With no more fear of the deflation devil investors feel they are in the arms of angels. Surely Ben Bernanke watches over them even when they sleep. Even the President of the United States thinks he saved the nation.

As for Tim Geithner, he takes no chances; he sings his own praises. Speaking to a gathering of the G20, he congratulated them all:

“…facing the greatest challenge to the world economy in generations, the G-20 gathered here in London and committed to an unprecedented program of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway.”

Stocks are still up. Commodities too. Oil is over $70. And most encouraging of all: the 10-year US Treasury note yields only 3.47%. So what evil sends investors running to the protection of gold? None at all, say the papers; investors buy gold in anticipation of better times. They see a recovery, bringing with it tightened supplies and rising demand. Every economist, investor and hair stylist knows what this means – inflation.

But if growth is underway, investors should be glad there is not more of it. The key indicators of real economic progress are negative. Unemployment is not rising; it is falling. Nearly 7 million Americans have lost their jobs since the recession began. In California, only 3 of 5 working age residents have a job. And those who are still working are putting in the shortest workweeks ever recorded. How could the economy be growing with fewer people earning money? The New York Times attempted to explain the enigma by calling it a “jobless recovery.” But a recovery without jobs is like a loveless marriage or a fat-free burger – it is disappointing.

Another key indicator is personal spending. Not surprisingly, that is down too. Personal spending has fallen in four of the last six quarters – something that has never happened before, since they began keeping records in 1947. The level of consumer spending is down 33% from a year ago – with discretionary spending in the United States now down to a level it hasn’t seen in 50 years. Consumers aren’t spending partly because they have no money…and partly because they apply what money they have left to relieving the headache from their previous binge. A report this week showed they had reduced their hangover of personal debt in July by more than $21 billion – four times as much as economists forecast. These are, of course, the same economists who pimp for the angels at Bernanke & Co. If they’re right, we have a spending-less, jobless recovery pushing up the price of gold.

We offer an alternate interpretation. We begin with a doubt about the one now on the table. In the popular version, the more the recovery seems real, the more investors fear real inflation. This drives them to buy gold. Of course, it should drive them to sell US Treasury bonds too – which hasn’t happened. Nor has inflation gone up. And if this view were correct, we should begin to see remedial measures from the US central bank. The Fed should soon begin to withdraw its monetary stimulus, returning the economy to a kind of normalcy it hasn’t seen in years. The risk, not insignificant, is that Fed economists will err. They may loosen monetary policy too slowly or too quickly. Asked about the risk, Janet Yellen, President of the Fed’s San Francisco branch, promised to avoid the error of 1937 – she will not “tighten policy too soon, aborting the recovery.”

Gold bulls are counting on her. And they may be right. But here on the back page, we add a nuance. We’re not surprised by an occasional Fed error. What surprises us is the rare accidental success. There are 500 basis points between zero and 5%. It would take a miracle for central bankers to find exactly the rate the market needs precisely when it needs it most. The ’37 error, for example, might have been a success. At least it sped up the process of liquidation so the decks were clear when the post-war boom finally came.

Maybe we’ll get lucky and the Fed will make the same error again. Not likely. This time they’ll make a different error – adding too much cash and too much credit for too long a time. Today’s ‘recovery’ is based on hot money from the feds. It’s a fake. It won’t cause real growth. When this becomes clear, commodities will sink – along with stocks…and gold. Central banks, ignoring the futility of their hot money program so far, will add even more hot money. Eventually, the hot money will cause inflation to rise and gold to ‘melt up.’ Gold bulls will be proven more right than they imagine. But they may be proven wrong first.

Enjoy your weekend.

Source:  Fed’s Fake Recovery

From there, both metals rallied slightly, but the real action didn’t start until the Comex opened for business at 8:30 a.m. in New York. Once New York began to trade, both gold and silver tacked on some nice gains…but they ran into the proverbial brick wall once London closed for the day at 11:00 a.m. New York time. After that, the gold and silver markets were comatose.

The usual N.Y. commentator said that…”Today was essentially a nightmare for the Bears: strong buying on the Comex open had June gold up $10.20 at its high, and it closed up $8.00 at $961.50. Estimated volume was 175,904 contracts. The HUI closed up 4.15% and the XAU up 4.24%. The charts could not be friendlier.”

Wednesday’s open interest numbers show huge volume once again…most of which was switches and spreads. In gold, o.i. rose a smallish 1,341 contracts to 398,306 on big volume of 262,718 contracts. In silver, o.i. was up a more substantial 2,535 contracts to 100,655 on pretty big volume…28,427 contracts. The new COT [for positions held at the end of Tuesday's trading] will be out at 3:30 p.m. Eastern time today…and I’ll report on its contents tomorrow.

Not a lot to report in gold and silver news. Yesterday was the last day for delivery into the May contract. In an un-exciting finish to the month, 54 gold contracts and 18 silver contracts were delivered. All the commentators on the Internet talking about a delivery squeeze in either gold and silver in May were again disappointed. How many months in a row is that now? There were no changes from the U.S. Mint. I doubt there will be any changes today either. The amounts in the SLV and GLD remain unchanged. With all the activity during the last couple of days, I’m sure that both GLD and SLV are owed a fair chunk…especially SLV…which must be owed in the tens of millions of ounces, if past history is any guide. And lastly, the Comex-approved warehouse stocks in silver rose 196,637 troy ounces yesterday.

It wasn’t a big news day yesterday, but what there was, was centered around the Treasury market and the U.S. dollar. The talk of “Quantitative Easing”….monetizing the debt…creating money out of thin air…call it what you will, has people talking more and more about hyperinflation, Zimbabwe…and the U.S.A…all in the same sentence or paragraph. It’s obvious that some people are getting spooked, and it should be no surprise that gold and silver are doing well.

Today’s first story is from usatoday.com. It shows the frightening decline in U.S. Federal tax revenue in April 2009…down $138 billion, or 34% from April 2008. The deficit can only be funded two ways…either borrow it or print it. Which will it be? I, once again, thank Craig McCarty for the story. The headline reads “IRS tax revenue falls along with taxpayers’ income” and the link is here.

The next story is from The Telegraph in England and is by Ambrose E-P. He states that “The US Federal Reserve may soon be forced to launch a fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long-term borrowing costs.” The headline reads “Bond markets defy Fed as Treasury yields spike” and the link is here.

The last story is from chinadaily.com. “Bitten by the gold bug, Chinese investors are now rushing to hoard the yellow metal as fears over the global recession deepen.” The headline says it all…”Gold fever grips Chinese investors”…and the link is here.

Blessed are the cracked…for it is they who let in the light. – Author Unknown

As I put the finishing touches on today’s rant, I note that gold and silver are up nicely in early morning trading in London. Of course, I’m just as happy as you are…as I watch my net worth increase by nice increments every day…but I never forget for one instant that the buying that’s driving up the price of both gold and silver right now, is being met by equally determined sellers, as the U.S. bullion banks et al go short against all longs. They are the only parties willing to go short in this environment…and they’re still in total control of this market at this moment…until they’re not. I’d love to see them get overrun…and watch the prices of both gold and silver head for the stars. It hasn’t happened yet, but it could. Someday it will…and when it does, the party will be at Ted Butler’s place!

All of us at Casey’s Daily Resource Plus hope you have a great weekend, and we’ll see you right here on Saturday.

Source: And Then There’s This…Friday, May 29th, 2009

The ECB announced that it will cut its key lending rate to its lowest level ever and begin a form of “quantitative easing,” in which it will buy corporate debt in order to reduce commercial interest rates. Details to follow, it said. “Stops” are to central bankers what safety fuses are to electricians. You may take them out when you really want to get the juice flowing; but your house might burn down.

But thus did the European troops pull out the stops and get under-way. Reluctant allies, they set off to join the battle against capitalism…with no reliable maps…with insufficient supplies and a strategy elaborated by incompetents. Of course, the gods must have laughed at Napoleon too. His armies had been cut off and destroyed in Egypt. Then, his Peninsular Campaign was a disaster. But the plan to attack Russia topped them all; even the draft horses must have snickered.

It doesn’t seem to bother the Europeans that their American commander is the same fellow who failed to spot the biggest bubble in history until it blew up in his face. Nor that their field marshal has no idea of the lay of the land; nor that anyone on either side of the Atlantic seems to know where they are going; nor that, wherever it is, it will cost more to get there than they’ve got.

This week the Obama government revealed its new budget deficit. If nothing goes wrong, it will reach $1.84 trillion this year – nearly 400% of the record set last year. In 2009, the US government will borrow 50 cents for every dollar it spends. Accumulated deficits to 2019 will reach $7.1 trillion, says the forecast. Moody’s was so alarmed it warned that the US may lose its Triple-A bond rating, which it has had since 1917.

But even as bad as it looks, Obama’s budget map is still fanciful – its mountains are made of whipped cream and its rivers run with Scotch. It imagines a loss of only 1.2% of GDP in the current downturn…and a quick return to growth, with a 3% increase in 2010. Yet, the last report showed the US economy contracting at a 6% annual rate. As for growth in 2010…where would it come from? Consumer credit is falling at its fastest pace in 18 years. Consumer incomes are falling too – down 1.2% in the last 12 months. If there were any lasting consequences of this downturn, opines the New York Times, it is likely to be the “shift to savings” by the US consumer.

Meanwhile, businesses aren’t exactly hankering to spend either. Even if they had the money, businesses wouldn’t expand; they don’t have to. Spiders build their webs on America’s remaining assembly lines with little risk of being disturbed; one out of every three factories is quiet. Until existing capacity is put to work, businesses will have no power to raise prices and no need to add to their facilities.

And yet, Napoleon Bernanke is upbeat. The troops will be home “before Christmas,” he says. But the central banks’ calendars are no better than their maps. In 2004, Mr. Bernanke credited improved monetary policy with having created what he called “the Great Moderation” – the period of strong growth and low-inflation since the mid-’80s. Specifically, he was referring to the Fed’s policy of ‘inflation targeting,’ which presumes that the inflation numbers carry all the information the Fed needs to guide an economy.

This was the map the Fed was using seven years ago. Then, a tiny recession took GDP down to all of 0.2% over an 8-month period. The Fed panicked. Its emergency policy pushed the fed funds rate well below the rate of consumer price inflation and left it there for two years. This was not merely a slight miscalculation. It was a fatal strategic error, say professors Carr and Beese of the University of Akron. Not only did the Fed’s map fail to warn them; it actually sent the economy over a cliff:

The low interest rates signaled…that credit was inexpensive and readily available…[then] the Federal Reserve moved from a low accommodative interest rate policy to one of a steady and consistent increasing of interest rates between 2004 and 2007…and became a prime cause of the financial services mortgage crisis of 2008.

Today, central banks use the same computers, same theories, and same maps they had seven years ago. With these feeble instruments, they set out to go where no central bank has ever gone before – borrowing, inflating, and intervening on a scale that would have been unimaginable a few years ago. Where will they end up?

We will take a guess: this grande armee sets off on the road to recovery with the wind at its back; it will end up in Moscow with snow on its face.

Enjoy your weekend,

Bill Bonner

Source: On to Moscow!

Here’s how it works… Incompetent managers at banks, insurers and automakers run their businesses into the ground while tearing the ass of the US economy in the process. They then turn to the politicians they finance via <!– /* Font Definitions */ @font-face {font-family:Verdana; panose-1:2 11 6 4 3 5 4 4 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:536871559 0 0 0 415 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:”"; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”; mso-fareast-font-family:”Times New Roman”; mso-ansi-language:ES; mso-fareast-language:ES;} a:link, span.MsoHyperlink {color:blue; text-decoration:underline; text-underline:single;} a:visited, span.MsoHyperlinkFollowed {color:purple; text-decoration:underline; text-underline:single;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –> lobbyists and campaign donations for handouts. Politicians then rush no-strings-attached legislation through Congress and dole out hundreds of billions of dollars to these failed companies with little or no oversight. The companies in receipt of these tax-funded bailouts then suck the lifeblood out of a once competitive free-market economy, prolonging any real recovery. The same incompetent management that drove these companies into a wall in the first place continue to make the same stupid mistakes, happy in the knowledge that they have politicians in their pocket and are protected by the mantra of “too big to fail.”

While no names will be mentioned I will soon document receipt of a $10 Federal Reserve Note (while it still holds value).

You know I write about the Fed a lot. They are at the epicenter of the American and global economic and monetary crisis. These same elitist powers now want to take their act world wide. The Fed’s 100-year reign has all but ruined this country. Only a second American Revolution that totally dismantles this monstrosity and strips away the power of those behind its curtain will allow us to once again function according to our founding roots.

In late 2007 I proclaimed 2008 would be “the year of the bailout”. What a dummy … thinking just one year would suffice. Neither did I suspect bailout money would find its way overseas. What do you expect from a mere dentist?

The Fed is busy handing over trillions of dollars to well-connected US based cronies. The sum of present promises is close to $13 trillion and counting. These are monstrous commitments on yours and your children’s behalf. Please reply at the bottom of this piece if any of this money has found its way to your doorstep.

Fed digital-entry funny money has also been sent to France’s Societe Generale ($11.9 billion), Germany’s Deutsche Bank ($11.8 billion), Britain’s Barclays PLC ($8.5 billion) and Switzerland’s UBS ($5 billion). Yep, these foreign elite banks were provided these funds through the perpetual AIG bailout. The overall plan includes sending hundreds of billions of dollars in “currency swaps” to foreign banks. The blood boils.

You can also rest assured that we are at the mercy of many foreigners at this point. If China, Japan or Middle Easterners dump the Treasuries they hold or refuse to buy more, the Treasury market and the dollar will tank. Nothing like compromising foreign policy.

Why do you think the Fed sends this unfathomable amount of money to foreign entities?

1. They are charitable.
2. The global system is so fragile that no domino can fall.
3. Blood is thicker than water. Elitist connections rule. Period.

Could it be that the Fed bails out foreign entities because the Fed itself is largely a foreign entity? Home and abroad, the Fed takes care of its own first and foremost. You’d better protect yourself.

Source: Why is the Fed Bailing Out Foreigners?

Anyway, I instantly liked the guy! He seems to be, like I always am, bewailing the fact that we economists are getting a really bad rap because of all the idiots in the world who also call themselves “economists”, with the important distinction between us and them that that they have taken over the schools, the governments and the media to spread their stinking, lunatic, neo-Keynesian econometric bastard offspring “theory of economics”, full of one ridiculous assumption after another, upon which they built an enormous, glittering edifice of Pure Economic Crapola (PEC).

Like what? Well, like “the consumption function” which is at the root of the whole theory, which is that when you get a dollar of income, you spend some and you save some.

I know what you are thinking; you are thinking, “These guys get paid for knowing THAT? Hahaha!”

Well, there is more, as the mysterious, necromantic arts of economics comes in to determine, as a constant – with an astonishing precision out to three decimal places! – exactly HOW much you spend and how much you save of each dollar! Hahaha!

And then they say, “That’s not complicated enough! Let’s adjust it for, ummm, the ‘wealth effect’, which is the phenomenon that when you make a lot of money or you have a lot of money, you spend a little more and save a little less!”

If it stopped there, it would be mildly interesting and make for good fodder for a barroom argument with other drunken sots, but these moronic Modern Economist Establishment weenies thought that they had finally found a computer program, full of equations and countless variables, that could reliably guide monetary policy to maintain the value of the dollar and prevent the business cycle while creating excess money and credit to maintain a boom of governmental deficit-spending and rampant indebtedness! Hahahaha! Morons!

And yet, trust me when I tell you that it will get you nowhere to stand outside the Federal Reserve Building in Washington, D.C. and helpfully yell out, “Hey! In case you ain’t heard, you Fed guys and all your stupid incestuous friends are morons if you think that your stupid econometric equations can possibly, possibly, possibly work, which can be easily proved if you just get up off of your fat, worthless butts and look at the ruinous, Depression-like conditions you produced! The purchasing power of the dollar is now crapola, while the top two industries in America are government spending and trading financial securities back forth between ourselves!”

If you have any time left before the security guards arrive and make you go away, try telling them, “Now the sheer suffocating size and expense of the federal, state and local governments in America are truly gargantuan, thanks to your stupid incompetence and sheer stupidity in actually believing such a ridiculous theory of benign consequences from such enormous expansion of money and credit!!!”

The three exclamation points are an indication that your voice should be at maximum volume at this point for optimal impact, as I can hear police sirens approaching.

Mr. Steil is not amused at our antics, and continues, “on the other hand, we call for trillion dollar stimulus plan on the basis of little more than citing John Maynard Keynes” which “gives us special license to talk economics without knowing any.” Hahaha! Exactly right! Well put!

And like the guy who wears a T-shirt that proudly proclaims “I am not a gynecologist, but I’ll take a look” the results of having economic poseurs and idiots at the Federal Reserve inflict their idiotic econometric theories upon us have been Disastrously, Ruinously Bad (DARB).

Which brings up, as you knew it would, a Powerful Mogambo Suggestion (PMS) to buy gold, silver and oil to protect yourself from insane monetary policies of the Federal Reserve and the insane fiscal policies of Congress, and maybe make a pile of devalued dollars in the process, too!

Whee! This investing stuff is easy!

Source: An Edifice of Pure Economic Crapola

The bearish camp is pointing towards Japan and claiming that asset prices will not rebound for many years. According to these folks, corporate earnings will continue to decline and unemployment will rise to much higher levels. So, the bears have concluded that global financial markets will stay depressed for the foreseeable future. It is my observation however that in post-war history (with the exception of the previous recession when stocks were grossly overvalued) stock markets have always commenced a new bull-market prior to the end of each recession.

The current U.S. recession commenced late last year, so it has already lasted for more than a year. The average post-war US recession lasted 10 months making this downturn more severe. With the exception of the Great Depression, the worst post-war recessions occurred in 1974 and 1982. Both of these lasted for 16 months, making them the worst recessions since World War II. Now, if we were to assume that the current recession continues well into 2009, this would imply that stock markets will probably bottom out over the coming months.

We must remember that the financial markets are a discounting mechanism and with prices down significantly from their highs, most of the negative news seems to be already factored in today’s prices. In the past few months, some nations have been brought to their knees, the entire investment banking industry has been decimated, homebuilders have taken huge losses and now auto-makers are facing bankruptcy! For sure, such circumstances are not signs of a major top; rather they are usually associated with the bottom of the business cycle. So, liquidating positions and taking losses during such a pessimistic environment would be a big mistake. On the contrary, the ongoing liquidation of all assets is providing long-term investors with a fantastic buying opportunity. Accordingly, over the past couple of months, I have deployed all of my personal surplus cash reserves into the markets. Now, I concede that it is possible that prices may continue to drift lower in the short-term, but the recent market action suggests that we may have reached an important low. Unfortunately, I cannot state with certainty as to whether or not last quarter’s low will turn out to be the ultimate low for this bear-market. However, I do know that investors who deploy capital in commodity stocks and bullion today, will probably be sitting on huge profits in 5 years from now.

At present, the markets are extremely oversold relative to their moving averages and investor sentiment is awful. In this environment, I anticipate a multi-month rally in commodities, related stocks and precious metals. Conversely, at the same time, I expect a decline in the U.S. dollar, Japanese yen and U.S. Treasuries. All of these assets appreciated considerably during the liquidation phase and they will come under pressure when the tide changes.

The main reason why I do not foresee deflation (decrease in the supply of money) is due to the fact that the contraction in credit arising from deleveraging is being more than compensated by the money-pumping actions of the various governments. In the past year alone, the Federal Reserve has expanded its balance-sheet by a whopping US$1.2 trillion! Moreover, thanks to Mr. Bernanke’s cash injections (quantitative easing), reserve balances have sky-rocketed from roughly US$5 billion to almost US$600 billion in roughly 3 months (Figure 1)!

Figure: Lift off in bank reserves – helicopters being primed?

Source: Federal Reserve Bank of St. Louis

Furthermore, it is interesting to note that the Federal Reserve (money-printer extraordinaire) has now started to inflate the supply of money. Over the past few weeks, the Federal Reserve has injected roughly US$300 billion into the banking system without a proportionate increase in its non-banking liabilities via deposits by the US Treasury. In simple terms, what this means is that the Federal Reserve is now increasing bank reserves without the US Treasury removing an equivalent amount of money from the system. Usually, when the Federal Reserves provides surplus reserves to its member banks, the US Treasury borrows this money from the market by issuing bonds; thereby offsetting the inflationary impact of the Federal Reserve’s monetary injections. However, this is not what is happening now and this has inflationary implications. Essentially, the Federal Reserve is now creating money ‘out of thin air’, debasing its currency and sowing the seeds for sky-high inflation.

At present, commercial banks are hoarding this cash, but I expect this newly created money to seep through the economy over the following months. When that occurs and credit starts flowing again, business activity will pick up and prices will start appreciating.

In the past few weeks, we have received numerous queries from anxious investors who want to know if we are heading into deflation. Obviously, we don’t know what will happen in the future, but for now, data shows that all the deflation hype is absurd. If you have any doubt whatsoever as to whether we are facing inflation (expansion in the supply of money) or deflation (contraction in the supply of money), you need to look no further than Figure 2 which highlights the rate at which various nations are inflating the money supply. There is no doubt in this writer’s mind that deflation is out of the question when the money supply is expanding at such a frantic pace. For the sake of clarification, I must state that what we have witnessed over the past year is not deflation but a contraction in asset prices due to forced liquidation (non-availability of credit).

Figure 2: Inflation is the problem

Source: The Economist

Now, you may be wondering why there is so much talk about deflation these days when inflation (expansion in the money-supply) is the real issue at hand. There are two reasons for this:

First and foremost, you must remember that banks are in the business of lending and the central banks’ prime objective is to manage inflationary expectations. So, Mr. Bernanke and his comrades are paid to keep a lid on the public’s inflationary fears. Accordingly, a ‘deflation scare’ is engineered ever so often, so that they can continue with their long-term stealth inflation agenda without raising too many eyebrows. Secondly, the establishment needs to advertise a ‘deflation scare’ so that the central banks can slash interest rates. If inflation rather than deflation was perceived as the legitimate threat, then the Federal Reserve would not get away with near zero interest-rates.

In summary, I am of the view that the set-backs in our preferred areas (energy, miners, agriculture and bullion) will prove to be temporary and these assets should outperform the broad market once the recovery commences. Finally, it is worth noting that silver and platinum are now unbelievably oversold and they should rally hard and outperform gold over the following months. Accordingly, I would recommend buying some silver and platinum bullion at these levels.

Source: Sowing the Seeds

Question is: Will the oft-dithering Congress actually take some action to enact this proposal? You can bet that the hallowed halls of the Capitol are buzzing with debate and counter-debate at the moment, but trying to get blustering lawmakers to agree on something requires the patience of a saint.

Meanwhile, Federal Reserve Chairman Ben Bernanke is 3,000 miles away, where he made a speech at the London School of Economics today. I was struck by this tasty soundbyte:

“It is unacceptable that large firms, which government is now compelled to support in order to preserve financial stability were among the greatest risk-takers during the boom period… The existence of too-big-to-fail firms violates the presumption of a level playing field among financial institutions.”

Unacceptable, yes. But apparently not unacceptable enough to bail them out anyway – and then going on record to advocate more of the same. I wonder if his helicopter ever runs out of fuel.

Specifically, Bernanke stated that, “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.” And in Fed-speak, that also means leaving the door open for more corporate bailouts for firms that don’t deserve it – but will get it anyway. In return, Bernanke says they must accept the additional regulation that will follow.

* * * * * * * * * *

Cash Grab

On Monday, almost-President Obama asked for the remaining $350 billion of the initial $700 billion bailout package to be released into the economy. And while Bernanke says Obama’s rescue package proposal should provide a “significant boost” to the economy, it might not be enough.

The most pressing need appears to be an effort to remove the “large quantity of troubled, hard-to-value assets” from banks’ balance sheets. That would involve setting up what Bernanke calls “bad banks” to hold the assets in exchange for cash and equity in the bank. Another move could be for the Treasury to simply buy the assets (using public money, of course).

But until this situation plays out further and we see what kind of effect all this stimulus has, we simply don’t know whether it will work. In addition, there’s a real concern about how the economy and market reacts once the government begins to return to “normal” economic and monetary policy and some have questioned whether the Fed has an exit plan.

Bernanke is right about one thing, though: “The world is too interconnected for nations to go it alone in their economic, financial and regulatory policies… International co-operation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.”

* * * * * * * * * *

Tech Is Dead? Not At This Firm…

Speaking of international affairs, it’s rare to find a company whose quarterly profits just jumped by 33%… but that’s the case for Indian tech giant Infosys (Nasdaq: INFY).

Thanks to signing a range of new contracts, the firm raked in 16.4 billion rupees ($343.4 million) during the fourth quarter.

And despite Infosys CFO V. Balakrishnan calling it a “one-off event,” Infosys still stands to reap some reward from the fallout of the accounting fraud at its chief rival, Satyam Computer (NYSE: SAY), which boasts General Electric (NYSE: GE) and IBM (NYSE: IBM) among its clients.

Infosys is likely to continue to see growth in 2009, thanks to the Satyam situation, plus the recent multi-year contract it signed with Astra-Zeneca (NYSE: AZN), and the devaluation of the Rupee, which makes it more competitive.

Infosys is a current holding in the Xcelerated Profits Report (XPR) portfolio – one faring well for us, thanks to our strategy of selling covered calls against our shares, in addition to picking up a dividend on the stock.

To find out how you can join the XPR team and discover which companies you should add to your portfolio, check out this report.

* * * * * * * * * *

Profit Slump In U.K. As Economy Experiences “Frightening Deterioration”

In Britain, however, many firms aren’t faring as well as Infosys.

Accountants Ernst & Young said the number of publicly traded companies that issued profit warnings jumped by 17% in 2008 – a seven-year high.

And with the British Chambers of Commerce stating today that there’s a “frightening deterioration” in the U.K. economy (one report just out stated that the British GDP growth slumped by 1.5% during the fourth quarter – the worst performance in 28 years), it doesn’t bode well for an improvement in 2009.

In Japan, the situation is even worse…

* * * * * * * * * *

Japan: “Closed For Business”

Research firm Tokyo Shoko said today that corporate bankruptcies shot up by 27.7% in December, compared with a year earlier.

In all, 1,362 companies filed for bankruptcy, as the fallout from the financial crisis clobbered Japan’s economy. And 33 publicly traded firms also went out of business in 2008 – the most in postwar history – as the nation saw bankruptcies rise by 11% for the year – the most since 1997.

The news isn’t surprising, given the steep drop in Japanese exports like cars, and the fact that the country slid into its first recession in seven years during the third quarter.

Source: Stimulus, Bailouts, Bernanke… And The Great U.S. Cash Grab

To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of U.S. Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff’s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact.”

If it is well known that the Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside, of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties – only to “flip” them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the incoming Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices, the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds it buys, the more inflation the central bank will create. As inflation diminishes the investment value of low-yielding Treasuries, the scenario will become apparent and will kick off a downward spiral. But the more active the Fed becomes in its quest to prop up bond prices, the bigger the incentive to hit the Fed’s bid.

The result will be that all Treasuries sold will be purchased by the Fed.

But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping – such as corporate, municipal and agency debt – to fall through the floor, pushing up interest rates across the board.

In order to “save” the economy from these high rates, the Fed will then have to expand its purchases to include all forms of debt. If that happens, runaway inflation will quickly turn into hyperinflation, and our currency will be worthless and our economy left in ruins.

To avoid this nightmare scenario, the Fed should pull out of the bond market before it’s too late and let prices fall to where real buyers – those willing to hold to maturity – re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.

The grim reality, of course, is that when the real estate bubble burst, the government was able to “bail out” private parties. However, when the bond market bubble bursts, it will be the U.S. government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyperinflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff’s clients might finally find some comfort.

Source: The Fed’s Bubble Trouble Will Cause Rates to Spike and Spawn Hyperinflation

President Thomas Jefferson once said, “A government big enough to give you everything you want is big enough to take away everything you have.”

Naturally, I am jealous of Thomas Jefferson, as he gets quoted all over the place, whereas the only time I was ever quoted was that time when I said, “I’m innocent, I tells ya!” which made everybody laugh because everybody knew I wasn’t, since they had all that videotape evidence, two busloads of eye witnesses, and the cranky old woman herself yelling, “That’s him, officer! That’s the guy who called me a stupid, moronic, ugly, half-witted old bag because I would not agree to buy more gold, silver and oil to somehow ’save myself’ from the economic collapse that he sees coming as a result of the Federal Reserve creating all that excess money and credit all those years, especially since 1997 when it REALLY got cranking! And he wanted to me give him twenty dollars as a donation to finance his trip to track down Alan Greenspan, former chairman of the Federal Reserve from 1987-2006, and slap his nasty, ugly face as but a small prelude to the punishment he deserves for what he has done to the country and its money!”

So, still bearing the psychic scars of that nasty encounter (I never did get the twenty bucks!), I never pass up an opportunity to show how I am smarter than Thomas Jefferson, which I typically prove by merely showing that I am alive and he is dead. I mean, he’s dead! What in the hell was he thinking if he is so smart?

But this time I can show the shallow thinking of Thomas Jefferson in another way by merely showing what he should have said, which is, “A government big enough to give you everything you want is big enough to take away everything you have, and that is exactly what it will eventually do because that is what it must eventually do if government is going to pay higher and higher bills as inflation in the money supply translates into inflation in consumer prices, and like a giant leech from Outer Space it will sink its fangs into you and suck you dry of financial liquidity, either in taxation or inflation (but usually both), and that is why I, Thomas Jefferson, and all the other Founding Fathers, put into the Constitution the requirement that money can only be gold and silver, which is to make sure that the government can’t produce extra money and credit and ruin everything with that boom-bust crap!”

Howard S. Katz at thegoldbug.net is obviously not anxious to get into this Jefferson-Mogambo debate, but writes, “the desire to live off the labor of others is very strong”, explaining the always-popular idea of the “common people that their government would ‘rob from the rich and give to the poor.’”

He immediately disabuses you of that silly notion by dryly noting, “No government in history has ever done this.”

Instead, because the government (in our case, through its proxy the Federal Reserve) creates excessive amounts of money and credit, and all of this money chases a fixed-in-the-short-term supply of goods and services, thus driving up their prices, and thus the poor must consume less, and the money they spend flows to the rich guys who borrowed the money in the first place! Hahaha!

We’re essentially robbing the poor to give to the rich because the Federal Reserve is creating so much money! Get poorer by having money! What a country! Hahaha!

And the poor are being robbed at a faster and faster pace, as prices are soaring for all kinds of things, as I note from the CRB index being up 9.2% year-to-date. And the Goldman Sachs Commodities Index is up a whopping 16.1% since January 1, and up a terrifying 43% over the last 12 months!

The new Economist magazine’s table of “Economic and financial indicators” shows that “All-Items” have gone up by 25% in the last year, and that the category of “Food” is up 41% in the last year! I am screaming my guts out in outrage!

And the prices of commodities are not finished rising because the central banks of the world are not finished increasing the money supply. I can say this with confidence not because I am an arrogant, loudmouth know-it-all (which I am), but this time I have a colleague in the famous Jim Rogers, who, according to the title of the essay MoneyWeek.com, answers a perennial question with “Why Commodity Prices Are Not Done Rising Yet”.

Here is where I cleverly take the words of Mr. Rogers and twist them around to my benefit. Thus, I proudly announce in a press release that “Jim Rogers, famous investor and economic seer, says that The Mogambo Of The Twinkling Blue Eyes (TMOTTBE) is absolutely right, and that you SHOULD be buying gold, silver and oil like the greedy little paranoid rat that you are, and if you are not buying them, then you are going to be busted and miserable no matter HOW much of a greedy little paranoid rat you are!”

Okay, he did not say that. But he did say, “There’s been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is going to get thrown out (of OPEC) because they no longer export oil, they are now net importers of oil. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the second largest importer of oil in the world.”

I can tell by the look of horror in your eyes that you are terrified that I am going to use this instance of increasing demand versus falling supply as an excuse to launch into another dreary lecture about how the prices rising and falling is what makes supply equal demand, but I am not. It is my birthday present to you. And if it is not your birthday now, then it will be one day, and you already have my present, so don’t go around saying, like my children, “He won’t even give us a birthday present and he won’t even call us on the phone on our birthdays, and if we call him, he says ‘Me no speakee English!’”

Mr. Rogers is apparently also afraid that I am going to launch into a Tiresome Mogambo Lecture (TML) about how he ignores the whole supply/demand dynamic that actually determines prices, and he cleverly cuts me off by saying, “Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years.”

On the other hand, “supply has gone down and demand has gone up for 25 years. That’s called a bull market.”

He sums it up by saying, “the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof.”

And gold, silver and oil will be right there in the lead, racking up the greatest gains of all! Whee!

Source: Robbing the Poor of Jeffersonian Wisdom