Yesterday, we had a couple of Fed Heads talking, but the Big Kahuna stood out and moved the markets with his statements… Here’s the skinny…

Big Ben was giving a speech, and said, “The Fed will monitor closely the currencies, and the Fed’s policies will ensure that the dollar is strong.” Now, when he first uttered those words, the dollar got bought and the non-dollar currencies were sold… But then, a few of us had this feeling… It was a feeling that we had heard all this before… And there – in the archives, circa June 2008 – Bernanke said, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.” Wait! We won’t get fooled again!

In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar… But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008… I mean… What has the Fed done in the past 1 1/2 years to “bolster the dollar”? Near zero interest rates that will remain in place for longer than they should… Quantitative easing… A bloated balance sheet of toxic bonds.

You could see the V-8 moments on traders’ faces when they realized, yesterday, that all this had been said before, and nothing came of it, so… We won’t get fooled again!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed. You should have seen the reversal… It was amazing…

Click here to read the rest of Mr. Butler’s article.

Last time he was down, we went out for a big steak dinner in the Palermo district of Buenos Aires, where our offices are. After dinner, Doug regaled us with stories of his near death experiences in Third World countries. Doug has made fortunes in countries that most people couldn’t pronounce!

Doug is very contrarian, and he “lets the bastards have it” like no one else we know. It used to be that even in front of an audience full of anarcho-capitalists Doug would clear out a few seats.

But times they are a changin’. At this year’s Agora Financial Symposium in Vancouver hardly anyone left their seats during Doug’s speech. Like James Dale Davidson, he believes that it’s almost the endgame for the current financial system.

It seems to me that it’s almost the endgame for this financial system. Since the depression of 1929 to 1946, we’ve had a worldwide economic boom; in its early stages it was quite real, since it was based on the savings that were accumulated during the depression. But over the last generation, starting in the 1980s, we’ve had a phony boom, driven entirely by debt.

The whole world is awash in debt. Individual consumers are head over heels in debt. State and local governments are head over heels in debt and going bankrupt. National governments all over the world are deeply in debt. And businesses that are catering to old patterns of consumption are going to find they have no earnings to service their debt with, and their assets are unsalable at acceptable prices.

One of the problems we’ve got here is that people confuse paper money with real capital. This is an important distinction that’s being overlooked. Capital is actually just another word for “savings” – the excess of production over consumption. I can’t emphasize that enough.

Unfortunately, people are used to thinking of capital as being the same as the dollar bills or other paper money in their wallets – and that can be created out of thin air. But capital can’t be created out of thin air.

So, I’m very concerned that all these governments are going to destroy the world’s monetary system in tandem. I don’t know exactly how it will end up, but it’s going to be really ugly. This is compounded by the fact everybody is looking to the governments to solve these problems. Government is the cause of these problems. And the people it employs are not the best and the brightest (how that ridiculous canard ever got traction astounds me) but the poorest and worst part of humanity. [...]

The talk of green shoots is all PR, because the morons running the government actually believe the economy is based on psychology. In fact, psychology has zero to do with it. If it did, then all the Zimbabwe government would have to do to solve their depression would be to slip everyone a Prozac tablet every day. But maybe we’ve already tried that here, since something like 50 million Americans are already on antidepressants….

There may seem to be green shoots in the same way it seemed that way for a while in 1930. After the stock market went down for six or eight months, it reached a temporary plateau and bounced back up. People thought it was just another recession, that they’d pull through as they did after World War I.

There’s a profit angle to all this. (There always is.) According to Doug, the glut in government borrowing and spending means the trade of decade is likely to be short US Treasury’s and long metals. We think he’s dead on with this call.

I want to go for the low-hanging fruit. What the stock market does and what the economy does are really two different things. Stocks could actually skyrocket because of all the dollars the government is creating. People might want to buy stocks because they actually are equity; they represent real wealth. I suspect that in this depression, the stock market isn’t going to bottom until we’re looking at dividends in the ten percent range across the board, after being cut from present levels, which implies a much lower stock market.

But do I want to make a bet that way?

Not particularly. All that money creation could drive the stock market up in spite of much lower earnings and a bad economic situation.

It seems to me that the sure bet is to be short bonds. Interest rates are going way up. Why? There will be tremendous demand for capital, of which there’s a limited supply. Interest rates are the price of capital. So they’re going up for that reason – and because of the trillions of paper dollars the government is creating, inflation is going to skyrocket. High inflation will itself guarantee high interest rates.

So, the trade of the decade is going to be to short long-term bonds and to go long precious metals (which are the only financial assets that are not also simultaneously someone else’s liability). These are two excellent investment plays, but there are many others. We go into a lot of detail on the best ways to play them in The Casey Report and the International Speculator.

However, just as important is political diversification. The main risk you have is your own government. You have to diversify your assets out of the control of your government. This is even more important than picking the right investment today.

[You can check out Will Bonner's introduction to the symposium here. We couldn't find video of Doug's speech from this year's symposium. But here's his speech from 2007. It’s called "The End of the World as You Know It". Enjoy!]

In the roaring bull market of the 90s – and since – his book was required reading. Millions of investors were strongly influenced by his research.

In the process, Siegel became a celebrity, appearing regularly on network and cable investment shows. He is also now an advisor to WisdomTree Investments, a sponsor of exchange-traded funds.

But while history once buttressed Siegel’s grand conclusions, current events haven’t been so kind…

More specifically, as of June 30, U.S. stocks have underperformed long-term Treasury bonds over the past five, 10, 15, 20 and 25 years.

Zweig Argues Against Siegel’s Methodology

To add insult to injury, Jason Zweig recently argued in The Wall Street Journal that Jeremy Siegel’s methodology was flawed from the beginning. It turns out that Siegel’s chosen stock market indexes and dividend calculations from the 1800s were not representative of the period, skewing returns upward.

“Another emperor of the late bull market,” Zweig concludes, “has turned out to have no clothes.”

But what’s the real story here: Are stocks not the best long-term vehicle? Are bonds – or something else – better? Is Siegel just plain wrong?

The answer to each of these questions, it seems, is yes and no.

Bonds have outperformed stocks over the last 25 years in part because yields at the starting point – during the hyper-inflationary early 80s – were sky high. From current low levels, outsized returns like these are impossible.

(That doesn’t mean, of course, that equity returns couldn’t still lag them.)

And we can quibble about how equity returns were calculated in the 1800s, but let’s be serious. What difference does it make exactly what “stocks” returned when investors were swapping certificates – along with fox and beaver pelts – under a shade tree beside a dirt road.

That scenario bears little resemblance to modern financial markets.

The Real Reason To Invest In Stocks

No, the real reason to invest in stocks is because it allows the average investor to hold a liquid,diversified portfolio of profitable businesses, something that would otherwise be cost prohibitive for most.

Granted, the economy is tough right now. But businesses can always respond to adverse circumstances.

• During recessions, a business can cut costs, lay off unnecessary personnel and refinance debt at lower levels. During inflationary times, businesses can pass on higher costs to customers. Even the burden of higher taxes and greater regulation – both underway – are ultimately passed along to consumers.

In short, we will always have economic needs. Yet it is not government that provides us with food, clothing, shelter, health care and other essential goods and services. It is business.

• Businesses exist to meet our needs and, in the process, maximize profits for shareholders.
• Business ownership has always been the most reliable route to financial independence. And owning a diversified portfolio of fine companies should continue build and safeguard capital.

Just don’t make the mistake of believing that anything is guaranteed or that the future will look just like the past.

As the late, great Peter Bernstein said in the Preface to the first edition of “Stock for the Long Run“:

“When all is said and done, the future will always remain hidden from us. The past, no matter how instructive, is always the past… Professor Siegel so rightly warns readers of this when he writes that ‘the returns derived from the past are not hard constants, like the speed of light or gravitation force, waiting to be discovered in the natural world. Historical values must be tempered with an appreciation of how investors, attempting to take advantage of the returns from the past, may alter those very returns in the future.’ Although the advice set forth in this book very likely will yield positive results for investors, the odds are higher that uncertainty will forever be your inseparable companion.”

Source: Dr. Jeremy Siegel: Are Stocks Still The Best Long-Term Investment Vehicle?

As Notes faithful will know, we pinned our colors to the inflation mast some time ago. It is a clear-and-present danger. Especially considering that the feds have no way of paying off their massive debts without triggering an inflationary episode.

But underground investor Tom Dyson says when it comes to the prices of goods and services now, deflation is the name of the game.

Timing is everything in the investment world, of course. And knowing that inflation is on its way is no good to anybody unless they have a reasonable chance of knowing when the tide will turn. And considering Notes is first and foremost about money-making ideas, we’ve decided to hang up our inflation boots for a while and pass on one of the best deflation plays we’ve seen all year.

The “buy-and-holders” just got killed again…

With the market’s plunge last week, many regular shareholders have seen their portfolios awash with more red numbers.

Tough break for them. But savvy investors know that this offers a great chance to value shop and buy back in. And one of the most effective and profitable investment strategies that you can use in a market like this is one that generates income… no matter what happens.

This can be done by selling put options.

So let me show you a little more about this options trading strategy – how it’s done and how easy it can be for the average investor.

Busting The Myths of Selling Put Options

If you’ve gotten this far, you’re on the right track. Many investors hear the words “put options” and “selling” in the same sentence and head for the exit. Too complex. Too confusing. And downright scary. Or so the myth goes.

Let’s bust that myth right away: Selling put options isn’t difficult to execute. In fact, it’s actually easier than most investment methods.

When you place a put-sell trade:

• You don’t have to buy a stock.
• You don’t have to sell a stock.
• It’s got nothing to do with bonds or currencies.
• And there are no complex parameters to the trade.

Here’s the deal: You’re either going to make money, or you’ll end up investing in a company at a ridiculously low, discounted price.

What you try to do is buy stocks for the price you want. And just for trying, you get paid. Think of it like Priceline.com – where customers name the price they want to pay for airfare and hotel rooms – except with stocks. The biggest difference is that you’re getting paid for your time.

It works in rising markets… falling markets… flat markets… any market. It’s a regular stock-buying strategy with a profitable twist upfront. Here’s how you can use it…

Selling Put Options In Four Easy Steps

Have you ever wanted to buy a stock but passed because the price is too high for your liking?

Most ordinary investors would simply sit on the sidelines and wait for the price to fall to a better level. But smart investors know they can still get in the game by selling a put option on it instead.

Here are the four steps you need to take when selling put options:

• Pick your chosen stock.
• Decide on a lower price, where you’d feel comfortable buying the shares.
• Check the put option prices for that level. For example, if the stock is trading at $20 and you want to buy it for $15, you’d select the $15 strike price and an expiration month.
• You then sell those put options. Since each stock option contract is equivalent to 100 shares, you’d sell five put option contracts if you want to buy 500 shares.

When you enter a trade like this, you’re obligated to buy those shares at your stated strike price by expiration. Keep that in mind when selling the contracts, so you don’t overextend yourself. For example, if you sell one $15 put option contract, you’ll need to have $1,500 on hand by expiration day to cover the cost of the shares ($15 x 100 = $1,500).

Note: You don’t need to have all that money on hand while the trade is open. Your broker will only ask you to keep a fraction of that amount available – known as a “margin requirement.” Consider the trade as a “buy now, pay later” type of deal. You’re putting off paying for the stock until a certain scenario occurs (see below).

In exchange, the option buyer will pay you for each contract you sell while you wait. This is known as a “premium” and is deposited into your trading account. (The farther out the expiration date, the more money you’ll receive when selling the option.) Meanwhile, ordinary investors are waiting for the price to drop without collecting any money.

Okay, then what happens?

On options expiration day, you’ll have two scenarios when selling put options:

• If Your Stock Trades Below $15: For every put option contract you sold, you’ll be obligated to buy 100 shares at $15 each. This is what you wanted – a 25% discount from its $20 price when you executed the trade. Plus, you get to keep the money that the option buyer paid you. The shares will appear in your account on the Monday after option expiration. It will now be a regular long position and you must manage it as you would any other stock. That’s why it’s important you pick a price at which you’re comfortable holding the shares.

• If Your Stock Trades Above $15: The put options will expire worthless. You won’t get to buy the shares at your chosen price, but you will get to keep the money for selling the contracts, just for trying.

So regardless of what happens, you keep the money from selling the put options upfront. Now let’s bust another myth…

But Isn’t Selling Put Options Riskier Than Buying Shares?

Selling put options is no riskier than buying shares outright.

• When you buy shares, the risk is that you lose your entire investment.
• When you sell a put option, you’re obligating yourself to buy shares, too… but at a much lower level than the current share price.
• And if you do end up buying the shares, your risk will be the same as a regular shareholder.

The difference is that nobody pays you cash to buy stocks outright – but they do when you sell put options. Selling puts is just another way to invest in the options market.

While some brokers see selling put options as riskier than stocks (and require that you keep more capital reserves on hand), your risk only kicks in if you’re obligated to buy the shares. And even then, you’d simply be long on the stock, with the same risks as with any stock holding.

Perhaps the biggest obstacle for most investors is that you need to be “approved” to sell puts. This means that you must apply through your brokerage. It’s a simple process , similar to filling out forms when you opened the account.

If you have questions, contact their customer service department and they can help.

An Important Note on Selling Put Options

Many folks don’t know about option trading strategies like put-selling, and Investment U will be working hard to bring you more like this in the coming weeks and months. But we wanted to give you an example of what’s working in the market right now.

It’s certainly not as risky or complicated as some people would have you believe.

And for those of you who know Lee Lowell, you’ll know he’s not a gambler. In fact, he’s one of the most conservative, risk-averse investors I know.

That said, selling puts isn’t necessarily for everyone. You’ll need to check with your broker to make sure you’re approved to trade options – and specifically, selling put options.

Source: Selling Put Options: How It’s Done & How Easy It Can Be

And Bank of America arbitrarily assigned a higher value to its Merrill Lynch assets. Earnings reports this quarter may also impress investors. Trade revenue is up on the big spread between treasury and other bonds. And the banks earned fees in May helping each other raise capital.

Good day… And a Tub Thumpin’ Thursday to you! Yes, I know the currencies and commodities got whipsawed yesterday, and my Cardinals got spanked, but that’s no reason for us to not enjoy a Tub Thumpin’ Thursday! Every day is a gift, and it has nothing to do with stocks, bonds, currencies, and commodities!

OK… Not that I try to be philosophical, sometimes it just comes out that way! Besides, you don’t want to think that I’m just a smart *** all the time! HAHAHAHAHAHA!

Well, as I said in the open, the currencies and commodities got whipsawed yesterday, and the culprit was the FOMC minutes… You see, the Fed Reserve met to discuss rates, and other items. And what they said just blew away the bond vigilantes, and really ticked off the Hawks, but in the end, what they said, was really that things will remain status quo…

Their announcement of bond buying didn’t measure up to what the bond folks wanted to see, and their announcement that interest rates won’t be going up for some time, didn’t measure up to the inflation Hawks, who wanted a comment about fighting inflation. Instead, what they received was more Alfred E. Newman on inflation… “What, me worry?” That’s how ridiculous their statement was folks… The Fed still looks for inflation to “remain subdued for some time”… Although… Their outlook for the economy was slightly upbeat…

So… If your confused about what the Fed is thinking… Then join the rest of us! The markets spent the day trying to sort it out, and when it was all said and done, they couldn’t, so they sold risk assets… So… The 1.41 level the euro enjoyed yesterday morning when I signed off, is now 1.3945…

On top of all this, the Swiss National Bank (SNB) has issued a communiqué’ that talks about their “new aggressiveness” toward Swiss franc strength. Now, isn’t that just one of the most ridiculous things for a Central Bank to say about it’s currency! Would someone over there at the SNB, please think about what you’re saying!

Oh well… This is all I’ll say about the SNB… It’s hard to soar with the eagles when you have to work with a bunch of turkeys! OH! And it’s also reported that this “aggressiveness” showed up as intervention by the SNB yesterday… They sold francs in the markets… UGH!

OK, let’s get back to the Fed, and their bond purchase program / Quantitative Easing / monetizing the debt / money printing… It’s all the same… Oh, one more thing, it’s the road to ruins, but don’t let that get in the way of the Fed Party! You see, the Fed didn’t announce anything this time, because all the world was watching and waiting for them to announce a “mega-buying program”… I told you earlier in the week to NOT expect the Fed to announce any changes to their road to ruins at this meeting, but instead the August meeting, when during the dog days of summer, when almost every #1 trader on earth is on vacation…

So… The bond vigilantes who want bond yields low realize, with the amount of supply that the Treasury is issuing these days, that the only way to get those lower yields is to have the Gov’t buying bonds!

I came across something yesterday, that I yelled across the desk to make certain everyone knew… Recall at least a month or so ago, I told you how China had called for a new reserve currency, replacing the dollar with SDR’s (special drawing rights), which would be a basket of currencies. This news received a ton of publicity… But one thing that didn’t receive a ton of publicity was the fact that President Obama agreed at an economic summit in London that SDR’s should now be used to help stabilize the balance sheets of nations struggling to combat the current crisis.

Now… On the outside that looks harmless right? Just helping these struggling nations… But! Could this also be a baby step toward a global currency? Could this be a baby step toward a further devaluation of the dollar, and it’s signed off on by the President?

OK, now here’s the thing that really caught my eye… The IMF is going to issued $300 Billion worth of SDR’s. That’s 10 Times… That’s right, I said 10 Times the amount of SDR’s that CURRENTLY EXIST!

Could this be the facility for China to quietly exchange dollar reserves for SDR’s? Come on! Somebody has got to see this the same way I do!

I mean, it was just LAST WEEK, that the countries of Brazil, Russia, India and China (BRIC’s) called for a “more diversified international monetary system?” Why, yes, Chuck, it was… Just last week! And then this week, the IMF “just happens” to be issuing 10-TIMES the amount of SDR’s that CURRENTLY EXIST! Hmmmm…

I probably should stop there… I’ll be accusing people of all sorts of things if I continue on this path… But there’s some food for thought, eh? You won’t see this on TV… They have more important things to show you and talk about, like… The President killing a fly! That’s a really sad thing, to think that our news has come to that!

OK… New Home Sales for May dipped lower, but the inventory of homes for sales also dipped… And, we got the surprise of year when Durable Orders for May showed an unexpected and very strong gain of 1.8%… While I think this is wonderful news, I have to question it… I mean, with the automobile industry basically shut-down, one would think this number to be quite lower… However, I’m told… That non-defense aircraft orders more than offset the auto losses. OK, so, this is NOT a green-shoot folks… This is a One-and-done!

OH! And to follow up on yesterday report regarding Existing Home Sales… I totally forgot to mention that Foreclosure Sales are soaring, and thus a big part of the rise in Existing Home Sales… So, no green-shoot here either!

Today, we’ll see the Weekly Initial Jobless Claims, and… The Final print of 1st QTR GDP, which will remain at -5.7%…

So, once again, not much on the data watch for today.

Before I go to the Big Finish… I want to follow up on the news I wrote about yesterday regarding the European Central Bank’s (ECB) EUR 300 Billion injection of liquidity out 12-months… The total came in at a higher figure than that, at EUR 442 Billion… Still, much lower than the forecasts, which had seen some call for a number as high as EUR 1 Trillion! And… This morning, the Eurozone announced that Industrial Orders fell 1% in April… So that data isn’t helping the euro any either!

And then there was this from the NY Times this morning… “The U.S. House Oversight and Government Reform Committee will question Federal Reserve Chairman Ben Bernanke about his role in Bank of America’s acquisition of Merrill Lynch. While Republican lawmakers are launching an attack on Bernanke, who is Republican, Democrats are defending him.”

Man, is that all mixed up! But… A week ago or so, we were getting reports about the Bank of America (BOA) purchase of Merrill Lynch… And now, nothing, absolutely nothing, say it again! Any wonder why? Well, maybe it will come out in the U.S. House Oversight and Government Reform Committee questioning, although I doubt it…

And the State of California… The largest economy in the U.S. and in the top 7 economies of the world (used to be 7th, but with their recession, who knows?), announced that they were going to pay their bills with IOU’s… The state’s controller said. “Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression.”

And… The Fed believes the recession is easing? Hmmm… Maybe they are too far away from the California books and records!

I’m on a roll here, somebody stop me! OK, I’m stopped!

The Treasury will auction $27 Billion of 7-year Treasuries today… Just keep the supply spigot open must be the Treasury’s motto these days!

Currencies today 6/25/09: A$ .7955, kiwi .6360, C$ .8605, euro 1.3940, sterling 1.6280, Swiss .9095, rand 8.0775, krone 6.5170, SEK 7.9350, forint 199, zloty 3.24, koruna 18.72, yen 96.40, sing 1.4575, HKD 7.75, INR 48.65, China 6.8345, pesos 13.27, BRL 1.9705, dollar index 80.78, Oil $69.05, 10-year 3.69%, Silver $13.86, and Gold… $934.20

That’s it for today… Draggin’ the line today, late night with my little buddy Alex’s baseball game. A ringing double and single with two RBI for Alex last night, in his last game of the year. HEY! How about the U.S. National Team, beating Spain in soccer / football? WOW! It’s been a while since the U.S. beat a ranked national team. So good for them! No breakfast sandwiches today for the boys and girls, as out little Christine is on holiday… Yay for her! She normally picks them up and I buy, but I forgot to do both this morning! UGH! 11-0 spanking by the Mets last night, leaves the Cardinals only 1 game in front in their division… Well… I’m going to attempt to have a Tub Thumpin’ Thursday, I hope you do too!

Source: Increasing SDR Issuance

While I’ve always doubted that the “money on the sidelines” argument is really all it’s cracked up to be, one can hardly argue with a recently released report from Harris Private Bank of Chicago [part of the U.S. arm of the Bank of Montreal (NYSE: BMO) that notes that stocks have rallied for the next two years whenever money market assets have exceeded 25% of the capitalization of the Standard & Poor's 500 Index. According to the Los Angeles Times, that figure is now 43%, down from 58% after having peaked in December - and that's even after the 30%-plus run-up in the S&P 500 since March.

What's interesting is that many investors holding large cash positions view their money as an asset, when, ironically, it's really more of a liability at this stage of the game.
Some might take issue with that statement. After all, even we at Money Morning have counseled readers that cash - correctly deployed - can allow an investor to sidestep the worst stretches of a financial crisis, like the one from which we're currently attempting to extricate ourselves.

But when the markets are as beat up as they as they have been, history suggests there's probably more upside than downside - even if we haven't bottomed out yet.
And there's a broad body of research to support that contention - including our own newly created "LSV (LIBOR/Sentiment/Value) Index" (published as a part of The Money Map Report, the monthly investment newsletter that's affiliated with Money Morning).

There's also data sets widely published by others, such as Yale Economics Professor Robert J. Shiller. Shiller has found that when you look at 10-year periods of Price/Earnings (P/E) data dating all the way back to 1871, the markets tend to rise when the average P/E is low, as it is right now. Conversely, when the average Price/Earnings values are high - as they were in late 1999, and again in 2007 - a decline in stock prices is much more likely.

There are obviously no guarantees that history will repeat itself. But if it does, the same data implies we could see real returns of 10% a year or more "for years to come," as Shiller noted in a recent interview with Kiplinger's Personal Finance.

My own research seconds the general-market-increase theory, but I'm much more conservative in my expectations of returns and think that returns of 7% are more likely.

Perhaps what's more important right now is that inflation typically accompanies growth - and with a vengeance. And that means that investors who are sitting on cash "until the time is right" may have their hearts in the right place but are relying on the wrong protection strategy.

My recommendation is a four-part plan that can help lock in the expected returns you want, while also protecting your cash from the ravages of inflation. Let's take a close look at each of the four elements of this strategy:

• First, protect your cash with Treasury Inflation Protected Securities (TIPs). Even though the trillions of dollars the Fed has injected into the system seem to be having some effect on the critically ill patient the U.S. central bank is trying to fix, we're likely to pay a terrible price in the future. Forget the hyperinflation scenario so many people are hyping at the moment. While that's certainly possible, it's not probable. However, what is likely is a dramatic realignment of the dollar and a general increase in worldwide living expenses.

If you're based in the United States and have mostly U.S. assets, you may want to consider something as simple as the iShares Barclays TIPS Bond Fund (NYSE: TIP) to offset this risk. The TIP portfolio is chocked full of inflation-indexed securities, but it also offers a healthy 7.46% yield. If you've got international exposure, you may also want to consider the SPDR DB International Government Inflation Protected Bond ETF (NYSE: WIP). It's a collection of internationally diversified government inflation indexed bonds that provides similar protection. Make sure you talk with your tax advisor about both, though. Depending on your tax situation, you may find that because of the tax liability on inflation-related accretion, these are generally best held in tax-exempt accounts.

• Own some gold but don't go crazy. Despite widespread belief to the contrary, gold has never been statistically proven as an inflation hedge. But the yellow metal has proven to be a great crisis hedge because of the 10:1 relationship between gold prices and bond coupon rates - which obviously are directly related to inflation. Over time, the two move in such a way that having $1 for every $9 in bond principal can help immunize the value of your bond portfolio.

So to the extent that you own gold, do so not because you expect it to rise sharply, but because it will offset the inflationary damage to your bonds. A good place to start is the SPDR Gold Trust (NYSE:GLD) because it's tied directly to the underlying asset without the hassles or risks of direct personal storage associated with bullion.

• Consider commodities. It's too early to tell if the so-called "green shoots" that everybody is so excited about are little more than weeds. Therefore, it makes sense to concentrate on picking up resource-based investments. History shows that these things are less susceptible to downturns, but more importantly, rise at rates that far exceed inflation when a recovery begins in earnest.

I prefer companies like Kinder Morgan Energy Partners LP (NYSE: KMP) that are less dependent on the underlying cost of energy than they are on actual growth in demand. That way, if energy prices don't take off immediately for reasons related to deflation or stagflation, those still will benefit from demand growth. It's a fine point, but one that merits attention for serious investors. KMP, incidentally, yields an appealing 8.68% at the moment.

• Short the dollar to hedge your bets still further. Not only is the government going to borrow nearly four times more than it did last year, but when you add the complete federal fiscal obligations into the picture, our government owes nearly $14 trillion. This makes the dollar, as legendary investor Jim Rogers put it, "a terribly flawed currency" that could fail at any time.

To ensure you're at least partially protected, consider the PowerShares DB U.S. Dollar Index Bearish Fund (NYSE: UDN), which will rise as the dollar falls. It's essentially one big dollar short against the European euro, the Japanese yen, the British pound sterling and the Norwegian kroner, among other currencies.
In closing, there is one additional point to consider. You rarely get a second chance to do anything, especially when it comes to investing. So act now before the markets make it cost-prohibitive to protect yourself. When the economic recovery gets here, you'll be glad you did.

Source: Four Ways to Immunize Your Cash Against the Ravages of Inflation

[Editor's Note: Fourteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he's closed every single one of his trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.]

Good day… And a Terrific Tuesday to you! Thundering storms moved through here this morning, as I was preparing to leave home and drive to the office. As slow as I am with getting around these days, I got pretty wet from my car to the office building. But, I didn’t melt, as most would have thought! HA! And, I’ll dry out soon enough… Well before anyone else comes in!

OK… Well… When I left you yesterday, the dollar was on a rampage, from the comments by the Russian Finance Minister, Kudrin… Was it an overreaction, I asked? A resounding YES was my answer… I think the proof is in the pudding on that this morning, as the dollar buying has hit a roadblock, and reversed overnight, with the euro gaining back about 1%…

The euro also got a needed boost this morning, as German Investor Confidence jumped to a three-year high. Seems most investors believe the economic slump in Germany, the Eurozone’s largest economy, is easing… Of course, we know that while Investors believe the economic slump may be easing, it may, in reality, not be easing… It’s all about perception, right? Any old way, the currencies have rebounded from yesterday’s bloodbath… And now the currencies have a bid tone, and not the dollar!

And now a news flash just came across that these countries are “considering buying each other’s bonds, and swap currencies” to eliminate the dollar from those transactions… OK… Skip back to yesterday… Here’s what I said… Pfennig 6/15/09: “I would have to think that the Finance Ministers of these countries would be interested in knowing how they can avoid another downward spiral caused by dollar buying… And… This… Would be the key, folks… I don’t know what it would be, but if they did something like a currency swap / foreign exchange line between each other for trade, that would be colossal! Which is bigger than HUGE!”

The BRIC (Brazil, Russia, India, China) meeting I told you about yesterday, actually happens today. Sorry for the mix-up, as I thought it would happen later this week. There were already comments hitting the news wires that Russian President Medvedev, wants to talk about issue of the dollar as the reserve currency… Now, if he does, and I’m not saying that he will, but if he does talk about that, doesn’t that wipe out the Finance Minister, Kudrin’s, comments about Russia’s belief in the dollar? And… If he does, and again, I’m not saying that he will, but if he does, my thoughts yesterday, that this would happen at the BRIC meeting, would come to fruition…

There’s always been a clamoring for a basket of currencies consisting of the BRIC countries… The problem is that the Russian ruble just isn’t liquid enough to get this done, like EverBank World Markets does their other CD’s… So… How about dropping the “R” and doing a BIC? Well… Again, even though EverBank does offer these currencies of Brazil, India and China individually, it’s not easy… In fact it’s quite the ordeal to get them done… But, eventually, we’ll think of something!

OK… Now back to the goings on in the markets… This BRIC meeting today seems to have quite a hold on the markets’ attention today… And it is a BIG thing, IF they do discuss the alternative reserve currency talk… Talk the talk, and walk the walk… These countries can’t keep complaining about the need for a new reserve currency, and not do anything about it…

Looks like all the stimulus and money supply in the U.K. is beginning to show up in the inflation data… U.K. May CPI jumped .6%, thus pushing the year-on-year (YOY) figure to 2.2%! Now, this is important for a couple of reasons, folks… 1. it could signal an end of the easy money in the U.K. IF they are prudent in removing the stimulus, as they and their friends over at the Fed claim they will be… And 2. and more importantly… Is… The U.S. has actually been behind the events surrounding the financial meltdown in the U.K…. So… If the U.K. is beginning to see inflation rise, it stands to reason that it won’t be long before we see it happening here too…

Down Under… The currencies of Australia (A$) and New Zealand (kiwi) both fell flat on their respective faces with the dollar on the rampage yesterday… But were able to rebound a bit overnight. They were moved higher, when the minutes of the last Reserve Bank of Australia (RBA) hinted that the RBA was going to maintain their easing bias, but move to the sidelines for the foreseeable future… Folks… That’s Central Bank parlance for… This is it! Unless the sky falls! This is the bottom as far as rate cuts go! But… It will be awhile until they move up…

Well, that’s how I read their statement! And I’ve been reading Central Bank statement for 17 years now… I think the traders that cover A$’s think the same thing… And kiwi, just grabbed on to the coat tails of the A$…

Did you see the color of the TICs data yesterday? WOW! Or should I say, UGH? The net security purchases by foreigners for April showed a HUGE drop! The total net purchases were $11.2 Billion… VS $55 Billion in March! And… The ongoing holdings of Treasuries feel a net of $2.6 Billion… Now… Here’s where I get all ticked off folks… We’ve had Japan, China and Russia all say publicly that they have full faith in U.S. dollar denominated assets (read Treasuries)… But when it came to backing up the talk with the walk… They failed to show that they have full faith in these assets, didn’t they!

These countries and their Finance Ministers caused investors HUGE losses with their statements, but when it comes down to the cheese that binds, these Finance Ministers didn’t have the intestinal fortitude to back up the statements… Well, at least in April they didn’t!

And $11.2 Billion a month is not going to be enough to finance the Current Account Deficit… Which will print tomorrow, how convenient! But that’s for April, and we won’t get all that data for months! However…

Right now, the “experts” believe the Current Account Deficit, which consists of the Trade Deficit, and the Federal Direct Investment, will be a deficit of $85 Billion (recall that the Trade Deficit had come down in the 1st QTR) for the 1st QTR… And going back, which is exactly what the Gov. doesn’t want anyone to do, I see that the total purchases in the 1st QTR were a mere $40.63 Billion… There’s a $46 Billion gap there folks…

I’ve gone over this financing thing so many times in the past that it make my head spin (yes, you should see it spinning right now!) just thinking about explaining it again… But, for those new to class… When a country has a financing problem (like it looks we had one in the 1st QTR) the gap gets pushed to the next quarter and so on, until… The chickens come home to roost… And then, a country has only two choices… They can raise interest rates aggressively to make the assets more attractive to the foreigners, or… They can allow a general debasement / weakening of their currency, to make purchases of the assets cheaper by discounting the clearing mechanism… The dollar, in this case… So… Which one do you think a Gov., especially one like ours, will choose to use? Yeah, right, like they would choose number 1!

Ok… Some more depressing news about the housing sector came through yesterday in the National Association of Home Builders Home Price Index (NAHB) printed worse than expected yesterday… The “experts” forecast the NAHB would be a 17… And it printed at 15… Soon afterward, economist Robert Shiller, said that the housing downturn “was not over yet”… Economist Nouriel Roubini, said that “house prices will fall another 15-20%” and… Banking analyst Meredith Whitney said that “she is even more bearish than either Shiller or Roubini on housing.”

That’s not good news folks… Nouriel Roubini as been dubbed as a gloom and doomer by the media (I don’t think so… He just tells it like it is, he can’t help it that it’s not all seashells and balloons for the economy, like the media would have you believe!) and when another analyst, as prominent as Meredith Whitney says she’s even more bearish than Roubini, you’ve got to sit up and take notice!

I just can’t end the day’s letter with those two depressing stories back-to-back… Oh! Here’s an interesting story… The Japanese Finance Minister, believes the recession in Japan is nearing an end… Yeah, right… If I had a 1-oz Gold American Eagle Coin for each time a Japanese Finance Minister has said those words since 1990, I would be quite the “rich man”! But, the markets swallowed his statement hook, line and sinker, which is good for the yen! Japanese yen outperformed all the currencies overnight, and is trading with a 96 handle once again!

Speaking of Gold… It has rebounded by $8 this morning, as the sentiment to buy dollars has faded…

Currencies today 6/16/09: A$ .8020, kiwi .64, C$ .89, euro 1.39, sterling 1.6440, Swiss .9220, rand 8.00, krone 6.42, SEK 7.8070, forint 201.50, zloty 3.2550, koruna 19.2780, yen 96.83, sing 1.4575, HKD 7.75, INR 47.75, China 6.8335, pesos 13.36, BRL 1.95, dollar index 80.55, Oil $72, 10-year 3.72%, Silver $14.35, and Gold… $937

That’s it for today… The rain that came through this morning was very a “hard rain”… And no, I’m not going to go into Bob Dylan here… We’ve had our share of “hard rain” lately, and the low lying areas are seeing flooding. The river that runs through my little river town, is on the rise again… I thought I had a doctor’s appt today, but my calendar tells me it’s next Tuesday! Yahoo! OK… Not too much else to talk about this morning, so, I’ll just end it here, and send you on your way to a Hopefully Terrific Tuesday!

Source:  German Investor Confidence Is On The Rise