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The Daily Reckoning Thursday, October 8, 2009 Is gold a bargain at $1,000 an ounce...or is it a trap? Or both? Preferring long-term positions on gold, stocks and commodities... The five things that we know for certain in this crazy economy... Addison Wiggin from the land of epic booms and busts: Dubai... Gold Touches a New Record by Bill Bonner London, England "Gold continues to climb...stoked by inflation worries," says a headline in the International Herald Tribune. Yesterday, it touched a new record - $1,050 - even as the dollar rose, oil slumped under $70 and stocks dipped very slightly. Well, what do you expect? The United States added $1 trillion to its monetary base in the last year or so. The federal government is running a deficit of $1.7 trillion this year. And along comes Barack Obama with an idea to stimulate employment - spend more money! This time, Obama's plan is a kind of 'Cash for Workers' program...in which businesses get a tax credit for hiring new employees. Gold investors must think the new program will be the straw they've been waiting for. Government has piled on bales of costly new initiatives on this poor camel's back. Still, he stands up straight. So, is gold at $1,000 a bargain...or a trap? Or both. We begin by asking: where's the inflation? We don't see any inflation. What we do see is deflation. Barclays Capital says gold could go to $1,500. We don't know where they got that number. It could go to $15,000 for all we know. Or it could go down, too. Our guess is that it will go down enough scare the bejesus out of speculators. Then, it will soar. But, hey, we're just guessing - along with everyone else. Sooner or later gold is probably headed to the lunatic moon. We're sticking with the yellow metal. We don't want to miss that ride. But when? Ah...we're going to stick our necks out and say "eventually." We're sure we're right about this. Just don't ask us for more precision; we have none. And what bothers us is that between eventually and now there could be a lot of time and a lot of trouble. And one trouble that could come up pretty fast is another crash in the stock market. If the stock markets of the world take another dive...like they did last year...gold will probably go down with them. Not as much, but down nonetheless. So, if we were speculating...we'd probably be short gold and short stocks too. We'd bet against bonds too - even though we think they will probably go up in the short run. The smart, long term money - in both stocks and bonds - is probably on the short side. Here at The Daily Reckoning, however, we never speculate - except in print. As to ideas about how the world works we have plenty. We speculate daily. As to gold, stocks and commodities, we prefer to hold onto our long-term positions. What seems fairly sure to us is that this recovery is a fraud. It's a mountebank and a flimflam. And now approaches a moment of truth - earnings announcements. Stock market investors bid up shares on the theory that sales and profits would rise. Will they? We don't think so. We think sales are going to be disappointing...and earnings will be even worse. If so, we'll see analysts begin to change their expectations...and announce that the results are "not as bad as expected." If we get a few really bad announcements - with results much worse than expected - it could sink the rally. Then again, if we're surprised with exceptionally good reports...it could send the market in the other direction. Good results will also cause us here at The Daily Reckoning to question our position. Maybe the economy is not sinking into a chronic depression, after all. Could we be wrong? Ha ha...are you kidding, dear reader? Of course, we can be wrong. When we were younger we were uncertain about things. But now that we're older, we're not so sure. [We are sure, however, that this recovery is a fraud...and could be more harmful to your existing wealth than you realize. Learn how to protect your assets (and build on your already-existing wealth) in our free special report. Get it here.] Now for the news, from The 5 Min. Forecast: "The credit crisis has forged an even larger gap between the rich and poor, though it might not last for long," writes Ian Mathias in today's issue of The 5. "The richest 10% of Americans made at least $138,000 each this year, according to Census data released last week. That's a record high 11.4 times the average income for the opposite end of the spectrum: the poverty line around $12,000. Pre-crisis multiples were closer to 11.2. "The middle class is getting credit crunched too. The median household income has fallen $1,860 over the last year - wiping out a decade of slow gains - to $50,303. "But if history is any guide, this trend may be near its peak. At present, about a quarter of America's total income is earned by 1% of its population (amazing, eh?). That level has only been attained once in US history - ironically, 1928, right around the start of the last economic depression. What followed then was a 50-year trend in the other direction. "We suspect history will rhyme this time around, if not flat out repeat... Between Wall Street, Washington and even Hollywood, it's open season on the über-rich." Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as Resource Trader Alert. RTA's latest report details a trading strategy that will help you rake in some nice gains in a short period of time...without having to touch stocks. Get the full report here. And back to Bill, with more thoughts: Here is what we're pretty sure about: 1) The credit cycle has topped out. Americans are saving - think of the poor boomers, 10 years older but not a penny richer than they were in 1999. Stocks have gone nowhere but down in real terms. Houses hit a high in 2006...now, they're off 30%...and still going down. Jobs? Forget it...there are already 15 million people who are unemployed and about 200,000 more every month. The job market is unlikely to recover for another 6-13 years - that is, after many of the boomers are retired! And if you are lucky enough to have a job, you're not likely to get a raise...not with so much spare capacity in the labor market. Under those conditions, a consumer boom is very unlikely. 2) We know that a period of credit contraction is deflationary. Prices go down as demand falls. Buyers disappear from the malls that once knew them, while the factories that produce stuff grow dusty and quiet. But we know the feds hate falling prices. And we know they are taking extraordinary actions to get prices to go up. So far, their efforts have been a giant flop. Prices are falling in the United States at the fastest pace since the '50s. Most of the feds' efforts have been directed towards keeping the bankers fat and happy...and getting themselves a bigger share of America's output. They took funds designed to relaunch the US economy, for example, and used them to buy themselves a big position in the auto industry, the financial industry and the insurance industry. 3) We know too, by the way they conducted themselves in those affairs, that the feds have become much more aggressive...throwing their weight around in the private sector as never before. What we don't know is how this affects markets in the short term. So far, consumer prices are falling, but the stock market is enjoying a bounce. It is a real, new bull market? Or just a bear market bounce? It is probably a bear market bounce...but it has been going for long enough that we have to at least consider the idea that it is a genuine bull market. That's why the numbers from this quarter are important...they'll tell us if the companies themselves are expanding earnings fast enough to justify investors' optimism. 4) We know too that there is a whole lot of 'flation going on. We are just unable to tell you what kind of 'flation it is. The monetary base is way up - it increased by $1 trillion in the last 12 months. But the money-in-circulation has barely budged. The feds give the banks overnight loans at practically zero interest. Then, the banks lend it back to the feds at nearly 4% more. What happens to it then? Well, what do you think...it is wasted on typical federal government scams and humbugs. So, relatively little of the money actually ends up in the consumer economy. And so, we can't tell you whether the 'flation will have a 'in' prefix or a 'de' prefix. They're just two letters. But they will make a whole alphabet of difference to the economy and to your investments. 5) Most important, we are dead sure that the people running America's financial policies are jackasses. We say that with all due respect, which is probably not much. They have only one idea - and it is a bad one. They think economies are improved by more consumer spending. They don't seem to care why consumers occasionally cut back on their spending. All that matters to them is finding ways to get the consumer shopping again. So they try tax cuts and government spending...bailouts and boondoggles...zero interest lending and federal takeovers...cash for clunkers, cash for houses, cash for employees.... ..trillions worth of claptrap and folderol. But what a nuisance! The fool consumer still won't shop! But they're determined to keep trying. That's why we can be pretty sure that, eventually, they'll get inflation rates up. One way or another. And then, gold at $1000 will seem like an outrageous bargain. (That's why you should get your share of it now.) Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: As we told you yesterday, Addison Wiggin and Chris Mayer are currently exploring the vast marketplace that is Dubai. Below, you can find Addison's thoughts on the land of epic booms and busts. Read on... Inshallah, Build It And They Will Come by Addison Wiggin Dubai, United Arab Emirates For a property virgin in the region, the City Scape 2009 real estate expo in Dubai was over-the-top nutty. Even for a city that has seen a 50% drop in property values in 18 months, the projects they have planned are limitless in their imagination. Not content with one giant archipelago of manmade islands in the shape of a palm tree...they built three. But even that wasn't enough; they built a replica of the Earth in islands...surrounded by the sun, the planets and the universe, three hundred high-end real estate islands. The only trouble? They've run out of money and investors. Two of the palm islands are washing away in the waves...to say nothing of the Earth, the sun, solar system and universe. But that doesn't stop the dreamers from trying to fund new projects. We've spent the week essentially living in an ultra chic mall. Our hotel is connected on one end to the largest mall in the world. In this part of the city, New Dubai, everyone - the expats, the imported workers, the Emeratis and their guests - basically live inside because it's too hot to go out. It's quite literally the desert. The whole new city is comprised of tall buildings with dusty constructions zones in between. Each parchment of land that isn't under construction is a patch of shifting sand. Yet, something like three out of five building projects have stalled completely...the contractors have just walked off the job. The mall we're attached to has every high-end store in the world. They have a Galeries Lafayette bigger than the one in Paris. Then every brand name you can imagine. BCBG Maxazria. Versace. Bloomingdales is opening a 4-story store in January. Armani has a cat walk right in the middle of the mall. There's an ice rink and aquarium in it, too. Outside sits a faux lake surrounding the Burj - the world's tallest building. Every night there are fountain displays choreographed to Arabic, Indian and African music. The fountain shoots water 50 stories in the air. Boats will be installed to help you move around the lake, like a water taxi in the Inner Harbor in Baltimore. It's a fantastic design, in the pejorative sense. While meandering about the place it's hard to stop asking basic questions: who will be sitting in the French, Italian, South African, Lebanese restaurants being opened along the shores of this new paradise? Who will be shopping in these "fashion forward" boutiques? Who will occupy all the thousands of units of office space and what kinds of business will they be engaged in? Who will live in the hundreds of tall dark glass towers? Each of the expats we've run into have been scratching their heads wondering what the fate of their business or job is going to be. The locals don't seem to care one way or the other. Still, there's zero unemployment, because once you don't have a job... you get exported. The laborers who've been imported from India, Nepal, Thailand, Vietnam and Pakistan are on two-year visas. Once they're jobs are up...out they go. Yesterday, after wandering around the immense real estate expo for several hours - replete with expansive models of future fairy tale development projects yet to find financing - we walked into the stock market. It is housed conveniently in the building next door, which itself was the first high rise built in the city back in the 1970s. I was asked by a young man near the door to leave my camera, but there was no security to speak of. We just walked out on the floor where the Emeratis were trading stocks, all wearing their white dishdashas. Despite the fact that we were there half an hour before the close, many of the stocks listed on the board reflected zero trades had been made during the session. Still, last night, while having martinis in a bar on the 63rd floor of the Address hotel in the shadows of the nearly kilometer-high Burj, our friend Peter Cooper, a British expat who has been a witness to the Dubai experiment for 14 years, helped put the whole city into context. The Sheiks used to invest all their money in the West, he explained. But after 9/11, the Patriot Act, the wars in Iraq and Afghanistan, they were afraid their money wasn't safe anymore. They feared it was in danger of being confiscated. "Here in Dubai, there is little money from oil or gas, it’s mostly trade, Western conglomerates setting up shop in a low tax jurisdiction and real estate. And, since the bust...debt." At the time, they didn't really have anywhere to invest it...so following the precedent set by Hong Kong in the '50s and '60s and Singapore in the '70s and '80s, they set out to build a world class financial center overnight. It has caused several booms and busts and all kinds of crazy property development plans, because they had way more money to work with when building the city out. And it's even weirder right now because they're only a few months off the bottom of the latest bust. Still, the city is still full of Russians, Iranians, and Pakistanis with money, all looking for somewhere to invest safely, too. The city is a bit like Switzerland in World War II; there is war and political intrigue all around them, but for the time being, they're putting up a stoic front and seeking to provide a tax friendly haven to all. At least, we believe that's what they'd like you to think. Peter was encouraged by the number of people at the real estate expo. Last year the convention center was a ghost town. In the years before they'd been packed with investors from all over the world. Michael Douglas, Catherine Zeta Jones and Michael Jackson lived here and helped promote some of the local investments. The number one tennis player in the world, Roger Federer, famously moved to, and trains in, Dubai. But after the bust...no one comes around anymore. This year, the construction on key projects like Burj has started up again. So the feeling and hope is that the bottom is in and a new sense of reality has brought back "bargain hunters". Two years ago Donald Trump gave the keynote address at the expo, this year he sent his son, Don Jr., to do the honors. The sheiks and property developers, with their remote heir of superiority, don't lament the bust. Inshallah is a local term meaning, more or less, "god willing" or "we don't really know how these things will work out, but we have faith they will." And in some cases they have - phenomenally well. The Burj is a perfect example. As the story goes, when the design for the tower was first being shown to the Sheik, it was meant to be the second tallest building in the world. To which the sheik responded, "Why not the tallest?" It seemed preposterous...and yet there it is, towering just outside the window to my hotel. All of the units in the building were sold before building even began. The five-star Atlantis Hotel at the tip of the first Palm Island is said to have only taken 18 months to start turning a profit. In that light, some of the fantastic plans at City Scape almost sound like good business. Provided, of course, investors continue to answer the beckoning call of Dubai from the far reaches of the earth. Further, there is a sense that booms and busts are the best way to build the infrastructure for their new world-class city overnight. The government in Dubai is spending nearly half of its annual budget on roads, bridges and modern energy and communications systems. One gets the sense that if these busts persist, the national government in Abu Dhabi will just throw money down the pot until the next boom begins - even if that's years away. Here in Dubai, there is little money from oil or gas, it's mostly trade, Western conglomerates setting up shop in a low tax jurisdiction and real estate. And, since the bust...debt. We are, in fact, off to Abu Dhabi today. According to our German-born Australian friend Dr. Andre Homberg, Dubai is like the call girl beckoning the world to take notice of the capitalist miracle burgeoning here in the desert, but Abu Dhabi is like the queen - regal, relaxed and rich. The GDP per capita in Abu Dhabi is reputed to be $60 million. The real estate projects in Abu Dhabi exhibited at the expo were more highly visible than at previous affairs. Many of them are more subdued than the fantasyland projects of Dubai - they target the world's richest. They promise to bring the green revolution to the desert...and to assuage an over-the-top fascination with Formula 1 racecars and Arabian horses. Abu Dhabi is the only of the Emirates in the UAE to "earn" their money from oil. Businesses there open at 10 AM and close at 3 PM - "Abu Dhabi" time, they call it. But they, too, are afraid of Peak Oil and emissions regulations clamping down on the era of cheap oil. So in the newspapers and around the shisha bars you hear discussion of the UAE's entrance into the nuclear era. The government is buying French technology and planning to build nuclear reactors under the sand, then pipelines for wires extending all the way to Europe. They expect to be able to sell energy to European consumers for $0.05 a kilowatt, thereby maintaining their position as low cost energy providers to the West. The other night, Andre introduced us to a Bahrainian-Qtari whose mother was an Iranian-American. His name is Mo. Mo works for a state-owned media company in the capitol city. Today, Mo is prepared to show us all the amenities Abu Dhabi has to offer if we're interested in moving our publishing operations to his great city... The same amenities he apparently wooed Forbes publishing with. They're opening a new office in Abu Dhabi in the spring. If Dubai is a bastion of low-tax speculation, booms and busts, Abu Dhabi appears to be a well-oiled (sic) government-sponsored machine. We'll have to let you know how our meeting with Mo goes. Regards, Addison Wiggin The Daily Reckoning P.S. In the meantime, be sure and check out my latest special report for our newest service. This report details the one country leading the way with the most aggressive wealth creation on earth...and how to play it. And if you act now, you can secure your charter membership to our newest service...and get in at 50% off the regular price! Get your foot in the door for your chance at the best opportunities and biggest profits in the years ahead - click here. Editor's Note: Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, a multi-million dollar financial research firm and publishing group based in Baltimore, Maryland. His second edition of The Demise of the Dollar... And Why it's Even Better for Your Investments was just fully revised and updated. He is also the executive producer of and a writer of I.O.U.S.A. a feature length documentary film nominated for the Grand Jury prize at the 2008 Sundance Film Festival. The film is inspired by the international bestsellers Financial Reckoning Day and Empire of Debt, which he coauthored with Bill Bonner. The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.