On one side is U.S. President Barack Obama and his plan to expand the authority of the Federal Reserve. In addition to its current powers, Obama plans to give the Fed regulatory authority over large financial institutions that are considered “too big to fail.”

On the other side is U.S. Rep. Ron Paul, R-TX, who has gathered 250 signatures for a proposal to audit the Federal Reserve. This audit, by Paul’s own admission is only a down payment towards his overriding goal of abolishing the central bank.

So who’s right? Should the Federal Reserve have more authority or less? And what will the outcome mean for investors?

The call for greater Fed power comes, as might be expected, from those who think the Fed has done a good job managing the financial crisis. Their view is that the Fed – by swelling its balance sheet by about $1.4 trillion and more than doubling the monetary base in less than a year – prevented deflation from taking hold in the economy and saved the banking system, which was in dire danger of collapse.

To those with this mindset, it makes sense for the Fed to act as the primary regulator of banks and investment banks that pose a systemic risk to the U.S. financial sector.

But the problem with this plan is that any potential rescues would not be carried out on the Fed’s dime, but on that of the Federal Deposit Insurance Corporation (FDIC). That means a collapse in the banking system would actually benefit the Fed by allowing the central bank toramp up its balance sheet to replace all of the banks’ losses and ensure that its chairman makes the nightly news every evening.

Even for those who are not staunch believers in Nobel Prize-winner James Buchanan’s public choice theory, the incentives seem to be wrong. It would make more sense to put banking system regulation firmly under the FDIC, which is responsible for paying up if anything goes wrong.

It’s not likely that an empowered Fed would impose tight restrictions on the big banks. Instead, the central bank’s governance would probably become a prime example of “regulatory capture,” by which spineless regulators exist mainly to do the bidding of the very institutions they’re supposed to be regulating.

Since the rest of us are dependent on the Fed’s monetary policy to survive economically, and need bank regulation that will keep the biggest banks from picking our pockets every few years, we don’t want the Fed to become a subsidiary of Goldman Sachs Group Inc. (NYSE:GS) – something that seems likely under the Obama proposal.

On the other hand, Paul’s bill appeals to those like myself, who believe the Fed has consistently run an over-expansionary monetary policy since the mid-1990s.

The credibility of this theory has been undermined by the fact that inflation has been kept under wraps, but this month’s consumer price index (CPI) and producer price index (PPI) figures – up 0.7% and 0.5% respectively – suggest that another surge in prices may not be far off.

As we go through the fall, the months of price declines in late 2008 that were caused by the collapse of energy and commodity prices will cause year-over-year inflation to trend higher. That, in turn, is likely to raise gold prices and Treasury interest rates, causing bond market panic and inevitably changing the public perception of the Fed’s performance.

So if the Obama administration wants to give the Fed new powers and extend Chairman Ben Bernanke’s term in office (which ends in January 2010) they had better do so quickly.

In any case, Paul’s proposal to audit the Fed would bring central bank operations more under the control of politicians, who supposedly would be able to expose unpopular goings-on and unexpected losses in the Fed’s operations. That’s why it has attracted bipartisan support.

But rather than simply auditing the Fed or abolishing it, as Paul proposes, there is a much better case for giving the central bank a new mandate, whereby its obligation to maintain monetary stability is given precedence over all other obligations.

Under the Full Employment Act of 1978, it has a dual obligation to maintain employment and monetary stability. A new mandate that prioritized monetary stability would force the Fed to follow the policies of former Federal Reserve Chairman Paul Volcker. That would mean keeping interest rates well above the rate of inflation, thereby favoring savers over borrowers.

As investors, we should thus oppose the Obama administration’s plans for the Fed, which seem likely to perpetuate the rent-seeking of Wall Street’s biggest banks. We should also be suspicious of Paul’s bill to audit the Fed, since that would bring it more closely under the control of elected politicians. History has shown that politicians cannot be trusted with the ability to create money out of thin air.

Instead, we should back plans to pass legislation that “Volckerizes” the Fed on a permanent basis, making monetary policy sound, eliminating the risk of inflation, and raising the rates we earn on all of our savings to a level that pays us adequately for providing banks and other borrowers with our money.

In the end, the ability to earn decent returns on savings and keep the result is the most important capitalist freedom of them all.

Source: Choosing Sides in the Fight for the Federal Reserve: Whom Should Wise Investors Align With?

During the bubble years, more and more credit produced less and less real prosperity. It was as if you were borrowing more and more, to invest in your business or merely to increase your standard of living, but your income didn’t rise fast enough to keep up with the interest payments.

In 2005, Americans saved nothing. Not even aluminum foil or string. Now, the savings rate is approaching 5% of disposable income – a big turnaround.

We know from logic and experience that saving money – not spending it – is the key to getting wealthier. Saving money gives you capital. And it’s capital accumulation – in the form of factories, roads, ships, buildings, machines…and raw savings – that gives people the ability to produce more. It may take a man with a shovel a whole day to dig a decent grave. Give him capital – in the form of a backhoe – and he can bury everyone in town. That’s why capitalism works. It rewards the fellow who saves his money.

Yet every yahoo economist in the year of our Lord 2009 takes news of rising savings rates like the death of Michael Jackson. If households don’t consume, they reason, how can a consumer economy grow?

The problem is that you can’t really grow an economy by borrowing and spending.

Recent history proves it. Despite the biggest splurge of borrowing and spending in history, the US consumer economy barely grew at all.

“In the five years to December 2007,” reports Grant’s Interest Rate Observer, “America’s credit market debt climbed by nearly 57%, to $18 trillion. However, in the same half-decade, nominal GDP was up by only $3.3 trillion.”

For every five dollars people borrowed, they only increased their incomes by $1. Imagine that the borrowing had an average effective interest rate of 10% (credit card debt can be much more expensive). At that rate half of the additional income earned between 2002 and 2007 had to be used just to pay the interest.

This was not the kind of growth that was likely to last. In fact, it didn’t. The whole thing came crashing down in ‘07 and ‘08. And now, the consumer has had a cup of coffee. He’s looked at himself in the mirror. He’s sorted through his pile of bills. And he’s made up his mind: that’s enough of that!

“The ratio of cash held by households as compared with assets has been rising sharply,” says James Saft in the New York Times.

“Companies, households and banks all want to pay down debt and…prefer to hold cash rather than assets, partly because the outlook for those assets is poor and partly because after a decade of excess, everyone now looks a bit over-extended.

“This is exactly what happened in Japan during its lost decade, when a balance sheet recession, one characterized by the paying down of debt and liquidations of assets, was self-reinforcing and very difficult to stem.”

And now this from David Rosenberg:

“The ultimate question is where all this cash is going to be deployed, and we believe it will ultimately be diverted toward debt repayment.”

Let’s see. We can figure this out from the numbers above. American consumers must have added about $7 trillion in extra debt during the Bubble Epoque, 2002-2007. Now, instead of buying things, they use their money to pay it down. The average household has about $43,000 worth of income. Let’s keep the math simple by saying there are 100 million households in the United States…and that they save 5% of their income. And let’s say they use every penny of savings to pay down debt. Hey…it will only take about 30 years to pay it off! Get ready for a long, long slump.

Yesterday, stocks went nowhere. Oil went nowhere. And the dollar went down as gold went up.

The reason for the dollar’s decline and gold’s rise was given in the front-page headline of today’s Financial Times. China launched a “new dig” at the dollar, it says. As near as we could tell, China merely stated the obvious – that the world is going to have to find a better monetary system. The US dollar won’t be king of the hill forever. And China, which is up to its neck in dollars, would like to find a solution sooner rather than later – that is, before the dollar goes the way of all paper.

The dollar will eventually give way to inflation and devaluation, but probably not soon.

“I’m absolutely worried about inflation,” says John B. Taylor.

But here at The Daily Reckoning, it is not inflation that worries us…it’s the lack of it. Making a long story short, as long as the feds see no inflation they will continue trying to create it. In the end, they will get more than they wanted.

Though, right now, instead of inflation, we have deflation. Today’s New York Times tells us that deflation in Ireland has reached 5.4% — the highest since the Great Depression of the ’30s.

You know the reasons for deflation as well as we do. The world suddenly has too many people who borrowed too much money buy too many things they really didn’t need and really couldn’t afford. This caused the world’s producers to greatly over-estimate the ‘real’ demand. Their customers began to disappear in 2007. Their factories are still standing.

“Is it always so cold in July?” asked an American visitor yesterday. London has been cold, windy and rainy for the last week. It comes as a shock to American tourists, who inevitably show up in shorts and t-shirts.

Europe has a milder climate than North America. Our guest comes from Ottawa, Canada.

“Everybody thinks it is so cold in Canada. But it’s much hotter there than it is here. A lot of houses in Ottawa have air conditioning. Here, almost no one has it. And I guess they don’t need it.”

But in the winter, the streets of North American cities turn bitter cold and bums freeze up on the sidewalks. That doesn’t happen in Europe. It rarely gets cold enough to freeze a bum here. Maybe that’s why there are so many of them.

Around the corner from our office is something we had never seen before. A mother-daughter team of ’street persons.’ Dressed in black rags, they sit with their bags and talk. They are there when we get to the office in the morning. They are there when we leave in the evening.

The daughter appears to be in her 20s or early 30s. She is a pretty girl, as near as we can tell. The mother must be in her 50s…maybe 60s. The two look very similar – like the mother/daughter combinations you see in skin cream advertisements. They dress the same. They have the same very English faces. They have the same expressions and same postures…sitting on the sidewalk with the backs to the wall. Whenever we pass, they are chatting with each other – happily, it appears.

Source: The Great Credit Contraction Cometh

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.

Silver had a series of gentle undulations between $14.10 and $14.40 and, though it closed nearer the lower end, was still in positive territory at $14.18/oz., up 16 cents. Overnight, silver is trending lower. (Click here for charts)

With the dollar off a bit and oil slightly lower, one might have expected the precious metals to turn in a blah day, and that’s about what happened. That there was a positive tint to the action was a bonus, considering the beating that the sector has recently taken.

“The U.S. currency continues to dictate direction,” wrote Andrey Kryuchenkov, an analyst at VTB Capital in London. “We expect gold to start consolidating” this week “as the dollar retreats.”

The Hightower Report analyzed the day thusly: “The gold market might have surprised the trade on Tuesday morning as the market was showing some minor strength overnight but as the trade moved toward the US scheduled report slate, prices began to firm. However, the gold market was unable to sustain the early strength through the US Housing Starts and inflation reports. With the gold market showing some downside momentum in the early afternoon trade in sync with the weakness being seen in the US equity markets, some traders are suggesting that the direction of equity prices is becoming more important than the action in the US Dollar. But in the end, the weak Dollar seemed to give the gold bulls a slight edge.”

Looking ahead, Kryuchenkov called it significant that finance ministers from the G-8 have agreed to consider steps to scale back economic stimulus measures once global growth resumes, and have asked the IMF how that might be accomplished without exacerbating the financial crisis.

“Provided this talk from policy makers intensifies towards the end of the year, we might see another strong rally in gold,” Kryuchenkov said. “Your average investor knows that G-8 finance ministers are already pondering rising inflation.”

And Kitco’s Jon Nadler threw a wet blanket on platinum’s recent gains, writing that, “Based on fundamentals, and based on the auto sector’s lack of vital signs, there is little to compel people to run out and buy the noble metals.”

Source: Precious Metals Recover a Bit

I am suing because this is identical – identical! – to what I said a long time ago, which I am sure you will readily see when you compare his obviously-plagiarized remarks to my original, “If you think that you can find a way to stop the inflationary suicide caused by the over-creation of money and credit, especially when used to finance massive government deficit-spending over the long-term, then you are in the category we professionals call Stupid-Plus-Insane (SPI), because the Entire Freaking History Of The World (EFHOTW) is one long, discontinuous, sad story of how one idiotic government after another cheapened its money by massive over-creation of money, or going into un-payable debt, or both, and thus destroying the economy until the idiots in charge found an excuse to declare war on someone either smaller and/or more lightly armed, and merely steal their stuff with which to pay debts.”

I am sure that you can already see the obvious similarities with just that little introductory bit, but which is brought into sharper focus when I continued, “And if you DO find a way to painlessly deflate these horrid monetary bubbles, then you will go down in history as the Smartest Person Who Ever Freaking Lived (SMWEFL), since all the smartest men who EFL before this all tried, with emergency governmental powers unfettered by man or gods, to find a way to bail dirtbag countries out of their bankrupting debts and associated government idiocies, and they all failed miserably.”

If there is any doubt left in your minds, ladies and gentlemen of the jury, that this Yu Yongding (if that is his real name, which I doubt because it sounds like he made it up to me!) plagiarized the official Remarks Of The Mogambo (ROTM), then explain the devastating similarity between his comments and my concluding remarks, which are “All of them failed, completely, to achieve this very thing, and which makes me laugh uproariously – hahahaha! – at anyone who still thinks it is possible, and if that is you, then I extend my promise to devote the entire rest of my life to bringing your Fabulous Big Plan (FBP) to the world if you succeed in finding a way to bail out a heavily-indebted, bankrupt, something-for-nothing welfare country that abuses a fiat currency and unlimited fractional reserve banking, coming as it does after all these many, many centuries of everyone looking, looking, looking to desperately find a painless solution to this Same Stupid Problem (SSP), which means you won’t succeed, but thanks for trying, moron!”

I plan on using the big cash award from the jury’s verdict to buy gold, silver and oil, which will not solve anything other than my own future well-being, since these things will soar in price because of the inflation in prices from all of this inflation in the money supply from all this inflation in government spending.

Maybe this ease of investment decision-making is why the Chinese are buying gold, the Russians are buying gold, all the smart people are buying gold, all the good-looking people are buying gold, and why Bloomberg.com reports that “Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time in the company’s 152-year history to hedge against further asset declines.”

In case you were wondering, they bought about $400 million in gold, which is interesting in that later, the article quotes CEO Edward Zore as saying that “In the Depression, gold did very, very well.”

The ominous reference to a Depression aside, what he did not say is that over the long-term, gold has always done very well. Neither did he comment on my lawsuit against Yu Yongding, nor did he squeal like a happy pig in his joyful glee that “Whee! This investing stuff is easy!” when you can so easily bet against government stupidity!

Source: Purchasing Gold as a Product of Plagiarism

The Great Depression Speaks

The most notable example of what happens to gold stocks in a prolonged deflationary environment is the Great Depression. However, the United States was on a gold standard at the time, so miners had a guaranteed selling price – which was a good thing for them, because their operating costs were plummeting. So the comparability isn’t perfect, but let’s see what we can learn.

When the stock market crashed in 1929, gold stocks were part of the general wreckage (sound familiar?). The market then rallied and recovered almost 50% of its losses by April 1930, with gold shares again tagging along. It’s what happened next that gives us our first clue about deflation’s effect.

When the bear market resumed in the summer of 1930, all securities sold off again – except gold stocks. Gold shares stayed basically flat until early 1931, when they boarded the elevator and headed for the penthouse.

Let’s look at how shares of Homestake Mining, the largest gold miner in the U.S. at the time, and Dome Mines, Canada’s senior producer, performed during the Great Depression.

And the chart doesn’t show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. And get this: both companies paid healthy and rising dividends as the depression wore on; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80.

Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings, but after the 1929 crash most of the volatility was to the upside.

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

From Homestake’s chart, you get a clear picture of what the stock did compared to the market as a whole:

You’ll notice the large spike down in both Homestake and the Dow during the 1929 crash… but then look at Homestake’s recovery immediately afterward, returning close to its old high. This is eerily similar to our recent pattern: our stocks sold off violently last October but have since doubled or more from their bottoms.

You’ll then notice that Homestake took almost two years to exceed its old high, but once it broke out, it was off to the races. The stock doubled four times in five years during a seven-year run to its peak after the ’29 crash.

The conclusion? If history is any guide, gold stocks can hold their own against deflation. And they could profit tremendously if the demand for gold as a safe haven continues to grow.

Gold vs. Deflation

On April 5, 1933, President Roosevelt issued an executive order forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz. And less than nine months later, he raised the gold price to $35, effectively diluting the dollar in every wallet 41% overnight and swindling everyone who had turned in his gold.

We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, it’s likely to retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

But with this said, the overriding concern is that in a fiat system, any deflation will be met with an inflationary overreaction (as we’re seeing). And the worse the deflation, the more extreme the overreaction will be.

It’s for this reason that the editors of BIG GOLD urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you have less than our recommended one-third of your investable assets in some form of gold, check around for places to buy gold coins and bars at good premiums.

The Silver Lining

For those with an inclination toward silver, our research points to clear signs that silver is increasingly being viewed as a store of value and not just as an industrial metal.

Here’s a comparison of silver’s performance vs. base metals over the past six months (10-1-08 through 3-31-09), which includes last fall’s meltdown:

If silver were viewed solely as an industrial metal, the price would be off sharply. This doesn’t mean we think silver or silver stocks can’t go temporarily lower from here, but rather that the demand for silver as a store of value metal will be growing.

Bottom line: Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit.

Buying physical gold and silver as safe-harbor assets is for many investors a no-brainer at this point. But only a few have heard of another prudent gold investment – one that has gone up more than 50% in 2008, at the exact same time when the overall stock market bombed. You don’t want to miss out on owning this “48 Karat Gold” stock… click here to learn more.

Regards,
Jeff Clark

Source: Gold Stocks in a Depression

This new bank credit is the stuff from which “money” is instantly made when someone borrows from a bank, which increases the money supply, which creates inflation in something when that new money is used to bid up the price (or prices) of part (or parts) of the existing stock of goods and/or services, the recipient of which goes out and bids up the prices of stuff that HE wants, round and around.

My Mogambo Sleepy-Time Plan (MSTP) was, alas, to no avail, and I tossed and turned fitfully all night, especially now that the far-Left, commie-think, brain-dead Obama administration – which I now refer to as The Obamaniacs – has gotten the Democrat-controlled Congress to spend a monstrous 28% of GDP, of which 13% of GDP (slightly less than half!) is borrowed money!

The Federal Reserve has two choices here. It can choose to tell Obama and the idiot Congress to go to hell because creating that much money will produce ruinous inflation, like it has always produced all the way through history, destroying the economy.

But instead, the despicable, incompetent Fed has chosen to acquiesce, and print the money necessary to buy all of that new debt! Trillions and trillions of new dollars flooding into the economy through governmental spigots! Yikes!

Perhaps this is why I am hearing a lot of things like, “The US dollar has fallen below important support at 81 on the index, and everyone expects it to fall more. This is what the guys and I were discussing while hanging around the water cooler instead of engaging in our usual banter of plotting some sick revenge against our boss, and we were wondering what you thought of this idea that the ailing dollar will go down, meaning that that other currencies are getting stronger, and we were also wondering if you would still be leaving work next Thursday at the usual time and walking down that same dark, deserted side-street to where you park your car for free instead of paying for parking like everybody else, you cheap bastard?”

Well, to the latter I say, “Not any more! Hahaha!” and to the former I say, “The dollar index is just a measure of the relative monetary stupidity of governments and their central banks. If you want to know the future of the dollar in terms of its buying power, on the other hand, then look at the dollar-price of gold, you moron!”

And on that golden note, Jim Willie of Goldenjackass.com reports, “The ratio of the 10-year USTreasury Note yield to the 2-year USTreasury Bill yield has always been highly reliable in predicting a move in the gold price.”

So the Treasury market says “gold bull market ahead!” and one of the things that tells me that we are in a bull market for gold is that, according to Barron’s, the Krugerrand is selling at the same price as the US Eagle and the Austrian Philharmonic, which is weird because the Krugerrand is one troy ounce of 22-karat gold and is only 91.7% pure gold, while the Eagle and Philharmonic are one troy ounce of 24-karat gold and are 99.999% pure gold.

So it seems that buying Eagles and short-selling Krugerrands would guarantee a profit when the price gap opens back up and people slap themselves on the forehead and say to themselves, “Wait a minute! You mean that I paid the price of an entire ounce of pure gold but I only got 91.7% of an ounce of gold? Sell!” Hahaha!

So what is the point of all of this technical analysis stuff that I do not understand, other than wasting everyone’s time? It is simply that gold is obviously getting ready to zoom, as the steepening Treasury yield curve attests, meaning that bond owners are belatedly realizing that all of this new money means that inflation will rise, making interest rates go up, handing bond holders a loss, and the longer the bond, the bigger the danger, so they are demanding higher yields.

As an interesting aside, as in, “We’re freaking doomed by a clot of corrupt government devils,” Mr. Willie says to “give credit to the USGovt statrats in their busy laboratories. They decided to ramp up the Q2 Gross Domestic Product by including all USGovt rescue funds for the big banks, including the diverse funds from the many liquidity facilities. All those funds will go directly into the GDP for Q2 as a special line item. Expect a miraculous economic recovery in the second quarter, based on vapor.”

Miraculous indeed! Hahaha! What a blatant governmental affront! What a colossal, transparent, low-IQ fraud!

I noticed that my trigger finger was twitching, my voice was bellowing in fear and outrage, my blood pressure was 500/400 and my kids were running away, crying out, “Run for the hills! Dad’s freaking out again!”

After they were gone, I calmed down in the sudden blissful peace and quiet, and it was then I remembered that gold, wonderful glorious gold, will save me like it has saved everybody else in the last 4,500 years of episodes of governmental monetary and fiscal insanity.

Even my trigger finger stopped shaking, so I used it to dial the phone and order some more gold, remarking to myself as I did that “Whee! This investing stuff is easy!”

Source: The Gold Bull Market and the Fed it Rode In On

“Inflation is coming, inflation is coming.”

The world knows it. Even the guys at the switch – the Fed – can’t deny it.

Last week, Philadelphia Fed President Charles Plosser warned inflation could heat up much sooner than expected.

Here’s the problem. Everyone and their second cousin keep piling into the predictable hedge – investing in gold. The World Gold Council reports investment demand in the first quarter increased 248% to hit a record level.

Forget the contrarian implications. Such overcrowding, to an extent, means the profit pie will keep getting sliced up in smaller and smaller pieces. Moreover, when we get to the end of the inflation road, it implies the selloff will come fast and furious. I mean, look what happened last summer when the fire alarm sounded on oil. Prices collapsed 80% before anyone knew what hit them.

Here’s all I’m suggesting. If everyone’s clamoring for gold like they did last summer for oil, why not consider a road less travelled, especially if it promises equal, and possibly better, protection?

Yes. Such an investment exists. It’s art investing.

Art Investing: More Than Art for Art’s Sake

I crunched the data on gold, art and inflation since the end of the Bretton Woods system. For art, I used the Mei/Moses Fine Art Index, which tracks the prices of art based on repeat sales at auction, and captures 90% to 95% of the market.

Here’s what I found:

• Art’s correlation with inflation rivals gold’s.

• Since 1997 art actually tracked inflation a tad better than gold, sporting a 0.26 correlation versus 0.24. (Remember, correlations range from 1 to -1, with 1 meaning prices move perfectly in tandem.)

• And during the last bout of out-of-control inflation, from 1977 to 1982, art prices jumped a healthy 130%.

Now, I know what you’re thinking…

Art’s highly illiquid. Transaction, transportation and insurance costs can be excessive. Diversification can be difficult to achieve unless you’re a billionaire. And most problematic of all, many of us probably don’t know the difference between a Monet and a Manet!

The good news is you don’t have to let these obstacles stand in your way…

Enlist The Help Of Art Investing Professionals

You can enlist the help of art investing professionals:

• Like longtime friend of The Oxford Club, Mike Kuschmann, President of Fine Arts Limited in Winter Park, Florida.To get in touch with Mike, call Fine Arts Ltd. at 800.229.4322 or 407.702.6638, or email him at mkuschmann@cfl.rr.com and ask for his free brochure pack.
• Or renowned money manager and art expert, Debra Diamond, who I had the pleasure to speak with and hear present at this year’s Investment U Conference.

Both can provide you with personalized art advisory and even discuss the potential tax advantages of investing in art. (Hint: gold does not offer the same advantage.)

Of course, some of you might be looking for a quick, cheap, no hassle art fix. Thankfully, one exists.

Track the Mei/Moses Index By Owning Sotheby’s

It stands to reason we can track the performance of the Mei/Moses Index by owning the auction house, the company that will facilitate the sale of each piece of artwork that will eventually become the data for the index.

Well, only one trades on a U.S. exchange – Sotheby’s (NYSE: BID). Granted, the current fundamentals leave much to be desired. But that will change.

As inflation draws nearer I expect well-heeled investors to bolster their art collections, especially while prices are depressed. And as inflation cools, they’ll inevitably look to cash in on their hedges. In both instances, Sotheby’s stands to profit.

At the same time, I’m encouraged by the highly cyclical nature of this stock. As the GDP growth resumes – and it will eventually – history dictates the stock will, too. If you have any doubt, check out this chart:

No Perfect Hedge Against Inflation Exists…

The fact remains, no perfect hedge against inflation exists. Not one investment sports a correlation of one with inflation. So let me issue a word of caution – don’t invest in only one hedge.

Or more simply, don’t be a John Paulson.

The famed hedge fund manager who successfully predicted the subprime market collapse is piling into gold. Based on the latest SEC filings, his total position size in gold-related assets soared to 23.16%, or roughly $6 billion.

Let me assure you betting the farm, no matter how strong your conviction, leads to ruin, not riches, more often than not. Not to mention, once you lose it all, it’s hard to make it back.

Bottom line, inflation is coming. But that doesn’t mean you need to follow the narrow-mindedness of the herd into the most obvious and overcrowded hedge, gold. Instead, I recommend you diversify across the five options David and I have provided. And position size!!!

Good investing,

Lou Basenese

Source: The Inflation Hedge Nobody’s Talking About

Good day… And a Wonderful Wednesday to you! I’m draggin’ the line today, as I was helping my oldest son, Andrew, with things in his brand, spankin’ new house, last night. Congrats to Andrew, for finding a great bargain, with a low, fixed, interest rate!

OK… Whew! What a day in the currencies yesterday! Another day, and another day of wild swings.. Volatility is the name of the game these days… Watching, for instance, the euro trade down to 1.4220, and then up to 1.4320 and not just on a one-way ticket! Oh No! this is a bounce here a bounce there… But just like it was going from 1.41 to 1.42, it took a few times over the 1.42 figure before it finally stuck, and headed to 1.43… All the other currencies followed in the swings, as usual…

In a change of things that have been going on, which was simply watching the Asians sell dollars, and watching the U.S. counterparts buy them… The Asians actually reversed that course last night taking the euro from 1.4320 to 1.4220 as I walked in this morning, which was later than usual… Had to go a scavenger hunt at home… No worries… But, as I was saying… The S. Korean monetary officials said that they “see absolutely no alternative to the dollar as the main reserve currency of the world.” Hmmm… Of course what else would you say if you were a small country connected to another country that likes to show its military power, and shoot off missiles, and Oh, by the by, they are believed to have nuclear bomb capabilities… You would be kissing up to the U.S. like an intern to their boss, as they attempt to get full time employment!

However, the S. Koreans weren’t the only Asian monetary officials to speak… The Indian Central Bank, which is dying a death of 1,000 daggers watching their currency gain 11% in the past 3 months! And… Then the Big Kahuna… Japan… But, we all know that the Japanese are the biggest currency manipulators on this earth, and they would do anything to get the yen weaker… Speaking of currency manipulating… (doing an Andy Rooney here) Ever wonder why the U.S. Treasury Sec. and lawmakers all point to China for currency manipulation and don’t mention Japan?

Japan was the whipping boy of the U.S. in the 80’s… Remember? It was all “their fault”… Skip ahead 20 years and it’s now switched to China… Ask Schumer, ask Graham, and any of the other dolts that signed the bill to assign tariffs to Chinese exports, that hangs out on the shelves in D.C. just waiting for the “right time”, who’s at fault here, China or Japan… They’ll tell you China… And never mention Japan…

Speaking of currency manipulation, the Big Boss, Frank Trotter, and I were talking the other day, and we came to a thought about manipulation… The U.S. is quick to find fault with currency manipulation, but isn’t the U.S. in the manipulation business too? Aren’t they buying Treasuries in their quantitative easing, to keep interest rates down? By buying the treasuries they are manipulating the price of the bond… But, does any one hear the media calling them out here? Bawk, Bawk, Bawk… Son! I think I see a chicken hawk!

OK.. On to other things… Did you hear Germany’s Chancellor Angela Merkel talking about Quantitative Easing? This is like one of those MasterCard commercials… Bundesbank President Axel Weber talking down Quantitative Easing… very worthy… But Germany’s Chancellor Angela Merkel talking about it… Priceless!

Why priceless? Because it is a long standing tradition in Germany that the leader of the country never comments on monetary policy… But with the European Central Bank (ECB) looking at ways of doing Quantitative Easing, she took her shot… And the shot was not just aimed at the ECB… She got three birds with one stone! Throw the Fed and Bank of England in here too… Here’s the Chancellor… “Unconventional monetary policies being pursued by the world’s main central banks could aggravate rather than ease the economic crisis.”

She went on to mention the Fed and Bank of England… Let’s listen in… “I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line,” Merkel said. “We must return together to an independent central bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.”

You know… Another female leader of a county from time past is responsible for another quote that I use in my presentations… I’ll go dig it up, and come right back… Just hum the Jeopardy song for the final question, and I’ll be back! … … … …

OK! I’m back! Here it is… “The problem with socialism is that you eventually run out of other people’s money.” —- Margaret Thatcher…

The Eurozone did get some damaging employment data overnight… The Eurozone unemployment rate hit 9.2% in April, after sitting at 8.9% in March. I know, that sounds bad… But just like I tell you all the time about comparing the dollar and euro’s data… The U.S. car is uglier than the euro car… Here’s the reason I say there in this case… I know of NO games that are played with Eurozone employment data, like the games the Bureau of Labor Statistics (BLS) plays here in the U.S. So… If the Eurozone say unemployment is 9.2%, it’s 9.2%! Whereas here in the U.S. when the BLS says that unemployment this Friday is 9.2%, it won’t really be 9.2%, instead it will most likely be closer to 20%!!!!!!

While the Eurozone deals with rising unemployment… Australia posted a better than expected rise in GDP for the last quarter! The last three months showed a rise in GDP of .4%, after shrinking .6% in the previous quarter! Now… The members of the Reserve Bank of Australia, can all breathe a sigh of relief after they left rates unchanged on Monday night! They can walk about like 20-game winners, with their chests sticking out, and their chins in the air! They are dragon slayers!

The news pushed the A$ to .8260, but profit taking has pushed the A$ back below 82-cents… But this news will live in the minds of traders for some time, and after the profit taking is over, they will once again take a run at higher levels for the A$. Could 85-cents be in the cards for the A$ in the near future? Could be… But, just as easy as it could go to 85-cents and maybe beyond, it could go the other way… What I’m saying here is that this run from March 1st, is going so fast! It certainly could see it break off, take a breather, go back and fill in the gaps, whatever you want to call it…

I was reading a report yesterday where a trade expert was interviewed regarding the massive bailout of Government Motors (GM)… Claude Barfield, a trade expert at the American Enterprise Institute, believes that the massive bailout of GM: “raises the question of whether the subsidies violate President Barack Obama’s pledge not to embrace protectionist measures. The intervention “will come back to haunt us in terms of the competitiveness of U.S. corporations and in terms of furthering U.S. public-policy goals.”

Well, slowly but surely (Hey, who’s Shirley?), more and more people who understand the ramifications of Gov’t bailouts, are starting to agree with me and speak out against them… Don’t you think that over half of the Financial Institutions that took TARP money are wishing they hadn’t ever hear of TARP right now? It’s a bad thing… Ronald Reagan used to say that the scariest words spoken are…”Hi, I’m from the Government, and I’m here to help.”

But, these were “not normal times” and they called for “not normal measures” right? Isn’t that the gobble-de-gook the Gov’t tells us, as they jam one measure after another down our throats that takes away free markets, and more importantly our republic… We The People, are soon to be, We The Government…

OK, I know, I’ll get a ton of emails telling me to shut my trap, and stick to currencies… But this all has something to do with currencies folks… Protectionism to a country’s currency, the dollar in this case, is like kryptonite to Superman… So, if you want to see your country’s currency on the slippery slope to nowheresville, just keep those protectionism measures floating… Because you can’t have both… You can’t have protectionism and a strong currency (dollar)… One floats, while the other sinks…

In a related story about having one but not both… A reader sent me two charts yesterday… One showed the fall in the U.S. dollar index in the past 3 months… And.. The other showed the rise in the stock markets in the same 3 months… The reader said that it looked to him that someone was saying, “you can either have a weak dollar and strong stock market or vice versa, but you can’t have both!” Yes… Just like the protectionism, and a strong dollar… You can’t have both!

In a “sign of the times”… The Vehicle Sales for May printed yesterday, and while all the car makers reported double digit declines of sales, the U.S. automakers outperformed the Japanese automakers!

And then… I know I go to the well quite often when I reprint something from the Daily Reckoning, but it goes both ways, so I don’t feel too bad! But, when Bill Bonner, the Mogambo, or someone else says something that I think you need to read, I go for it! So… Yesterday, Bill was talking about U.S. Treasury Sec. Geithner’s visit to China… Let’s listen in: “it will be helpful if Mr. Geithner can show us some arithmetic,” said
Yu Yongding, a former advisor to the Chinese central bank.

Yes, we’d like to see that arithmetic too. How do you add $1.75 trillion in deficits…pay for it with funny money from the Fed…and still come out even on the value of the dollar? There’s no arithmetic we know of that works in the Chinese favor. Right now, the numbers…and the logic of the situation…are telling us that feds aim to create inflation. Instead of trying to keep prices under control…they’re trying to get them to go up. That’s yet another thing we didn’t expect to see!

The US government is less concerned with protecting foreign lenders than it is with getting the US economy back to its old E-Z money ways.

Cheap money is what people want. Cheap money is what the feds are trying to give them.” Bill Bonner, The Daily Reckoning (www.dailyreckoning.com)

I’ll head to the Big Finish in just a minute… But before I go there, I was looking at some graphs yesterday of the major currencies… Dollar, euro, yen, sterling, and even Canadian loonies… I’ve told you over and over again that this dance is gonna be a drag, no wait, I’ve told you over and over again that the currencies have all posted gains VS the dollar since March 1st… Well.. Euro, sterling and loonies have all outperformed yen… You would have to think that if China is pulling Asia out of the economic meltdown, that Japan would also benefit… So… Maybe, we’ll see yen catch up with it’s major currency counterparts…

Speaking of sterling… Chris Gaffney and I were discussing the other day about sterling’s rise… I talked about this a couple of weeks ago, and said I was impressed with the performance but wasn’t sold on its ability to remain strong… But there it is with a 1.65 handle on it, after hitting a low of 1.35 in Feb… I still don’t “get it” as the U.K. has the same problems as the U.S., but… As I told Chris… Sterling is probably a beneficiary of the “crosses” with all the currencies that are going up VS the dollar… Explains it a bit, but sterling has put in a very good performance the past three months!

But… The sterling’s performance is not even on the same page as the performance of the South African rand… And the Brazilian real… Of course past performance doesn’t mean that future performance will repeat itself… And on that note… Here’s the Big Finish!

Currencies today 6/3/09: A$ .8160, kiwi .6450, C$ .92, euro 1.4220, sterling 1.65, Swiss .9370, rand 8.0250, krone 6.2820, SEK 7.5650, forint 198, zloty 3.1575, koruna 18.8675, yen 95.90, sing 1.44, HKD 7.7510, INR 47.05, China 6.8309, pesos 13.21, BRL 1.9230, dollar index 78.98, Oil $68.10, Silver $15.87, and Gold… $976.80

Chuck Butler

Source: Wild Swings!

“What we’ve seen is a continued rally in risky assets — equities, commodities and emerging markets,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon (NYSE:BK).

It’s “the green-shoots rally that has really perpetuated the dollar sell-off in recent weeks,” Woolfolk added. “It’s not being driven by fundamentals but market sentiment.”

The buck was strong as long as economic turmoil and fear dominated market thinking, with the currency seen as a safe haven. Now, however, the appetite for riskier investments is on the rise “across the board,” notes Kenneth Broux, of Lloyds TSB in London. “It certainly looks like there is a great acceleration in recent trends.”

Among the day’s numbers, the Institute of Supply Management’s national manufacturing index rose to 42.8 in May from 40.1 in April. That bettered economists’ expectations for a reading of 42, but anything below 50 indicates that industry is still contracting.

Meanwhile, the Commerce Department reported a 1.1% rise in disposable incomes in April, which mostly went into savings rather than spending. The personal savings rate jumped to 5.7% in April, a 14-year high.

Real consumer spending fell 0.1%, the second consecutive decline and the 8th decline in the past 11 months. Inflation was relatively tame in April, with consumer prices rising 0.1%, and core prices — which exclude food and energy – up 0.3%.

Source: Dollar Weak Against Euro