This morning we’ll listen in on former Fed Chairman Volcker’s speech, which ought to be a good one, don’t you think? I mean, this is the guy that said a couple of years ago that the U.S. could see a currency crisis… And didn’t it? OK, it’s not now, but turn your clocks back to June, and you’ll see what I’m talking about here. Volcker is a “hero” of mine in how he took on the inflation of the late 70’s early 80’s and didn’t dance around the dance floor with it… He whipped it into shape, and then left it all in good shape for Big Al Greenspan… We all know what happened after that!

We’ll also see Consumer Confidence for the first part of this month, which is expected to take the Nestea plunge from and index number of 59.8 to 52! You know me, I can’t ever, for the life of me, figure out how Consumer Confidence can even be this high! But then, if every one worried about the stuff I worry about, this would be a dull place to live, eh? HA!

The S&P Case/Shiller Home Price Index will also print this morning, so expect more rot on the vine with home prices here… And finally… The Fed begins a two day meeting today… The Fed’s FOMC begins today with a rate announcement expected tomorrow. What do you think it will be… A 25 BPS cut? Or 50 BPS cut? I’m thinking that it will be 50 BPS… I’ve always kidded that I wondered what the Fed Heads do for two days before announcing their rate moves… I think they play Battleship! By Joe you’ve sunk my Battleship! HA

One of my fave economists, Nouriel Roubini, said in interview that he believed the Fed was going to have to move rates to zero! That’s a big fat goose egg folks! Wow! What country does this all remind you of? Come on, you know what I’m referring to here, as I keep bringing this up over and over again… Oh, I think I’m turning Japanese, I really think so… (my good friend, and big fan of the 80’s, Rick, tells me that song was by the Vapors)

Let me add up the facts here… A collapsing stock market, check. Falling bond yields, check. Economic stimulus packages, check. Bailouts, check. Dire times for the economy, check. A Central Bank that believes cutting interest rates to near zero is the right thing to do, check, and checkmate! Which country was I talking about there? The U.S. or Japan in the 90’s? Oh, I think I’m turning Japanese, I really think so! This all reminds me of those Memorex commercials… Remember? “Is it live or Memorex?” Is this Japan or U.S.?

Speaking of Japan… The yen saw selling yesterday for the first time in a while… I know from my view in the cheap seats, most yen selling that I saw was simply profit taking… You have to think that given the price action in almost all assets these days, seeing one with a profit is very inviting, eh?

So… With yen weakening just a bit, did it mean that the risk takers were back? I don’t think so… Not yet anyway. As I said, it all looked like profit taking to me. Not even the threat of Bank of Japan (BOJ) intervention was going to bring the risk takers back out… By that I mean, that if the BOJ was going to intervene, which means sell yen to weaken it, the risk takers might use that information to their advantage and put Carry Trades back on the books… But, that didn’t happen, I think the risk takers have had the bejeebers scared out of them with all that’s going on, and it will be awhile before we see them in the places with bright shiny faces!

And… While I don’t want to spend the whole letter today on Japan… I must say that I think we should all be very wary of the BOJ and their history of intervening to keep yen weak. This will be a huge battle between the Carry Trade unwinders and Uridashi Bond sellers VS the BOJ… Just don’t get caught up in it… If it happens, stay to the sidelines, you don’t want to get caught up in an intervention battle…

I was reading friend, Bill Bonner’s Daily Reckoning (www.dailyreckoning.com) last night, and noticed that he was talking about the Dow going to 5,000… He had this to say about it, which plays well with our thought about all the deleveraging going on in the world right now… Here’s Bill…

“It probably would have corrected to the 5,000-range already. But the feds intervened. And now we’ve really got trouble. Because in trying to head off a recession/bear market, the authorities provoked a housing bubble, a financial bubble, and a worldwide credit bubble. Homeowners over-bought. Banks over-lent. Consumers over-stretched. Almost everyone seemed to over-do it. So, what might have been a typical bear market has been transformed into a monster of deleveraging.”

Gold is up $13 this morning! But Silver has dropped below $9… And we still can’t find physical Gold or Silver supplies anywhere! We did find 2,000 Gold Olympic Coins from Canada a few weeks ago, and those went out the door as fast as they came in! This whole lack of physical metals and slumping prices is beyond my ability to figure it out… I get asked all the time why isn’t Gold going higher, and I went through all that yesterday, but it’s important to know that I’m a firm believer that all this stimulus, and low interest rates are going to fuel much higher inflation, and that should be a good thing for Gold prices.

The Swiss franc continues to remain well bid and resist the strong pull down of the euro. I would think that given all the “risk” in the global markets these days, that francs would be well bid, which means that there are buyers of the currency. There’s little in the way of yield here in Swiss francs, but it’s better than nothing, nada, zero, zilch, a big fat goose egg like we’ll soon see here in the U.S!

In its semi annual Financial Stability Report released overnight, the Bank of England (BOE) said that the five biggest banks and Nationwide building society could lose as much as 130 Billion pounds over the next five years, well in excess of the 50 Billion pounds that the banks recently promised to raise as part of the Treasury’s bailout plan, forcing the banks to ask shareholders for even more cash. Things don’t look rosy for the U.K. or pound sterling, folks…

And speaking of not looking so rosy… Nothing has changed in Iceland… We can’t get payment for our maturities, as the clearing mechanism for currencies has been shut down, with the takeover of the largest banks in Iceland. Now, I read that the Icelandic Central Bank raised interest rates 400 BPS to 18% this morning… For what? I don’t get it… That’s like rearranging the deck chairs on the Titanic! I just wish the Central Bank would worry more about getting maturities paid! UGH!

You know… I talked a lot about foreign bonds when I was doing the Currency Tours. Foreign bonds are a great way to take a long term position in a currency, and not worry so much about the day-to-day moves of the currency. You lock in a yield to maturity on the bond, and it’s liquid… Seems like a lay-up to me, especially when you consider that in a lot of countries your yield to maturity would be higher than what you can find here. Foreign Bond trading is how I got my feet wet in the currencies… I cut my teeth on Foreign Bonds, so they have always been near and dear to my heart…

I was thinking the other day about all these people taking losses breaking their CD’s and attempting to catch a falling knife, and said to myself… “Chuck, why don’t you tell people about taking that currency they own, and using it to buy a foreign bond?” So… There! I did just that! Should you want to talk to somebody about that, our bond guy is Don Ries… He can be reached at the same 800#, 800-926-4922, that you call us on everyday…

Chris Gaffney sent me a note yesterday regarding our first MarketSafe CD maturity, which happened yesterday! Recall, we created MarketSafe CD’s on different assets (before all the volatility in the markets squeezed us out of the structured product creation), and the owner of the CD would have upside potential of the underlying asset, and enjoy 100% principal protection… Well, this first maturity was one based on the S&P 500… And it sure looks like the owners of that CD did quite well!

Chris tells me that the ending price of the S&P 500 index today was 848.92, which equates to a 29% fall vs. the original S&P price of 1196.54. Investors in this MarketSafe CD will be receiving their original investments with no upside payment. So… We saved investors 29% (assuming they would still be holding stocks)… Pretty cool…

And on that note… I think I’ll head to the Big Finish! Oh, and the currencies have risen a bit since I first came in, so we’ve got that going for us today!

Currencies today 10/28/08: A$ .6190, kiwi .5495, C$ .7720, euro 1.2505, sterling 1.5680, Swiss .8615, ISK (no quote), rand 10.66, krone 6.8650, SEK 7.9950, forint 212.75, zloty 2.9775, koruna 19.48, yen 94.60, baht 34.90, sing 1.5075, HKD 7.7520, INR 49.87, China 6.8385, pesos 13.21, BRL 2.19, dollar index 87.13, Oil $64.03, Silver $8.91, and Gold… $742.50

Source: FOMC Meeting Begins Today…

“It’s getting increasingly evident that this is a once-in-a-century type of phenomenon,” he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, “not the standard type of liquidity crisis that we have seen in the past.

“It’s verging on the issue of solvency.”

To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the UK and then US financial systems. When Northern Rock (NHRKF) went belly-up last Sept. and then Bear Stearns (BSC) blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short- term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn’t lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money – when they found any money to borrow – simply too high to bear.

“It’s still very evident from [inter-bank lending] spreads that we have not gotten closure yet,” Dr.Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem – or at least tease it out for months if not years – clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

“It’s essentially, fundamentally the price of homes in the United States which are determining…the ultimate collateral of mortgage- backed bonds, pretty much around the world.”

Looking ahead, he concluded that “we’re still nowhere near the bottom of the home-price thing” – the word “thing” standing in for “crash…collapse…crisis…deflation” and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today’s pan-global banking crisis, he chose to keep US interest rates way below the rate of inflation – making debt pay and savings a suck of real value – for three years straight starting in August 2002.

That period marked the first run of sub-zero returns paid-to-cash since the inflationary ’70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world’s faith in the Dollar.

The start of this decade also saw the gold price- dormant-to-dead ever since the US took that strong medicine at the start of the ’80s – double inside five years.

“First warning,” as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. ‘07, of trouble ahead.

“Ultra-expansionary US monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of Gold more than doubled in nominal terms and against the Dow Jones Industrial Average.”

So why didn’t gold take a dive when Greenspan’s successor – Ben Bernanke – tip-toed his way back to 4% real rates of interest in late 2006…? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue – and home ownership a god-given right for even the flakiest debtors – the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving “Reflation Part II”.

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he’s managed to out-Greenspan the Maestro…pushing real US interest rates way down to minus 3% and worse.

Take gold as a marker of stress, and the true extent of today’s crisis becomes clearer still. Bear Stearns’ fire-sale to J.P.Morgan in mid- March – which required an open-ended loan of $29 billion from the Federal Reserve – saw gold jump to $1,032 per ounce. We think it’s signal that Alan Greenspan ignores it.

“Central banks, of necessity, determine what the money supply is,” as he told Congress in a 1999 hearing. “If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

“The reason there is [now] very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.”

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the “Deflation Scare” of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world’s nostalgia for gold, in response, has seen it treble in price vs. the Dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan points instead to government bonds when gauging the size of today’s crisis. A true policy wonk, Greenspan thinks only of political bail-outs to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won’t get any help from Bernanke’s repeat of the Maestro’s “reflationary” error.

Adrian Ash
for The Daily Reckoning Australia

Source: Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative

If you haven’t figured it out, I’m talking about green investing. And as gas prices rocket higher and higher, green technology will become even more widespread.

In the past two weeks, I have written about the subject. I’ve discussed that for the most part, the economics of becoming green don’t make sense. But thanks to higher gas prices, green energy is becoming more and more commonplace.

For example, the Financial Times estimates that by 2030, plug-in cars will make up 50% of all cars sold. According to the World Watch Institute, starting in 2010, China will spend over $236 billion each year on green investments.

That’s huge. But that’s not all…

In a recent Harper’s Magazine article, it was pointed out that to have a bubble you need three things:

1. Government incentives or deregulation
2. An irrational belief that drives the masses to buy
3. A sector which can spawn new ways to make money nearly instantly

Now think about it. The Internet bubble saw all three things.

The government decided not to collect taxes from online purchases. They also helped speed up adoption of broadband and granted various tax credits to companies that would deal in technology (Silicon Valley anyone?). So obviously, the government helped.

Second, most people believed the Internet was the future. They thought that it would be so huge that life itself would depend on it (they weren’t wrong, just early). Remember the Y2K bug scare? That was part of America’s obsession with technology.

To make matters worse, everyone thought that buying an Internet stock was a sure bet. Companies were spawning every day and they all thought they had a great idea. But the problem was that they were only ideas. I saw my best friend’s father make over $140,000 – and then lose almost all of it as the bubble burst.

Now let’s look at the real estate bubble.

Under Greenspan, financial regulation was a joke. He believed in a free market and so thought that any government regulation would result in more harm than good. Add in the super-low interest rates we had and you’ll see that banks had the green light to grow undeterred.

Mix all of this in with the belief most people had that real estate never goes down, and you’ve got yet another bubble recipe brewing. Heck, people who had never bought real estate were buying and flipping houses and speculative vacant lots in a matter of months.

Finally, when mortgage demand started drying up, banks started issuing subprime, interest only, and no-doc loans. Then they would pull mortgages off their balance sheet, wrap them up in a nifty little investment vehicle, and sell them to hedge funds, banks, and investors looking for the supposedly safer mortgage backed returns. These banks were essentially creating these investment vehicles out of thin air.

As you can see, the real estate market also fits the profile of a bubble.

So how about the green market?

Well, the government recently incentivized production of ethanol, biofuel, and solar technology. If a Democrat gets into office, these incentives should grow. Congress even pushed up the Corporate Average Fuel Economy (CAFÉ) guidelines for the first time since 1975. And the idea of carbon credits is beginning to gain traction in Congress.

So the government is helping fuel the creation of cleaner energy. Step one is complete.

What about step two?

If I talk to any of my friends and tell them I love the things oil does to the earth, they’ll slap me (yes, I know oil is bad for the earth). If I told them that I didn’t recycle, they’d yell at me (yes, I recycle). My friends are already convinced that the green movement is the way to go.

If you type in the word ‘green’ in Google, you’ll see thousands of new websites that all talk about how great it is to be green.

Look at corporate trends, and you see more commercials with companies talking about going green. Wal-Mart, IBM, Intel, Google, and even ExxonMobil is getting into the act. The idea of going green is spreading like wildfire. And it will only increase as gas prices move higher.

Accompanied by that reassuring bit of alleged “certainty,” gasoline at $4 a gallon doesn’t sound quite so scary. In other words, we know that gas prices are headed higher, but we also know that there’s a limit, and we know exactly what that limit is.

Early last week, the U.S. Department of Energy said that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since that high price will serve to curb demand and keep prices in check.[although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level].
With crude oil having spiked above the $112 a barrel level last week on reports of declining oil supplies, grandstanding politicos on both sides of the aisle took the opportunity to bash each other’s energy policies [Don’t tell me … it must be an election year]. Seeming to add credibility to the Energy Department’s prognostication was last week’s weekly inventory report that showed that demand is waning – ostensibly because record gas prices now stand more than 55 cents a gallon higher than they were at this time last year.

But here’s the problem.

The Energy Department is wrong.

Indeed, the federal agency is just the latest “expert” to make erroneous forecasts for energy prices. Thankfully, that’s not true of Money Morning.

Since its inception last year, Money Morning has repeatedly predicted incrementally higher prices for crude oil and gasoline. Invariably, these predictions have proved themselves correct. And we’ve done more than just make predictions: We’ve also outlined investment opportunities that would allow investors to capitalize on this advance in energy prices.

In December, for the first time ever, Money Morning Investment Director Keith Fitz-Gerald publicly predicted that oil prices would reach $187 a barrel within three years. In mid-March, he reiterated this projection [accompanied by several suggested ways for investors to profit from this powerful trend]. Not only has this forecast continued to receive widespread play on energy- and investment-related Web sites, we’re starting to see similar “me too” predictions being made by some the energy sector’s heavyweight experts: Literally only days after Money Morning reiterated its forecast, Wall Street giant Goldman Sachs Group Inc. (GS) said that crude oil prices would reach $175 a barrel in the next two years.

This underscores one of the key mandates for Money Morning. While it’s true that we’re the hottest global-investing news service in the market today, this case study demonstrates that we’re more than just a purveyor of news. Our role is to provide our regular readers and subscribers with the news, of course, but it’s more important for us to explain just what the news actually means. To that end, look for us to:

• Put the news in context.
• To describe how the issue at hand fits in with the handful of powerful global trends that we’ve ferreted out and identified as the top ones that you need to follow if you’re to succeed and profit.
• To stay ahead of the crowd by projecting the “end game” – the outcome – for these top trends.
• And, finally, to research and highlight investment opportunities that are the best-positioned to benefit from these trends, meaning these represent some of the best profit opportunities in the market today [Editor’s Note: If this investing strategy appeals to you, it’s well-worth checking out our affiliated monthly newsletter that maintains several portfolios of stocks and funds chosen using these guidelines. New subscribers get a free copy of investment guru Jim Rogers’ new best-seller, "A Bull in China."]

Stay tuned: We’ll continue to follow the oil-and-gasoline saga as it unfolds, and we’ll continue to find ways for investors to profit from this and other top global trends.

Last Week’s Market Action

If you’re of a certain age, surely you remember some of the marketing “slogans” airlines used to burnish their brand names and, hopefully, to attract passengers. attract passengers.

After all, whatever happened to: “We Earn our Wings Everyday,” or “Fly the Friendly Skies,” or even “Something Special in the Air?”

Last week, however, the more appropriate taglines may have well have been: “We No Longer Overlook Safety,” or “Enjoy Your Stay in the Updated Airport Concourse,” or even better “When the FAA Talks, We Now Listen.”

As if the escalating gasoline prices have not caused enough hardships for the airlines, in recent weeks, they seemed to realize that they actually are required to abide by government safety regulations. Just last week, American Airlines Inc. (AMR) canceled more than 3,000 flights, thus, inconveniencing an estimated 250,000 travelers because a little faulty wiring “may” cause fires in certain aircraft. While some analysts were astonished at the lapse in judgment exercised by AMR’s airline management, others believed this to be classic bureaucratic overreaction due to previous lax oversight. In any case, the airlines undoubtedly will see their future earnings suffer and ticketed customers will experience extended delays [forcing them to seek out the closest Chili’s Bar & Grill inside the airline terminal - at least perhaps representing a boon for the earnings for that company].

John Williams of shadowstats.com is quoted in an interview by Kevin Phillips in Harper’s magazine, which was re-printed in the St. Petersburg Times newspaper under the title “Hard Numbers” with the subtitle “Think the economy’s bad? It’s worse than you know; blame a half century of presidential Pollyanna Creep.”

I did not know that John Williams had cleverly coined the phrase “Pollyanna Creep” to describe how the White House, the Congress and the repugnant Federal Reserve, starting with John Kennedy circa 1960 and continuing unabated, and worsening, all the way through to Bill Clinton where Mr. Phillips’ chronology ends, continuously came up with one stinking lie after another to disguise the horrendous inflation in prices, and rise in unemployment, that resulted from the egregious fiscal and monetary performances.

The article goes into such frauds as “imputed income” (such as the “value” you receive from living in your own home, or the “value” of your free checking account), the total of which Mr. Williams calculates was 15% of total GDP (!) in 2007! Wow! “Imputed income” was 15% of GDP? Hahahaha! We’re freaking doomed!

Such laughable duplicity continues into the description of the phantom jobs conjured up by the “Birth/Death Model” (which assumes that new businesses are being formed, and employees being hired, which are too new for anything to show up in the data), and the six separate calculations of unemployment, of which one of the most inclusive shows unemployment at a terrifying 9%! Nine! One out of eleven people in the work force in unemployed! Yikes!

Then, finally, we get to how to magically reduce inflation with “product substitution” in the consumer’s shopping basket (”if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon”), continuing with the lunacy of the inflation-reducing scam of “geometric weighting” of the items still in the shopping basket (”goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption”), and concluding with the infamous “hedonic adjustment”, (which even the author says is “an unusual computation by which additional quality is attributed to a product or service”).

It is this last fraud that has been used to such success by Mogambo Inter-Planetary Industries (MIPI), by which we commit an as-yet legalized extortion by utilizing the word “improved”. The basic premise was outlined in the MIPI business plan, which is cleverly explained in our corporate motto, namely “Crappy products made out of cheap materials with shoddy workmanship, and passing the savings on to you!”

But before we ship anything a stupid customer ordered, we send a letter saying that the order cannot be fulfilled per contractual price since the product they ordered was “improved” before their stupid check cleared, and therefore the new price should be higher because of the hedonic adjustment for the increase in quality, and if they had some “problems” with that, then you could take it up with Alan Greenspan and the Federal Reserve, ya freaking moron, which is who first came up with this silly crap, and if they still wanted their “Mogambo Ultra Blow-Up Doll” with the optional appendages and pendulous breasts, then they should send another $15.95 in cash, which is their cost for the extra quality inherent in saying “improved” without having to prove anything! Hahaha!

The business plan assumes that sometimes there will be people who will actually send the extra $15.95, whereupon we send them another letter demanding another $15.95. Hahaha! Suckers!

But, as per the business plan, we are sure that they will all eventually give up and demand their stupid money back, like THAT is going to happen (see Section Two of the MIPI Business Plan: “Skipping Town: The Fun Part”, which I cheerfully title “Starting over again, but with a lot of money this time!”).

The point is not that P.T. Barnum was right when he said, “There’s a sucker born every minute”, or that my first girlfriend’s father was right when he said, “You’ll never amount to anything other than a Worthless Piece Of Mogambo Crap (WPOMC)!”, but about how we got to be such suckers to let the Federal Reserve and the Congress (except Ron Paul) do this “lying about inflation” crap to us, and how people being ignorant stupid suckers is so very vital to the success of Mogambo Enterprises, Inc.

Where these people came from has always befuddled me, but which has now been explained by Junior Mogambo Ranger (JMR) Rob H., who writes:

“Dear Mogambo, I have long believed that people, in general, over time, were getting stupider and now have a ‘grand unified stupidity theory’ equation that I think can serve as the axiomatic equation for future theorist to expand upon. If true, this equation is very disturbing, especially if you add a time element into it and the associated exponent.” He notes, “This may explain why we are where we are in the world.”

My finger poised over the “Delete” button as my eyes drifted down over the few equations he provided, and through the rising glaze of incomprehension of math or anything that even LOOKS like math, I still knew enough that I could probably use this to get one of those elusive Nobel Prizes in economics (and that luscious cash prize of millions of dollars!).

So, for the official record, my completely original work that I came up with all by myself, and I declare under oath that I never even heard of anyone named Rob, especially one named Rob H., and that I have, personally, alone, proved that “one half-wit multiplied with another half-wit = a quarter-wit”, which is expressed algebraically as 0.5 X 0.5 = 0.25 wit (a “quarter wit”), which soon becomes 0.25 X 0.25 = 0.0625 wit (a “one-bit wit”).

But the irrepressible JMR Rob looked at this halfwit breeding thing and came up with the brilliant Zen koan “Therefore: Etc.” Hahaha! Perfect! Hahahaha! So we can share credit! Hahaha!

The Mogambo Sez: I admire the sheer bravado and raw guts of people who look around them and don’t immediately think to themselves, “This is freaking crazy! I gotta get out of stocks and bonds, and get some gold! Lots of it!”

I hope this little compliment of mine about their bravery pleases them and gives them comfort when their whole world turns to ashes and crap, although I prefer the proven comforts of gold, probably because I am such a coward who prefers not starving in the dark and cold streets.

But, to each his own! Hahahaha!

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.

Yesterday was a big day in Italy – 63 years ago. That was the day that Mussolini was shot, along with his mistress. They were hung upside down in Milan. What went wrong with Benito?

“What always seemed to go wrong,” said our guide on Sunday, “was that they ran out of money.”

She was speaking about emperors. She might have been speaking about elected presidents or dictators. When they run out of money, trouble follows.

This week, the United States opened its largest and most expensive embassy ever – in Iraq. It is like the Vatican City, say reports, a country within a country…both heavily fortified and luxurious…ready for a siege or a party.

The Vatican was attacked by its own Holy Roman Emperor, Charles Quint, in the 15th century. He had put together an army of Protestants, at whose head; a general carried a noose – ready to hang the Pope.

But the Pope wasn’t giving up without a fight. With the help of his Swiss Guards, he slid down a back wall of the Vatican and raced over to the Castello San Angelo, where he was able to hold out until the siege was lifted. His Swiss guards, however, were not so lucky. They fought almost to the last man to protect him.

But let us return to our beat – money. Alas, nothing much happened in the world of money yesterday. Instead, markets stood still – as if waiting for something to happen. The Dow eased off only 20 points. The price of oil stayed at $118. The dollar held at $1.56 per euro. And gold rose $5 – remaining where it has been, below $900.

Gold is correcting. Is the bull market over? Readers will remember what we can’t forget what happened to gold in 1980. The price of gold shot up over $800…but then began a bear market that lasted 20 years. Many people think it is happening again. But we also remember that the United States had a positive current account in 1980…and that Americans owned more of foreigners’ assets than foreigners owned of theirs…and that Paul Volcker pushed lending rates above 15% in order to protect the dollar!

Look to the left, dear reader. Look to the right. Do you see Paul Volcker at the Fed? Nope. Volcker is still alive – warning that there is a painful adjustment coming. But at the Fed itself, there is only Ben Bernanke, promising to drop dollars from helicopters, if necessary, in order to keep the economy bubbling along. And since the United States lives so far beyond its means…and owes so much money to so many people…the likelihood that a Paul Volcker will come along to protect the dollar is probably about as likely as Alan Greenspan being elected as the new Pope.

No, fear not. The Fed is unlikely to fall victim of a sudden attack of monetary integrity. The dollar is unlikely to rise very far against gold.

Still, the current correction could take the price down another $100 and still be above the 50-week moving average. So hold onto your gold…and hold onto your hats. And why not take advantage of this dip in the gold price? You can protect your portfolio from the ups and downs of the rest of the market by adding our favorite yellow metal – for just a penny per ounce. See here for all the details…

Elsewhere in the news, we find that OPEC has said $200 oil is a possibility. It hit $120 over the weekend. And truckers are protesting high gasoline prices. In other places, mobs are protesting the high price of food. You might think that these people don’t realize how markets work…that they don’t know that prices aren’t set by popular demand. In fact, what they know is how government works. If you can make a big enough stink about something, the government will intervene in the markets on your behalf. In fact, governments are already controlling prices for fuel and for food all over the planet. But there is no problem so bad that government can’t make worse.

*** We are here in Rome trying to learn something – on your behalf, of course, dear reader. So far, what we’ve learned is that the Abruzzo and Barolo wines are rich, complex and smooth. The wines we’ve tried from Compania, on the other hand, seemed a little green…and a little sharp. But the Barolos tend to be expensive. Last night, our restaurant didn’t have a single one less than $150.

As for the world of money…we have found out what brought the empire down. Money, of course. They ran out of money. But that was only a part of the story…and not even the most interesting part.

“The empire held together pretty well,” explained our guide, “at long as it was controlled by Rome’s leading families, who shared the same culture and the same values. But as it expanded, it came into contact with more and more groups. And in order to protect the borders – which had become vast even before the empire itself was officially recognized under Augustus – more and more soldiers were required, and more and more money.

“I saw in the paper that you Americans opened a huge embassy in Iraq and that it was very expensive. Well, that’s what the Romans did too. They had garrisons all over the empire. And each one was expensive to maintain. The ‘cursus honorarium’ – it was the route to power and prestige, like today, we go to a good college and then get a job with a good corporation and then we might go into politics…well, then, young men who were ambitious had to go into the army and take their post at these distant garrisons. And then they began to bring people into the system from the outside…and spend their lives outside Rome. Many leaders were no longer from Rome and some rarely even came to Rome. And many of the soldiers weren’t Roman either.

“When the empire was still expanding, there was a lot of money coming into Rome. Whenever they conquered another city or another tribe, they brought in more gold, silver and slaves. But when the empire stopped expanding…they had the cost of maintaining the borders, but no source of revenue.”

Now, let us check in on today’s empire. Where does it get its money? How could it afford such an extravagant embassy – in an area where it has no real interests? How can it afford the trillion-dollar tag for the Iraq War? We will state the obvious: it too is running out of money. But unlike the era of Caesar Augustus Caesar or Romulus Augustus our modern government can conjure money out of thin air. It doesn’t even have to print it up on a piece of paper. It’s enough just to send an electronic transfer.

Now we will ask you a question, dear reader: What is an electronic transfer? Or, in an electronic transfer, what is transferred?

“Electrons,” you will answer. Or perhaps “information.” Or a “symbol of wealth”…something that represents money.

And here…back to penises for a moment. We once overhead a woman in a tour group in Paris, gazing at the Place de la Concorde. The leader had just informed her that the long, talk obelisk in the middle of the square might be considered a “phallic symbol.” She turned to her neighbor and asked:

“A phallic symbol of what?”

The electrons…or even the paper dollar…may be a symbol too. But a symbol of what?

More to come…

Bill Bonner
The Daily Reckoning

The ongoing subprime mortgage mess, the resultant credit crunch and daily stories about housing defaults, escalating oil prices and lousy corporate earnings only seem to further fuel the debate.

Of course, we all see the government reports and analyst research notes that seem to contradict one another from one day to the next – and sometimes from one hour to the next.

So here at Money Morning, we thought we’d take a bit of a different approach, and use some of the social indicators that we’ve come across to develop a “Top 10 List” of reasons the U.S. economy may have achieved a new market bottom – though perhaps it’s not yet the ultimate market bottom.

Admittedly, this list is absolutely tongue in cheek. But social indicators do play a huge role in successful investing, even though the scholarly types often consider them little more than slightly disguised voodoo.

Nevertheless, here’s our Top 10 List:

10. Although its company stock is down 14% year-to-date, there are still 172 Starbucks Corp. (SBUX) employees for every citizen of Vatican City.

9. The world’s three richest men – Warren Buffett ($62 billion), Carlos Slim Helu’ ($60 billion) and Bill Gates ($58 billion) – are worth as much as the combined gross domestic product (GDP) of the world’s 40 poorest countries.

8. Chairman and Chief Executive Officer Angelo Mozilo of Countrywide Financial Corp. (CFC), and former executives Charles O. “Chuck” Prince III who was ousted from Citigroup Inc. (C) and E. Stanley “Stan” O’Neal of Merrill Lynch & Co. Inc. (MER), can still make house payments.

7. Upscale hedge fund managers still prefer Mercedes SUVs for their nannies.

6. Weathermen have a better predictive record than economists.

5. History shows that recessions wipe out between 20% and 25% of financial assets. Even with the almost $300 billion in financial write-downs we’ve seen so far, we’re still at a mere 5% of the total (depending on which numbers you believe).

4. Alan Greenspan reportedly makes more money per speech now than he did annually as chairman of the U.S. Federal Reserve.

3. U.S. Federal Reserve Chairman Ben S. Bernanke still has a job.

2. As of the close yesterday (Wednesday), the Standard & Poor’s 500 Index has only fallen 13% from its intraday peak on Oct. 11, 2007. Like a barber-school trainee, recessions typically clip 25%-30% off the top.

And the number-one reason we haven’t reached the bottom yet:

1. BusinessWeek has yet to publish a successor issue to their infamous Aug. 13, 1979 cover story that predicted “The Death of Equities.” That story preceded one of the greatest bull market runs in history.

Treasury Secretary Hank Paulson has proposed the Federal Reserve be given broad powers to regulate the financial industry. He could not have nominated a more incompetent body. The Coast Guard would do a better job.

Financial upheaval owes homage to derivatives that shrouded the massive growth in debt and leverage. This murky world inflated the incentives of those who ran the machinery over the cliff — bankers, mortgage brokers, law firms, appraisers, rating agencies, politicians, and on it goes. This is well known. Despite protestations, the parties knew they were behaving either recklessly or criminally at the time. The Federal Reserve encouraged them.

With a straight face, Hank Paulson proposes that the Fed quash future imbroglios. Yet the terracotta soldiers of Xian would bring more initiative to the assignment.

In September 1998, the Federal Reserve didn’t have the slightest idea of how the banking system functioned; it hadn’t the slightest idea of the banks’ exposure to hedge funds; nor had it the slightest idea of the leverage within the financial system. Maybe these deficiencies are excusable, although the Federal Reserve was responsible for regulating bank holding companies (the holding companies being where much of the risk was housed). It is unpardonable in the aftermath, having learned of its own deficiencies, that the Federal Reserve made no effort to improve its oversight or to warn of the dangers it had recently discovered. Instead, the Fed encouraged devious practices.

In the first three weeks of September 1998, Long-Term Capital Management (LTCM), a Greenwich, Conn., hedge fund, lost half a billion dollars per week and everyone knew it. Except, possibly, Alan Greenspan. In mid-September, the Federal Reserve chairman told the House Banking Committee that “Hedge funds [are] strongly regulated by those who lend the money.” On Sept. 21, LTCM lost $550 million. In a virtuoso rejection of every financial institution’s model, all security prices went down. This is normal. In a panic, everyone sells.

The Fed’s lackluster oversight was partly to blame. On May 2, 1998, Alan Greenspan gave a speech in which he emphasized the advantages of “private market regulation.” Greenspan explained, “Rapidly changing technology has begun to render obsolete much of the bank examination regime established in earlier decades. Bank regulators are perforce now being pressed to depend increasingly on ever more complex and sophisticated private market regulation… One of the key lessons from U.S. banking history [is] that counterparty supervision is still the first line of regulatory defense.” He also noted the Federal Reserve’s decision to supervise “risk management procedures, rather than actual portfolios.” The Fed now evaluated how banks monitored their own risks (e.g., their modeling techniques, the process used to monitor counterparties) in lieu of examining specific securities.

The Federal Open Market Committee (FOMC) held a conference call on Sept. 29, 1998. The staff and Federal Reserve governors briefed Greenspan on Long-Term Capital Management’s counterparties — the banks that lent to LTCM. He was told that none of the banks, with the exception of Bankers Trust, had an up-to-date balance sheet for LTCM. Even this was “only a small piece of [Bankers’] whole action because so much of the latter is off balance sheet.” When assets are off balance sheet, the bank’s motivation to “strongly regulate” is diminished.

The Federal Reserve chairman was at a loss: “The question is why it happened in the first place. Is it just that the lenders were dazzled by the people at LTCM and did not take a close look?” Vice Chairman William McDonough replied there “was in place a credit system that made a great deal of sense.” In the next sentence — which simply cannot have been an explanation of this sensible system — McDonough told the FOMC: “For at least some of the lenders, there was no initial margin requirement.” McDonough went on to suggest the Federal Reserve might have taken more initiative: “We do not regulate the firm. But given the number of institutions they dealt with around the world, was there a way that should have enabled us to be more aware of their overall position? One is inclined to say, ‘You bet.’ But exactly how we could have done that I am not so sure.”

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This was not the time for the FOMC to design a regulatory apparatus, but the Greenspan Fed never did attempt to fill this gap. In retirement, Greenspan reminds his audiences that the Fed does not regulate hedge funds. True, but the Fed could have worked backward from the foundation that McDonough had suggested. (The SEC is responsible for monitoring broker-dealers. It, too, has failed miserably.) The need for adult supervision of banks was obvious when a staffer commented on the conference call, “It is something of a signature for [LTCM] to insist that if a counterparty wanted to deal with them, there would be no initial margin. Not many other firms have gotten away with that.” For this reason alone, the Fed should have geared up its watchdogs to better monitor the suicidal banking system it regulated.

Another staff member enlightened the FOMC with a frightful prospect: “The counterparties…get comfortable with zero percent margin. But from the [financial] system’s point of view, zero initial margin permits an essentially unlimited amount of leverage. There is no constraint other than the exhaustion on the part of the counterparties.” Greenspan and Bernanke fiddled with their slide rules as financial derivatives grew to 10 times the world’s GDP. In 2007, Bernanke should have known that banks, in a desperate attempt keep dancing, were borrowing at five percent to lend at four percent.

Early last week, the U.S. Department of Energy said that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since that high price will serve to curb demand and keep prices in check.[although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level].

With crude oil having spiked above the $112 a barrel level last week on reports of declining oil supplies, grandstanding politicos on both sides of the aisle took the opportunity to bash each other’s energy policies [Don’t tell me … it must be an election year]. Seeming to add credibility to the Energy Department’s prognostication was last week’s weekly inventory report that showed that demand is waning – ostensibly because record gas prices now stand more than 55 cents a gallon higher than they were at this time last year.

But here’s the problem. The Energy Department is wrong. Thankfully, that’s not true of Money Morning. Since its inception last year, Money Morning has repeatedly predicted incrementally higher prices for crude oil and gasoline. Invariably, these predictions have proved themselves correct. And we’ve done more than just make predictions: We’ve also outlined investment opportunities that would allow investors to capitalize on this advance in energy prices.

In December, for the first time ever, Money Morning Investment Director Keith Fitz-Gerald publicly predicted that oil prices would reach $187 a barrel within three years. In mid-March, he reiterated this projection [accompanied by several suggested ways for investors to profit from this powerful trend]. Not only has this forecast continued to receive widespread play on energy- and investment-related Web sites, we’re starting to see similar “me too” predictions being made by some the energy sector’s heavyweight experts: Literally only days after Money Morning reiterated its forecast, Wall Street giant Goldman Sachs Group Inc. (GS) said that crude oil prices would reach $175 a barrel in the next two years.

This underscores one of the key mandates for Money Morning. While it’s true that we’re the hottest global-investing news service in the market today, this case study demonstrates that we’re more than just a purveyor of news. Our role is to provide our regular readers and subscribers with the news, of course, but it’s more important for us to explain just what the news actually means. To that end, look for us to:

• Put the news in context.
• To describe how the issue at hand fits in with the handful of powerful global trends that we’ve ferreted out and identified as the top ones that you need to follow if you’re to succeed and profit.
• To stay ahead of the crowd by projecting the “end game” – the outcome – for these top trends.
• And, finally, to research and highlight investment opportunities that are the best-positioned to benefit from these trends, meaning these represent some of the best profit opportunities in the market today [Editor’s Note: If this investing strategy appeals to you, it’s well-worth checking out our affiliated monthly newsletter that maintains several portfolios of stocks and funds chosen using these guidelines. New subscribers get a free copy of investment guru Jim Rogers’ new best-seller, "A Bull in China."]

Stay tuned: We’ll continue to follow the oil-and-gasoline saga as it unfolds, and we’ll continue to find ways for investors to profit from this and other top global trends.

Last Week’s Market Action

If you’re of a certain age, surely you remember some of the marketing “slogans” airlines used to burnish their brand names and, hopefully, to attract passengers. attract passengers.

After all, whatever happened to: “We Earn our Wings Everyday,” or “Fly the Friendly Skies,” or even “Something Special in the Air?”

Last week, however, the more appropriate taglines may have well have been: “We No Longer Overlook Safety,” or “Enjoy Your Stay in the Updated Airport Concourse,” or even better “When the FAA Talks, We Now Listen.”

As if the escalating gasoline prices have not caused enough hardships for the airlines, in recent weeks, they seemed to realize that they actually are required to abide by government safety regulations. Just last week, American Airlines Inc. (AMR) canceled more than 3,000 flights, thus, inconveniencing an estimated 250,000 travelers because a little faulty wiring “may” cause fires in certain aircraft. While some analysts were astonished at the lapse in judgment exercised by AMR’s airline management, others believed this to be classic bureaucratic overreaction due to previous lax oversight. In any case, the airlines undoubtedly will see their future earnings suffer and ticketed customers will experience extended delays [forcing them to seek out the closest Chili’s Bar & Grill inside the airline terminal - at least perhaps representing a boon for the earnings for that company].

— The Great Greenspan Reputation Rehab tour is officially under way.

“I was praised for things I didn’t do,” Greenspan said this morning in The Wall Street Journal. “I am now being blamed for things that I didn’t do.” Not that he spoke up when Bob Woodward hailed him as the “Maestro” …or when Time magazine featured him on its cover as the head of the “Committee to Save the World,” of course.

— Yesterday, we noted fiery comments Greenspan directed at critics in the Financial Times. Today, The Wall Street Journal trots out the results of not one, not two but three recent interviews.

The Maestro’s Last Defense: Look deep into his eyes. When his hand closes into a fist, 18 years of easy money policies will vanish from your memory. Poof!

“Omniscience is not given to us,” Greenspan told the WSJ, dodging one bullet. “There is no way to predict how innovative markets will develop. All you can do is set a general strategy. The choice is between a lightly or tightly regulated economy. The former is highly competitive, innovative and dynamic — but periodically visited by wrenching crises. The latter is more stable, but slower growing.”

“Monetary policy is process based on probabilities,” he continued, dodging another, “I don’t remember a case when the process by which the decision making at the Federal Reserve failed. Events often did not proceed as we anticipated, but that resulted from a lack of foresight, not from a flawed decision making process.”

Nearly 300 years ago, John Law, a Scottish gambler and womanizer, conducted the first modern experiment with paper money in early 18th-century France. While the party raged, Law became the richest man in the world and was hailed a hero by king and court. Before it was all over, Law barely escaped France with his life after having his carriage smashed by an angry mob. We recounted the story in Financial Reckoning Day in 2002, at the height of Greenspan’s Maestro-ness.

The fabulous destiny of Alan Greenspan awaits…we’ll keep you posted.

— Likewise, the sunny optimism breaking over Wall Street — thanks to the Washington Mutual rescue plan — turned cloudy yesterday. Traders are getting jittery about first-quarter earnings announcements.

Perhaps, rightfully so.

Alcoa, the first Dow component to report, did so yesterday after the close. It came in at 44 cents per share… analysts were expecting 48. But we don’t expect the aluminum producer will have much of an effect. Most of the financials begin reporting next week. That’s when the fireworks will begin.

For the day yesterday, the Dow and S&P each lost a skosh. The Nasdaq dropped about a quarter percent…down 0.26% Otherwise, trading was quiet.

— We’re detecting a theme in much of the day’s news. Something you might call “Peak Everything.” Oil, food, water — you name it — supplies are falling and prices and tensions are rising. The world appears to be entering one of those phases in history that will take generations of library-sequestered historians inventing new theories to explain.

— But let’s dive in, starting with oil. It’s approaching record levels again. Light, sweet crude closed up nearly $3 yesterday, at $109.09. One reason for the rise: a decline in production from Russia — the world’s second biggest oil exporter.

“Production has been flat the last three months,” explains our Byron King, citing an obscure report from oil analyst Aram Mäkivierikko, “and it’s still below the maximum of under 10 million barrels per day set last October. That’s putting a strain on global supply, despite what OPEC ministers say.”

In a worst-case scenario, the study says, Russian production has already peaked. And even in the best-case scenario, production can’t increase by more than 5-10%. Should this report bear scrutiny, the implication of “Peak Oil” in Russia will be dramatic.

On the home front, Byron’s keeping his eye on a company that claims it can transform used tires into fuel…and it’s going into commercial service no later than May 31. Down the road, the same technology could be used to breathe new life into American oil wells that have been abandoned for decades.

And it has a one-of-a-kind leg up on all competing technologies when it comes to extracting oil shale — the hard-to-extract stuff in the Rocky Mountains that’s estimated to total three times Saudi Arabia’s proven reserves. We’ve reserved details for paying members of Byron’s Energy and Scarcity Investor — on sale this week. If you’re interested in learning more, you can do so here for a limited time.

— Just days after Robert Zoellick, president of the World Bank, warned 33 countries are at risk of riots because of food prices — the risk is already becoming a reality in several of them.

Four people have been killed in Haiti, where the prices of rice, beans and fruit have risen 50% in the past year.

Food riots were reported in four West African nations yesterday, and a nationwide strike was called for today in a fifth. Plans for a general strike in Egypt to protest rising food prices have been squelched, but only because police arrested more than 200 people.

“I think what we are facing is a perfect storm,” comments Bettina Leuscher from the World Food Program. “More and more people are going hungry and need food aid. At the same time, we’ve got the lowest food reserves in some 30 years on the markets. And prices have gone up tremendously, sometimes doubled in the last few months and you’ve got climate change with less harvest, droughts, floods.”

No riots in New York — not yet, anyway — but food pantries report major shortages because donations are way down.

– “We need to be concerned,” U.N. Secretary-General Ban Ki-moon commented yesterday, “about the possibility of taking land or replacing arable land because of these biofuels.” This, two years after the United Nations Food and Agriculture Organization forecast that biofuels would wipe out hunger and poverty for up to 2 billion people.

“I’ve heard from at least a dozen farmers,” counters Kevin Kerr, who has been on the biofuel beat for years, “in Illinois, Minnesota, Iowa, Wisconsin and Indiana. They’re all telling me the same stories of either ethanol plants under construction that have ceased operations or plants that are declaring Chapter 11. Looks like the ‘dream’ of the new gold rush in corn-based ethanol is starting to unravel, and fast.”

— How about the outlook for U.S. crops this spring? Says Kevin: “Not great.”

“The wet, muddy conditions and continued rain make it next to impossible to get equipment in the fields,” Kerr writes. “Also, farmers run the risk of putting seeds in too early and, basically, losing the crop. The situation is pretty grave this year, as demand for all the grains is very high, as are the costs to plant them. The hope seems to be that we will have another year like last year and Mother Nature will be kind. It may not end up that way.”

Kevin heads out next week for his annual trip to the upper Midwest. “I knew corn would be going to $6 three years ago largely because of what I found out by visiting farms and seeing what was going on long before the ethanol boom landed on the front page of Barron’s.” We’ll keep you posted on Kevin’s travels.

Oh…some angry farmers respond to our coverage of the ethanol boom, too, below.