Good day… And a Tub Thumpin’ Thursday to you! Day One at the Orlando World Money Show (WMS) went well. My room for the presentation was packed! It was standing room only, and the good part was the fact that there were only about 30 Pfennig readers in the crowd. I say that not because I have something against Pfennig readers, oh Lord, they are dear readers! The reason I say that is I like to know how many of the non-readers I can convert to Pfennig readers!

Well… As you know, when I’m on the road like this, I’m not sitting in the saddle back home, and watching the markets all day long, and reading stories about what’s happening, etc. So, the “road Pfennigs” tend to be a bit shorter. But as my friend, and once editor of our monthly newsletter, David Galland, used to tell me… “you’ve got to get it out every day, no matter what!”

So… From what I can tell this morning, the currencies traded in a very tight range after the sell-off from the previous night that I told you about yesterday. Japanese yen is a bit weaker, from yesterday morning’s currency round-up, but other than that small move in yen, the levels look like they are wearing the same clothes as yesterday!

Today we have the Central Banks of England and the Eurozone meeting to discuss rates. As I said earlier in the week, I truly believe the Bank of England (BOE) to cut rates aggressively once more to bring their internal rate to 1/2% or 50 BPS, just like here in the U.S. The forecast is for the BOE to cut to 1%… But I’ll go out on that limb and say they’ll be even more aggressive. Here’s the thing that just gets my goat though… The more aggressive the BOE is in cutting rates, the better pound sterling will trade. Now this should be the opposite, as a rate cut is a true debasing of one’s currency. But the mental giants in today’s trading world don’t see it that way. They see it as a plus for the economy and so for the currency.

I could really go off on a tangent now about how trading desks are run by Ivy leaguers that got that job right out of grad school and don’t carry the same “valuation tools” as old timers… And quite frankly could very well be one of the reasons we’re in this mess today… But I won’t go there, as that’s too touchy of a subject!

The European Central Bank (ECB) will also meet today, but ECB President, Trichet, has pounded it into everyone’s heads that the ECB will NOT cut rates today, and to look to the March 5th ECB meeting as the next “chance” for a rate cut.

Here’s another example of not carrying the same “valuation tools”… The ECB is being prudent and waiting to see the results of previous rate cuts, so as to not “over cut” and get in trouble with spiraling inflation, etc. Why debase the currency when you don’t have to? But…. NOOOOOOO! The mental giants these days are punishing the euro because they believe the ECB is now “behind the curve” with regard to rate cuts. See how crazy this has all become? Crazy… I’m crazy for thinking about you… I’m Crazy… Crazy for feeling so blue… Ahhh, the soothing voice of Patsy Cline… Now, I can get back to writing without carrying on about “valuation tools”… Or as the kids say nowadays those guys are “tools”… HAHAHAHAHAHAHAHAHAHA!

Yesterday, I told you about the surprise Pending Home Sales report, and how maybe it’s a sign of better times, but I needed to be shown more before I would commit to saying that it’s a true sign. Well, my friend, Bill Bonner, author, and Daily Reckoning fame (www.dailyreckoning.com) had this to say yesterday about this very subject…

“Our guess is that the little light investors thought they saw will turn out to be another torpedo blowing up. Millions of homeowners and stock market investors have gone down already…but there are many still afloat.
And many torpedoes that still haven’t found their marks.

In Japan, for example, property prices began falling in 1991. They fell for the next 13 years…reaching a low in 2004 equal to where they had been in 1973!

If that pattern plays out in the United States, the housing market won’t hit bottom until 2020…when you’ll be able to sell your house for what you paid for it in 1989.”

Our old Fed Chairman, who is highly regarded for his inflation fighting in the early 80’s, Paul Volcker, spoke last night and he’s none too happy with the delay in starting the economic advisory group that the new President, Obama, set up. Obama picked Volcker, but Volcker isn’t seeing any moving forward with this advisory panel. Volcker wants to help, and I believe we need his voice, but no one wants to “include” him… Hmmmm… I wonder what’s going on there… Does the new administration believe they don’t need Volcker’s voice? I sure hope that’s not true!

In another sign that the German economy has fallen into a recession, German Factory Orders for December fell -6.9% bringing the annual number to a staggering decline of -25%, according to the report I saw this morning… This is just another reason why the euro no longer trades at 1.60…

I saw a report this morning regarding India and the rupee… I don’t talk about India very often, because not much in the way of market moving news comes out of India… But, this report is talking about black clouds hovering over India, so I thought I had better fill you in… An advisor to the Prime Minister said last night that the 2009 Budget “may” reach 7.5% of GDP! The forecast is for 2.5% of GDP. If this is true, the writer believes that the rupee could sell off from today’s level of 48 and change to 52… If that all holds true, then holders of rupees will be thankful for the above market interest rates to cushion that blow… But again, this is all based on a “may” and could turn out to be a boy crying wolf!

I’ll end today’s letter with a “feel good story”… Gold rallied to $915 yesterday… Gold traders say that they believe Government spending will spur inflation, the dollar will weaken, and gold will take off on the strength of its inflation fighting make up.

Goldman Sachs Group, Inc. (which probably has so many research people you can’t count them with stick) said that they believe Gold will reach $1,000 within three months. And a commodity analyst at Dresdner Bank said this, “expectations of future inflation and dollar depreciation are driving the market right now.”

I told the crowd at my presentation yesterday that Gold IS an excellent inflation fighter… And not to listen to those that preach otherwise, as they use the high of the 80’s at $800 and say Gold hasn’t done a very good job of fighting inflation since then! But! Not so fast Tim! I say you have to go back to when President Nixon closed the Gold window, and took the dollar off the gold standard. Gold was trading then at $35 an ounce… Now follow Gold’s price through the years to the present at $915… Now… That’s what I call an inflation hedge!

And finally on Gold… Kristin sent me this note that she came across… “Short term, said Tom Pawlicki, of MF Global in Chicago, “Investment has been a key supporting factor for gold,” and thus “Passage of the stimulus package in its current form would likely be inflationary and bullish for gold while a Senate filibuster would be bearish.”

On to the Big Finish! Wait! There’s been a nice move up in the currencies since I got up this morning! WOW! Alrighty then, let’s go to the currency round-up!

Currencies today 2/5/09: A$ .6485, kiwi .5130, C$ .8125, euro 1.2875, sterling 1.4515, Swiss .8615, rand 9.9765, krone 6.83, SEK 8.2625, forint 230.32, zloty 3.62, koruna 21.98, yen 89.70, sing 1.5050, HKD 7.7540, INR 48.77, China 6.8367, pesos 14.44, BRL 2.3075, dollar index 85.60, Oil $40.44, Silver $12.71, and Gold… $915.80

Source: Gold As An Inflation Fighter!

Yesterday was a big day in Italy – 63 years ago. That was the day that Mussolini was shot, along with his mistress. They were hung upside down in Milan. What went wrong with Benito?

“What always seemed to go wrong,” said our guide on Sunday, “was that they ran out of money.”

She was speaking about emperors. She might have been speaking about elected presidents or dictators. When they run out of money, trouble follows.

This week, the United States opened its largest and most expensive embassy ever – in Iraq. It is like the Vatican City, say reports, a country within a country…both heavily fortified and luxurious…ready for a siege or a party.

The Vatican was attacked by its own Holy Roman Emperor, Charles Quint, in the 15th century. He had put together an army of Protestants, at whose head; a general carried a noose – ready to hang the Pope.

But the Pope wasn’t giving up without a fight. With the help of his Swiss Guards, he slid down a back wall of the Vatican and raced over to the Castello San Angelo, where he was able to hold out until the siege was lifted. His Swiss guards, however, were not so lucky. They fought almost to the last man to protect him.

But let us return to our beat – money. Alas, nothing much happened in the world of money yesterday. Instead, markets stood still – as if waiting for something to happen. The Dow eased off only 20 points. The price of oil stayed at $118. The dollar held at $1.56 per euro. And gold rose $5 – remaining where it has been, below $900.

Gold is correcting. Is the bull market over? Readers will remember what we can’t forget what happened to gold in 1980. The price of gold shot up over $800…but then began a bear market that lasted 20 years. Many people think it is happening again. But we also remember that the United States had a positive current account in 1980…and that Americans owned more of foreigners’ assets than foreigners owned of theirs…and that Paul Volcker pushed lending rates above 15% in order to protect the dollar!

Look to the left, dear reader. Look to the right. Do you see Paul Volcker at the Fed? Nope. Volcker is still alive – warning that there is a painful adjustment coming. But at the Fed itself, there is only Ben Bernanke, promising to drop dollars from helicopters, if necessary, in order to keep the economy bubbling along. And since the United States lives so far beyond its means…and owes so much money to so many people…the likelihood that a Paul Volcker will come along to protect the dollar is probably about as likely as Alan Greenspan being elected as the new Pope.

No, fear not. The Fed is unlikely to fall victim of a sudden attack of monetary integrity. The dollar is unlikely to rise very far against gold.

Still, the current correction could take the price down another $100 and still be above the 50-week moving average. So hold onto your gold…and hold onto your hats. And why not take advantage of this dip in the gold price? You can protect your portfolio from the ups and downs of the rest of the market by adding our favorite yellow metal – for just a penny per ounce. See here for all the details…

Elsewhere in the news, we find that OPEC has said $200 oil is a possibility. It hit $120 over the weekend. And truckers are protesting high gasoline prices. In other places, mobs are protesting the high price of food. You might think that these people don’t realize how markets work…that they don’t know that prices aren’t set by popular demand. In fact, what they know is how government works. If you can make a big enough stink about something, the government will intervene in the markets on your behalf. In fact, governments are already controlling prices for fuel and for food all over the planet. But there is no problem so bad that government can’t make worse.

*** We are here in Rome trying to learn something – on your behalf, of course, dear reader. So far, what we’ve learned is that the Abruzzo and Barolo wines are rich, complex and smooth. The wines we’ve tried from Compania, on the other hand, seemed a little green…and a little sharp. But the Barolos tend to be expensive. Last night, our restaurant didn’t have a single one less than $150.

As for the world of money…we have found out what brought the empire down. Money, of course. They ran out of money. But that was only a part of the story…and not even the most interesting part.

“The empire held together pretty well,” explained our guide, “at long as it was controlled by Rome’s leading families, who shared the same culture and the same values. But as it expanded, it came into contact with more and more groups. And in order to protect the borders – which had become vast even before the empire itself was officially recognized under Augustus – more and more soldiers were required, and more and more money.

“I saw in the paper that you Americans opened a huge embassy in Iraq and that it was very expensive. Well, that’s what the Romans did too. They had garrisons all over the empire. And each one was expensive to maintain. The ‘cursus honorarium’ – it was the route to power and prestige, like today, we go to a good college and then get a job with a good corporation and then we might go into politics…well, then, young men who were ambitious had to go into the army and take their post at these distant garrisons. And then they began to bring people into the system from the outside…and spend their lives outside Rome. Many leaders were no longer from Rome and some rarely even came to Rome. And many of the soldiers weren’t Roman either.

“When the empire was still expanding, there was a lot of money coming into Rome. Whenever they conquered another city or another tribe, they brought in more gold, silver and slaves. But when the empire stopped expanding…they had the cost of maintaining the borders, but no source of revenue.”

Now, let us check in on today’s empire. Where does it get its money? How could it afford such an extravagant embassy – in an area where it has no real interests? How can it afford the trillion-dollar tag for the Iraq War? We will state the obvious: it too is running out of money. But unlike the era of Caesar Augustus Caesar or Romulus Augustus our modern government can conjure money out of thin air. It doesn’t even have to print it up on a piece of paper. It’s enough just to send an electronic transfer.

Now we will ask you a question, dear reader: What is an electronic transfer? Or, in an electronic transfer, what is transferred?

“Electrons,” you will answer. Or perhaps “information.” Or a “symbol of wealth”…something that represents money.

And here…back to penises for a moment. We once overhead a woman in a tour group in Paris, gazing at the Place de la Concorde. The leader had just informed her that the long, talk obelisk in the middle of the square might be considered a “phallic symbol.” She turned to her neighbor and asked:

“A phallic symbol of what?”

The electrons…or even the paper dollar…may be a symbol too. But a symbol of what?

More to come…

Bill Bonner
The Daily Reckoning