In secret talks, Gono has agreed to replace the out-going Ben Bernanke, who is said to be going to work as a helicopter pilot. Gono will take over the Fed. And a new bill has already been designed – our source was able to sneak out a copy of the new note – for 1 million US dollars.

That’s Gideon Gono’s picture on it. According to reports, Gono insisted on getting his face on the bill as part of the deal. “Dead presidents are a dime a dozen,” he is said to have remarked. “And this is just the beginning; we can add zeros later.” Gono was in the news yesterday for other reasons too.

Zimbabwe has taken a couple of bold steps recently. First, it announced that henceforth citizens would be allowed to use currency other than the stuff produced by its own central bank. This came as a great relief to the people of the nation – who were already using US dollars to replace the Zimbabwean brand. With 230 million percent inflation, the Zimbabwe dollar has not been so much a store of value but an incinerator of it. Second, Gono announced that he was taking 12 zeros off the Zimbabwean currency. Twelve seems like a lot. And it seems like only yesterday that Gono introduced the first note with 12 zeros on it – the 1 trillion Zim dollar note.

But that’s the problem with zeros. They’ve got holes in them. You add nothin’ to nothin’ and you still got nothin’. Easy come. Easy go. You can as easily add zeros as take them off. At the end of the day, the extra zero gets you zilch.

Still, dear reader….

In Gono We Trust. Our economy is in a terrible mess. We need inflation; only Gono seems to know how to get it.

Yesterday, the report card on the economy came in. It showed growth in the last quarter of last year at MINUS 3.8%. “Could have been worse,” say economists. It WILL be worse, we reply. This Depression is just getting started.

The Dow fell 40 points yesterday. We’re in February already. Investors look back and see that stocks have lost more than 8% so far this year – the worst on record. In 87% of cases, what goes down in January goes down all year long. Last year, we had the worst stock market performance on record. But what the heck… records are made to be broken. This year will probably be worse still.

Macy’s said it laid off 7,000 people. California says it is kiting checks. And Republicans say they are digging in their heels about Obama’s Bailout Boondogglization program. They favour boondoggles of their own.

Consumer spending fell last month – for the 6th month in a row. Consumers are exhibiting the quality that economists fear… “the propensity to save.” Until last year, of course, they had a propensity to spend. Now, all the news tells us that what ought to happen is happening now; consumers are closing their pocketbooks.

According to mainstream economists, this “propensity to save” thing is as welcome as halitosis. It’s a conversation stopper, for sure. One man’s expiration is another’s inspiration. One’s spending is another’s income, in other words. So when he stops spending, the whole system of consumer spending comes to a halt. Sales plummet. Incomes fall. Jobs are lost.

Hey… welcome to the Depression of 2008-201?

And get ready to welcome Gideon Gono to the Fed. We need him.

*** Yesterday, we promised to take up a theme… hmmmm…. what was it…? Oh yes, the critical issue… when.

When? When what?

Oh yes… when will deflation turn into inflation?

You want a date, don’t you dear reader? You want to know exactly when you should switch out of Treasury bonds and into stocks, gold and freeze-dried food. Alas, that we can’t give you. Not even an approximate date.

This past weekend, we sat down in the Dr. Richebacher chair that we keep next to the fireplace. It’s the chair where Kurt Richebacher used to do his heavy thinking. We inherited it from the family after he died.

We sat and we tried to channel Kurt. What would he think… we wondered.

“Imagine you are in a small town,” we thought we heard him say. “Imagine that the banker printed up the town’s money in his basement. One day, he went a little crazy and started making huge loans, even to unqualified borrowers, at very low rates of interest. You would soon have a boom on your hands, with everyone paying for everything with IOUs, all derived from the bank’s easy credit policy. But, eventually, when it was discovered that people couldn’t repay their loans, there would be a terrible bust.

“That is where you are now. (I say ‘you,’ because I am no longer among the living… but I have to say, heaven is not a bad place to be… There is almost a total absence of economists, lawyers… and not a politician anywhere.) It is a period of price discovery in the credit market… because no one knows who can pay his bills and who can’t. The IOUs are being marked down.

Unemployment is rising, too, as the local economy slows down. Consumer demand has been greatly reduced as every has gotten poorer.

“Now, the banker sees what a mess the place has become. Naturally, he wants to do what he can. He tries to lend more money, but people have been down that road; they are reluctant to borrow. Then, he undertakes to build a new ballpark… you know, for playing baseball. And he decides to upgrade the town hall too… printing up the money to pay for it, as necessary, and to pay for a variety of projects to keep his friends and relatives employed.

“But while he is trying to get the boom going again, the bust is still going on. For every dollar he puts back into the town economy, $2 or $3 is taken out. Instead, of spending money like they used to… citizens stuff it in mattresses and bank accounts (much of it comes back to the bank where it started!)

“This process can go on for much longer than you think. Because the banker is, in effect, standing in the way of what needs to happen. He is blocking the process of price discovery… by lending money to deadbeat debtors and propping up businesses that are no longer profitable. The baker, for example, had built a fancy oven to produce 200 pastries every day. When the boom was in full swing, he sold every one of them. But now that people are cutting back, he sells only half as many. His investment in the new oven is now a losing proposition. But it takes the market a long time to find out; because the banker gives him enough money to carry on… when he should have declared bankruptcy months ago. And so with the tailor and the hat-maker and all the rest.

“Eventually, the banker realizes that his efforts to restart the boom have failed. Instead of spending money, people use it to pay down their debts. They cut their expenses; they reduce their output; and they’ll continue to use their cash surpluses to pay their debts until they are back down to where they usually are, he reasons. Even then, people are likely to save because they’ve gotten in the habit of saving; this could go on for a long time, he figures.

“And then, he realizes that the only way to prevent people from falling into the ‘propensity to save’ trap is to make them realize that the currency is not worth saving… that it is losing value. That is when he will turn to Gonoism. He will go down into the basement; print up stacks of $100 bills… and begin passing them out on street-corners.”

Inflation is needed. Not just more credit from the bank. But money… cash… free cash… piles of it.

The US currently has about $1 trillion worth of spare output capacity. It has about $6 trillion worth of private debt – above and beyond what is traditionally considered ‘normal.’ And unemployment is rising. As long as those things persist, prices are not likely to go up. First, because business has no pricing power – not when there is excess capacity. In our example above, for instance, the baker can double his output of pastries with no further investment nor additional costs. He cannot raise prices; instead, he’ll probably lower them in order to compete with the baker down the street who also has excess capacity. Nor are labour rates going to go up – not when workers are still being laid off. The proletariat has no more pricing power than the bourgeoisie. And as for consumers… they won’t go back to consuming until they’ve lightened their debt burden. With $6 trillion, more or less, to unload it will be a long time before they’re ready to spend again.

So don’t expect miracles from the Boondogglization programs. Prices won’t rise until central bankers Go Gono. And once they’ve gone Gono… things will really start to pop! Stay tuned.

*** Our friend, Nassim Taleb, author of the “The Black Swan,” told the Davos crew that “we should not trust these bankers. Look at their track record. The only way to stop the process is for the government to own those banks.”

Yes, dear reader, everyone is jumping all over the bankers. As we pointed out two weeks ago, there are two schools of thought. Either the bankers are evil. Or they are just very, very stupid.

Jamie Dimon, chief of JPMorgan Chase, joined the ‘they are stupid’ camp.

“God knows, some really stupid things were done by American banks and by American investment banks,” he said. But he went on to suggest that maybe the bankers weren’t the only morons. “To policy makers, I say: ‘Where were they?’”

The grammar suggests he really is stupid enough to be a politician. He probably meant to say: “To policy makers, I say: “Where were YOU?”

But the thought seems correct to us. Where were the regulators… the policy makers… the economists… the commentators… the media… the analysts… the rating agencies? And where were the investors? Of course, they were all in the same place as the bankers – fantasy land.

And now, guess what? They’re still in fantasy land… imagining that these trillion-dollar boondoggles will erase the mistakes caused by their earlier fantasy.

Oh, Mr. Gono, wherefore art thou?

Source: In Gono We Trust

As we hear it, Robert Mugabe will become the ceremonial president. Morgan Tsvangirai will become executive prime minister.

That’s precisely what we want to see. Because we have a direct stake in the outcome.

We’re invested in a little company that is positioned to profit handsomely if things turn around in Zimbabwe. It’s got big investments in this country. It’s involved in IT and finance and chemicals… But there’s more to it. Because an end to the country’s political crisis is also going to be fantastic news for the region.

Zimbabwe is a landlocked country. So a lot of its international trade used to flow through the port of Beira in Mozambique.

That port is in for boom times if Zimbabwe’s economy turns around.

And our company has invested in major commercial property right in the centre of Beira. That will put it smack in the centre of Zimbabwe’s revival…

And that’s what we could be about to see if today’s rumours are right…

Zimbabwe may be about to turnaround…

South African newspaper The Star broke the story yesterday.

The two sides have been trying to hammer out a deal in South Africa. And the paper says it has seen a copy of the draft agreement they have reached.

Under the agreement Tsvangirai will appoint two deputy prime ministers. One will be from his Movement for Democratic Change. The other will be from Mugabe’s ruling ZANU-PF. More than twenty ministerial posts will be split between the two parties.

Mugabe will stay out of daily government decisions. And an amnesty will be declared for pre-election violence.

We’ve still got to wait for an official announcement. But it looks like we could finally see an end to Zimbabwe’s decade of turmoil.

And if it does, Zimbabwe looks set to re-emerge as a major regional powerhouse economy.

Of course we have seen several false dawns in Zimbabwe already. This could turn out to be just one more.

But we have actually seen some signs of sanity returning to the country recently. (Sanity is a relative term, of course)…

Zimbabwe’s central bank lopped off ten zeroes from the value of the Zimbabwean dollar at the start of this month. That revalued Z$10bn of existing currency to one Zimbabwe dollar.

That’s given the country’s economy breathing space from the 2.2 million percent inflation that it’s been struggling with. But without a solution to the political crisis it won’t be long before hyperinflation returns.

A lot hangs on the negotiations going on right now. But if The Star’s information is right, Zimbabwe could be on the brink of a big turnaround.

And if that happens, our little company is there to profit from it.

It’s a good time to get in to Africa

We’ve been keeping our ear very close to the ground on this situation. Because Africa offers some of the hottest investment opportunities on earth right now. And that little company that I was telling you about is involved in many of the best of them.

It isn’t just positioned to profit from a turnaround in Zimbabwe. It has also taken control of a small port on the west coast of Africa. That was probably one of the smartest moves I’ve ever seen. Because that port is critical to America’s economic future. That was honestly one of the most audacious moves I’ve ever seen. And I’ve written a short piece on it that you can read here.

Regards,
Manraaj Singh
Editor
Profit Hunter

Source: Peace Talks In Zimbabwe Could Mean Big Profits For Us

Then both metals began a gentle rise…and then a gentle decline into the London p.m. fix. From there, both metals were away to the races. Prices continue to rise quietly in Thursday morning trading in the Far East as I write this…which is late Wednesday evening here in North America.

Open interest for Tuesday was quite interesting. Gold o.i. only rose 1,384 contracts, which is not a lot considering gold rose almost $15. There must have been short covering in there as well. Silver o.i. rose a more than substantial 2,466 contracts…no short covering there at all. These would be technically motivated funds putting on long positions, as silver is now well above it’s 50-day m.a. I wonder what entities took the short side of that trade? Whoever they were will remain unknown until the COT comes out on May 30th…next Friday.

Well, what I predicted in my commentary on Tuesday did not come to pass on Wednesday…but there’s still time for it to happen…but not a lot. Only a couple of trading days to be exact. I must admit that seeing the counter-intuitive price action in the HUI…actually going negative on the day…did nothing to allay my fears about what might happen in the very near future. This is one of the events that we at GATA have sometimes seen just before a major sell-off attempt by the boys. I don’t believe for a second that it had anything to do with the drop in the Dow, as we had a big drop on Tuesday and the HUI had a terrific day. But as I’ve said before, maybe I’m looking for a black bear in a dark room that isn’t there. Let’s see what today brings.

In other gold news on Wednesday, I see that Mr. Gartman laid on another long position in gold and will add another once gold trades above $930 in New York. Will that be today? I’ll be ecstatic if it is.

Yesterday it was the Zimbabwe dollar…such as it is. Here’s a graphic illustration of what the US$ might look like a few years down the road. Andrew Jackson would not be amused…

click to enlarge

I’m totally overwhelmed by the number of stories that are worth mentioning, but I only have room for a couple. The first story is a GATA dispatch of a speech given by Benn Steil, senior fellow and director of International Economics for the Council on Foreign Relations. The headline reads “CFR official: Gold is the world currency of the future.” The link is here.The second story is from Reuters and is entitled “Goldman, UBS and Morgan Stanley agree on dark pools.” According to the article, about 10% of all equities trading is now done in these “dark pools”. If this doesn’t sound very transparent…it isn’t…and that’s the whole idea. The article is linked here.

I see that the derivatives market expanded 44% last year (according to the BIS) and now sits at $596 Trillion dollars…that’s spelled with a ‘T’. If this pace keeps up, by this time next year, total derivatives will exceed one Quadrillion dollars…that’s spelled with a ‘Q’!!! And Moody’s says that a ‘computer error’ accidentally gave triple-A ratings to billions of dollars worth of now worthless debt products. You believe them…right?

I don’t think we’re in Kansas anymore, Toto….

See you on Friday.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Thursday, May 22nd, 2008

It didn’t appear to have anything to do with either the dollar (which had been falling for hours)…nor oil (which had been rising for hours). And not the Dow either, as it was already well into the tank by then.

It’s hard to say if it was new buying…or someone covering their short positions. The open interest numbers due out later this morning will shed some light on this. I’d love it to be the ‘8 or less’ traders in both metals covering short positions, because they have never…ever moved to cover their short positions in a rising price environment…as they are always taking the short side on any major up-side price move. But we’ll find out soon enough. I just hope that Tuesday’s open interest numbers, whatever they may be, actually make it into Friday’s COT report.

Open interest on Monday did what it should have done…it went down in both metals. Gold o.i. declined 1,287 contracts…and silver fell 643 contracts.

So where do we stand at the end of Tuesday’s trading? Technically, we should move sharply higher as both gold and silver are sitting right on their respective 50-day moving averages…the last barrier before all (not just some) tech funds come pouring back into the market with long positions in hand…not knowing that their own bullion banks are going short against their trade.

It’s certainly no coincidence to me that the price rises in both metals yesterday, were stopped dead in their tracks at their respective 50-day moving averages. Gold closed at $918.80 (Kitco) and its 50-day m.a. is $917.10. Silver closed at $17.66 (Kitco) and its 50 day m.a. is $17.70. So, are we going to take off from here, or are we going to see a ‘failure’ at the 50-day moving average? Of course, I (like you) will be praying for the former…but watching carefully for the latter. June is a big delivery month for gold, and options expiry is right around the corner. There have been a lot of longs put on since last Thursday, and the boys can pull the lever and harvest them any time they wish. The Wednesday before options expiry (after the COT cut-off) is one of their favourite times to start doing their dirty work. That’s today…and I’d love to be wrong in spades on this one.

News from Zimbabwe…again! Their central bank has just issued a new bill worth $500 million Zimbabwe dollars…a week after they issued the new $250 million dollar bill. Prices are now doubling every week. Here’s the photo of the $250 million dollar bill issued on May 2nd…as the ink was still drying on the new ones. Please note the expiry date. Why bother, one would think, when it will obviously be inflated to worthlessness long before the due date. So if prices are actually doubling every week, every bill out there is losing about 7% of its purchasing power a day.

A couple of stories today. The first is a short one from The Times in London about the ongoing problem with “house rage” in Las Vegas..and everywhere else in the USA…where ex-owners of foreclosed properties trash the place before they move out. This isn’t the first story I’ve seen about this…just the latest. It’s entitled “Las Vegas experiences spate of home rage” and is linked here.

However, the second story is of far greater significance. It’s the rebuttal that silver analyst Ted Butler makes against the CFTC report that the silver (and gold) price is not being artificially suppressed. I urge you to read it a couple of times…and I also recommend that you take the action he requests by contacting the Inspector General of the CFTC. It will only take a few minutes of your time to forward the letter and article…plus add a few personal comments of your own if you wish. Us silver (and gold) investors are on are own on this, as there is no one else out there who will help us. “We, the people….” are going to have to look after ourselves. In this article, Ted Butler is interviewed by Jim Cook of investmentrarities.com…and the link is here.

To see the Dow down 200 points (like it was yesterday) should be of no surprise to anyone. It should actually be down at least several thousand points by now, if the free markets were allowed to operate…which they aren’t. I haven’t a clue as to what today might bring, so it’s a Hobson’s choice of the blue pill or the red pill…and I’ll see you right here tomorrow morning.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Wednesday, May 21st, 2008

I remember university. When I wasn’t diligently studying economics, that’ll be most of the time, then, I was doing what everyone does at that time of life. Trying to pack as much enjoyment into those three short years before I had to go out into the world and actually work for living.

Naturally that involved a lot of parties. And while they were fun, as much time was spent feeling tired and stressed as actually enjoying myself. Especially as the night wore on, the booze ran out, and you wondered whether you should just quit and go to bed.

But then… someone would turn up, late back from a club, bearing fresh supplies, and the fun would all kick off again!Yesterday felt a bit like one of those moments. Tired and flagging, the markets got a second wind as a mood of optimism engulfed the financial world. The FTSE went up 150 points, while the Dow Jones Industrial Average was up almost 400, the best start to a second quarter since 1938. Wow!

Meanwhile, reporting season is upon us, meaning all those sly banks have to ‘fess up to their losses and the system can finally purge itself of all but the happiest of happy thoughts.

Lehman asked investors for $3 billion and got $4 billion. Lehman’s shares went up 8.5%. Other banks rose too…

They think it’s all over…

So is this the turning point? There are still losses we don’t know about, but some investors feel that they’ve already been priced in.

“We’ve been hearing that argument for the last six months!” says a world-weary Manraaj Singh.

“At some point all the losses will be priced in,” adds Bill Bonner. “Are we at that point yet? I don’t know. A new trend’s not going to announce itself like an ambassador to the Court of St. James. Instead, it’s going to sneak in like a thief in the night. We’re not even going to realise it’s been here until we wake up the next morning and find the silver missing.”

So beware. We could be seeing a ‘value trap’ — a short-term rise that will suck in early optimists. It’s tempting to think a lot of ‘value’ is being uncovered right now. Tempting to try and be clever and pick up what we think are bargains.

But if we get a long-term bear market, shares could get a lot cheaper before it’s all over. You don’t want to be holding them if that happens.

“It’s going to be a real stock-picker’s market,” says Theo Casey, one of our investment panel. “Undervalued shares could stay ‘undervalued’ for a long time yet. There’ll be some shares out there worth buying, but don’t blindly grab onto anything.”

Manufacturing inflation hits 13-year high; pound at all-time low against the euro

Step off the market merry-go-round, and the picture for the UK’s real economy looks less rosy.

Input costs for UK manufacturers last month saw their largest rise since April 1995. Meanwhile, the pound has hit an all-time low against the euro, adding fuel to the inflationary fire.

This makes a case for the Bank of England to keep interest rates on hold. It’s a chance for Mervyn King to look strong, to stick to his role as an inflation fighter, despite a weakening housing market and fears of recession.

He may just take it — the Bank’s credibility could do with a boost, plus Merv may want to keep his powder dry, and unleash a mega-cut when the going gets really tough.

The markets, so one report goes, have already priced in a 70% chance of a quarter-point-cut. We could see a few disappointed faces in the Square Mile next Thursday lunchtime.

Gold falls, but oil stays above $100

Gold is down to $888, but oil has stayed above the magic $100 mark (excepting a short spell yesterday when it poked its nose just below for old time’s sake).

“I find it interesting that gold fell but oil didn’t,” muses Bill Bonner. “Oil has real demand behind it, while gold is monetary.”

“Absolutely,” agrees Garry White. “You make loads of stuff from oil. Plus,” he adds, “there’s a real supply crunch going on. We all seem to focus on US oil inventories, but we should be looking at capacity in producing nations too.”

The Gulf is experiencing a power crisis, and it’s hitting production capacity.

“The fundamentals are in the driving seat now!” says Garry. “And the fundamentals are tight.”

Which is great news for Garry’s oil play, which is looking mouth-wateringly cheap right now. Find out why oil is one of Garry’s Power Trends — 5 trends that could see smart investors make an absolute killing in the months ahead.

Hope for Zimbabwe

Could Mugabe finally go? The opposition Movement for Democratic Change is claiming victory in the country’s elections.

But the Zimbabwe Election Commission still hasn’t announced a result, giving rise to fears that Mugabe’s Zanu-PF party might try to rig the vote.

“It would be fantastic news if we finally see change there,” says Manraaj Singh.

I asked him what he thinks is the investment case for Zimbabwe. If we do see an end to Mugabe’s 28-year reign, will Zimbabweans finally see a stable, growing economy?

“The investment case is very good,” says Manraaj. “The infrastructure is already in place and so are the human resources. What’s needed is legal clarity and a currency that you can actually get your head around.”

It’s good to be hopeful. But until anything happens, I’m wary of tempting fate.

Until tomorrow

Ben Traynor