What A Tangled Web We Weave…

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… -- Thomas Jefferson, 1802

If policy makers are not careful, present dynamics may precipitate a worldwide Trade War culminating in a worldwide DEPRESSION, brought about by protectionist pressures exacerbated by Global, political "Beggar Thy Neighbor" motivations. (it's happened before: There is no end to the stupidity of politicians)

Past evidence of cycles suggests that we are about a third of way through what might be a 16 to 20 year DEPRESSION. However, "debt deflations", such as the one that we are in, will be much worse than typical cycles, which are also Government induced but brought on by the FED increasing interest rates and tightening credit (a la Paul Volcker in 1980). One key indicator that can be used to illustrate this idea is the ratio of the level of the S&P 500 Index to the price of an ounce of Gold, which hit a high of 5.5x towards the end of the Tech Bubble in 2001. The ratio has since collapsed to below 1x. While this is not the lowest it has been, it is an indication that confidence in owning paper assets has evaporated (that is probably what the ever shrinking volume is telling us) and the classic hard asset of Gold has won out as the only reliable STORE and preservation of Wealth, which is now fast becoming investors main concern. Similar collapses in the ratio were seen after the 1929 crash and the 1973 oil crisis.

A fiat currency is only as strong as the belief it inspires to its holders.

I have been postulating that Treasury Bonds are in an expanding bubble and have become the New Toxic Assets that will end up being the Biggest Exploding Ponzi Scheme in history. At some point in the not too distant future, the markets will realize that the amount of Treasuries outstanding are so large that they can never be repaid and the currency in which they are denominated is dropping in value like a stone. So if they are to be repaid at all, they will be repaid in worthless Fiat Dollars. When such realizations finally become obvious, a massive exiting out of Treasuries will begin, resulting in a huge shift to commodities and precious metals as a safe haven. But here is the tragedy: Increased inflation will not be perceived - at least not at first - as anything to worry about. As each monthly rise will be considered as a good thing because of the current IRRATIONAL fear of the deflation that we are in. Therefore any pickup in the inflation index will be interpreted as a pickup in the overall economy. Eventually, however, as inflation continues its steady month over month rise, the price increases will begin to really hurt and the job market, instead of improving, will actually get worse. Suddenly the American people will no longer be swayed by phony government statistics and wake up to the fact that we are in a Major Depression as the inflation rate soars past the 1979 high of 14%.

But there is a key difference between today and 1980: Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did. Back in 1980, there was no such thing as Derivatives that now total 1000 times more than World GDP of $60 trillion, which if interest rates begin to rise as they did back then, will bring the whole world's financial system crashing down.

Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), he lacks the backbone and more importantly, the common sense to realize that he has been making a mistake all along. If there is a run on Treasuries, Bernanke will not be able to raise interest rates to hold Treasury Investors - if he did, he would wipe out all the Too Big To Fail banks, and break the Treasury of the U.S. Federal Government (both of which depend on the Fed's cheap money as completely as if it were oxygen). What is even more dangerous is what rising rates would do to the quadrillions of dollars in Derivatives (something that I have been warning about since 2006). To make matters worse, FINREG did nothing to even address the Derivatives or any of the other Deep Seeded major problems.

Back in 1980, Volcker didn't have today's constraint. He could raise rates - but even so, he paid for it with a 4% increase in unemployment.

However, unemployment today is already at 10% (17% to 22% in reality) and that's in a soft credit environment. So even if he didn't have the TBTF banks and the Federal Government on cheap money life support, Bernanke cannot raise rates in order to stop a run on Treasuries, stop a run-up on commodities, and stop incipient hyperinflation. The economy is too weak. Adding 400 basis points to the current unemployment situation - that would drive US unemployment to 14% (25% in reality, the same as the highest rate hit during the 1930's) or more. It would cause political pandemonium, not to mention riots.

Finally, Bernanke won't raise rates - can't raise rates - because of the disease of the mind that he has: Due to Alan Greenspan's pernicious, destructive influence, which I have discussed at some length in the past. Bernanke is a Keynesian Ideologue and thoroughly believes that only liquidity injections and cheap money can save the economy - he is doing his best to create inflation. He is so terrified of the American economy going down the deflationary drain that he is deliberately going in the other direction.

Bernanke doesn't realize that inflation is a symptom that can augur many things. He is convinced that inflation means growth - the opposite of deflation. So all his liquidity windows, all his cash infusions to prop up the Too Big To Fail banks and their huckster operators, QE, QE-lite, and the forthcoming QE2 - all of it is being carried out by Bernanke so as to cause inflation. He is convinced that inflation will signal that the economy is recovering and that the Federal Debt will be inflated away, and then we can all live happily ever after.

THE 2010 ELECTIONS

We are now about to experience one of the most dramatic political revolutions in our nation's history. But will the new Congress be any better than the old one? Will a new leader spring up in 2012 to save the day?

Even if the new Congress only succeeds in blocking new stimulus programs, it will be a major reversal in economic policy with a potentially colossal impact on the economy and the investment markets.

• We may see a correction in Gold of $100 - $200. But it will be a huge buying opportunity. Gold will then soar BEYOND $1,500 per ounce before the end of this year, just as I predicted back in February.
• After a brief and maybe even dramatic Rally, due to goings on in Europe, the U.S. dollar index will continue to sink and will not hit rock bottom until maybe 2012 - 2013.
• Oil and energy investments will swing wildly, but will NOT hit new highs since the demand for oil will shrink drastically as the USA drags the world into Recession come Depression.
• Both the U.S. Bond and Stock Markets may continue to rally in the very near-term but soon plunge, culminating in the worst Bear Markets in history as the Recession spreads around the world.

It's one of the reasons why, for the past few years, I've continuously advised you that I own physical Gold and Silver - at least 35% to 50% of my total liquid assets. Yes, the price of Gold and Silver took a swoon because the U.S. Government is making sounds like it will support the dollar. But that was just a Gift Buying opportunity and for the long term, precious metals are still the safest and best place to be.

Where is the Housing Recovery?

Bottom line, the housing market has not yet begun to recover. It is not only going to take much longer than everyone anticipates, but the decline in prices will be much greater than your WORST NIGHTMARES. That should not be too surprising to anyone who is smart enough to learn from the past: History teaches us that the average Bear Market in housing lasts approximately 10 years before the down trend is reversed and that is after a normal FED induced, high interest rates, cyclical drop: Nothing like what we are suffering through today. So our lesson should be that we have at least another 6 years before the Real Estate market is ready to reverse its present course. In the past, we always had a healthy FRE, FNM and banking system, while now not only are all three bankrupt, but the Government has not even addressed their problems and we no longer have a vibrant Public Market place for mortgages. I could go on, but you are all well aware of the myriad of other problems now facing the Real Estate markets and the economy (most of which I have outlined in many of my past missives). DEPRESSION is looming heavily in the USA and on the rest of the world as well. Only a complete about face back to Laissez Faire Free Market Capitalism can possibly save the day.

THE OBVIOUS IS OBVIOUSLY WRONG

GLOBAL WARMIMG

The snow cover over Asia, Korea, Alaska, and Canada is greater this year than it was last year on the same date. It is also clear that the Arctic ice cover this year is also greater than it was last year, Global cooling is alive and well, but you will not hear or read about in the mainstream media.

FINREG

Contrary to the popular propaganda, FINREG like Sarbanes Oxley before it will not only do nothing to make it safer for the public, small investor and us taxpayers; It will do much more damage than any other regulations ever have and will set the stage for the next debacle. Not only has it not addressed any of the main and most serious financial problems, but it has instead increased compliance costs by creating multiple layers of new and overlapping bureaucracies staffed by political appointees with absolutely no experience. And yet they have the ability to make new rules & regulations, with one hand not knowing what the other is doing. Nevertheless, its costs are always passed on to the consumer and taxpayer. The mirage of confusing regulations and costs will end up driving more and more of our financial business offshore; just as Sarbanes Oxley has already done. Unfortunately it is a lot easier to pass new regulations than it is to get rid of them, should they not work. Is it any wonder that companies refuse to repatriate and pay a double tax on their offshore profits? If we are not careful and continue to vilify corporations and their profits, they will move their on shore profits off shore; just as Halliburton has already done.

QE2 and STAGFLATION

We are about to witness the crowd being wrong again as we discover that whatever QE 2 turns out to be, it will mark the top of the Rally that started in March 2009 as the Bear Market resumes in earnest.

On November 3rd, the Federal Reserve will make an announcement that will be the driving force for investments for the next year. On that day, Fed Chief Ben Bernanke will reveal his plan for the next round of quantitative easing or QE2. By creating Inflation he is trying to break the psychology of "Why spend today when I can buy the same goods cheaper tomorrow," they are hoping to drive growth that would be more commensurate with a (phantom) pickup in employment. But the scheme is not founded in reality or sound economic principles. The most likely initial outcome will be; a late 1970s type of scenario where by the inflation genie is finally let out of the bottle for all to see. That's when they invented the word STAGFLATION. That's when the real pain begins.

There is nothing worse than having two self-promoting know it alls who actually know nothing and understand even less and that for some reason (?) have been given the power to destroy our currency, economy and our country's wealth. Why; because they helped get us into this mess in the first place?

WORLD WAR III?

It is my judgment that today every Government and their clueless Central Bankers feel they have the right and obligation to use monetary policy to the advantage of their own short-sighted wealth preservation and power games. Could the conflict of the 21st Century revolve around a Currency Devaluation Wars, rather than Shooting Wars? Should we rephrase Churchill's warning: "If the financially developed nations of the world were to wage a war of competitive currency devaluation on one another, they would be thoroughly sick of it before it was finished"? Could competitive currency devaluation be this Bear Market surprise mechanism that pits countries and people against one another, just as the First World War did devastating the entire world? The First World War is remembered for the senseless slaughter of trench warfare. Will this period be remembered for its disruptive worldwide impoverishment due to trade and currency warfare? Was the halting of Rare Earth's exports by China over a relative minor disagreement between China and Japan or Russia's halting of wheat exports be only the First Shots heard around the world? Will it become 2010's Sarajevo leading to WW III?

HOW NOW DOW

I'll make this letter short and sweet. In my opinion, the markets already have or are only days away from topping out. If you expect the Democrats to hold on to power and Bernanke to announce only a very moderate QE 2 policy, then go short Monday. However, if you expect a landslide Republican victory and a Bernanke policy announcement on Wednesday of at least a $500 billion or more QE 2 Stimulus Package, as I do, you might want to wait for a Wednesday afternoon and Thursday 200 to 350 point BLOW OFF and short into that. Either way, this 18 month Bare Market Rally is in my opinion OVER! A third alternate strategy may be to take initial Put positions on Monday and take the balance of your Bearish positions over the coming week. I have no exact way of knowing what the public's initial reaction will be to Tuesday's election results and Wednesday morning's Bernanke speech. Just remember this: Any euphoric reaction will definitely be wrong.

GOLD

Two week ago, the 2 major indexes of Gold stocks -- the HUI and the XAU -- surpassed their 2008 highs. It reminds me of when the Dow broke decisively through 1000 into new all time high territory back in 1983. It indicated then (although not recognized by most) that a new major Bull Market had begun. Today, the Gold markets rise above $1,250 indicated to me at least, that a new leg in the Bull Market in the Gold and Silver and their mining stocks has in reality just started, rather than blowing off. They didn't believe the market then and most don't believe Gold, GDXJ, HUI and XAU now. "Back then if the Dow was able to more than triple, going from 1,000 to 3,600 in a little over 3 years which proved to be only the beginning of its march to 14,000: now as back then, I think we can see a more than tripling in the GDXJ, HUI and XAU mining indexes over the next three years. This will just be the start for eventual much higher highs into 2017, exactly as I had originally forecast back in 2005.

Even though there have been lively discussions lately about when the Bull Market in Gold will end, I find the idea of Gold in a "bull market" completely misleading as if Gold was a consumable commodity like oil or coffee or copper. Once again, Gold has become real money: The standard by which the "value of all other things" are measured. The apparent increase in the price of Gold as expressed in Fiat currencies is as much a reflection of the respective currency's vanishing purchasing power, due to inflation, in its true sense, as is its increased preference as a store of wealth. To hold Gold over currency is in recognition of currency's lost function as a store of wealth. As long as there is an ever increasing propensity for the US and the world's central bankers to keep printing fiat money and using it to monetize their country's Debt, there is NO chance that Gold is even close to blowing off. While it is possible that Gold (Silver) can get ahead of itself and will therefore correct, the correction will only be a temporary set back that will offer a perfect opportunity for us to increase our positions.

Because Gold is not consumed and its rate of disappearance is miniscule, it should NOT be considered a commodity according to the definition of that word. Commodities, like steel, copper, grain, potash, sugar, rubber, etc. are the raw materials which are consumed in the process of manufacturing or just living. While Gold has been hoarded for more than 5,000 years, every ounce ever found is still being hoarded in one form or another, but mostly as Central Bank Reserves and as individual's store of wealth and/or jewelry.

Since Nixon took the US Dollar off of the Gold standard in 1971, the US Dollar is now worth only $0.12 in 1971 dollars.

IS GOLD TOPPING OUT?

Should we be so lucky as to see Gold manipulated down to $1,200 or even e $1100 as it may be, don't panic. And don't make the mistake of thinking that the "Bull Market" in Gold is over. It will be just another GIFT HORSE to be taken advantage of, just as we have done in the past. Gold will resume its steady rise in price as expressed in currencies as long as currencies continue to be indiscriminately mass produced "out of thin air," which is the only TRUE definition of Inflation. The more inherently-worthless Fiat dollars that are created "out of thin air" and used primarily to monetize the nations' debts, the more Fiat money it will take to buy any asset with real intrinsic value, especially Gold and Silver.

The biggest profits always accrue to those with the courage to stand alone. Try calculating company profits at $6,250 Gold and $250 Silver. You all know my track record, so before you consider following somebody's advice, check out their track records first.

Up until now, whenever the stock markets are weak, the reaction has been that fear flares and capital flees into the relative safety of cash (US dollars) and US Treasuries. (What a joke, I'd laugh but it's not funny). The dollar has become a slave to the SPX's fortunes, not the other way around as most would assume. Slowly but surely, more and more people are waking up to the realities.

If I told you once, I have told a 1,000 times, Gold is in a market unto itself and there is no lasting long term correlation to any other markets. We are in a Once in a Lifetime 16 to 20 year Bull Market for Gold and Silver - DON"T BLOW IT.

 

 

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