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Thursday, December 31, 2009

We're headed for high inflation

Even as the Dow sits above 10,000, the public remains justifiably anxious about the state of the economy. The Federal Reserve has worked overtime to convince the public that it has saved the economy from a meltdown, but with unemployment at a 26-year high and the dollar tanking, it's a hard sell. What most people easily understand is that the Fed has produced a monetary time bomb. Since August 2008 the monetary base (bills in circulation plus bank credits at Federal Reserve banks) has increased by 137%. If not defused, this bomb will eventually explode into inflation. We are told by Fed Chairman Ben S. Bernanke and other members of the Fed's bomb squad not to worry. They assert that they know how and when to disarm the bomb.

Such assertions are a stretch. After all, it was the Fed's ultraloose monetary policy and disregard for the value of the greenback that fueled the asset bubbles that burst and set off the panic and subsequent destruction of jobs and wealth.

The time bomb hasn't exploded yet because, for now, the expansion in the monetary base has not given rise to a comparable expansion in a broader measure of the money supply called M2. That's the monetary base, plus demand deposits (commercial and individual) at banks, traveler's checks, savings accounts, time deposits and money market mutual funds.

The key here is something called the money multiplier, which is M2 divided by the monetary base. The multiplier measures, in a sense, the inflationary bang from every buck the Fed creates. In August 2008 the multiplier was 9.1. By December 2008 it had collapsed to 4.9 and since then has declined along an irregular path to 4.2. When the demand for the more narrowly defined kind of money goes down, as it eventually will, the money multiplier will move back into a normal range of 8 to 9. That is, the dollars manufactured by the Fed will give rise to more money (broadly defined) burning holes in people's pockets. An excess of money in spenders' hands is a recipe for inflation. This is when the Fed will need to shrink its balance sheet, but it will not be willing to do so because unemployment will probably still be elevated. In this scenario inflation expectations will become unhinged and inflation will accelerate.[Emphasis added]
--from "Income During Inflation / Bonds are a risky venture when inflation is set to explode at any moment. Play it safe. Go for dividends." by Steve Hanke

Bonds are risky when inflation is set to explode

In February 2009, Steve Hanke was recommending gold and TIPS (see my previous post). Here are his recommendations at the end of November 2009:
With the Fed intent on keeping interest rates artificially low for an extended period of time, some of my previous recommendations should still work well. In September I recommended tapping into gold and commodities via the SPDR Gold Shares (GLD), iShares S&P GSCI Commodity-Indexed Trust (GSG) and PowerShares DB Commodity Index Tracking Fund (DBC). Since then, these funds have appreciated by 13% to 15%, while the S&P 500 has notched a 9.2% gain. Retain these positions to protect your portfolio from the Fed.

With the inflationary wolf at the door, what's an income investor to do? Go for dividends.

Leggett & Platt ( LEG - news - people ) (LEG, 20), a manufacturer with a product line that started out as bedsprings and veered off into things like parts for farm machinery and retail shelving, generates plenty of cash, even when sales slump. The dividend, which eats up 50% to 60% of earnings, was raised last year and now comes to an annual 5% of the share price. Management has also spent cash on stock buybacks, shrinking the number of shares outstanding by 15% over the past three years.

Philip Morris International (PM, 50) is the second-largest tobacco company in the world. PM claims almost 16% of the non-U.S. cigarette market, a big plus for dollar bears. The market is currently pricing in a revenue growth rate that is lower than what the company has enjoyed over the past five years. The yield is 4.56%.

With its acquisition this year of Alltel ( AT - news - people ), Verizon Communications ( VZ - news - people ) (VZ, 30) has a customer base equal to 30% of the U.S. population. Annual revenue growth over the past ten years has averaged 11.9%. But Verizon is not receiving much credit for its rapidly growing wireless business (it owns 55% of Verizon Wireless). This segment is growing at an annual rate of 17% and is now larger than the wire-line side of the business. The dividend yield is 6.4%.

Kellogg ( K - news - people ) (K, 53) has a yield of only 2.8%, but its dividend is well covered (it uses up only 44% of earnings) and has enjoyed seven increases over the past ten years. The cold cereal company gets 34% of its revenue from outside North America. That portion will go up, so here is another hedge against a weak dollar, as earnings abroad get translated into EPS gains here. Wall Street is expecting mediocre growth--too pessimistic. Take a bite.
--from "Income During Inflation / Bonds are a risky venture when inflation is set to explode at any moment. Play it safe. Go for dividends." by Steve Hanke

Stocks for the long run?

Following conventional wisdom has led a generation of investors down the road to ruin. That wisdom had us believing that over the long run stocks produce the highest returns, that a diversified stock portfolio protects you against loss and that the risk of owning stocks is small if you hold them for a long time.

We now know that conventional wisdom is wrong. While the number of decades in which equities in the U.S. underperform other asset classes may be small, the size of the shortfalls, when they occur, can be huge. For the first decade of this century it is highly likely that the return on U.S. stocks will be negative. For those who are near retirement, the shortfall is devastating; they might not get a shot at making up the loss in their lifetimes.

Diversification is useful, in varying degrees, most of the time. But there are occasions when all stocks dive simultaneously and putting your eggs in different baskets doesn't save you.

Like a broken record, the CNBC sages are still telling young people to buy stocks because if you have a long time horizon, you don't have to worry about these market fluctuations. While this sounds like a reasonable theory, it's wrong even if you're young. The so-called experts fail to account for the potential severity of the underperformance when stocks fall.
--from "Unconventional Wisdom" by Steve H. Hanke (02.25.09)

By sheer coincidence, I came across Hanke's 11-month old article today (January 31, 2009), when the Chart of the Day shows the returns from the Dow decade by decade:
Hanke's advice has been to buy gold and Treasury Inflation Protected Securities ("TIPS"):
If you followed my columns in 2008, you would have bought gold and inflation-indexed Treasurys. I'm not veering from this advice. Forget conventional wisdom and ignore play-by-play economic commentators. Buy federally guaranteed, inflation-protected TIPS and sleep soundly.
Today's Chart of the Day shows that the losses of the '30s were followed by gains in the '40s, '50s (huge gains), '60s, and even the '70s (slight gains) before the huge gains of the '80s and '90s. Will history repeat itself? Will the losses of the '00s be followed by gains in the '10s and '20s?

Wednesday, December 30, 2009

A modest goal? Or an audacious one?

[O]ur goal for 2010 is a modest one. We hope to avoid losing money…and enjoy the show.
-- from "Taxpayer-Supported Colossal Blunders" by Bill Bonner

Tuesday, December 29, 2009

The underlying cause of the terrorist problem

Al-Qaeda may not be a match militarily but it will more and more cause us to erode our liberty and sanity. In all the talking heads yaking on TV very little is said about the underlying causes of our problem: American military and diplomatic interventionism in the affairs of the Middle East. They do not hate us because of ”our liberty.”
-- from "Retreat From Reality: Some Obvious Observations" by Mario Rizzo

Marc Faber is bearish on Treasuries and cash

And bullish on equities?
Investors need to be “very careful” holding U.S. Treasuries and cash, and U.S. stocks will rally as Federal Reserve Chairman Ben S. Bernanke and his colleagues may have to print more money to help the government finance its debts, said Faber.

The Standard & Poor’s 500 Index “could go up 200 percent if it prints enough,” Faber said. “The worst investment, in the long run, will be U.S. Treasuries, and cash which has no return at present. This is the one reason that I am moderately positive about equities is that this money goes into leverage plays.”
--from "Marc Faber Says Dollar May Rise 5-10% Versus Euro (Update1)" by Deirdre Bolton and Ye Xie

Doug Casey on Ben Bernanke as Time Magazine's "Person of the Year"

L [Louis James, Editor, "International Speculator"]: So, Ben Bernanke just got named “Person of the Year” by Time magazine. I know you must have some thoughts in response to this auspicious event?

Doug [Casey]: I just don’t know where they find these people... On the other hand, Slime magazine has always said that those named Person of the Year are not necessarily the most laudable people, but those who’ve had the greatest impact on the events in a given year. That would explain Hitler’s achievement of the same honor, and Stalin getting the nod twice.

L: Not to mention Bin Laden.

Doug: Yes, let’s not mention him. This is different: Bernanke isn’t being held up as a villain, but as a hero.

L: The tagline Time puts on it is: “The story of the year was a weak economy that could have been much, much weaker. How the mild-mannered man who runs the Federal Reserve prevented an economic catastrophe.”

Doug: Right. And Bernanke is always presented as a Ph.D., a scholar of the Great Depression, its causes, and how to cure such an economic downturn. But he hasn’t prevented an economic catastrophe – he’s done just the opposite of what needs to be done, and there’s going to be hell to pay.
-- from "Doug Casey on Bungling Ben" (interview by Louis James, Editor, "International Speculator")

Capitalism: guilt by association

with Alan Greenspan!
In the 1960s, [Alan Greenspan] was an acolyte of Ayn Rand and wrote a famous essay defending the gold standard, which I read in her book, Capitalism: The Unknown Ideal. And then he goes on to become the most inflationary Fed chairman in history until Bernanke superseded him.

The really shameful thing about Greenspan is, not only were his policies the igniters of the giant bubbles we saw in the stock market and then in real estate, but since he was associated with pure capitalism through Rand, his failures through government intervention in the market have falsely discredited capitalism as a system in many people’s view.
-- from "Doug Casey on Bungling Ben" (interview by Louis James, Editor, "International Speculator")

Pearls of wisdom from Chairman Ben

From "Doug Casey on Bungling Ben" (interview by Louis James, Editor, "International Speculator"):
On July 1, 2005, Bernanke stated with great confidence that the U.S. was not experiencing a housing bubble, saying: “I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”

In November of the same year, he talked about derivatives, saying, “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” He also said, “The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”

And a couple months after that, back on housing again, he said, “Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise” . . . .

And in February of 2008, he said, “I expect there will be some failures of smaller banks.” Bear Stearns collapsed just a couple weeks later . . . .

Remember, this is the same guy who told the world that Fannie and Freddie were “adequately capitalized” and “in no danger of failing.”

Earlier this year he said, “Currently, we don’t think [the unemployment rate] will get to 10 percent." Wrong again and if you actually count people who are out of work, rather than the government’s phony subset of that number, we already have over 17% unemployment.

This guy is truly pathetic but nobody points any of this stuff out. That he can be so dead wrong about so many vital things and not get called on it is simply amazing to me it makes me feel like I’m living in some sort of demented parallel universe.

The destruction of the dollar will be the ultimate disaster

I’m afraid the U.S. dollar is going to be totally destroyed. The consequences of that are going to make everything that’s going on now pale by comparison. I mean, as bad as the consequences of propping up all these dinosaurs like General Motors and AIG and General Electric and Goldman Sachs, among many others, might be next through direct theft from the U.S. taxpayer are, that’s nothing compared to what will happen when things get really bad, which they haven’t yet.

It’s really going to be bad when they destroy the dollar that’s when it’s really going to hit the fan. Runaway inflation is bad enough in a place like Zimbabwe, where most of the people are still living on a subsistence level. And it was bad enough in Germany in the 1920s, when most Germans were still living on farms or making things with their own hands. But in an advanced industrial society, as heavily urbanized as the U.S. is, runaway inflation is going to be unbelievably disastrous. As dim as the average American is, he’s bound to get perturbed when his quality of life nose-dives, and who knows what the social consequences of that will be. . . .

Runaway inflation in the U.S. would be the ultimate disaster. Think about all those people who have dollars set aside, which is to say the prudent middle class; they’ll be totally wiped out. Even huge corporations that have massive cash reserves, like Microsoft and McDonald’s, if they don’t hedge that cash with the utmost skill, could find those hoards wiped out and themselves bankrupted as well. Remember that people all over the world are holding U.S. dollars. There’s far more U.S. currency outside the U.S. than there is inside the U.S., and all those foreigners are going to resent it personally and hold it against Americans when their U.S. dollars are wiped out. On top of that, most central banks around the world hold U.S. dollars as their main asset, and that will be wiped out as well. It’s going to be a complete, worldwide disaster.

It’s going to be much worse than what happened in Germany or Zimbabwe. This is a couple orders of magnitude greater seriousness and it seems to me that this is almost certain to happen with a monumentally stupid person like Bernanke steering the ship of state into a reef.-- from "Doug Casey on Bungling Ben", (interview by Louis James, Editor, "International Speculator")

What we need is deflation, less consumption, and more savings

[Speaking of Ben Bernanke:] I just don’t see how someone who’s studied the history of economics can so completely set aside its most pertinent lessons. It’s possible that he knows he’s caught between a rock and a hard place in technical economic terms, that he knows he and the economy are totally screwed and sees no choice but to carry on as long as he can and hope for a miracle. He probably knows that giving the economy the medicine it really needs would bring on a deflationary collapse, and losing his job would be the least of his worries.

As I’ve explained before, deflation is not only not a bad thing, it can be a very good thing. In a deflationary environment, the purchasing unit the dollar becomes worth more. That rewards people who have saved dollars, the prudent middle class upon which so much in modern society depends, and makes them prone to save more. Inflation makes people very loathe to save because what they’re saving is going down in value. And the solution to this depression we’re entering is not more spending, it’s not more consumption, it’s just the opposite of what these morons in Washington are saying: it’s less consumption and more savings. Savings are capital accumulation, and that’s what’s needed to start new businesses, create more jobs, and so forth in a sustainable way. Creating phony make-work jobs with more debt only serves to make things worse, come reckoning day.

So, switching from an inflationary policy to a deflationary one would be the right thing to do, but it would be such a sharp adjustment, this whiplash would hurt a huge number of people in the short term. And though most people don’t see it, the U.S. is on such a shaky political foundation at this point… It’s really become a question of “Do you want to die by fire or by ice?” Either way, the U.S. is going to crash into a brick wall at high speed.

-- from "Doug Casey on Bungling Ben", (interview by Louis James, Editor, "International Speculator")

Doug Casey on where to invest your savings

First and foremost, all of your savings, money that you don’t want to lose but need in a liquid form, should be in gold or gold proxies. To a lesser degree, silver as well, silver being a sort of poor man’s gold. That’s number one. You should have a very large position in these two things.

Second, regarding the speculative funds that you have, remember how much money Washington is creating. That’s definitely going to inflate other speculative bubbles to be on the watch for. I think it’s possible to make serious money spotting these early and cashing in before they pop. That’s number two: position yourself for taking advantage of speculative opportunities.

Third and I can’t emphasize this enough is that since what we’re really looking at is a political disaster causing the economic disaster, you must diversify your assets politically. And since the epicenter of this meltdown is the U.S., it’s absolutely vital that you diversify your assets, including the gold and the speculative investments, outside the U.S. That’s number three, but not third in importance there will be foreign exchange controls, and once we have those, your alternatives will be severely circumscribed.
-- from "Doug Casey on Bungling Ben", (interview by Louis James, Editor, "International Speculator")

Sunday, December 27, 2009

Taking internet companies public in the late '90s

The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren't much more than pot fueled ideas scrawled on napkins by up too late bong smokers were taken public via IPOs, hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

It sounds obvious now, but what the average investor didn't know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman's later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry's standards of quality control.

"Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public," says one prominent hedge-fund manager. "The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash." Goldman completed the snow job by pumping up the sham stocks: "Their analysts were out there saying Bullshit.com is worth $100 a share."

The problem was, nobody told investors that the rules had changed. "Everyone on the inside knew," the manager says. "Bob Rubin sure as hell knew what the underwriting standards were. They'd been intact since the 1930s."
-- from "The Great American Bubble Machine " by Matt Taibbi

Taleb and Mandelbrot on the unpredictability of economies and markets

I’ve been influenced by a number of thinkers about the unpredictability of economies and markets. A couple of my favorites would be Nassim Taleb, author of Fooled by Randomness, and Benoit Mandelbrot, author of The (Mis)behavior of Markets. Another useful book on these ideas is Mauboussin’s More Than You Know. Mandelbrot writes a lot of highbrow stuff, but in this book he teamed up with Richard Hudson, a former Wall Street Journal editor, to reach a broader audience. Mandelbrot is a critically important thinker in finance. But he is not revered by academics.

As Paul Cootner, an MIT economist, put it: “If [Mandelbrot] is right, almost all of our statistical tools are obsolete. Almost without exception, past econometric work is meaningless.” So there you go. Academics ignore him because if he’s right, academia is pretty much a farce. Academics won’t embrace Mandelbrot’s ideas because their salaries depend on them not embracing those ideas.

So if you think that academia might be promoting a farce – for the first time ever, of course – you might want to examine Mandelbrot’s ideas in more detail.

-- from "The Yellowstone Syndrome" by Chris Mayer.

Government actions to rescue the economy actually threaten the economy

This experience in Yellowstone sounds a lot like what’s happening in our economy today. Congress and the Federal Reserve are so busy “rescuing” specific pieces of the economy that they fail to realize how these efforts are threatening other pieces of the economy.

Our government has propped up the auto manufacturers. It’s propped up numerous banks, mortgage lenders and the world’s biggest insurer, AIG. But the rest of the economy is still swooning.

In fact, portions of the government’s rescue efforts are contributing to the economy’s difficulties. Because the Fed is supplying so much credit at such low rates of interest to the big finance companies, these finance companies can make a lot of money by simply buying Treasuries, rather then lending to businesses. The result is that most small and mid-sized companies cannot get loans. If the Fed’s did not supply credit so inexpensively, the banks would be forced to loan to businesses.

Unintended effects like this one produce unintended effects elsewhere, and before you know it, cause and effect are hard to discern…or to explain accurately. “Yet our minds are not beyond making up a cause to relieve the itch of an unexplained effect,” Mauboussin writes. “When a mind seeking links between cause and effect meets a system that conceals them, accidents will happen.”

That’s why so many so-called experts are so often dead wrong. They think that know what’s causing what. But they don’t.

For instance, there is no shortage of financial experts who will tell their clients to put 15% of their portfolio here and 10% there or whatever. And these experts will have definite opinions on each of their recommended mutual funds. This one is better than that one. They’ll give numbers. It will seem very concrete and real and “expert.”

But guess what? Almost all the experts produced an identical 35% loss for their clients in 2008.

If an investor hopes to minimize or avoid losses of this magnitude, they must understand that economies are complex adaptive systems – replete with feedback loops and black swans and power laws. Investors must approach the future with humility. And that means fearing risk more than craving reward. A humble investor will also insist on a margin of safety in each investment.
-- from "The Yellowstone Syndrome" by Chris Mayer.

Sunday, December 20, 2009

The future is like a child

[O]ver the last couple of weeks, an idea has been taking shape. The future is like a child. It will grow into an entirely new person. One that has never existed before. But it is a product of the past too. It may have Mom’s eyes…or Aunt Lou’s quick temper. It lives in a house originally bought by Dad when he was working for IBM in the ’80s. And it uses money that is controlled by an organization set up under the Wilson administration.

When we look ahead, we see enough elements of the past to confuse and mislead us. “Those who do not study the past are doomed to repeat it,” say the schoolteachers. But what about those who DO study history? At least one of Hitler’s top generals had in his pocket a copy of Caulaincourt’s recollections of Napoleon’s disastrous Russian campaign, when he was taken prisoner at Stalingrad.

We are supposed to believe that investors can avoid the calamities of the past by studying what happened in previous market cycles. To some extent it is true. You read enough stories of bubbles and you begin to get an instinct for them – at least at the extremes. That is how some of us were able to foresee the dotcom blow-up in ’00…and later, the blow-up in the financial sector in ’08.

Part of the problem is just filtering out the noise in the system. Probably 99% of what you heard is just noise – distracting information, misunderstood phenomena, and dubious data. When you read the commentariat…the pundits…the newscasters, economists, and analysts who are telling you what is happening and what lies ahead, you have to remember that most of them had no idea what was happening two years ago. Now, they have even less of an idea of what is happening.

We don’t have any idea either. For, like a newborn babe, this period in our financial history bears some resemblance to past cycles. The most striking resemblance is to the depression period of the ’30s in the US…and the long, slow depression in Japan since 1989. But it is different too. As you will see, below, we have far more to reckon with that we did in the ’30s.

Of course, those who misunderstood the financial bubble of ’03-’07 (Ben Bernanke thought it was a period of “Great Moderation” caused largely by his own superior handling of the Fed) now misunderstand the post-bubble world.

They think it is a technical challenge. They imagine that if Bernanke – whose bid for another term cleared the House yesterday – can just make the right adjustments, everything will be hunky dory.

Alas, Bernanke will do an even worse job than we would do. We have no idea. He has a bad one.
--from "Studying History in the Post-Bubble World" by Bill Bonner.

Thursday, December 17, 2009

Is a bubble brewing in China?

Schonberger: Are you at all concerned about a bubble brewing in China, given your investment there?

Schiff: Yes, I am concerned about that. They are creating too much money in China, and that is problematic. It will create bubbles in assets there. [However,] I think that the bubbles could inflate for a long time, given the real productivity and competitiveness of the Chinese economy and the savings that they have. This bubble could expand for five or 10 more years.

At some point, if we get real crazy valuations in Chinese assets, then I'll have to move out of that market. Right now, if you look at most Chinese companies based on dividend yields, P/E ratios, you don't have those kinds of crazy valuations yet.

--from "A Tough Year Ahead for the U.S. Economy?", an interview with Peter Schiff by Jennifer Schonberger.

To preserve wealth, invest outside the U. S.

Any investor who wants to preserve or enhance their wealth has to look outside the U.S. The nations and areas of the world I think are the most vibrant now are in Asia -- Hong Kong as well as mainland China. I'm also buying the resource countries like Norway, Australia, and Canada. I own a lot of mining stocks -- principally Canadian companies. I'm also investing in parts of Europe and Latin America.

I think gold stocks relative to the price of gold have underperformed the price of gold for years. If you look at gold, right now it's still better than 10% above its 2008 high. Yet gold stocks are better than 10% below their 2008 high. Silver is still below its 2008 high by more than 10%. So I don't see a lot of speculation, despite what you hear about a bubble in precious metals. I don't see any signs of that all. Yes, the price is going up, but for good reason. I don't see a lot of speculation on the part of the general public.
--from "A Tough Year Ahead for the U.S. Economy?", an interview with Peter Schiff by Jennifer Schonberger.

Tuesday, December 15, 2009

Obama's multiple drags on the economy

In the past year, the government has seized control of more than half of the nation’s mortgages, it has taken over one of the world’s biggest insurers, it literally controls major car companies, and it is now telling financial institutions how much they can pay their top executives. On top of this, the feds are seeking vast new powers over the nation’s energy markets (through the House Waxman-Markey “Clean Energy and Security Act” and pending Kerry-Boxer companion bill in the Senate) and, of course, are trying to “reform” health care by creating expansive new government programs.

For anyone who thinks free markets are generally more effective at coordinating resources and workers, these incredible assaults on the private sector from the central government surely must translate into a sputtering economy for years. Any one of the above initiatives would have placed a drag on a healthy economy. But to impose the entire package on an economy that is mired in the worst postwar recession, is a recipe for disaster.
-- from "Killing the Currency" by Robert P. Murphy.

Massive default by inflation?

Conventional economic forecasts for government tax receipts are far too optimistic. The U.S. Treasury will need to issue far more debt in the coming years than most analysts now realize. Yet even the optimistic forecasts are sobering. For example, in March the Congressional Budget Office projected that the Obama administration’s budgetary plans would lead to a doubling of the federal debt as a share of the economy, from 41 percent of GDP in 2008 to 82 percent of GDP by 2019. The deficit for fiscal year 2009 (which ended Sept. 30) alone was $1.4 trillion. For reference, the entire federal budget was less than $1.4 trillion in the early years of the Clinton administration.

Clearly the U.S. government will be incurring massive new debts in the years to come. The situation looks so grim that economist Jeffrey Hummel has predicted that the Treasury will default on its obligations, just as Russia defaulted on its bonds in 1998. But another scenario involves the Federal Reserve wiping out the real burden of the debt by writing checks out of thin air to buy up whatever notes the Treasury wants to issue.

Many analysts are worried about Fed chairman Ben Bernanke’s actions during the financial crisis; Marc Faber is openly warning of “hyperinflation.”

-- from "Killing the Currency" by Robert P. Murphy.

Bernanke has been printing money like crazy, yet prices haven't gone up. Why not?

Since the start of the present financial crisis, the Federal Reserve has implemented extraordinary programs to rescue large institutions from the horrible investments they made during the bubble years. Because of these programs, the Fed’s balance sheet more than doubled from September 2008 to the end of the year, as Bernanke acquired more than a trillion dollars in new holdings in just a few months.

If Bernanke has been so aggressive in creating new money, why haven’t prices skyrocketed at the grocery store? The answer is that banks have chosen to let their reserves with the Fed grow well above the legal minimum. In other words, banks have the legal ability to make new loans to customers, but for various reasons they are choosing not to do so. This chart from the Federal Reserve shows these “excess reserves” in their historical context.

U.S. depository institutions have typically lent out their excess reserves in order to earn interest from their customers. Yet currently the banks are sitting on some $850 billion in excess reserves, because (a) the Fed began paying interest on reserves in October 2008, and (b) the economic outlook is so uncertain that financial institutions wish to remain extremely liquid.

The chart explains why Faber and others are warning about massive price inflation. If and when the banks begin lending out their excess reserves, they will have the legal ability to create up to $8.5 trillion in new money. To understand how significant that number is, consider that right now the monetary aggregate M1—which includes physical currency, traveler’s checks, checking accounts, and other very liquid assets—is a mere $1.7 trillion.
-- from "Killing the Currency" by Robert P. Murphy.

Supply of dollars going up + demand for dollars going down = dollar crash!

[C]entral banks around the world have been quietly distancing themselves from the U.S. dollar. Over the summer, officials in India, China, and Russia opined publicly on the desirability of a new global financial system, anchored on a basket of currencies or even gold.

We thus have in motion two huge trains of supply and demand, and the result will be an inevitable crash in the value of the dollar. Just as the Federal Reserve is embarking on a massive printing spree, the rest of the world is looking to dump its dollar holdings. It’s impossible to predict the exact timing, but sooner or later the dollar will fall very sharply against commodities and other currencies.

A crashing dollar will translate immediately into huge spikes in the price of gasoline and other basic items tied to the world market. After a lag, prices at Wal-Mart and other stores will also skyrocket, as their reliance on “cheap imports from Asia” will no longer be possible when the price of the dollar against the Chinese yuan falls by half.

The consequences will be so dramatic that what now may sound like a “conspiracy theory” could become possible. Fed officials might use such an opportunity to wean Americans from the U.S. dollar.
-- from "Killing the Currency" by Robert P. Murphy.

What should investors do to protect themselves?

[W]hat should average investors do right now to protect themselves? First and most obvious, they should rid themselves of dollar-denominated assets. For example, government and corporate bonds promising to make a fixed stream of dollar payments will all become virtually worthless if huge price inflation occurs. (In contrast, holding U.S. stocks is not a bad idea from the point of view of inflation; a stock entitles the owner to a portion of the revenue stream from a company’s sales, which themselves will rise along with prices in general.)

Second, investors should acquire an emergency stockpile of gold and silver. If and when dollar-prices begin shooting through the roof, there will be a lag for most workers: They will see the prices of milk, eggs, and gasoline increasing by the week, yet their paychecks will remain the same for months or longer. If the dollar crashes in the foreign exchange markets, gold and silver would see their prices (quoted in U.S. dollars) increase in the opposite direction.

We can’t know the timing of the impending monetary catastrophe, but it is coming. Smart investors will minimize their dependence on the dollar before it crashes. At this late date, no one should trust the government and media “experts” who assure us that the worst is over.
-- from "Killing the Currency" by Robert P. Murphy.

Jim Rogers: other things being equal, buy commodities, not commodities stocks

Studies show, in my experience, that commodities themselves outperform commodity stocks. In the ‘70s, oil prices went up 10 times; commodity oil stocks did nothing. With stocks you have to worry about the management and the balance sheet—a hundred things. Commodities are pretty dumb: If there's too much oil, the price is going to go down; if there's too little, it's going to go up. Oil doesn't care who the head of the Federal Reserve is; it doesn't care what laws Congress passes, for the most part. But if you're Exxon, you've got to worry about that stuff.

The studies show that you would've made 300 percent more investing in commodities themselves over the past several decades than in commodity stocks, but if you know a company that's going to discover a lot of natural gas in Berlin, you buy all you can. Then you call me. Because then you're going to make a lot more money than in commodities themselves.
-- from "Jim Rogers: Long Sugar, But Getting Short Bonds", an interview with Jim Rogers by Heather Bell.

Jim Rogers: solar and wind have a brilliant future because government will subsidize them even if oil prices don't rise enough to make them economic

Alternative energy has a fantastic future if you can find the right companies that can execute—whether it's wind power or nuclear power or solar power; whatever it happens to be. Solar and wind are not economic right now at these prices for oil, but oil prices are going to go higher, and if they don't, the governments are still going to subsidize that kind of energy, so they have a brilliant future.
-- from "Jim Rogers: Long Sugar, But Getting Short Bonds", an interview with Jim Rogers by Heather Bell.

Jim Rogers: the fundamentals are improving for commodities and only commodities

Commodities are the only place I know where the fundamentals are improving. The fundamentals at Citibank are not improving; the fundamentals for commodities continue to improve, and that's where I'm focusing. Perhaps currencies—if you know what the Japanese yen is, you might consider investing there, or the Swiss franc or the Canadian dollar. But other than that, for the most part, I haven't bought any stocks except in China last fall.

The only bubble I see developing in the world right now is in long-term government bonds in the United States. The idea that somebody would lend money to the United States for 30 years in U.S. dollars at 4 or 5 or 6 percent interest is incomprehensible to me. I'm not short bonds right now because the government keeps driving them up—I don't know how long they're going to do it—but I do suspect and hope that sometime in the next year or two, I'll be shorting U.S. government bonds, because that's the only bubble I see developing.
-- from "Jim Rogers: Long Sugar, But Getting Short Bonds", an interview with Jim Rogers by Heather Bell.

Jim Rogers: we're making the situation worse

What we are doing now is making the situation worse. The idea that you would solve a problem of too much debt and too much consumption with yet more debt and yet more consumption? That defies comprehension, for me. Now, I'm not a politician, or obviously I'd think this was brilliant.

It's making the situation worse, and in two or three years—or maybe even next year—we're going to be facing a much, much worse situation.
-- from "Jim Rogers: Long Sugar, But Getting Short Bonds", an interview with Jim Rogers by Heather Bell.

Monday, December 14, 2009

The vicious cycle

U. S. interventionism leads to terrorism, which, in turn, leads to more U. S. interventionism.
[M]any Americans look at the occupations of Iraq and Afghanistan and say, “Our government is there to kill the terrorists. If it wasn’t there killing the terrorists, the terrorists would be coming to kill us here in the United States.”

The problem is that such Americans have it backwards. They think that the terrorism comes first, giving rise to the necessity for invading and occupying Iraq and Afghanistan to kill the terrorists before they come and kill more people in the United States.

Actually, it’s the other way around. U.S. interventionism comes first. For example, consider the brutal sanctions against Iraq during the 1990s, which killed hundreds of thousands of Iraqi children. Consider also U.S. Ambassador to the UN Madeleine Albright’s infamous statement to “Sixty Minutes” that the deaths of half-a-million children from the sanctions were “worth it.”

Those two things made people in the Middle East terribly angry. As year after year went by, with the death toll rising in Iraq, the anger began boiling over into rage. After all, there was nothing that anyone, including Americans, could do to bring the sanctions and continuing death toll to a halt. In fact, whenever an American was caught delivering humanitarian aid to the Iraqis in violation of the sanctions, he was prosecuted viciously by the U.S. government.

Moreover, fueling that fire of rage was the unconditional financial and military aid provided the Israeli government by the U.S. government, the deadly and illegal no-fly zones over Iraq, and the stationing of U.S. troops near Islamic holy lands.

The rage finally boiled over on September 11, 2001. Actually, it had boiled over long before that. In 1993, Ramzi Yousef committed a terrorist bombing of the World Trade Center. At his sentencing hearing, he angrily pointed not to America’s freedom and values but to U.S. foreign policy, including the brutal sanctions on Iraq that had killed, even up to that point (1993) countless Iraqi children..

The twisted part of all this is that the U.S. government used the 9/11 attacks as an excuse to take the very types of intervention actions it had been doing before 9/11 — the things that gave rise to the anger and rage that had culminated in the terrorist attack in 1993 and then again on 9/11. By invading Iraq and Afghanistan, the government continued killing more and more people in that part of the world, arguably many more people than the pre-9-11 sanctions had killed.

There is one — and only one — way to restore a sense of normality to our country: Withdraw all U.S. troops from overseas, beginning with Iraq and Afghanistan. To think that the U.S. government can continue to kill people without incurring the risk of retaliation from people who sympathize with the victims of occupation is folly.
-- from "More Blowback from U.S. Foreign Policy" by Jacob G. Hornberger.

Saturday, December 12, 2009

"Dr. No" says, "it's time to go"

Excerpts from Ron Paul's statement before the Foreign Affairs Committee, United States House of Representatives, December 10, 2009:

[W]e are told that we have to “win” in Afghanistan so that al-Qaeda cannot use Afghan territory to plan further attacks against the US. We need to remember that the attack on the United States on September 11, 2001 was, according to the 9/11 Commission Report, largely planned in the United States (and Germany) by terrorists who were in our country legally. According to the logic of those who endorse military action against Afghanistan because al-Qaeda was physically present, one could argue in favor of US airstrikes against several US states and Germany! It makes no sense. The Taliban allowed al-Qaeda to remain in Afghanistan because both had been engaged, with US assistance, in the insurgency against the Soviet occupation. . . .

Nevertheless, the president’s National Security Advisor, Gen. James Jones, USMC (Ret.), said in a recent interview that less than 100 al-Qaeda remain in Afghanistan and that the chance they would reconstitute a significant presence there was slim. Are we to believe that 30,000 more troops are needed to defeat 100 al-Qaeda fighters? I fear that there will be increasing pressure for the US to invade Pakistan, to where many Taliban and al-Qaeda have escaped. Already CIA drone attacks on Pakistan have destabilized that country and have killed scores of innocents, producing strong anti-American feelings and calls for revenge. I do not see how that contributes to our national security. . . .

[T]he only solution to the Afghanistan quagmire is a rapid and complete US withdrawal from that country and the region. We cannot afford to maintain this empire and our occupation of these foreign lands is not making us any safer. It is time to leave Afghanistan.
-- from "It Is Time To Leave Afghanistan" by Ron Paul