By: Gary North, Mises on Money

Most people will not change. Too radical. Not going with the flow. Not betting against the herd.

The best examples in the 20th century were Jews in Germany in 1933. They stayed. This included Jewish bankers, all of whom could have left. They thought they could deal with Hitler. They did not read Mein Kampf. They did not take it seriously.

About 7% did leave early: 38,000 out of 523,000. More left after 1938. By 1941, about 160,000 remained in Germany. Then emigration was closed by the Nazis. Earlier, it was encouraged. The data are here.

At some price, almost all could have left. There were countries that would have let them in. They would have had to learn a new language. They would have arrived in poverty. But Jews had faced those options ever since the Assyrian captivity in the eighth century B.C. So what?

They all would not have escaped the Nazis. Some would have moved to other European countries that were overrun by Germany after 1939. But they could have tried to get away. They stayed. They refused to acknowledge the warning signals. “It can’t be that bad.” It got worse.

Jews had an answer for worrywarts. “No problem. We can handle it.”

The Armenians went through the same thing. The Turkish massacres of 1895 were a foretaste. Most stayed behind. Then came the genocide of 1915.

NO PROBLEM!

Look back at the economy in October 2007. The Dow was at 14,000. The banks were booming. Real estate was down a little, but the experts gave no warning. They were wrong. All of them.

The U.S. government is running a $1.8 trillion deficit this year. Federal tax receipts are down 34%, which means that the deficit will go above $2 trillion. No one cares. No one says, “This is the end. The American economy will never again be what it was.”

Think “2007.” Would you have believed that Chrysler and GM were both headed for bankruptcy? In October 2007 GM shares were at $43. Now they are at $1. There was an industry called investment banking. Bear Stearns, Lehman Brothers, and Goldman Sachs were not part of the commercial banking system. To survive, a few made the transition in September 2008. Some did not make the cut.

Merrill Lynch is gone. Bank of America and Citigroup were bailed out by the government. They would have gone under. They sell for a fraction of what they did in 2007.

And what do most people say? “No problem.”

There is no problem for which their answer is not “no problem.”

Medicare will go bust. Social Security will go bust. “No problem.”

The unemployment rate keeps rising. “No problem.”

When people refuse to face reality, because reality is going to be more painful than anything they have experienced, they look for signs that the problems they cannot avoid without changing are really not that bad. They look for offsetting good news.

They think the status quo ante will return. The U.S. government is about to spend another $30 billion to buy a dead carcass of a company. It has already spent $20 billion. “No problem.”

The government will let the company stiff bondholders for $27 billion in exchange for 10% of the company, 72% owned by the government and 17% by the United Auto Workers medical insurance fund. “No problem.”

Bondholders were originally told that it would take a 90% vote to authorize this. The government has changed the rules. It will determine after the May 30 vote by bondholders what percentage must approve. “No problem.

The company will never return to what it was. “No problem.” People will not buy as many cars as before from a company run by the government and the United Auto Workers. “No problem.”

The Dow rose 100 points on the rumor that the largest bondholders will accept the deal. The deal is a disaster, but investors are in “No problem” mode. Somehow, the wipeout is less of a wipeout.

Who is going to buy a GM car instead of a Japanese car? Here is a company that is about to break its contracts with thousands of its dealers. “No problem.” Yet buyers are expected to trust a GM warranty.

Oldsmobile is gone. “No problem.” Pontiac is going. “No problem.” Cadillac sells its cars with an ad of a flash model putting the pedal to the medal. Hot stuff! The company thinks people with money will not see through this ad. The Cadillac division has lost its way. “No problem.”

The price/earnings ratio for the S&P 500 is over 120. Traditionally, 20 was regarded a sell. The investor pays $120 on the hope that the stock will retain a dollar of earnings, and pay investors some minimal percentage of these earnings as dividends. “No problem.”

We are watching the investment world adopting a lemming mentality that has always produced losses. “This time it’s different. No problem.” Read More…

Bill Bonner
Provided as a courtesy of Agora Publishing & The Daily Reckoning
May 29, 2009

What’s the nuclear option? It’s the Zimbabwe Solution… pioneered by Gideon Gono, head of Zimbabwe’s central bank… and recently proposed for the US by Harvard professors Rogoff and Mankiw. And they’re not the only ones.

Of course, there is no need to exaggerate. The facts are outrageous enough. So, let’s calmly look at what has happened so far… and where it is likely to lead.

As you know, the battle between inflation and deflation is going badly for the feds. Deflation is winning. And yesterday, the Eastern Front collapsed.

Germany announced that consumer prices are now 0.1% lower than they were a year ago. Germany is in outright deflation. The rest of Europe is probably not far behind.

In America, the trend is probably in the same direction. The money supply - M1 - grew at an 18% rate over the last 6 months. But taking just the last 3 months, the rate of growth has fallen to only 1.8%.

Meanwhile, the US Treasury is borrowing hundreds of billions of dollars in order to close the gap between what the US spends and what it receives in taxes. Even if the Chinese are willing to fund that borrowing in the very short term, it just pushes forward the inevitable day when the list of willing lenders is shorter than the list of US Treasury bonds to be sold.

When that happens, the Chinese can bend over and kiss their reserves goodbye. Because there is no way the US government is going to forego spending money just to protect foreign bondholders. Instead, to raise money, it is going to turn to its very own bond buyer of last resort - the Fed.

The Fed will “monetize the debt” - by buying Treasury debt and converting it to dollars in circulation. At least, that’s the plan. The risk is that it will cause consumer price inflation. Everyone is aware of the risk. Few doubt that it would happen.

But that’s where Gono, Rogoff, Mankiw and many others, come in.

Caroline Baum reports:

“Harvard University’s Ken Rogoff and Greg Mankiw think more is better when it comes to inflation.

“Rogoff said he advocates 6 percent inflation ‘for at least a couple of years.’ That would alleviate the strain deflation imposes on debtors, including the U.S. government, who have to pay back their loans in appreciated dollars.

“In the Middle Ages, they threw people who failed to repay their debts into debtors’ prisons. Today debtors are rewarded with all kinds of government perks. Look how far we’ve come!

“Borrowers took out mortgages they couldn’t qualify for to buy homes they couldn’t afford. When the housing market collapsed, they were rewarded with government-subsidized mortgage modifications and, in some cases, partial forgiveness on their loan balances. And now, under Rogoff’s 6 percent solution, debtors would see more of their burden lifted.

“And we, the savers, get screwed again.

“‘Zimbabwe Solution’…

“And who says the Fed can orchestrate 6 percent inflation and not let it get out of hand? You know what would happen to those well-anchored inflation expectations: Ahoy, matey, it’s out to sea with you.

“‘Trying to manage a slight increase in the rate of inflation in a discretionary way is not practical,’ says Marvin Goodfriend, professor of economics at Carnegie Mellon’s Tepper School of Business in Pittsburgh.

“Mankiw didn’t specify his preferred inflation rate in the Bloomberg story. He was too busy to give me an interview, directing me instead to his New York Times column from last month where he proposed the idea of negative interest rates: not negative real rates, adjusted for inflation; negative nominal rates.

“The idea is ‘to make holding money less attractive’ so people will spend it.”

Needless to say, we can’t wait to see what happens. The Chinese already seem to think that holding dollars is less attractive than it used to be. But Geithner and Bernanke assured Wen Jiabao that his money was safe. We wonder what he’ll do when he realizes they played him for a fool.

May 29, 2009
Bill Bonner
Source: http://www.dailyreckoning.com.au/fed-will-monetize-the-debt/2009/05/29/
email: DR@dailyreckoning.com
website: The Daily Reckoning

Bill Bonner is the founder and editor of The Daily Reckoning.

Bill’s book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, is a must-read.

He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions.

Maybe the fact that central banks, banks and governments around the world are acting like monetary idiots explains why gold is shooting up in price; or maybe that it is going up in price explains why there is such a new interest in gold; or maybe it just explains why people are as disrespectful of the dollar, as am I.

And there are lots of them, as I gather from Jim Willie at GoldenJackass.com, who is warning us to keep an eye on the Chinese, and that we should expect them to move “toward creation of the Chinese yuan as a global reserve currency,” which is certainly interesting from a geo-political perspective, but which becomes Very, Very Interesting (VVI) when he cautions us to also “watch their simultaneous moves away from the USDollar and toward gold for reserves management,” a phrase that is rated “VVI” by the Mogambo Intergalactic News Service because it means that gold will positively soar in price, meaning (in turn) that my pathetic little store of gold will be my ticket out of this dump, speeding me posthaste to wonderful, new, bright city lights and adventures where nobody knows me and nobody can credibly threaten “I’m going to tell your wife/boss/galactic overlord what you did/said/downloaded onto your computer!”

Until then, we have the same responsibilities, and so this next part I carefully wrote down in my notes because it sounds like it will appear, perhaps as an essay question, on the mid-term exam. Mr. Willie said, “The merger of the two important strategic initiatives is a gold-backed yuan currency.”

This “gold-backed” Chinese currency is more than mere grubby speculation by a couple of guys who know that gold will soar as a result of the supreme stupidity and corruption of the world’s governments, and who are getting tired of waiting for gold to soar so we can get started with developing a sensory overload of wicked, licentious, hedonistic over-consumption, sort of like Sodom and Gomorrah if they had had enough money! Hahaha!

Captivated and distracted by such dreams of glorious, gluttonous excess, I was startled by Mr. Willie saying that a gold-backed Chinese currency is “precisely what was stated openly by Zheng Lianghao, managing director of the World Gold Council’s Far East division. That news came out this week.”

Even more telling, I think, is when he reported, “The Germans have demanded all of their gold held in custodial accounts inside the United States to be returned to German soil.”

He admits, “The story is not public, but details have come to me from a private source close to the action.” But if I know Germans, and I don’t, they are not going to sit around waiting for America to steal their gold, if indeed there is any left after the criminally-incompetent Federal Reserve and Treasury encumbered thousands of tonnes of gold by leasing it out, which was immediately sold into the market by those borrowing the gold, massively depressing the price of gold (which was the whole purpose of the exercise) so that bubbling inflation in prices from the floods of money and credit coming from the Federal Reserve to finance massive, long-term deficit-spending by the federal government was effectively disguised by making gold ridiculously cheap, which made guys like me, whose familiarity with the Austrian school of economics allows us to see through this despicable scam, and we begin to accost strangers on the street in a heroic attempt to save them, and we say to them, “Buy gold now, you moron, because it will never be this cheap again! And if you don’t buy gold even after being told, point-blank and right to your face, to buy gold as your only rational response to massive government incompetence and corruption that will destroy the dollar, then you are as stupid as you look! Hahaha! You’re a moron! Hahaha!”

Interestingly, he adds, “The Germans have also given counsel for Dubai to demand all of their gold held in custodial accounts inside London to be returned to Dubai, where a new gold trading center will spring up. In my view, THIS IS THE BIGGEST NEWS FOR GOLD THIS ENTIRE YEAR.”

Careful readers looking for “news behind the news for news you can use” will no doubt notice his use of all-capital letters with which to indicate particular emphasis, perhaps along this very line, which must be important as hell, for whatever reason, because the year is not quite half over and we already have the best news? Wow!

Then I learned that I did not even suspect that “the hidden arch-enemy for the US-UK on all matters pertaining to gold bullion is Germany.” He admits that this “is not a well-known concept,” letting me save a little face, although Germany is “also advising the Chinese on currency and gold matters. Can one detect some coordination?”

To this I say, “Yes, and it’s about time, too, that smart people came together to do something good, like putting their currencies on a strict adherence to gold and thus getting rid of price inflation once and for all instead of a lot of stupid people coming together, like in Congress, to deficit-spend zillions of dollars to do things that sound good to a bunch of nurturing wet-nurses, which is what we have become, but are guaranteed to fail with disastrously inflationary results!”

It is only after I have had a few drinks, and am now despondent and self-pitying after having been rejected by all the good looking girls in the room, mostly responding with variations either on the theme of “Ewww! Go away, creepy old man!” or “Okay, but it’s gonna cost ya triple because you are such a creepy old man!” that I admit that I don’t know why I am complaining about such irresponsible, stupidity in government because I am doing exactly what history says to do in order to capitalize on it: Buy gold, silver and oil to personally capitalize on loathsome governmental incompetence, blatant corruption, and now the legitimization, not to mention the incredible institutionalization, of outright stupidity.

But I have to laugh at the linguistic problems, since I know a little German, no Arabic and only enough Chinese so that I can order dinner (“Gimme a Number 7 combo and a couple of egg rolls, chop chop!”), so it will be comically confusing since I will not know what in the hell they are talking about.

And although I am the perfect guy to advise these guys on gold, I realize it will be hard for me to communicate with them since I don’t speak their languages and they don’t speak English except with funny-sounding foreign accents, so I cleverly decide to speak to them all with the universal American Indian language that everyone understands (as I gather from watching old movies on TV), and I say, “Gold! You get-um! Heap big wampum!”

And, if you are wondering, advising foreign governments to adopt a gold standard for their money is just ONE of the many, many happy reasons why I say to them and to you, to buy gold, a chore made easy because, “Whee! This investing stuff is easy!”

By: Continental Capital Advisors, LLC

We published a chart earlier in the year that showed Treasury Bonds were falling. Below is the chart updated thru May 28, 2009. Treasuries fell at the beginning of the year when the economy was still in freefall and have continued to decline despite the Federal Reserve’s announcement that it would buy $300 billion worth of Treasuries. When an asset class goes parabolic and then falls, no matter how favorable the news is, it is likely that the bubble is popping. The housing bubble illustrates this phenomenon. At the end of the housing bubble most commentators knew that housing prices had overshot yet many remained optimistic that prices would simply correct with slower growth or only slight declines. Treasuries are again demonstrating that bubbles do not end by correcting sideways.

Central Banks Own Government Backed Debt, Not Other Forms of US Credit

There is a belief that falling Treasuries show that investment dollars are being reallocated from perceived low-risk Treasuries to riskier assets such as corporate bonds and equities. This trend, however, is not favorable for foreign central banks. Foreign central banks have huge US Dollar investments concentrated in Treasuries and mortgage-backed securities, which means they have two forms of risk associated with their holdings – the value of US Treasuries and the value of the US Dollar. Even though US corporate bond and equity prices have rallied, foreign central banks have had no benefit. Of late, these foreign holders have only suffered losses. These losses are the opposite of what our creditors grew accustomed to in the 1980s and 1990s. When the US slipped into recession, Alan Greenspan cut rates, which helped US growth resume and benefited the exports of foreign economies. At the same time, Treasuries and the US Dollar rose for nearly twenty years. It was this market action that reinforced central bank buying of Treasuries. Today we are on the verge of something quite different.

Historically, politicians and central banks have always acted the same. These people/institutions want to own assets that are rising because it makes them look smart while governments become fearful and sell assets that are falling. In the late 1990s, gold was doing poorly and the US Dollar and Treasuries were doing well. This explains why central banks sold gold and increased their holdings of US Dollar investments. As is now clear, every central bank is suffering sizable losses and as seen by the chart above this trend is beginning to spin out of control. Therefore, it should not be long until the US Dollar and Treasuries are treated in the same manner as gold was in the 1990s. This situation sets up for a severe reversal in central bank holdings.

It is now widely discussed that China has been stockpiling commodities. This has caused some investors to question the recent moves in commodity prices. Interestingly, this is what China has done for the last 20 years with Dollars yet no one recognizes the similarity. If China has been hoarding US Dollars (along with all other central banks) and now holds so much that they can not sell them, what does that say about the true value of the US Dollar?

The Real Bubble

Markets and investors still do not grasp the problems facing the US economy. The stock market bubble of the 1990s, the housing bubble and the more recent Treasury bubble were not the real bubbles. They were all offshoots of the main bubble, which is the US Dollar. That bubble is now bursting. The US Dollar is falling against every currency in the world. This is not because of quantitative easing or our weak economy, as many countries are facing similar problems, but rather because so many US Dollars are held abroad by individuals and central banks. For example, the US Dollar can fall against the Korean Won, despite Korea being an export-dependent economy because the central bank in Korea and so many Korean investors own US Dollars. As their holdings lose value, the temptation to sell increases dramatically. On the contrary, relatively few Americans own the Korean currency and thus there is virtually no selling pressure.

There is no doubt that the US benefited during the 1980s and 1990s from foreigners accumulating US Dollars. Interest rates, commodities, and consumer prices were kept low, which helped to propel asset prices higher. However, there is no such thing as a free lunch. Most informed people knew by the end of the housing market that the flurry of activity was unsustainable. However, where views differed was the extent of the damage of the correction. The key was understanding that housing was a bubble and bubbles end disastrously. Today most people know that the policies of the US government’s stimulus and bailout plans, not to mention Social Security and Medicare, are problematic for the US fiscal situation and US Dollar yet have not accepted that the US Dollar is a bubble. When the market fully recognizes the Dollar bubble, the outcome will prove disastrous for anyone holding US Dollars.

The losses that foreigners are suffering on their US Dollar and Treasury holdings are rapidly accumulating. Even more so, the Fed is now trapped. The Fed was hoping to hold down Treasury rates by announcing the purchase of $300 billion of Treasuries. However, Treasuries are falling despite the Fed’s intervention. If the Fed increases its buying there is no telling how far the US Dollar may fall. If the Fed does not increase its purchases, Treasuries may fall even further, sending home prices spiraling downwards. When combining the Fed’s precarious position with recent fears about the credit rating of the US, the unlimited downside potential of all US assets is becoming clear even to the greatest of bulls. Despite waiting for so long for these events to unfold, it now seems as if the end is near.

Daniel Aaronson - daaronson@continentalca.com
Lee Markowitz - lmarkowitz@continentalca.com

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute “forward-looking statements” with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.

Gold investors know all too well the psychological importance of $1,000 gold. The yellow metal’s been hovering frustratingly near that level for weeks after briefly surpassing it in February. According to John Kaiser, editor of the Kaiser Bottom-Fishing Report, “we’re getting very close.” In this exclusive interview with The Gold Report, John shares his “modest” price forecast of $1,300 - $1,400 within the next six months and presents strategies for gold companies looking to create value.

The Gold Report: John, you have said that you believe gold may go up to $1,300 to $1,400, but probably not higher. Can you give our readers an overview of how you achieved those targets?

John Kaiser: I think we’re ready for a real increase in the price of gold, which is why I am looking at more modest targets, such as $1,300 to $1,400, happening fairly quickly, probably bouncing plus or minus $200 or $300, around that level, but it’s a real price increase without a corresponding catastrophic collapse in the U.S. dollar or hyperinflation descending upon us.

TGR: What time frame are you looking at?

JK: I think we’re getting very close. We’re knocking on the door of $1,000, which is a very important psychological level. I would say in the next six months, as people realize that the banking system is still troubled and will be for a long time because an uptrend in real estate prices is not in the cards for a very long time. And, in order to make the banks solvent, the underlying collateral needs to have liquidity and a stable price.

I’m saying that in the next six months the realization will kick in that the world has changed in a significant way and the United States is losing its role as the overwhelming economic superpower and will continue to do so over the next 20 years as other countries such as China and India come into their own and pick up the slack that’s created by the collapse of consumption right now. If it breaches $1,000, I think it’ll very quickly go to $1,300-$1,500 and establish that as a new base.

What I’m arguing is that the uncertainty about the next 20 years is going to encourage more and more people to put part of their wealth into gold and keep it there. This expansion of investment demand differs from the situation we had in 1980. Back then we had a tenfold increase in the real price of gold from 1972 to 1980 and part of that was because gold’s value had been artificially suppressed through the gold standard and once that was removed, we had a slingshot reaction and gold adjusted to a price ten times higher. There were mines being shut down in the ’60s because their costs kept rising while the gold price remained fixed. Then all of a sudden we had new technology in the form of heap leaching and new economies of scale that unleashed an enormous amount of new gold supply. During 1980 the new mine supply of gold was 42 million ounces, which was actually lower than the 48 million produced in 1970. It rose steadily after that, peaking at 82 million ounces in 1999 when gold was also under pressure from official selling by central banks and indirect selling through the gold carry trade made possible by gold leasing. From 1980 through last year gold producers added 1.9 billion ounces to the above ground stock, bringing it to about 5 billion ounces today. But mining costs have kept going up and up and the annual mine supply has been declining since 2004.

TGR: If the gold price continues to rise but costs remain stable, wouldn’t one want to invest in the gold production companies?

JK: Yes. In the last four years the gold producers have not actually done very well despite the recovery from $260 to the current level. We’ve had a base metals commodity boom that drove up the costs of producing gold at a much faster rate than the price of gold was increasing. On an inflation-adjusted basis, $400 gold in 1980 today should be about $1,000. The rise since the low of 2001 is not a real price gain, just a catch-up. But in the current deflationary environment another 30% to 50% boost in the price of gold would be a real gain that has a profound impact on the bottom line of gold producers.

For companies that have deposits that are marginal when gold is $600-$700/oz., you wouldn’t dream of putting them into production with gold now at $925-$950/oz. But at $1,300-$1,400/oz., with the cost staying at $600/oz., all of a sudden there’s a huge margin available to be tapped. So we would see a rush of capital going into these deposits and companies and producers to develop these ounces in the ground and turn them into cash flow, which, of course, the market will use its discounted cash flow model to put a value on. And the key thing is, again, to see that this is a real increase in the price of gold and the sense that this is now the new reality, not just a temporary spike that will correct and drive gold back down to, say, $600.

TGR: At a recent conference you highlighted strategies or approaches that gold companies should pursue to create value. Can you give us an overview of those strategies and some examples of companies who are doing that well?

JK: You’ve got to look at it as producer and non-producer categories. The big producers have been creating value by putting existing deposits that they have in their inventory into production and they have been growing themselves bigger by doing mergers of equals—so that the big mining companies just get bigger and bigger by consolidation.

But the more popular route is for a bigger company to take over near-development assets. The stronger company comes in and buys out the distressed company because it has the internal capital to develop those assets. With the non-producers, the idea is to look at the projects that have the ounces in the ground where it may not be so great right now, but if we are expecting a significant increase in the price of gold, value will end up being created, courtesy of the gold price increase.

So in anticipation of this type of takeover bid what these non-producer companies are doing now is raising the risk capital to push these projects along the exploration cycle. They’re doing their in-fill drilling, metallurgical studies, and pre-feasibility studies. And even if the pre-feasibility says, well, this is kind of so-so at the $700-$775 three year trailing average the engineers are plugging into their cash flow models—if we do get this move, everybody will say, well, that pre-feasibility study established the cost side of the equation. And now we’re seeing the revenue side expand massively thanks to a higher real gold price, now there is value being created, and the stocks will adjust upwards five, ten times in price to reflect the new reality of a significantly higher gold price.

TGR: Thanks, John. This has been very informative.

John Kaiser, a mining analyst with over 25 years experience, is editor of the Kaiser Bottom-Fishing Report . He specializes in high-risk speculative Canadian securities and the resource sector is the primary focus for an investment approach he developed that combines his “bottom-fishing strategy” with his “rational speculation model.” Kaiser began work in January 1983 as a research assistant with Continental Carlisle Douglas, a Vancouver brokerage firm that specialized in Vancouver Stock Exchange listed securities. In 1989 he moved to Pacific International Securities Inc where he was research director until April 1994 when he moved to the United States with his family. From 1989 until 1994 he was also a registered investment advisor. He worked six months as a researcher for Bob Bishop’s Gold Mining Stock Report before branching out on his own with the publication of the first issue of the Kaiser Bottom-Fishing Report in October 1994. He has written extensively about speculative Canadian issues, is frequently quoted by the media, and is a regular speaker at investment conferences.

London, England

Have you checked your stops, dear reader?

Remember back in November, we waited for the Obama Bounce? It was the one of the most reliable phenomena in the world of investing, we said. Then, we began to wonder. Month after month…no bounce.

It took a long time coming…then, finally, in March prices headed up. Since the 9th of March world stock markets are up 37% – about average for a post-crash bounce.

Now, it looks as though the bear market rally might have run its course. And yesterday, the Dow was down 184 points. We don’t know if that marks the end of it or not. But count us out. At this point, it is far too dangerous to be heavily invested in stocks.

Why? Because the Bubble Epoque is over. The bubble in the financial sector blew up last year. That marked the end of a half-century of building up debt. Most likely, now debt is going to be thrown off, shucked, dumped, paid down, worked out and defaulted on.

Without the financial sector puffing up assets, prices will tend to go down, not up. And without the financial sector adding debt…and giving American consumers the wherewithal to dig themselves deeper holes…the whole world economy needs to be restructured. Manufacturers in China can’t depend on the consumers of first and last resort in America anymore. People in the US are no longer buying what they don’t need with money they don’t have. Because no one will lend them money. And so, global commerce slumps. Ships wait at loading docks; where are the containers? Factories wait for orders and stores wait for customers; but where are the customers? The customers aren’t going to show up. Because if there is one thing Americans have learned from this crisis it’s that they must stop spending so much money. They’re facing what the Washington Post calls the “Baby Boomers’ Retirement Bummer.” They have no choice; they have to pay off debt, not add more of it.

We’re hearing that China is recovering. We don’t believe it. Who’s buying?

They say the US economy is close to a bottom, too. We don’t believe that either.

Wait…let’s ask Alan Greenspan. Here’s the Bloomberg report:

Former Federal Reserve Chairman Alan Greenspan said on Tuesday that “the seeds of a bottoming” in plunging U.S. home markets were becoming visible.

Speaking to a National Association of Realtors summit, Greenspan said there were reasons to believe that bulging inventories of unsold homes were dwindling and that should bring some stability to prices.

“It looks to me, judging from the balancing of household formation on one hand, conversions, mergers, demolitions…that we’re at the edge of a major liquidation in that excess of inventories which I suspect and I hope will be of such a pace that it will stabilize prices,” the former Fed chief said.

“So as I look at the housing market…we are finally beginning to see the seeds of a bottoming,” he added.

We can imagine seeds of a recovery. We can imagine signs of a bottoming. But we don’t know what the hell “seeds of a bottoming” is supposed to mean.

Do the seeds grow downward? And turn into a bottom? Then what happens?

But that confirms it for us. If the former Fed chief thinks he sees the “seeds of a bottoming,” a bottom must be nowhere in sight. And how could it be? You can’t hope to erase the errors of a 50-year debt build up in a single year.

Just look at the auto industry. How long will it take to turn GM around…or to break it up…sell off the assets…and put the good pieces back to work? Many years. How long will it take to work off the housing inventory? Years. How long will it take China to retool her economy for domestic consumption? Years.

It makes sense to guard yourself because the inevitable downturn coming our way…sooner than you may think.

And how long will it take the American consumer to pay down his debt to a level where he is comfortable again? Well…forever… Just do the math. The savings rate has gone up to 5% of GDP. That’s $700 billion per year. Yet, the excess debt alone is estimated (by us) to be between $20 and $30 TRILLION. At that rate, it could take 40 years, or more, to pay it down.

But wait again…while consumers are paying down debt, the feds are borrowing more than ever. While consumers may pay off $700 billion of debt, the US government is borrowing $1.84 trillion – at this rate, Americans will never get out of the hole.

“The market seems to be looking as if this is going to be an average recession, but it’s not,” said Paul Krugman, Princeton University’s Nobel Prize-winning economist.

Nouriel Roubini also thinks the forecasts of a recovery are “too optimistic.”

They’re almost certainly right.

Krugman goes on to warn that the run-up in stocks can’t be justified by the fundamentals: “It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely.”

Let’s review: stocks get expensive…then they become cheap. That’s just the way it works. Prices go up and down in long cycles. At the top of the cycle, they’re very expensive – over 20 times earnings. At the bottom, they’re very cheap, under 5 times earnings. At the top of the cycle you might need as many as 43 ounces of gold to buy the Dow stocks. At the bottom, one or two ounces will do the job.

At present, stocks are not cheap. In nominal terms, the Dow is 8 times higher than it was when the bull market began in August 1982. In terms of gold, it takes about 9 ounces today to buy the Dow. That’s a lot less than it took in 1998, when the Dow was 43 times the price of an ounce of gold. But it’s a lot more than you find at real bottoms. At the bottom of the cycle in 1982, you could buy the entire Dow for just one ounce of gold. And in terms of P/E ratios, you can buy a few stocks at very low price-to-earnings ratios today, but the majority are still above 15. When they get down to 5, we’ll talk.

There being no sign of a bottom in the stock market yet, nor even the seeds of a bottom, we’ll adjourn today’s session…and guess that the real bottom is still far ahead.

Time to sell the rally.

Until tomorrow,

Bill Bonner
The Daily Reckoning

By: Trace Mayer, J.D.

On 16 December 2008 in Oil Majors Should Just Buy Real Gold I wrote, “The entire eligible COMEX stockpile represents an immaterial 0.36% of the current assets of the five oil majors.  The oil majors could drain the COMEX with a rounding error.  It would be 14% of what Exxon Mobil was spending per quarter buying back stock.  Why buy back stock when oil is so cheap compared to gold?  Why not just buy physical gold and truck it away?”  As the chart shows, Exxon and the other oil majors should have done that.  COMEX stockpiles have also precipitously declined.

London and Zurich have been the loci of gold trading for centuries.  The London gold vaults serve the needs of the London Bullion Market Association.  On 11 May 2009 The LBMA reported, “Gold ounces transferred between accounts held by bullion clearers fell 7.6 percent to a daily average of 20.5 million ounces in April from a month earlier. … Ounces transferred in silver rose 2.4 percent to a daily average of 101.1 million.”  This amounts to approximately $19B of physical gold and $1.4B of physical silver which exchange everyday.

THE EXCHANGE TRADED FUNDS

Many people think the GLD ETF claims to physically possess more than 32M ounces of gold.  On 29 March 2009 Jake Towne wrote, “The inventory of SLV has leapt from 218 million ounces since January 1st, and reached 267 million ounces on March 26. This exceeds the limit of 264 Moz that the trust had set for the custodian, JP MorganChase. In the new prospectus (pg 8/44), the text reads:

The custodian has no obligation to accept any additional delivery on behalf of the trust if, after giving effect to such delivery, the total amount of the trust’s silver held by the custodian exceeds 264,550,265 troy ounces. If this limit is exceeded, it is anticipated that the trustee, with the consent of the sponsor, will retain an additional custodian… As a result, the new agreement may differ from the current one with JPMorgan Chase Bank N.A., London branch, with respect to issues like duration, fees, maximum amount of silver that the additional custodian will hold on behalf of the trust, scope of the additional custodian’s liability and the additional custodian’s standard of care.

I have not been able to find out who SLV has named as the new custodian.”

I have written extensively about the problem with the GLD ETF prospectus regarding the actual possession of gold.

CENTRAL BANK GOLD PRICE SUPPRESSION SCHEME

Dr. Greenspan testified before Congress in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

Ad hominem attacks, those which appeal to emotions instead of reason or logic, are for the intellectually slothful mental midgets.  Ideas can only be overcome by other ideas.  When confronted by superior ideas it is common to lash out like a frightened animal, appeal to emotion and refuse to confront the fitter ideas.  After all, when one will lose the fight the only option is to flight.

GFMS claims to be “the world’s foremost precious metals consultancy, specialising in research into the global gold, silver, platinum and palladium markets. … GFMS can claim to be the only genuinely independent researchers of the gold market, as we do not rely solely on financial support from one sector of the industry. You can trust us to give it to you straight.”

When questioned about debating the Gold Anti-Trust Action Committee about the central bank gold price suppression scheme Philip Klapwijk, Executive Chairman of GFMS, “replied with a very definite “NO!”  He quoted Margaret Thatcher on the IRA in that he would not wish to give the GATA views the publicity that such a debate might generate.”

The truth will cleave its own way and GATA’s views are spreading as billionaire Adam Fleming recently hosted GATA on 7 May 2009 in London.  ”Wednesday was a great first day of work for GATA’s delegation to London — GATA Chairman Bill Murphy; Sprott Asset Management’s chief investment strategist, John Embry; John’s wife, Nancy; and your secretary/treasurer.

We had interviews with the Sunday Times and Dow Jones Newswires and then in the evening made an hour-long presentation to a group of about 80 financial and mining people at the office of Fleming Family & Partners.”

Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig [central bank gold price suppression scheme] after exposure to the evidence is either in denial or is complicit.” Read More…

Whether inflation or deflation strikes, a growing number of people are fast buying gold for defence…

IT’S COMMON KNOWLEDGE that gold bullion proved the most reliable wealth-store during the vicious inflation of the late 1970s. Yet almost un-noticed, gold has once again been the best-performing asset bar none this decade, too.

Gold has dominated the 21st century so far, in fact – something which will look plain to future investors, although only a handful appreciate it today.

Whether gold can now extend or repeat this performance, of course, is less clear. But “People rightly buy gold when they fear inflation ahead,” as William Rees-Mogg, a keen historian of gold, puts it. And just as during the Great Depression of the 1930s, many people now fear inflation, sparked by the very threat of deflation driving government interventions and central-bank money creation.

That’s why global demand for gold jumped throughout 2008, rising 26% on the GFMS consultancy’s data, just as the US, British and Swiss central banks moved to begin quantitative easing – a.k.a. printing money.

Gold Prices had already trebled and more against the world’s major currencies, gaining an average 14% per annum in Sterling terms since the start of 2000.

Yet gold still remains a “fringe” asset class for most funds and advisors. High-margin offers and outright scams are starting to trap the unwary, while good information about how to buy, own and trade the metal remains scarce. Quite how much of your wealth you allocate to this “ultimate insurance” is something to decide for yourself. But buying and selling gold can now be much simpler and safer than during gold’s last multi-year run. It should be dramatically cheaper as well.

The story so far

The spark for this decade’s bull market in gold? It came from the huge central-bank gold sales of the late 1990s. Because whatever Gordon Brown sells, a few bloody-minded investors agreed, must be worth buying. It wasn’t just the UK Treasury, however.

Gold sales by those central banks about to join the Euro reached such levels, they signed a deal (the so-called Washington Agreement) to cap annual sales and limit uncertainty on the open-market price. (Renewed in 2004, the Central Bank Gold Agreement expires in September this year. Annual sales undershot the 500-tonne ceiling by one-third or more in both 2007 and 2008. The Agreement may be rolled over to accommodate the sale of 400 tonnes by the International Monetary Fund (IMF), first proposed in February 2008.)

At the same time, in the mid- to late-90s, the Financial Times and Economist both declared “the death of gold”, tempting a similar fate to the famous “death of equities” cover published by BusinessWeek just before the US stock market began its two-decade bull market of the 1980s and ’90s. The Dot.Com Crash that followed between 2000 and 2003 led a growing number of people to seek out alternative wealth stores. Whilst institutional funds overwhelmingly chose fixed-income bonds, a growing number of private investors began to buy gold, especially as the central bank fix – led by the Bank of Japan and US Federal Reserve – was to encourage a tide of cheap credit into all asset markets via (then) record-low interest rates of just 1.0%. Read More…