Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

This shows an explosion in America’s monetary base on an unprecedented level. According to Laffer, a former economic advisor to President Reagan and supply-side economist:

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10. It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless…

To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5%…

This is bad news for America’s earners and savers. And good news for America’s debtors. That’s because inflation at this level would reduce the value of Americans’ savings and investments at the same time as it would reduce the value of the debt owed by America’s spenders and borrowers.

In a nutshell, this is why we believe that inflation will sooner or later win the day in the epic battle currently being fought between the forces of deflation (credit deleveraging, debt deflation, supply overhangs, higher personal savings rates, reduced consumer spending, etc) and the forces of inflation (record government spending and borrowing, Bush’s and Obama’s ‘stimulus’ programs, the Fed’s money printing, etc).

Inflation is simply the path of least resistance for Team Obama: it puts off America’s economic problems to a later date and favors spenders and debtors over earners and savers.

Without hesitating, the federal government has responded to the 2% drop annual drop in US GDP with a 100% increase in monetary base (the total quantity of currency in circulation outside of banks plus the currency held by banks or deposited with the Fed). As Porter put it last fall in DailyWealth:

The coming great inflation will destroy America’s economic leadership. It will lead – eventually – to the return of settling international obligations in gold instead of paper dollars. And this will happen much faster than anyone expects.

By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the US government. The price of gold will be well over $2,500 per ounce.

The big question for investors right now, says Porter, is: “How long will it be until this ocean of paper causes a severe decline in the dollar and a massive run-up in gold?” This from today’s DailyWealth:

We can’t know for certain. Nobody has seen anything like this, ever. But I believe it will take at least two years before the inflation that’s been put into the system starts to roil the real economy. (Of course, it might not take that long… oil prices have already nearly doubled from their lows.)

As I’ve said before, I’m not happy to be the one to tell you all of this. I hope I’m dead wrong. But, while I don’t believe we’re in immediate danger of inflation, it’s paramount you own some gold to protect yourself from what today’s chart shows.

The ‘big’ news yesterday was the Fed’s policy decision announcement. Of course, it wasn’t big news at all. The Fed’s June pep talk on the economy was the pretty much the same as its April one. Here’s what Peter Boockvar, equity strategist with Millar Tabak & Co, had to say about the news non-event (hat tip, The Big Picture):

The FOMC began with talk on the economy that was very similar to the April one. “The pace of economic contraction is slowing.” It followed with the caveats of constrained household spending due to job losses, lower housing wealth and tight credit and also referenced businesses cutting back on fixed investment and staffing and they believe the economy will be weak for a time. The main change came in the 2nd part when they mentioned the rise in commodity prices BUT they continue to hang their hat on the ‘output gap’ in giving them comfort that “inflation will remain subdued for some time.” The final part was identical to the April comments in saying the fed funds will be at an exceptionally low level for an extended period and maintaining their current QE plan. Traders were looking to see how the Fed was going to respond to the game of chicken with the bond market and the Fed somewhat turned their head and bonds are lower in response. Fed members can say they are not conducting the monetization of US debt as they couch it in helping the markets but it’s just semantics.

We have this crazy, old-fashioned idea that shareholders actually own public corporations – not management teams and certainly not the government. We believe the owners of a business have the right to decide whether or not to go forward with important changes to the capital structure – like mergers and acquisitions. It is, after all, their property. So when Bank of America’s management team decided to buy Merrill Lynch despite Merrill’s enormous $15 billion fourth-quarter loss and its decision to accelerate billions worth of employee bonuses, we think Bank of America’s rightful owners should have been appraised of these significant developments before shareholder vote.

You probably heard what happened instead: The government leaned on Ken Lewis to keep quiet about Merrill’s losses. And he caved. Then in a move of utter cowardice, Ken Lewis tried to blame the affair on Merrill’s former CEO. We hope shareholders sue the government for tortuous interference with the contract. They’ll win. We hope Ken Lewis goes to jail for securities law violations – for which he is clearly guilty. We hope Bank of America’s rightful owners will one day have their property returned to them. So I guess you could say we’re on the side of property owners and against the endless number of leeches who try to con, steal, and muscle in on them.

No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). Paying off these debts will put more pressure on the U.S. dollar. The single best way to protect yourself is to buy sliver.

When I explained this for the first time in May 2006, gold was trading for $675 an ounce and silver was trading around $14. Today gold is trading for $935 – an increase of 38% in about two years. Silver is now around $18, an increase of 28.5%.

These numbers tell me that, while you would have done well in precious metals over the last two years (far, far better than in stocks), the real move into gold and silver hasn’t started yet. What should you do?

The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I would recommend at least a 5% position in gold and a 5% position in silver. I wouldn’t allocate more than 15% of your portfolio. That should be plenty to hedge yourself. Don’t forget, well-run companies will also appreciate along with other assets during an inflationary period. So you don’t need to dump high-quality stocks and buy a huge position in gold and silver.

The best way to buy gold or silver, in my opinion, is to simply own bullion – plain coins. Buy them and bury them somewhere safe. The gold won’t rust. Silver is more difficult to manage, but the best way to own it is to take physical possession. If you can’t manage physical possession of the metals, consider ETFs or become skilled at analyzing mining stocks.

That’s what I strongly recommend you do. Right now. Seriously. I wouldn’t be surprised to see prices soar next week if Fannie and Freddie are taken over by the Feds, which is what I expect will happen.

Source: How Americans Should React to the Fannie Mae Bailout

It’s experiencing real economic growth – which doesn’t count inflation – of 4.7%. That puts to shame the 2.2% real economic growth of the United States last year.

It is also the third most economically free country in the world, after Hong Kong and Singapore, according to the Heritage Foundation. That means its citizens are relatively free to “work, produce, consume, and invest in any way they please,” and the government protects that freedom. (The U.S. is fifth on the list.)

Finally, this country is a developed nation in Western Europe, it is a member of the European Union, and it has one of the smallest debt-to-budget ratios in the E.U.

Now, the amazing thing is, if you had invested in this booming economy on January 1, 2007, you would be down 31.4% to date. In fact, out of all of the indexes I follow, this country – Ireland – has the single worst-performing stock market over the last 12 months.———- Advertisement ———-
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The following chart shows the Datastream Total Market Ireland index since 2000. This index holds Irish companies that range in market cap from €12 billion to about €50 million.

As you can see, Irish stocks peaked in early 2007 and have performed horribly ever since. How could a country that experienced such explosive growth in 2007 have seen its market tumble so far?

Stock markets are forecasting machines. And although Ireland’s economic situation was bullish in 2007, investors expect it to become much worse in 2008…

Here is the situation: A large portion of Ireland’s GDP growth came from industries related to real estate development. And like in the U.S., Ireland property is in the midst of a slowdown.

According to The Economist, “If the decline in [Ireland's] house prices were to accelerate, a recession would be likely.”

So it doesn’t sound like trend followers should buy now… But I am going to put Ireland on my watch list. Ireland’s stock market is cheap. Its historical median price-to-earnings ratio is 12. Right now, Ireland is going for a P/E of 8. That’s a big discount to where it normally trades…

When investors realize they may have overreacted and the uptrend starts, I’ll know it’s finally time to jump in.

At that point, we’ll probably take a look at the New Ireland Fund (IRL). IRL invests at least 65% of its assets in Irish Equity. It invests the rest in companies outside Ireland that should benefit from improving economic conditions in Ireland.

Good investing,

Ian

Source: The World’s Worst Performing Stock Market

Turn on the printing presses, impose lots of new taxes and regulations, eat the rich. But… America is now the world’s largest debtor nation. What will our foreign creditors and trading partners do if the dollar continues to fall? If the rice market is any indication, we will face dozens of additional export restrictions, as more and more countries refuse to accept the U.S. dollar in trade. I wonder what will happen then? Perhaps a war to gain access to raw materials? Canada, be careful.

You think that sounds crazy, I’m sure. But listen to what U.S. Sen. Chuck Grassley told reporters recently: “If part of our problem is that the Chinese are going to eat meat and you’ve got to have corn and soybeans to feed the Chinese their meat, then why isn’t it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol?”

Here you have a United States senator suggesting our most important foreign creditor should eat rice so we can power our SUVs with corn-based ethanol, the production of which actually consumes more energy than it produces. It’s not often I’m surprised by the stupidity of our government officials. But this one got me. Grassley would be wise to consider that the Chinese can afford to pay higher prices for grains, because their currency continues to rapidly appreciate versus the dollar. Meanwhile, we’re going to have a hard time buying rice if the Chinese don’t lend us their savings.

I wonder what our readers make of these events – of U.S. citizens demanding to keep their homes even though they can’t pay their mortgages; of U.S. senators demanding our trading partners stop buying our corn; of major retailers placing limits on the purchase of rice; of banks blowing up day after day; and of the dollar falling from one new low to the next.

We’ve been advising people to buy gold and silver for at least the last five years as a hedge and protection against the risk of hyperinflation. Now, it has arrived. But how many subscribers, I wonder, have bought gold or silver? My bet? Less than 10%. It’s still not too late, though. And our own Matt Badiali has found a way to buy gold and collect big dividends, too. Click here for the details.

The IRS started mailing the economic stimulus checks this week, and Goldman Sachs already compiled a list of the 10 companies that will benefit most from the extra cash: Cheesecake Factory, Best Buy, Darden Restaurants, Home Depot, JCPenney, Kroger, Kohl’s, Royal Caribbean, Safeway, and, of course, Wal-Mart. Wal-Mart was an easy guess considering that 8% of U.S. retail sales already go there.

From a reader: “Why are your recommended trailing stops always 25%?”

In my newsletter, I frequently adjust the stops of my positions based on the risk of the investment and our desired holding period. But a 25% stop loss is a good place to start. With an initial allocation of 4%, a 25% stop loss puts 1% of your original capital at risk.

If you use a trailing stop loss and the position moves up at all, your principal at risk can quickly fall to zero. Using stop losses and trailing stop losses must be done in conjunction with position sizing. The goal is to minimize the impact of any loss. Once you learn to avoid big losses, you’ll find it’s much easier to make money investing.

Billionaire real estate mogul Sam Zell is buying Brazil, “It has the chance 30 years from now of being a bigger economic power than China,” Zell told the Milken Institute Global Conference. Zell said the country’s 180 million people, skilled work force, and wealth of natural resources has made it largely self-sufficient.

He also mentioned Brazil’s biggest mall operator was seeing retail sales growth of 10% annually. And what’s stopping China? The country’s one-child policy, which Zell believes will decrease the number of workers in China and “come back to bite them big time” in 2020.

International Strategist editor Tom Dyson is also hot on Brazil. He took an agricultural tour of the country earlier this year. In his travels, he found the future of the world’s agricultural production, Protein City. This mega complex will produce the world’s cheapest commodities and make an absolute fortune shipping them all over the world. Tom found the best way to profit from Protein City, and his pick is up 25% in less than two months.

Tom holds three Brazilian stocks in his portfolio, all three are up double digits. And he’s got three more Brazilian stocks on the radar. To learn more about International Strategist, click here…

Regards,
Porter Stansberry and Dan Ferris

“But don’t mistake a bear rally for a new bull market,” says Eric Roseman.

“No matter what happens in the short-term, most stocks will be poor investments over the next several years as inflation, deflation and a long-term contraction in bank credit slow the world’s largest economy to pre-1995 levels.

“I still think this market will form a bottom sometime in the fourth quarter — not before. But even then, I don’t expect a bull market to return because the contraction of credit has fractured the economy, corporate earnings and the consumer. It’s hard to be bullish on the market for an extended period especially when oil is trading north of US$100 per barrel.”

“Great investments are made during bear markets, says Porter Stansberry. “Great investors earn their reputations during bear markets. The fortune you hope to gain from the markets will be made by what you do during bear markets. It’s easy to buy and hold during good times. It is much, much more difficult to put money to work in critical situations when you have to go against the crowd and your own fears.”