current recession, Kenneth Rogoff, former chief economist at the International Monetary Fund, told Bloomberg News yesterday.

“We’re going to get to the point where recovery is just not soaring and they’re going to do the same again,” he said. “We’re going to have a very slow recovery from here.”

Fiscal Stimulus

The U.S. economy plunged at a 6.1 percent annual pace in the first quarter, making this the worst recession in at least half a century. President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.

Gold, copper and other assets “that China will like” are the best investment bets as currencies including the dollar and euro face pressures, Taleb said. The IMF expects the global economy to shrink 1.3 percent this year.

Gold, which jumped to a record $1,032.70 an ounce March 17, 2008, is up 3.6 percent this year. Copper for three-month delivery on the London Metal Exchange has surged 55 percent this year on speculation demand will rebound as the global economy recovers from its worst recession since World War II.

Commodity prices are also gaining amid signs that China’s 4 trillion yuan ($585 billion) stimulus package is beginning to work in Asia’s second-largest economy. Quarter-on-quarter growth improved significantly in the first three months of 2009, the Chinese central bank said yesterday, without giving figures.

Credit Derivatives

China will avoid a recession this year, though it will not be able to pull Asia out of its economic slump as the region still depends on U.S. demand, New York University’s Roubini said.

Equity investments are preferable to debt, a contributor to the current financial crisis, Taleb said. Deflation in an equity bubble will have smaller repercussions for the global financial system, he added.

“Debt pressurizes the system and it has to be replaced with equity,” he said. “Bonds appear stable but have a lot of hidden risks. Equity is volatile, but what you see is what you get.”

Currency and credit derivatives will cause additional losses for companies that hold more than $500 trillion of the securities worldwide, Templeton Asset Management Ltd.’s Mark Mobius told the same Singapore conference today.

“There are going to be more and more losses on the part of companies that have credit derivatives, those who have currency derivatives,” Mobius, who helps oversee $20 billion in emerging-market assets at Templeton, said at the conference. “This is something we’re going to have to watch very, very carefully.”

Taleb is best known for his book “The Black Swan: The Impact of the Highly Improbable.” The book, named after rare and unforeseen events known as “black swans,” was published in 2007, just before the collapse of the subprime market roiled global financial institutions.

A Tale of Two Depressions

This masterpeice by Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, formerly a Senior Policy Advisor at the International Monetary Fund and Kevin H. O’Rourke,Professor of Economics at Trinity College Dublin and CEPR Research Fellow is worthy of the widest dissemination, catching as it does the epic nature of the contraction and both the significant differences as well as the apallingly similiar if not, frankly scary economic aggregrates.....

A Tale of Two Depressions

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then



Source: Eichengreen and O’Rourke (2009) and IMF.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then



Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then



Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html
It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.
Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)



Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

http://www.voxeu.org/index.php?q=node/3421

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

http://www.voxeu.org/index.php?q=node/3421

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.
Conclusion

To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.
References

Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress.

Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press.

Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.

Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009).

Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009).

This article may be reproduced with appropriate attribution. See Copyright

Interview with Orlov ~ Reinventing Collapse

For those of us who have already gone through all of the emotional stages of reconciling ourselves to the prospect of social and economic upheaval, it might be helpful to have a more precise terminology that goes beyond such emotionally charged phrases. Defining a taxonomy of collapses might prove to be more than just an intellectual exercise: based on our abilities and circumstances, some of us may be able to specifically plan for a certain stage of collapse as a temporary, or even permanent, stopping point. Even if society at the current stage of socioeconomic complexity will no longer be possible, and even if, as Tainter points in his "Collapse of Complex Societies," there are circumstances in which collapse happens to be the correct adaptive response, it need not automatically cause a population crash, with the survivors disbanding into solitary, feral humans dispersed in the wilderness and subsisting miserably. Collapse can be conceived of as an orderly, organized retreat rather than a rout.

Dmitry Orlov says that the US should be looking to its old enemy - the Soviet Union for lessons on how to deal with the global financial crisis. He says the coming upheaval presents a plethora of opportunities for reinvention - if it's handled right.

This interview was recorded last night (US) and aired some hours later in Australia. Audio is available for download here. The host, Philip Adams, was well primed for the occasion and asked thoughtful questions. A good, short introduction to the subject. Philips did suggest opening one's veins at the end but he also suggested opening a bottle of wine as an alternative.

download

Things Aren't as Bad as You Think, They're Probably Worse

By David Schectman

Why is it so hard for most investors to understand that the problems at hand cannot be solved and that the US dollar and all dollar denominated assets are on the verge of a terrible tumble?

I think that there is a simple answer to this question. First of all, money managers, stock brokers and the Wall Street gang are touting a recovery of the economy and of the stock market by later this year. They are urging investors to "stay the course" and urge investors to take a long-term view. Stocks will come back, they say. The economy will rebound, they say. Yes, they will be right, I say, when I can dunk a basketball! We all like to dream.

A friend of mine was at a fancy health club recently and he spoke to a man who he knows, a retired employee of the Minneapolis Federal Reserve who had just returned from a bankers conference in Singapore. The ex-banker told my friend that they expect the economy to rebound by the fall of 2009. He asked me what I thought of the prediction.

I asked him why he gave credibility to a Fed banker when they have been 100% wrong all along in predicting the economic collapse and worse yet, were primarily responsible for creating it in the first place. If you want to place the blame, look no further then Alan Greenspan and Ben Bernanke. The Fed lobbied hard for de-regulation of the banking industry and no regulation for derivatives. They then flooded the market place with cheap credit which allowed the greedy crooks on Wall Street to kill us all with many trillions of toxic derivatives, which they received billions and billions of commissions for selling. Look no further than AIG.

I say the recovery, when it finally arrives, and I suggest that it will be more like 3 to 5 years minimum down the road, will be weak at best. Meanwhile, the stock market is in grave danger of losing another 50% from where it now stands. I have pointed out many times in the past that, according to Dow Theory, the stock market will bottom when stocks are offered at great values. That is NOT the case even now. The price to earnings ratio and dividends are at least twice as high today as they should be at a market BOTTOM. Think 3500 Dow or lower.

As far as the myth that stocks are a great place to have your money for long-term investing - earlier this week Richard Russell wrote, The Dow's extreme high, recorded in 2007, was 14,164. As I write the Dow is below 6800. The Dow is now selling at less than one-half its peak price. This represents a horrendous loss in a period of less than two years. My interpretation of this violent action is that we are probably heading into another Depression. I don't know how far the Dow is fated to fall, but I do know this -- the stock market is still far away from the values that existed at previous major bear market lows.

Watching the stock market action, I'm getting the feeling (my instinct) that we're heading into chaotic times. We're going to see things that the most recent three generations have never seen or even imagined.

Over the last year I've been warning my subscribers that there's a "hard rain a'comin." The hard rain has now arrived, but it isn't showing up yet in the economy. It will -- I think by the end of the year.

My advice again is to get in cash and gold, and get out of debt. Don't buy anything that will cost you money to carry.

In July, 1932, in the depths of the Great Depression, the Dow collapsed to 41 a low not seen since then. In October 2007 the Dow peaked at 14164. The halfway level of the entire climb from Dow 41 to Dow 14164 is 7082. As I am writing this newsletter, the Dow is at 6870, 212 points BELOW 7082, the halfway level of that prodigious climb.

In other words, the Dow has given back more than half of all its gains since the bottom of the Great Depression. This shows you the mind-boggling damage that decimated the market since 2007. No one is immune. Even Warren Buffet's Berkshire Hathaway lost half its value, so far, in this brutal bear market! And Warren Buffett is now warning us that the US economy will be "in shambles" for the rest of 2009.

When I talk in a negative manner to my friend he usually says "Do you mean we are going to all live in caves?" No, I have never said that, but I do believe that the standard of living in American is going to atrophy by at least 25% to 30% and many Americans will re-visit the 1950s life style. I grew up in the 1950s in Minneapolis and lived in a small two bedroom house (cost $14,500) with one air conditioner (a small window unit), one small black and white TV and one 5 year old car (paid for in cash, of course) for my parents, and my brother and me. I walked 2 miles each way to high school, even in 30 below weather. Truth be told, I didn't have any idea that I had it so bad. We all did fine. We ate well and were well dressed. We were middle class. That was not exactly "Third World" living standards, but it was a far cry from today's McMansion, adorned with multiple large screen TVs, 3 luxury cars in the garage, annual warm weather vacations, every imaginable electronic gadget and all the trappings. The problem is that this elevated standard of living was based on credit. Very few people bought their cars and toys for cash. Very few people put down 20% or more on their mortgage. People tend to live from paycheck to paycheck and are solvent as long as they have two big incomes coming in and can meet the monthly payment schedule. Let just one of the two family incomes go by the wayside and soon the house of cards starts to tumble. You can see it happening all around you with huge increases in credit card defaults and millions of people walking away from their homes.

For a number of weeks now, more than 600,000 people per week have joined the ranks of the unemployed. A large number of them lost high paying jobs, jobs that they will never replace in kind. Professional people, business owners and executives are scrambling to find any work - any kind of a job in order to put food on the tabl e and delay the inevitable when they run out of savings and have to leave their home. My wife's grandparents lost their home in the 1930 owing but $450 on the mortgage. Her grandfather, a wonderful man, never recovered from the loss of their home. He rarely ever smiled after that experience.

In 1982, my wife and I both lost our (high paying) jobs and were on the verge of bankruptcy. I can tell you first-hand how demeaning and depressing it is to lose a job and not be able to find another. Fortunately for me, I landed a job in the precious metals industry and my life turned around in a hurry. But where will the millions of recently unemployed people go to find another middle class paying job? Would you like to support your life style on $10 an hour? Those are the only jobs out there - if you are lucky enough to find one. What will people do when their benefits run out and their savings are gone? This is a human tragedy of epic proportions.

How can the economy recover without millions of new high paying jobs? Where will the jobs come from? How can we compete with Third World countries and their low wage scale? I speak with my oldest granddaughter honestly about her future. I urge her to study hard and very carefully pick a profession that offers a reasonable future. Medicine, engineering, health care. There are a few areas where good jobs can be had, but for most Americans, the middle class will be but a memory. We will have a two class society - a small percentage of very wealthy people (with a huge tax burden) and everyone else. This is the end of the American Dream. God, I hate to write that, but for most Americans it is a fact. The next generation will not live better than we did, and just getting by will be difficult for them.

One of the reasons that I am obsessed with accumulating as much physical gold and silver as possible is so I can give my grandchildren a better chance to succeed. They will need all the help that they can get. If you have the same concerns, do not risk your capital by staying in dollars or dollar denominated stocks. Your losses will be severe and there will be no way to make it up. Gold and silver, on the other hand, are getting ready to explode in price. $2,000 gold in less than 24 months is a reasonable starting point and silver should top $50 an ounce in that environment. That's just for starters.

David Schectman
CEO, Miles Franklin
1-800-255-1129

The $700 trillion elephant

SANTA MONICA, Calif. (MarketWatch) -- There's a $700 trillion elephant in the room and it's time we found out how much it really weighs on the economy.
Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth.
But valuing them correctly is exactly what we should be doing because these comprise the viral disease that has infected the financial markets and the economies of the world.
Try as we might to salvage the residential real estate market, it's at best worth $23 trillion in the U.S. We're struggling to save the stock market, but that's valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion.
Compare any of these to the derivatives market and you can easily see that we are just closing the windows as a tsunami crashes to shore. The total value of all the stock markets in the world amounts to less than $50 trillion, according to the World Federation of Exchanges.
To be sure, the derivatives market is international. But much of the trouble we're in began with contracts "derived" from the values associated with U.S. residential real estate market. These contracts were engineered based on the various assumptions tied to those values.
Few know what derivatives are worth. I spoke with one derivatives trader who manages billions of dollars and she said she couldn't even value her portfolio because "no one knows anymore who is on the other side of the trade."
Derivatives pricing, simply put, is determined by what someone else is willing to pay for the contract. The value is based on an artificial scenario that "X" will be worth "Y" if "Z" happens. Strip away the fantasy, however, and the reality of the situation is akin to a game of musical chairs -- without any chairs.
So now the music has finally stopped.
That's why stabilizing the housing market will do little to take the sting out of the snapback we are going through on Wall Street. Once people's mortgages were sold off to secondary buyers, and then all sorts of crazy types of derivative securities were devised based on those, and those securities were in turn traded on down the line, there is now little if any relevance to the real estate values on which they were pegged.
We need to identify and determine the real value of derivatives before we give banks and institutions a pass-go with more tax dollars. Otherwise, homeowners will suffer as banks patch up the holes left in their balance sheets by the derivatives gone poof; new credit won't be extended until the raff of the old credit is put behind.
It isn't the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished -- trading phony instruments to the tune of $700 trillion.
Let's figure how to get out from under that. Then maybe the capital will begin to flow again through the markets. Right now, this elephant isn't just in the room, it's sitting on us.
Thomas M. Kostigen is the author of You Are Here: Exposing the Vital Link Between What We Do and What That Does to Our Planet (HarperOne). www.readyouarehere.com

In real terms DOW correction only half way over

If the Real DOW overshoots as much as it did last time the stock market reflected a relatively minor debt deflation, we are only about half way through the correction.

Keep in mind our Real DOW is, well, real – that is, inflation adjusted; during the previous debt deflation bear market, stocks declined rapidly in nominal terms then in inflation-adjusted terms. Note that in Real DOW terms, the entire 1966 to 1983 period appears as one continuous bear market, first disinflationary then inflationary. Likewise, the more extreme debt deflation bear market that started in early 2006 during the inflationary weak dollar period and continued into the disinflationary period that started at the end of 2008; in Real DOW terms, the decline is continuous.

There are several ways that the DOW can go on to the queasy lows shown above. One way is for inflation to rise and for the DOW to fall only moderately further in nominal terms. We might, for example, see the DOW fall to 5000, our long-term DOW target, while inflation rises into double digits as occurred between 1975 and 1980, in early 2012. But that's just a guess, of course.

http://www.itulip.com/forums/showthread.php?p=80503#post80503

After the Economic Dunkirk

http://www.debtdeflation.com/blogs/2009/03/05/after-our-economic-dunkirk/

Not well. Rudd’s stimulus is a whopping $42 billion–a big number. But our private debt is now over $2 trillion. If the private sector de-levers by as little as 5% of its current debt level, that will withdraw $100 billion from spending. In the new economic Rock vs Scissors game, Deleveraging trumps Government Stimulus every time.

This is why Japan is still mired in a Depression, 19 years after its bubble economy burst. You can’t solve a problem caused by too much debt by going into more debt. Ultimately, the only solution is to reduce debt.

There Australia is in a quandary. We don’t yet have insolvent banks–the USA on the other hand has nothing else. So drastic means of attacking the problem are possible in America, once the Yankees get over their usual pussy-footing about nationalisation. But we can’t follow that path while it still appears that our banks are solvent.

So all we can do is brace ourselves for a massive increase in unemployment, and do what we can to ameliorate the pain. Several policies are obvious there: remove the waiting period for receiving the dole, eliminate (or drastically prune) the requirements that unemployed persons exhaust their savings before they receive the dole, get rid of the punitive job application requirements, and take the stigma away from being a victim of a global financial crisis that is well beyond the control of those whose jobs will be destroyed by it.

That will necessitate a massive increase in the government deficit, but that is justified in making sure that the pain of a Depression is shared more equitably. It is also a far more sensible way of going into deficit than throwing a fistful of money at soon to be unemployed consumers.

We can also change the rules on mortgage defaults, so that a failed borrower becomes a renter from the bank or lender that extended the money, and pays a rent based on a proportion of their income. That might mean a lot less revenue for banks, but it will also mean a lot less mortgagee sales–and there will be a tsunami of those coming our way if the economy continues to shrink by 0.5% or more every quarter.

On that front, the most recent figure was a drop in the bucket compared to what we’ve already seen overseas, and what we are likely to see here as deleveraging reduces debt-financed spending, our terms of trade collapse, and our export voumes plummet. It seems that the days of Kangaroo Economics–”We won’t suffer a recession because we have marsupials”–are over. Bye Bye, Boom Boom.

“Bail us out, but leave us alone.”

This will appear in the next issue of Al-Ahram Weekly http://weekly.ahram.org.eg


Prison of nations


Sarkozy’s ‘incoherence’ is a sign of the euro-impasse, says Eric Walberg


Riots swept across Eastern Europe this winter. In Latvia 100 were arrested when they attacked the Finance Ministry with cobblestones from the quaintly restored tourist area protesting unemployment, budget and wage cuts. In Lithuania, riot police fired rubber-bullets and tear gas on a trade union march. A demonstration in the Bulgarian capital turned violent leading to the arrest of 150 protesters. These three states are all members of the Exchange Rate Mechanism (ERM2), the euro’s pre-detention cell. They must join.


The IMF calls for devaluation of the currencies of these “economies”, which are not really economies at all after their deindustrialisation over the past two decades, but the euro-agreements prevent this. And even if they could do the IMF number, their huge mortgage debts contracted in euros and Swiss francs over the past decade would still be unrepayable.


Latvia’s government was trying to comply with IMF-imposed measures to qualify for an emergency loan, much like Argentina in 2001, when brutal cuts to education and social programmes sparked a general strike and radicalised the entire nation (except, or course, those responsible for the crisis). The riots in Lativa brought the government down and its credit rating was just lowered to junk status.


It’s no better inside euroland. Q: What’s the difference between Ireland and Iceland ? A1: The letter “c”. A2: Six months.


We haven’t even mentioned Greece, which is already considered a failed state, virtually in a state of civil war since last September. And now the very pillars of the European Union are crumbling. In January, hundreds of thousands marched in French cities in the biggest protest in two decades. An ongoing month-long strike in France’s far-flung Guadeloupe is now full-scale urban warfare, with the dead including a trade union leader. The ruling white elite and tourists are at this very moment fleeing in panic. Martinique and Reunion have joined in.


In Britain demos are breaking out across the country protesting unemployment and the bank bailouts. The British National Party shocked the establishment by winning a council seat in Kent, “penetrating” the south of England, and are expecting major gains in the EU elections in June. Spain lost a million jobs in 2008 and the unemployment rate is expected to reach 25 per cent this year. Spain’s (and Ireland’s) so-called wage inflation now requires wage deflation, workers are told. With Spain’s high debt levels, this is impossible. Even if it were possible, wage deflation is a recipe for revolution.


Marches protesting the economic plight of the people are expected to grow and lead to further violence throughout Europe, with Greece as the prequel. Suddenly, the spectre of the end of the EU, certainly the end of the common currency, is being raised. Coined to convince the “free world” of the dangers of Communism, the domino effect is back with a vengeance.


The string pullers over the past two decades managed to transform the face of Europe, destroying the Soviet Union and expanding the EU and NATO rapidly eastward. But just as Napoleon and Hitler before them, the over-confident conquerors moved too far too fast, and now face the prospect of losing everything. The marvel of the euro zone is now derided as the Völker-Kerker (prison of nations) recalling the Austro-Hungarian Empire. Italian journalists have begun to talk of Europe’s “Tequila Crisis”, referring to the collapse of Mexico’s peso in 1993 when the elite took their money to the US. A similar capital flight from Club Med could set off an unstoppable process and even bring the euro down.


What is the euro, except a fixed exchange rate agreement among members? Sceptics have always dismissed it as a dangerous straight-jacket, since Europe is far from uniform. It means national governments are highly restricted in their monetary and fiscal policies to deal with crises. It also means that ripples in Europe become tidal waves, as all the countries’ economic successes or failures happen together.


This is fine if governments are united in pursuing a common agenda to promote stability and prosperity for the common Europeans, but neoliberalism allows for no such political will. The common economic space has merely allowed large companies and banks to take control of the whole market, supposedly to be equal competitors to their big brothers in the US, China and elsewhere. But riding the wave of privatisation and euro-expansion, they threw caution to the winds, with no strong national governments to clip their wings. The EU “government” is exposed as worse than useless, a rubber stamp for this Thatcherite mania, fooling Europeans into thinking there was someone controlling the private chaos.


As the euro begins to slide against the worthless dollar (that’s right), no one is seriously preparing for the possibility of its immanent collapse and what to do about it. Instead, incredibly, a Financial Times columnist calls on the EU to drop its euro-entry requirements for the “economies” of eastern Europe and quickly shepherd them into the “safe” euro-fold. Just as mad as this strategy may seem is the one presently being implemented: to pump endless cash into the banks that have recklessly moved into this economic wasteland.


It is vital to keep the edifice afloat, after all. Virtually all of Eastern Europe is in hock to Western banks and as they go bankrupt, or for the “lucky” ones, their exchange rates plummet with respect to the euro, they represent bargain-basement fire sales for the West. The Polish zloty plunged 50 per cent in the past six months, making it impossible to repay the countless euro-Swiss loans contracted by unwitting Poles, lured by low interest rates.


The banks have lent Eastern Europe about $1.7 trillion, since “independence” and this must be saved from disappearing at all costs. The currently proposed $31 billion to be pumped into the banks is peanuts -- as long as national governments (that is, the people) pay it, of course.


If the steely-nerved bankers can stay the course, the pay-off is potentially immense. Lured into euro-clutches, these orphan nations can now be squeezed. Integration with a vengeance, on a par with their WWII and post-WWII occupations. At least under post-WWII socialism (which many Eastern Europeans remember fondly), the common people were provided for and the ruling party’s privileges circumscribed. But if today’s unsupervised elites keeping sending their money abroad, the pit becomes bottomless. Riots turn into revolutions.


France will no doubt lead the way. Students occupied the Sorbonne recently in a long-running battle against President Nicolas Sarkozy’s education reforms, supported by 70 per cent of the population. French radical politicians Jose Bove and the popular New Anti-Capitalist Party leader Olivier Besancenot have already travelled to Guadeloupe in solidarity with the strikers. “Their fight is our fight — against captialism, exploitation, the big supermarkets,” exhorted a newly radicalised Bastille district activist.


Sarkozy’s popularity is at its lowest at 36 per cent, with a similar number of French saying they would welcome strikes “on a huge scale”. The pollster Dabi said, “There is a sense of incoherence and a sense that Sarkozy does not really know where he is taking France. But that’s largely because there is an incoherence and Sarkozy doesn’t know here he is taking France.”


The same can surely be said of all Western leaders these days. United States President Barack Obama has it easy. He at least has a clear agenda to tear up -- the Reagan-Bush one. But the only common policy of Western leaders so far is one dictated by the banking elite: “Bail us out, but leave us alone.” If anything, they are demanding coordinated bailing out and calling for a new international banking institution, which of course they will control, and which, we are supposed to believe, will avert any further unpleasantness. Such an institution may well act to avert capitalism’s collapse, but there will be lots of “unpleasantness”, evenly distributed among the common people.


The sunny euro-vistas of yesterday are no longer. Eastern Europe risks being eaten alive by Western banks. Western Europe risks mere stagnation and endless political unrest. All indications are that this is a deadend, that the only way forward is to break the hold that the economic system has on both East and West. The upheavals have begun and the real domino effect will spread throughout Europe this summer. That the European parliament elections in June will take place in a hostile atmosphere is an understatement.


Using a crisis to push through unpopular measures doesn’t work anymore, as Greek and Latvian politicians have discovered. The streets are already ringing with the cry: “We won’t pay for your crisis!”

***

Eric Walberg writes for Al-Ahram Weekly. You can reach him at www.geocities.com/walberg2002/

Talking Shop With a ‘Vulture’ Investor

In the financial industry, there used to be a niche specialty called "distressed investing." Some called these folks vultures, because in the aftermath of a collapse, they would go swooping in to buy up the wreckage on the cheap. That's not much of a specialty anymore — the state of the market means we're pretty much all vultures now. But we thought we could get some perspective by getting in touch with an old friend who is on the front lines — he trades at one of the most established and respected distress funds. Last time we saw him in person, around Thanksgiving, he was talking Apocalypse with a capital A and scaring the crap out of everyone. It was a great holiday. We thought, given how many fabulous buying opportunities people keep saying are out there, his mood would probably have improved by now.

We were wrong.

NYM: How are you doing?
V: Since I saw you last, things have deteriorated more than even I could have imagined. We're invested in virtually all sectors, primarily through debt, so we have pretty good access to management. The color coming from them is mind-bogglingly awful. We need to flush all the banks and start again. I told my wife I'm putting gold bars and shotguns under our bed.
NYM: Can we take refuge with you, if it comes to that?
V: You're more than welcome. We have thick walls and a high perch from which to pick off the marauding throngs.
NYM: What's the least-bad news you've heard recently?
V: The only thing anyone on the desk can come up with is the fact that there have been a number of high-grade non-financials who have been able to raise debt in the market. That's it. GDP is going to be down 10 percent this quarter, is my guess.
NYM: Give me the bad news then.
V: I heard this yesterday: The top five U.K. banks have $10 trillion of assets and their GDP is only $2.13 trillion. The whole country could fall into the ocean. The top five U.S. banks represent only about 60 percent of GDP by comparison. The other thing is a survey that I just read about in the Times. Over six in ten Americans think that someone in their household will lose their job in the next year. That means six in ten people won't buy anything other than basics. The economy comes to a full halt even worse than now.
NYM: That means the other four out of ten better be out there buying Gucci. You're not losing your job. Are you buying any Gucci? Taking vacations? Leasing a new Mercedes?
V: I'm still taking vacations and renting a summer house but I ain't buying anything. Credit-default swaps scare me too much. For the banks, their portfolios of second-lien loans is terrifying and nobody, including the government, wants to talk about it. The banks carry them at par and have hundreds of billions of dollars of them. We just bought some at 33 cents on the dollar in the market. If they turn out to be worth 33, every bank would collapse.
NYM: How about the Obama speech? That float anybody's boat on the desk?
V: Mixed. Couple of die-hard Republicans hated it. Most others thought it was pretty good, balancing reality with optimism.
NYM: Shouldn't you be licking your chops these days — aren't there once-in-a-lifetime bargains all over the place for brave distress investors?
V:There are and they get cheaper every day. The private-equity guys are going to be done.
NYM: So you are buying?
V: We're slowly buying but conserving cash for the tsunami of bankruptcies that are coming.
NYM: Do you think that before the big one a few years ago, people used the word tsunami as much as they do now?
V: It's been part of my vernacular for years.
NYM: What else is in your vernacular?
V: Catastrophe, debacle, putrid, relentless, overwhelming all come to mind.
NYM: Thank you very much. Please do your best to hold up the economy.

link

A bull market in chaos ~ Final stretch in the road to ruin

Road to Ruin: Final stretch
http://itulip.com/forums/showthread.php?p=78579#post78579



by Eric Janszen (February 23, 2009)
The credit crunch may only be in its early stages and a bigger contraction in lending in coming months could have "serious implications" for the U.S. economy, Standard & Poor's Rating Services said Friday.

While politicians and others have complained that banks aren't lending, the data on credit outstanding credit in the U.S. only tenuously supports this idea, the rating agency said.

"What's behind the apparent difference between perception and reality?" Standard & Poor's credit analyst Tanya Azarchs said. "It may be that, while growth in overall credit was positive through at least third-quarter 2008, it has risen at a slower pace than at any time since 1945 -- far below the 8%-10% rate in most years."

Banks are replacing loans as they mature, but there's little net new loan growth, she noted. "That could mean that the slowdown in lending is just an opening act, and a true credit crunch may yet take the stage," Azarchs warned. - Credit crunch may only have just begun, S&P warns, MarketWatch, February 21, 2009

Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union. - Soros sees no bottom for world financial collapse, Reuters, February 21, 2009

"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."

In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."

"It's broken down in the face of almost all expectation and prediction," he noted. - Volcker sees crisis leading to global regulation, AP, February 20, 2009
The method to our madness -- negative on stocks since we opened in 1998 and positive on gold since 2001 -- becomes painfully apparent.

The DJIA closed Friday at 7,367, a level first seen in May 1997 in nominal terms. Adjusted for inflation, 7,367 shares of the DOW today buys only that which 5,600 shares bought in 1997; in real terms, the stock market got kicked back to1996. As dreadful as those facts are, they could be worse - and current course and speed maintained -- will.

The Nikkei closed Friday at 7,416, off 81% from Japan's stock market bubble peak of 38,916 on December 29, 1989 -- nineteen years ago -- as Japan's credit, stock, and real estate bubbles ended and an era of debt deflation set in. Collapsing US credit, stock, and real estate bubbles confronted the US with a similar fate starting in 2007. Marking the top of the US stock market bubble at 14,165 on October 9, 2007, if the US debt deflation era goes as badly as Japan's -- is as badly managed -- we can look forward to the DOW closing at 2,700... in the year 2026.

Imagine that.

As iTulip readers who have been us from the start know, we do not believe that will happen. Instead, as we have said for ten years, the US will never pay down all the foreign debt taken on during the FIRE Economy era, from 1980 to 2006, at least not on full-value dollars. America 2008 is not Japan 1990.

Japanese policy makers transferred debt from private to public account via bailouts and fiscal stimulus, siphoning off cash flow from households and businesses to repay the loans carried on the books of banks as assets on the side of the creditor-debtor balance sheet where the political power lives, collateralized by buildings, houses, and land, which prices were inflated by the very credit that created in the onerous debts that became ever more so as the Japanese economy shrank.

Banks and other creditors convince government to pursue policies to deflate the debt against the incomes of households and productive businesses, reducing the debt the slow painful way, dragging the country deeper and deeper into a hole. The Obama administration's stimulus plan does not target spending on infrastructure projects that boost long term US economic growth and competitiveness as much as we had hoped, and it fails to confront the core problem, the need to restructure both private sector and public debt left over by the FIRE Economy.

Debt Deflation Continuation Plan

So far, one year into debt deflation, the US is executing a Japanese style Debt Deflation Continuation Plan, as if the US, with its gross external debt of 95% of GDP, and current account deficit that grew from 5% to 7% of GDP in recent years, financed by nearly $4 billion dollars per day in capital imports, is in the same position as Japan in 1991, without external debt and running a large current account surplus as the world's largest exporter of capital. The magical thinking that underpins US policies extends the core fantasy that formed the foundation of the FIRE Economy itself: an economy can grow continuously by taking on ever more debt.

The US may be starting down the path of deflating debt against the incomes of its hard working citizens and non-financial business sectors, but the situation is temporary. After more than 30 years the US is in the final stretch on the road to ruin that stated in 1971 when the US left the international gold standard and developed into the FIRE Economy starting in the early 1980s. Long before 19 years pass, US creditors will address the heart of the matter, that as markets deflate asset prices in the US - housing prices have only only lost half their bubble era gains -- the debts against them must deflate as much as well. So far, mortgage relief programs are not aimed at reduction of principle but only the size of interest payments on excessive debt. If principle on debts is not reduced by negotiated debt restructuring, the markets will eventually deflate the debt against the monetary unit of the debt, the US dollar.

False Dawn

But wait, you say, back up. Is there not a silver lining in the US economic contraction? Isn't the personal savings rate is finally rising, laying the foundation for the next economic expansion?

Sadly, no. Incomes fall during economic contractions generally as debt repayment rises, creating a statistical increase in saving because debt repayment is reported as saving. But in a post-bubble world it is not the kind of saving that winds up in bank accounts to be spent later in consumption. What we are seeing today that looks like saving for future consumption is in fact the debt left over from the FIRE Economy sucking the life out of the US economy.

Similar policies, combined with the demographics of an aging population, led to a continuous decline in personal savings in Japan since 1992, two years after the end of the assets bubbles ended that started in 1985. Not coincidentally, the savings rate in Japan peaked at the same time. Why? During a period of asset price inflation, households stop saving and take on debt. After the asset price inflation ends the savings rate then increases for a year or so as debt is repaid.

Asset price inflations and deflations exert a perverse effect and saving. First the pool of savings to be spent on future consumption shrinks during the period of asset inflation because households are fooled into believing that asset price inflation is wealth creation, that inflating stock and home prices are doing the saving for them. Income is spent on current consumption. After the bubble pops and the fake wealth is wiped out, briefly the savings rate rises as post bubble recession has not yet expressed itself as rising unemployment and incomes have not yet begun to decline. About a year later then the pool of savings starts to shrink again as unemployment rises, incomes decline, and a greater proportion of income is goes to paying off debts taken on during the boom.

Collision Course

The duplication by the current administration of Japan's misguided policy to use public and private funds to pay down debt taken on during a credit bubble era is self limiting in the US case in a way it was not for Japan; as long as the debt repayment versus restructuring is pursed, and the banking system is left in its current state of disrepair, the US economy will continue to rapidly decline. (See: How a government that is politically independent from its financial sector swiftly ends a banking crisis.)

By our estimates, due to the combined impact of the crushing weight of debt burdens created by the FIRE Economy and maintained by the current Debt Deflation Continuation Plan and absent an immediate and effective, politically independent response to the banking crisis, leading to an intensification of the credit crisis as S&P predicts, real GDP will fall 4% in 2009 and 4% again in 2010. This despite the fiscal stimulus, estimated by Adam Posen of the Peterson Institute for International Economics at $1.5 trillion when TARP and other programs are taken into account. If federal government spending continues to increase outlays at the current rate of more than 10% of 2007 GDP per year, and federal government receipts continue decline at a 7.5% annual rate in 2009 and 2010 as in 2008, the fiscal deficit as a percent of real GDP will certainly exceed 10% in 2010, and the current account deficit on a balance of payments basis rise above 10% percent, even as imports fall as previously prodigious capital exporters in the Middle East and Asia suffer current account deficits of their own.

If and when its fiscal deficit reaches third world levels, will the US -- with its massive current account deficit financed by the public sector and daily dependence on capital inflows to maintain a balance of payments - finally suffer a balance of payments crisis, rapid currency depreciation, rapidly rising cost-push inflation, and rising interest rates? What we at iTulip.com refer to as a "Poom" portion of a Ka-Poom Theory?

It could happen this year. In fact, it may be happening now.

When the Russian government found itself unable to pay the interest on its foreign debt in August 1998, nor able to borrow more money in the international financial markets, nor increase taxes on its imploding economy, nor locate private capital inside Russia willing to lend it money, it suffered a balance of payments crisis. The result was capital flight, a ruble crash, and a spike of cost-push inflation.



In theory, this can't happen to the US, or so we are told. If the US experiences a balance of payments crisis the capital has no place to flee to from the US. The US is world's least bad place to hide. The US issues the world's reserve currency. The US is the world's most politically stable major nation. The dollar has a long history of stability, having persisted for over a century without having ever been recalled, unlike any other currency in existence today. But these arguments ignore two facts.

First, historically it is the very absence of previous experience with either a severe inflation or deflation that lulls policy makers into over-stepping the bounds of market tolerances. Japan, its currency and its people's savings once wiped out by hyperinflation pursues inflation phobic policies that leave the nation vulnerable to deflation while the US, once gripped by a deflation spiral in the 1930s, pursues reckless anti-deflation policies that expose the country to a horrific hyperinflationary outcome (See Hyperinflation case revisited - Part One: On the road to hyperinflation. Will we complete the trip?).

Second, the dollar is not the only option for capital flight from economies doing even more poorly than the US as the collapsing FIRE Economy spreads economic hardship around the world. Money is has been fleeing into hard assets the in the manner of capital flight by insiders from a third world country before a balance of payments induced currency crash (See US exchange rate and capital controls or bust?).

Most observers do not see the recent rise in the price of gold (and silver as well) in this context because gold as been a cult for so long that even the gold cultists don't understand what has changed. They see the current price rise as a part of a bull market that started in 2001, but we side with Soros on this, and Volcker: we are witnessing a global systemic breakup, the end of the road we got onto in 1971. We passed the last exit in 2001, the last chance to adopt a strategy to shift to a production and savings based economy through a series of steps negotiated with trade partners. Instead we increased the debt further through a property bubble financed with fraudulent structure credit products. The road ends when the US cannot finance its debts. The end of the road is near.

Bull market in chaos: Is a US balance of payments crisis imminent?
Your sensible source for apocalyptic predictions

March 15, 2006 (Metafilter)

iTulip.com has returned. Back in the go-go days when Internet stocks ruled the world, iTulip was one of a very few voices warning about the NASDAQ bubble and the likely fallout. As bad as things got, the overall financial bubble never really popped, it just shifted into debt and real estate after furious slashing of interest rates and money-printing by the Fed. Financial manias are terrible; their unraveling has been compared with economic nuclear weapons. The only good solution to a bubble is not to have one in the first place.
When we re-opened in March 2006, we observed in an article on Credit Risk Pollution in 2006 that structured credit was an accident waiting to happen to the global financial system, and the Frankenstein Economy - the result of a breakdown in accountability between borrower and creditor -- was an accident waiting to happen to the US banking industry. Now the greatest accident of all that has been waiting to happen, and is coming upon us with the same grim predictability as the other crises forecast here over the years but astonishing speed: US dependence on capital inflows to maintain its balance of payments, which inflows depend outflows by US creditors, which outflows depend on now rapidly shrinking output.

Japan, for example, experienced its first ever trade deficits over the past five months as the yen-carry trade reversed, spiking the yen, and exports declined due to a collapse in US demand and a strengthening currency. China has been taking up the slack. When China can no longer cover US capital import needs, it's all over but the crying.

The mother of all accidents waiting to happen




Source: IMF

The nearing of a US balance of payments crisis point is, in our view, why gold crossed the $1,000 mark again Friday to close at $994 while stocks closed at 12 year real lows.

We edge ever closer to our 2:1 DOW/Gold ratio target of 5,000 for the DOW and $2,500 for gold. The DOW/Gold ratio declined from 15.34 in September 2008 to 7.65 on Friday, 50% in five months. The previous 50% drop took five years.

Our positions in Treasury bonds and gold have served us well for over a decade. A buy-and-hold 85% position in 10 year Treasuries since 1998 combined with a15% gold position since 2001 has returned north of 7% a year. However, after ten years we are growing increasingly uneasy with our Treasury bond position.

Our concern about Treasury bonds is not technical. Our long-term targets remain at $2,500 for gold and 5,000 for the DOW as they have for years. Our new concern is that we are not be taking the forecast far enough, fast enough.

Think back three years to the time iTulip re-opened. We made correct calls on gold, stocks, and Treasury bonds, the collapse of structured credit and the credit-dependent financed-based economy, the decline in the Fed Funds rate to zero, the bailout Superfund (aka TARP), unemployment exceeding 10% in 2009, and later forecast infrastructure and energy related fiscal stimulus spending. But consider how much else has happened, and how much more quickly, than even our dire forecasts predicted?

Think back to March 2006 and imagine we had also forecast the following:
Fannie Mae and Freddie Mac nationalized
Lehman Brothers and other major Wall Street investment banks bankrupt
US automakers facing bankruptcy
Major US banks facing nationalization
Collapse of Iceland's and Latvia's economies and governments
Japanese output declines more than 25% in five months
If you look back over the dozens of articles and newsletters published by us years before this crisis, warning you about it, you will find that they describe events developing more slowly and less dire than the actual events that transpired with astonishing speed. In short, while we have been accused of making overly apocalyptic forecasts we were, in the event, overly optimistic. What if we still are?

Extrapolate and recalibrate: Accelerating to the end of the road

We are getting a 1930 to 1933 financial system and debt deflation collapse but in Internet time. The Internet that operated so efficiently for ultra efficient transmission of pricing information and execution of transactions is accelerating the financial and economic crisis process far more quickly than governments can respond to it. A 20th century international regulatory and trade institutional framework is no match for 21st century computer networked financial markets. No administration can correct 30 years of errors in a few months. Unfortunately, a few months is all we have because of the accelerated rate of change we are experiencing.

History teaches us that adjustments to imbalances can be sudden and brutal, and we think it imprudent to bet that the mother of all international payments imbalances -- between the US and the rest of the world -- will be the exception.

The rise of gold from $260 to $700 in six years followed by an increase from $700 to $1000 in two years may be quickly followed by a rise from $1,000 to $5,000 in just a few months.

In other words, our forecast of gold at $2,500 and the DOW at 5,000 may be as prosaic as our other seemingly dire forecasts because our perception of the rate of change and extent of the financial system, economic, and political crisis has been too optimistic.

Our primary concern at this stage is no longer our readers' portfolios but their ability to weather a US dollar crisis if one erupts. In response, we are increasing our gold allocation to 30% and moving all Treasury holdings to the very shortest maturities, to three month Treasury bills, until we see indications that conditions are stabilizing. We encourage you to engage with the community to actively discuss strategies that are appropriate for you.