Jeff Clark (Casey Research):

In the short term, a catastrophic deflation is quite possible. But in the long term, extremely high levels of inflation are now inevitable. The situation is very serious. Gold is the best hedge against both of these things. The better part of your financial assets should be in gold, augmented by well-thought-out speculations. Doug Casey, November, 2009.

Doug Casey and the editors at Casey Research are very skeptical that we are experiencing any sort of economic recovery. In our opinion, too many economic indicators are based on faulty data and optimistic assumptions. Our research suggests that a recovery isn’t sustainable yet. And with that, we lack the foundation needed to support the rapidly rising stock markets.

Among the many reasons for our doubt is this standout:

Over the next two years, the so-called Alt-A and Option ARM loans face massive resets. Even with today’s low mortgage interest rates, most of these home loans, currently enjoying ultra-low teaser rates or pick-your-own-monthly-payment schemes, will see their monthly payments adjust higher – far higher. The result: loan losses and write-downs will balloon for banks, and mortgage holders will get hit with another wave of homeowner defaults. We just don’t see any way for the economy and markets to escape the fallout.

Even the Fed’s perpetual public smiley face can’t hide what’s happening. In their own statement last month, they said, “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.” A clear and present danger remains in the system.

What does this mean for our favorite sector? Following the market lows in March, gold and gold stocks have, with some exceptions, mirrored the market’s moves both up and down. If the markets correct again, whether mild or severe, gold and gold stocks could get taken down as well.

There will come a point when gold stocks separate from the movements of the general markets, and we look forward to that day. But for now they’re still holding hands.

In the meantime, our view of the big-picture outlook hasn’t changed. Rising inflation and a falling dollar are baked in the cake. Price inflation follows monetary inflation, and governments around the globe have pursued an unprecedented and unsustainable policy of inflating the money supply. Monetary inflation + time = price inflation. It’ll come, and when it does, it will wipe out those who are unprepared.

But in the near term, current economic uncertainties mean heightened risk and call for caution. In other words, this isn’t the time to be aggressive with stock purchases.

So, how does one invest in this kind of environment? Is there a way to hedge your exposure against price fluctuations?

Yes! The secret lies in asset allocation.

Achieving good portfolio performance is possible without overexposing yourself to stocks. The strategy involves playing defense as well as offense.

The following tables compare the returns an investor could expect using different asset allocation models under three hypothetical market scenarios, and assumes a starting portfolio of $10,000.

      *All returns exclude commissions and taxes 

      *Cash return for 1 year of 1.55% based on use of money market account; higher rate possible with a CD, but access to your cash is restricted, and it involves fees and penalties for early withdrawal.

You can see that you’re giving up only 6.6% in gains in Scenario #1 by apportioning your portfolio in equal thirds vs. being overweight stocks. But if stocks decline while you’re overweight that category, as shown in Scenario #2, you stand to lose 16.8%.

If you don’t elect a defensively positioned portfolio at this point, and gold stocks indeed get sucked into the vortex of a general market sell-off, you’ll wish you had that extra $2,300 in cash – which buys well over 100 shares of Kinross at today’s price. And when KGC likely doubles in a couple years, as we expect, remorse may be knocking on your door.

By allocating your investments in a more defensive mode, you’re making a small sacrifice for possible profits over the next six months without sacrificing long-term returns.

You can continue to follow the thinking of the editors at Casey Research — and get specific recommendations for solid, secure gold investments — with an inexpensive subscription to Casey’s Gold and Resource Report. It comes with a free report called The Three Best Ways to Invest in Gold, and until December 18, you’ll get a free subscription to Casey’s Energy Opportunities — all for only $39. Click here to find out more.

The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114.

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing, the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see… in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ‘80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights.

For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success.

And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had.

Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall.

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

Yesterday, it touched a new record – $1,050 – even as the dollar rose, oil slumped under $70 and stocks dipped very slightly.

Well, what do you expect? The United States added $1 trillion to its monetary base in the last year or so. The federal government is running a deficit of $1.7 trillion this year. And along comes Barack Obama with an idea to stimulate employment – spend more money! This time, Obama’s plan is a kind of ‘Cash for Workers’ program…in which businesses get a tax credit for hiring new employees.

Gold investors must think the new program will be the straw they’ve been waiting for. Government has piled on bales of costly new initiatives on this poor camel’s back. Still, he stands up straight.

So, is gold at $1,000 a bargain…or a trap? Or both.

We begin by asking: where’s the inflation? We don’t see any inflation. What we do see is deflation.

Barclays Capital says gold could go to $1,500. We don’t know where they got that number. It could go to $15,000 for all we know. Or it could go down, too.

Our guess is that it will go down enough scare the bejesus out of speculators. Then, it will soar.

But, hey, we’re just guessing – along with everyone else.

Sooner or later gold is probably headed to the lunatic moon. We’re sticking with the yellow metal. We don’t want to miss that ride.

But when?

Ah…we’re going to stick our necks out and say “eventually.” We’re sure we’re right about this. Just don’t ask us for more precision; we have none. And what bothers us is that between eventually and now there could be a lot of time and a lot of trouble. And one trouble that could come up pretty fast is another crash in the stock market.

If the stock markets of the world take another dive…like they did last year…gold will probably go down with them. Not as much, but down nonetheless. So, if we were speculating…we’d probably be short gold and short stocks too. We’d bet against bonds too – even though we think they will probably go up in the short run. The smart, long term money – in both stocks and bonds – is probably on the short side.

Here at The Daily Reckoning, however, we never speculate – except in print. As to ideas about how the world works we have plenty. We speculate daily. As to gold, stocks and commodities, we prefer to hold onto our long-term positions.

What seems fairly sure to us is that this recovery is a fraud. It’s a mountebank and a flimflam.

And now approaches a moment of truth – earnings announcements. Stock market investors bid up shares on the theory that sales and profits would rise. Will they? We don’t think so.

We think sales are going to be disappointing…and earnings will be even worse. If so, we’ll see analysts begin to change their expectations…and announce that the results are “not as bad as expected.”

If we get a few really bad announcements – with results much worse than expected – it could sink the rally. Then again, if we’re surprised with exceptionally good reports…it could send the market in the other direction.

Good results will also cause us here at The Daily Reckoning to question our position. Maybe the economy is not sinking into a chronic depression, after all. Could we be wrong?

Ha ha…are you kidding, dear reader? Of course, we can be wrong. When we were younger we were uncertain about things. But now that we’re older, we’re not so sure.

Here is what we’re pretty sure about:

1) The credit cycle has topped out.

Americans are saving – think of the poor boomers, 10 years older but not a penny richer than they were in 1999. Stocks have gone nowhere but down in real terms. Houses hit a high in 2006…now, they’re off 30%…and still going down. Jobs? Forget it…there are already 15 million people who are unemployed and about 200,000 more every month. The job market is unlikely to recover for another 6-13 years – that is, after many of the boomers are retired! And if you are lucky enough to have a job, you’re not likely to get a raise…not with so much spare capacity in the labor market.

Under those conditions, a consumer boom is very unlikely.

2) We know that a period of credit contraction is deflationary.

Prices go down as demand falls. Buyers disappear from the malls that once knew them, while the factories that produce stuff grow dusty and quiet.

But we know the feds hate falling prices. And we know they are taking extraordinary actions to get prices to go up. So far, their efforts have been a giant flop. Prices are falling in the United States at the fastest pace since the ’50s.

Most of the feds’ efforts have been directed towards keeping the bankers fat and happy…and getting themselves a bigger share of America’s output. They took funds designed to relaunch the US economy, for example, and used them to buy themselves a big position in the auto industry, the financial industry and the insurance industry.

3) We know too, by the way they conducted themselves in those affairs, that the feds have become much more aggressive…throwing their weight around in the private sector as never before.

What we don’t know is how this affects markets in the short term. So far, consumer prices are falling, but the stock market is enjoying a bounce. It is a real, new bull market? Or just a bear market bounce? It is probably a bear market bounce…but it has been going for long enough that we have to at least consider the idea that it is a genuine bull market. That’s why the numbers from this quarter are important…they’ll tell us if the companies themselves are expanding earnings fast enough to justify investors’ optimism.

4) We know too that there is a whole lot of ’flation going on.

We are just unable to tell you what kind of ’flation it is. The monetary base is way up – it increased by $1 trillion in the last 12 months. But the money-in-circulation has barely budged. The feds give the banks overnight loans at practically zero interest. Then, the banks lend it back to the feds at nearly 4% more.

What happens to it then? Well, what do you think…it is wasted on typical federal government scams and humbugs.

So, relatively little of the money actually ends up in the consumer economy. And so, we can’t tell you whether the ’flation will have a ‘in’ prefix or a ‘de’ prefix. They’re just two letters. But they will make a whole alphabet of difference to the economy and to your investments.

5) Most important, we are dead sure that the people running America’s financial policies are jackasses.

We say that with all due respect, which is probably not much. They have only one idea – and it is a bad one. They think economies are improved by more consumer spending. They don’t seem to care why consumers occasionally cut back on their spending. All that matters to them is finding ways to get the consumer shopping again. So they try tax cuts and government spending…bailouts and boondoggles…zero interest lending and federal takeovers…cash for clunkers, cash for houses, cash for employees….

…trillions worth of claptrap and folderol. But what a nuisance! The fool consumer still won’t shop!

But they’re determined to keep trying. That’s why we can be pretty sure that, eventually, they’ll get inflation rates up. One way or another. And then, gold at $1000 will seem like an outrageous bargain.

Until tomorrow,

Bill Bonner

Source: Gold Touches a New Record

Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn’s panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don’t believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this ‘stimulus’ money hasn’t permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold’s tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold’s bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

Figure 1: Is gold about to shine?

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold’s bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena

Source:Inflation is Our Future

Not to crunch too many metaphors right here at the top, but a consensus seems to be firming up in the animate jello of the Internet that we have entered the Season of the Witch. An odor of ripeness fills the virtual air — something between dead carp and apples baking.

Whatever else appears to be going on in the upper stories and verdigris-tinged turrets of capital finance — currency rackets, gold switcheroos, interest rate arbitrage games, concealment of losses under rugs and behind curtains, Chinese fire drills performed by Spanish prisoners, executive three-card-monte set-ups, boardroom work-arounds, accounting quicksteps, Peter-to-Paul-shuffles, check kitings, pigeon drops, Ponzi schemes, hugger-muggers, bezels, shucks, jives, and enough monkeyshines to make Lord Greystroke cry for mercy — apart, in other words, from business-as-usual, such as it is these days, on Wall Street, there is a rising collective sense of anxious expectation that things are about to shake loose in the sad-ass shell of what remains of our economy. And the most perplexing part is that there hardly seems any safe place to preserve one’s savings.

The showmen over at the Financial Sense website, have put on an excellent month-long series of interviews and debate podcasts between leading inflationistas and deflationistas — Daniel Amerman, Peter Schiff, Robert Prechter, Mark Faber, Michael “Mish” Shedlock, Harry Dent — and after weeks of sedulous listening I still remain flummoxed as to where to stash the dwindling cash.

Harry Dent was a curious case in point this week. He has made some howlingly wrong calls before (e.g. in 2006, predicting a Dow 40,000 at the conclusion of the post-2001 bubble). Perhaps he missed the crack-up aspect of the most recent boom. He did not foresee the long gruesome meltdown of late 2007 to March 2009, or rather, his timing was off, since he called for the commencement of a new Great Depression in 2010. (And I hasten to insert here that my own timing of events has not been so great either.) Anyway, Dent sees a “winter” of finance and economy looming from here forward, characterized by extreme deflation, based on his view that the amount of private debt going bad (est. $40 trillion) far outweighs government’s ability to create new “money” (a few measily trillion) and hence that there is no chance in hell we’ll find ourselves in an inflationary situation for some time ahead. The private debt workout has to be completed first.

Most curious, though, was when the interviewer, Jim Puplava, probed Dent about his views on Peak Oil. Dent said he didn’t believe in it; that when he was in college in the 1970s (remember the OPEC oil embargo of ‘73), he learned to disregard any suggestions that we are “running out of oil.” He stated this, by the way, as a simple assertion, without any further explanation, and Puplava didn’t belabor him with arguments. But it was a weird moment. Of course, it hardly need be said that Peak Oil story has never been about “running out of oil” per se, but rather about declining flows, geopolitical management of flows, and the effects of depletion on industrial economies — in particular the effect on regular, expected, cyclical “growth” of the type that financial markets utterly depend on to power the trade in investment paper.

It is exceedingly odd that this does not factor into Dent’s thinking, because what Peak Oil inescapably does is introduce the very sobering idea of discontinuity — that is, that the game has changed radically, especially where all our assumptions about continued “growth” are concerned. In that brief exchange on Peak Oil, Dent seemed to take the position that the “winter” part of any historical financial cycle always produced “new technology” that invariably saves the day, putting this seemingly very smart man in the camp of so many techno-cornucopian triumphalists all wishing for the same outcome: that some mythical “they” will “come up with” a set of rescue remedies to keep all the cars circulating on the freeways, and all the WalMarts groaning with swag.

Like so many major league prognosticators, Dent arrives at his ideas by building models of reality, assembling “data” to create charts of trends in prices, interest rates, and especially demographics – what age group of people are buying a lot of what in which stage of their lives. The whole business seems very rational and reasonable except when you realize that it is just another “narrative” — to borrow one of Nassim Nicholas Taleb’s terms — girded with statistical justification. One can hardly fault it from a strictly procedural point of view — since, in our culture, conclusions ought to proceed from evidence — but one can’t escape the feeling that it amounts to little more than old-fashioned augury… that someone examining the entrails of a dead chicken, spread over the front page of The Wall Street Journal, might arrive at very similar conclusions. All that said, Dent was an appealingly confident personality on-the-air, the kind of authoritative voice you’d like to believe, if only it were possible.

Prechter was much the same a few weeks earlier, and he, too, foresees a darker American future, based on a different set of models called Elliot Wave principles. His forecasts derive from a picture of “social mood” as much as economic data flows. He, too seems to disregard the Peak Oil story and its implications as the master resource driving growth in industrial economies.

Personally, I am not at all sure that the Peak Oil story, or its associated general resource scarcity story, will shed a whole lot of light on the question of inflation-or-deflation. I say this because I think it is a short way down the road of depletion-and-scarcity before the major complex systems we depend on for daily life become so unstable that general socio-economic collapse ensues. After all, capital finance is only one of these many complex systems — some other biggies being food production, trade and manufacture, transportation, electric power distribution, infrastructure maintenance, the military, and governance. Inflation-or-deflation will only be symptomatic of larger failures and instabilities in these systems necessary for modern, civilized life.

All of it begs the question not only whether you or I will have two nickels to rub together, or two gold eagles, or a bundle of six month US Treasury bills, or a zillion shares of Apple (NASDAQ:AAPL), or a gainful vocation, or a roof over our heads, or a hot meal at the end of the day, or a safe place to sleep, or a country we can recognize. I’ve done my share of forecasting, with some episodes of notably bad timing. I don’t do it for grandstanding effect but to provide some basis for knowing what to do in the years directly ahead, so we can hope to construct lives worth living. I’m impatient with models, charts, and statistical analysis. Perhaps this is childish. I’d rather tell a story or paint a picture. So, I’m going to spend the rest of the week finishing the last chapter of World Made By Hand Two: The Witch of Hebron while the US economy wanders where it will.

Regards,
James Howard Kunstler

Source: Inflation, Deflation, Peak Oil and Complex Systems

Even in the world of finance, there are momentous conversions. As they say on Wall Street, a rally ends when the last bear gives up. An old friend had been a source of inspiration for tech bears for many years. He suddenly saw the light and gave up in 1999. Shares he had formerly scorned – often dotcoms with no revenue and no business plans – were suddenly added to his own portfolio. This also heralded a big change – the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then, Stephen Roach became vaguely bullish in 2007, after a long period of doubt and misgivings.

Now it is Jim Grant who has changed his mind. A generation of investors has gotten used to Grant’s ‘doom is nigh’ warnings. Now, he says, it’s a boom that is nigh.

What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His WSJ article shillyshallies around; rehearses the history of previous recessions and comes to rest in front of a flickering match: “The deeper the slump, the zippier the recovery.”

Many were the sheep in Grant’s flock. They feel betrayed, as if their shepherd had gone over to the wolves. Here at The Daily Reckoning, we take no personal offense. In the following few words we merely stoke up the fire.

We will not argue with Newton’s Third Law. For every action, there is a reaction. Every boom has a bust. And every busted bubble has a bounce. Even the Titanic’s stern rose, before she slipped below the waves.

First, we consult the facts. But facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stock market rally, the once half empty glass has become half full. We predicted it ourselves. But we’ll let Robert Prechter say, ‘I told you so.’ Even before the rally began, Prechter foretold its story:

“Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”

As to Mr. Obama’s popularity, Prechter was wrong. But 4 out of 5 ain’t bad.

Grant’s brief tour of recession history seems to confirm his Newtonian position: the further an economy falls, the further up it rises to get back to normal. This downturn has clipped nearly 4% off America’s GDP, substantially more than any previous downturn since WWII. Therefore, it will come back strong.

Today’s slump in the United States hardly compares to the one of ’29-’33, which took 27% off the GDP. Then, in the ranks of the unemployed, stood one out of every four able-bodied workers, as opposed to just one out of every 10, according to today’s statistical legerdemain. Still, the depth of the drop did not prevent a vigorous bounce; on the contrary, it seemed to demand it. After ’33, the US economy grew by nearly 10% in each of the next four years.

In the slump of ’82, GDP sank at a 6.4% rate. Again, the reaction was nearly equal and opposite to the action. “Not until the third quarter of 1984,” says Grant, “did real quarterly GDP growth drop below 5%.”

Of course, even a US Congressman will bounce, if you push him down the Capitol steps. But not every one will get up again. In the ’33 example, the US economy, still youthful and vigorous, got up nicely. But then it fell again. By the end of the decade he was still on his back, with 15% unemployment and 2% deflation. Only later, after four years of world war, did the economy begin a sustained recovery.

Now it is 2009. The poor fellow is down again. The feds rushed to help him to his feet. They gave him a combined fiscal and monetary shot-in-the-arm seven times stronger – in terms of GDP – than the average postwar countercyclical stimulus. The juice opened his eyes. But he still staggers. He has put on some weight over the years; he now carries three times the debt/GDP as he had in ’82. His stocks are three times as expensive, in P/E terms, too. His bones are more brittle and his mind a little slower. What’s more, in ’82, he had been on a deleveraging diet for more than a decade. In ’09, he has just begun.

What will happen next, we don’t know. But if we turn bullish on this economy and urge you to buy stocks, it will surely be time to sell them.

Enjoy your weekend,

Bill Bonner

Source: The Last Bear

Today, we light a candle and try to interpret the shadows on the wall…

Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.

Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?

According to the papers, the feds have already done it. “Fed says recovery underway,” says a headline from yesterday’s press.

Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September… to a 28-year low.

House sales too have been goosed up by the feds’ tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention – about 80% of the total. What will happen when this program ends in November? Hey… let’s guess… uh… housing sales will fall, right?

And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don’t know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:

“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the world’s largest bank.

“Jiang, chairman of Indus trial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase & Co.

“The contrast illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest U.S. banks towers above what’s paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.

“The United States is home to four of the nine largest banks in the world — JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.

“China, for example, boasts three of the world’s four biggest banks, yet the leaders of those banks — Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China — are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year.”

If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that’s their business. A pox on all of them. But in come the feds… and now we’re all paying the price. And if the program ends in December, as scheduled, we’ll get to see how far the economy goes without taxpayers’ money in the gas tank. Let’s see… it comes to a complete stop?

But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a ‘second great depression,’ and that the government has rescued the economy. Now they see nothing but clear highway ahead… perhaps with a little bump from time to time.

What’s ahead? We don’t know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary base exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.

But amid all the confusion, uncertainty and noise… your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don’t know what markets will do. We don’t know how much gold will sell for next year… or what the actual GDP will be. But when we look at the shadows… we have a strong hunch that we are entering a depression… and that we won’t get out of it soon.

That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression à la 21 st century. A depression with Iphones and Twitter. This is NOT your grandfather’s depression.

It’s not your grandfather’s depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:

“FRUGALITY THEME IS SECULAR, NOT JUST CYCLICAL

We came across two articles that truly resonated on this score — about how U.S. households are changing their entire approach to the family budget and this transformation cuts a wide swath on a socio-demographic basis. See Census: Recession Had Sweeping Impact on U.S. Life on Bloomberg news (by Hope Yen) as well as Consumer Spending Cuts Reach Across Incomes in the Associated Press business news section (by Eileen Connelly).”

With so much noise… and so many distortions… it’s hard to tell what is really going on… and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it’s not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that’s not likely to happen any time soon… so let’s ignore it for the present.

What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices… and tax revenues.

New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.

Apartment rents in New York City are falling. Credit card defaults hit a new record. And the Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.

All of those things are about what you’d expect.

Another thing you’d expect is a decline in America’s relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:

“Sept. 23 (Bloomberg) — U.S. budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of “The Dollar Crisis.”

“The U.S. has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

In “The Dollar Crisis,” first published in 2003, Duncan argued that persistent current account deficits by the U.S. were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.

“The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,” Duncan said in an interview in Hong Kong yesterday.

“Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.”

*** Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. “Empire of Debt,” we called it. It was such a hit that the publisher asked us for a new edition… which was released this summer.

[Editor’s note: You can get Bill’s book here.]

Richard Duncan, with Bloomberg on lead guitar, was singing our song:

“The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.

“The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.

“ U.S. workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said.

“That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”

Once the U.S. debt burden becomes too large and the government can no longer sell debt to the public, the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he said.

Source: Awaiting the Depression

And Warren Buffett came out saying he’s buying equities again. All the while, the dollar is sitting at an 11 month low, and gold touched $1006 this morning.

As I perused the underground, I came across a piece by Jeff Harding of the Daily Capitalist that I had to share. He begins by asking, “how has the playing field for our economy changed and how will those changes affect our future? The answer to these questions will determine the future of the world’s economies.”

He then outlines the 7 mega-trends that will dictate our economic future. We’ve touched upon many of these ideas in previous issues. But here they are:

• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No. 2. Consumers will continue to increase savings to prepare for retirement.
• Megatrend No. 3. Declining U.S. consumer demand will continue to negatively impact the world economy.
• Megatrend No. 4. Deflation will continue for some time.
• Megatrend No. 5. Home ownership rates will decline to more historical levels of, say, around 66%, down from the high of 69% during the boom, which will keep a lid on home prices.
• Megatrend No. 6. Government stimulus and recovery programs only delay recovery and deepen the pain for workers.
• Megatrend No. 7. Massive federal deficits will double the national debt, result in higher taxes, and will act as a permanent drag on the economy.

If you have a chance, you should check out the piece in full. It is jam packed with facts and figures that will give you something to chew on for breakfast, lunch and dinner.

So where do these trends all lead?

All cycles eventually bottom out and growth resumes. The timing of any recovery is impossible to predict and for the most part it depends on what the government will do (or, hopefully, not do). The more the government interferes with the recovery process by propping up bankrupt banks, by manipulating the economy with fiscal and monetary stimulus, by creating a huge national debt, and by increasing taxes, the longer it will take.

With commercial real estate in serious decline, deflation will continue, and we’ll see more bank failures. While we may see a “bump” in GDP in Q3 and Q4, the liquidation of commercial real estate assets and other debt will accelerate. At some point, deflation will stop, and asset prices will find a bottom, as housing is starting to do now. My view is that the post-deflation economy will remain sluggish with high unemployment for some time. I believe that, unlike Japan, we will eventually see inflation.

There are significant differences between our economy and Japan’s and the comparison to Japan in the 1990s may not be entirely applicable here. The Japanese were reluctant to let banks and companies fail, but, despite a few notable exceptions, we aren’t. This is a necessary requirement for recovery, and we are better at “creative destruction” than are the Japanese.

Also, we have a more dynamic culture of entrepreneurship than Japan, making us more responsive to a recovery. However, the main difference is that Japan’s debt was largely financed internally due to their very high savings rate in the 1990s (about 14%). While our savings rate will continue to grow, I do not believe it will keep up with rising federal deficits, and we will need to finance our national debt on the international markets. This will drive interest rates up and put pressure on the dollar.

Then I believe inflation will assert itself as banks renew the lending cycle. I believe the Fed will maintain its loose monetary policy in order to keep interest rates down to stimulate growth. Governments always find it expedient to create inflation to give people the impression that the economy is growing. The problem is that inflation will depress the formation of real savings necessary to finance growth, and like the 1970s, we’ll see stagnation and inflation (”Stagflation”). If inflation gets out of hand, then, for a while we may see price and wage controls.

After that, who knows? Cut the money supply as Paul Volker did, and drive up interest rates and bring on a new recession? Continue to inflate? That’s too far in the future and politicians don’t think that far ahead.

It’s back to business. No more long lunches. No more afternoons painting windows. No more soirees in the evening.

We return to our lonely métier – chronicling the decline and fall of the US economy…and the Anglo-American empire too….

Two bits of news signal the scale of this trend. But first, here’s one two-bit piece of news: the Dow lost 185 points yesterday. Could this mark the beginning of the end for the rally? Yes, it could. Should you be out of US stocks? Yes, you should.

But let’s turn back to our ‘decline and fall’ chronicles…

From Florida, comes news of the first drop in population in 60 years. “Unemployment is soaring,” reports USA Today. “Florida is second to California on foreclosures.”

Yes, dear reader, there is trouble in the sand states…

Florida lost a net 58,000 people this year…for the first time since the 1940s.

Why would that be? We’ll take a guess. Florida is a state where people go to retire. It is where people go when they stop producing and begin consuming. The major industry in the state was housing…building houses for consumers!

But now, the turn has come. Fewer people have money to consume. And those who do are keeping their money in their pockets. We even saw a report in The Wall Street Journal that people are cutting their own hair to save money. They’re also staying put, rather than moving to Florida. So Florida needs fewer new houses…and fewer people to build them.

Second, from national income statistics comes a report that the typical US household has less discretionary spending than at any time in the last 50 years. Why? Americans have no money to spend because they already spent it! Now they’re paying the price. And it will take years – maybe 10 years, maybe longer – before they’ve paid down their debts to more comfortable levels. In the meantime, they are poorer than they’ve been since the Eisenhower years.

Keeping it simple: Our view is that there is a major transition underway. There will be no genuine recovery, not now…not never. That is not to say the world economy is doomed to perpetual darkness and misery. Not at all. What it’s doomed to is a long period of adjustment…with high unemployment, on-again, off-again recession, and desperate efforts by the feds to return to the good old days of the bubble years.

But there’s no going back. It was as if the economy was playing a game of Russian roulette…and then the pistol went off – the debt bubble blew up. Once the bullet left the chamber, the game was over. Recovery? Forget about it. The old economy isn’t going to bounce back; it’s dead.

Still, just because a thing is hopeless doesn’t make it unpopular. The feds are fighting the correction every step of the way. They’re propping up brain-dead companies…and keeping zombie banks going by feeding them the blood of taxpayers. It’s ghoulish…it’s a very scary movie!

Unfortunately, the ghouls vote! And everywhere the feds look there’s a campaign contributor or a lobbyist or a voter…and they all want the A-positive blood of taxpayers. They look to the feds for a transfusion in order to keep living in the style to which they’ve become accustomed…

Just what you’d expect, in other words. And with so much debt in the system, the feds are desperate to raise inflation levels. They must increase the CPI to persuade consumers to spend money rather than save it. Otherwise, the nation risks falling into a deflation trap – the very thing Ben Bernanke has pledged to avoid. So they’ll continue going down that road – towards inflation – until they finally get there. And they’ll keep pressing harder and harder on the monetary accelerator until they finally run into a tree. Again, just what you’d expect.

So, where’s the surprise? We’re on the road to destruction; that’s clear. But it may be a much longer road than most people expect.

Ambrose Evans-Pritchard in London’s Telegraph:

“‘The current financial crisis is unlike any others,’ says the Bank for International Settlements. Lasting damage has been done. The ‘cumulative output loss’ is likely to reach 20pc of GDP in the major economies.

“The message is the same at the International Monetary Fund. ‘The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,’ said Olivier Blanchard, the Fund’s chief economist.

“It has certainly alarmed US retail tycoon Howard Davidowitz. ‘As a country we are out of control, we’re in a death spiral,’ he said.

“Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. ‘Generational destruction of a society’s balance sheet will not rectify itself in a matter of months.’

“‘How about a quarter century?’”

Until tomorrow,

Bill Bonner

Source: Trouble in the Sand States

The big question preoccupying the talkers at CNBC is whether the post-March upturn is the beginning of a new bull market or only a pause in a bear market that will last for years. Don’t obsess over figuring out the answer. Markets are always perverse and unpredictable. Instead of trying to time your next buys and sells, think about what is going to happen over the next decade and how you will cope with it. You should be thinking about the purchasing value of the dollar.

Dremen, like your Notes editors, believes we are in for a bout of “wild inflation” – something along the lines of what we saw from 1979 to 1982. (For those of you too young to remember, this period saw the CPI rise 13% a year and long-dated US Treasurys yield as much as 15%.) Why this dire outlook? This, again, from Dremen:

Simply because our Treasury and its counterparts in other countries are printing money around the clock. They are also printing bonds, and with the same objective: reviving stagnant economies. The Keynesian belief that large fiscal stimulus is crucial to ending an economic downturn is prevalent among policymakers worldwide. No democratic government could stay in power these days if it didn’t undertake countermeasures against unemployment, the possibility of deflation and the worst financial crisis since the 1930s. It is inevitable that all this stimulus will be followed at some point by a period of rapidly rising prices.Central banks, including our not-so-omniscient Federal Reserve, will again fail to take the punch bowl away from the party soon enough, keeping stimulative polices going far past the point when unemployment has turned a corner and the financial debacle is behind us. Treasury Secretary Geithner and Fed boss Bernanke are trapped by politics and events. They make pronouncements downplaying the inflation threat, but inflation will hit like a tsunami within three years, maybe sooner..

So what can you do about this threat to your savings? First, sell long bonds. When inflation hits long-bond prices are going to plummet as yields skyrocket. Remember, bond market crashes can be as bad as stock market crashes.

Dremen also recommends repositioning your portfolio with heavier weightings in oil, natural resources and cyclical stocks… and cutting back on utilities and consumer staples. If you believe, like we do, that a crash in stocks is coming, hold off on buying stocks until values come off their current highs – buy the dips.

The third weapon in your armory against inflation is real estate. Dremen reckons real estate will be “one of the best investments in the years ahead.” Remember Buffett’s great contrarian maxim: “Be fearful when other are greedy and greedy when others are fearful.”

Also keep in mind Steve Sjuggerud’s rule of thumb for successful investing: buy assets that are cheap, hated and on an upswing.