The distortions from reality are mind-boggling, yet all of us depend on the status of the simple fiat for our financial wellbeing.

The person with the most skin in the dollar game is, no doubt, President Obama. The nation’s economy hinges on the fate of the greenback and the White House knows it. That is why it is doing anything it can to slow the slide.

Even if it is entirely psychological.

Today, reports are flowing from Washington that show Obama may have plans to use up to $210 billion in TARP money to lower the nation’s ever-increasing deficit.

It is creative accounting at best and a $210 billion bribe at worst.

While the average Oprah-watching, Crocs-wearing American won’t take a second out of their do-nothing day to read below the feel-good headline, there is a handful of us that are actually paying attention.

With this idea of “paying down our debts,” it is vital to remember the Treasury didn’t pull the $700 billion in TARP funds out of some cavernous account.

We borrowed that cash. And now Obama wants to use the borrowed money to pay back our debts, minus a year’s worth of interest of course. It’s like taking out a loan to pay off your mortgage.

The timing of these rumors is more than suspicious.

Just yesterday, China slapped the currency markets in the rear by once again raising the notion of dumping the dollar and making a sudden change in its exchange-rate policy.

Ironically enough, less than 24 hours later, Obama has a $210 billion check in his hand ready to “repay” our debt.

It is money from one hand, around the back, and into the other.

But it gets better.

Obama is not the only one trying to mask Uncle Sam’s debt problems. Just about every exporting country in the world is desperate to keep the dollar strong.

They have to. Their economies depend on it.

Rumor has it countries like Russia and South Korea have been buying dollars on the open market over the past few weeks, in an effort to keep the greenback’s slide from gaining even more momentum.

The governments would rather risk devaluing their reserves than allow their economies to suffer from the effects of a weak dollar.

Looking forward, the question is how long can the manipulation last? How long can the dollar remain artificially inflated? And how long until the markets naturally take care of the situation?

While we may not know the exact answer to any of those questions, it does not take an economics scholar to realize the outcome will be horrific, at least for those of us with dollars in our pockets.

*** The solution? Buy gold. According to the top dog at Canada’s behemoth gold miner, Barrick, we have every reason to believe we surpassed “peak gold.”

That means all the easy gold has already been stripped from the ground and supplies are only going to shrink from here.

According to the CEO, Aaron Regent, global gold production peaked in 2000 and is expected to continue declining into the foreseeable future. So far, mine production is down by nearly 10%.

The news of increasing supply constraints comes at a time when demand is already surging. For those of you that were under the bleachers during Econ 101, it means prices will continue to rise.

There has been a lot of discussion about a sudden collapse in gold prices as many investors believe the current boom is merely a fear-induced bubble. Two or three months ago, I would have bought the story. But not now.

The dollar is simply too weak and foreign reserves are accumulating gold too quickly for prices to fall sharply.

China’s immense buying alone is enough to limit near-term fallout. The country has already doubled its gold reserves and Beijing continues to be a major buyer.

Just one more reason for bulls to send prices higher.

*** Just so you can’t say I don’t let you in on anything for free, I’m going to toss a freebie your way.

With gold prices reaching into record territory, it is a perfect week for Van Eck to release its Market Vectors Junior Gold Miners ETF (NYSE:GDXJ). The freshly created fund gives investors a stake in 38 small- to mid-sized gold miners.

For investors looking for a simple way to take advantage of the gold bull with some additional leverage, this is the ETF to do it.

Thanks to the speculative nature of junior miners, expect shares to beat the market when gold prices are surging and underperform when the bears return. For now, there is plenty of upside potential.

(Taipan Publishing Group) – Gold, small caps and the U.S. dollar have had a stable three-way relationship for the better part of the 2009 rally. Now the three could be parting ways.

Dr. Marc Faber is one of the few market wise men whose thoughts are worth pondering. His monthly “Gloom, Boom & Doom Report” is always a good read. He is an active, Asia-based investor with decades of experience, hundreds of millions under management, and many prescient calls under his belt.

Faber has stated firmly and clearly what he thinks of the U.S. dollar. As you might expect, his opinion is not too flattering.

In the long run, Faber assigns the buck a value of “zero.” In the manner of all fiat currencies, America’s scrip is slowly being turned into toilet paper. The present cast of clowns in Washington seems bound and determined to accelerate this process as Wall Street cheers them on.

But that’s the long term, mind you. In the shorter term – i.e. for at least the next quarter or so – Faber is bullish on the buck. So bullish, in fact, that he is now on record as a buyer of $USD.

“As of today, I will be long in dollars,” Faber told Bloomberg last week. (Perhaps he is buying from my colleague Adam Lass, who professed on Thursday his intent to remain short.)

Continue reading Justice Litle on Taipan Daily.

Meanwhile, a bankruptcy filing is not certain in the GM restructuring case, and reports that the Obama administration will steer the automaker into bankruptcy as early as this week are premature, Reuters reported on Friday, citing a source familiar with the situation.

Negotiations will likely continue right up to the May 31 deadline, the source said, with the Chrysler LLC case – where the process continued until the deadline – serving as a good comparison.

Magna International Inc. (NYSE: MGA) appeared to gain the early edge Friday in the race to buy Opel, surpassing rival bidders Fiat S.p.A. (OTC: FIATY) and RHJ International Inc. (PINK: RHJIF).

German officials said they were leaning toward the offer submitted by the Magna, a Canadian car parts group, because its plan would leave open four manufacturing plants located in the country.

With Federal elections looming in September, any merger plan containing the possibility of massive job losses would appear to be dead on arrival.

A German government official, who preferred to remain anonymous, said the Magna offer was gaining significant support in Berlin.

“There is a rather clear preference for Magna’s offer emerging within the government,” the official told Reuters.

GM will make the final decision on who ultimately prevails in the battle for Opel, but the German government will have a say because it is seen as the likely source of financing guarantees for the eventual winner.

Even though the Chinese automaker submitted a letter expressing interest in purchasing Opel a day after the May 20 deadline for bids, a concrete offer may not be forthcoming, Bloomberg News reported, citing people familiar with the matter.

“The risks are huge” for a potential Chinese bidder, Yu Bing, an analyst at Ping An Securities in Shanghai told Bloomberg. “Chinese carmakers aren’t big or experienced enough and lack the technology and management skills to buy something like Opel.”

According to GM, Opel needs $4.6 billion (3.3 billion euros) in new government financing to survive, Bloomberg reported. The carmaker is selling a majority stake in its European operations while preparing for a probable government-forced June 1 bankruptcy.

The Magna and RHJ bids include cash, while Fiat’s calls for $9.8 billion (7 billion euros) of financing, Bloomberg’s sources said. Fiat’s bid is two-pronged: It contains an offer for the Opel and Vauxhall units, and alternatively offers to also buy GM’s operations in Brazil and Argentina.

Fiat Chief Executive Officer Sergio Marchionne aims to create the world’s second-largest car company, second only to Toyota Motor Corp (ADR NYSE: TM), by combining Fiat and Opel with Chrysler and GM Europe and possibly GM’s Latin American operations.

Magna’s primary interest in Opel centers around increasing sales in Russia to about 1 million units, GM Europe CEO Carl Peter Forster said last week in a Bloomberg interview.

Opel, which is headquartered in Ruesselsheim, near Frankfurt, and traces its roots in Germany back to the 19th century, has manufacturing facilities in St. Petersburg and Uzbekistan, which could accelerate growth in the two countries.

Magna’s plan has also gained favor because it will keep the existing European management team in place.

Source: Chinese Express Interest in Opel, GM Bankruptcy Still “Not Certain”

This from the BBC:

Germany’s economy minister has said the government couldn’t afford to spend all the money required to save every threatened job at carmaker Opel.

With Fiat continuing talks to buy Opel from General Motors, the Italian firm has already warned that one Opel plant in Germany will likely close.

Fiat wants loan guarantees from the German government to secure the deal.

Karl-Theodor zu Guttenberg said the government “had an obligation to deal responsibly with taxpayer’s money”.

Arriba! Cinco de Mayo heralds big news for the S&P 500 this morning:

After a manic 36% bounce from its March lows, the S&P 500 has turned positive for the year. It’s now sitting on a whopping 0.4% gain, thank you very much.

But before you down the Cuervo Gold and shimmy onto the parquet for a hat dance… consider this:
The resurgence in S&P 500 is being driven by only three sectors: Consumer discretionary, materials and tech. See for yourself.

It’s hard to believe in “bull market” when two-thirds of the players are in the red.

We’re taking a closer look at tech, but for the time being — as if you need another reason to turn off CNBC — health care, utilities and consumer staples, the classic refuges for mainstream money managers, aren’t such good choices during this sucker’s rally.
“Buffett thinks his utilities and insurance businesses will do ‘quite well’ despite the recession,” says Chris Mayer, recapping Berkshire Hathaway’s annual shareholder meeting.

“Berkshire has its fingers in many different businesses, so Buffett has an eye into many parts of the economy. Buffett was mostly gloomy. Aside from utilities and insurance, he saw weakness in service and manufacturing and his other lines.

“Also interesting was a comment that he was looking more in the U.S. now than overseas. Last year, Buffett seemed to be devoting more energy abroad — I recall a trip to Germany, for instance. Now Buffett seems to find the U.S. situation more interesting.

“One other note: Buffett may not see much in manufacturing, but I’d say it is a wide spectrum. In Capital & Crisis, for instance, we own a few manufacturers in key areas of water, infrastructure and energy. They’ve turned in great results. But Buffett doesn’t see these, as they are too small for his radar screen. Too bad for him. Big advantage for us.”

In fact, Chris booked a 117% gain on just such a stock yesterday, in less than five months. Special Situations readers could have taken another 30% yesterday too, if they were following Chris’ advice. How did you do? If you’re not privy, become so here.
Stocks soared again yesterday, thanks mostly to another batch of “less awful” data. Traders started to rush in after construction spending and pending home sales data hit the tape at 10 o’clock. Both were way better than expected: Construction spending rose 0.3%, after a 1% drop in February, and pending home sales rose for the second straight month.

Of course, historically speaking, both measures are still in the dumps. But better to buy first and ask questions later… major indexes jumped 2.5-3%.
Markets are more timid today. The Dow is down about 20 points as we write — we suspect profit taking. And…
“Right now, the credit markets are broadcasting the following warning,” says Dan Amoss. “The equity of overleveraged REITs is at risk of elimination or permanent impairment. Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount a ‘garden-variety’ recession in commercial real estate.

“REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.

“REITs thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess capital during lean times. Since REITs pay out all their earnings, they cannot grow without taking on more debt. During the boom, a REIT strategy encompassing growth, leverage, and acquisitions was a virtuous cycle that led to juicy dividends and soaring stocks; in this bust, it’s morphed into a vicious cycle of dividend cuts, dilutive equity offerings, debt offerings at double-digit interest rates and bankruptcies.

“The REITs that levered up and grew too fast at the peak will go to zero in bankruptcy. Others could fall into the low single digits by year-end as the market anticipates that creditors will take title to many properties in 2009 and 2010. These developments would push the value of the REIT Index dramatically lower.”

Following that logic, Dan just handed his Strategic Short Report readers a short-REIT play with “200% profit potential.” Thanks to yesterday’s rally, it looks a whole lot juicier today… details here.
“I don’t know what in all honesty,” White House Press Secretary Robert Gibbs “government can do about it,” highlighting another industry ripe for short selling: flailing newspapers.

Of course, Gibbs assured us President Obama “believes there has to be a strong free press,” but it seems that any hope of a GM-sized bailout check from Uncle Sam was informally squashed yesterday. Alas, papers like The New York Times and McClatchy have borrowed just enough money to go out of business, but not enough to pose the all-so-critical “systemic risk” to the U.S. economy.

Only magnificent failure is rewarded in I.O.U.S.A.
Ten of the 19 banks undergoing government stress tests are going to have to raise capital… that’s the word from The Wall Street Journal this morning. Wells Fargo has now joined Citi and Bank of America on the unnofficial list of banks rumored to have been naughty.

No one will really know for sure until Thursday, when the government has promised to release results. But seriously, who’s cereberally challenged enough to believe this charade anyway?
The mighty greenback is looking knock-kneed and feeble as stocks soar. The dollar index dropped a full point, to 83.8, during yesterday’s rally. That’s a one-month low and nearly 6 points off its credit crisis high.

The dollar swing has given the euro a 2 cent shot in the arm, too. It’s up to $1.34 as we write. The pound followed suit, rising from $1.48 to $1.51 in less than 24 hours. Only the yen held pretty steady… around 98.
Gold likes it when the dollar sucks air. The spot price climbed $15 yesterday and another $10 this morning, bringing the current price up around $915 and ounce. Work it.
Oil has also been enjoying the stock rally, too. The light sweet stuff edged up higher again yesterday, this time to a 2009 high of $54.47 a barrel.
Quietly, gas has been inching back up to levels of concern. The national average price for a gallon of the cheap stuff is now solidly above two bucks… $2.07, to be exact.

Although compared to the average price this time last year — $3.61 — who’s complaining?
A bankruptcy judge OKed Chrysler’s request to tap a $4.5 billion government loan yesterday, even though holders of their senior secured debt have yet to be repaid.

Investors and funds are filing motions left and right to stop the transfer of any assets to Chrysler… at least until the company ponies up $6.9 billion in assets to cover their debt obligations.

We doubt those “evil Wall Streeters” will get their way, but… oy… this thing is already a mess.

“The gurus in Washington say that the Chrysler bankruptcy is prepackaged,” writes Byron King. “And it’s going to be fast and easy. Yeah, right. Beware hubris. Like the previous administration thought that the Iraq war was going to be fast and easy.

“I used to practice bankruptcy law. Is there a courtroom anywhere in this land that’s big enough to hold all the players in a Chrysler bankruptcy? It’s the first ‘big’ automobile bankruptcy in the U.S. since Studebaker in 1933. There’s no recipe book for doing this.

“The judge in the case might just have to book Madison Square Garden to have enough space for all the participants. And everyone is entitled to their day in court. Considering the tens of billions of dollars in play, I expect we’ll see many days in court, up to and including the U.S. Supreme Court. That should take only a few years.”

But at least you’ll be able to drive one of these afterward:

The Fiat 500: Not Currently Available Near You

“After researching, over the past 10 years, the different venues of alt energy,” writes a reader, “I have invested what I can in geothermal. There is no other source that runs 24/7, has zero ecology damage and zero carbon footprint, is available virtually under every rock and is economically less expensive than any other source. We don’t have to wait for the sun, wind or enough uranium to be mined. Oh! We don’t have to figure out how to bury the byproduct in somebody else’s backyard (NISEBY).

“It is such a no-brainer that considering any other way must mean that there are serious politics involved. Maybe the wrong people will make the money. The difference in costs could go to solving the problems raised in I.O.U.S.A. Do you suppose that Big Oil would find it a problem if the grid were run on geo? It can be done.”

The 5: We suppose they’d be annoyed, but as an investor, why choose one or the other? Byron’s Energy & Scarcity Investor has strong plays in both oil and geothermal… check it out, here.
“So what if Byron King is right,” writes a reader, “that China now controls the ‘rare earth metals’ that are integral to the manufacture of guided ballistic missiles (and all the other knickknacks that we don’t really need — and some we probably do).

“I’d rather have the Chinese control them than the delusional, slobbering cowboys in our military. Maybe they’ll do something with these metals other than design weapons whose purpose is the wholesale slaughter of human beings. Besides, what are they going to do with them? Eat them? Of course not. They’ll sell them on the world market at market price and we can go on happily making new bombs, which, it seems, is the only thing we are really good at.”

The 5: Heh. You have a good point there.
“Hey, 5,” writes the last, “thanks for the ‘tip o’ the mug’ to Red Emma’s. In this day of lunatics and liars, Red Emma’s gives us a break, helps keeps us grounded. Not enough of that around these days.”

The 5: Best coffee (and transgender anarchist poetry selection) in Baltimore.

Source: Market Comeback, Sector to Short, Berkshire Meeting, Investing in Swine Flu and More!

There are, as I understand it, police reports that people two freaking blocks away dialed 911 in a panic because they heard my screaming and crying in terror when I saw what was going on in the banks and at the Federal Reserve.

First off, Total Fed Credit was up about $5 billion last week, which is, in the parlance, “goodly sized!”, which makes me howl in dismay because this is the ultimate source of fiat money! Total Fed Credit is the legendary stuff from which fiat money springs… From the bowels of the banks, in whose bowels this credit first appeared (thanks to the Fed depositing it there from their bowels!), and which was turned into some multiple of this $5 billion credit when someone borrowed some huge, unbelievable multiple (fractional reserve banking at its finest!) of this $5 billion increase in TFC from the aforementioned banks.

That is the situation in a nutshell, and if you are suddenly cold with fear and you feel a scream of terror rising in your chest at the obvious fraud, then congratulations! This means that you are achieving Total Mogambo Enlightenment (TME), which means you now understand the significance of the seeming overuse of the word “bowels” in the preceding paragraph, and now you are appropriately disgusted at the repellent true nature of fiat money.

One of the benefits of TME is that there are no real bowels involved at all (unlike when raising children or pets), nor any fees or dues to pay, except for the price of your very soul and sanity, because now you begin to comprehend the terrifying enormity of what happens to a country so completely idiotic that they ignore their own Constitution’s Article 1, Section 10 requirement that only silver and gold coin can be made a tender in payment of debt, and instead, use the One Damned Thing (ODT) that the Founding Fathers and everybody else feared above all others, namely a fiat currency!

A damned silly piece of paper or electronic fluff that can be increased, without limit, at the mere caprice of an authority figure, which is the ODT we didn’t want because this inevitable increase in the supply of fiat money leads to increases in prices, and history is FULL of the ugliness of what happens when people can no longer afford food because their money is rendered worthless! It’s a killer-diller!

As the solid foundation of your True Mogambo Enlightenment (TME), you have the fact that not once in the 4,000-year history of man and money has this “fiat money” crap NOT led to total ruination. Not once. Not even close.

And then, as your TME skills grow and develop, you will become evermore horrified, evermore paranoid, evermore suspicious and hateful, when you read things like how the Non-Borrowed Reserves in the banks hit a new record in disgusting banking infamy; they now have to report a staggering negative $111.8 billion in Non-Borrowed Reserves!

The brain explodes; “What? Total Reserves in the banks are the same lousy $42 billion that they have always laughably been for the freaking last decade or so, but now Non-Borrowed Reserves are a negative $111.8 billion? Gaaaahhhh! It makes no sense! Don’t make me crap in my pants out of horror!”

Of course, it will just keep getting weirder, and you will crap in your pants at the horror of the economic mistakes being made, and your TME skills will grow stronger until one day you find yourself gobbling heart medication by the handful at the mere sight of a fact like, well, how last week the Fed itself sold another $17 billion of its stash of government debt.

Interestingly, the Federal Reserve has now sold over one-third of its stash, taking their remaining stranglehold on us, through our money, down to $502 billion, waaAAAaaaay off from the $790 billion they had in August, 2007, and even down from their $713 billion in March, just two months ago! Panic mode!

And as you quickly blossom into a full-fledged Junior Mogambo Ranger (JMR) after about two minutes of TME, you will be outraged and personally insulted that only you, of all the people around you – people that you now regard with contempt and loathing – see the awful significance of how inflation in prices is the thing that is going to destroy this country, which it will because the demonic Alan Greenspan and the Fed has destroyed our country by creating so much money and credit for so many, many years, which produced, first, inflation in the prices of stocks and the prices of bonds, which everyone loved, and then inflation in the size of government, which everyone loved, then inflation in the prices of houses, which everyone loved, and now inflation in commodities like food and energy, which nobody loves, and now nobody likes you because you remind them of me, and they all hate me, and I hate them back because they are stupid and they elected people to Congress who have destroyed us.

And though you will, thanks to the True Mogambo Enlightenment (TME) side of you, foresee many, many horrors that will inflict the dollar, and thus the country, and be sorely afraid, you will also know that the answer to your own financial salvation, and verily the salvation of a country, is to own gold. And you will.

It’s the Greedy Mogambo Side (GMS) of you that makes you think that the only thing better than financial salvation is having lots and lots of financial salvation, and that path lies in owning lots and lots of gold and silver. Me, too! Whee!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

Source: Fiat Ruination