Britannia Radio

Thursday, May 7, 2009 The feds dirty, undercover campaign against the free market... Results of the big bank stress tests are out... The states now get most of their money from the feds... Jeff Clark on why gold won't be going to $2,000...and more! --------------------- Special Offer --------------------------- All Those People Laughed at You When You Bought Gold... Wouldn't you love to throw it back in their face? Drive past their house in your Lamborghini on the way to your private jet? So you can fly to your private island? Now's your chance. One simple move that can turn $10,000 into $1,509,000. But I warn you... Only 1 in 100 people can probably handle this. Are you one of them? Only you can decide... --------------------------------------------------------------- The War On Capitalism Continues by Bill Bonner London, England The bear rally continues...it is about to enter its 9th week. And the War on Capitalism continues! The Dow rose again yesterday - up 101 points. Oil went up too - to $56. The dollar held steady. And gold was up again...to $911. "Emerging market surge...Investors pile in on hopes of improved global economy," says the Financial Times. And this from the Telegraph: "Recession 'over by Christmas,' says Fed chief Bernanke." He did not say "Mission Accomplished." That phrase was used too recently by another high official. In that event, the mission turned out to be not as accomplished as he thought. Will the government's War on Capitalism turn out better than their War on Terrorism? Or their War on Drugs? Or their War on Poverty? "The last successful government program was WWII," said Jimmy Breslin. Since then, almost all of them have been useless or counterproductive. But year in and year out, they've given federal hacks more money and power. The current War on Capitalism didn't begin a year ago, by the way. The feds have been conducting a dirty, undercover campaign against the free market for many years. Instead of permitting willing lenders and borrowers to set the price of credit, for example, the Federal Reserve imposed its own short-term rates many times over the last 50 years. Eleven times during that period, capitalism tried to correct the "borrow and spend" economy. Each time, the feds rushed in with more credit on even easier terms. By the recession of 2001-2002, the feds were intervening with such heavy hands that it set off the bubble in housing prices in the 2002-2007 period. And when the bubble exploded, the fed's dirty campaign turned into a major war with huge pitched battles...and millions of casualties. Bloomberg reported yesterday, "nearly a quarter of US homeowners are underwater." When the Fed flooded the market with so much easy credit, it pushed up housing prices way beyond what people could afford. Capitalism struck back - blowing up the dikes that held all that liquidity in place. But the explosion blew out the cushion of equity that kept homeowners afloat. House prices are still falling at a 14% annual rate. "Less than before," say the bulls. But still going down. This has left some communities - such as Salinas, California - with as much as one-third of the housing stock worth less than the money owed against it. And in Victorville, California, the bank decided it had too many foreclosed houses. An entire new development of 16 houses - some completed, with granite countertops and all...some incomplete - had been foreclosed. Squatters and vandals were making a mess of the place. So the bank demolished the lot of them. And overstretched homeowners who have an "Alt-A" or "Option ARM" mortgage are in trouble come 2011...when the majority of these loans will reset at a higher rate. You think it was bad when the first wave of defaults hit the United States? This could have even more catastrophic consequences. Learn how to protect yourself from the second downturn by clicking here. Today, the results of the stress test on banks are out. They show some banks in good shape. Others need more capital. Bank of America, for example, is said to need another $34 billion. Wells Fargo needs $15 billion. GMAC and Citi both need more cash. But investors decided to look at the part of the glass that was full rather than the part that was empty. They pushed up financial sector stocks generally. If capitalism had its way, it would sort out the banks quickly. Banks that couldn't raise the money they needed would go out of business. Their assets would be bought up by the solid banks. Life would go on. But the feds' war against capitalism prevents this kind of simple resolution. Instead, weak, mismanaged institutions are kept alive with taxpayers' money. "Trillions of dollars have been thrown at the system so that we can avoid the natural process of creative destruction," write Matthew Richardson and Nouriel Roubini in today's Financial Times. Our next question: where is all this money going to come from? And now, over to Addison with today's contrarian indicator: "Bill Miller is bullish and buying shares of banks and credit card companies," writes Addison in today's issue of The 5 Min. Forecast. "The Legg Mason 'legend', based right here in Baltimore, famous for beating the S&P 500 15 years in a row, is now quite infamous...for buying Fannie Mae, AIG, Bear Stearns, WaMu and Wachovia all the way to the bottom." "This morning, all we can do is cringe. Miller is setting himself up as the historical proxy for the mainstream disaster of the day. "The current 'bull market', reasons Mr. Miller grasping at straws, is behaving 'much more like the rally that ended the 1973-1974 bear market or the one that began off the bottom in 1982, or even that which erupted in March 2003 from the last debt deflation scare.' "Banks, he believes, 'have the biggest potential to outperform.' Wells Fargo, Capital One and American Express are his favorite speculations. This guy will chase anything. In response, we'd like to announce our latest addition to the short watch-list: Wells Fargo, Capital One and American Express." Want to make sure never miss an issue of The 5? You can get The 5 - in its entirety - sent to your inbox, every Monday through Friday by becoming a subscriber to one of Agora Financial's paid publications, such as Resource Trader Alert. Get your guide to trading commodities by clicking here. Back to Bill, with more thoughts: On page one of the Telegraph is another headline, which is almost sure to be correct. "Your country needs YOU to work five years longer." And accept big cuts in health and education spending. And pay more taxes. There is no mystery to this news item. You don't have to be a clairvoyant like Ben Bernanke to see that 1) living standards are certain to go down in England and America...and 2) governments will have to raise taxes and/or cut 'services.' We have put the word 'services' in quotes because we don't you to get the wrong idea. Most government services are not services at all...but disservices. Each year since the war, government budgets have gone up. Now, there are more people getting money from the government than there are taxpayers. And what do the taxpayers get for their money? Is the country really a better place than it was in the Eisenhower era? Are we better governed? Are we safer? We are certainly better off in many ways...but all the ways we are better off are the result of technology and private innovation, usually in spite of government. A couple of inventions have made life much more agreeable. Air conditioning is a major boon to gracious living in the southern states. And the Internet - with free telephone service, via Skype - is another major boon. And while we're on the topic of technological innovations, we'd like to alert our dear readers that the DR has entered the social media realm, by way of Twitter. Historians, economists, and contrarian investors alike use Twitter to communicate current information throughout the day that you may not find in our daily columns. You can sign up for a free account and follow us here. Of course, there are many innovations that are probably net negative too. Television, for example. It's brought entertainment and companionship to millions over the years. But it's also expanded popular, brain dead culture and disseminated propaganda. People seem stupider today than they did when we were young...TV is probably largely to blame. But returning to the feds... This year, the U.S. stopped being the United States of America. Yesterday, it was reported that the states now get most of their money from the feds. "He who pays the piper calls the tune," is the old expression. The feds are paying the piper; the states have to dance to whatever tune they propose. That's the end of the federal system...the end of the system announced in the U.S. Constitution...which was a union of sovereign states. Now, it's a fully centralized system...a popular democracy of the worse sort...in which celebrity hacks are elected and rule without any real shame or limit. Even Louis 14th, France's Sun King...an absolute monarch...knew he was subject as well as monarch. He was God's man on the throne of France. Now, America's leaders answer to no one...except the mob of TV-addled voters. The song the feds are singing is a song of higher taxes...more regulation...bigger government budgets...and huge new deficits. The War on Capitalism will cost trillions. The direct costs - and the indirect cost of a battered, shackled, tortured market system - will have to be paid somehow. The good news is that citizens will get fewer services from their government. The bad news is that governments will reduce services in the worst possible way - firing teachers, rather than educational bureaucrats...filling holes in bank balance sheets, but failing to fill the potholes in the roads...and so forth. And more bad news is that they will raise taxes... The good news is that you can protect yourself from the feds' bad decisions. Think of it as your own 'personal bailout'...since they certainly don't have your best interests in mind. Get all the resources you need in our financial survival library. Poor old Ireland. It's been a terrible year on Erin's Isle. The country that most benefited from the boom suffers more than others from the bust. That's just the way it works. Property prices are in free fall. Unemployment is soaring. And now comes Mr. Obama, pulling the bog out from under the bog trotters. Your editor operates a mini-multinational. Yes, we have offices all over the world - in Paris, London, Madrid, Buenos Aires, Johannesburg, Melbourne, Bombay...and Waterford, Ireland. That is why we spend so much time traveling...just trying to keep up with business. We moved to Waterford to take advantage of the 12% corporate tax rate. You gotta be somewhere? Why not go somewhere where they don't tax you so much? In practice, this has not proven very important, because we never made enough money in Ireland for the tax rate to matter. Still, it was nice to know that if we ever did make any money in Ireland at least we wouldn't have to give so much of it to the Irish government. But along comes Obama's anti-tax haven initiative...and poor old Ireland is even poorer. The American president proposes to do away with Ireland's tax advantage altogether...at least as it applies to American firms, who are the main beneficiaries. In fact, he'll penalize U.S. firms abroad. Not only will they pay local taxes...but they'll pay U.S. taxes too! Yes, our poor little micro-multinational will have to pay more taxes. And your poor editor too. Dear reader...please do us a favor. Please write your congressman. Tell him to drop dead. Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- The $2.5 Trillion Gorilla in the Room This is vital. Because, you see, a lot of Americans - and a lot of people in the rest of the world - are counting on credit-card carrying American shoppers to jumpstart the global economic engine all over again. But it isn't going to happen. And you don't want to bank your investments on the idea that it will. Or you'll risk even bigger losses than many Americans have suffered already. Here's how you can save yourself and boost your profits during the coming time bomb... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Gold has breached the $1,000 level twice and has been staying above its old high of $850 for weeks now. And this high price is without the usual situations that keep gold high. So, wonders BIG GOLD's Jeff Clark, what happens to gold when high inflation, excess cash, and a falling dollar jolts the economy? Read on... Global Economics on Tilt - How to Protect Your Ass(ets) by Jeff Clark Rockland, California Gold isn't going to $2,000 an ounce. Before you gag on your coffee or suffer chest pains, allow me to explain. We're about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold's pretty much had its day and that once the recession is over, it will retreat for good. However, the four-digit gold price we've seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down - high inflation, excess cash jolting the economy, and a falling dollar? After all, gold's performance to date has been powered only by general anxiety, not by any visible erosion in the dollar's value. I decided to take a fresh look at calculations that could be used to appraise gold's upside potential. Not one of them, by themselves, comes with compelling logic. But they all point in the same direction. Gold's Percentage Rise in the Last Bull Market: What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce. U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we'd arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce "..the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar?" Gold/Dow Ratio: The ratio was about "1" when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today's stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz. All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price. U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country's deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June '07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce. U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you'd suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price. No, we don't think gold will hit $192,000 or even $32,000. And there really isn't any surefire way to forecast the eventual high. But it's clear that every weathervane is pointing in the same direction. So, yes, gold isn't going to $2,000; it's going higher. When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire. Eastern Europe borders on bankruptcy. Brazil's economy is falling off a cliff. Ditto Mexico. Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France. In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now...) An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac's new CEO resigned after six months on the job. Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC's "problem list." So far this year, 19 banks have failed. The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in. The projected US$1.75 trillion federal budget deficit is almost four times the nation's previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan's now reads $7.8 trillion. High unemployment has become a worldwide epidemic, with the infection spreading. With world economies taking it on the chin, it's little wonder that investor interest in gold as a safe haven is growing - a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in. Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended strategy here at BIG GOLD remains keeping one-third in cash, one-third in physical gold, and one- third in our selected gold stocks. New money for investment should be split among the same three categories; we just don't see any safer places to be. As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we'll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us. Regards, Jeff Clark for The Daily Reckoning P.S. Even though some of the mainstream media are already popping the champagne, cheerfully pronouncing the end of the crisis, we beg to differ. The economic quagmire the U.S. and much of the developed world is in is far from over...so be right and sit tight, as we at Casey Research like to say. And find out how you can make the most out of gold as a safe-haven investment, by clicking here. Editor's Note: Jeff Clark is editor and one of the primary writers of Casey Research's BIG GOLD. Whether it is researching new companies to recommend, analyzing the big trend in gold, or looking for other safe and profitable ways to capitalize on the bull market, Jeff is devoted to making BIG GOLD a top-notch precious metals newsletter for the prudent investor. He coordinates the efforts among the research and writing team, ensuring that whatever is happening in the gold and silver market doesn't escape coverage. Casey Research's Doug Casey will be among the many high-caliber speakers we will have at our annual Agora Financial Investment Symposium in Vancouver, British Columbia...and the conference is just around the corner. Don't miss out on what promises to be the most important 4 days of the year. Secure your spot now: AF Investment Symposium, July 21-24, 2009 --------------------- Special Offer --------------------------- Your "30-Day Retirement Plan" One month and three "Flash Action" market moves could be... Your Chance to Turn $500 into $14 Million. It's happened before. It could happen again - starting as early as next week... So will it happen to you? Read on here to find out.   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... Click to Learn More About Mobs, Messiahs and Markets.

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