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Thursday, April 30, 2009 A look back at what heroic acts saved us from the '50s recession... You can always count on a rally after a major downturn... Our Trade of the Decade still has some juice in it... Chris Mayer on how gold will top $2,000 an ounce...and more! The Good New Days by Bill Bonner London, England Those were the good ol' days! The Wall Street Journal: "US economic output tumbled in the first quarter as businesses cut back sharply, marking the nation's worst six-month contraction in 51 years... "The 6.1% annualized decline in gross domestic product came as the home-building sector continued to deteriorate, business investment in buildings and equipment plunged and firms drew down inventories at the fastest pace since the start of the decade." But wait...51 years ago was the decline of '57-'58. According to our sources, that recession - though frightening when it began - only took 3.2% off the nation's GDP. And it ended after six months. Perhaps we should look back and see what heroic acts on the part of Congress and the Fed cured that recession so quickly. What's this? The record shows that Fed did almost nothing. According to Jim Grant, though the Fed cut its key rate to 2.25%, the total monetary stimulus provided by the Fed during that period amounted to zero. On the fiscal side, however, Congress boosted spending, adding to the deficit the equivalent of 3.2% of GDP. In other words, faced with an equivalent downturn, the feds of yesteryear cured the recession of '57-'58 - or it cured itself - with a total exertion of barely one-tenth what they are doing today. But it was a different world back then. To make a long story short, the great boom was just beginning...the Empire was still rising...its currency was still backed by gold...and its books - both federal government registers and national trade accounts - were in balance. That was also when Detroit's invitation to "see the USA in a Chevrolet" still had advertising punch. We remember the ads on television...those sleek new automobiles (Detroit came out with brand new models every year)...with their big tailfins and their wide, comfy ride...tops down...roads open...no seat belts - those were the good old days. General Motors was the biggest and most profitable automobile company on the planet...an icon of American capitalism and its industrial success. But what's this? Today's news tells us that not only is GM to be nationalized, it and Chrysler are to be taken over by the UAW! Ah...at last...Marx's dream has come true. The workers - at least those in the United Automobile Workers union - are taking over the means of production. Between the government and the unions, General Motors will be almost entirely in the hands of the sweating proletariat. To that end, a dear reader wrote in this morning and said: "GM will not disappear. Just a slight change to what it represents: Government Motors." Along with the story - in the Financial Times - comes a photo of the UAW on strike in 1937. It's a 'sit down' strike...so we see them sitting down in the factory...comfortably resting on Chevy seats while reading the paper. But these are the good new days. Imagine if we'd had to write these daily reckonings during the Eisenhower years. What would we have said? We couldn't rant about government debt - the feds were running balanced budgets and paying down the debt from WWII. We couldn't fret about trade deficits either - we were running huge trade surpluses. Nor could we wag our finger at consumer spending and personal debt. People were spending money - but they were earning it. The savings rate was healthy. And total debt stood at only about 150% of GDP. Now it is close to 360%. What a dreary time. There was nothing and no one for a sensible economist to laugh at. Vice President Richard Nixon pledged to fight the recession of '57-'58 with "whatever action is necessary to stop the economic downturn and stimulate the recovery of the recession." But, the government's efforts were very modest. Besides, it was still 14 years before Nixon took out his knife and stabbed the gold-backed monetary system in the back. Back then, the people were freer...but the government was more constrained. There were still limits on what mischief a reckless government could get up to. A country with a pile of dollars back in the '50s had no worries. It could turn them in to the U.S. Treasury and receive gold at the statutory rate. Its only risk was that the foreign treasury might run out of gold before it got there. This was no risk in the case of the United States of America - it had cleverly sucked in the majority of the world's gold in exchange for goods and services (hint...many of them made loud noises) during the two world wars. But all of that has changed now. No one wants to 'see the USA in a Chevrolet' anymore. They prefer BMWs. And hybrids made by the Japanese. Now, the U.S. government runs the biggest deficits in history - intending to buy its way out of a recession that, so far, is no worse than the Eisenhower recession of '57-'58. Next week, the feds will hold the largest auction of Treasury debt in history. They will raise $71.6 billion...on their way to doubling the U.S. national debt over the next five years. The U.S. savings rate is nowhere near as high as it was in the '50s and '60s...but it least it has one. Savings disappeared completely during the final years of the Bubble Epoque. Now, Americans are saving 5% again. The savings rate in the United States isn't good for our friends in the Far East. Not at all. In fact, according to Merrill Lynch, China's economy didn't grow at all in the last quarter of 2008. And it's still contracting fast, ever since the start of this year If the American and European consumers don't loosen their grip on their wallets, the Chinese 'miracle' could be reversed. And the effects on the battered U.S. economy will be much worse than the impact the Asian currency crisis of 1997 had on the United States. While Shanghai stocks haven't yet collapsed anything close to what we're seeing on this side of the ocean... it won't be long before they catch up. Before that happens, there are two simple moves you can make to protect yourself and your money. Read about it here. And now the poor Chinese sit nervously on 1.4 trillion dollars - wondering what to do with it. They buy a few factories...they cut a few deals. But they cannot readily exchange their dollars - neither for gold nor for anything else that doesn't have a $ sign on it. As soon as they begin the trade in any substantial volume, the object of their exchange will shoot up in value...while their dollars will plunge. The total value of all the gold ever mined is only about $4.4 trillion, for example. The United States is still the largest holder...but it has only 8,133 tons of the stuff...for a total value of $240 billion. So, if we did the math right, the Chinese could buy up all the entire U.S. gold reserve and have about $1.2 trillion left to spend. Now, we turn to Addison for his take on Obama's first 100 days: "We pause, amid the bustle of today's news, to assess the new president's first 100 days in office. Heck, everyone else is," writes Addison in today's issue of The 5 Min. Forecast. "And we figure a good place to begin is the budget resolution the House passed yesterday. All $3.5 trillion of it. Complete with revenues only half that number." "The resolution comes complete with projections of spending and revenue out to the year 2014, by which time the deficit will be whittled down to a 'mere' $523 billion. Which is actually less than the White House's projection of $749 billion. Hope springs eternal." Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial's paid publications, such as Penny Stock Fortunes. Their latest special report details the easiest way to make money in this market - by focusing on stocks most investors overlook. Read all about it here. And back to Bill, with more thoughts: The rally is on! The Dow rose yesterday - up 168 points. Gold rose $7 - to close at $900. Oil is above $50 again, but just barely. We repeat ourselves: one of the surest things in the investing world is a rally after a major downturn. Typically, prices recover 20% to 50% of the previous decline. Then, there is another leg down. At first, when the rally comes, investors are hesitant. They've just lost a lot of money. They don't trust the market. They wait. Then, as prices rise more, they begin to pay careful attention and wonder: is it time to get back in? Gradually, more and more commentators answer: yes. And so the money comes back into the stock market. A trickle at first. Then, a flood. Prices rise...and the financial press talks about a new bull market. But if it is a real bear market, this is just a way of bringing naïve investors back into the market so they can be destroyed. Prices fall again...to a much lower level. Often, this process is repeated several times before the real bottom comes. And by then...nobody cares. Gold traded over $800 an ounce in the early '80s. Stocks, then at a major bottom, declined to the point where the Dow was also in the 800s. For one ounce of gold, you could have bought the entire group of Dow stocks. Back in the early 30s, a similar thing happened. At its lowest point, the Dow fell to 41 on July 8th, 1932. Then, it took 2 ounces of gold to buy the entire Dow. Could a similar thing happen this time? You bet it could. It now takes about 9 ounces of gold to buy the Dow. That's already down from a high of 43, set in 1998. Back then, the Dow was over 11,000...and the price of gold was only $260. Since then, our 'Trade of the Decade' has been to sell the Dow and buy gold. But the decade is not quite out...and the trade still has some juice left in it. We could easily see the Dow below 5,000 in the next downward move. That alone would put gold in the 5 or 6 oz/Dow range. Keep waiting and it should eventually get to 1 or 2 ounces per Dow - perhaps at about 4,000 on the Dow...and $2,000 for gold. Read the full report here - and learn how you can pad your portfolio with 'zero-downside' gold. You'll be happy you did. Poor Ireland. It is expected to decline by 8% this year. And a think tank warns that the decline might rise to 14% of GDP by 2010. Soon, the ships will be leaving Dublin harbor again...bound for faraway places...and laden with huddled masses, yearning for a job. They will go to Sydney, to Baltimore, and to Buenos Aires...just like they did in the 19th century...filling the world with another great Irish diaspora, singing their sad songs and telling their sad tales...and dreaming of Erin's isle, without rain. Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- Here's How YOU Could Make Easy Forex Profits... On Monday, March 16, 2009 - at 4:05 P.M., I sent a short email to my select group of readers. In this e-mail, I recommended one simple FX trade... By 10 a.m. that Thursday, I told my readers to sell half their position for a 99% gain... You need to give this a try...get my next alert here... --------------------------------------------------------------- The Daily Reckoning PRESENTS: It used to be only 'gold bugs' had faith in the yellow metal as the ultimate store of value. Now, some of America's biggest and most successful investors are buying this 'barbaric relic'...and below, Chris Mayer makes the case for why you should be buying gold as well. Read on... How Gold Will Top $2,000 Per Ounce by Chris Mayer Gaithersburg, Maryland "The value of gold, as the only true 'hard currency,' is coming to the fore, as evidenced by the investment choices of some of the world's most seasoned investors." - AngloGold Ashanti Ltd. chief executive officer Mark Cutifani For the first time in a couple of decades, some of America's most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis. Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He's also got a big position in Kinross Gold. Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold's broadening appeal. "I have had more phone calls in the past six months than ever before - from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions," he says. "I am not saying George Soros, but people of that caliber have told me they are buying gold." You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world's greatest investors may be the leading indicator for a quick 116% climb - to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed. Why? The biggest reason is that the value of the dollar looks about as brittle as a 90-year-old's hip socket. And if you worry about the value of the dollar - or any paper currency - then gold is a good alternative. In fact, gold has held up well while most everything else has taken a beating over the last year. On a recent conference call with investors, First Eagle fund manager Abhay Deshpande points out that gold is at a new high in just about every currency apart from the U.S. dollar and Japanese yen. "It has performed its job for everyone in these countries," he says. "It has held its value." Take a look at the nearby chart and you can see the falloff of the dollar in recent years and the rise of gold. "...the value of the dollar looks about as brittle as a 90-year-old's hip socket. And if you worry about the value of the dollar - or any paper currency - then gold is a good alternative." "But there have always been worries about the value of the dollar," you say. "That's not new." True. What is new is a global financial crisis unlike anything we've seen in the post-World War II era. And that crisis has brought with it serious doubts - the most serious in decades - about the dollar's ability to keep its top perch in the aviary of world currencies. As that doubt increases, gold gathers new fans. As I write, the headlines are abuzz with China's proposal to replace the dollar as the world's reserve currency. (The U.S. Treasury secretary, in a weak moment, said: "We are quite open to that." He took back those words, but the hammer had already hit the nail.) China and other countries hold a lot of dollars. And they are not too happy to see the U.S. government handing out bills like after dinner mints. America's $2 trillion (and ballooning) annual deficit and ballooning national debt causes them to wonder about the value of all the paper they hold. They are not the only ones worried, as I noted up top. Many top investors are already buying gold. It is easy to buy gold today with gold exchange-traded funds (ETFs). They are like mutual funds that hold gold. As investors pile into these ETFs, the ETFs' gold holdings also go up. It's one way to see the dramatic increase in demand for gold in just the last few quarters. (See chart below.) So we have to ask: At $900 per ounce, are all the fears baked in or are we on some new history-making path? I have a good friend who advises institutional clients on investing. As he reminds me, the really big money hasn't started buying yet. There are no big pension funds or endowments with significant gold holdings. That could change. If so, the gold price will go wild. "Gold is a small market," Munk notes. Munk's career spans 60 years and he knows the gold market as well as anyone. Says he: "Let's say a small percentage of the world's central banks - or simply the United Arab Emirates itself - do not believe President Obama's pledge that he will halve the U.S. deficit by the end of his first term. They shift some of their dollar reserves to gold. It would not take many decisions of this kind to push the price above $2,000 per ounce." That's how gold gets to $2,000 per ounce - just a bit of doubt turning into action. The mind boggles at what would happen if China decided to hold more gold! Gold could well hit $5,000! As long as President Obama, Fed Chief Bernanke and pals treat the dollar like confetti, gold should continue to gather new fans. And gold stocks should do even better. Gold stocks are supposed to do especially well as gold rises. But that has not been the case over the last year and a half. Mostly, this was because mining costs were rising as fast as, or faster than, the price of gold - thanks in part to record-high energy prices. But as Deshpande points out: "These things have reversed in recent months as gold stocks became quite cheap relative to the underlying value of the gold in the ground." The case for gold and gold shares is a nice and clean setup, like one of those toy houses in the window at Macy's on Madison Avenue. The world order will not always hinge around the dollar. Global finance will not always find its center on Wall Street. As Munk pointed out: "Look around Davos this year. So Goldman Sachs cancels its dinner party. In its place, a Kazakh company has a dinner party." As the dollar goes bust, who knows what will replace it? With gold, you don't have to worry too much about the answer. Regards, Chris Mayer for The Daily Reckoning P.S. Our gold play here at Capital & Crisis has a good balance sheet and is cheap on cash flow and net asset value bases. If you want to be more conservative and not take on the risks of a single mining stock, you could just buy a basket of gold mining shares. Either way, I recommend you get some exposure to gold stocks. Learn how you can get Capital & Crisis by clicking here. Chris will speaking at this year's Agora Financial Investment Symposium in Vancouver. In addition to Chris, all of your favorite DR editors will be there - and a few special guests, to boot! This year's event marks the 10th anniversary of your favorite free online newsletter, The Daily Reckoning, so the Symposium will be focused around a "Decade of Reckoning"...four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade. If you secure your spot by this Friday, May 1, you can save $300 off of the regular price. Click here for all the info: The Agora Financial Investment Symposium: July 21-24 Editor's Note: Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris is the editor of Capital and Crisis and Mayer's Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks.   The Daily Reckoning - Special Reports: Investing in Gold: The 5 Best Ways to Invest in Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...