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The Daily Reckoning Friday, November 6, 2009 Buenos Aires, Argentina Gold jumps to a new record high, eyes the $1,100 mark, Where might that barbarous ol' relic go from here? And why we're glad this doesn't look anything like a real recovery... ---- Introducing Options Hotline ---- Our readers could have turned $5000 into $1 million in just over 5 years "Each week, I tell my readers to make just 1 investment buy. And since November of 2006, not one pick has lost value! It's no wonder our readers could have turned $5,000 into $1 million in just over 5 years! Now, we're quickly closing in on $2 million - currently at $1,892,043.04! "Read on Here to find out how to start making huge gains!" - Steve Sarnoff, editor Options Hotline -------------------------------------------- Bill Bonner, reporting from Buenos Aires, Argentina... We left our Crash Alert flag up while we were away in the mountains. And for a while last week it looked like we were geniuses. Stocks seemed like they were going to crash. But along came two very important bits of information. First, we got word that the crisis was officially over. GDP grew last quarter. Thanks to all the Cash for Clunkers, Cash for Bankers, Cash for Houses, Cash for Trash, and cash for every other blessed thing under heaven, the number crunchers were able to report positive economic growth for the third quarter. Let's not get too excited. Stocks bounce. Bonds bounce. An economy bounces. Even dead economists bounce. And if we're following the Japanese experience, with a long, slow on-again/off-again period of depression, we can expect some quarters of growth, followed by quarters of non-growth. It's going to be a painful adjustment to the 'new normal,' whatever that is. The other important bit of news was that the Fed - faced with undeniable evidence of growth and prosperity - decided to err on the side of caution. It will keep monetary policy loose from here until kingdom come, if necessary, in order to avoid a Japan-style slump. But so far, a Japan-style slump is just what we seem to have...and our public officials are fighting it, Japan-style. Unemployment is headed up. The U6 figure - a more accurate picture of how many people are out of work - is up to 17%. There are 1.5 million homeless children in the US now, including 300,000 in the state of California alone. One out of 10 Americans will not bite the hand of government - for it is the hand that gives him his food stamps. Foreign direct investment has dropped 30%. International trade is down 10%. Do you call this a recovery? We don't. As David Rosenberg puts it, the man on the street is perhaps "less enthused by the fact that a lower rate of inventory de-stocking is arithmetically underpinning GDP growth at this time." In other words, it's 'growth' that only an economist could love...and then, only an economist who was an idiot. Rosenberg: "Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go - and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market. "Only 29% of those polled believe the economy has hit bottom - imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally - not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned." Growth is largely illusional. It is the result of delusional policy- making at the Fed. So, we'll just keep our Crash Alert flag flying. Meanwhile, gold hit a new record high yesterday. It's at 1,089. More on gold, below. The Dow went up too - 203 points yesterday. It's over 10,000 again. Not very impressive for a bear market bounce. A 50% retracement would take the Dow to 10,300. But you have to give the bounce credit. It's been going on since March. That is impressive. And now everyone is bullish, except us. We'll see who's right... in the fullness of time... Gold seems to be advancing towards a new milestone - $1,100. Makes us nervous. We always feel more comfortable out in the wide, open spaces...that is to say, in trades we have all to ourselves. But gold is still a marginal holding by marginal investors - like us. Central banks - especially those in emerging countries - have very little gold. The man on the street doesn't know anything about gold. He wouldn't know a gold coin if it hit him on the head. As gold becomes accepted as a true store of value, we can expect more and more people to want to own it. Governments are running breathtaking deficits...and accumulating alarming debts. Japan has a national debt of nearly 200% of its GDP. Where did that debt come from? It came from 20 years of trying to buy its way out of a slump with borrowed money. Of course, it didn't work. But now, Britain and America are following the Japanese lead...and the Japanese are still at it! At the present rate, Japan's government debt will grow to 300% of GDP in 10 years. America's debt could grow to 100%...and then 200% of GDP...over the next decade (depending on whose projections you believe). And Britain, if we read the report in The Financial Times correctly, will have debt equal to 200% of GDP within 3 years. Just what kind of crisis do these numbers portend? It's hard to say. Probably a combination of confidence, followed by debt default and inflation. Would the US actually default? We agree with Paul Samuelson; the answer is 'maybe.' Samuelson, writing in The Washington Post: "The idea that the government of a major advanced country would default on its debt - that is, tell lenders that it won't repay them all they're owed - was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn't. Well, it's still a very, very long shot, but it's no longer entirely unimaginable. Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then? "...People have predicted such a crisis for decades. It hasn't happened yet. The currency's decline has been orderly, because the dollar retains a bedrock confidence based on America's political stability, openness, wealth and low inflation. But something could shatter that confidence - tomorrow or 10 years from tomorrow. "Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates - and we don't know when, how or whether that may happen." Why wouldn't the US just "print its way out of debt?" Because it's not that easy. In effect, the feds are trying to print their way out of debt now. They've added huge amounts to the monetary base. But that money is not getting into the real economy. Instead, it's going into vaults and speculations. "Jittery Companies Stash Cash," says The Wall Street Journal. And banks, too, borrow...but they don't lend. They can borrow at negligible rates of interest...and buy US Treasury bonds on a leveraged basis...producing a 20% yield. That means, the US dollar has replaced the yen as the go-to currency for speculators. Net effect? Lots of cash in what appears to the Mother of all Carry Trades. The Financial Times: "The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualized - as the fall in the US dollar leads to massive capital gains on short dollar positions." But in the economy itself? As in Japan, very little economic progress comes from this kind of speculation. Bankruptcies rose 7% last month. Unemployment gets worse. The financial markets bubble up. The real economy shrivels up. And people with any sense are stocking up. David Rosenberg, again, on gold: We are still contemplating the massive gold purchase by the Reserve Bank of India - the largest in at least 30 years that took up half of what the IMF intends to sell. Look for China to come in next. But here is the reality. All India did was bring gold to a 6% share of its total FX reserves from 4%. Fifteen years ago, that representation was closer to 20%. China has increased its gold holdings by 76% over the past six years but they are a mere 1.9% of the aggregate 2.2 trillion of reserves and Russia's gold holdings is just under 5%. This is not the 1990s when Bob Rubin was running a hard US dollar policy, US fiscal deficits were vanishing and gold production was on the rise. Today's world is exactly the opposite. Policymakers beginning in the 1990s wanted disinflation and got it. Now they want inflation - it will take years, maybe a decade, but it will come. For the near-term, we are still optimistic on Treasury securities but be forewarned that this view has an expiry date that is earlier than the peak we are likely to see in gold. It is very clear that central banks are behaving in a way that would suggest that gold is now again being considered a currency within the global monetary system. As we said before, it is all about relative scarcity and a well-defined supply curve - fiat currency at this juncture does not share that quality. As a good friend reminded me yesterday, when the Fed was created nearly a century ago, it was acceptable to have at least 40% of the money supply backed by gold reserves. The US now has 8,133 tons of gold in reserve, which equates to $285 billion at this year's pricing. Meanwhile, the Fed has spiked the punchbowl to such an extent that the monetary base now stands at $1.7 trillion. Do the math - under the old regime (which indeed hamstrung the Fed), the US alone would need to buy an incremental $400 billion of bullion or the equivalent of what would be nearly four times the typical level of annual demand. We could do the same calculation based on M2 but we don't want anyone falling off their chairs. And finally today, we're still ruminating about what to tell you about our trip to the ranch. The funny thing was...it had little to do with cattle ranching...and a lot to do with the personalities that we brought with us. It's no easy job being a parent...especially when the kid is 38 years old...and not your kid. More to come on that another time... Until then, let's get to today's essay... --- Outstanding Investments Metals Research Report --- From Hulbert's #1 Ranked Advisory Letter Over a Five-Year Period... Even if Gold hits $2,000 by the end of this year...here's a hidden way you can get in for less than one cent per ounce. Over the next two years, you'll witness the greatest surge in gold prices in market history - at least 119% above where gold sits today, as I write this. But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per- ounce" gold. That is, doing this is a "backdoor" way to own as much of a position in gold as you like... for the equivalent of paying a single cent per ounce. --------------------------------------------------------------- The Daily Reckoning PRESENTS: As the unemployment rate soars to a new 26-year high and gold soars to a new all-time high, the distresses and difficulties of the American economy seem to be intensifying. But these signs of distress are nothing new to Daily Reckoning readers; we've been worrying aloud about these things for years. Today, however, we'll take a brief break from our habitual hand-wringing to explore one of the things America is "doing right." Read on for the details... The Future of Medical Technology By Doug Hornig Afton, Virginia In the future, a visit to your family physician, or any specialist, will begin with a quick scan of the computer screen, where a few keystrokes will tell the doctor everything he or she needs to know about you - all the way from how much you weighed at birth, to X-rays of that bone you broke when you flipped your motorcycle thirty years ago, to how much you spent on blood work last year, right up to the hypertension pills you took after dinner yesterday (and maybe even what you ate, although hopefully not). Much of your medical info is already stored electronically, of course, but much more is stuffed into old paper file folders. Nor is there any centralized database that routes your records wherever they are wanted. That is going to change, and change dramatically. The present system has too many embedded inefficiencies, and the industry wants them gone with yesterday's used latex gloves. Whether you like it or not, someday soon there will be a collection of bits and bytes that stores all the most intimate details of your health history. Making that happen is a daunting job, and a touchy one. On the one hand, think of how much medical data each American accumulates each year. Multiply that by 300 million. The amount of paper currently required to track it all would stretch to the moon. Doctors want to set fire to that stack. But on the other hand, they don't want their patients' records falling into the hands of every Eastern European hacker for whom such data would be a major arm shot to his fake Viagra business. Data security has to be tight. Thus software solutions must be developed both to serve and to protect. Billions will be spent in the process of digitizing, maintaining, and guarding medical records, and guess whose pocket the money will be extracted from. Did you select mine? Don't care for this idea of white jackets anywhere in the world having access to your private info at the click of a mouse? Or don't like the idea of footing the bill for the conversion? Well, tough. On both counts. You won't be able to prevent the medical business from setting up the grand database, nor from using your own money to manufacture the electronic you. In fact, the government has already installed the plumbing that will feed the big money shower. As in, very big. That happened on February 17, when President Obama signed the Health Information Technology for Economic and Clinical Health Act (HITECH), which its sponsors had tacked onto the comprehensive American Recovery and Reinvestment Act (ARRA). Everyone loves ARRA, right? Well, maybe. But citizens who cheered it might not have been quite so happy if they were aware of everything they were agreeing to fund with their hard-earned dollars. Buried inside HITECH is an allotment of $19 billion (yep, that's billion with a B) just for the conversion of paper medical records into electronic. Tell you who was cheering lustily, for certain: health care software developers. For example, maybe you read about the recent deal whereby Dell acquired Perot Systems, a premium software company, for about $4 billion. What that was largely about was HITECH. Dell didn't have real access to it. Perot Systems - whose annual revenues derive 25% from government and 48% from health care - did. Sound the wedding bells. Dell, of course, is by no means the only company eager to step into the generous governmental shower stall. You can bet that IBM, Hewlett- Packard, and the rest of the heavies in the field are all busily preparing proposals, if they haven't already filed them. And the big guys won't have that field all to themselves. There's a lot of cash to be spread around. Smaller competitors will nab their share. Those are the kinds of companies Casey's Extraordinary Technology searches for and recommends as longer-term investments. The ones whose bottom lines will profit the most from political largesse. Subscribers learned about one such firm in the September issue. There will be others, as anyone who has both a solid product and the savvy to play Washington's money game, is going to prosper mightily in the years ahead. Tech is the most vital industry in the United States. Learn more about how to profit from it - just click here. Regards, Doug Hornig, for The Daily Reckoning ---- Introducing the Lifetime Income Report ---- Enroll today and immediately start collecting "pension paychecks" every 15 days, for the rest of your life... Retirement, Plan B: Without doing a single moment's work, now you can legally sneak onto the "payroll" of nearly 1,000 of America's best companies... And collect a regular "Plan B Pension" check as often as every 15 days... At any age and for as long as you like, even after you've already retired... With nonstop annual incomes running as high as $120,000 or more... Step-by-Step Details In This Exclusive Report.   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.