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The Daily Reckoning Thursday, November 12, 2009 Gold crashes through another nominal record, and where to next, How to buy a politician: A chart that ought to make your blood boil, Is the United States really turning Japanese? And plenty more... --------------------------------------------------------------- Bill Bonner, reporting from Buenos Aires, Argentina... The Dow rose again yesterday - up 44 points. Gold went up too - to a new record of $1,114 [then continued to $1,122.85 per ounce in Asia]. Can anything stop stocks and gold? Trees do not grow to the sky, dear reader. And for every bounce there is a bust. --- Five More Ways to Ride Gold to New Record Highs --- From Hulbert's No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet... GOLD $2,000 "I'm so sure gold will soar higher I'll even make you a guarantee... plus, I'll give you five entirely new ways to play the trend..." "Including one hidden way to snap up gold... for less than one penny per ounce..." --------------------------------------------------------------- "It's amazing; the US is doing everything that Japan did wrong," said a friend yesterday. Let's see, in the 1980s Japan's corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses. In the '80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights. For example, instead of saying that businesses always need to try to do things better, they referred to "kaizen" as if it were the secret of success. And US economists urged the Reagan Administration to have an "industrial policy" - because that was what Japan had. Japanese businesses were the envy of the world. Japan was the world's second largest economy. But in growth and stock prices it was Numero Uno. It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall. The stock market crashed in Tokyo in 1989. The Japanese economy entered a recession. At first, the experts believed it was temporary. They urged investors to take advantage of the opportunity to buy into Japan, Inc. at record low prices. They thought Japanese industry was unstoppable...unbeatable. It would recover in no time, they said. But Japan, Inc. didn't recover. Instead, it went into a long, drawn-out recession that lasted year after year...with on-again, off again deflation...and several stock market rallies. Each time stocks rallied, they fell again. Each time the economy began to grow...along came another setback. This continued for the next 20 years...until March of this year...when Tokyo stocks hit their lowest point for the whole bear market. A generation of investors had been nearly wiped out. Over two generations they had made nothing. Trillions worth of wealth had been erased. What did the Japanese authorities do during these last two decades? They fought the correction every step of the way, with the boldest attempt at fiscal and monetary stimulus every undertaken up to that point. Interest rates came down to effectively zero. And government spending soared, creating the largest deficits in Japanese history. Now, Japan's national debt approaches 200% of GDP - a peacetime record. If it continues to grow at this rate, it will hit 300% of GDP in just a few more years. Sound familiar? It should. The key US interest rate is now effectively zero. The Fed says it will leave it there for "as long as it takes." And deficits have reached staggering levels - 13% of GDP. At this rate, the US debt/GDP ratio will hit 100% in just a few years. And if it continues, US debt/GDP will reach 200% not long after - as recession- reduced tax revenues meet stimulus-increased outlays. But wait...the feds say they won't let it happen. They'll turn this thing around. The economy will begin to grow. Tax revenues will rise. Prices will go up. Hey...that's just what the Japanese said! So far, the US is doing almost exactly what the Japanese did...propping up zombie companies and stimulating the economy as best it can. But if it does the same thing the Japanese did, won't the US get the same results the Japanese got? Here is where it gets interesting. Because the US economy is not exactly like the Japanese economy. Japan had high savings...and a positive trade balance. It could run up huge government debts and "owe it to itself." It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds...or selling them suddenly. America's government debt is different. The US doesn't save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America's ability or willingness to repay its debts, they'll drop the dollar like an annoying girlfriend. And when they do, the whole global monetary system will come crashing down. But suppose savings rates go up in America - to, say, 10% of GDP, like they were before the bubble years. That would make $1.4 trillion of savings available to finance the feds' deficits. And suppose the slump continues...as we think it will, with another big scare in the investment markets. People will seek safety in...yes, you guessed it...US bonds. This will take the pressure off the dollar and permit the US to finance its countercyclical spending without depending heavily on foreigners. The recession/depression will be annoying...but not insufferable. And Bernanke will figure het has more to lose by undermining the dollar than to gain from it. In that case, the Japan- like slump could go on for many years - just as it has in Japan! --- Invest in Commodities with the Resource Trader Alert --- Locked away for 136 years, now open to you: Here's How You Can Legally "Hack" Your Way Into the World's Most Secretive "Millionaire's Market" Right NOW you can legally "hack" your way into the financial community's best-kept secret: the "Millionaire's Market." Once inside, you'll have a chance to legally "withdraw" $810 or more per week - and you'll be able to deposit the money directly into your retirement account! --------------------------------------------------------------- As we've often said in this space, there is no situation so bad that government can't make it worse. Ian Mathias, editor of The 5-Minute Forecast, has yet another example of this with today's news... Back in the States, Congress is trying to clean up the mess from our own easy money fiasco. Grab your galoshes...some serious slop to wade through today. Sen. Chris Dodd unveiled a whopper of a bill, one that might cause the biggest financial and monetary shakeup...umm...ever. Like most of Congress, we've barely cracked the 1,136-page affair...but here's what we're picking up thus far: Under the proposed bill, the Fed gets stripped of almost all its banking oversight and consumer protection powers. Bernanke and company will be used only to determine monetary policy. The bill would create three new government agencies: One would be designed to regulate banks, essentially combining the current powers of the Fed, the Federal Deposit Insurance Corporation, the Comptroller and the Office of Thrift Supervision The second new agency - the Agency for Financial Stability - would be a "council of regulators" that would monitor systemic risk, enforce capital standards, limit leverage and even break up companies if Congress sees fit The third agency would be called the Consumer Financial Protection Agency, which will save us from ourselves by regulating consumer mortgage, credit and investment products The SEC, for all its glory, gets more power and more money. Hedge funds with more than $100 million will have to register with the SEC and disclose more information. Investment advisors and ratings agencies will also be targets for stricter oversight. Looks like the most complicated regulatory system in the world is about to get much more complicated. Well keep an eye on it. The real question: Who will benefit from these proposals? Follow the money... Shameful. How's this for reform...the world's biggest banks should not be allowed to buy a campaign for the chairman of the Senate Banking Committee. Shameful indeed. So, how about some good news? Well, good news for gold holders, at least. Today's essay is below... --- A Special Report from Capital & Crisis Research --- Urgent Retire-Easy Alert: Introducing the Single Best Way to Make Sure You'll Never Run Out of Money... The Endless "PAYCHECK PORTFOLIO" In three simple steps, unleash a steady flow of work-free income... starting with up to 48 automatic "paychecks" deposited directly into your account. Act now or risk missing the next "payday"...* *Two "paychecks" per day on at least eight of the days listed. --------------------------------------------------------------- The Daily Reckoning PRESENTS: Yesterday gold climbed atop another all time nominal record. That's a long way from its all-time high when adjusted for inflation, of course, but it's what one might call "a start." Capital & Crisis editor, Chris Mayer, has some details for our dear gold bugs... Another Reason to Buy (More) Gold By Chris Mayer Gaithersburg, Maryland The age of de-leveraging is upon us. Bad news for the US economy; good news for gold. For the past 60 years, corporate debt has grown faster than the economy - 4.1% annually for debt, compared with only 2.7% for the economy as a whole. In short, more and more debt went toward producing each dollar of GDP growth. What if this 60-year trend reverses? In fact, I think that is the likely scenario. The deleveraging will take some time...and it won't be fun. "Today's overleveraged assets will become tomorrow's underleveraged assets, and vice versa," QB Partners, a hedge fund, explained in a recent letter to shareholders. What will this new world look like? More people will save more money. And they will focus more on preserving that wealth than on making a big score. We've been here before. Michael Farrell, the chairman of Annaly, says the psychology of people will change as it did for those of 1930s, as he discussed on his company's first-quarter conference call: Exhausted by the uncertainties of the 1930s and 1940s, the older generation just felt lucky to be alive and they settled into a time of saving, preservation of capital and lowered expectations as consumers. If that kind of financial orthodoxy takes root, then leveraged assets like real estate and bank balance sheets face a long period of stagnant returns as they continue to deliver - that is, as borrowers and lenders ratchet down the debt on these things. (I find it ridiculous that government officials want us to believe that the US banking system is OK at 25-to-1 leverage. The banking system's insolvency will become more apparent as it continues to take losses from bad debts made during the bubble.) Deleveraging puts pricing pressure on leveraged assets. Banks must raise capital, diluting their shareholders and hurting their stock prices. Real estate owners must sell property to raise capital to defend other properties, thus putting pricing pressures on real estate assets. And so on... So as an investor, it will pay better to stick with the unlevered assets, which face no such head winds. After all, there is no pressure to sell an asset with no debt, no ticking clock. "What are the most underleveraged assets?" you ask. QB Partners gives the answer: hard assets and natural resources. The ultimate unlevered hard asset may be humble old gold. In fact, something important is happening in the gold markets right now. All through the 1990s to the present day, the world's central banks were net sellers of gold. Europe's central banks, for instance, have sold 3,800 tonnes of gold in the last 10 years. According to The Financial Times, this move has cost them $40 billion, and that's with gold at $900 an ounce. Well, too bad for them. But suddenly, that recent habit of selling gold is changing. Last year, central banks sold only 46 tonnes, which was the lowest amount in 10 years. As the FT reports: "Sales in Europe have slowed to a crawl and fresh demand is emerging elsewhere and the financial crisis has helped to highlight gold's value in turbulent times." In fact, we may soon see central banks flip to net buyers of gold. China has doubled its holdings of gold this year and is now the world's fifth largest holder of the metal. China is likely to be a buyer of gold for years because its gold holdings are still very small relative to the size of its total reserves. Gold represents only 1.6% of China's reserves, versus a global average of nearly 11%. To further diversify its reserves - just to get to average - would require significant amounts of gold. In a post-2008, deleveraging world, it is the unleveraged assets that will outperform against those saddled with debt. It's another plank in the case for gold, which just seems to get stronger with each passing month. "A new chapter has begun in the gold market," the FT opines. Indeed, it has. The International Monetary Fund, never known as a wise handler of money, is selling a bunch of gold. India bought half of it. A number of emerging market central banks are also upping their gold exposure. Maybe these CBs are onto something. Russia's gold holdings now make up 4% of its foreign reserves, compared with only 2.2% at the beginning of the year. Smaller central banks are also being crafty. Ecuador's gold holdings have more than doubled since the start of the year - to 54.7 tons, from only 26.3 tons. Gold now represents 32% of that country's reserves. Even Venezuela is buying gold. Gold now makes up 36% of its reserves, compared with only 23% in 2009. So who is the sucker here? Perhaps central bankers see more clearly than most what the effect of all their money creation will be. In recent months, we've seen a truly unprecedented boom in bank reserves. Bank reserves drive money creation. More money means money buys less - and the gold price should rise. Then there is this chart of the Shadow Gold Price. In the old days of the Bretton Woods Agreement, countries had to maintain certain ratios of gold against their currencies. The Shadow Gold Price aims to replicate this discipline. So for the US, the Shadow Gold Price is Federal Reserve Bank liabilities (bank reserves) plus money in circulation divided by US gold holdings. Also on the chart, you can see the spot price of gold. The important thing here is that you see how massive amounts of money creation have barely made an impact at all in the gold price - so far. Gold is fundamentally cheap compared with all the money added to the system in recent months. As Paul Brodsky and Lee Quaintance of the hedge fund QB Partners write: "If one allows for even a small probability of a future monetary system that reflects more honest/tangible money, then a quick glance at the graph above makes it easy to conclude that spot gold is fundamentally cheap. Even if this is too far a stretch for market participants skeptical of such a radical change in monetary policy, it is reasonable to conclude that the prices of spot gold and the Shadow Gold Price should converge somewhat over time." They note that the spot gold price has never been so cheap compared with the Shadow Gold Price. For parity to set in, gold would have to trade for $16,000 per ounce! No one is predicting $16,000 per ounce gold. In any case, it shows you the risk of holding paper - and bonds - on the eve of a massive devaluation of the dollar. Maybe the central bankers of Russia, Venezuela and Ecuador understand all of this better than they let on and that's why they are buyers of gold. It seems pretty obvious to me that if you create a lot of money, you are going to destroy the value of that money. And in that case, you want to own something other than that money. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: In a previous life, as the editor of another financial newsletter, we cooked up an idea to let our readers try some of our best research for a pittance. It would work, we reasoned, because people would be able to try our stuff with no risk and - here's the important part - decide for themselves whether or not they liked it. Who knows, we reckoned, if the research was profitable enough for them, perhaps they might even decide to sign on for good. And so, with that in mind, the Mayer's Special Situations $1 offer was born. We don't mind telling you, Dear Reader, that it was quite a success, both for us AND for our readers. Why? Because the research provided by the same Mr. Mayer who penned today's column, made sense - both from an investment and a membership standpoint. But please, don't take our word for it... In fact, we created the $1 offer precisely so you don't have to. Here's a short, introductory page if you'd like to check out our offer. If not, no worries. You'll still get your regular Daily Reckoning tomorrow, either way. ------------------------------------------------------------------ And finally today, Bill takes us on a late night stroll through Argentina's captivating capital... "You go ahead. I'll take care of the baby." You editor is visiting his son and grandson in Buenos Aires. Last night, granddad agreed to babysit so the young parents could go out to dinner. After a pizza and some horsing around, the little boy - 18 months old - began to have doubts about granddad. It was late. He was getting tired. He looked around and asked for "mama." No stranger to parenting, your editor knew just what to do. He put the boy in a stroller, took him out on the street, and began a long walk. We were in Palermo Soho, a thriving and trendy neighborhood of Buenos Aires. The buildings are only two or three stories high. Streets are made of cobblestones, with sycamore trees on each side. And everywhere you look, there are restaurants, cafes and boutique shops. By day, it is a nice area...but a visitor sees derelict buildings as well as spiffy renovated ones. At night, the run down properties disappear in the shadows. In the Plaza Serano, a man on stilts walked the streets. He must have been looking for tips from the automobiles that passed. Little Liam, our grandson, looked up at him in alarm. The world must be a strange and wonderful place to a small child; he must have wondered how the man got so tall. In the center of the square, a small woman sang tango songs, accompanied by a guitarist and an accordion player. We walked along. People looked at Liam in his stroller and smiled. He smiled back. Then, they looked at your editor with curiosity, wondering if he was the father or the grandfather. Couples walked arm in arm. Some embraced on street corners. One couple sat on a bench, kissing on each other so enthusiastically they clearly needed a hotel room. Several cafes had tables out on the sidewalks. Waiters carried trays of beer and wine. Girls in blue jeans looked at the fashions in a shop. Within two blocks, Liam was fast asleep. The jostling of the paving stones didn't seem to bother him. Neither did the wail of an ambulance or the murmur of couples in conversation. Or the bright lights of the restaurants. But by then, we were fascinated. There were so many young people on the street. So many fashionable shops. So many renovated houses, many with innovative and interesting designs. So many bars. So many cafes and restaurants...each with its own theme. One promised a traditional 'parrilla"...another advertised 'Italian cooking'...still another was clocked in red, promising diners an amorous encounter. We wandered for blocks. Then we realized we were lost. No matter. We just kept walking...looking in the restaurants...studying the shoes and dresses in the shop windows... and smiling at the passers-by. There are many cities with lively sections. Many offer interesting nightlife. But we can't recall one where the nightlife seemed so relaxed and friendly that we could walk along with an infant in a stroller and have such a good time. Maybe it's because we never tried. Regards, Bill Bonner The Daily Reckoning   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.