Inflation there is out of control. And not only in Vietnam. Eric expects gold prices to break through it's inflation-adjusted high of $2,200 set in 1980 as global inflation spikes.

Gold prices ended the week $930 an ounce on heightened inflation fears and despite a stronger dollar.

Taking a Page Out of FDR's Great Depression Playbook

Eric Roseman

It seems Vietnam just borrowed a page from the U.S. financial-history books – by suspending all gold imports in June.

This marks the first time a Southeast Asian country has ever barred gold imports during skyrocketing inflation, soaring interest rates and an overvalued currency – the Vietnamese dong.

Seventy-five years ago, Franklin Delano Roosevelt (FDR) issued Executive Order number 6102 and confiscated all gold privately held in the United States on April 5, 1933. But unlike FDR's edict, the Vietnamese can still hold or own physical gold. They just can't import any more.

This shocking development was just revealed to me by my good friend in Zurich – Swiss Asset Manager, Robert Vrijhof of WHVP. It illustrates a new trend popping up in emerging market economies to stop gold hoarding.

By restricting gold purchases, the Vietnamese Communist Authorities are trying to hold down the local skyrocketing inflation. But inflation is already heading for Weimar Germany-style double-digit or possibly, triple-digit consumer prices.

Gold's Success is Fiat Money's Failure

Asian Inflation Out of Control

It comes as no surprise to me that another dollar-linked or semi-pegged currency has collapsed vis-à-vis gold. Gold prices have been rising against all currencies since 2005, including the euro.

Spot gold prices have averaged US$910 an ounce in 2008 compared to US$659 just 12 months ago. From an average price of US$295 an ounce in 1998, gold prices have gained a cumulative 214%. But compared to its peak in January 1980 at US$850 an ounce, spot prices are up just 8.8%.

Asian inflation just hit a 9 ½ year high and averaged 7.5% in April. So it's no wonder dollar-pegged currencies are coming undone. Other peripheral currencies in the region that follow the Federal Reserve's monetary policy are also sinking under the pressure of inflation. This phenomenon is also happening throughout the Gulf region where dollar-pegged units are unraveling amid rising inflation.

Vietnam's Biggest Challenge: Wrestling 25% Inflation

Introduced in 1978, the Vietnamese dong is another example of fiat money gone wrong.

Inflation is now clearly out of control. Inflation soared 27% over the last 12 months through June. And inflation is still climbing as crude oil and other commodities prices continue to hit new highs.

The dong is down just 3.7% this year versus the dollar, but it still remains severely overvalued. Also, recently the dong breached its government-imposed trading band.

I visited the Vietnamese economy in early 2007. So I saw firsthand how Vietnam is overheating. It's a natural consequence of this country's strong economic growth is inflation and high interest rates.

High rates and inflation always threaten financial assets like stocks. The VIN Index, the country's largest stock exchange in Ho Chi Minh City has collapsed more than 60% since hitting an all-time high last year. Also, real estate prices are now in a downtrend following a big boom since 2005.

The Vietnamese economic miracle averaged a stunning 7.3% GDP (gross domestic product) growth rate this decade. And now Vietnam risks coming undone if the State Bank of Vietnam can't stop surging consumer prices.

The World's #1 Gold Importer

The Vietnamese government's decision to ban gold imports follows an unprecedented surge in gold ownership. The locals have lunged for gold bullion lately. In fact, they even surpassed India and China as the world's largest source of demand.

Gold production is already approaching net supply deficit. The largest gold exporters, South Africa and Australia continue to struggle to bring new supply to the market this decade.

Demand destruction is the code-word for declining consumption when commodity prices rise exponentially. So far, this has NOT happened in Vietnam. Fabrication demand has fallen sharply in India as gold prices raced through US$750 an ounce last fall. But despite a surging price since last August, the Vietnamese continue to absorb imports at a record clip – until now.

According to the World Gold Council, Vietnam's first quarter gold imports were 36.8 tons. That's up an astounding 71% from the first quarter in 2007. And gold-hungry consumers purchased 31.5 tons of that total supply or 86% as investments. In other words, they're buying gold to protect their wealth against rising inflation and a weak currency. Sound familiar?

No One in Vietnam Can Afford Gold Anymore

Since June, the Vietnamese can no longer buy gold. Officially, the government claims this new policy is to temper booming imports, which resulted in a record trade deficit for the first half of 2008. First-half imports surged 64% to US$45 billion while exports rose only 27% or US$28.6 billion.

Yet the value of gold imports prior to the June suspension was US$1.7 billion or 3.8% of total imports. That's hardly a dent compared to heavy industrial machinery and machine tool imports used for manufacturing. That suggests the government is targeting gold to stop demand.

Thus far, the Vietnamese Communist government has not confiscated gold. FDR made gold ownership illegal in the 1930s when the United States was suffering a devastating deflation. The U.S. also revalued gold to US$35 an ounce during this period.

If Vietnam continues to lose control of inflation, and possibly, the economy, gold confiscation becomes a real possibility in a country with a short history of fiat money.

All paper money, including the euro, the yen and even the resource currencies, continue to buy less gold compared to just three years ago.

I imagine gold prices will benefit enormously from the new global inflation spike the latter half of this decade. I see gold breaking through its inflation-adjusted high of US$2,200 an ounce set back in 1980 in the not-too-distant future.

ERIC ROSEMAN, Investment Director

Source: Taking a Page Out of FDR's Great Depression Playbook

Will the 'Cold War' Against Inflation Heat Up?

Mike Burnick

Another Federal Reserve Bank official said in a speech this week that he is: "Taking the recent inflationary pressures very seriously." He also said "Policy needs to react decisively" to keep expectations of higher inflation in check.

So is this just more lip service from the Fed in an attempt to jawbone inflation (and perhaps support the dollar)? Financial markets aren't so sure, because the Fed funds futures continue to price-in a Fed rate hike sometime this year.

The major economies of the developed world are bracing for a recession. At the very least, we're all experiencing a sharp slowdown in growth. In fact, the U.S. economy expanded at a feeble rate of just 1% in the first quarter.

And when data for the second quarter finally gets reported, we'll know if we're officially in a recession yet or not.

But even as the economy slows, consumer price inflation in the U.S. rose to 4.2% in May, while wholesale prices rose 7.2%.

Meanwhile, emerging market economies continue to enjoy very robust economic expansion, expected to average 6.7% this year. That compares quite favorably to growth estimates of just 1.3% for developed countries including the U.S. and Europe (the U.S. will grow just 0.5%).

While inflation is running above the Fed's comfort level in the U.S. (and the ECB's target in Europe), inflation in the emerging world has become an even bigger threat. In fact, inflation exceeds double-digit rates of 10% or more in 50 economies around the world, nearly all of them emerging markets.

This is an economic environment that looks shockingly similar to the "stagflation" era of the 1970s and early 1980s.

Famed investor Warren Buffett highlighted the dueling threats of slower growth and faster inflation recently saying: "I think the ‘flation' part will heat up and I think the ‘stag' part will get worse."

MIKE BURNICK, Senior Editor & Global Markets Analyst

Source: Will the 'Cold War' Against Inflation Heat Up?

In some countries soaring inflation is eroding consumer purchasing power. In others tumbling asset prices are destroying investor wealth. In most both are happening at once.

It's a major headache for central banks. Bill says the Fed should follow the ECB in hiking rates, even if it means an economic slump...

The Worldwide Consumer Shellacking

By Bill Bonner

Investors turned a whiter shade of pale yesterday, as the Dow dropped another 166 points…oil rose $3 to a new high of $144…the commodities index, the CRB, hit a new record high of 614.

It was not a very rewarding day for investors…and it comes hard on the heels of what has been one of the worst six months on record. As measured by the MSCI world index, investors have not taken such a beating in 26 years.

The Royal Bank of Scotland (LON: RBS) has a "crash alert" warning out. And the European Central bank threatens to raise rates. Jean-Claude Trichet says there's a risk of "exploding prices" as the rate of producer price inflation in Europe reaches a record high.

Already, the U.S. key lending rate is only half the ECB rate. Already, the dollar seems to holding on by its fingernails. If the ECB raises rates again, the dollar could be kicked off its narrow ledge.

We have been trying to figure out the queer dynamics of current central banking policy. So far, all we've been able to figure out is that it is more perverse and more complicated than we thought.

In a nutshell, it is obvious now to everyone that the world economy is going in two directions at once. Consumer prices are going up - as if there were a boom going on. Asset prices, lending, IPOs, and consumer confidence are all going down - as if there were a bust.

Yesterday brought news that "consumer delinquencies are rising." Overdue home equity lines recently increased at their fastest pace since 1987, says the American Bankers Association.

Car sales are at a 10-year low. And SUV owners are getting "burned twice," says a news item. Not only do they pay far more for gasoline than they expected to…now, when they go to trade in their tanks for a more modest form of transportation, they get less for it than they had hoped. Who wants an SUV today?

But think you've got it bad? Think again. Inflation in the Ukraine is running at 30% per year. In Latvia, it's 18%. Egypt is suffering 16% inflation. And, oh yes…there's Zimbabwe. The average worker's salary in Zimbabwe is 15 billion Zimbabwe dollars per month. The poor fellows are billionaires, every one of them. But it takes 19 billion Zimbabwe dollars just to buy a pack of 10 cookies - if you find it. A pound of margarine is 25 billion.

Consumers are getting shellacked all over the world. So are investors. Europe's stock markets are down nearly twice as much as Wall Street. And many foreign markets are down twice as much. China and Vietnam, for example, are both down more than 50% from their peaks.

And poor Japan! The world's second largest economy can't seem to get a break. The Nikkei Dow is having its "longest losing streak in 43 years," says today's financial news.

Readers will not let us forget that we've been a little sweet on Japanese stocks. Not because we think they will necessarily go up; we just feel sorry for them. Where else can you find a market where stocks have been going mostly downhill for the last 18 years? Where else can you find a place where consumers prefer to leave their wallets closed and save their money…expecting prices to go down, not up?

In fact, this bout of global inflation may actually be good for Japan, says Christopher Wood. Finally, prices are rising. Core inflation is at its highest level in 10 years. Who knows? Maybe the Japanese will begin spending again…and maybe even borrowing?

MoneyWeek Magazine also points out that Japanese banks are actually solvent. "Unlike their western peers, [Japanese banks] have the money available to lend."

We'll stick with our fondness for Japanese stocks…at least for now.

*** Adding to our nostalgic mood this morning is an item on Richard Russell's website, showing how much prices have risen since 1967. Crude oil, for example, is 45 times more expensive. Gold is 25 times more costly. Houses have gone up 12-fold. Stocks are up (as measured by the S&P) 15 times.

But here's the crushing news: according to his figures both consumer prices, generally, and incomes are up exactly the same amount - 7 times.

In other words, the typical American makes not a dime more today - adjusted to the official consumer price index - than he did when we graduated from high school. That's 40 years without a single step in the right direction.

*** What's a poor central banker to do? He expects the economic slump to reduce prices. Maybe he should stimulate the economy to offset it? But prices are rising, not falling. Maybe he should raise rates to head off inflation? But won't that make the slump worse?

A growing mob of kibitzers tells central bankers that it is time to raise rates in order to bring worldwide inflation under control. But what central banker wants to raise rates significantly when unemployment is rising and growth is slowing? None.

We're still waiting for someone to call our "Hotline." You remember, dear reader, we're ready to offer advice to central bankers…any time, day or night. No charge. But so far, the phone has been silent; we presume it is Ben Bernanke who hasn't called.

When the call comes in, though, we're ready: "Raise rates," we will tell him.

"How will that help things," he will ask. "Isn't the country in danger of sinking into a Japan-like recession?"

"No, don't worry about that…the situation is different. The Japanese had savings. They had a positive trade balance. They didn't have subprime mortgages and didn't owe the rest of the world trillions of dollars. They didn't have 10 million people on the edge of bankruptcy. And they didn't have a $600 million military budget or a war in Iraq to pay for. The situation in America is much worse than it was in Japan. Japan could afford a slump…America cannot."

"Then why do you tell me to raise rates?"

"Real rates are going up anyway…that's what happens when you get to the credit contraction phase. So you might as well put them up. Besides, we just want to see what will happen."

Source: The Worldwide Consumer Shellacking

We've run a ton of charts showing this theory at work. The S&P 500 vs. gold is the centerpiece chart of our theory. The S&P is the world's most widely followed gauge of stocks. Gold is timeless, real wealth.

As you can see from this week's chart, stocks are still in a long downtrend when measured in gold. This trend won't reverse itself anytime soon.

Briant Hunt

Source: The Latest on Stocks Vs. Gold

We think it must be the "better to push on an opening door" syndrome!

The miners are being outshone by the metals themselves. Yet mining shares continue to outperform the general market. The FTSE Global Mining Index was up 10% in the first half, compared to a 13% decline in the FTSE Global All-cap Index.

Miners of gold, however, have not been among the best performers... yet!

Still if these forecasts materialise, the worst could be over for some. Take Randgold Resources (NASDAQ:GOLD), a mid-tier explorer, developer and — importantly — producer in Africa.

Randgold first roused our interest back in July 2007 when the share price hovered around R12. By April 2007 it reached R28 — a gain of more than 130%!

But then, it all started to go wrong...

Then the slide began, as a result of cost and production fears. More than a third of its value was wiped out, along with other mid-tiers.

But Randgold still has all the ingredients for success. Chief executive Mark Bristow is not deterred by a market driven "purely by instant gratification". He is going for continued "organic" growth. That means Randgold finding its "own gold, so we’re not forced to buy ounces at a premium by the demands of a bull market."

Hitting its targets by 2011 will increase attributable annual production from Randgold’s West African mines by 50%. The figure will be a whopping 600,000 oz.

Randgold has great key objectives — to make falling output and ore grades a thing of the past and to aggressively tackle soaring costs. It may have raked in higher gold prices this quarter, but cash costs were up 47%.

In spite of that, net profits still rose 42%. And the production pipeline holds promise. Two existing open pit operations have just produced 63,249oz at a cost of $470/oz . They are on target to deliver 265,000oz this year. A new high grade underground mine has started to deliver, too. By 2010 it will be producing 400,000 oz — result! Another is in the final planning stages.

Randgold has its fingers in plenty of pies

Its project in the Ivory Coast is enjoying a "steady improvement in the political climate". Randgold has also recently announced a 52% increase in the more reliable "probable" reserves category.

In a world where production is falling, new deposits are crucial. Randgold has a good track record here. In Tanzania, it has decided to enter phase two of the 500,000 oz joint venture with AIM-listed African Eagle (LON:AFE). A geological model has given good reason to do so.

All in all, Randgold’s net profits could increase by as much as 70% this year, Bristow reckons. Not bad!

And it is scanning the horizon for more! Africa may be Randgold’s "home-turf", but it is not averse to taking its skills elsewhere to new and profitable gold targets.

So, keep mining,

Erin and Isabel

Source: Randgold Still Has the Ingredients for Success

Beating the Bear

By Justice Litle

And so without further ado, let’s look back on the higlights, lowlights and oddball surprises of this holiday shortened week...

Welcome to the bear market. It’s now official, says the Wall Street Journal: “Stocks fizzled [yesterday], ending in bear-market territory for the first time in more than 5-1/2 years as oil jumped and fears about the financial health of General Motors (NYSE:GM) mounted.”

This is bad news for all “buy and hold” investors whose best hope for a happy ending is retiring on a market upswing. For those of us who know markets can go down as well as up -- and who aren’t afraid to buck convention – there are plenty of ways to “beat the bear.” And remember, too, that no matter how bad the headline indexes get, that time-tested old adage still holds: There’s always a bull market somewhere.

By the why, look who else has been grizzly-bit. None other than the great one himself, Warren Buffett, is struggling. According to Bloomberg data, Berkshire Hathaway (NYSE:BRK.A) is now down 20% from December of last year -- the official threshold for bear territory. It’s Berk’s worst first half since 1990.

No one need shed a tear for Buffett, though. Chances are, he and his investors will come through this just fine.

What to make of the news from Starbucks (NASDAQ:SBUX)? The relentless expansion of the Seattle coffee chain was once a potent symbol of American consumer might; an old article from The Onion caught the zeitgeist with a mock headline that read, “New Starbucks Opens in Rest Room of Existing Starbucks.”

But that was then, this is now. Here in 2008, the mighty SBUX is closing 600 stores and laying off as many as 12,000 employees. “Perhaps this is a sign of the apocalypse,” your humble editor mused. “Or better yet, make that a venti chai nonfat triple mochocalypse.”

Irwin Greenstein, our emerging markets blogger, thinks the news just highlights where the growth is... outside the USA. “The company operates in about 45 countries,” he observes, “and is still expanding its presence in most of them. They can’t all be in Europe.”

Speaking of oil not going down... good grief. Light sweet crude was headed straight for the $150 mark at last blush, even as SUV sales fall off a cliff and US consumers lay off the gas pedal for the first time. A little over a month ago, we noted that the gold-to-oil ratio was at an extreme low point. You can read that piece here: Checking in on the Gold-to-Oil Ratio. We further noted that, given the course of events, it was much more likely for gold to move higher than oil to move lower. Guess what happened? (Hint: gold and oil have both gone up substantially since then.)

Special Victims Unit: Fed and Treasury division? After the big Bear Stearns mess, Treasury Secretary Hank Paulson wants to set up some kind of task force to handle big investment bank collapses in future. Details are still thin on the ground, but the plan sounds nutty whatever it is. The WSJ reports, “among the ideas being floated are establishing a special "SWAT" team within the government to help dispose of assets...

And finally, if you want a way to REALLY beat the bear, there’s hardly a better way to do it than this... one of the best traders I know is about to make a lot of people VERY excited by unveiling his long awaited service, IPO Confidential. That’s right... I’m talking about the one, the only, the man himself, Cash McDash.

In case you just got here, Cash McDash is the pseudonym for a very real (and very successful) hedge fund trader who focuses on the IPO and new issues market. I’ve known Cash for many years, and for the past few months we’ve been doing a back and forth each week in these pages.

Over the past few months, Cash has shared a number of winning trades with Taipan Daily readers. (Here is just one example of many.) Now we’re pulling back the curtain even more, and allowing a select group of readers to enter Cash’s world via IPO Confidential. So keep your eyes peeled for that... and when you get a chance to sign up, I’d recommend being quick about it. We don’t know how fast this thing is going to fill up, and the exclusive nature of the picks means they can’t be broadcast to everyone.

Source: Beating the Bear

Once upon a time, the defense sector was the place to have your money. From wars in Iraq and Afghanistan, the U.S. was spending tons. Is the party over? That’s what our reader Paul was wondering when he asked…

Subject: UTX United Aircraft?

Hi Charles, Shares are down perhaps because of building slump dropping HVAC and elevator backlog? This seems to be a well-managed company. Jet engines doing well (Pratt-Whitney) and more efficient ones will go into the newer lightweight composite fuel efficient jobs the survivors will have to be flying to be competitive. Whatcha think? Paul

The whole sector is being downgraded. It explains why United Technologies (UTX) is suffering. The scariest part… airlines should reduce their orders in the next two years as they cut costs to cope with higher oil prices.

Just when you thought things were at their worst, now investors are worrying about the election. Obama wants to pull troops from Iraq, which would mean less defense spending. McCain isn’t in a hurry to pull troops out, which means a continuation of defense spending.

That’s a huge uncertainty that won’t be fully resolved until after the election in November.

Technically, the company is a falling knife. Well, that is unless you look at their weekly chart. They are sitting just above their 200-week moving average. While this may look tempting as a buy, when you look back, you’ll notice the last time they hit their 200-week average, they still fell under it.

In other words, there’s no real pattern of their 200-week acting as support. The last thing you should do is buy because your hoping a pattern emerges.

While I believe the sell-off in this company is overdone (and we may see a bounce), this stock probably won’t perform until after the November election.

Let United Technologies (UTX) slide.

Grand Theft Society

Llewellyn H. Rockwell

A core problem with government is that its managers believe that all reality will conform to their wishes if they issue the right orders, pass the right laws, and put the right people in charge. Reality resists this simple-minded approach; witness the debacle of the war on terror. Sadly, the same group that has managed that war is now managing another one: the war on recession.

The tendency of these managers is to fabricate a view of cause and effect that conforms to what they would like to do. In the war on terror, we were told that the 9-11 attacks came about because shadowy bad guys from afar resent our freedom. If you believe that, the answer is more militarism and killing as a preventative measure. If, however, you realize that these attacks grew out of a desire for vengeance against American military policies, the implied policy solution looks radically different.

So it is with the economy and the proper policy response to recession. If you believe that there is no good reason for an economic downturn other than a wave of animal spirits and flagging public confidence, your response is to inject optimism via the printing press. Surely, nothing makes folks happier – temporarily – than for them to find themselves awash in newly printed bills. This will lead to internal joy, consumer spending, and thus recovery.

So believes the silly political class.

Consider a different view of cause and effect. If the recession is a correction to an overly pumped economic boom, matters change. The recession, then, is not an aberration crying out for correction; it is itself the correction for the unsustainable economic bubble that preceded it. It should be welcomed in the same way we welcome a sober day after a drunken evening, or the detoxification of an addict after a period of addiction.

But here again, government begins with a view of cause and effect that conforms to its institutional wishes. The recession is the problem, and the only problem, and it can be corrected through the usual means: issuing orders, passing laws, and giving more power to the right people.

It gets worse. A recession contains at least one feature that turns out to be a saving grace for consumers who are hit with economic instability. In the midst of layoffs, tighter lending standards, and a riskier entrepreneurial environment, at least there are some sectors that have declining prices. At least in some areas, the purchasing power of money is rising. This makes life a bit easier. In times when there is very little good news, this is something to hang on to.

But instead of seeing falling prices as the silver lining in the recessionary cloud, government (and the media as an echo) sees them as the cause of all other problems. So, wouldn't you know, government sets out to stamp out falling prices on the theory that if this succeeds, the entire economy will rise like a phoenix from the ashes.

This was the view during the Great Depression. Herbert Hoover's and then FDR's economic team was convinced that falling prices represented not a saving grace but a mortal economic sin. They spent more than ten years trying to make all prices rise. This, they believed, would cause recovery. They tried inflating the money supply. They tried wage and price floors, with vigilante enforcement, and even all-around industrial price planning. Finally, FDR tried the ultimate sand-in-your-face tactic: he went to war, and sent all those unemployed folks to foreign lands to kill and be killed, or to make-work jobs in the military-industrial complex, the CCC on steroids.

What did we learn from that debacle? Let's make it official: we have learned nothing from our experience during the Great Depression. Even now, people are under the impression that falling prices cause recessions. Here is proof from the lead to this New York Times story: "With sinking home values continuing to drag down the economy…"

Sorry, but it just isn't true. Falling house prices are not good news for homeowners who believed that they had purchased an asset that would forever go up in price. But they are wonderful news for people who are shopping for homes. They can buy more for less, and avoid frightening levels of mortgage debt in the process. In macroeconomic terms, the housing bust is also a welcome event since it was precisely this sector that was wildly ballooned during the boom. Unsound investments (or consumption goods masquerading as investments) must be leveled out before economic recovery can begin.

But it is really true that an economy can survive and thrive with falling prices. Falling computer prices didn't drag down the economy in the '90s. Nor did falling clothing prices. And consider the Gilded Era, the most prosperous until that point in all of human history. The consumer price index fell from 47 in 1864 to 25 in 1900 – nearly by half. That's another way of saying that money became twice as valuable. And where was the calamity? Savings and pay packets zoomed in value. This period is called the Second Industrial Revolution because of the astounding increases in productivity, population, and technology. Falling prices and sustainable economic expansion are positively related in all of economic history.

If government and the Fed succeed in propping up home prices or preventing them from falling as much as they might otherwise, what will be the result? Homes will continue to be overexpensive and, on the margin, unwarranted purchases. This will not bring about economic recovery. This will force American consumers to spend more at precisely the time when they should be saving and getting out of debt.

There are lessons here. One is never to permit the government to discern the relationship between cause and effect. Government invariably rules out the possibility that the structure of the public sector itself is to blame for the problem, whether that problem is terrorism or recession.

Another lesson is that we need to shut down the machinery that allows government to enact its plans. If there continues to be a slice of the population that gets its kicks from issuing orders and trying to make the world conform to them, these people ought to be given a video-game console to play with. The game can be called Grand Theft Society. The stakes are too high to permit them to play their games using real wealth and real lives.

Regards,

Lew Rockwell
for The Daily Reckoning

Source: Grand Theft Society

Inflation or Deflation...Pick Your Poison

By Mike Burnick

"The U.S. economy, and most other developed nations continue to be squeezed between two opposing economic threats. Commodity-price inflation and asset-price deflation are creating havoc with financial markets, while global consumers, businesses, and central bankers are caught in the cross-fire."

The U.S. Federal Reserve appears to be caught like a deer in the headlights. Bernanke and company were unable to reach a consensus last week about how to deal with the twin flations. The FOMC decided to hold-the-line, keeping the fed-funds rate steady at 2%.

By contrast the European Central Bank (ECB), confronted with the same economic data as the Fed, has reached the opposite conclusion. The ECB just raised its benchmark rate to ward off inflation- now at an uncomfortably high 4% in the Eurozone.

Of course this makes life difficult for the U.S. dollar. There is the slight matter of "yield differential," which my friend and colleague Jack Crooks has discussed at length.

The dollar "yields" just 2% (the Fed funds rate) while the euro yields 4.25% (the ECB benchmark rate as of yesterday's meeting).

That's why Treasury Secretary Paulson was busy with a four-day, whirlwind tour of Europe earlier this week. He's desperately trying to talk ECB finance ministers into a less-hawkish stance.

After all, higher Euroland rates could send the dollar plunging further. That in turn will lead to even higher commodity-price inflation. A vicious cycle if ever there was one.

The dilemma for central bankers around the world is trying to figure out which is the greatest threat to economic stability at present:

A. The threat to growth from deflation in real estate and equity market values amid the housing recession and credit crunch.

OR

B. The threat to purchasing power that results from accelerating inflation rates around the world.

The Fed has focused more on the de-flation threat, while the ECB is more concerned with in-flation at the moment - and financial markets are caught in the cross-fire! Stay tuned...

Source: Inflation or Deflation...Pick Your Poison

 Shadow Stocks: The Low-Risk, High-Profit Way to Play the Leading Global Trends

By Horacio Marquez

Most investors know them as "exchange traded funds," or ETFs. But we refer to them as "shadow stocks," and with good reason.

We've labeled them as shadow stocks because they "shadow" the performance of a particular market, index, or sector. They're baskets of stocks that - like mutual funds - enable you to buy or sell a portfolio of securities in a single purchase.

Unlike mutual funds, however, you can trade shadow stocks just as you would an individual stock: You can buy and sell them at intraday prices on U.S. stock exchanges, you can buy options on them, and you can even sell them "short."

These relatively new, highly focused forms of mutual funds offer investors a diversified way to play economic sectors, global financial trends, market events and other so-called "special situations."

But no matter how you label them - whether you refer to them as shadow stocks or as ETFs - one thing is certain: For individual investors, shadow stocks are the most-innovative, and most-powerful investment vehicle to hit the financial markets in at least two decades.

There are three key reasons why this is true. Shadow stocks:

• Offer a risk/reward profile that's much better than either individual stocks or regular mutual funds can offer.
• Provide a way to make investment plays that would otherwise be out of reach.
• Give you terrific diversification and liquidity, offering significant safety.

Now that we've listed these important benefits, let's look at each one in more detail.

Shadow Stocks: The Super Sector Selectors

If you want to succeed as an investor, there's one key fact you need to understand. It's so important, in fact, that in my research, writing and presentations I refer to it as Shadow Stock Profit Secret No. 1:

• It's not the stock you buy, it's the sector you play.

I'm always stunned by how few people actually are aware of this basic fact. But study after study bears this out: More than 50% of any gain an investor realizes in an individual stock is due to the sector it's in, not the stock itself.

Indeed, because they are so well focused, shadow stocks (or ETFs), allow you to play the sector, theme, or global trend that will generate most of your gain.

What's more, since they are a "fund," shadow stocks offer risk diversification that individual stocks could never offer. If you identify a great global trend to play for a profit - but pick the wrong stock (it has an earnings disappointment, a liability lawsuit or gets caught up in a financial crisis) - you could actually incur major losses, despite having chosen a winning trend.

Putting Profits Back in Reach

That brings us to Shadow Stock Profit Secret No. 2:

• Shadow Stocks Put the "Out of Reach" Back Within Your Reach.

Here at Money Morning last year, we uncovered a fascinating investment opportunity - only to realize there was no direct way to profit from it.

Our global money-flow analysis pointed to Taiwan as a lucrative long-term investment opportunity. Drilling down, we uncovered a terrific profit play: Hon Hai Precision Industry Co. Ltd., a Taiwan-based company that manufactures all three of the hot new video game consoles that have been duking it out in the $10 billion worldwide video-gaming market. With those gaming systems, we're talking, of course, about:

• Sony Corp.'s (ADR: SNE) PlayStation 3
• Microsoft Corp.'s (MSFT) X-Box360
• And Nintendo Co. Ltd.'s (OTC ADR: NTDOY) Wii

Hon Hai isn't some little wannabe: As the maker of every global gizmo from Hewlett-Packard Co. (HPQ) PCs to the hot new Apple Inc. (AAPL) iPhone, Hon Hai has grown into a global leader so dominant that BusinessWeek magazine labeled it as an "earnings machine." In fact, it's now the biggest electronics manufacturer on the planet.

Sounds like a great investment, right?

Wrong.

Unfortunately, Hon Hai wasn't registered with the U.S. Securities and Exchange Commission, meaning its shares weren't available to U.S. retailer investors.

We didn't give up, of course. While we couldn't get around the SEC regulations, we did find another investment that held a big stake in Hon Hai - along with dozens of other Taiwanese companies with the same kind of potential. It was a "shadow stock" - an ETF called the iShares MSCI Taiwan Index (EWT). And Hon Hai's Taiwanese shares were the fund's largest holding.