Category Archives: capitalism

Governments Reflate and Gold Will Rise!

14 Friday Nov 2008

Posted by in capitalism, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, oil, Politics, precious metals, silver, Today, U.S. Dollar, Uncategorized, uranium

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Governments Reflate and Gold Will Rise!

Source: GoldForecaster.com   and The Gold Report 11/14/2008

 
A long and deep recession, possibly a depression is being forecast across a broad front. But the real picture is different. Governments and central banks are not only committed to doing all in their power to resurrect growth and give their different economies ‘traction’ but have begun the vigorous implementation of reflation. They will do “whatever it takes” to get growth and confidence re-established globally. In essence, the crisis appeared quickly and devastatingly out of greedy lending by banks loaning to uncreditworthy individuals on a broad front. It has to be rectified just as quickly because banks control the lifeblood of liquidity in the economy and they will place their financial health well before that of the broad economy and their customers. They have been saved by central banks to date, but it is resumption of growth and confidence, not healthy banks, that must be achieved first. In the major economic blocs of the world actions are underway, to differing degrees, to force the banks to lend or be bypassed, so that the damage they can inflict on growth, through congealed debt and their instruments, is neutralized. The banks have made it opaquely clear, that they will not lend in such a way as to rectify the underlying crises of a dropping housing market and its ‘ripple’ effects on consumer spending. Governments do see banks as an obstacle to the resuscitation of growth and confidence, so their powerful influence over the state of the economy has to be reduced considerably before this can be done. And it has to be done before any semblance of recovery can be achieved again. The longer the process takes the more difficult and lengthy the solution will be.

Just take a look at the world’s three main economic bloc’s efforts at stimulating growth again:-

  • China said it would spend an estimated $586 billion over the next two years, roughly 7% of its gross domestic product each year, to construct new railways, subways and airports and to rebuild communities devastated by the May 2008 earthquake in the southwest. Their reasoning is as follows, “Over the past two months, the global financial crisis has been intensifying daily,” the State Council said. “In expanding investment, we must be fast and heavy-handed.” But in China, much of the capital for infrastructure improvements comes not from central and local governments, but from state banks and state-owned companies that are told to expand more rapidly. China maintains far more control over investment trends than the U.S. does, so they can unleash investments to counter a sharp downturn. The Chinese government said the stimulus would cover 10 areas, including low-income housing, electricity, water, rural infrastructure and projects aimed at environmental protection and technological innovation, all of which could incite consumer spending and bolster the economy. The State Council said the new spending would begin immediately, with $18 billion scheduled for the last quarter of this year. In addition, China has already announced a drastic increase of the minimum purchasing price for wheat from next year, by as much as 15.3%. There is also going to be a substantial increase of the purchasing prices for rice, said the National Development and Reform Commission. In the meantime, they also announced plans to stabilize prices for fertilizers and other agricultural means of production, to ensure that the grain price increase will not be eaten away by input making the price increases real income gains for farmers. This will shore up domestic demand and head off any social unrest in the rapidly growing economy. The government there sees its task to harness all sides of the economy to produce growth while they pull their 1.4 billion people out of poverty. Their recent history confirms their ability to succeed!
  • In Europe, with a more Socialist environment than the U.S.A., [meaning greater central government control over the economy], we believe that after bailing out so many European banks, a very heavy pressure will be put on banks to vigorously lend down to street level again. President Sarkozy’s threat to seize banks that don’t lend gives meat to this forecast. In Britain, nationalization lies ahead of suffering banks and the end of senior executive careers, if they don’t lend freely. Despite the lack of the same effective management [ignoring politics and commerce and other capitalist principles] of the economy in Europe as in China, governments will act in the same way as the Chinese are, eventually, to make growth and confidence happen again. They are committed to this, at last. So 2009 will be the year of reflation in the face of deflation.
  • In the U.S.A., such synthesis of national institutions in fighting deflation is unlikely as the cooperation of banking, commerce, etc to focus on the underlying economic crisis would barge into so many valued principles fought for, over time. However, we have no doubt that the intransigence of such principles in the face of a decaying economy will produce overwhelming pressures on the system to revitalize the consumer and restore his spending. The government has now seen the banks follow the “profit and prudence” principles after their bailouts and their holding back on lending to safeguard themselves, first. Secretary Paulson has now faced off with them and redirected efforts to make government provided financial relief go direct to the consumer. But he is only at the beginning of this process, which must be across the entire spectrum of consumers, not simply a portion of clients of the largest mortgage providers, Fannie Mae and Freddie Mac. Indeed, the slow nature of this solution as it wends its way through political and financial obstacles, could produce a near revolutionary climate, until sufficient action is taken to re-finance the economy from consumer upwards. After all, day-by-day, solid U.S. citizens are being impoverished by the financial sector problems, not their own. As slow as the pace of support becomes, the more degenerative impact it will have on uncertainty and confidence. We have no doubt that 2009 will be remembered as the year of reflation in the face of deflation. Already, house-owning households are likely to receive direct financial aid, if their mortgages are more than 38% of income. If this is applied to all U.S. households in this position we fully expect to see hope lead to confidence, then spending, then growth. These and the suggested support of the consumer on car finance and credit cards will re-kindle spending and the economy. Such moves must convince the U.S. consumer and stop him thinking like a victim. [In the Depression of the early thirties the U.S. used, as part of its battery of tactics, paying people to dig holes and fill them in again, just to get money flowing from ground level up]. This can be implemented in the next few months and impact on the broad economy by the end of the first half of 2009, if applied properly, as government implies it wants to. If it is, then the first 100 days of President Obama will indeed be a honeymoon.

 

The Importance of Growth

Mr. Ben Bernanke and the governments of the U.S., the Eurozone and China have recognized in no uncertain way that confidence must be regained before growth gains traction and becomes self-sustaining. It appears that they have got the message now and will do whatever it takes to ensure the credit crisis is replaced by confidence in credit. That the banks should suffer for their indiscreet past behavior is just, for a lender should carry the same risk as a borrower.

Inflation and Gold and Silver Prices

  • Reflation is vigorously being implemented across the globe, but inevitably it will come with inflation. It is impossible to say just how much money needs to be printed to counter deflation, but for sure it will be more than needed and will keep flowing until the financial sun is shining again. 2009 will probably not see inflation rise to dangerous levels, because of its absorption by deflation. But as the money fills deflationary holes, it will spread far and wide and eat into the value of debt, so bringing relief to troubled debtors in addition to direct governmental support. This will be found to be politically acceptable and will delay, if not remove, the pernicious impact of bad debt that we are seeing now. Growth and confidence are considerably more important problems than inflation. Banks have been given debt relief already and so will the consumer, because that is the only solution to the credit crunch. It will be accompanied by the cheapening of money, leading to far higher gold and silver prices than we are even contemplating now. As this is slowly realized by an ever-widening audience across the globe, gold will re-enter the mainstream of investments as an anchor to monetary values if only at individual levels. Thereafter institutions and perhaps central banks, will appreciate it fully?
  • Governments have to act very fast to stop the confidence-eating impact of deflation from becoming a way of life, just as borrowing was, over the last thirty years. Consequently expect global stimulation to be put in place before the end of the first quarter of 2009. In that time we fully expect forced selling of all assets to slow to a trickle. Thereafter a positive tone will benefit gold and silver in the long-term, as well as short-term.

 

Let’s be clear though, there is no historic precedent to what we are about to see.

We expect gold to thrive in an atmosphere of hope, against a threatening backdrop, with the gold price realistically discounting the diminishing buying power of paper currencies.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

Are We There Yet? Finding that Elusive Bottom – The Gold Report

14 Friday Nov 2008

Posted by in capitalism, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, silver, Today, U.S. Dollar, Uncategorized, uranium

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Are We There Yet? Finding that Elusive Bottom

Source: The Gold Report  11/14/2008

 

David Skarica, author of the Addicted to Profits newsletter, gives The Gold Report an exclusive preview of coming market attractions including double-digit inflation, a super pop in gold stocks, and the demise of an empire. A financial advisor who earned his reputation as a contrarian before he turned 30 by predicting the dot.com bust, Skarica was the youngest person ever to pass the Canadian Securities Course. He incorporates technical analysis, historical precedent, demographics and investor behavior into his forecasts and names some likely beneficiaries of the next market move.

The Gold Report: Have we finally hit the bottom? Are things turning around?

David Skarica: I’ve studied the panics that have occurred over the past 100 years and discovered that there’s a similar trading pattern when you reach the true bottom. A panic like we saw this September through October is typically followed by a reaction rally similar to what we have now. That rally will take the market 20% to 30% off its lows and last for about a month and then you’ll get a retest. Maybe not an all-out retest, but a repeat of that rally over the next month or two. For example, in ’87 and ’74, after a big 30% or 35% decline, you got a rally into November, then this decline into October and then the market held, the lows took off and launched a bull market for a couple of years.

Once this rally plays out, the key thing to watch is a pullback into December that could very well be “the low.” You’ll know it’s the low because you’ll see non-confirmations. You won’t get as many new lows in the market; the fear gauges like the VIX (Chicago Board Options Exchange Volatility Index) won’t hit such extremes. A lot of the industries that led us down, such as the banks or the airlines, will hold well above their lows. That will be the bottom. In a worst-case scenario like 1929 or 2001, when you had big sell offs, there were rallies for four to six months before the market rolled over and hit new lows. If the market continues rallying into January or February, that would be a very negative signal. I want to see that retest. One positive thing is that we already saw one retest in late October and now we’re seeing this secondary rallying. In 2001, there was no retest. The market sold off real bad for three or four days after 9/11 and then kept rallying.

Gold stocks are at an all-time low in terms of P/Es, and their price relative to the price of gold. The dollar rallied during all the de-leveraging but at some point, the dollar is going to roll over. If you look at the currencies that got killed— the Canadian dollar and the Australian dollar—fundamentally, those countries are still stronger. They’re not running huge deficits. Canada’s deficit will only be a couple of percentage GDP, unlike the U.S. with a deficit of nearly 10% of the GDP. The Canadian banks are fine; none of them need a bailout.

TGR: European banks and Japanese banks are bailing out their banking systems too. Why would U.S. currencies do worse against other currencies?

DS: I don’t think the dollar will totally tank in the short term because Europe —not just the Euro but also all the other European countries thrown in with Euro—have something like 70% of the dollar index. These countries have problems as well. Milton Friedman said he never thought the Euro would survive its first severe recession because you’d never get consensus among the different countries. How are you ever going to get the British, Italians, Germans, and French to agree on anything? The dollar rallied because people thought that the U.S. at least had a policy. I don’t see the dollar collapsing in the short term. Unless we’re going into a total worldwide depression—I don’t think that’s going to happen. I really believe the rest of the world will distrust the U.S. financial system.

Wall Street packaged all this fraudulent stuff and then sold it to everyone. These guys were dumb and greedy for buying it but they were defrauded. So Asian banks won’t be buying anymore Fannie and Freddie bonds; they’re going to say the heck with it and invest in China, India and other emerging nations. Capital flow will shift away from the U.S. After the crash of 1929 the world’s financial center shifted from the U.K. to the U.S. This crash will shift the financial centers from Wall Street to Singapore, Dubai, Mumbai, and Bombay. Japanese banks are pretty solid right now and so are a lot of Asian banks. They’re involved in lawsuits because they own some of these toxic assets, but, again, you’re not seeing mass bailouts over there and Australian banks are strong, too.

There will be growth going forward in emerging economies. Meanwhile, in the U.S. the baby boomers are retiring. In technical analysis we talk about overhead supply and that’s when the stock goes way up and comes way down. The problem that stocks are going to have is the people who bought at much higher levels are going to sell into any rally to cut their losses. Baby boomers are retiring, so they’re selling into any rally. In the 1970s and 1980s they were in their 30s and 40s, so they bought stocks. Over the next ten years they will be sellers.

TGR: What about the echo boomers? They’re getting out of college now. The biggest group is starting college.

DS: They’re getting out of college, but won’t reach their peak earning years until they are in their 40s and 50s.

TGR: Yes.

DS: Echo boomers probably won’t invest significant amounts of money for 10 or 15 years. This is interesting because I do a lot of cycle research and 10 to 20 year cycles are common. In the market, cycles run for 17 or 18 years. For example, we had a bull market from 1949 to 1966, but a bear market from 1966 to 1982 and then another bull market from 1982 to 2000. Now we’re in the midst of a long-term bear market. When that next generation really starts to invest heavily coincides with the time that the baby boomers will have sold out.

As I said, I think we might bottom here; we might have a one or two-year bull market like we had from 1975 to 1976 after the bad bear market in 1973 to 1974. But I think we’re still in what’s called a secular bear market, which lasts for 15 to 20 years. One of the underlying causes is the printing of all this money. I think interest rates are going way up. The next bubble to burst will be the U.S. bond market. You will see high rates in the coming years because right now the U.S. money supply is 38%. That is unbelievable. Even in Y2K, it went to only about 15%.

TGR: The big debate is are we going into a deflationary or inflationary cycle?

DS: I think hyper-inflationary—not like Weimar Republic but like the 1970s. We’ve already started that cycle. Look at the SGS (Shadow Stats – http://www.shadowstats.com), which calculates inflation the way they did in the 70s and 80s. They changed that formula in about 1990 allegedly because the old method overstated inflation. I think the current method understates inflation. When oil was $150, everyone agreed that inflation was higher than the reported 5% or 6%. Using the old method, we were at 10% to 12% this summer when resources were at their highest. So even if you split the difference between the old and the new way of calculating inflation, we were in the range of 8% to 10% this summer.

Anytime they print this much money anywhere, it always led to inflation. One of Bernanke’s big things is to avoid cutting the money supply like the Federal Reserve did from 1929 to 1932. He is doing the opposite. All that liquidity he’s introducing will result in inflation. Typically you don’t go from a period of inflation to deflation. The CPI in the 1920s was going down. They had deflation then and went to ultra deflation in the early 1930s. So usually you go from high inflation to the higher inflation. We’re on a pure fiat currency right now. There’s no gold standard; there’s nothing. Pure fiat currencies usually end in inflation, not deflation.

Take Japan in 1990s and the U.S. in the 1920s—both were creditor nations. People saved. The governments were net creditors going into those downturns, so they could afford to take on debt. Roosevelt only ran one or two deficits before World War II. Obviously, during the war he ran up big deficits. So when you’re a debtor nation, you can’t afford deflation because the amount that you owe goes up in value, right? You’ve got to inflate that away. Some would argue that the whole system is based on credit. No matter how much money the U.S. government prints, no one’s going to lend, and no one will take out loans. That will cause prices to go down. Deflation is a decrease in money supply and in the price of goods. Over the next year or two, go to the store. Is the price of your beer going to go down? Gas prices are lower now than they were in the summer, but they’re a hell of a lot higher than they were six years ago. During a deflationary cycle, you’re going to start seeing deflation on the grocery shelf. The price of your cereal is going to go down; everything’s going to go down in price but that’s not happening. Right now we have asset deflation. I don’t think we’re going to have deflation in the entire economy.

TGR: What’s going to beat the higher interest rates?

DS: Higher interest rates will be (governed by?) supply and demand. Look at the yield of the ten-year bond. The low of that yield got to about 3.2% from 2002 to 2003. The low during this ultimate panic, the worst crash we’ve seen since 1987, has only happened six or seven times in the last 100 years. In 2008, the bond yield only got down to about 3.8%. So we didn’t see this huge influx of money into the bond market. If you were really moving into deflation, the bond market would tell you. The bond market would be going down to a 1 to 2% yield and telling you, okay, everything’s going to come down. But, instead, the bond rates are around 4% right now. To get back to supply and demand, they’ve got to issue $550 billion worth of bonds this quarter to pay for the bailout and they’ll probably have big deficits over the next year or two because it’s going to be a pretty bad recession. Issuing more bonds will probably mean the buyers of those bonds are going to ask for a higher return.

TGR: How high do you think interest rates will go?

DS: That’s really difficult. There’s no reason you can’t get back to at least 7 to 9% on the ten-year bond, which is where we were in the late 1990s. It’s not exactly a heady level, but we could reach low double digits. Here’s the thing no one’s talking about. If you read about the decline and the fall of the Roman Empire or the U.K., the U.S. has made all the same mistakes they made. They tried to police the world with an overly aggressive foreign policy and they spent all your money on war. They went to a pure fiat currency. The U.S. is a super power in decline. It could take a generation, but I think it will happen. In 1913 the U.K. ruled the world. Thirty-five years later after two world wars, the U.S. had to bail them out. These things can change quite quickly. Ultimately people will demand higher returns on that debt, so I see interest rates reaching 10% or higher and I’m being conservative. At the secular top you might get back to where you were in the late 1970s.

TGR: Where would you expect the inflation rate to go once hyperinflation kicks in?

DS: It will be 10 to 15%. Gas was up 10% today; oil’s up 10%. I’m an inflationary guy. Watch someone like Jim Rogers. He’ll talk about how it’s not just a demand thing with China and India or the U.S. dollar going down. His point is that there’s no oil supply coming on the market and alternatives like solar and wind will take a long time to replace fossil fuels. So, I expect double-digit inflation. Now they may only report it as 7% or 8%, but it’ll probably be 15% to 16%, maybe even 18% or 19% higher than that. Look at the way they calculated inflation in 1980. Using that formula, inflation actually got up to 10% to 12% this summer. Now it’s probably down to about half of that because of the drop in commodity prices.

But here’s an interesting note. Commodity prices started falling apart in September during de-leveraging when people were dumping everything. The PPI, the producer price index, in September still went up. Even with huge commodity price declines, you still had an increase in the PPI. I think that’s due to the fiat currency effect. It’s very difficult to get inflation. Remember, even from 1980 to 1982 when they upped rates to 20% to kill inflation, inflation slowed down from 20% to 4% or 5%, but we never went into deflation. People just get mixed up because they think that when stocks go down or real estate goes down that’s deflation. In fact, that’s asset deflation. Deflation is actually a decrease in money supply and decrease in the price of goods. Look at your electricity bill. You won’t see it going down that much.

TGR: As you said, oil was up 10% today.

DS: Oil is $70 now. Oil never hit $70 until a few years ago. People act like, oh, it’s gone down from $140 to $70. But remember, oil was only $25 to $30 when the Iraq war began in 2003. People act like this is deflationary, but oil is just pulling back. To Jim Rogers ‘This is the fourth decline of 40% or greater in the price of oil since the bull market began in 1998.’ I think we’re in a big commodity secular bull market that started in 2001. Commodities are very volatile. They can fall 50% and still be in a bull market. In 1975 to 1976 gold went from $200 to $110 after it went from $35 to $200. Everyone thought the gold market was over and then in the next four years it jumped to $800. Gold can go to $600 and still be in a bull market. People just don’t get that because they don’t think long term.

TGR: So if you’re saying the commodity bull market started in 2001 and that these cycles take 15 to 18 years, we are about half way through this then.

DS: Yes.

TGR: Commodities are volatile, but will the last two-thirds of this bull market grow exponentially faster? Or will it grow fast then drop off?

DS: The two biggest moves are always the one at the beginning and the one at the end. For example, the HUI, the Gold Index, went from $35 to $200 within a couple of years after reaching bottom. That’s a great 6:1 gain. So usually you have a huge launch off the bottom. The Dow went from 800 to 1,500 in its first year or two of the bull market. The first move up will be big and then in the middle you’ll go up more gradually. At the end you’ll have the bubble blow-off. And you’ll see another double or triple gain.

The only comparison I can use is the CRB Index, which is more of a commodity. It went from $100 to around $170 or $200 in the mid-1970s and then had a final blow-off to $350 to $360 in 1980. So the CRB Index went up 250% in the 1970s. It started this bull market at $180 and went to $470. But, again, if you go up 250% from $180, you’re talking about the CRB being about $600 to $650, which would be more than a doubling of its current level. This commodities bull market is going to be bigger because of what’s going to happen when it turns into a bubble. It’s like the growth of the Internet – all of that got priced into the tech stocks from 1999 and 2000. Even though the Internet’s a lot bigger and faster now than it was ten years ago, and there’s more commerce being conducted over it, the stock prices all peaked in 2000. Five to ten years from now, you’ll see these commodities pricing in global economic growth to perfection. So people won’t get it after that if they invest in commodities in 2018. In 2025 commodities will be down 40 to 70% from their highs, but the global economy still growing.

Three things drive commodities: money supply, the U.S. dollar, and supply-demand. In the 1970s the economy was a shambles, but commodity prices went nuts because you had terrible economic policies. The government was printing tons of money, and the U.S. dollar was declining. There was no investment during the 1980s and1990s in big new commodity funds and now a lot of them have been shut down because of this pull back. Commodity prices will rebound by 2010. That will introduce a five to ten year period of high prices where people will aggressively look for stuff and bring supply to the market.

TGR: Where will gold be in the next 12 to 18 months?

DS: That’s a tough call. Right now it’s really interesting because the U.S. dollar has been trading opposite to the market since September. We’ve seen the rally in the dollar; we saw the decline in other currencies because of the flight to the dollar. When we talk about the redemption of hedge funds, most of the people who own those funds are actually outside of the U.S. When you speculate all over the world, you’ve got to buy U.S. dollars just to pay people back their redemption, right? That was part of what was going on. If we get this retest to the market in December after the short term decline in the dollar, you might see another rally out which can hit gold maybe back to around this low $700 area. But if I’m right and the market rallies next year, and this fourth quarter is really the bottom, gold will reach $1,000, even $1,100. The opportunity right now is not in gold; it’s in the gold stocks. Even with this rally that we’ve seen in the gold stocks – for example, the XAU to gold ratio, which is the percentage of the XAU’s trading of the price of gold—it’s usually 22%, which means, for example, gold – let’s make it easy – is $1,000, the XAU is $220—even with today’s rally, the XAU is about $90 and gold is about $750, right?

TGR: Right.

DS: When you do the math that’s about 12%— almost half of the historical ratio. So if gold were to go to $1,000, the gold stocks can more than double. There’s a time to buy gold instead of stocks and there’s a time to buy stocks. I’d be looking at the smaller, lower-cost producers like Agnico-Eagle Mines Ltd. (TSX:AEM). That company will return to its regular valuation. Gold could go to $600 and if the XAU went back to that 22%, it’d be trading at like $130. So the XAU could go up 40% if gold went down over $100 to get back to its normal valuation. That’s not the gold stock saying that gold’s going to go down, they’re feeling it or whatever. That was just like the hedge funds were all in the gold stock. The gold stock market is a smaller market than the equity market. They all had to sell everything and that was it.

TGR: What about buying seniors who have just been battered versus juniors that have a potentially higher upside?

DS: For the average investor, I’d be looking at seniors because they are so cheap. When I say juniors, I’m talking about junior producers with lower levels of production because they have cash flow. And, again, it’s the whole leveraging thing. Hedge funds own them, too, and they’re even more liquid than seniors. So instead of the seniors, which all went down, say, 60 to 70%, the juniors, in many instances, went down 70 to 80% or even 90%.

Look at a stock like El Dorado Gold Corp. (TSX:ELD) (AMEX:EGO) (ELD.TO), a junior producer in the late 1990s when all the gold stocks went down 70 or 80%. Eldorado was a 40 to 50 cent penny stock and, because it was a junior producer, it had more leverage when gold went up and ultimately it got as high as $8 or $9. A lot of these little penny stock gold and silver producers with cash flow, could become the next Eldorado. They could bring a lot of 10 or 20:1 deals over the next three to five years.

Another thing that’s going to be really positive for gold and resources going forward, has to do with the behavior of 15 to 20 year bear markets. Usually the big busts come in the first half of that secular trend. If you look at 1929 to 1948, the two worst parts of that bear market were 1929 to 1932, with a 90% decline in the Dow, and 1937 to 1938, with a 50% decline. After that most of the climbs were muted, like 30% down and 25% up. The same thing happened in the 1970s. The 1970 bear market was 36% off and the 1974 bear market was 48% off. From 1975 to 1976 to 1982 at the bottom, the climbs are more gradual. So we had a bad bear market when the tech stocks blew up, which was over 40%. This bear market is over 40%, assuming we hit the bottom a few weeks ago. What you’re going to see now— as volatile as it’s been, it sounds crazy to say this – but, say, we get a one or two year bull market after this bear, you’re going to see volatility dry up. By the way, that’s how you start bull markets. When you start, when the sellers are all out, you usually get everybody giving up, not in a panic, but when the market hasn’t done everything for years. During those times when the market is doing nothing, that’s where resources and gold usually do well.

TGR: So, David, do you have some stock ideas for our readers?

DS: I like Agnico-Eagle Mines Ltd. (TSX:AEM) and Royal Gold Inc. (RGLD), which is a royalty company. The two juniors I really like are Fortuna Silver Mines Inc. (FVI) and Silverstone Resources Corp. (TSX.V:SST). They are both smaller silver producers. Actually, Fortuna was up quite nicely today from about 55 to 70 cents but it had been over $2. Fortuna also fell from $4 to 50 cents. It’s back up to around 60 or 70 cents right now. Right now you’re still getting in at a good level. On a totally different sector, if you’re looking at the major market, you can get stuff that’s really beat up. If we get this retest in December, I’d be looking at – and a lot of people will think I’m nuts saying given the state of the economy —some of the casinos. MGM fell over 90% from its high and I usually find that unless the company is going bankrupt, you’re really safe buying something that’s down 90% from its high. For example, this summer I wrote an article in Investor’s Digest of Canada telling people to buy the airlines because the airline index in the States had gone from an all time high of $200 down to $14, which is 90+%. Now the airlines are one of the only sectors that have gone up since July. A lot of the airlines went up 50 to 100% since then. Even with the higher oil prices, airlines are very cheap, for example, WestJet (WJA.TO).

TGR: What’s that one?

DS: It’s a Canadian discount airline. I put WestJet in my newsletter at about $9.50. Now it’s $10.50. The nice thing about it is a lot of airlines are forward selling oil prices to $80. But a lot of them expired this quarter, so now they’re going to be able to go to $60, $70, and $80 oil and it won’t kill them. I also like some of the emerging markets. I like the India Fund (IFN) and the South Korean Fund (EWY) or the Templeton Russia Fund (TRF). They are more leveraged. They usually fall 80% in U.S. dollar terms in a decline and they’ll go up hundreds of percent in a bull market. But I would wait for that retest before going into the emerging markets. I’m kind of all over the place in terms of the types of sectors I like because of the valuation of some of these things. I look for the really beat up sectors—obviously all the precious metal stuff—because they are very, very cheap.

TGR: Dave, Are there any exploration companies that are catching your eye?

DS: Yes, there are a few. The problem with exploration at the moment is cash flow or lack thereof. These companies have no revenues; money is difficult to come by at the moment. They have burn rates. That is why if you are going to buy a smaller junior, you have to look at the producers first. Therefore, I think you have to look at companies who have cash on hand. One such company is Rimfire Minerals Corp. (TSX.V:RFM). In the past they were criticized for being too conservative, much of their budget has their joint venture partners (which include majors) so they will not burn through their cash. They have about C$0.25 (per share) in cash on hand, and the stock trades at C$0.15 (per share) so you are getting the company at a 40% discount to cash. Basically, you are buying at .60 on the dollar to cash and getting all the properties thrown in for free. Also at their burn rate it will probably take them three years to go through their cash position and by then the credit markets will be back.

There are also companies I have on my list that have heaps of cash, large resources and are going into production next year, like ATW Gold Corp. (TSX.V:ATW) and Avion Resources Corp. (TSX.V:AVR). Again, I do not mind if a company is going into production, as it should get cash flow sooner rather than later. Avion is trading at cash.

I also like Full Metal Minerals Corp. (TSX.V:FMM) . The company has had strong results as of late; they are raising money to put their Lucky Shot mine into production. This will be a high grade mine, low cost. It will only have a few years of production, but again that will give them cash flow to survive. The financing they are doing is small and I think they will get it down, even in these markets.

In the case of Rimfire and Full Metal these were C$2.00 per share companies not too long ago, it will take them a bit to base, but it could still happen.

Finally, for a shot in the dark I like Cityview Corporation (CTVWF) (ASX:CVI). This is a very interesting little deal that has collapsed. They were doing a gigantic financing for offshore oil production in Angola, which fell through when the credit markets collapsed. They are now doubling the float of the company to raise capital to put a diamond mine into production in Angola, they are also looking at an oil refinery. This offering should allow them to survive and they will get production from the diamond mine. They will have a huge float (over 900 million shares), but they have the former Angolan Mines Minister as chairman and are positioned to be a leading company in Angola, Right now the stock has a market cap of about 8 million of the new offering. It is something that could turn around huge when this is finished or tank if they can’t get the funds. It is worth a small roll of the dice at $0.01.

Dave’s first book “Stock Market Panic! How to Prosper in the Coming Bear Market” published in January 1999 provided thought provoking arguments on why this great bull market will end in the most vicious bear market of all history. He is also the author of “The Contrarian Who Saved the World,” which explains how markets work. Dave has also been a contributing editor to Canadian MoneySaver and Investors Digest of Canada

Is Hyperinflation on the Horizon? – Seeking Alpha

14 Friday Nov 2008

Posted by in capitalism, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, oil, precious metals, silver, U.S. Dollar, Uncategorized

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Is Hyperinflation on the Horizon? – Seeking Alpha

By Jason Hamlin of Gold Stock Bull

Many gold investors have lost confidence as the metal has failed at several attempts to regain the $1,000 mark and is currently languishing in the $700-$750 range. This 30% decline caught many gold bugs by surprise as the widespread liquidation of assets has hit all sectors and deflation fears rule the moment.

But the total bailout tab, estimated by Forbes to be $5 trillion thus far, will undoubtedly lead to a hyper-inflationary scenario. When this will happen is anyone’s guess, but some analysts are predicting it could take place within the next 3 months and push gold to somewhere between $1,500-$2,000 and oil to the $200-$300 range. I don’t see it happening that quickly and with such magnitude, but I am certain this scenario will indeed manifest eventually. Whether it is in the next few months or next few years, I think precious metals and energy are offering very attractive entry points at the moment. Fire up the printing presses. The bailouts have just begun, with everyone from automakers to airlines getting in line for a government handout of taxpayer dollars.

I am currently short the dollar, long precious metals, long agriculture and long energy. Commodities are oversold and when they whip back to the upside I expect the move to be extremely powerful. Don’t miss it by sitting on the sidelines with cash that is rapidly losing value.

Steve Watson of Infowars.net wrote the following article which was published on Thursday, Nov 13, 2008:

Economic experts have predicted that rampant inflation caused by government stimulus packages will soon take hold of the economy and force precious commodity prices to all time highs.

Johann Santer, MD at Superfund Financial Hong Kong told CNBC that he expects to see gold climb from its current position at $710 to a whopping $1500-$2000 an ounce within the next three months.

“Should money be going into cash, paper?” asked CNBC anchor Martin Soong, to which Santer replied in the negative:

“Not necessarily, we see that for the time being this remains the right strategy to be in, of course people are quite nervous, but once we start to understand again that it will not really protect us from inflation, which most likely will come in the long run, because of all the stimulus packages, I would assume that we should also start looking at the gold price at the moment and find opportunities there.”

Santer explained that deflation is not going to protect us from what he sees as inevitable heavy inflation in the long run caused by the huge amounts of money being pumped into the market in the name of saving the economy.

Santer predicted that we may even see double digit inflation.

“We better get prepared right away and start to look at real assets, for example gold could be really attractive at the moment, trading at $710.” Santer added.

“At the moment there is a major sell off in everything, people are really looking at cash and treasury bills but in the long run, we will not escape from inflation so we have a medium to long term target of $1500 within the next three months.”

Johann Santer’s prediction mirrors that of numerous other fund managers and top investors such as Jim Rogers, Robin Griffiths and Jurg Kiener who are now predicting that global central banks’ insistence on printing their way out of economic turmoil is setting the stage for a hyperinflationary holocaust, a knock-on effect of which will be gold’s acceleration towards $2,000, as demand for precious metals outstrips supply.

Meanwhile another investor, Puru Saxena, CEO of Puru Saxena Wealth Management, has told CNBC that within the next four to five years he sees oil prices skyrocketing to up to $300 a barrel.

“Over the last few months we have seen widespread liquidation of all assets, nothing has been spared, commodities, corporate bonds, real estate, equities in the emerging markets, the Dow Jones the FTSE, everything has been sold because of distressed liquidation. However, if you look at the supply and demand dynamics of most of the natural resources, whether it’s energy or food or mining companies, they are still very very bullish.” Saxena stated.

He explained that he feels people are only looking at one side of the equation at the moment with regards to the decline in the value of oil, which is currently hovering around the $55 per barrel mark.

Saxena predicts that we are going to see a huge rebound in resources in the next couple of years due to increased demand and reduced supply.

“Obviously no one has a clue where the market will be in two or three years from now, or indeed the price of oil, but over the next four or five years I suspect it will go to over two or three hundred dollars a barrel.” Saxena added.

With OPEC continually cutting oil output it is not surprising to hear such predictions emerging from investors. We have been continually warned that the sharp decline in oil prices is a temporary respite only.

We have previously reported on the corporate elite’s efforts to hike oil prices up to the $200 mark. Earlier this year, a report by Goldman Sachs Group Inc. forecasted that oil prices will reach $150 to $200 dollars a barrel within 2 years. JPMorgan Chase & Co have also predicted that prices could rise to $200 a barrel. Such levels would set the stage for a possibly catastrophic post industrial revolution.

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”
– Thomas Jefferson

An Interview With Peter Cardillo: Part I & 2- Features and Interviews – Hard Assets Investor

12 Wednesday Nov 2008

Posted by in capitalism, commodities, deflation, Finance, gold, inflation, Investing, investments, Latest News, Markets, precious metals, U.S. Dollar, Uncategorized

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An Interview With Peter Cardillo: Part I & 2 – Features and Interviews – Hard Assets Investor

Written by HardAssetsInvestor.com   

Part 1 

Mike Norman, HardAssetsInvestor.com (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today my guest is Peter Cardillo, chief market economist at Avalon Partners.

Peter, nice to see you; thanks a lot for coming on the show. Look, you’ve been in the business a long time, Peter, you’ve been in the business a very long time. Tell us your thoughts about what we have gone through recently, particularly this enormous market plunge, not just in stocks but in all asset classes. Have you seen anything like this in your career?

Peter Cardillo, chief market economist, Avalon Partners (Cardillo): Percentagewise yes, of course, but you know, in such a short period of time, the answer is absolutely no.

I have not gone through anything like this before in terms of market declines, of the market losing 20% in one week; that never happened before, and of course the reason for that is, obviously what we had out there was a fear factor that was gripping everyone, and of course, with the credit market seizing up, that just added even more fear out there, and then of course the blowing up of a lot of hedge funds didn’t help either. That’s probably one of the reasons why we saw this market dive the way it did.

Usually the markets always discount, and this market has discounted a lot of things, just recession, and probably even a recession is going to be a little bit more severe than we previously were contemplating, but nevertheless, as I said, the way the market dropped, you might say, fast market action that we had, and the volatility that we had was all due to this unwinding of assets, whether they were equities, bonds or hard assets, commodities, you name it; it went all down at one time.

Norman: Except for the highest quality, like Treasuries. Where are we, do you think, in this whole process? You sort of alluded to perhaps that the smoke may be clearing. We’ve discounted a lot, we’ve discounted perhaps a very, very deep recession, and as you mentioned, investors have pulled out of assets of all classes with the exception of the safest, most liquid. Where are we now, in your mind, in this process? Are we in the middle, are we still in the early stages, or are we closer to the end?

Cardillo: I think we’re closer to the end of the crisis as we know it. In terms of economic activity, I think it’s going to be at least two or three quarters of some real tough going here. We’ll probably see unemployment climb above 7.5% and we’ll probably see inflation really fall off a cliff.

Now there’s a positive side to that, and of course there’s a negative side to that. In fact, I think if you read between the lines, if you heard today Mr. Bernanke, obviously you know he’s for another stimulus package; why is he for that? Very simple: Because he knows that we’re in for some rough times here in terms of economic activity, and the greatest fear out there – although I believe it was avoided – was a deflationary period. Yeah, I think that was avoided; I really do.

Norman: Through the actions taken by the Fed and the government and other central banks, you mean?

Cardillo: Absolutely; there’s no doubt in my mind that if we didn’t have those actions, this market could have been really down even another 20%, 30%, maybe 40% from these levels.

Norman: Some say that the government intervention in all its forms – the central bank and the federal government – is a negative thing. Do you agree or disagree with that?

Cardillo: No, I think it’s a positive, but it does have some negative implications. Obviously somewhere along the line, when we do get back on track, the government, the Fed, is going to have to fight inflation and not disinflation or deflation. You’re printing money, you’re creating deficits that have gone into orbit, and that’s not a positive, that’s always a negative.

But as I said before, right now they needed to avert a serious deflationary spiral within the economy, and I think they’ve done that, not only here domestically, but on a global scale as well. Look, you saw the numbers out of China; growth is at 9%. Now 9% is pretty strong, but by the same token, for an emerging market, that was almost at 11%, 12% – it’s down rather sharply.

Norman: A big surprise there, no question about it. OK, folks; that concludes my first interview with Peter Cardillo. Stay tuned at this Web site because we’ll be having the second interview with my guest and much more to come. We’ll see you soon, take care.

Watch The Video Part 1

Part 2  

Mike Norman, HardAssetsInvestor.com (Norman): Hi everybody, and welcome back to the second part of my interview with Peter Cardillo, chief market economist at Avalon Partners.

Peter, in our last interview, you were talking about the Fed and other central banks and actions by the government that have prevented a deflation. Now leading up to this, over the past five or six years, the big concern has been inflation. Indeed, we’ve seen materials prices rising across the board, a lot of concern about inflation, we’ve seen a fall in the exchange value of the U.S. dollar. All this happened very quickly, this sudden idea or notion of a deflation

Peter Cardillo, chief market economist, Avalon Partners (Cardillo): Well, obviously, you know, when you have the credit markets seizing up and no one is willing … when the banks are not willing to lend to each other, that’s a serious problem. Look, what we went through … there were signs of what happened in the early 1930s, there’s no question about that. However, I think that the governments certainly have learned the lesson now in terms of avoiding a deflationary era, and that’s why I think the fact that they came out with all these stimulus packages, rescue packages – whatever you want to call them – basically is the right thing at the right time.

Now, grant you, maybe the Federal Reserve and the Treasury were a little bit asleep at the wheel in the sense that they should have seen this brewing, because we had excessive real estate speculation. And unfortunately, the former maestro who created this – Mr. Greenspan that’s right, who basically is somewhat responsible for this – up until his last months in office he always said, well, we have a slight bubble in the real estate market in certain areas of the country, but we don’t have a real bubble.

Obviously that is not the case and we did have a bubble. But the problem is that no one knew the extent and the depth of the problem until it finally nearly collapsed the system.

Norman: Now prior to this implosion, some of the best-performing asset markets were raw materials, commodities … this idea that we have a lot of emerging new economies, developing economies; you mentioned China, India for example. Those have been some of the hardest-hit markets on the way down. With the efforts now by the Fed and other central banks and governments to sort of reflate the system to avert a deflationary collapse, will these markets and these countries resume as the leaders?

Cardillo: I think they will, but it’s going to take some time. I think we can see the equity markets regain over a short period of time. I wouldn’t be a bit surprised to see us recapture Dow 10,000 very shortly, but this bear market that we’re in – and this is a global bear market, it’s certainly not only domestic, that’s for sure – is going to take a while. This bear grip that we have is not going to let loose, but we’ll see an improvement. I think we’ll see an improvement not only in prices but in psychology, and the key is confidence, restoring confidence, and we’re beginning to see that.

If you look at the overnight interbanking lending, you’ll see that the spreads are beginning to narrow, and once we get them down to levels where you’ll see the credit market unclog and banks begin to lend again, that will be the key; the confidence restored in the credit markets.

Norman: Do you think what has transpired will lead to sort of a fundamental change in the way we view markets, away from this sort of free-market fundamentalism, as it’s called, to where you have markets much more regulated and managed by authorities, governments, central banks, whatever?

Cardillo: Well, if you’re asking me do I think capitalism is dead, the answer to that is no. Are we going to have a shift; are there going to be a lot of regulations? Yes, but I think this so-called small part of socialism that we may have entered will not be long-lasting; I think it will be short-lived.

Norman: All right, thank you very much Peter. Well, you heard it here: Capitalism is not dead, folks, so stick around here, come back; we’re going to have a lot more on this interview series. Thanks for stopping by. This is Mike Norman; see you next time.

Watch The Video Part 2

What’s happening with Gold? « The Economics Journal

06 Thursday Nov 2008

Posted by in capitalism, commodities, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, U.S. Dollar, Uncategorized

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What’s happening with Gold? « The Economics Journal

By: Balaji Viswanathan of The Economics Journal

Gold had the biggest monthly drop since 1983, last month. It dropped 18% in that month to about $700/ounce (1 troy ounce approximately equals 31 grams). It seems counterintuitive given the fact that crisis generally increases the price of gold, and October is the month of peak credit crisis.

One of the biggest factors causing this is the fading of inflation fears from the mind of investors. Inflation always pushes people to look for hard assets and after a year of inflation worries, the central banks are breathing easy that the oil drop has taken at least one of the worries from their backs. 

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Performance of GLD – one of the main ETF’s for gold, in October.

Another factor is because of the drop in interest from speculators who have been selling all profitable assets to make good for their losses elsewhere. Suppose you are an institutional investor who wants to maintain a constant allocation of 80% in stocks, 20% in gold, you would have lost 40% of the value in stocks since the start of the year, while your gold worth would have increased, skewing your portfolio heavily towards gold in the process. This will force you to sell gold at this time and re-balance your portfolio.  Marketwatch writes that:

Speculators reduced their buy positions by 8,313 contracts on the Comex while increasing their sell positions by 12,574 in the week ended Oct. 28, according to latest data from the Commodity Futures Trading Commission. One contract represents 100 ounces of gold.

The Gold report gives another reason for this drop:

It has been central bank gold loans, even more so than official gold sales, that have really pulled the rug out from under gold. Gold loans by central banks are an alternative, and invisible, means of injecting liquidity into the banking system. These gold loans to banks and bullion dealers by the leading central banks are probably a significant multiple of outright official sales.

In simple terms, a central bank may lend or deposit gold with a banker or bullion dealer who simultaneously sells forward. Even with the recent substantial increase in gold-lending rates, at the end of the day the dealer receives cash in the transaction at a cost that may be advantageous to short-term money-market borrowing costs. Central banks have great freedom to lend gold outside their government-mandated rescue programs and these lending activities are typically hidden by their accounting practices…

Why is gold a good buy right now?

  1. Gold is very good hedge given its low/negative correlation with stocks and bonds as you can see from the chart below from World Gold Council. More likely, gold will stay neutral or move slightly opposite to your rest of the portfolio giving you a good risk balance. image
  2. Gold is a bet against all currencies – and a good inflation hedge. As nations the world over keep turning on their money spigots, all the currencies get weaker. By the end of this crisis, there is a good probability that the central banks would have pumped in far more money than the money supply contraction caused by deleveraging, and that could cause a severe inflation. Gold is historically good with inflation. 
  3. People in developing nations like India and China traditionally turn over to gold in times of trouble – as they don’t have too much trust in their equivalent of Treasury bills. Given the performance of their stock markets (loss > 50-60%) and asset classes, it is expected that they might turn toward the asset class known to them for 1000s of years instead of the stock or bond markets that are still nascent by Western standards.
  4. The thawing of credit markets is pretty superficial. There are still deep problems down there and they will take years to solve. So, even if the current situation looks calm and serene, turmoil and volatility might turn any time. Whenever people lose trust in banking system they tend to fall back towards gold.

However, take note that gold over the long term under performs other asset classes like equities and bonds and you should not weigh too much of your assets in gold. If you are a long term investor think gold more like an insurance, and you could keep a small amount of it to give better risk tolerance to your portfolio and don’t assume it to take care of your retirement. The best gold investments come over the short term to medium term, in times like these. Here is the 15 year gold price chart from the WGC. Gold has significantly outperformed most other asset classes in the last 6 years.

image

Read More:

Gold Council report for Quarter 2, 2008

Disclosure: Long position in GLD.

My Note and Disclosure, I am Long GLD – jschulmansr

 

The Perversion of American Capitalism

05 Wednesday Nov 2008

Posted by in capitalism, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, silver, socialism, Uncategorized

≈ 1 Comment

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The Perversion of American Capitalism

By: Naufal Sanaullah of Dorm Room Derivatives

The United States does not rely on industry for growth. Its economic backbone is money. America finances the globe’s corporations and emerging markets, its dollar is the world’s preeminent reserve currency, and its citizens’ puchasing power allows for the monstrous consumption that accounts for over 60% of the world’s largest GDP.

It is sad, then, that this nation faces a liquidity crisis out of all possible economic scenarios. The United States economy is based on international reliance for its financing, and a global credit crunch greatly diminishes that leverage.

Since the 1970s, America has gradually shifted from being an industrial production superpower to a consumption-based financial center, concurrently going from a significant creditor nation to debtor nation. It was able to do this because of the leverage it had on the rest of the world’s economies. Trade deficits were allowed and even encouraged because of the supreme strength of the US Dollar, being the world’s most important reserve currency. Newly capitalist post-Cold War economies stemming from the Soviet Union’s collapse offered huge new markets that America financed and invested in, again providing leverage for debt. The United States was the safest investment in the world, with its strong currency, economy, and liquidity.

Then came Greenspan.

As Federal Reserve Chairman, Alan Greenspan manufactured a credit bubble in the 1990s through a series of interest rate cuts. Because of an extremely inaccurate new methodology of inflation calculation introduced by Bill Clinton, interest rates were manipulated to aritifically ease credit, which grossly misdirected capital and created a series of bubbles, in information technology, dot-coms, equity markets, real estate, and credit in general. The 90s were a period of ridiculous economic growth in America, but it was substantially artificial, as overconsumption pervaded the perceived growth. This overconsumption was financed by borrowing using artificially free credit. True purchasing power was significantly below perceived wealth, and thus asset values shot up and, now, are shooting back down twice as hard and twice as quick.

Now that the credit market has collapsed (as well as credit-dependent markets, namely housing and automobile), purchasing power is going to begin a quick descent to real terms. Americans are going to lose wealth quickly, especially through their invested capital in mutual funds and pensions funds, as well as their homes. To ease the flow of credit to get Americans borrowing again and consequently consuming, propping back up the American economy, the Fed has been lowering interest rates again, but this time there is an added problem– inflation.

The recalculation of inflation is now manifesting itself in a weakening dollar, and eventually valuations will finally come to represent true inflationary levels, most likely around 8% already. The problem is the American government is trying to stimulate consumption once more by re-liquifying banks by buying out bad mortgage-related assets, especially derivatives. Consumption does not drive economic growth on the long term, capital investment does. Capital spurs technology, adds liquidity, and increases output, something America has not experienced since its back on industry. America has enjoyed strong inflows of foreign capital because of its equity markets and strong currency, but neither of those are incentives for investment any longer. The government’s plan to buy defaulted credit assets to bailout big banks is in fact worse for its long-run economic growth, because it weakens the dollar even further. The US dollar is now essentially backed by bad mortgage debt, and the only thing propping it up right now is temporary relative strength as the rest of the world experiences its own credit crises and the dollar remains the fundamental reserve currency. But for how long?

American national debt is the last bubble to collapse, and in fact it is still inflating and will continue to until a weakened global economy will force nations to call in their debts outstanding from the United States. This will be the coming of age for the next wave of economic titans: Singapore, Hong Kong, India, China, Australia, and Russia. This will be the downfall of the American Dollar and its replacement as the world’s pervasive reserve currency. This will be the true liquidity crisis, as the United States will essentially be forced into bankruptcy with no surplus to pay off debts and no way of financing through an illiquid banking structure.

This will be the end of capitalism in America. Socialist programs of the ’60s and ’70s foreshadowed the economic collapse, Alan Greenspan ushered it in, George Bush and his debt-financed wars worsened it, and Barack Obama and his socialist taxpayer-funded big government programs and bailouts will make it a perfect storm. I see in the future the possibility of an economy characterized by free credit but no demand and no purchasing power based on ridiculous inflation. Sounds eerily similar to 1930s Germany. Who will be America’s demagogue?

Buy precious metals now to save yourself. Venture capitalists are gone, there are no new IPOs, there is no industry, the currency is going to be worthless, hyperinflation may kick in, and there is no demand curve growth in sight. Buy precious metals.

America’s only hope? After four years of Obama, Barry Goldwater is resurrected from the dead to preach Austrian School capitalism and libertarian social policy.

Long recommendations: GLD, SDS, SKF, QID

Author’s Disclosure: I am long none of these ETFs, but will be after the current countertrend bear rally finishes (expecting around February-March).