At this level, gold isn’t overly dramatic. We haven’t seen any really big moves one way or the other. The big moves will happen, eventually, I believe. We just have to be patient.

Why do I believe that gold will soar? Well, we’re still in the early chapters of the overall “gold story.” The plot is still forming, although I believe that all of the main characters are on stage.

We have excessive U.S. government spending. It’s out of control, to all intents and purposes. We have the deepening federal deficit, and associated exploding national debt. We have significant monetary players overseas, like Japan and China and Middle Eastern nations, holding trillions of dollars worth of U.S. bonds and other paper — and getting nervous about it. We have a hollowed-out North American economy that’s turned into what historian Charles Maier calls an “empire of consumption.”

Then we also have the utter incompetence and hubris of upper-level U.S. politicians and policymakers. They’re collectively so out of touch that they don’t even know that they’re out of touch. We have the parallel incompetence of the Big Media, with their overall “infotainment” approach to presenting vital news to the American people.

Where’s the tragic theme? There’s this sense of denial that anything really bad can possibly happen. It’s the monetary equivalent of a Dec. 6 or Sept. 10 kind of thinking. It’s a failure of imagination at the highest levels.

And whatever does happen, there’s this attitude that the U.S. can add complexity to the system and “spend its way” out of anything. Big government? Sure, and let’s make it bigger. (Hey, let’s have the government take over health care while we’re at it.) Stimulus? Go for it. Bail out Wall Street? Of course — aren’t they too big to fail? Cap and trade, and thus cripple the U.S. energy economy? Yep, we’ll just “conserve” more energy and build lots of windmills. Right?

It’s just spend, spend, spend, spend, spend. Or control, control, control, control, control. And bureaucratize, bureaucratize, bureaucratize, bureaucratize, bureaucratize. Modern governance is all about spending money we don’t have on complexity that we, as a society, cannot afford in any sense of the word. And few of the power brokers at the top seem to think that there’s anything wrong with it. They’ll just pass another law, spend some more money.

The tragic part of this drama is that the high and mighty are setting themselves — and the U.S. economy — up for a terrible fall. Sooner or later, with all the spending and new bureaucracy, we’re going to have an implosion and see a collapse in the level of complexity. Those green “notes” that the Federal Reserve prints — with the nice pictures of dead presidents on them — will not be worth nearly what most people believe.

Neither you nor I can do anything to prevent it. (OK, write to your congressman, for all the good it’ll do. Or go to a town hall meeting, for all the good it’ll do.)

The answer, of course, is to protect yourself and your family, and save what you can. When the mighty tumble, be sure not to be standing there in the crash zone.

Source: My Favorite “Mistake”

That prospect has kept the gold bugs banging the drum to buy the metal, with the television and radio cluttered with ads that tout the benefit of doing so.

Last week, Lou Basenese noted the numerous reasons why the price of gold should be moving higher – but countered with the reasons why the price has continued to languish around $935.

Today, I’m going to look at another important factor that drives gold prices…

The Dollar-Gold-Inflation Relationship

While the recent rash of government spending hasn’t propelled gold prices to new highs, it has contributed to a decline in U.S. dollar.

Having reached a hit 89.70 less than two months after President Obama took office, the Dollar Index has since pulled back to around the 80.00 level. It could easily be lower, but because it’s measured against a basket of other currencies, the price is relative.

For example, the euro makes up about 60% of the Dollar Index weighting, since there are 16 nations using Europe’s single currency. And because Europe is also battling fiscal problems, in addition to Japan and Britain (whose currencies are also weighed against the dollar), the greenback has held its ground.

Most of the time, a weaker dollar will cause gold prices to rise, while a stronger dollar usually sees gold decline.

Add in the prospect of inflation (or hyper-inflation) at some point and the scene is set for gold to potentially make new, all-time highs.

Except we’re not even close to that point yet. Inflation is nowhere to be found – as evidenced by the Consumer Price Index falling by 1.3% in the 12 months through May. That was the largest drop in 50 years.

So how do we play gold in the short-term?

Don’t Blindly Follow The Crowd Into Gold

The main reason why the gold market concerns me at the moment is that despite almost everyone being bullish, the metal hasn’t been able to set new highs.

The long side is crowded with bulls, just like the technology sector was back in 1999. And we all know how that turned out.

That said, the gold market is much different than the tech sector. I believe every investor should have some gold or another precious metal in his or her portfolio… but there’s a better way to do it than by simply buying it outright at the moment.

The easiest way to do so is by following this ratio…

Use The Gold/Silver Ratio To Make Your Gold And Silver Purchases

In the selloff that began in March 2008, gold prices fell about 34% from high to low. By contrast, silver prices fell 60%.

This relationship is important because by the time the market set lows in October 2008, the gold/silver ratio(how many ounces of silver it takes to buy an ounce of gold) was trading at 81:1 – an extremely high level.

A ratio of 80:1 is considered high, while and 40:1 is considered low.

From the October lows to the recent highs, the gold/silver ratio has corrected itself, with silver more than doubling (and making new recovery highs in June), while gold has risen just 49%. However, the ratio remains around 69:1.

Here’s how to use the gold/silver ratio to make savvy metals purchases…

How The Gold/Silver Ratio Works

Investors who always keep a percentage of their assets in precious metals should keep a close eye on the gold/silver ratio.

Having a “ratio” position is a strategy that you want to adhere to all the time because it’s such a dependable trade and carries less risk than just being long, or short on the metals.

It works by basically timing your gold and silver purchases according to the ratio. For example, when the ratio is relatively high (as it is now, at 69:1), we swap gold for silver. When the ratio is relatively low, we buy back into gold.

So right now, the 69:1 ratio is too high to buy gold. I’m looking to make my next swap from silver back into gold when the ratio drops to around 40:1.

Personally, each time I cycle through a complete swap – gold to silver and back to gold again – I increase the value of the trade and hold more ounces of gold or silver than I started with.

Go The ETF Route With The Gold/Silver Ratio

If you don’t always have a percentage of your portfolio in precious metals, you can simply play the “ratio” using the SPDR Gold Shares (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).

When the ratio is high, you can short GLD while buying SLV, using the same dollar amount for both positions. When the ratio approaches 40:1, just reverse the positions.

Source: Use This Reliable Ratio To Time Your Gold And Silver Purchases

“These are some of the worst numbers we have ever seen,” said Scott Pattison over the weekend.

Who is Mr. Pattison? Not a man you should know, but certainly one worth listening to: He’s the head of National Association of State Budget Officers, and he’s rightfully freaked out.

The fiscal year will close in about two weeks for all but four states — New York, Texas, Michigan and Alabama. The 46 others have until midnight June 30 to figure out how to wrangle the $121 billion budget gap coming due over the next fiscal year. That task is so daunting, states have stopped increasing spending for the first time since the S&L crisis in 1983:

Cutting state government spending by a whole 2.2% certainly won’t save our states. Personal income tax revenues are down 6.6% and cooperate tax revenues have fallen 15.2%. The proposed $24 billion in new state taxes and fees for the fiscal year 2010 won’t even cover a quarter of the projected shortfall — a projection, we hasten to add, that’s counting on the recession to bottom sometime in the current calendar year.

We’ll keep an eye on this crisis yet to be. In the meantime, watch for some bizarre budget tricks. Proposals in various states include: Furloughs, pay cuts, park closures, early prisoner release (seriously), benefit cuts and odd new taxes (Kentucky is looking into taxing the purchase of cell phone ring tones.)

California, the state in the most fiscal hot water, is in danger of a “multinotch” credit downgrade, Moody’s warned late Friday. The ratings agency, oddly still relevant, says that “if the [California] legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most nonpriority payments in July.”

If the Golden State can’t mend its budget woes, Moody’s is threatening a credit downgrade of at least two notches. California is already rated A2, Moody’s sixth highest grade and the worst of any U.S. state. A2 is also just five notches from “junk” status.

If California were a country, it would be the 10th largest economy in the world… and almost a junk bond? Scary.

The global economy will shrink 2.9% this year, forecasts World Bank today. “The global recession has deepened,” read a report from the group, which revised its March projection of a 1.8% global contraction.

(For a detailed look into this report, check out Joel Bowman’s sarcastic synopsis in today’s Rude Awakening.)

“Energy consumption from non-OECD countries has passed OECD countries for the first time ever,” reports Chris Mayer, with BP’s latest Statistical Review of World Energy report in hand. “OECD stands for the Organization for Economic Cooperation and Development. There are 30 members. Essentially, it is a group of “Western” countries, including the U.S and U.K., along with several other European countries.

“Non-OECD countries include everyone else — most notably, China, India, Russia and Brazil. So you can look at the OECD broadly as developed countries versus the developing countries of the non-OECD.

“The Asia-Pacific region alone accounted for 87% of consumption growth. China by itself accounted for 75% of the increase. Even through the economic bust, Chinese demand for oil still rose 7% in 2008.

“My guess is that these lines won’t ever cross again, unless the membership of the OECD shifts. The world has changed in a fundamental way. The focus is east, not west.”
The price of oil is backing down a bit today, along with just about every other commodity. Barrels of light sweet crude are down to $67 a pop as we write. News like you’ve read above has taken its toll on the whole “global rebound” story… copper’s down 3% today. Aluminum’s fallen 4%.
Gold’s under pressure today too. The spot price is down $15, to $920 an ounce.
But today’s commodity sell-off has also snapped gasoline’s 54-day hot streak. The national average price at the pump rose every day for nearly two straight months, from $2.05 a gallon at the end of April to $2.69 this morning. That’s down 3/10ths of one cent from yesterday… whoppededoo!
Stocks are in trouble today as well. The S&P 500 opened down about 1.5% this morning, as the same commodity-oriented companies that led the last leg up are now heading back down.

“Equity investors,” writes Rob Parenteau, “appeared to have recognized that rising interest rates and commodity prices might pose some challenges to the trajectory of any economic recovery they have begun to anticipate over the past few months. We have been discussing this feedback loop for several weeks now, as massive Treasury issuance and a shift in institutional investors toward inflation hedges do pose challenges to the extent they lead to rising input costs and greater consumer discretionary income drains.

“FedEx coming up short on revenues and lowering guidance for the upcoming quarter added some bottom-up confirmation that, green shoots aside, the reality is that the global economy is still struggling to escape a rather severe recession.”
Another bad sign for stocks… insiders at the S&P 500’s 252 companies have been sellers of their stocks at the highest rate since the rebound began. According to insiderscore.com, execs at S&P companies have actually been net sellers for the last 14 straight weeks — as clear a sign as any that insiders have little confidence in the next few quarters.

The site says the ratio of sellers to buyers was around 1-to-1 at the start of the rally. At the end of last week, the ratio was nearly 9-to-1. That’s the highest rate of insider selling on the S&P in two years.
Despite today’s sell-off, Breakthrough Technology Alert readers are sitting pretty. They own shares of Medarex Inc., which is up 17% today after the company announced a successful trial on prostate cancer patients. Basically, the company’s breakthrough treatment allows aggressive, inoperable prostate tumors to be reduced to an operable size.

“Medarex currently has magic bullets,” editor Patrick Cox told readers back in December, “aimed at lupus, hepatitis C, rheumatoid arthritis, Hodgkin’s and non-Hodgkin’s lymphoma, leukemia, lung cancer, kidney cancer, prostate cancer, ulcerative colitis and other diseases… This company, I truly believe, has the potential to join the ranks of legendary earners such as Genentech.”

Breakthrough Technology Alert readers are now up 87% on this pick, thanks to Patrick’s recommendation. Medarex was just one of several stocks he mentioned in his recent special report on the future of medical technology investing… check it out here.
Another Monday, another batch of failed banks. Three bit the dust this weekend, the FDIC announced, taking a $363 million chunk from the regulator’s war chest.

That makes 40 bank failures this year, costing the FDIC over $11.5 billion.
The U.S. dollar is one of very few asset classes on the rise today. When the world sells, it gets dollars in exchange… thus, the dollar index is up about half a point from Friday’s low, to 80.7.
“Friday’s reader comment and Addison’s return shot, ”writes a reader today, “causes me to wonder — which fox is worse? While Greenspan toiled away at the Federal printing presses, Wall Street created funny money of its own. Even recent attempts by ‘Helicopter’ Ben to catch up to the Street’s profligacy have been meager. Though the deficit numbers and acronymic (TARP, TALF) promises are staggering to behold, they pale in comparison with the obligations implied by the notional value of derivatives issued by the investment bankers. Put a number in front of 12 zeroes and hope that your counterparty doesn’t call seemed like an easy way to make money. Having learned nothing about black swans (or even white ones) from the LTC brain trust fiasco, Wall Street and its less well-informed cousins in the insurance business bet scads of money it didn’t have on products it didn’t need (to paraphrase Bill Bonner).

“I don’t believe the government will do a wonderful job of managing risk in the financial marketplace, but it may as well give it a try. It’s obvious now that the average overpaid C-level managers didn’t do very well at it. Since the Feds and, by extension, the public are funding the rescue, shouldn’t we be able to dictate the terms?”

The 5: “The popular narrative,” Dan Amoss inadvertently responds in his latest Strategic Short Report, “is that that the financial crisis was a failure of the free market, but this narrative glosses over the fact that banking is far, far from a free market. Those who describe the banking business as a wild, woolly free market simply do not understand how banks operate — especially how, with government subsidies and backstops giving them the confidence to make insane loans, banks had grown large enough to blow up the entire global economy.

“Last year was less of a failure of free markets than it was the failure of the ‘shadow’ banking system built on a weak foundation: bankers’ lack of connection with the risks they underwrote, government guarantees and tax incentives for mortgages and misapplication of statistics to exotic fixed-income securities, to name just a few things. The shadow banking system could not have grown as large and dangerous as it did without banks’ subsidies from taxpayers and the Fed’s manipulation of the price of money. The Fed’s interest rate targeting creates illusions about default and liquidity risks and distorts the natural relationship between savings and capital investment.

“The banking system shares much in common with the federal government, especially in their common isolation from the discipline of the free market; Free market discipline refers to the fact that if you make mistakes, your customers will let you know about it by leaving, and if you don’t reform and improve your product or service, you’re out of business. By promoting competition, free market discipline imposed on business has done more for ‘the little guy’ than any government handout by spurring advances in productivity and living standards.

“The banking system hasn’t been subject to free market discipline for decades, and it’s still not.”

Source:  Coming States Crisis, A Mega-Trend, The Financial “Free” Market, Insiders are Selling and More!

Companies that have followed a policy of consistently increasing dividends have historically outperformed the market.  And the best part–they put a growing stream of cash in your pocket.  Plus, steady dividend growth helps counter inflation which could rear its ugly head due to rampant government spending.

We are still suffering from a financial crisis and global recession… these are still risky times for investors.  One great way to ride out the turmoil is with blue-chip stocks that keep raising dividends.

Another key factor to success is investing in companies that are dominating players in their business.  If you are the key player in your sector then you can raise prices to keep up with inflation.  The market leaders can easily raise capital and survive economic downturns.  These companies are mature cash cows that funnel their excess cash to investors in the form of dividends.

Invest in the 800 pound gorilla!  The one that can crush their competitors by lowering prices if need be.  Recessions and downturns actually make them stronger, because it flushes out the weak players in their space–and they gain market share.

Here are some of my favorite blue chip stocks with steady dividend growth and income.  In addition, they are the dominate player in their industry:

Procter & Gamble Co. (PG) provides branded products of superior quality and value to improve the lives of the world’s consumers.  They run a great business and own some of the world’s best brands like Tide, Duracell, Pampers, Gillette and many more.  P&G has increased its dividend for 53 consecutive years.  I believe they will continue to deliver dependable sales and earnings growth over the next several years, benefiting from growth prospects in new markets.

Wal-Mart Stores Inc. (WMT) is the biggest retailer in North America and has set its sights on other parts of the world.  They do great during times of economic downturns because people turn to discount retailers which offer more goods for less money.  Wall-Mart has vast economies of scale and can offer consumers cheap goods while turning a tidy profit.  WMT has increased its dividend for 26 consecutive years and is well positioned to gain market share in an adverse economic environment.

Exxon Mobil Corp. (XOM) is the largest publicly traded integrated oil company on earth, serving customers in over 200 countries.  XOM is well positioned to benefit from higher crude oil prices and is one of the best managed companies in the energy sector.  XOM has increased its dividend for 26 consecutive years and has excellent earnings and dividend growth and stability.  They have $32 billion in cash sitting in the bank which will allow them to gobble up competitors and gain market share.

The Coca-Cola Company (KO) is the world’s largest producer of soft drink concentrates and syrups, as well as the world’s biggest producer of juice and juice-related products.  Coke will benefit from higher retail prices as inflation kicks in.  Plus, global demand for Coke’s products has virtually unlimited potential.  Furthermore, people continue to drink Coke’s products during recessionary times like these.  They have increased their dividend for 39 consecutive years.  KO will continue to be a cash cow and pay you a hefty dividend for years to come.  Invest in and Drink Coke…

Please keep in mind that the current rally could run out of steam and we could experience a major market pullback in the near term.  Therefore, you may not want to take a full position in these stocks right now.  Take a position over time by buying in small lots.  Or, wait for a market pullback to get a better entry price.  These are some of the highest quality stocks around, but they are not immune to a market selloff.

If you’re looking for more high quality income producing stocks I suggest you subscribe to my colleague Andrew Gordon’s Income letter.  He has an excellent portfolio of income producing stocks and the newsletter is only $99 per year.  Get more information on Andrew’s Income newsletter here.

Source: Buy Quality!

…at which point I was getting my hopes up that he would mention me saying something, you know, memorable, such as, “I seem to remember that The Mogambo said something that was so deliciously, delightfully clever, and although I do not remember which it was among his voluminous bon mots, I do recall how his flashing eyes twinkled when he spoke of How Freaking Rich (HFR) he was going to be when the prices of gold and silver exploded as a result of such Federal Reserve malfeasance, including their manipulating the prices of silver and gold down to levels that are officially classified as ‘laughably cheap’ which made such riches possible by being able to ‘buy low’ now and ‘sell high’ very soon, and how we laughed – ‘Hahaha!’ – when he kept saying how we were all freaking doomed because of the constantly increasing price inflation from the constant increases in the money supply by the Federal Reserve creating so much money and credit to accommodate constant expansion of government spending!”

Alas, it turns out he did not mention me at all, but said that an interesting way to look at the economy was that “The great boom that the world is enjoying is, in effect, an enormous shorting of cash and going long on debt” which is indeed an interesting perspective, although it does not say that that bastard Alan Greenspan is directly responsible when he had the Federal Reserve keep increasing money and credit, at lower and lower rates, for so long that a constant simmering inflation resulted as people “went long on debt” by borrowing, borrowing, borrowing, including the federal government borrowing, borrowing, borrowing trillions of dollars to expand a huge, monstrous entitlement-generating government that is now So Freaking Big (SFB) that total federal, state and local governments comprise half of all spending in the USA! Half! Gaaahhh!

I am so outraged at this that I say we ought to rise up in outrage and rush to our telephones, where operators are standing by to take your order for “Mogambo Brand” Mob Supplies (MBMS), including not only the popular Mogambo Flaming Torch (MFT) and Mogambo Long-Tine Pitchfork (MLTP), but now featuring a new line of filthy rags in which to dress with which to give the whole thing a kind of surreal, repellent horror, as all politicians know that there is no more dangerous a person than a hungry, bankrupted peasant in filthy clothing brandishing a Mogambo Flaming Torch (MFT) and/or a Mogambo Long-Tine Pitchfork (MLTP)!

Mr. Price is apparently not prepared to advocate buying one of my shoddy, overpriced products or mob rule, but he might as well have, as the result of going short cash and long on debt is that “Eventually, there will be a short squeeze on cash which will have to be covered by going long on cash and shorting debt” which ought to make your spine curl up into a tight little knot when you remember that money now comes from debt, and this debt going down in price means money going up in smoke with bond prices falling, meaning interest rates are moving up (since bond prices move inversely to interest rates), which means that rolling over debt means losing more and more money while owing more and more! Hahaha!

Again, Mr. Price is not interested in my interruption or my stupid observations, and says that “Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing” to which he adds, by logical extension of solving nothing, that “Debt must be reduced by defaults and bankruptcies. There is no other solution!” where the astute reader will notice that Mr. Price has appropriately included an exclamation point at the end to indicate special emphasis, which seems appropriate considering the sorrowful effects of “defaults and bankruptcies”!

But there is also a plethora of exclamation points for when one considers the effects of inflation in prices and the resultant civil unrest as prices rise faster than incomes rise for the people who have incomes, and the screaming outrage of people who don’t have incomes that can rise!!!!

For those of you surprised at the “plethora of exclamation points” at the end of that last sentence, you cannot say you were not warned about them in the first part of the sentence, or that you were not warned of the disastrous effects of inflation in prices, which everybody has known about for centuries and which drove the Founding Fathers to write into the Constitution that money “shall only be of silver and gold” just to make sure that it would not happen in America by the simple remedy of making money out of something that the government, nor anyone else, cannot create at its whim.

All of this brings me, as you knew it would, to gold. It’s a valuable thing that nobody can create at a whim, and that is why, as everyone has learned for the last 4,500 years, you gotta have gold or you got nothin’ when governments are acting this, ugh, way.

Perhaps this is why TheGoldForescaster.com reports, “The joint holdings of the two leading Exchange Traded Funds have grown larger than the gold holdings of Switzerland, rising to 1,272.26 tonnes up another 43.21 tonnes.”

Whee! This investing stuff is easy!

Source: Attack of the Debt Mobs

In case you were wondering, this level of earnings is down to where it was in 1995, and at that time the S&P 500 was selling for about $450, versus today’s $770, and which makes the price-to-earnings soar to an almost-unheard-of 27! A P/E of 27! Hahahaha! So you can see why I thought I was dreaming!

This evaporation of earnings also probably explains why the S&P500 index is at $770.05, down from last year’s $1,353.11, meaning that if you had bought the index last year, you have lost almost half your money in nominal terms, and you have lost ever more when calculated in inflation-adjusted terms, as the dollar has lost buying power in the last year which has made food and necessities get higher in price, higher and higher until I am screaming out the window, “The Federal Reserve, creating all that money and credit in the banks – so that somebody could borrow all that new money and use it to buy such mountains of public and private debt – is stupid-beyond-madness, you lowlife morons, and now we are all freaking doomed because all the world’s money is going to crap as, suddenly – as part of a coordinated, global economic stimulus – whole mountains of money and credit are being created so that governments can try to spend their way out of bankruptcy! We’re freaking doomed, you morons!”

And although my stupid neighbors protest about my screaming like that, the fact is that it is worse than that, because the U.S.A., with its $14 trillion economy, has a federal government that is going to spend, over the next year, all the money in their usual $3 trillion-plus budget, but also another $2 trillion or so over the next year! $5 trillion in government spending, at a cost of $3 trillion in new debt, all in a $14 trillion economy! Gahhhhh! We’re freaking dooooooooomed!

I did not mention that there are only about 100 million non-government, non-taxpayer paid workers in the U.S.A., which means that there are only 100 million workers who can make a profit with which to pay taxes, which means that $5 trillion in government spending is a staggering $50,000 for Every Freaking One (EFO) of those non-government, non-taxpayer paid positions! And you think THAT is going to work out for the best? Hahahaha!

Well, most people (the majority) do; and maybe you do too. And if so, I love your optimism. In fact, I envy your sunny optimism, even as I deplore how stupid you are; (although I already knew you were pretty stupid because here you are, reading my stupid Mogambo Guru newsletter, and I gotta tell ya, that’s a classic sign of stupidity!)

In order to explain it away, I say that my personal stupidity was caused by asphyxia after being choked by some beautiful woman’s big jealous brute of a boyfriend who jumped me from behind – which sounds so much more romantic and macho than the truth, which is, “I was born sorta like this, and then it got worse after I banged my head a lot as I grew up, suffering damage through various childhood accidents and my heart being broken by cruel, manipulative girls, and then more slamming my head against the wall in disbelief as an adult at the sheer stupidity of the neo-Keynesian econometric economics being used by the Federal Reserve to create so much excess money and credit that it produces inflation in prices and inflation in the size of government, either of which is enough to destroy us a hundred times over!”

But don’t get me started with heart-rending, sorrowful stories of how I am living proof that girls don’t date guys who are both creepy AND broke (although I found that they will tolerate one or the other for short periods of time) because it is time for Living Mogambo Theater (LMT)! Yippee!

Now, sit back and enjoy my riveting performance, for which I should have won an Oscar – and WOULD have won an Oscar if it had been filmed (which it wasn’t, maybe from government goons always sabotaging me, but mostly by I just made it up right now! Hahaha! The joke’s on me!)

Anyway, my powerful voice becomes eerily hollow and booming, my face a study in fear, as I say, “And when roaring inflation happens, thanks to the damned government spending more money to buy their way out of bankruptcy caused by their previous deficit-spending and the damned Federal Reserve creating the money and credit to finance this insanity as they financed the excess-money-and-credit insanity that got us here in the first place, everyone and everything are ruined!”

I slowly crumple to the floor, a pathetic, wasted husk of a man, my every move a subtle nuance of woe and utter despair. Suddenly, I spring up, my features drawn into a mask of horror, my stentorian voice blaring out, “And then the damned government usually finds a way to get into a war against scapegoat foreigners, which is Really Bad News (RBN) nowadays when you consider that foreign countries and foreign people (who admittedly speak foreign languages that nobody can understand and they probably don’t either), have been hurt even more than we morons here in the United States, and in their case, they are RIGHT: A foreigner caused all their trouble! Us! Hahahaha!”

My laughter echoing in the theater, the lights come up as the camera slowly pulls away to get, on film, the powerful, thrilling close, “And yeah, although the ‘foreign devils’ are truly us Americans, the filthy bastard that did it all is Alan Greenspan, disastrous former chairman of the Federal Reserve, who did it by merely creating too much money and credit, which pounded down interest rates, to pay for it all! If you can’t pay for a boom, you don’t get a boom, and if you don’t have a boom, you don’t have a bust!”

After pausing for dramatic effect, I go on, “And so all this mess is because of Greenspan, by both egregious commissions and omissions, legal and illegal, day and night, more and more, which explains why food costs more nowadays, and has always been costing more and more for as long as you can remember, and why everything has now turned to crap in the inevitable bust that always follows a monetary boom!”

Instead of the thunderous applause that I thought I was going to get, maybe a few shouts of “Encore!” or “Bravo, Mogambo!” there was only silence. Looking up, I peer out to see that the place is empty and that everyone has left the theater and gone home, not even waiting for the boffo ending.

Hmmm! I immediately suspect script troubles, but the important thing is that I never got to tell them about how they should be buying gold, silver and oil right now, which was the point of the whole thing!

But I am telling you to buy them, which is almost as good, I figure.

But if you were one of those people who walked out on my wonderful theatrical performance, then don’t buy gold and go to hell, you tasteless moron who wouldn’t appreciate real cultural excellence if it came up and pissed on your damned shoes!

Source: Optimism in the Face of Inflation

This dismantling of the so-called “New Federalism” will be readily apparent again this week as the federal government is once again at the forefront of the most-closely watched  crisis-fighting initiatives at hand: With Congress pushing forward on an $827 billion stimulus plan and the Treasury Department planning to unveil its new banking bailout blueprint on Tuesday, economists and other experts say the federal government is taking its biggest role in the economy in a generation.

States that once pushed away from the federal government as part of the New Federalism are now essentially begging it for financial support, banks and Big Business that once viewed near-total deregulation as Corporate America’s Holy Grail are now seeking federal financial aid and new regulatory protections (and in many cases are becoming actual business partners with the government), and individuals are asking for tax relief.

Alan Viard, a Bush administration economist now at the American Enterprise Institute, may well epitomize this reversal of thought: He’s one of the economists who initially rejected the need for a fiscal stimulus, stating that the right size for a government spending bill was “probably zero,” believing that federal interest rate cuts and existing unemployment benefits would be enough to do the trick. But he now sees the package as necessary.

“Things have gotten so bad so quickly,” Viard told The Washington Post. “We have now lost 3.6 million jobs, a stunning loss. But what’s more horrifying is that half that loss has occurred in the last three months. This is a severe recession.”

The exact shape and size of the package matters less than the timing, and any delay will be very damaging, economists say.

“Most of the things in the package, the big dollar amounts, are things that are pretty quick stimulus and need to be done,” Alice Rivlin, who was former president Bill Clinton’s budget director and a critic of aspects of the proposed stimulus, told The Post. “Is it a perfect package? Of course not. But we’re past that. Let’s just do it.”

Signs of the Stimulus

The U.S. Senate late Friday reached agreement on the estimated $827 billion stimulus bill, setting the stage for what’s expected to be some tough negotiations with the House of Representatives over tens of billions of dollars in aid to states and local governments, tax provisions, and programs focusing on education, health and renewable energy.

Congress is pushing hard to complete the legislation this week. But that figures to be a challenge. The House bill was passed without any Republican support, while the Senate version passed Friday night between Democrats and three moderate Republicans.

During a rare floor session on Saturday, Republican opponents continued to criticize the entire stimulus proposal – even though they clearly don’t have the votes to stop it. The bill is expected to be passed in the next few days.

The price tag for the Senate plan is only slightly more than the $820 billion measure adopted by the House late last month. Both plans seek to resuscitate the U.S. economy with similar one-two punch strategies:

• Fast-acting tax cuts designed to jump-start consumer and business spending.
• And longer-term – albeit slower-acting – spending on public works programs and other projects that are projected to create more than 3 million jobs.

Despite these seemingly similar philosophies, the two plans rely on approaches that are very different. The higher-priced House bill emphasizes help to states and municipalities that would otherwise be facing major cuts in services and layoffs of public employees, while the Senate slashed $40 billion of that kind of funding from its version of the bill.

The Senate plan focuses more on tax cuts, lowers a proposed increase in food stamps and provides health-care subsidies for the unemployed that are much less generous than the House version. The Senate plan also creates $30 billion in tax incentives to encourage Americans to buy homes and cars within the next year.

House Speaker Nancy Pelosi, D-Calif., said the emerging Senate cuts to the stimulus program “very damaging” and that she was “very much opposed to them.” But after the Senate reached a deal, Pelosi expressed resolve to complete the legislation in the days ahead.

U.S. President Barack Obama has made the economic recovery effort the centerpiece of his agenda since even before he officially took office. But President Obama now intends to get much more involved, and much more aggressive: He will conduct a “town-hall-style” meeting in Indiana today (Monday), followed by a formal “prime time” White House news conference – the first of his term – tonight.

The president will then pitch the plan again in Florida tomorrow (Tuesday) and again in Virginia on Wednesday.

Senate Majority Leader Harry Reid, D-Nev., said final passage of the Senate bill is expected Thursday, after which congressional leaders say they will hurry to get the House and Senate versions into conference with the hope that a passed bill can be sent to the White House by the end of week, the San Francisco Chronicle reported.

Banking Plan Overhaul Unveiling Tomorrow (Tuesday)

Busy new U.S. Treasury Secretary Timothy F. Geithner last week promised that the Obama administration would unveil its new blueprint for rescuing the U.S. banking system today. Over the weekend, however, the administration said the rollout would be delayed until Tuesday, so that the focus could remain on passage of the stimulus package, Bloomberg News reported.

But that doesn’t mean the banking bailout plan isn’t key.

According to a recent analysis, the Obama administration has a multi-pronged strategy for quelling the financial crisis, including:

• A program to insure banks against extreme losses on mortgages and other loans.
• A new round of investments in banks.
• Help for homeowners facing possible foreclosure.
• The broadening of a U.S. Federal Reserve program to ramp up lending.
• The Treasury Department could also look at purchasing toxic assets from banks – possibly with the aid of private-sector financing.

This would represent an overhaul of the $700 billion Troubled Assets Relief Program (TARP) initiated by the Bush administration. As the name implies, TARP was initially concerned with buying troubled assets – but it quickly evolved into a direct-government investment into the banks.

This new Obama plan reflects Geithner’s personally held view of how governments should respond to financial crises. Geithner believes all available financial tools should be used – and used aggressively. Any such effort would include direct efforts to deal with the financial sector’s massive losses, since that would help renew public confidence in the financial system.

Too small a government response during a crisis poses more risk than too much response, he said during his confirmation hearing.

Many of the details of what Geithner will announce remained in flux, although the broad outlines were becoming clear, published reports state. But one thing is certain: Even the ideas that are continuations of the initiatives started by former Treasury Secretary Henry M. “Hank” Paulson Jr. will have a unique Geithner twist.

One example: The government will almost certainly continue to invest in banks. But past investments consisted of a form of “preferred stock” that granted the federal government no say in how the bank was run, or how the money would be used.

As a Money Morning investigation revealed, that lack of control allowed banks to use taxpayer-provided TARP money as financing for buyouts. And then the banks refused to detail how they spent the money – and why not? They weren’t required to.

Under the new plan, there will still likely be new government investments in banks. But Geithner will likely call for those new investments to be convertible into common stock after some fixed period of time, perhaps seven years. If the banks are unable to raise private capital in that span, government control would escalate.

Banks receiving money also will probably have to report to the government and to the public, and the government is likely to insist that the new capital be used to expand lending.

Geithner has also been looking for a way to bring back the original TARP concept, which Congress passed on Oct. 3. Paulson pitched the plan to Congress as a program to buy troubled assets off of banks’ books, then shifted the plan and opted to invest directly into the banks instead.

Paulson’s chief worry – and the reason that he changed direction – was that asset purchases would involve too many technical complications, meaning it would take too long to enact. And that delay could be costly to a system where banks were teetering on the precipice of failure.

After struggling with those same issues, Geithner and his team appear to have settled on an approach that amounts to financial triage, meant to give investors confidence that banks will not encounter vast new losses so that they are willing to invest private money, The Post reported.

In addition to buying bad assets, the Fed and Treasury in the next few weeks are expected to expand a program that should jump-start lending outside the banking system. In November, the agencies launched a program – the “Term Asset-Backed Securities Loan Facility” – that would devote $200 billion for credit card, auto, student and small-business loans.

That program will be extended to include residential real-estate mortgages and into the commercial real estate sector. Geithner may also announce an initiative that would inject government money into companies known as mono-line insurers. These firms are key players for states and municipalities when it comes time for those state and local government bodies to borrow money. With the implosion of the housing bubble, and the subsequent implosion of the commercial real estate business, mortgage-related losses by the insurers have made it harder for states to issue the municipal bonds that would help them ride out the recession without aggressive tax increases or budget cuts.

Geithner is likely to roll out a plan, worth $50 billion to $100 billion, to encourage the modification of mortgages for homeowners who would otherwise likely face foreclosure. It could be based loosely on a strategy for foreclosure relief engineered by Federal Deposit Insurance Corp. (FDIC) Chairman Sheila C. Bair, when the FDIC took control of the failed bank IndyMac Bancorp Inc. (IDMCQ) last year.

Market Matters

On the corporate front, United Parcel Service Inc. (UPS) posted a profit (though revenue declined) and then announced new cost-cutting measures.  Motorola Inc. (MOT), The Walt Disney Co. (DIS), Time Warner Inc. (TWX), and Costco Wholesale Corp. (COST) reported disappointing results.  Visa Inc’s (V) earnings jumped by 35%, though management warned of tougher times ahead.

Bailout plan recipients have tried to cut back excessive spending (and the associated bad PR) as Goldman Sachs Group Inc. (GS) (Miami) and Well Fargo & Co. (WFC) (Las Vegas) canceled huge boondoggles. Bank of America Corp. (BAC) is selling off corporate jets, and Citigroup Inc. (C) may be attempting to get out of the $400 million marketing deal with the New York Mets.

C-SPAN must be enjoying stellar ratings as investors seem obsessed with the inner-workings of Congress and their debates on the stimulus and bailout.  The markets disregarded much of the dire earnings and economic data (terrible unemployment report…see below) and focused on the newfound optimism that politicos can work together to get the country moving in the right direction.

Economically Speaking

Just how long until a stimulus package starts creating jobs?  That answer can’t come soon enough for the almost 600,000 people who moved to the unemployment line in January, the most devastating month for job losses since 1974.  The unemployment rate climbed to 7.6%, forcing many economists to (upwardly) revise their projections for the rest of the year (and beyond).

Since the recession “officially” began in December 2007, the country has lost more than 3.6 million jobs, with most of the losses coming in the past three months.  The rest of the data released during the week did little to contradict the lousy unemployment picture.  Factory orders fell for the fifth straight month and the ISM index revealed that purchasing managers still look for contraction in the manufacturing sector. Though the services sector showed a slight rebound in its ISM survey, the index reported a fourth consecutive month of declining activity.  Residential construction spending experienced its worst annual decline ever recorded (since 1993), though optimists are hopeful that a stimulus package that focuses on infrastructure growth will prompt a renewal in non-residential building.

With the Fed stuck looking for creative ways to get involved (now that the benchmark Federal Fund rate stands at about 0%), its international counterparts took action (or inaction) of their own. The Bank of England (BOE) cuts its primary lending rate to a record low 1.0%, while the European Central Bank chose to leave its rate unchanged (for now) at 2.0%.

Weekly Economic Calendar

Source: As Stimulus-Package Debate Continues in Congress, New-Look Bank Bailout Plan is Set to Debut This Week

This from Investor’s Daily Edge:

Well folks, it looks like the inflation genie is out of the bottle. All these economic stimulus packages and bailouts will have to be paid back eventually. It looks like we are going to have to print our way out of this mess.

Not to mention, the U.S. national debt is over $10.6 Trillion and the Federal budget deficit was over $400 billion last year and could exceed $1 Trillion this year.

Federal spending could reach 25% of GDP this year, which would be the highest level in American history outside the World War II period. The U.S. government is going to have to borrow more money than at any other time in history.

Where is all this money going to come from? Currently, investors around the world are still standing in line to buy our short-term government securities. The global economy is in bad shape and America still has the most trusted and stable market in the world.

But China’s exports have plummeted so they don’t have the money to lend us anymore. Oil prices have dropped sharply, so OPEC doesn’t have as much to lend us. On top of that, if America opens up the printing presses it could scare investors out of the dollar and into the Euro or Japanese Yen.

So what happens if the world stops supporting our lavish spending habits? We will have to print money to meet our crushing debt obligations and that will result in a huge jump in inflation.

Inflation seems unavoidable considering the huge amount of money that’s being created and put toward our country’s economic problems.

The government recently reported that there has been a large spike in the amount of money that is floating around. The Fed is pumping huge amounts of capital into the financial markets to rescue the banks and restart lending. The monetary base is accelerating and currency in circulation is exploding. This is very inflationary.

The Federal Reserve has been cutting interest rates to head off a deeper recession. One potential risk to that strategy is inflation.

President Obama has hinted that America will spend its way to prosperity. He knows that dumping billions of dollars into upgrading our infrastructure will create jobs and stimulate the economy. His plans to reinvigorate our economy will have a big price tag and this is another case for inflation.

America has the biggest and most resilient economy in the world and we will eventually recover from our financial woes. But, when our economy recovers I expect the prices of goods and services to rise substantially. We have all witnessed prices for many everyday items going up already.

The U.S. is not going to make it out of this financial crisis without significantly devaluing the dollar to inflate away part or the entire debt problem. Batten down the hatches, inflation is coming.

Now, I’m not saying we will have hyperinflation. It will not get that bad. We will not end up like Zimbabwe with 231 million percent inflation.

But, it is important to protect ourselves from inflation to preserve our wealth and purchasing power.

So How Can You Profit From Inflation?

You can own an asset whose purchasing power has outlasted governments and civilizations for more than 5,000 years. Gold has always protected one’s assets in inflationary times.

Gold is the best performing asset class this decade. Since 2000, gold is up over 200% and it looks like it will keep going.

Inflation decreases the value of the U.S. dollar. As the dollar goes down, the value of gold tends to go up, because gold is priced in dollars. That’s why you should be a gold bug.

One of the best ways to protect yourself against inflation is to own gold.

A great way to own gold in your portfolio is to buy the SPDR Gold Shares (GLD). This Exchange Traded Fund is the largest gold-backed ETF on Earth.

Bottom line: Hold gold, the ultimate currency!

This from Taipan Daily:

The euro is fast approaching an inflection point.

On Jan. 15th – Thursday of this week – the ECB (European Central Bank) will meet to decide how much to cut interest rates. The general consensus is that the cut will be big.

I wonder if the euro will “pull a sterling” and go up instead of down on the news. The chart certainly leaves room for that possibility.

As you can see, the euro’s move higher in December was sharp and swift. The ensuing downdraft has been more of a sideways lurch, creating something of a wedge formation. A sharp move back above $1.35 (and above the 50-day MA) could thus see some real upside follow-through.

While it’s generally true that anything can happen, it feels even more true in forex these days.

“Currencies Trading All Over The Map,” the Washington Post reports. “Over the past several months, global exchange rates have taken some of their wildest swings in years, with a fresh bout of zigzags hitting an array of currencies in both rich and poor countries in the past few weeks.”

Much of this uncertainty is tied to the prospects for U.S. recovery and the $64 trillion inflation versus deflation question. The theme song for the period could be “Should I Stay Or Should I Go” by The Clash: If I go there will be trouble… if I stay it will be double.The good news is currencies historically have a very strong tendency to trend. That means an “all over the map” currency period that began in 2008 could revert into a new stretch of powerful (and profitable) trending behavior in 2009.

And speaking of The Clash (and whether “to stay or go”), the powers that be threw a little more light on the subject of treasuries this week. In a speech to the London School of Economics on Tuesday, Ben Bernanke reminded his audience of the Fed’s willingness to buy long bonds.

“In determining whether to proceed with such purchases,” Bernanke said, “the committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets.”

Brother, Can You Spare Some Inflation

What does that mean? It means the Fed wants inflation, ladies and gentlemen, and will do what it takes to get it.

A small helping of inflation would do nicely, but they’ll take a godzilla-sized helping too, if need be. Beggars can’t be choosers.

The logic is straightforward here. If deflation continues to grip markets, then credit conditions will clearly need “improving,” which, as Bernanke spelled out in London, would mean the Fed buying up treasuries with freshly printed dollars.

If, on the other hand, private credit markets start to “improve” on their own – without the Fed’s help – that means a flood of TARP cash, currently idle in bank vaults, is trickling its way back to work.

Either way, the end result is more dollars circulating through the system – and a jolt of reflation (maybe a BIG one) to go alongside.

Here’s a TIP

The “all roads lead to inflation scenario” is one reason Bill Gross is so high on TIPS, or Treasury Inflation Protected Securities.

Gross, the manager of the $128.4 billion PIMCO total return fund, managed to outperform 99% of his peers in 2008. He and a few others consider TIPS an amazing deal right now, in large part because the bond markets are still priced for heavy deflation. (TIPS outperform normal bonds in times of inflation, but underperform in periods of deflation.)

This presents another interesting way to think about the short treasuries trade – in the context of a TIP/TLT spread. (TIP is the iShares TIPS ETF; TLT is the 20+ Year Treasury ETF.)

As you can see from the chart, TIP dramatically underperformed relative to TLT all through the second half of 2008. This was due to the deflationary impact of the “great unwind” as credit flows collapsed.

You can also note from the chart that, as of late December, TIP started gaining ground again. Inflation-linked securities have grown more popular in recent weeks, as some look around and see the money-printing handwriting on the wall.

Source: Another Way to Play Inflation? Pssst, Here’s a Tip

This from Taipan Daily:

The most important thing for you to take away from the tail end of 2008 – indeed most all of 2008 – isn’t the real estate collapse, or the bank collapse, or the Wall Street collapse or the automakers collapse.

I’ll grant that this is one awfully big bunch of awfully big collapses. But in the end, they are all mere phenomena – not causes but effects, stemming of a fundamental battle.

I am speaking of the whole inflation/deflation thing. As we have pointed out repeatedly in this column, this interplay is one of the single binding actors in the market.

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Four Clues to Our Future

Right now, for instance, I have on my desk four articles from the feed services, and one chart. One bemoans the fate of retail stores who have been doling out 75% discounts since Black Friday in a desperate attempt to clear out rotting inventory and maintain at least a modicum of cash flow.

Now it appears that they are hoist with their own petard (the Shakespearean equivalent of shooting off your own foot), as shoppers seem unwilling to purchase a damn thing at retail anymore. (I can confirm this trend from personal experience: My wife actually made me wait till the 27th for my gifts so that she could get even better price breaks.

The second item is on the price battle brewing in airfares. The airlines have been cutting flights willy-nilly in an attempt to reduce excess capacity, and they still can’t seem to put bottoms in every seat. So now they will try cutting prices so low it will entice even the most reticent stay-at-homes back into the friendly skies.

Here too, I can confirm this trend from personal experience that our clan abandoned its usual holiday confab in NYC in favor of a long, long (really too long) retreat at Chez Lass. I must say that I did consider FedExing the children somewhere.

Anywhere really. Fairbanks, Alaska, came to mind.

The third item also confirms our reticence to spend or travel. It is from a data conglomerator, and notes that between November 2007 and October 2008, Americans drove 100 billion fewer miles than they did in the prior 12-month period. The report lays that drop at the feet of $140 oil.

Like a Snake Eating Its Tail…

This brings to mind the cyclic nature of these inflation/deflation trends. Allow me to demonstrate…

For the better part of a decade, I have warned that loose dollars would lead to spiking inflation, which in turn would stymie the very growth that those dollars were intended to stimulate.

And indeed this is exactly what came to pass. The price of most everything (other than lead-covered Chinese toys) shot to the moon, breaking the back of the American consumer and engendering the global recession we are now “enjoying.”

Inflation Begets Deflation…

But now that this recession has finally come to pass, the wags in Washington claim that deflation is now the number-one threat. And they point to those very items that I mentioned earlier: falling prices for oil, retail items and services over the past eight to twelve weeks or so.

As this trend continues, manufacturing falls off (and indeed it is at decadal lows now), and excess inventory begins to evaporate. The service sector curtails offerings (just as we see the airlines doing). And as the folks in the oil patch stop pumping expensive steam into old wells, or even stop searching out new ones, gradually we see all that excess oil disappearing off the market.

And in point of fact, most all of my wire service feed today is obsessed with the big fight between Russia and its former satellites. Seems that the demand for natural gas had fallen a tad, and now the Russians can’t get their asking price anymore. With the Russian stock market tanking, Putin and his puppets decided to cut the entire flow of gas to most all of Europe. “Don’t want our gas at our price, eh? Well, let’s seem ’em do without it, then.”

Everyone is calling this a political power play, and perhaps it is. But in the end, the Russians are simply doing exactly what the American airlines are doing: withdrawing excess supply.

… And Deflation Returns the Favor

Some look at this whole operation like a scale: Diminishing demand is balanced by diminished supply. But that would suppose that economies are simple systems that seek balance.

This is nonsense, and it’s a good thing too. In a genuinely balanced system, all information is uniformly distributed and understood, and all goods, services – and stock shares – are perfectly priced.

Real life, however, is a chaotic system in which a moron flapping his arms at a Starbucks on the New Jersey Turnpike can eventually raise the price of sugar in Brazil.

This system may seek balance, but it will never attain it. Rather, each cycle sows the seeds of the next imbalance. Again let’s look to oil: Already this reticence to look for new supplies has New York futures traders salivating like maddened dogs. Over the past few weeks, oil futures have risen some 43% off their December lows.

This brings me the final feed item on my desk today: It is from one of those speculators, noting that he anticipates that the demand will cross over available supply sometime in the next six to 18 months.

I’ll grant that this is an absurdly vague window. But it is his conclusion that is intriguing: He anticipates another whole round of massive oil price shocks. Except this time, it won’t stop at $140/barrel. He is figuring more like $240.

Is he nuts?

The Inflationary Power of $1.75 Trillion New Dollars

For that to happen we would need billions of dollars chasing relatively few gallons of oil. We already know how the oil supply is being reduced. Now where would we come up with, oh, say, $1.75 trillion dollars…

Oh my: That’s exactly the amount of money Washington has already put out there or is proposing to print.

And what happens when too much money chases too few goods? That would be called looming inflation, folks. Which is exactly why both Justice and I have been advising that you short the dollars any way you can now, while they are still big enough to short.

Specifically, I have and will continue to recommend both shares of PowerShares DB US Dollar Index Bearish (NYSE:UDN) for investors, and call contracts against the same for traders. The former ought to gain a minimum of 20% per quarter over the next twelve months, while the latter could earn deft operators 100% or more over the next 90 days.

Deflation or Inflation? Get It Right, and You’re Rich. Get It Wrong…