But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Click here to continue reading Mr. Fitzgerald’s article.

Oil didn’t move yesterday. Neither did gold.

The Wall Street Journal reported that markets were reacting to “mixed data”.

That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard. The other for sunny skies and warm temperatures. Investors didn’t know how to dress.

Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year.

Since states cannot print money, they’re forced to make cutbacks – typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base. This leads to less consumer spending.

Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace.

Well, don’t worry about it. We met a guy who explained the timeshare business to us.

“What you’re selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn’t work that way. They get stuck in the cheap unit and the dream gets a little faded… And then, they stop coming… and then they try to sell the timeshare. Timeshares are rarely a good investment.”

Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it’s sunny skies.

House prices seem to be stabilising. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That’s why we like falling housing prices: we get more for our money. But most people want a rising housing market. They think it makes them richer.

They’re likely to be disappointed. They show up at the beach with their umbrellas and sun-tan lotion… just as a winter storm hits the coast.

Forbes lists eight reasons to “remain worried about housing”.

• The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers.

• The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops?

• Mortgage lending standards are tightening up generally.

• Houses are still not cheap. Forbes cites Shiller’s numbers, putting the average house price 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive.

• Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.

• The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, during the school break. Then, sales fall with the autumn leaves.

• There are still huge numbers of houses that will be repossessed. Forbes says only 12% of option ARMs have been reset. More repossessions will increase the supply of desperate sellers and decrease prices.

• There’s a ‘shadow inventory’ hanging over the housing market. It could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilise. As they put their houses up for sale, that too will hold prices down.

Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression. It’s a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy – and through the US housing market – for many years.

Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time.

***Our old friend Marc Faber is “highly confident” that things will turn out badly.

“The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society,” he writes.

“We have a money-printer at the Fed,” he continues, which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well.

Meanwhile, Paul Volcker says that China’s rise merely “highlights the relative decline of the US.”

So there you have it: China on the way up, America on the way down .

That’s the drama that we’re watching every day here at the Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Brothers. But there are probably a lot more shoes to drop before people are fully aware of what is going on.

The way we see it, almost the entire 20th century was a mistake, a dead end. Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order.

Not long after, German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century – from 1939 to 1989 – was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists.

In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas .

“Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you,” Nietzsche warned.

Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot and the rest, Western societies decided both to fight them and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism… and every other ‘ism’ they could think of. Parents spent good money to send their children to universities that turned them into mush-heads.

And – perhaps most ominous – in the United States of America, the military grew into a greedy, grasping goliath… the very thing Eisenhower had warned against.

Then, there were counter-trends in the 1980s… led by Margaret Thatcher in England and Ronald Reagan in the US. But these were mostly frauds . Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it.

And now, the US staggers under the weight of its eternal wars… its imperial illusions … and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed.

Still, it spends and spends… and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending – even in a time when America faces no substantial challengers – cannot be rolled back. Neither can social spending.

Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined.

Until tomorrow,

Bill Bonner

Source: A Century of Bad Ideas

We began having doubts about the ‘feds inflate… gold soars’ hypothesis last year. It was too easy… too obvious. And if it were that easy to inflate a nation’s currency, how come the Japanese couldn’t get the hang of it in the ‘90s?

So, we moved towards a contrarian position – inflation, yes… but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.

To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that’s all we ask of it, we are always satisfied. Even if it is down in the short run – and it went through an 18-year down cycle from 1980 to 1998 – it will come back in the long run.

Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in dollars nor in euros; he should count it in ounces.

Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now… everyone’s a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the gold price… followed by a new, big bull market after inflation has found its footing.

And so what does gold do? It goes up!

Yesterday, gold rose $11 – still comfortably above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we’d see it in the bond market. But instead of selling off – which is what Treasuries should do if there were any hint of inflation – bonds are going up.

Is gold going up because people are afraid of the dollar going down? Well, maybe. But that is like saying that the dollar is going down because people are afraid the price of gold is going up. Where’s the chicken? Where’s the egg? Which is the cause? Which is the effect?

The dollar is still going down… as gold rises. Yesterday, it closed just below $1.48 per euro. It is so low now that Americans’ cost of living is among the lowest in the world. The average house sells for just $160,000. That’s just over 100,000 euros. Even out in the country… you would have to do some serious searching for a nice house anywhere in Europe that you could buy for $100,000 euros.

And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse – by delaying it, disguising it or diverting it in another direction (such as converting deflation into hyperinflation).

Yesterday, the Dow rose again – up 51 points. As far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.

House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January an estimated 350,000 houses have been bought thanks to the program.

Household net worth also is going up – at least, that’s what the papers say. For the first time in 2 years. Of course, what do you expect? The feds are pushing up asset prices – giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends… so does the temporary wealth effect…

Is this still a contrarian view? Seems to us that it’s becoming more contrarian every day. The longer the rally goes on, the more people think it is the real McCoy.

If we are right, the massive effort by the feds will make things massively worse. That is the position taken by Arthur Laffer in a recent Wall Street Journal editorial, by the way:

“The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.

“The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products… beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!)… By the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That’s one helluva tax….

“Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon…”

“The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that’s the story.”

We had no doubt that inflation can occur during a depression; hey, we read the papers. Anyone who has followed the Zimbabwe story knows that you can have a deadly depression… and dizzying levels of inflation at the same time.

But there’s always more to the story. Devaluing the dollar in terms of gold had the immediate effect of increasing the money supply – it was like adding zeros to the currency.

In our wallet is a Ten Trillion dollar Zimbabwean bill, with a picture of stones on it. Those words – ‘ten trillion’ – did not get printed on that bill by accident. We assume they got printed on there by a printer in the employ of a government that figured that the cost of printing a ten trillion dollar bill was less than the cost of not printing it.

That is, by a desperate government that had so fouled-up the economy that a period of hyperinflation might seem like an improvement. Besides, hyperinflation might have a therapeutic, purgative effect.

But let us not get sidetracked by hyperinflation. It is nowhere in sight. Nor is its more civilized cousin – normal, polite inflation. The money supply in America – as measured by M2 – is contracting. The banks get money from the feds, but they don’t pass it along. The chain of reflation is broken – or at least temporarily stretched. Currently, it takes a long time for money to get from one end to the other. The cash tends to get waylaid –either by the bankers… or by consumers themselves. It stays in bank vaults… or in bank accounts. Money is not being multiplied by the speed by which it changes hands. Instead, it is divided by immobility. It sits. It shrinks. It waits for a real boom.

Until tomorrow,

Bill Bonner

Source: Waiting for a Real Boom

The Fed wants you to believe hyperinflation is looming. Or at least, it shouldwant that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (”whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson(also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again onJune 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Timeson Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Source:  Faber and Greenspan: Shills for Fed Snake Oil

And to cap it all, we are about to close the first half of 2009, with all the consequences in terms of portfolio adjustments that need to take place.

The Treasury debt placement was well received by the markets.   We saw these issues amply oversubscribed and trading well after their placement.  This was very encouraging.  End of the half adjustments also saw a bid coming back into the U.S. dollar.  And, with the Federal Reserve issuing a statement in which they are not expanding quantitative easing further, the ghost of hyperinflation is delayed for the time being.

With all the slack in the U.S. economy there is no room for manufacturers to pass cost increases on to consumers.  As the fiscal and monetary stimuli become ingrained, this will change.  But for the moment, the great fears of a runaway monetary base have been moderated.

This view is also supported by the commentaries of both Warren Buffet and General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt.  The oracle of Omaha saw no recovery yet in his numbers.  And Buffett’s group holdings are diversified enough, and he and his management team are as well connected enough, to be ahead of any recovery.

Similarly, Immelt commented that the underpinnings for a recovery were in place.  And he also observed that China, and some government-driven emerging markets are strong and could be driving U.S. exports.  He did mention that the thrust of aircraft engine orders come from abroad rather than the United States.

In this column, we took early and aggressive advantage, starting last October and December, of low market valuations.  The market did not price then the strong monetary and fiscal stimuli that were devised to bolster the economy.

Without the Fed’s strong measures and quick actions, we would have fallen into a deflationary spiral and much deeper downturn.  But the Fed’s actions normalized markets one by one; starting at the epicenter, the interbank and money markets, and moving outward in concentric circles through mortgages, and student and car loans.  These actions helped bring the corporate bond markets and the equity markets back to life.

Stocks appreciated the Fed’s effort, as the market shifted its valuation from an “end-of-the world” scenario to a deep recession scenario or better.  But that trade is over.

As Warren Buffet says and Jeff Immelt implicitly recognize, the recovery will take a long time to materialize.  There are still huge numbers of homes facing foreclosures, and the slack in the U.S. economy is very pronounced.  We need to see some more good news in order to justify higher valuations.

Ahead of this realization by the market, we have been in profit-taking mode for the most volatile stocks and moved to hold for longer-term recommendations.

The Standard & Poor’s 500 Index has recognized this and had started moving sideways with a very slight downward bias as of late.  Do not construe this to be bad news.  In fact, the cup-and-handle formation in the S&P 500 usually precedes a sharp move up.

That is a very distinct possibility that we will eventually be playing with many of our existing ‘Buy’ recommendations, as well as with new ones, should the scenario materialize.  But we need to get over the cap-and-trade and healthcare reform humps.

If the cap and trade legislation passes, the overall cost of energy will go up, taxing the whole economy, and there will be a shift to renewables, creating many jobs in this industry and ample profits.  We need to see these issues defined before pulling the trigger in most hugely actionable trades.

So, I started screening different income-generating strategies and I discovered a great way to have both upside with high-yielding, yet low-default bonds, and at the same time enjoy dividends from mammoth companies that are likely to keep paying them: The TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW).

I normally shun from recommending funds.  Why pay management fees when I can come up with a similar strategy on my own and recommend it to you?

But there are two circumstances that make this case different:

• When there is such a level of expertise behind the strategy that it would be almost impossible for a non-expert to replicate with a decent chance to obtain similar results.
• And when the value of diversification is huge, and such diversification is unavailable or almost impossible for the individual investor to obtain.

Both of these reasons are huge factors here.  Let me explain.

Let’s start by explaining what this fund has in its belly.  It can invest from 50% to 60% of the fund in tax-free municipal securities and between 40% and 50% in equities and other income securities.  So we are not only playing the rally in bonds that stand to benefit from the markets’ realization that we are in for a longer recession than expected, that inflation is very subdued, and that the debt placements by the U.S. Treasury were well received.

It helps the bond market a lot to have seen that the Fed did not continue expanding its quantitative easing.  So why not benefit from this by buying high-yielding, tax–free bonds?

We are going to get both capital appreciation and a high yield.

The fund is positioned right now some 54% in munis and 10% in other income. And it is well diversified in 59 strong large caps with an average market capitalization of about $55 billion that pay an average dividend yield of 4.85%!

The key to the strategy is executing precisely in the muni world, given the fund’s higher weight in it.  Also, this very specialized asset class requires detailed credit analysis of municipal and project finances.  The beauty of most munis is that these jurisdictions have taxing power and they are careful to keep their credit ratings.

In fact, fund’s holdings are 42% in AAA-rated bonds, making it 88% of the bond holdings rated single A or better.  In addition, it has a duration of 15 years, which will be beneficial to returns with a bond rally.

But as many in the market learned painfully last year, “not all AAA bonds are made equal,” and many went straight to default.  I have known this for a long time and have always done my own research on credit quality, never relying on rating agencies.  Because of this discipline, I was able to get out of Enron, Worldcomm, the toxic-waste-laden structured investment vehicles, and innumerable securities well before they were downgraded to junk.

So why am I sending you to a muni-heavy fund, at a time that the US municipal and state finances are under such pressure?  Because I know the manager of the fund very, very well.  He is not just your typical fund manager.  He is someone that has been at the top of his class for decades.  He is extremely well known by his clients, issuers, and Wall Street, which grants him top-level access.

I used to work a few offices down the corridor from Vincent Giordano at Merrill Lynch Asset Management and cannot even begin to tell you how much I have learned from him over the years.  He was responsible for bringing the municipal bond management of the firm up to above $60 Billion from $2 Billion by the time he left to start this fund.  He did that on the basis of exemplary and disciplined performance, leveraging the superb distribution network that Merrill Lynch has.  “Vinnie,” as all his friends call him, is the poster-child of discipline, never becoming complacent and always questioning his own assumptions.  This requires inordinate amounts of reading, research and consulting the best sources in the market.  He is a master of risk-reward analysis, which is the key in any investment.

But get this:  The fund is trading at a 12.46% discount to Net Asset Value.  That is, as a closed-end fund you are buying exposure to the securities it holds at such discount to what you would have to pay just to buy them yourself.

In addition, the fund yield is an amazing 9.50%, most of which is tax free, since it is coming from munis.

Hence, on the back of a very supportive fixed-income environment and to keep a toe in high-dividend, strong large caps, we go for an expertly-managed and well diversified balanced muni-equities fund.

Recommendation: Buy the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) at market (**)

Source: Buy, Sell or Hold: The TS&W/Claymore Tax-Advantaged Balanced Fund is a Diversified Profit Play with a High Yield

Before you tell me I’m wrong, let me ask it this way…

• If inflation returns, or even hyperinflation…
• If the economic crisis persists and gets worse…
• If uncertainty and fear continue, and chaos and rioting begin…
• If stock markets languish or suffer another meltdown…
• If the recovery spending of the world’s governments proves futile…
• If government interference in the economy continues to increase…
• If the value of the U.S. dollar takes a major fall…
• If world recovery from the current recession/depression takes years…
• If you’re still wondering whether you have enough “safe” money…

…would you feel you own enough gold?

If all those things come to pass, I suspect many of us, including myself, would wish we had a few extra gold coins or bars stashed away.

So let’s assume you answered “No” to my question and need to add some ounces to your collection… is now a good time to buy?

The Best Time to Buy Gold?

Before glancing at the chart below, if you had to pick the month with the weakest average gold price, which would you select?

In our current 8-year bull market, June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy.

How does this compare to the bull market of the 1970s?

In the last great bull market, summer also was a good time to buy gold (although April was even better.)

What about gold stocks?

Since 2001, July and October have been the weakest months for gold stocks, as measured by the AMEX Gold Bugs Index, and the best times to buy.

However, keep in mind that these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

Don’t lose sight of where we are at this point in the recession – in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment – and markets – could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power.

How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.

Having physical gold in your possession is always a good idea in times of economic turmoil – there is no “uncertainty hedge” like it. But to actually make money, you should also look at premium gold stocks. Our current favorite has been so consistently successful that we call it “48 Karat Gold.” Click here to learn more.

Wait…scratch that…make it negative 2.9%.

Somebody must have slipped a few Rude pages to the honchos over at The World Bank. It seems the Washington-based lender is hedging its bets. A 2.9% contraction in the global economy this year is a far cry from its March estimate of 1.7%. But growth will be back to 2% next year, the bank assures us, slightly down from the 2.3% they originally expected.

What went wrong during the springtime, we wonder? Didn’t unprecedented levels of stimulus flow from government taps around the world? Weren’t Bernanke and Geithner manning the pumps? Didn’t the global media confirm sightings of green shoots? Or were they recovery saplings? Your editors were too busy “calling B.S.” to keep up with all those flowery euphemisms for delusion. Still, shouldn’t we be smelling the turnaround tulips by now, on our way back towards bull market springs?

Not just yet, says the bank of the world. The following adjustments must be made to the March forecast:

• Output in the U.S. will drop by 3%…not 2.4%,
• Japan’s gross domestic product will shrink 6.8%…not 5.3%.
• The Eurozone will have it a bit tougher too, contracting 4.5%…not 2.7%.
• And the globe as a whole? Uh…eh…it won’t decline 6.1%, as predicted. Better expect closer to 9.7%.

The lender also called for “bold” actions to hasten a rebound (an urgency upgrade from “tough” actions) and said the prospects for securing aid for the poorest countries were “bleak” (adjective upgraded from “slim”).

Does that mean the “delude-a-bulls” are spent? Is the sucker’s rally over? Insiders seem to reckon so. Bloomberg reports that, “Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.”

Worldwide markets did enjoy a pretty nice rally over the past couple of months. Perhaps that’s the end of the first suckers’ rally. Maybe last week’s 3% mini-selloff on Wall Street was only a harbinger of things to come.

Personally, we wouldn’t expect any hope of a sustainable turnaround until The World Bank downgrades its forecast from “bleak” to at least “apocalyptic.”

Joel’s Note: Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching…and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a “Decade of Reckoning”…four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade.

So, will we be seeing you there? This event is already 70% sold out, so you’ll want to be nimble. Click below for all the info:

The Agora Financial Investment Symposium: July 21-24

Source: World Bank: Whoops!

Then, historian Niall Ferguson – Professor Punchy – took a jab at the meddlers in the pages of the Financial Times. His point was simple enough – that the feds were spending trillions of dollars without really knowing what they were doing. If they borrow money to stimulate the economy they are just taking money out of the private economy and diverting it to public spending. There’s no gain in that, he said.

Watch out Niall! The Nobel Knucklehead – economist Paul Krugman – hit back.

We’ll return to this grapplefest. But first, let’s take a look at what is happening outside the arena…

Nothing!

Yesterday, for the third day in a row… not much happened in the markets. The Dow fell 24 points – hardly worth mentioning. Gold held steady at $955. Oil rose a dollar – to $71. And the dollar itself remained about where it was – at $1.39 per euro.

It is as if everyone was waiting to see what happens next. Let’s see…

We’ve seen the biggest stock crash in history…

… the biggest property crash in history…

… the biggest deficits in history (4 times the previous record!)…

… the biggest bailouts in history (we can’t even count that high)

… the biggest bankruptcies in history…

… the auto industry and the finance industry have been largely nationalized…

… the president of the United States of America is now making financial decisions for formerly private industries…

What’s left to see?

Oh yes… the depression… and hyperinflation.

“Get ready for inflation and higher interest rates,” warns Art Laffer in the Wall Street Journal. Remember him? Creator of the ‘Laffer Curve.’

But don’t worry about inflation, adds Harvard professor Gregory Mankiw, also in the Wall Street Journal: Inflation is just what we need. “In the current environment, the goal could be to produce enough inflation to ensure that the real interest rate is sufficiently negative… ” to force people to get rid of their money as fast as possible.

Over in the bond market, investors are finding out what a little bit of inflation – or even hints of inflation – can do. People bought US Treasuries during the panic of ’08 for safety purposes. Now, they’re getting what we predicted. Alas, yes, they are getting what they deserve, not what they expected. Our friend Chuck Butler points out that prices of 10-year treasuries have come down from $110 as recently as 5 months ago to just $94 this week. How’s that for safety – a 15% loss!

What they were fleeing from was the uncertainty and risk of the big wide world of investing. When Lehman Bros. went broke, foreign investors took the first available plane out of India, for example. But now, our friend Ajit Dayal reports that they’re coming back. Things are looking up on the sub-continent:

“What a month!

“The 36% surge in client portfolios after the election results have brought the value of the client holdings back to where they were before the Lehman bankruptcy in September 2008. “We see this as a base for a possible assault on a new peak by June 2010.

“That is the good news.

“The bad news is that many of the lessons learnt in the implosion of capital markets in the year 2008 may be forgotten. Memories are short – in fact they may not exist.”

Memories? Here at the Daily Reckoning, we’ve got all the memories you could want. We may not be able to remember what we did with our car keys, but we remember that fateful day – August 15, 1971 – when Richard Nixon ‘closed the gold window.’ It’s been downhill ever since…

In his blog, Krugman accused Ferguson of  “living in a dark age of macro-economics, in which hard-won knowledge has simply been forgotten.”

The ‘hard-won knowledge’ he referred to was Keynes’ “proof” that extra government spending was indeed a plus to the economy – as long as there was not full employment. Once full employment was achieved, things changed, he said. Then, government borrowing just “crowded out” private borrowing.

We don’t expect Daily Reckoning readers to be deeply interested in these squabbles; you’ve got better things to do.

We just bring it up to make a point. The world’s governments – led by the United States of America – are spending trillions to head off what they believe could be a terrible depression. Yet the theory on which they hang their theory is such a thin string, some of the world’s leading thinkers can’t seem to hold onto it. Merkel thinks the theory is wrong; Ferguson thinks it’s wrong. Heck, we even think it’s wrong.

Not that that proves anything. We could be wrong. But we’re not spending trillions of dollars based on an idea that is the subject of hot dispute.

“Keynsian revolution was not a triumph of good science, but of good judgment,” says the FT’s headline from yesterday. Ha ha… that’s a good one. They’re right, of course. There was no science in Keynes’ oeuvre. It was all guesswork. But good judgment? Not much of that either.

As for Keynes’ “proof”, it is defective. He argues only that when the feds borrow and spend in a recession they can’t “crowd out” private borrowing without also increasing economic activity – which he takes as a gain.

Which reminds us how simpleminded economists can be. Imagine a town where people borrowed and spent too much. Faced with unemployment and a slump, the mayor borrows money to build a new town hall – thus putting “idle” resources back to work.

He doesn’t “crowd out” private activity, because private citizens are hunkered down, trying to pay off their debts. They save. They lend to the mayor. Private borrowers have no better use for the money.

That is the theory of it. On the surface, it appears that the mayor’s stimulus plan is a big success. Pretty soon, people are working again. Money is changing hands. The new city hall is going up.

But what has really happened? The citizens will have a new town hall. But it’s a building they hadn’t particularly wanted when the good times were still rolling. And now they have their share of the debt the mayor incurred to build it.

Yes, it may look as though the town is more prosperous – with people employed on the new town hall, collecting paychecks and spending money. But the prosperity is phony. Citizens got not just one thing they didn’t want, but two – a new town hall and more debt. And somehow, sometime in the future… other spending plans will have to be shelved so that the town hall can be paid for!

That’s what Angela Merkel was saying in her attack on the central banks. When all is said and done, 10 years from now we’ll be back to where we are now.

*** This morning, we got a call from a reporter. “How long do you think this rally will continue,” she asked. “Why do you think it won’t last?”

“As to the first question, we have only an intuition… based on very few historical precedents. When you get a crash as big as we had until March… you can expect a rebound for 3-6 months after. The current rebound is now almost exactly 3 months old. By our guess it could run 3 months more… which takes it to September. But it’s very dangerous. If you’re playing this rally, be sure to use tight trailing stops… the next leg down could be worse than the first. Remember, after the Crash of October ’29 the market rallied until the following May. Then, it went down. And it didn’t bottom until 1932.

“As to the second question… why can’t the rally become a real boom?… the answer is very simple. Debt is either expanding. Or it is contracting. When it gets to an extraordinary high… it tends to go down. Because it can’t go up any more. That’s where we are now. Since consumer debt can’t increase — and since consumer incomes are definitely not increasing… especially not in Britain and America – there is no way that a consumer economy can expand. Since it can’t expand, it must contract. You can’t have a boom in a consumer economy when consumer credit, consumer incomes, and consumer spending are all going down. Forget it.”

Source: Worldwide Economic Mud Wrestling

What a great time to be an economist!

Yesterday was another dull day in the markets. The Dow was steady. Oil rose a buck. Gold went up $3.

But there’s nothing dull about the economic news. Already, we’ve been able to see things we never thought we’d see. It’s as if our strange neighbours had invited friends, and even some animals, over for a night of fun – and left their curtains open.

So far, we’ve seen a stock market crash and what looks like the beginning of another depression, already marked by the biggest bailouts and nationalizations in history. We’re getting an eyeful! And with a little luck, we’ll probably see a bout of hyperinflation too. Crash, Depression, Hyperinflation – this is the Triple Crown of Financial Catastrophes!

It is remarkable enough that we have been able to witness a genuine market crash. The crash of ’87 barely counts. It sent prices down as much as a third all around the world. But it was a very short-lived affair. Bread put in the oven at the beginning of it was still doughy when it was over. Then, it kept rising for the next 20 years.

The last real crash in America occurred 80 years ago. We never thought we’d have the privilege of seeing another one. Especially since nearly three generations of economists and financial authorities have been working to prevent them. They set up their safety nets and perfected their formulae… Fed monetary policy was thought to be such a finely tooled instrument that it was widely believed that the feds had mastered the business cycle – thereby eliminating the need for crashes or recessions. When the economy heated up, the feds turned on the air-conditioning – higher rates, stricter credit standards, and even higher taxes. When it cooled down, the switches were thrown in the opposite direction and on came the heat. The economy was supposed to maintain a constant temperature all year round.

With such perfect climate control systems in place, many thought the cold shivers and hot sweats were over. But something seems to have gone wrong…

And now we’re enjoying the show. From one spectacle to the next – you can’t say it isn’t entertaining. But what might keep us from realizing our goal and seeing all three major catastrophes that give economists the willies?

Uh oh… what’s this?

“US banks to repay $68 billion to Treasury,” says the lead headline in today’s Financial Times. “Move marks turning point in economic crisis.”

The banks are now feeling healthy enough to give the feds back their money. All is well, we guess.

And what’s this… ?

“OECD says statistics point to recovery,” begins an item in the Financial Times. The organization says most advanced economies are indeed past the worst part of the downturn. The “possible trough” was reached in April, it says.

OECD is looking at the same data as everyone else. They say it points to growth and prosperity. We wonder; how could that be? What about all those investments that still haven’t been written off… written down… and restructured? What about all that debt that is still carried on tired shoulders? What about all those homeowners still yearning to sell – as soon as they can catch a break? What about all that debt that the feds are adding to the system? What about the credit contraction? What about the de-leveraging? What about all those balance sheets – household and corporate – that need to be cleaned up? What about those falling corporate earnings? What about… what about…

Richard Russell tells us that the Transport Index has still not confirmed a new bull market – well, that’s a good sign – but that the usually reliable Coppock Index is signaling an end to the recession and rising stock prices ahead.

Oh my… what if we’re dead wrong? What if something is going on that we don’t understand at all? What if there is no depression… no hyper-inflation… no Triple Crown of Catastrophes that we were yearning to see?

“There’s more under heaven and earth than is contained in your philosophy,” wrote Shakespeare. No matter you think, things are always more complex than you imagine… with interpretations very different from those you impose.

Will we go to our graves without ever having seen a real depression or a real hyper-inflation?

What if we are wrong?

For example, we believe stocks are getting ready for another big fall. As we wrote yesterday, the smart money is short the stock market.

“If you think that, how come you’re not 100% short the stock market,” asked a friend.

In fact, we’ve still got about a quarter of our family wealth in stocks. How come?

Well, the simple answer is: we may be opinionated, but we’re not crazy. It’s one thing to have an idea about what will happen. It’s another thing to stake your whole financial future on it. Also, we treat our family money differently from our own, personal money.

Why do we own stocks, even though we think the stock market will probably go down?

1) We know someone who is at least as smart as we are who believes that buying stocks – at bargain prices – is the safest, surest way to wealth over the long term. He and his team spend all day, every day looking for extremely undervalued companies. He operates a private, family office… not available to the public… and only buys when they’re priced so cheap that even if they had to be broken up and sold off in parts, the shareholders would still come out ahead. We figure our children’s money is at least as safe with him as it is with us.

2) While we expect a downturn in stocks, we’re not sure how this downturn will be expressed. A big increase in inflation could send stocks’ nominal prices up.

As we explained yesterday, you can de-leverage in one of two ways – the old-fashioned honest way which is repaying your debts. Or, you can inflate your debts away. If the feds succeed in causing substantially higher rates of inflation, stocks could go up as investors buy them in order to escape inflation.

Of course, the best defense against inflation is gold. But gold doesn’t pay dividends. And gold has no earnings. And gold doesn’t send you quarterly reports that you can use to light a fire.

We think there will be no recovery… that the feds WON’T succeed in causing inflation soon… and that stock prices will fall. Still… we hedge our bets in some very cheap stocks… just in case.

*** While the private sector deflates and de-leverages… the public sector is building the biggest debt bomb the world has ever seen. Here are the numbers we promised yesterday:

US private debt is at a record high, about $44 trillion.

Compared to that, the federal government’s $11 trillion of official national debt doesn’t seem so bad.

And, the states have about $2 trillion more – which, in round numbers, doesn’t seem like a cause for worry.

But last week, Gov. Schwarzenegger said California’s ‘day of reckoning’ had come. He’s looking at a $24 billion hole in the Golden State’s finances. And at least he’s proposing to close the gap honestly – by cutting back on services and raising taxes.

What else can he do?

The federal government has options… and “a little technology called a printing press,” as Ben Bernanke famously put it. But California can’t counterfeit the money to pay its expenses; instead, it has to borrow it from willing lenders or steal it from unwilling taxpayers… there’s no other way.

The feds are convinced that they can spend as much as they want. This week alone, for example, they’re selling $65 billion in Treasury bonds. And this year, a total of about $2 trillion are to be auctioned off. Who’s going to buy these things? Beats us.

And consider this: in addition to the fed’s ‘official’ debt, there’s some $100 trillion more of unfunded liabilities, commitments and obligations. Those are mostly things such as Social Security and health care commitments which the government has sworn to honor. If all those “debts” are put together… .well, it comes to one helluva number – about $157 trillion of debt in America, or more than 10 times total annual GDP.

*** “Mmmm… .this lamb is very good,” we said at a dinner party in France the last time we were there.

“Oh… yes… it is good,” said our old friend, Pierre. “It’s from New Zealand. And it almost got me arrested.

“Back in the ‘80s, I was raising sheep. Even then it wasn’t a great business. Sheep are a pain in the neck. You can never turn your back on them. They are either getting stuck in the fence or coming down with a terrible illness. You have to be on the job 24 hours a day… 7 days a week. No vacations. No holidays. Never a day off.

“And to make it worse, you don’t earn any money. At least not in France.

“Anyway… as poor as the sheep business was, it got poorer in the ‘80s. The British exported lamb to the French market… and they undercut our prices. Because they were part of the European Union, we couldn’t do anything about it. It’s a free trade zone. But the British couldn’t produce lamb that cheap either. What they did was import it from New Zealand and then sell it all over Europe as ‘British lamb.’ It was outrageous. And I was very mad about it.

“So about a dozen of us decided to take political action. We found out where the British lamb was shipped from… a place in Poitiers… and we decided to block the roads.

“Well, it didn’t go so well. We drove up and waited for one of their trucks to come along… and then we put our cars in the middle of the road. But we left a little gap… actually, a fairly big gap between a couple of the cars… Then, when the truck came up, the driver stopped… and he yelled… ‘What the Hell are you guys doing.’ Or something like that. We explained that we were blocking the road so he couldn’t distribute British lamb. Well, he got back into his truck, put the big rig in gear… and smashed through our cars… .

“The next time, we did stop one of the trucks… and we decided that we were going at least to let them know in Paris that we were upset about these lamb shipments… So we took the truck to the train station… dumped the lamb out onto the tracks and set fire to it. It was a huge fire, so hot the rails glowed red. We had the police, fire department, news media. But it was night time… and we just pretended to be spectators when the police arrived.

“Then, we really decided to go big time. We planned a commando raid on the British embassy in Paris. I was supposed to distract the guards… while one of our trucks got through the gates. It was all planned out to the second. And we even had an insider – someone who had a pass to the embassy… I don’t know how he got it…

“But that went bad when there was a terrorist attack in Britain… and all the embassies were on alert… so we called it off. Instead, we decided to target the French minister of Agriculture. What a waste of time. The media didn’t even cover it. They were used to it. The chicken farmers had been there the week before. And the dairy farmers tried to demonstrate the same day we did. You practically had to get in line and take a number if you planned to do a demonstration at the Agricultural ministry…

“Later, we tried one last thing at home. This time we stopped one of the trucks with British lamb and set the whole truck on fire. This time the gendarmes were really mad. They came and surrounded us. They took our names and addresses and let us go. They were planning to arrest us later. But that just shows how the police operate in France. We knew someone in the police headquarters. He went on the computer and erased our names… So I was never charged with anything… ”

Source: The Triple Crown of Financial Catastrophes

Platinum spent nearly the whole day rangebound between $1130 and $1140, before ending near the low end at $1133, unchanged. Overnight, platinum is slightly lower.

Silver noodled around the $14.50 mark from Hong Kong to the New York open, then followed gold strongly higher but outdid its sister metal, adding 50 cents to nudge the $15 mark before subsiding and coasting to a close at $14.75, up 14 cents. Overnight, silver is trending higher. (Click here for charts)

The precious metals were quite a mixed bag yesterday, with gold finishing lower, platinum flat, and silver solidly in the green. Again, the dollar was the primary driver among the usual suspects, with its strength undercutting gold’s appeal.

But the downtrend was likely tempered a bit by rising oil prices.

Kitco’s Jon Nadler, who tends toward the negative, stated flatly that, “The market is overbought,” then asked, “Where are the jitters? North Korea did not do the trick … Add it all up, and we see profit-taking as imminent.”

But in an interview from Hong Kong, noted market analyst Marc Faber went way out on a limb and said he sees the U.S. entering a “hyperinflation” that will be “close to” Zimbabwe.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

Faber added that, “I don’t think that gold will run up right away. I never sold gold and I’m still buying gold … [because it] has been an adequate hedge against inflation … If you bought it in 1980 at the price of $850, then it hasn’t been a good hedge against inflation, but if you bought it in 1999 at $251, then it has done very well.”

Inflation? No way, Nadler says. He might as well have been responding to Faber when he said: “Where is inflation? A speck on the horizon.”

Nevertheless, the funds continue to pile into metal. Hedge funds and other large speculators increased their net-long position in New York gold futures last week, by 7.7% over the previous week, according to CFTC data.

Source: Precious Metals Mixed