In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

By “shows signs of improvement”, I suppose he means things like another extension in unemployment benefits, which he admits “is something that the administration and Congress are going to look very carefully at as we get closer to the end of this year.”

Naturally, I take points off his grade and I note that “look very carefully at” is a prepositional phrase, and he should have more correctly said that extending unemployment benefits “is something at which the administration and Congress are going to look very carefully” but either way it means that it is a “done deal” since there is going to be almost $3 trillion in deficit-spending money ($1.84 trillion in budgeted deficit and the usual $2 trillion in Supplemental Appropriations that will appear in the next year), all seemingly just sitting there! Hahaha!

The 5-Minute Forecast took a look at the specifics, and found that “Congress is under pressure to extend benefits again. Emergency legislation has already bumped unemployment programs to 79 weeks in half the states, about triple the norm and the longest since its 1930 inception (the rest of the states have programs ranging from 46-72 weeks).”

Yikes! We’re already at records of unemployment never even seen before! Nevertheless, they continue “Word on the street is that Congress will tack on another 13 weeks for states with unemployment rates over 9%… at a cost of $70 billion”, which seems like such chump change when next year’s federal budget deficit is, by itself, $2 trillion!

Blomberg says that Larry Summers, director of the White House National Economic Council, glossing over the fact that he has not been right about the economy or raised a peep about the rampant “creating excess money and credit” crap that Alan Greenspan and his loathsome Federal Reserve were doing for the last 15 years, says that he is now sure, sure, sure that the economy will resume growth in the second half of the year, although the job picture “will be serious for some time to come.”

Naturally, one wonders how economic growth can resume when more and more people are unemployed, with no viable options, and staggering under the biggest debt loads in the history of America, but even when you send him an email asking “What kind of stupid thing is that to say, you ignorant, loudmouth neo-Keynesian halfwit lowlife?” he never explains!

Just in time, The 5-Minute Forecast sort of obliquely answers my question when they reported that “both Larry Summers and Tim Geithner refused to rule out a middle-class tax hike.” Hahaha!

Oh! Growth in government taxation! Hahahaha!

Ignoring my rude laughter, Bloomberg continues with the insight that has Mr. Summers saying, “the Obama administration will work with Congress to ‘do what’s necessary to make sure appropriate unemployment benefits are available.’”

And working with Congress ought to be a snap, as Congressman Charles Rangel, chairman of the House Ways and Means Committee, said he “supports extending unemployment insurance benefits for another 13 weeks” because there is “no question” that the unemployed “deserve it”, because the are the “the true victims of this fiscal disaster.” Hahahaha!

The truth is that everyone is a victim of the abject stupidity of government morons like Congressman Rangel, who happily voted to deficit-spend monstrous amounts of money year after year after year, plus pledging a hundred trillion dollars in future benefits, and encouraged the Federal Reserve to create massive amounts of excess money and credit so that people could go into crushing debt by borrowing Too Much Money (TMM) to buy, among other things, the gobs of new government debt, all of which cemented into place a bloated, dysfunctional, corrupt, government-centric economy! Hahaha! We’re freaking doomed!

And now – unbelievably! – Congressman Rangel thinks that increasing federal government deficit-spending, via expansions of the money supply by the Federal Reserve to promise another 13 weeks of unemployment benefits to the victims, is going to fix things? Hahahahahahackahackahaha!

The extended “Hahahahahahackahackahaha!” is to cleverly denote that I am laughing and laughing until my sides are starting to hurt, and I am coughing and hacking up what appears to be pieces of lung at such preposterously and overwhelmingly funny Theater of the Absurd stupidity! Hahahaha!

In such a giddy state, I obviously cannot continue to the inevitable climax where I demand that you buy gold, silver and oil immediately as protection against the best intentions of government or suffer my contempt and scorn, which admittedly seems so far away from my current fit of laughing and coughing! Hahahahahackahackahaha!

Anyway, I could never say, “Buy gold, silver and oil because your own government is destroying your money and you!” better than when Mr. Rangel says it for me with “Victims deserve more of what they got!”

Whee! This investing stuff is easy!

Source: The True Victims of Government Stupidity

Good day… And a Tub Thumpin’ Thursday to you! Once again yesterday, we traded all day in a very tight range with the currencies. The ADP/Challenger data didn’t give anyone a warm and fuzzy about the labor picture, and tax receipts are in the news… So, let’s go to the tape!

OK, front and center this morning, I have to talk about this deal with tax receipts in this country. So, I’ve chronicled the April and June debacles for tax receipts, but just in case someone is new to class, and missed that, let’s review… The U.S. used to count on the months of April and June for HUGE cash receipts from tax returns, but this year, both April and June’s tax receipts were so bad, the expenditures were greater than the receipts! I highlight these two months because, they should have been positive months for the budget balance… If we can’t post a positive balance in April and June, what’s the rest of the year going to look like?

Well… Just for starters, tax receipts in the U.S. are the worst since the Great Depression, and if they continue on this path, could pass that awful period of time for the top spot! My friend, the Mogambo Guru, had this to say, in that “special” Mogambo way of describing something… Let’s listen in…

“In fact, speaking of taxes, it makes your hat fly up comically off your head in astonishment when you realize that total income and corporate taxes are less than this year’s federal budget deficit alone! And then you really start screaming your guts out in anger when you then realize that the total federal budget is 400% of total federal revenues! They are spending four times as much as they take in! Four times as much!”

You can read the Mogambo Guru on the Daily Reckoning… www.dailyreckoning.com

OK… Now that I’ve sufficiently raised my blood pressure talking about the fact that in a time when tax receipts are down because of the depression, the Gov’t is spending more and more and more and more. I’ll stop there, even though the Gov’t isn’t stopping their spending! And just like I used to bang on consumers for spending more than they made… The U.S. Gov’t continues to do so… Consumers have gone to saving (YAY!), but the Gov’t has not! As we all found out, you can’t continue to spend more than you make forever… I wonder when the Gov’t will figure this out… (probably when foreigners say “no mas” on financing the deficit spending!)

Well… The currencies, like I said at the top, remain in a very tight trading range… Three currencies stick out above the others though in the overnight trading…
1. Mexican pesos… Moodys affirmed Mexico’s credit rating, which was thought might be revised lower, and the peso rallied on the news…
2. Canadian dollars/ loonies… After a day of consolidation trades due to the Central Bank Gov. once again threatening the markets if they take the loonie higher, the loonie went higher! Look for the Bank of Canada (BOC) to come out and make a statement, something to the tune of they are going to extend their interest rate pledge for a longer period. They will do this to once again attempt to keep a lid on the loonie…
3. Brazilian real… Oh brother! Somebody put a leash on this puppy! The real continues to edge higher and higher, and now is close to move past the 1.80 level.. The real has posted a better than 27% gain VS the dollar this year, with most of that move coming in the past 3 months!

Yesterday, there was a story in China Daily, that China was going to switch from Australian Iron Ore to Brazilian Iron Ore… Now… On the outside this looks bad for A$’s and good fro reals, right? Well… As I told the boys and girls on the trading desk yesterday, I think this is more posturing by China, after some of their businessmen were arrested in Australia and charged with espionage. We’ll have to keep an eye on this, to see if there’s more to this than posturing…

The news didn’t hurt the A$ yesterday… In fact the A$ is trading near a 10-month high this morning, after posting a surprising jobs report for July last night… Australian employers added jobs in July. Once again, the jobs markets sparks the A$ higher, just like in the go-go days before the deleveraging meltdown last year.

I’ll tell you what this report does do more than anything… It gives the markets the idea that the Reserve Bank of Australia (RBA) is definitely on track to raise interest rates next year… And some traders are now thinking that the RBA moves rates higher before we turn the calendar page on 2009! WOW! Now that’s aggressive thinking! So, you can see why the A$ took the news in China Daily, and let it roll off its back like water on a duck’s back!

In the U.S. yesterday… The ISM Index for Services (non-manufacturing) printed, and fell unexpectedly in July… The ISM Services Index printed at 46.4 following the prior month’s 47.0 reading. The weakening was broad-based amongst the sub-indices. New orders declined to 48.1 from 48.6, business activity fell to 46.1 from 49.8 and employment softened to 41.5 from 43.4.

But… To offset the ISM we saw Factory Orders rise, but that data was for June… I really don’t understand why it takes two months to get data like this to the markets!

Today, we’ll see the Weekly Initial Jobless Claims, which have fallen below 600,000 each week, but remain very high at 580,000, so nothing to get the “recovery is here campers” all excited… Today’s report is just an appetizer for tomorrow’s Big Jobs Jamboree…

Economists are expected a HUGE drop in the jobs lost figure for July, dropping to 327,000 from June’s 467,000 (after BLS adjustments, of course!) I really don’t know where they think the jobs came from, but if they’re right, then good for the U.S. worker! And, that kind of number, although it will seem strange to say this, and for you to hear it when you read it, but… A good Jobs Jamboree number will be negative for the dollar…

Why? Because… As I’ve been telling you over and over again, like a broken record, or for you youngsters, a scratched CD… The dollar was a safe haven last fall and winter with U.S. Treasury purchases… As the losses mount on those “safe haven” purchases of Treasuries, and things begin to look brighter those “safe haven” trades are reversed, and than means the dollar gets sold…

You know for some time now I’ve written about the Treasury Bubble popping… And those darn Fed Reserve purchases of Treasuries kept a lid on the losses mounting… But, it appears that the cartel, I mean Fed Reserve has backed off their purchases… And Treasury yields are once again on the rise… And for those of you new to bonds, they work like this… As a bond’s yield goes up, the price goes down, and vice versa… So… In January this year, the 10-yr Treasury yield was 2%… In June it reached 3.80%, then the cartel, I mean Fed Reserve bought Treasuries, and the yield on the 10-yr fell to 3.12%… But in the past three weeks, those yields have risen once again to 3.73%… Looks like the Bubble popping is once again on the table, eh?

You’ve got the U.S. issuing more and more Treasuries to finance their deficit spending, and on the other side you’ve got Treasury holders unloading them on the markets… That looks like a perfect storm brewing, folks…

The Bank of England (BOE) and The European Central Bank (ECB) are meeting as I write… Don’t expect anything earth shattering from either meeting… There is hope that the BOE will announce an end to their Quantitative Easing (QE), which I talked about yesterday. Now that would be earth shattering, but… There’s no guarantee that the BOE sees things the way the markets want them to be seen!

Gold backed off yesterday as it saw profit taking. The shiny metal had traded over $670 yesterday before seeing the profit taking. I would think that the inflation hedging buying of Gold would really be strong for the remainder of this year, as my inflation fears really begin to grow stronger every day, you know I’m alright now… HA!

Currencies today 8/6/09: A$ .8410, kiwi .6705, C$ .9320, euro 1.4390, sterling 1.6975, Swiss .94, rand 8.05, krone 6.02, SEK 7.1350, forint 187, zloty 2.8825, koruna 18.04, yen 95.50, sing 1.4350, HKD 7.75, INR 47.73, China 6.8312, pesos 13.04, BRL 1.8130, dollar index 77.79, Oil $71.56, 10-year 3.73%, Silver $14.69, and Gold… $961.05

Chuck Butler

Source: Spending More than We (the U.S.) Make…

After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world’s largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar.

Since that time, the global economic outlook – especially beyond U.S. borders – has improved, and gold prices have stabilized.

The next step – many gold bulls say – is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce – down substantially from early 2008 when prices hit a record-high $1033.90, but significantly higher than the $712.30 an ounce it was trading at in mid-November.

Then, when talk of inflation resurfaced in February, and later in April, prices surged well over $900 an ounce, again testing the $1,000 level. Gold prices hit $983 in early June – a 38% jump from their November low.

Gold prices have since lost some of that momentum, dropping back down to $940 an ounce, but many analysts believe this is where gold will find support before eventually shooting back to $1,000 – and possibly even higher – by the end of the year.

There are many reasons to believe that gold is poised for such a strong showing: Supply of newly mined gold is dwindling, fresh discoveries of deposits are on the wane, and demand has remained strong.

But the biggest reason analysts believe gold will rebound to its 2008 apex is that the medium and long-term outlook for dollar is rapidly darkening.

Government Support for Gold

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that’s spiraling out of control, the dollar is extremely vulnerable.

The Federal Reserve has lowered its benchmark Federal Funds rate to a range 0%-0.25% and has said it will remain there for “an extended period.”

The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds.

“In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base,” said Money Morning Contributing Editor Peter Krauth. “That can only lead to serious inflation, perhapseven hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace.”

In addition to the Fed’s action, the United States’ spiraling debt poses a significant threat to the dollar’s value, as well.

Federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to theCongressional Budget Office (CBO).

The CBO projects the U.S. budget shortfall will reach at least $1.85 trillion – equivalent to 13% of the nation’s gross domestic product (GDP), a level not seen since World War II – in fiscal 2009. And if the economy doesn’t rebound soon, that number will very likely top $2 trillion by the end of September.

The CBO anticipates the deficit will shrink to about $1.4 trillion in fiscal 2010 and $1 trillion in fiscal 2011, if the economy continues to stagnate, there is a good chance that those budget shortfalls will be even greater than the fiscal 2009 deficit.

Some of U.S. President Barack Obama’s advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be in the cards.

Laura Tyson, former chair of the U.S. President’s Council of Economic Advisers during the Clinton administration and current advisor to President Obama, said July 6 that the $787 billion stimulus passed in February was “a bit too small,” and that more may be required.

But if another stimulus is needed, how exactly does Washington plan on financing it?

While the government has continued to find buyers for its Treasuries, the question being asked by analysts is at what point will investors start to balk at continuing to finance the American expenditures.

China – the largest holder of U.S. debt – is already losing its appetite for U.S. Treasuries. In fact, the world’s fastest growing economy has already admitted to stocking up on gold to hedge against the dwindling value of its dollar holdings.

With the Dollar Diving, China Turns to Gold

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March.  That stands in stark contrast to the Treasury market of two years ago, when China’s demand for U.S. securities actually exceeded the United States’ own borrowing needs.

Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes – those that mature in a year or less – while at the same time unwinding its position in Treasuries with longer maturities.

“They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JPMorgan & Co. (NYSE:JPM) analyst Frank Gong told The Associated Press. “Inside China, there has been a lot of debate about whether they should continue to buy Treasuries.”
As Money Morningreported in June, Treasury Secretary Timothy F. Geithner traveled to Chinato reassure the nation about the value of its holdings. But not everyone was convinced.

“I worry about details,” said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Dailynewspaper. “We will be watching you very carefully.”

Prior to Geithner’s visit, Yu told Bloomberg News that he was hopeful for details on the U.S. plan to support the dollar. He also warned that despite its sizeable commitment to U.S. debt, China has other options.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds,’” said Yu. “The euro is an alternative. And there are lots of raw materials we can still buy.”

One such raw material is gold. China recently announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years.

“Gold is shifting back from a sovereign reserve asset central banks were inclined to underplay to one of growing, strategic interest,” said Trevor Keeley, global head of sovereign client services at the Anglo-Swiss bank UBS AG (NYSE: UBS). “This shift is logical; gold remains the world’s primary financial asset that is no one’s liability.”

And China’s not the only one loading up on the yellow metal.

Whether it’s through exchange traded funds (ETFs), or acquiring actual gold bullion, investor demand for gold continues to soar.

Individuals’ bullion purchases almost doubled last year to 862 metric tons, The Wall Street Journal reported. And while gold buying by investors has fallen from its 2008 peak, the volume still remains historically high. The 130 metric tons of gold purchased in the first quarter of 2009 is 50% higher than this decade’s average quarterly volume.

Of course, bullion isn’t the most practical way to get in on gold’s pending surge.

How to Stock Up on Gold

One way to stock up is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE:GLD). Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion.

The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

Buying stakes in gold miners is an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index(HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Source: With Inflation on the Horizon, Gold Prices are Ready to Rally

When I left the country in 2006, the place was awash with excess – property developers ferried themselves around in helicopters, private bars served €20 cocktails, the roads were full of top-of-the-range BMWs, Mercedes and Aston Martins. Now the bubble has burst and the Irish are baying for blood.

Ireland’s fall from grace was nothing if not spectacular. According to The Economist, the economy probably shrank by 2.5% in 2008 and may contract by another 6.5% this year. Unemployment has jumped from 5% to 10.4%, faster than America’s decline. Meanwhile, Irish banks are blighted by souring property loans. And a crisis in public finances has forced the government to add an extra income tax levy on all its citizens to plug a hole in the public finances.

Of course, all this is putting huge pressure on Irish sovereign debt. The yield on Ireland’s ten-year government bonds, at about 6%, is way above that of Germany, at about 3.2%. And the state has gone even further than the US in guaranteeing banks’ toxic debts worth two to three times annual GDP. According to Goldman Sachs, total losses could reach $27 billion, or 10% of GDP.

The federal budget deficit is expected to be $1.8 trillion this year. That is $6,000 for every man, woman and child. Does anyone think this living beyond our means is money well spent? Sent your comments, thoughts and rants to info@contrarianprofits.com.

“Investors, showing no sign of concern about the outlook, took the GDP report at face value and pushed stocks up sharply on the news,” ran another breathless piece of editorial, following data that showed U.S. GDP up 3.3% in the second quarter.

But as Addison Wiggan and Ian Mathias pointed out yesterday in Agora Financial’s 5. Min Forecast, the government’s stimulus check program and a weaker dollar were partly responsible…

Government stimulus checks helped boost second-quarter GDP up 3.3%. That’s nearly double the Commerce Department’s initial projection. A weak dollar also helped U.S. exports rise. They’re up 13%… 4 points higher than the expected 9%.

And for every bit of good news, says the 5, there’s a litany of scary data close behind…

Bankruptcy filings, for example, were up 29% in June, year over year. Total filings for the 12-month period rang in just under 1 million.

And here’s a curious bit of data for both Buffett and Greenspan, champions of the “American productivity” school of euphorinomics: Between 2000-2007, U.S. worker productivity increased 18%, but salaries declined, on average, $2,000.

Despite producing an average of 2.5% more geegaws each year, the median inflation-adjusted family has fallen over the past seven years, from $58,000 to $56,000. “It’s a compelling example of a large disconnect,” says Jared Bernstein of the Economic Policy Institute. “Americans aren’t being rewarded for their productivity.”

And as Strategic Investment editor Dan Amoss said in an earlier post about bond king Bill Gross’s plea to Barack Obama to boost the budget deficit to $1 trillion, GDP figures are not necessarily a foolproof measure of the health of the economy…

I’ve always been skeptical of GDP as a measure of economic progress. It treats dollars spent and dollars invested equally (a dollar invested adds to capital formation, while a dollar spent subtracts from it). The GDP equation also treats government spending as a good thing. It is not. Aside from spending on the occasional “public good,” it just sucks capital out of the efficient, adaptive private sector and doles it out to politically powerful voting blocks.

For the sake of U.S. stocks, let’s just hope investors keep on taking those GDP figures at “face value.”

Bond king Bill Gross would like to see the budget deficit reach $1 trillion.

Last month, he wrote an open letter to Barack Obama asking him, if he is elected, to save the US economy by upping federal spending by a further $500 billion.

According to Dan Amoss, Gross’s prescription for the economy would do more harm than good. For a start it would cause the price of oil imports to spike…

More from Dan…

In his July 2008 investment outlook, available on PIMCO’s Web site, Gross writes an open letter to Democratic presidential nominee Barack Obama. Presuming Obama will be the next president, Gross urges him to dramatically expand the federal budget deficit until it reaches a trillion dollars. I quote:

“While the Republicans will blame you for years and label you “Trillion-Dollar Obama” in future campaigns, there is, in fact, not much that you or any other president can do. You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender-of-last-resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years.”

The U.S. economy “will need an additional jolt of $500 billion or so of government spending real quick,” pleads Gross. His comically simple formula for GDP, this $500 billion “jolt” to the slowing real economy, is as follows:

“Some quick math for you, sir: Gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C [consumption] + I [gross investment] + G [government spending] formula (scratch the trade deficit for now), when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well, there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so.”

Only a Keynesian could argue that such an extraordinary waste of capital is a good thing. And only a Keynesian would believe that the simple GDP equation could summarize a vastly complex, adaptive economy.

I’ve always been skeptical of GDP as a measure of economic progress. It treats dollars spent and dollars invested equally (a dollar invested adds to capital formation, while a dollar spent subtracts from it). The GDP equation also treats government spending as a good thing. It is not. Aside from spending on the occasional “public good,” it just sucks capital out of the efficient, adaptive private sector and doles it out to politically powerful voting blocks.

Gross’ prescription to “save” the economy through wasteful spending would do much more harm than good. He aptly notes that the U.S. depends on foreigners to continually reinvest U.S. dollars back into the U.S economy and government.

As OPEC knows, many of the dollars recycled back into the U.S. were originally exchanged for oil imports. Gross acknowledges that the U.S. economy has an “energy cost” problem. But what does he think oil exporters’ reaction to an extra $500 billion spending “jolt” will be?

It won’t be pretty. Major oil exporters will demand higher oil prices and higher interest rates to offset what they know will be an ever-growing supply of U.S. dollar assets. Would you invest in an asset if you knew the future supply of that asset were guaranteed to increase at a rapid rate?

I have a more constructive suggestion for the next president:

DON’T dream up creative new ways to suck $500 billion in capital out of the private economy and redirect it into vote-buying programs. DO take a crash course on how the energy supply chain works, and invite Congress. Energy ignorance is the biggest immediate obstacle to the government being part of any sort of solution.

Inflation is here to stay, albeit with occasional “deflation” scares. Adjust your portfolio accordingly.

P.S. The above essay was pulled from the most recent issue of Strategic Investment. For more see here. Dan Amoss, CFA, runs Strategic Short Report and is a contributing editor for Strategic Investment. Dan joined Agora Financial from Investment Counselors of Maryland, investment adviser for one of the top small-cap value mutual funds over the past 15 years.

Source: Welcome to a Trillion-Dollar Deficit, Mr. President