The environment we are headed into – and the view Mr. Market seems to (perhaps) be acknowledging now – is a classic combo of wearisome economic stagnation and creeping paper-fueled inflation. One acts as a fearsome headwind, blowing in the face of consumer-oriented names reliant on economic recovery to justify their newly bid-up valuations. The other acts as a powerful tailwind, further bidding up the price of inflation hedges and hard assets.

Justice’s trading service, Macro Trader, has a special recipe for this environment. If you’re interested in following Justice’s trading advice more closely, read on here.

We’re about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.

However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.

I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.

Gold’s Percentage Rise in the Last Bull Market: What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce

Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country’s deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.

When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.

- Eastern Europe borders on bankruptcy. Brazil’s economy is falling off a cliff. Ditto Mexico.

- Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France.

- In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now…)

- An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac’s new CEO resigned after six months on the job.

- Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed.

- The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.

- The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion.

- High unemployment has become a worldwide epidemic, with the infection spreading.

- With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.

Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended strategy here at BIG GOLD remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.

As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.

Regards,

Jeff Clark

Source: Global Economics On Tilt – How To Protect Your Assets

Who fixed it? The people who had no idea what was wrong with it, of course.

What did they fix it with? The same thing that caused the problem they didn’t see – debt.

Who makes sure it won’t break again? The people who didn’t notice the wheels coming off the last time.

Yesterday, the Dow rose 214 points. Oil closed over $54. Gold ended the day over $900. And dollar sank to $1.33 per euro.

Most interesting…bond yields, though still pathetically low, are rising. The U.S. 10-year note yields more than 3%. The long bond yields more than 4%.

The longer these trends go on, the more reasons people will find to believe that it is not just a bounce…but another major boom.

New York-based Economic Cycle Research Institute says, “The U.S. is on the cusp of a growth rate cycle upturn,” the article explains.

Let’s look at whether this optimism is justified.

On the housing front…U.S. houses are down 30% from their highs. The Case-Shiller index of housing prices has fallen for 30 months in a row. Isn’t that enough?

Maybe. The latest data shows more sales – of new, as well as existing houses. And there are more housing starts too. But in the former boomiest states – California, Nevada and Florida – about half the sales are of foreclosed properties. These properties are hitting bargain prices…but pulling down the value of the entire housing stock. And there are still lots of houses to sell. So don’t expect any major turnaround in prices. If prices have hit bottom – which we doubt – gains are likely to be very small…and they’ll come very slowly.

When the housing crisis began, we estimated that prices needed to come down about 40% in order to make the average house affordable by the average person. But that was before the average person’s income came down. If the depression continues, as we think it will, house prices should come down a further 10% to 20%.

Besides, if the United States is entering the “worst downturn since the Great Recession,” who will have the money to buy a house? But that’s the issue. Maybe the world is not entering a major downturn, after all. Maybe it was just a case of mass hysteria…a panic, like the Y2K bug…or terrorism…or swine flu. Maybe people are now getting over it…and getting back to business, just like they did before.

Consumers are becoming bolder. Consumer confidence measures are about 20% below the baseline metric of 1985…but that’s a big improvement; they had been nearly 40% below the ’85 standard.

There is some evidence that consumers are returning to their bad habits, too. Consumer spending is picking up – at least, that’s what recent numbers from the discount stores show. They’re taking up cheap thrills and necessities again. But luxury shops are still reporting drops of about 20% per year.

Major stock markets have rebounded 20% and more. But the real excitement has come in emerging markets. A few months ago, it looked as though China would be unable to decouple from the developed world. They were stuck, said analysts, like a rusty sink drain. The Middle Kingdom was headed towards recession just like everyone else. But then those clever Chinese seem to have found a wrench big enough to pop the joint. Almost unbelievably, China seems to have pulled off the much desired “V-shaped recovery.” Instead, of contracting, China’s figures show it expanding at a more than 8% rate.

China might be lying, of course. It seems very unlikely to us that China could have recovered so quickly. This is not a recession, we keep saying. It’s a depression. And depressions demand structural changes – the kind that takes time.

Besides, eyewitness reports tell a story that sounds like a cross between “Grapes of Wrath and a repeat of Mao’s Long March.” That is Elliot Wilson’s description after a recent trip into the heartland of the communist giant.

More on this below, but first, we turn to Addison to see what’s driving the S&P rally:

“Ariba! Cinqo de Mayo herald’s big news for the S&P 500 this morning: The S&P 500 is now registering a small gain for the year,” writes Addison in today’s issue of The 5 Min. Forecast.

“After a manic 36% bounce from its March lows, the S&P 500 has turned positive for 2009. It’s now sitting on a whopping 0.4% gain, thank you very much.

“But before you down the Cuervo Gold and shimmy onto the parquet for a hat dance… consider this:

“The resurgence in the S&P 500 is being driven by only three sectors: Consumer discretionary, materials, and tech. See for yourself.

“It’s hard to believe in a ‘bull market’ when 2/3s of the players are in the red.

“We’re taking a closer look at tech, but for the time being – as if you need another reason to turn off CNBC – healthcare, utilities and consumer staples, the classic refuge for mainstream money managers aren’t such a good choice during this sucker’s rally.”

And back to Bill, with more thoughts:

“Once-bustling malls are now empty,” Wilson continues. “Plaza 66 in Shanghai, owned by Hong Kong-listed Hang Lung Properties, is a case in point. On a Friday afternoon, the 51,700 square meters of high-end retail space boasted exactly 11 customers…

“Everywhere’s the same. I talk to the concierges of Shanghai’s leading hotels, always men in the know. At the JC Mandarin, occupancy is at 40 percent in early February, against 80% a year ago. At the vast JW Marriott, it’s even worse; just 25%…”

Office complexes too are “empty, empty, empty…Gemdale… 50 floors of office space completed last summer are all empty…”

But what the heck? Maybe we’re wrong. Maybe China is already recovering. It may be a structural depression – but only for the developed countries, particularly the United States. Maybe it’s only a recession for China. And maybe it’s over. Seems almost unbelievable…but now, with so many wonders to wonder about we wonder why we bother to wonder at all.

Besides, other developing economies are reporting the same things – increases in exports after a catastrophic collapse at the end of the last year. You can measure the collapse easily just by looking at the Baltic Dry Index – which keeps track of bulk shipping rates. It fell by more than 90% last year. From its low, it’s doubled – up 100%. But that still leaves it down 80% from a year ago.

Stock markets in emerging markets show similar increases. Brazil’s stock market is up almost 90% from its low. South Korean stocks are up 71%. And Chinese stocks – those listed on the Shanghai exchange – have gained 50%.

Apparently, someone thinks the worst is over. Maybe that person is right. But we doubt that this rebound is the sign of a new, healthy boom. Credit expanded for half a century. The Bubble Epoch at its end caused trillions of dollars worth of errors. Many of those errors have already been corrected. But the economy the bubble built remains unreconstructed. Same mismanaged companies…same mismanaged regulators…same mismanaged banks. Exporting nations had gotten into the habit of earning net sales from the U.S.A. of $2 billion per day. Those earnings provided much of the speculative capital that created the Bubble Epoch prices. But that money has all but disappeared. And there’s not much chance that it will return anytime soon.

Instead of a healthy new boom, our guess is that the world is enjoying a sick echo of the old one. Governments, led by the U.S.A., attempt to reinflate the bubble with guarantees and giveaways equal to an entire year’s annual output of the world’s largest economy. Since every penny of this money is borrowed, it makes sense that every penny will have to be withdrawn from the world economy at some point.

In fact, economists are already looking ahead to the moment when deflation fears give way to inflation fears.

“Inflation Nation,” is the title of an editorial in today’s International Herald Tribune. In it, Alan Meltzer argues, “If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflation years [the 1970s].”

Professor Meltzer reminds us that cutting off the inflation of the ‘70s wasn’t easy. The feds turned the screws…and let the prime rate go above 21%. Of course, today’s Fed has this information. And Paul Volcker, who was Fed chairman during that period, is now an economic advisor to Barack Obama. Still, “I do not worry about their knowledge or technical expertise,” continues Mr. Meltzer, “What I doubt is the commitment of the administration and the autonomy of the Federal Reserve … Under Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury…”

“The Fed’s job is to take the punch bowl away,” said an Eisenhower era chief. But we have come a long way since the Ike and Dick years. This time, the inflationary party is likely to get out of control, happy days will be here for a while…and then some very sad days are likely.

Until tomorrow,

Bill Bonner

Source: Market Deceptions

I interrupt and say, “You said it, dude! The inflation in prices from such an inflation in the money supply will destroy us all, probably taking the fast-food industry with it, and then where the hell will I be when I say, ‘Boy! I’d sure like a taco right now! Let’s go out for tacos! Who has any money with which to buy tacos?”

Well, Mr. Murphy is apparently not that interested in my gastronomic concerns, and notes that “Unfortunately, the issues here get very complicated, and so it’s difficult for the layman to know whom to trust. Not only do left-wingers like Paul Krugman say that we need more inflation, but even (alleged) right-wingers like Greg Mankiw are saying the exact same thing”!!!

Careful readers will note the use of the rare “triple exclamation point,” which is used in this case to indicate raised eyebrows in an expression of incredulity and scorn.

As an example of why my eyebrows are like that, Trace Mayer, J.D., in an article titled “Insane Psycho-Sociopathic Court Economists,” writes that Krugman said, “children can be taught that some problems (such as 2x + 6 = 0) have no solution unless you are ready to invoke negative numbers. Maybe some economic problems require the same trick.” Hahaha! Negative money! Hahaha! Incredulity and scorn! Hahaha!

Mr. Murphy’s analysis? “With all due respect, those guys are crazy.”

While the enormous inflation in the money supply is already terrifying and causing me to scream, “We’re freaking doomed!” even louder than ever before, Mr. Murphy does not descend to such infantile crying and complaining, but says, “Normally, I do my best unshaved-guy-wearing-a-sandwich-board routine by showing the scary Fed chart of the monetary base. But every time I do that, some wise guy argues that I don’t understand how our banking system works, and that because of ‘de-leveraging’ we are actually experiencing a shrinking money supply.”

His answer? “No, we aren’t. It’s true that there are forces tending to shrink the money supply, but Bernanke has more than overwhelmed them.”

So why haven’t prices for necessities exploded and caused people to riot in the streets like I figure is only a matter of time, and the only people who are going to eat like kings are the ones with gold and guns?

Well, without getting into any of that, he calmly says, “Now the reason prices haven’t exploded is that the demand to hold U.S. dollars has also increased dramatically,” which he relates to the 1980s when “the Reagan tax cuts and Volcker’s squelching of severe price inflation made it much more attractive to hold dollars, and so the Fed got away with printing a bunch even though the CPI didn’t increase wildly.”

The bad news is that this is not a happily-ever-after” thing, but that “Once people get over the shock of the financial crisis, the new money Bernanke has pumped into the system will begin pushing up prices,” ending in “an avalanche as people come to their senses.”

But we have a lot of insanities to try before that, I guess, as he reminds us that Janet Yellen of the Federal Reserve “argues that if the Fed could sell its own debt, then it could drain reserves out of the banking system without unloading its own balance sheet,” which is so ludicrous that it could only come from Janet Yellen! Hahaha!

She thinks the Fed should create and sell some bonds on itself, and create the money to pay for them, which is just a variant of the idiocy that got us into the mess we are in! Hahaha!

But an even better chuckle comes from “economists Woodward and Hall” who think that “the Fed just needs the ability to charge banks for holding reserves. The Fed already (recently) obtained the right to pay interest on reserves, and so Woodward and Hall think the Fed should also have the ability to do the opposite, i.e. to be able to pay a negative interest rate on reserves that banks hold on deposit with the Fed”!

Mr. Murphy correctly asks, “How does this avert the threat of hyperinflation?” The answer is, “Simple, according to Woodward and Hall. If banks ever start loaning out too much of their (now massive) excess reserves, and thereby start causing large price inflation, then the Fed can simply raise the interest rate it pays on reserves. Banks would then find it more profitable to lend to the Fed, as it were, rather than lending reserves out to homebuyers and other borrowers in the private sector. Voila! Problem solved.” Hahaha! Either way, money pours into the system! Hahaha! We’re freaking doomed!

My stomach actually hurts from laughing that anybody who thinks this kind of crap will “work,” and I am terrified that those people vote, and yet are stupid enough to not be buying gold to protect themselves against such economic suicide!

And since I am sure that it will not work, I am buying gold so that at least one of my favorite guys (me), can capitalize on such Sheer Economic Insanity (SEI), and if you, too, buy gold, then I’ll probably see you where the rich people go to get away from all the busted-out morons who didn’t!

Whee! This investing stuff is easy!

Source: When Fresh Money Goes Rotten

I [...] leave with a growing sense that our tax system is in shaky condition and needs a major overhaul. We need a system that is much simpler and less burdensome. That won’t happen with mere tinkering around the edges. Many people who have held top jobs at the IRS and Treasury agree. Our federal tax system is “so shot through with deductions, credits, exclusions, loopholes and outright noncompliance that it fails in its essential job of raising revenues efficiently,” says Charles Rossotti, a former IRS Commissioner. “The complexity and instability of the tax system also leads people to believe that the average person always gets stuck, while the big hitters find ways to avoid paying, regardless of the advertised tax rates.

As Will Rogers once observed about tax forms: “Even when you make one out on the level, you don’t know when it’s through if you are a crook or a martyr.”

What does Herman see ahead? A crackdown on individuals in the form of audits. Further restrictions on off-shore tax havens. And the revival of the death tax.

The article is well-worth reading not just for Herman’s insights, but also for several anecdotes from his time on the tax beat. Here’s our favorite:

Strangest request: A reader who called himself a “senior, senior citizen” wrote several years ago to say he had amassed $2.1 million of stock-market losses.

“In order to use (and not lose them), I would have to marry a woman with large capital gains,” he wrote. He said his accountant told him “it is not necessary to live together, and a divorce can be had after the tax loss is used up.” If he filed a joint return, “her tax savings would be split between us. Needless to say, she can be properly protected by a prenuptial agreement. Your advice on how I might find such a lady would be greatly appreciated.”

He added: “And should a fee or reward not be paid (and how much) to a person finding her?”

We love to see that entrepreneurial spirit of trying to spin losses into gains!

As George Mason University Professor Tyler Cowen writes at his blog, Marginal Revolution:

U.S. government spending as a percentage of GDP is now equal to Canada’s and rising, leading one Canadian op-ed writer to crow about Canada’s low tax, free market economy. Damn that hurts.

Here is the bad news represented by a chart:

But as we’ve said before, this hands you a golden opportunity as an investor: it gives you a macroeconomic “script” to test your investment decisions against. Here at Notes we believe that the government’s power grab is a game changer, whether you’re a top-down or bottom-up investor.

In our eyes, there has always been something strangely stage managed about this rally, which sent the badly wounded S&P 500 zooming up about 31% from its March 6 lows. First, the ‘leaked’ memos… then the earnings report press releases… then the bogus earnings reports themselves – filled with once-off items, FASB accounting hocus-pocus and missing months.

But the massive increase in program trading (computer trading of large baskets of stocks) by Goldman adds an even stranger dimension. The bank has fed the rally with a massive increase in its principal program trading at a time when other quant funds and program traders have been quickly deleveraging. One billion shares principal traded is becoming the weekly norm for Goldman.

There’s a neat quid pro quo here, if you care to look for it. The government bails out AIG using taxpayers’ money. The idea supposedly being to provide enough liquidity to AIG to allow it to make credit-default-swap settlements to counterparties at significant haircuts to avoid “systematic risk.” But what happened? These trades were settled at 100% – handing massive profits to counterparty banks.

The bank in receipt of the biggest AIG settlement, Goldman Sachs, then uses these funds (or part thereof) to feed the rally in stocks via its massive principal program trading operation, thus relieving pressure on the Obama administration as it completes its significant 100 days in office milestone.

Look close enough and what you see if a massive taxpayer-financed rally orchestrated by the banks and their government sponsors. First, the AIG conduit: the counterparty CDS unwinds were taxpayer financed. Ditto the PPIP, which proposes using tax dollars as leverage for private funds who want to buy toxic assets from banks. The banks have also been raising money via government-backed debt issuances – something very few mainstream investors understand or even know about.

Luckily, there are alternatives to trusting your luck in this kind of market. For instance, Money Morning’s Geiger Index trading program has maintained a 100% success rate this year.

Since its inception in December 2008, every single trade the Geiger Index has closed out has been a winner. It’s not a fluke. It uses a profound but simple mathematical concept also used by the CIA and U.S. military. The Geiger Index speaks the language of the markets by reading the “noise” and detecting patterns that are invisible to traditional analytics.

It can look deep inside any investment – stocks, currencies, ETFs, bonds – for any given time and pinpoint its price with 95% accuracy.  To find out exactly how it does this, go to this free report.

Today, we duly note that Goldman Sachs has just hired former Barney Frank staffer Michael Paese to be its top Washington lobbyist. This position was formerly held by Mark Patterson, the current chief of staff at the Treasury.

Pease and Patterson are not the only ones to pass through the revolving door between Washington and Goldman. Bush’s Treasury secretary, Hank “The Hammer” Paulson is a former Goldman CEO. And his replacement, Tim Geithner, was mentored by Gerald Corrigan, a former New York Fed president and current partner and managing director of the Office of the Chairman of Goldman Sachs.

Who else was President Obama considering for Treasury secretary? Former Goldman hotshots Robert Rubin and Jon Corzine (now the governor of New Jersey).

Are other Goldman alumni close to government? Just a few… Ed Liddy, who the government appointed as CEO of AIG was Goldman’s vice chairman. World Bank president Robert Zoellick was a managing director. Neel Kashkari (an appropriate surname for a government bagman if ever there was one), the 35-year-old overseer of the TARP program was a vice president. And Geithner’s replacement as president of the New York Fed, William C. Dudley, is also a former Goldman employee.

Oh… and Robert Rubin was Treasury secretary under President Clinton. And former Goldman senior partner Stephen Friedman headed Bush’s National Economic Council in the first term. And Josh Bolton, another former Goldman golden boy, served as White House chief of staff under Bush.

The former CEO of the NYSE, John Thain, is also a Goldman alumnus. And his replacement, Duncan Niederauer, spent 22 years of his career at the bank.

Of course, these high-level appointments are probably just coincidental. Just as it was probably coincidental that on September 15, 2008, then New York Fed president Tim Geithner pressed for AIG’s biggest counterparty, Goldman Sachs, to help the insurer raise capital after it became clear that AIG was at risk of going bankrupt. And that on the same day Goldman’s current CEO, Lloyd Blankfein, was at the New York Fed. And that Goldman ended up in receipt of about $12 billion in tax dollars thanks to AIG’s wholesale credit-default swap unwinds after the government bailed out the insurance giant.

Oh… and which bank’s employees were among the largest donors to President Obama’s recent campaign, giving more than $884,000? You guessed it…

If it’s a conspiracy to believe that Goldman Sachs gets preferential treatment from White House administrations that are 1) in receipt of major funding from Goldman Sachs employees and 2) populated by former Goldman Sachs insiders, we’d love to know what the official explanation is.

Goldman’s close ties with Washington are important because during the recent “junk-stock rally” that has pushed up the value of bank stocks and taken pressure off a beleaguered White House, Goldman has been by far the biggest program trader by volume on the NYSE (where former Goldman boy Niederauer is CEO). And when we say by far the biggest, we mean by far the biggest.

As you can see from the above chart, last week latest Goldman Sachs traded for their principal account (i.e. using the bank’s own funds) more than the next 14 largest institutions in the world combined! Goldman traded 1,028,100,000 shares versus 953,000,000 for all other reporting institutions.

Actually, I have been in several places in my life where things have gone as badly as they have this past year. One of them was my first year on board ship in the Navy. This is worth reading; it’s as funny as any military humor I have ever read and does lead to the point of this article.

A large naval vessel has to have a sanitary waste system. You cannot pump sewage overboard inside of 12 miles of the coast. Our system was particularly complex, why? It’s the Navy! It looked like a heart transplant. There were at least six different alignment possibilities that could store, pump, transfer, vent, discharge overboard, boil off the water or pump the sludge. It never worked properly. And this baby was mine! As the junior Ensign, newest officer of the Wardroom, I got the poop system.

We had a new Commanding Officer coming on board for a quick one-day cruise before he took command. The idea was to give him a chance to see the ship and crew underway. We started our preparations to get underway, which of course included shifting the sanitation system from its shore hook up to its underway setup.

Normally, I did the set up and shift from shore to the at sea settings.  I wanted to be certain there were no foul ups. You definitely don’t want to start pumping sewage all over the pier as you are leaving port. It will ruin your whole day.

This particular day my C.O wanted me to stay on the bridge, so I had my first class, Crusher, that was really his nickname, take care of making all the changes to the valves to make sure the sewage got where it was supposed to go. I had been over it with him a hundred times.

Everything was going along fine. The new C.O. and the current C.O. were outside the bridge on the Bridge wing, doing what C.O.s do, talking and drinking coffee.

I noticed they were both wiping their hair and brushing what looked like flecks of dirt or particles off their clothing. Neither seemed too concerned about it, but several of the crew on the forward part of the ship were also brushing themselves off. In fact, one crewmember literally lifted his hands to see if it had started to rain.

You guessed it! Crusher had misaligned the valves for the poop system and the internal pumps were pushing the solid portions of the holding tank up through the gas vent tube, which of course ran along the side of the bridge, directly above where the C.O.s were standing. About a dozen crewmembers were treated to a shower of, yup, you guessed it.

That is a SNAFU. Almost 30 years later and I am still laughing about that one.

That’s how this past year has impressed me. Misaligned valves that pumped sewage all over everyone. The exception is that it wasn’t an inexperienced kid who misaligned the valves, it was the best and the brightest, the leaders of the biggest and most powerful financial juggernaut of the ages, the cream of the crop.

This is almost my twentieth year in the money business and it is the first time I have ever been ashamed of my profession. What has gone on is inexcusable, bailing them out is the icing on the cake, but it had to be done.

If it were an isolated incident, it might be a little more palatable, but this is ridiculous. Virtually every firm is in trouble for no other reason than a complete lack of judgment. They seem to have abandoned all reason, forgotten all the lessons learned for the past 70 or 80 years.

The most recent mantra from the Wall Street elite is that Congress mandated all the changes that led to the problems in mortgages and then the credit markets. Maybe so, but since when does congress make the decisions about what firms do with their money. In fact, since I have been in the business, no one has ever believed that congress was anything but a bunch of incompetent bloodsuckers.

Talk about a SNAFU! Despite the best efforts of Congress and Wall Street, we will survive. We will be better for it and hopefully will learn from it. Too bad it is going to cost so much to fix.

There have been several times in the past few months when I felt like going outside, just like that sailor did on the deck of my ship, and put my hands out to see if the sky really was falling. It seemed to be raining something on us for most of the year.

The new Obama Administration takes over in 2009 and promises a new way, new ideas, new people and the hope for a better tomorrow. Let’s hope someone checks to make sure all the valves are in the proper position. But just in case, don’t stand anywhere near that vent tube.

Source: 2008, The Year of SNAFU

Here are four thoughts to trip over as we round yet another sharp corner on the path to economic recovery.

1) The perfect world arrived last summer.

Deregulated US banking, housing and financial sectors led to a world of no credit.

This is the era for which a vocal financial publishing crowd has been begging. No regulations. No credit. No borrowing. No more extra debt.

So, how are you enjoying their world… is it the paradise as outlined in the millions of pages in books penned by our betters who sniffed because hoi pathetic polloi lived on credit?

Of course, you know we’re about to wreck this beautiful Eden with a big bite out of the borrowing apple.

Me, I can’t wait to realize Eve is naked.

And, I sure wish the publisher John Wiley and Sons was publicly traded, because its presses are going to be cranking overtime.

2) As you’ll see, we don’t have this problem here at IDE, but here’s a huge economic truth, one that’s created a lot of hypocrisy lately.

If you buy a corporate bond, you are a creditor. You have lent a company your money – commercial paper, secured debt, unsecured debt, senior debt and subordinated debt – you hope you’ll be repaid at a tasty profit.

That’s different from when you buy a stock – a share. In that case you buy a share of the company.

A bond must be repaid, usually at an agreed upon amount.

If the company goes bankrupt – defaults on its repayment to you – you get in line, somewhere near the back, and hope to get some of your money back, while most shareholders are S.O.O.L.

This is the world of credit.

What the hell is wrong with that?

Even better, today, we’re told that corporate bonds are one of the world’s safest investments. Here at IDE, Steve McDonald has, what I am told, a great bond trading program.

You should check it out because to heck with Polonius, I want to be the lender… as long as the return is high.

But, while hypocrisies are delicious, you need to be aware that if you buy bonds you will need to cut the crap when it comes to credit and borrowing rhetoric.

You buy a corporate bond… you tout corporate bonds… then you can’t strut around and complain about a credit-wrecked US economy.

That’s more than okay with me. I’d rather hear you talk about your fat profits than listen to complaints about that which is out of your control.

Ohhh, the prospect of sweet silence – quick, everyone go see Steve McDonald. The line starts here.

3) I do not care what the Debtors of Doom… or the Doomsters of Debt say… credit makes the world go round.

This is a centuries-old reality that somehow evaded a bunch of cranky two-century-ago Austrians.

They probably couldn’t get credit… thus, they couldn’t get hot chicks… thus they wanted everyone to spend cash to level the playing field when it came to chasing hot frauleins who swooned over bankers and barons and not pfennig-less economic geeks.

Honest, maybe there was no Federal Reserve, but credit is really old… the world revolved around it years before revolving credit.

Do you actually think Christopher Columbus put up his own cash to explore the New World?

4) While the Doomsters of Debt will choke on it, the indisputable truth is that credit will lead the globe out of its economic crisis.

You see, borrowing is good.

Next year will prove it.

During the past few months, we’ve seen some amazing – unprecedented – coordination between governments and central bankers that should pay off with some seriously revived growth. That’s all because virtually every country in the world will have low (and lowering) interest rates.

Under those circumstances, it is absolutely inconceivable that the combined power of global economic stimulus won’t work.

Sometime during the first four months of 2009, the creaky 2007-08 economies will be overwhelmed by an age-old force – cheap money and credit.

President Obama’s jobs program will start to take shape. He will force bankers to be bankers again and start lending all those government bailout dollars.

Low interest rates will heat up the housing market.

Homebuilders will crank things up a bit (hint: sometime in January or February take a good look at homebuilders’ stocks or a homebuilders’ ETF, then thank me around Christmas).

The stock market will heat up by March…

We’ll start blowing the bubble again… a huge one this time, because people will be in a race to make it all back.

Banking profits will start to soar and they’ll pay back Uncle Sam.

Homeowners will once again refinance to pay off other debt.

Suburbs and exurbs will expand farther from job centers.

The federal debt will be crazy.

People will be happy and employed.

Medicare and Social Security will still be a mess.

My generation will emulate its parents and steal from its children.

All will be right with the American world.

This is just the way it is now… a much larger scale of the way it’s always been… credit is one of the world’s oldest professions.

The seasons will go round and round… the Debtors of Doom will sell more “open-your-stupid-eyes” bad-news books…

The rest of us will dream of the trappings that make us look more upper class. We’ll pop beers, toss steaks on the grill and flinch at the thought of how close the end is.

Tell me different and I’ll tell you that you’re probably someone who enjoys it when bad things happened to good people.

But that’s not me, man. I not only know my place, I revel in it.

Fairways and greens, baby… and maybe a just hint of an illegal smile.

See you next week… seven days closer to full economic health.

Make Money, Not War
Andy

Source: Good Credit Cures A Bad Economy