We now have a government that wants to dictate how we live, work and earn money. Tax cheats can aspire to running the IRS, with the recently confirmed Timothy Geitner as their model. In addition, it seems that a large enough majority of the country wants the government to provide healthcare for everyone, as well as manage our banks.

All of which begs the question… What’s next?

There’s no need to speculate since we already know the outcome. With an annual deficit of over a trillion dollars, the government and the American people will have to face a choice: either accept a lower standard of living or fork over some extra cash in the way of higher taxes.

Guess which one we’ll choose.

The easy answer of course, is taxes. That is unless we want to become the next Weimar Republic. If you don’t remember it from your history books, that’s part of the point. Suffice it to say, it didn’t work out.

Too Much Convenient Cash Is Going To Make Gold Soar

That’s the problem in a nutshell, and there is a solution for the individual investor. Justified or not, the more money we print to prop up the various institutions, the less valuable that same money is going to be.

Naturally, that will make precious metals more valuable, so continue adding to your gold holdings whenever it pulls back. Because there will be pullbacks. Take yesterday when gold broke the $900 barrier before pulling back again.

Gold stocks tend to be a leading indicator for the price of bullion, such as late last year when the shares hit 52-week lows only to bounce back sharply, gaining 50% across the board.

That time, readers of The 400 Report, Xcelerated Profits Report, and Strategic Income, all participated in the rally through ownership of low cost producers. There was money to be made, and bottom line: we made it thanks to our plays on Goldcorp (NYSE: GG) and Yamana (NYSE: AUY).

And there are more profits to be made in the long run.

You should also be buying up municipal bonds, through high quality muni ETFs if you can.

That might sound like strange advice considering that last year everybody was terrified of municipalities going under. But with the new government promising to pump money into everything, there’s little worry of that happening now. The Obama administration has already signaled aid to the states as a cornerstone of the new stimulus package.

If you’re in the 25% to 35% bracket, you can rack up yields of over 9% in high quality muni funds. Look to Nuveen or Blackrock to buy into high quality (AA, AAA and insured) funds.

The Index of Leading Economic Indicators Tells All

With all of the changes being made, it’s obvious that we’re in uncertain times. But there was an interesting ray of light yesterday when the Index of Leading Economic Indicators (LEI) turned up instead of pointing down. Take it as you will…

The LEI stands out as a predictive indicator, as it factors in jobless claims, factory orders, housing starts, money supply and consumer sentiment to predict what will happen over the next 6 to 9 months.

Jobless claims just skyrocketed yesterday in what the media quickly dubbed as Bloody Monday, housing prices continue to fall despite an occasional upturn here and there, consumers still aren’t spending what they used to, and factory orders are unsurprisingly down thanks to the slew of economic bad news.

In fact, there is only one factor that I can see which is actually increasing… Money supply! Yup, the LEI went positive because we bailed it out just like everything else.

Source: How Do You Say “Higher Taxes” In French?

True, a big barrel of West Texas Intermediate crude oil might be hard to fit under a Christmas tree. And it’s probably a fire hazard. But it also makes an excellent end table or lectern. However, we would wait for the post-Christmas sale, or maybe even until 2009, for a lower price.

Speaking of Christmas, just a reminder that our third annual Doomer’s Ball is tomorrow night. The location is BLVD Bar, located at 6 Queensbridge Square on Southbank in Melbourne, from 6:30 p.m. until later. There will signs directing to the right room and even be a red carpet, we hear. If you’ve RSVPd, there will be a check in desk where you can pick up a name badge at your ticket for a free drink . See you then!

Today’s AFR reports that Australia has a funding gap. The credit crisis is causing foreign banks to pull up stakes, pack up their cash, and head back to wherever they’ve come from. The AFR reckons about $50 billion in lending will have to be replaced by Aussie banks.

Those banks, by the way, may not be so keen to make new loans. ANZ boss Mike Smith was in Melbourne Friday swinging the axe. Eight hundred heads toppled from their shoulders by the time he was done. If the banks do as good a job deleveraging their balance sheets, things might start to look better in 2009.

You’d expect job losses and a bad year for stocks to impact consumer confidence and spending habits. You’d be right. Australia had a $20 billion current account deficit in March, according to David Uren in today’s Australian. That was seven percent of Aussie GDP and pretty remarkable for a country in the middle of an export boom.

Now, though, consumers are rolling back their spending ways. The weaker Aussie dollar makes imports more expensive. The current account deficit has halved to 3.2% of GDP. This probably isn’t great news for retailers. But if household’s rebuild their balance sheets on savings, it’s not a bad development.

Over the long run, in fact, an increase in the savings rate increases the amount of credit banks can lend to businesses. Household savings are the source of bank deposits. And in a fractional reserve banking system, every new dollar deposited is multiplied into ten dollars that can be lent. If the banks are lending, that is.

Christmas has come early for Leighton Holdings (ASX:LEI). Dubai’s Department of Civil Aviation awarded Leighton’s Middle East operation a $1.3 billion airport contract. At $21.31, Leighton is not selling for much above its 52-week low of $18.68. It trades at just 10 times earnings. Is it a buy?

That depends on whether you think countries like Dubai are going to keep building and spending. Dubai has the money, generated from the oil trade. And it’s in the middle of an ambitious project to turn oil money into the capital stock of a new economy, via tourism, finance, and trade. But it could also be just another example of the credit bubble.

Take away Western demand fueled by credit, and the world needs less oil. Ironically, this actually accelerates the rate of depletion in global oil fields. How? When a good falls in price, people tend to use more of it. The cheaper it is, the more you use it. But wait. There’s more.

While cheaper oil prices in 2009 accelerate the depletion rate by encouraging more use (and lulling us all into a false sense of oil security) they also discourage smaller firms from going out and finding more. The majors are always looking for oil. They have to constantly replenish reserves to match production, or the stock price falls. But what about all the other searchers and explorers. Will they keep looking for oil with the price at $40?

In America, Barrack Obama is already busy spending money America doesn’t have. And he hasn’t even officially taken office yet. Impressive. Obama is dusting off construction plans for bridges, highways, and schools that he says are “shovel ready.” That means all the blue prints and plans are drawn up. They just need men, machines, and money.

America doesn’t have the money. But that has never stopped anyone with a can-do attitude. Obama says we can’t worry about the deficit in the short term. Right. It doesn’t look like anyone has been worried about the deficit in America for a long time.

Dig a hole. Fill it up. We’re not sure where we heard that. Maybe it’s a Buddhist way of dealing with stress, and realizing…something. But we get the feeling a lot of holes are about to be dug across the world. And most of it will be paid for with borrowed money.

But who will be doing the lending? So many new government bonds are going to hit the market in the next year from the U.K. and the U.S. that you wonder if the world’s creditor nations aren’t starting to get a bit nervous. What happens if they balk? Interest rates should rise.

That’s not happening yet. Just the opposite. “Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt,” reports Bloomberg. And get this. The yield on three month T-bills is a sparkling 0.01%.

Hear that sound? It’s the sound of the bond bubble stretching to historic levels. Cover your ears.

Source:$40 Barrel of Oil for Christmas

“Is China preying on BHP Billiton (ASX: BHP)? Or is BHP preying on Rio? Who are the barracudas and who are the minnows?” asks Dan Denning of the Daily Reckoning Australia.

Steel prices are up by about 10% this year already.

First, the big fish. “With iron ore prices rising explosively,” says China’s National Development Reform Commission (NDRC), “many domestic firms are very enthusiastic about investing in overseas mines, which needs strengthened macro guidance from the country.”

Macro guidance is about what you’d expect from a nation that has methodically and with stunning success, pulled itself from centrally planned poverty to centrally planned prosperity (at least for some). But what does ‘macro guidance’ mean? GPS? RFID?

–Today’s Australian has all the intriguing details on China’s Grand Strategy towards Australia in a story titled, “Beijing takes over BHP raid plans.” The comments from the NDRC are a fascinating take on how at least some Chinese officials think capitalism works. “Globally, iron ore mines that are of high quality and easy to exploit are basically in the hands of major multinational companies. Our firms need to pay a high cost to mine iron ore resources abroad. Their exploitation risks and costs are increasing.”

–Is it really ‘exploitation’ to pay the market price for natural resources? Or is that just the language of socialism? Perhaps a crash course on free market economics is in order for the NDRC.

–Not to sound too condescending (this coming from someone who uses the royal We), but you have to wonder if there is some wishful thinking going on in Beijing. Or maybe, after having lost money in Blackstone and Bear Stearns, state backed firms are wary of buying equity chunks in public companies. Maybe they want a different arrangement.

–Either way, it is clear the Chinese have woken up to the fact that the century is theirs for the taking. But there seems to be some confusion about what rules the century is going to operate under: will it be mostly free market rules…or other rules. The market price for the resources China wants is rising. So it would prefer to not pay the market price.

–By the way, we reckon free markets are headed for a bit of a bear market. Globalisation, in the bastard form we find it (where trade isn’t really free and currencies are manipulated regularly) has produced US$114 oil, massive inflation, the worst credit crisis since 1929, food riots, and a growing popular backlash. Expect more direct government intervention and regulation in financial markets and, perhaps, resource markets. That should play right into China’s hands, actually.

–This latest line of probing rhetoric coming from China is not exactly a new line of attack. After all, the resources are there for the taking on the public markets. There’s no need to attack at all. But it does feel like an attempt to flush out Australia’s politicians and get them more involved in China’s plans for Australian resources. The government is already involved, of course, with the Takeovers panel quashing the bid by Shougang Steel and APAC resources to take a 40% stake in iron ore up-and-comer Mt. Gibson (ASX:MGX).

–Let’s put this whole affair in the context of steel and GDP. We found the chart below yesterday while preparing for a radio interview with a Canadian business show. The host wanted to know how steel companies could afford to pay a 300% increase in coking coal prices and a 75% increase in iron ore prices. We asked him to picture the chart below.

Steel and GDP, Marching Hand in Hand

Source: Mining and commodities exports, Angelia Grant,
John Hawkins and Lachlan Shaw, 2006

–The chart shows that world steel production leapt ahead of GDP growth during the two big periods of Asian industrialisation of the last 50 years, in Japan and Korea. With China now industrialising, and coming off a much lower base in steel production, a period of growth in steel production that exceeded world GDP would be quite the spectacle. It would also mean China’s consumption of base metals is just now hitting high gear.

–From an Australian perspective, what’s so flabbergasting about the chart is that both Korea and Japan have been devoted customers of the black coal from the Bowen Basin that is so well suited for coking. They’ve also been tied up for years as customers of Rio Tinto and BHP for the iron ore that comes from the Pilbara. Now you add China to the queue.

–Despite its surge to the top in terms of global steel production, China’s individual steel firms are still smaller, at least according to the latest figures from the International Iron and Steel Institute, than Japan and Korea. Nippon Steel, Posco, and JFE are all bigger producers than Baosteel. Keep in mind, however, that as recently as 2002, China was a net steel importer. It’s now a net exporter.

Source: International Iron and Steel Institute