Britannia Radio

Wednesday, May 27, 2009 A thought or two on what's really going on in the markets... The Federal Ponzi scheme is doomed to fail like all the others... Why our Trade of the Decade may be the Trade of Two Decades... Byron King on inflation and the rush to precious metals...and more! ----------------------- Special Offer ------------------------- Who's Laughing Now? With all the flack you've taken over the years for singing gold's praises, wouldn't it be nice to laugh right back. Well, today is your lucky day. Starting this month, you can be one gold bull who doesn't have to take it lying down anymore... With opportunities to make up to 20 times your money. But hurry, this 10-minute step is only available until 5 PM, May 29. Read more here. --------------------------------------------------------------- Bizarre Conditions for a Bull Market by Bill Bonner London, England Stocks were up yesterday...the Dow rose 196 points. What were investors thinking? "Home prices fell more than forecast," reports Bloomberg. They're still going down at a 19% rate. Unemployment is still rising too. The state with the biggest economy in the nation is going broke. So is the nation's biggest manufacturer. Profits are falling. And the government is racing to put in place a form of state-sponsored socio- capitalism much like Mussolini's Italy...or Peron's Argentina. These do not sound to us like ideal conditions for a bull market. Did we say thinking? There's not much thinking going on. People don't often think...not if they can avoid it. And it's probably better that they don't. Who knows what opinions they might come to if they put their minds to it? Instead of thinking, they react. And after a big drop in stock prices, they bounce. We're now in an extended bounce...which could last until mid-summer...and could take the Dow back to 10,000. That is to say, there is nothing unusual about this kind of stock market action. Au contraire...it's classic. Investors are also reacting in the bond market. They're buying Treasury bonds in reaction to bankruptcies, defaults and falling asset prices. Investors feel they can put their money into Treasuries and not worry. But maybe they should spare a thought or two about what is really going on. Lending money to the US government is no sure thing. Far from it. In fact, under the present circumstances, lending money to the feds is asking for trouble. Recently, you could put your money in T-bills and get zero yield. "An extraordinary thing..." said Warren Buffett - so extraordinary that he was "not sure [you'd] see that again in your lifetime." The US Treasury market is in a bubble. Like all bubbles, it will pop. And as always, when bubbles pop, there are those who get hurt - and those who profit. The difference is how well you're prepared for it. On the numbers, the US government is the worst credit risk in the world. You determine a man's creditworthiness by looking at his balance sheet. Add up his assets and subtract his liabilities. Do that to the federal government and you get a very big number with a minus sign in front of it. Even if they were to sell off the Capitol building and all the federal lands west of the Mississippi, the feds would still have a hole in their finances larger than any other in the entire world. While the balance sheet looks awful, the cash flow is worse. In the current year, the feds will take in about $1.9 trillion in taxes and spend $3.6 trillion. In other words, the feds aren't just living beyond their means...they're not even on the same planet. Who in his right mind would lend to a spendthrift whose outgo exceeded his income by nearly 100%? The only way any loan can reasonably be repaid is from income. Income must exceed expenses or there will never be money for debt repayment. Lending to a corporation or an individual, the lender expects the borrower to earn his way out of debt. Otherwise, it's a fool's game. The debtor is soon kiting checks and going deeper in the hole. He borrows from one lender in order to pay off the first lender... In effect, he operates a pyramid scheme - depending on fresh suckers to keep giving him new money - until the whole thing comes crashing down. The federal government doesn't even pretend that it is going to earn its way out of debt. It presumes that there's an endless supply of money it can borrow...and new suckers born twice a minute who are willing to lend. But this is exactly where all Ponzi schemes crack up. The fed's pyramid will fall in the same spot; where it runs out of new money. Mr. Obama says he plans on cutting the budget deficit in half by the end of his term. Let's see...that's four years out. If he's true to his word, that will mean deficits averaging about $1.5 trillion a year...or about $6 trillion total. Where will that money come from? What sucker has that kind of cash? America's savers are putting their backs into it. They're saving about 4% of GDP currently, which could rise to 5%. They typically only put less than one percent of their wealth into Treasury paper; but let us imagine that they use every penny to buy it. Over Obama's term that could be as much as $2.4 trillion. The other big buyer is the Chinese. If they were somehow able to continue buying at the same rate that they have for the last 6 months, that would add $2.8 trillion more. So even if both these Hollywood endings should come to pass, the show would still be a horror. There would still be $800 billion worth of Treasuries left unsold. More likely, Americans might multiply their purchases of Treasuries by 10 times...not 100 times. And more likely, the Chinese might buy another $1 trillion or so. But sooner...not too much later...buyers are going to begin to notice that there aren't enough of them to keep this Ponzi scheme going. The smart ones will head for the exits early...the slow and the dull will be crushed at the doorways. Now more news from Ian, back in Baltimore: "You know the dollar's back in the doghouse - the dollar index just capped off its worst week since 1985." writes Ian in today's issue of The 5 Minute Forecast. "But what's the best-performing currency of the year thus far? Any guesses? "The Brazilian real overtook the South African rand today as the world's best-performing currency. Brazil posted a $146 million current account surplus in April, its government announced yesterday, the first such surplus since September 2007. Brazil's government has introduced aggressive new tax cuts and new trade agreements (mostly with China), and has thus become the darling of the currency trade. Low taxes, open trade and account surplus is good for a nation's economy? Huh... Who'd have thought? "'And any current account figure that's written in black is good for a country and its currency!' chimes in our friend Chuck Butler. 'And the real is no exception to this rule. "'The real is trading this morning at 2.0060, spittin' distance from losing that "2" handle! (The real is a European-style priced currency, so the lower the price, the more value it returns versus the dollar.) The real hasn't seen the underbelly of a "2" handle since October of last year! "'You may recall last fall, I wrote about how the real was holding serve, but eventually, it had to give up ground, with the euro losing value and commodity prices circling the bowl. But now that the euro and commodity prices are on the rise once again, the real is back in the driver's seat.'" Every business day Ian Mathias writes for The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of economic and financial developments - in five minutes or less. It's a service available free only to Agora Financial's paid publication subscribers. One such newsletter, Wayne Burritt's Easy Money Options, offers a "bread and butter" technique for discovering the most lucrative gains around...like 150% plus in as little as two weeks. Click here to learn more. And now back to Bill with some more thoughts: The price of oil remains at $62...the American peso is still trading for peanuts ($1.39 against the euro)...and gold lost about $5 yesterday; it trades this morning near $953. Do you have your positions in gold, dear reader? We hope so. We advised readers to buy gold when we first began our Daily Reckonings 10 years ago. Back then you could have bought an ounce of gold for less than $300 any day of the week. Today, you'll have to pay more than 3 times as much...and you could have to wait a few days to find gold coins. That is, unless you're clued into something no one else knows about... Like how to buy gold for just one penny per ounce. Of course, you remember our "Trade of the Decade"? It was very simple. Buy gold on dips; sell stocks on rallies. We're almost at the end of the decade. So far, we've got a nice profit on the gold side. And a nice profit on the stock side too. And we're beginning to wonder what our trade will be for the next decade. Why do we trade just once a decade? Mostly because it's hard to figure out a winning trade; we're too lazy to do it more than once every ten years. But it turns out that frequent trading is a losing proposition anyway. Major trends are the only ones you can spot reliably...and they take time. In the present case, our Trade of the Decade may turn into the Trade of Two Decades. Because neither the bull market in gold nor the bear market in stocks has fully expressed itself. The price of gold is barely higher, in nominal terms, than it was 29 years ago. Some people will look at that bit of information and conclude that gold is always a losing bet. We conclude that it is sometimes a losing bet. Other times it is a winning bet. For the last ten years, gold has been in the money. Even so, it would have to nearly triple from here in order to beat its price record (in real terms) set a generation ago. There are good reasons to think it might. Not the least of which is the aforementioned shortage of ready cash to fund the US government's deficits. As the supply of Treasuries increases, the supply of willing and able Treasury buyers is likely to lag. Into the gap comes the Federal Reserve, checkbook in hand. Rather than allow Treasury yields to increase - which is what happens when there are more borrowers than lenders - the Fed will do the buying itself. It will buy, not with savings but with money of its own making. As the Fed creates more new green money, the old-fashioned yellow money is likely to look better and better. Perhaps only because it will be harder to find. There are about $1,600 trillion worth of derivatives in the world...$125 trillion worth of real estate and business assets...$100 trillion worth of stocks and bonds secured by assets...$65 trillion worth of government bonds (rising rapidly)...$4 trillion worth of actual currency...and only between $2 and $4 trillion worth of gold and silver. We'll take the gold and silver...at least until the bubble in Treasury debt blows up. Until tomorrow, Bill Bonner The Daily Reckoning P.S. As we mentioned above, we know that some people consider gold a losing bet. No doubt you've run into some of those people - especially over last year. But what they don't know about our favorite yellow metal could have you laughing all the way to the bank. We've got big news set to drop on Friday, May 29th at 5 PM - and we want you to be the first to hear it. Click here now for all the information. The Daily Reckoning PRESENTS: Things have gotten out of hand in Washington...with the constant bailouts and out of control spending. Bryon King believes that all of this leads to one thing: inflation. And when that happens people will rush to gold. Keep reading to learn how to beat the rush... The "Axis of Overspending," Inflation and the Rush to Precious Metals by Byron W. King Pittsburgh, Pennsylvania I have been banging the drum so hard for precious metals that readers must know the drill by now. Government spending is out of control. We have a big-spending Congress in Washington that can't say no to anything (except the token defense cut, or taking away school vouchers from inner-city kids in the District of Columbia). It's been going on for way too many years, under both previous and current party management. Everybody who's anybody in this country, it seems, gets a permanent, pet government program, if not a large bailout. (Huh? You didn't get your program or bailout?) How long can it last? I think we're about to find out. As Bernie Madoff might say, "Bailout, schmailout." Still, the axis of overspending leads to inflation. It's the 1970s redux. And inflation will soon rear its head and roar so loud that even the wizards of Washington will have to admit the obvious. Actually, our betters in Washington are waking up to the issue of inflation and the decline of the dollar. Just yesterday, I received an inquiry asking if I want to appear on a nationally syndicated show that originates from Washington, D.C. (well, Alexandria, Va., to be exact). The audience is Washington people - you know the type - and their intellectual and spiritual kin in "blue spots" across the country. Here's the exact inquiry: "We're doing a story on hoarding behavior and I am looking for people who have taken some (or all) of their savings out of traditional investments and are now storing money as cash or in the form of physical gold or some other precious metal in a safe or secret place. I am having trouble finding anyone like this. Do any of you know of someone who fits this description, who might be willing to talk to me about it? I am looking for someone in Boston; Washington, D.C.; New York; or maybe Chicago. If anyone has any leads, please let me know!" Oh, man! That's rich! Verbatim! Honest to God, I have not edited this inquiry by EVEN ONE WORD! These people are clueless! The producer wants to interview gold bugs for the show. In an anthropological fashion that would do Margaret Mead proud, the subject of the story is "hoarding behavior." But the poor producer says, "I am having trouble finding anyone like this." (Like looking for a registered Republican at the Harvard Faculty Club?) And how about that request to find somebody in Boston, Washington, New York or Chicago? If you're from, say, the silver mining town of Wallace, Idaho, you need not apply. Here was my reply: "People who've taken their savings out to buy gold and store it or hide it probably don't want to brag about it on NPR." "...the axis of overspending leads to inflation. It's the 1970s redux. And inflation will soon rear its head and roar so loud that even the wizards of Washington will have to admit the obvious." Remember that line from the movie Apollo 13? "Houston, we have a problem." Wow. Do we have a problem in this country, or WHAT? It's WORSE than Apollo 13. We should be so lucky as to be in a small capsule in the cold of space heading away from Earth toward the moon with almost no oxygen or electrical power. Instead, we're watching the national currency declining and dying right before our eyes. And the opinion makers of the nation don't know anybody who owns gold. Amazing! Well, the producer could always go find somebody in Dubai. Because from that distant desert kingdom comes word that the Dubai Multi Commodities Centre (DMCC) has finished building a state-of-the-art precious metals vault, with world-class tracking and security systems. Think Fort Knox, but in the desert and without the trees and pretty landscaping we see in the hills of Kentucky. You want "hoarding behavior"? The new vault will become the home for the exchange-traded fund (ETF) of Dubai Gold Securities. Also, "It's a natural home for the central banks in the region to store their gold in Dubai, rather than in London, where they have typically held their gold," said a Dubai-based gold dealer INTL Commodities DMCC's CEO Jeffrey Rhodes. Yep. "Natural home." (Margaret Mead, call your office!) A DMCC official stated that the new vault will be used to store precious metals associated with precious metal-based ETFs that are on the drawing boards and scheduled for launch later in 2009. This can only add to worldwide demand for gold and silver, especially from the traditionally gold-friendly Middle East. OK, so here's the bottom line. When the American people realize that the dollar is in for another round of inflation, they're going to look for a way out. When people envision the future decline in their purchasing power, we'll see a rush for the monetary exits. It'll be the "Gold Panic" of 2009, or 2010 or 2011... Whichever year gets the naming rights. When the reality sinks in, people will flock in droves to physical precious metals (yeah, try to get some!), as well as mining shares. I'm old enough to remember the last time it happened, in the 1970s and early 1980s. And I've studied enough history to know it won't be pretty. So beat the gold rush! Hoard now! Until next we meet, Byron W. King for The Daily Reckoning Editor's Note: The above was taken from the latest issue of Energy & Scarcity Investor. At 5 P.M. on May 29, he's offering ESI readers a chance to transform their life, existence, and wealth - beyond anyone's wildest dreams. There's going to be one simple set of recommendations that arrives in your email inbox at 5 PM EDT on Friday, May 29. Just follow those recommendations and you're good to go. Learn all about it here. Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also editor of Outstanding Investments and Energy & Scarcity Investor.