That was the general reaction from the press when US food giant Kraft launched its first bid for British confectioner Cadbury less than two months ago. Pundits spewed out potential target prices like bingo numbers – £8, no £10, no £12! – and analysts scribbled out scenarios involving white knights and rival bidders from across the globe.

Reality has been a little more disappointing. Despite attempts to talk up the deal, no rival bidders have come forth. And yesterday Kraft came back to the table with an offer that can only be described as – as Cadbury’s board put it – ‘derisory’.

It’s just another sign that there’s a vast gap between conditions in the financial world and those in the ‘real’ world…

Market hopes are stretched far beyond reality
The Cadbury / Kraft bid saga shows just how far market hopes are stretched beyond reality.

Right up to yesterday’s bid deadline, analysts and investors were clearly expecting Kraft to pull some rabbit out of the hat that would give them an excuse to drive the confectioner’s share price higher from its already optimistic level of around 760p.

Instead, Kraft came back with an offer that suggested that, frankly, they can take Cadbury or leave it. The bid terms were exactly the same, which – because Kraft’s share price has fallen since the original bid was made – meant that the actual per share value had fallen, from the equivalent of 745p to 717p.

Yet, the Cadbury share price is still hovering pretty much exactly where it was yesterday. You can read more about the background to the story, and what we reckon Cadbury shareholders should do now, in my colleague David Stevenson’s blog on the topic.

What’s perhaps more interesting about this bid battle is what it says about the bigger picture and the market’s psychology right now. When this deal was first announced, the excitement in the City pages was palpable. This was the return of big deals, a sign that the recovery was on track.

Click here to finish this article at Money Week UK.

Yesterday, we mentioned the oil market. Today, we slide in deeper.

You’ll recall, dear reader, some time ago we guessed that the feds’ efforts to keep consumers consuming were essentially inflationary…and that the inflation they caused would tend to go more into gold and oil than into economic growth or asset prices.

Since then, the price of oil has shot up over $100. Yesterday, it hit a new record at over $126, before falling back to $124. Gold, meanwhile, has traded above $1,000 – and now is correcting in the mid-800s.

This is already a major adjustment. It comes along with a major adjustment in the purchasing power of the dollar, generally. Americans’ global purchasing power has been cut in half. The value of their assets – on the world market – are only half what they were during the Clinton years. And the value of their most precious asset – their time – has also been greatly reduced.

This is why you see so many Europeans in the United States…America is a cheap place to visit. It’s also why U.S. export industries are reviving; the country has become a low-cost producer for many things; it is now a place where richer nations can consider outsource production.

All of this has gone almost ‘according to plan’ – that is, it is pretty much what we guessed would happen.

But now, we have to ask: are these adjustments enough?

You’re expecting us to say ‘no,’ aren’t you? Instead, our answer is ‘maybe.’

In the case of America’s 50% pay cut, (the U.S. dollar is only worth about half as much as it was compared to other major currencies) we think it should do the trick. Now comes a long period in which people come to realize it and begin living not quite as large as before. They lose their houses. They cut back on their spending. They relearn an old word – thrift – and find they like it. They downsize their lives – with smaller houses, smaller cars, and littler expectations. The economy goes into a long slump – as 70 million people, facing retirement, begin to save money.

In the case of gold, our guess is “probably not.” Gold has still not come near the inflation-adjusted peak it set 28 years ago. Considering all that has happened during those years, we bet that there is another peak to come – even higher than the last. In 1980, the United States still had the residual financial integrity to stand up to inflation. Paul Volcker could push the yield on the 10-year Treasury note up to 16%; he caused a recession, but not a revolution. Most importantly, he protected the dollar. We don’t see any Volcker around now…and we don’t see how anyone – even Paul Volcker himself – could “pull a Volcker” now.

The country has twice as much debt per person. It has a hugely negative current account. It has the biggest government deficit ever (think what would happen to it in a real recession…the deficit would go to $1 trillion). No, we don’t think gold is in danger of a sudden attack of monetary propriety. Instead, we think the gold bull market has much further to go – probably above $2,500 an ounce, before the dollar-based financial system collapses completely.

Agree or disagree, dear reader…but you’ll want to take advantage of this dip in the gold price. Pad your portfolio with the yellow metal – for just one penny per ounce. You can beat that. Find out how here.

But it is oil we set out to reckon with today. And what we reckon is that oil is getting close to its near term peak. If we were holding major positions in oil, we would sell them.

Here’s why. While gold is nowhere near its record high – oil is above it. In today’s money, the top price ever paid for a barrel of oil, until recently, was only about $79. Today, oil seems to be headed to twice that level. And a few experts think it will go much higher. Goldman’s oil expert predicts $200 oil.

But why should it go so high? For all the talk about China’s insatiable demand, it is still true that prices and demand must worth themselves out. When the price goes up, people grumble…but they use less. We filled our tank in France last weekend. The total price came to more than $150. We had been thinking about driving down to the South of France next weekend. Instead, maybe we’ll take the train…the trip would have cost us more than $300 in gasoline alone.

Everything happens at the margin, said a dead economist. Americans alone probably drive millions of marginal miles – to places they really don’t really need to go…when they don’t really have to be there. At over $3.50 – they’ll drive less. Already, the Financial Times reports that U.S. demand is falling more than expected.

There’s so much shifting sand in the oil market – usage, new discoveries, distilling capacity, storage facilities, OPEC policy, inflation, drilling technology, emerging market developments, the dollar, U.S. economic growth – its impossible to know how big the dunes will get. But oil demand – and prices – should generally stay in line with GDP. The more growth, the more oil. Plus, if you measure GDP and oil in dollars you eliminate both inflation and currency depreciation as variables. Well, at $100, reports Martin Wolf in the Financial Times, “the annual value of world oil output would be close to $3,000 bn. That is 5% of world gross product. The only previous years in which it was higher than that were 1979 to 1982.”

Those were not good years to enter the oil business. The price subsequently collapsed.

Yes, you could make a lot of money in oil…many people already have. But sure as fleas come with stray cats, success leads to excess. As the price rises, more and more people imagine that it will keep going up. Some take measures to avoid using it. Some find substitutes. Some increase production. Markets still work, in other words. Every bubble eventually finds its pin. The day can’t be too far off when the price of oil will fall back under $100.

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Source: Oil’s Adjustment

GE is one of the best-diversified and well managed companies on earth, and is seen as a barometer of both the U.S. and the world economies. Its latest earnings report was affected by the expected fall in financial services and a continued strength in overseas earnings. But it also showed a largely unexpected fall in the sales of U.S. medical devises as public and not-for-profit hospitals, suffering massive increases in their borrowing costs, cut back on spending.

The fall in GE’s earnings suggests that recession in America is taking hold across a wider spectrum and is not restricted to sub-prime real estate. As this idea reality finally began to dawn on Wall Street, the Dow Jones Industrials and other broad market indices lost some 2 percent on the day.

As investors lick their wounds, they should also realize that nominal losses in U.S. stocks are really just half the story. So far this year, the American dollar has lost some 7 percent against the Euro and some 10 percent against the Japanese Yen. As more GE-like earnings reports loom on the horizon, and as the dollar continues to slip, holding even blue chip American stocks will remain a risky proposition.

False rally

Not long ago, before the sub-prime debacle (of which Peter Schiff and I had warned of repeatedly) really began to take its toll, the majority of economists foresaw little widespread difficulties in the American economy. However, when Bear Stearns became completely unraveled almost overnight, most of these formerly optimistic observers now belatedly recognized real problems. Their fears have been largely assuaged by the magnitude of the Government’s response.

Using methods that the legendary former Fed Chairman, Paul Volcker, said, “stretched the very limits of its legal powers,” the Fed dramatically rescued Bear Stearns on March 17th. Such was the sanguine sense of relief that investors felt our national economic problem had been largely cured, at a single stroke, by the Fed.

In the four weeks since March 17th, stock markets appeared to rally, on the back of what can best be described as the ‘euphoria of blindness’ to the realty of the systemic economic problem we face in the ‘real’ world.

Credit contamination

Renowned Yale Professor Robert Shiller has shown that from 1995 to 2006 the value of U.S. real estate rose some 30 percent above its century-long value line. Today, the U.S. residential housing stock is valued at some $20.145 trillion, of which more than half is debt! Admittedly, not all this debt is sub-prime. But the sub-prime problem is, as we have long forecast, spreading both upwards and across the real estate field and the credit markets.

As the average consumers’ single most important asset is their homes, the fall in house values is now adversely affecting American consumer confidence. This bodes ill for both the American and the world economy, in general.

The Fed Chairmen, Ben Bernanke, now has an historic opportunity staring him in the face. Should he continue to back the government in disguising the natural economic recession, by debasing the U.S. dollar and so continue to rob every single American citizen of his or her hard-earned wealth? Or should he, at long last, stand up for American citizens and their money by using his ‘independence’ to force our government to adopt sound economic and financial policies?

Cosmetic patches versus radical cures

Recent pronouncements indicate that he has decided to ignore his legal ‘independence’, and instead submit to political pressures and allow the government to silently tax current and future citizens in order to bail out financial and real property. Characteristically, Wall Street appears to applaud the decision, accepting both more inflation and further debasement of our dollar to save themselves, for a time, at least.

The Fed balance sheet amounts to some $800 billion. This sounds like a lot of money and it is. But it is dwarfed by the county’s debt exposure, which includes not just the $10 trillion of residential property debt, but also trillions more in commercial property, auto loans, and credit cards and increasingly vulnerable business loans!

The key question is: Does the government have enough money to finance a bailout of several trillion dollars? The answer, of course, is no. But, although national savings are at an all time low, both the American taxpayer and many ordinary citizens still have some net worth that can be both taxed and eroded by inflation and currency debasement!

Recent pronouncements to extend the regulatory powers (read: funding ability) of the Fed to the really big gamblers, namely investment banks, derivative traders, insurance companies and even to hedge funds (the speculative vehicles of the super rich) and the increasing political talk of ‘help’, indicate that both the government and Congress are now set on a path of higher taxation, inflation and dollar erosion.

For alert Americans, investment attitudes must undergo a sea change. Instead of thinking in terms of return ‘on’ capital, investors will be well advised to think about return ‘of’ capital! Greed should give way to extreme prudence.

It is becoming increasingly clear that any investors, who wish to protect their wealth, should invest in non-dollar denominated financial assets and, where possible, hold them (legally, including paying tax) offshore, in order to avoid any risk of the future imposition of American exchange controls.

As the old song goes, ‘the times, they are a changing’. Soon unfortunately, that refrain will bring smiles only to those who have taken wise protective action with their investments.

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For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

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