viernes, 19 de agosto de 2011

A Hell of a Decade

By: Peter Schiff

In its recent look back on the first ten years of the century, Time Magazine proclaimed the period to be "the decade from hell." The editors made their case based on what they saw as the signature events of the last ten years, notably the ravages of terrorism, failed wars, and a global financial crisis. Taken together, these factors produced an era that Time is convinced will be remembered as one of the low points in our history.

As the media hates to dwell on the negative, the commentary was rife with notes of optimism about pending recovery. It could hardly be accidental that in the very next issue, Fed Chairman Ben Bernanke was named "Man of the Year" for his supposedly Herculean efforts to keep the economy afloat as we departed the Naughty Aughties. Although Time takes pains that to point out that the "Person of the Year" honor reflects impact rather than adulation, its profile of the Chairman was triumphant.

Even if you believe the "survived the worst/turned the corner" narrative offered by Time, it still should strike anyone as ironic that Chairman Bernanke, a chief architect of the economic problems that surfaced in 2007, should be held in such high esteem.

Apart from its misplaced reverence for the Fed Chairman, I would take issue with Time's entire characterization of what has now become history.

Under no circumstances could the past ten years be described as "the decade from hell." In fact, in terms of economic good fortune, the period shares parallels with the Roaring Twenties. I would describe this as a decade of sin that paved the way to hell.

Yes, we had spectacular problems like September 11th and the invasion of Iraq - which were horrific for those who were directly affected - but for most Americans, it was a time of unexpected wealth and unearned prosperity. Up to the days of the stock market crash, the economics of the decade will be remembered for cash-out refinancing for millions of homeowners, no-doc liar loans, no-money-down car purchases, eight-figure Wall Street bonuses, cheap Chinese imports, and trample-to-death holiday sales. In other words, the decade now closing gave us the biggest and most irresponsible spending orgy in U.S. history. The past decade was the party; the one ahead will be the hangover.

The fact that Time completely ignored these issues shows how poorly the mainstream media understands the forces bearing down on our economy. Yes, they were able to identify some of the adverse consequences we experienced this decade. That's the easy part. But as far as seeing the causes behind the effects, they haven't a clue. As a result, Time has no ability to see the underlying pattern and will happily encourage our leaders to repeat the mistakes of the past on a grander scale.

For now, Congress and the President remain as clueless as Time. To show its resolve to 'get to the bottom of things,' the Obama Administration has impaneled a commission to investigate the causes of the financial crisis. Do not expect the proceedings, which are just getting underway, to come up with anything but the most politically useful explanations.

Blame will be laid at the feet of 'ineffective regulators' who failed to 'get tough' with industry, banks, and corporate leaders who held the 'public good' hostage to their 'personal greed.' There is no hope that anyone who actually saw the crisis coming will actually be asked to testify. If they called me, I would be happy to give them an earful. Unfortunately, the only way my views will ever be heard by the powers-that-be is if I am elected to the Senate - which is exactly what I plan to do next fall in my home state of Connecticut.

My sincere hope for the coming decade is that I can help our leaders see what Time cannot: we need to stop committing the economic sins that are leading us to hell, so that our stay down there will be as brief as possible. We need everyone to stop spending more than they earn. That is true not just for individuals, but for our government as well. Just this week, the Treasury Department removed its internal caps on bailout funds to Fannie Mae and Freddie Mac. Meanwhile, another bailout was proffered to ailing GMAC. If we continue the same bad behavior, it might not just be one decade from hell, but several.

However, if we can confess our sins, and vow to reform our ways, perhaps this will merely be a decade in purgatory. Perhaps we can turn it into the decade of hope, hard work, individual liberty, savings, production, investment, sound money, de-regulation, exports, budget surpluses, capitalism, limited government, and respect for the Constitution. These traits will harden us to withstand the fallout from our reckless past.

As of yet, our troubles continue to snowball - and I don't like a snowball's chances if we have a real decade from hell.

The Fix Is In

The Fix Is In

By: Peter Schiff |

This week's wild actions on Wall Street should serve as a stark reminder that few investors have any clue as to what is really going on beneath the surface of America's troubled economy. But this week did bring startling clarity on at least one front. In its August policy statement the Federal Reserve took the highly unusual step of putting a specific time frame for the continuation of its near zero interest rate policy.

Moving past the previously uncertain pronouncements that they would "keep interest rates low for an extended period," the Fed now tells us that rates will not budge from rock bottom for at least two years. Although the markets rallied on the news (at least for a few minutes) in reality the policy will inflict untold harm on the U.S. economy. The move was so dangerous and misguided that three members of the Fed's Open Market Committee actually voted against it. This level of dissent within the Fed hasn't been seen for years.

Many economists have short-sightedly concluded that ultra low interest rates are a sure fire way to spur economic growth. The easier and cheaper it is to borrow, they argue, the more likely business and consumers are to spend. And because spending spurs growth, in their calculation, low rates are always good. But, as is typical, they have it backwards.

I believe that ultra-low interest rates are among the biggest impediments currently preventing genuine economic growth in the US economy. By committing to keep them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Low rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little.

It may come as a shock to some, but just like everything else in a free market, interest rate levels are best determined by the freely interacting forces of supply and demand. In the case of interest rates, the determinative factors should be the supply of savings available to lend and the demand for money by people and business who want to borrow. Many of the beneficial elements of market determined rates are explained in my book How an Economy Grows and Why it Crashes. But allowing the government to determine interest rates as a matter of policy creates a number of distortions.

It was bad enough that the Fed held rates far too low, but at least a fig leaf of uncertainty kept the most brazen speculators in partial paralysis. But by specifically telegraphing policy, the Fed has now given cover to the most parasitic elements of the financial sector to undertake transactions that offer no economic benefit to the nation. Specifically, it will simply encourage banks to borrow money at zero percent from the Fed, and then use significant leverage to buy low yielding treasuries at 2 to 4 percent. The result is a banker's dream: guaranteed low risk profit. In other words it will encourage banks to lend to the government, which already borrows too much, and not lend to private borrowers, whose activity could actually benefit the economy.

This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments. American investment capital will continue to flow abroad, denying local business the means to expand and hire. It also destroys interest rates paid to holders of bank savings deposits which traditionally had been a financial pillar of retirees. In addition, such an inflationary policy drives real wages lower, robbing Americans of their purchasing power. The consequence is a dollar in free-fall, dragging down with it the standard of living of average Americans.

Until interest rates are allowed to rise to appropriate levels, more resources will be misallocated, additional jobs will be lost, government spending and deficits will continue to grow, the dollar will keep falling, consumer prices will keep rising, and the government will keep blaming our problems on external factors beyond its control. As the old adage goes, "insanity is doing the same thing over and over again and expecting different results."

Gold Rallies to $1,800 Again!

Gold Rallies to $1,800 Again!


08/18/11 St. Louis, Missouri – At one point yesterday, it looked as though the dollar was about to get a root canal, as the euro (EUR) climbed back to 1.45, the Aussie dollar (AUD) $1.05 and so on… The currencies were rallying so much that gold climbed into the back seat and let the currencies drive for a while… But, this morning… Gold is back in the driver’s seat, with the currencies backing off their charge against the dollar.

The backing off came in the Asian session after some weak data from the region pushed Asian stocks lower, and took the “risk trading” off the table… The one piece of data that really shook up the region printed in Singapore, where overseas sales slumped for the first time in 3 months… Malaysia saw their economy grow at the slowest pace since 2009, but the real meat was the Singapore data. You see, Singapore depends on overseas demand; they don’t have an economy the size of China that can switch to a domestically demanding economy… This is a little disturbing, but not like having one’s credit rating downgraded, so… Let’s see what comes next here before we scream that the sky is falling.

The data, though, is really pushing down currencies, as they have now been handed over to the European session, which didn’t see any reason to prop them back up. So, our Tub Thumpin’ Thursday is starting off as a “Risk Off Day”… But, in recent days… Risk off affects currencies, commodities and equities… Not gold…

I’ve said this before, but it bears repeating… Gold is more than just a commodity… It’s real money! And… An excellent way to diversify an investment portfolio! As I tell audiences all the time… Gold has independent pricing mechanisms that the other assets you hold don’t. Gold smoothes the volatility in an investment portfolio especially in highly volatile times. Gold is not subject to any form of liquidity risk, and does not contain credit risk, and finally it has no liabilities attached to it!

Yesterday, we saw the color of the latest PPI (wholesale inflation) report here in the US. July’s PPI showed a 0.2% increase for the month, which didn’t erase June’s -0.4% print… But did get people talking about inflation again. But we won’t find inflation in today’s printing of CPI (consumer inflation)… That just won’t happen, folks… The hedonic adjustments department will make certain of that!

It will be a busy day for the data cupboard, as CPI will be joined at the printer by Weekly Initial Jobless Claims, Leading Indicators for July, the Philly Fed (manufacturing), and Existing Home Sales… None of it will be too revealing to us… I like to see what’s going on with Leading Indicators, as it is a forward looking report…

I had a reader ask me why I hadn’t commented on the riots going on in England… Well, that’s because I would really like to imagine them not happening… You see… For the last 3 years, whatever’s happened in England, ends up happening here about 6 months later… And while I’ve always known that back in the deep dark closet, that kind of social unrest could come to this country (because of austerity measures that will have to be taken in order to seriously change the course of this country’s finances), I’ve always hoped that a hoola-hoop could be invented to alleviate the whole mess…

I was sent another note by a reader that reminded me that the Rugby World Cup was being held in New Zealand, right now, and the forecasts for people coming to New Zealand to watch the games were understated… So… Kiwi (NZD) could very well see a short-term rise, based on the activity in New Zealand…

And I already told you how the Asian stock market dip caused the Aussie dollar to slide… Well, that holds true for the New Zealand dollar/kiwi too… There was a guy talking on the Bloomie TV this morning, saying that “investors should buy the Aussie dollar on any significant dips”… Hmmm… I don’t think today’s price slide would be considered as a “significant dip”, but a couple of weeks ago, when the Aussie dollar slid to $1.00… THAT was a significant dip!

So… The two central banks that keep coming back to the intervention table – the Swiss National Bank (SNB) and Bank of Japan (BOJ) – are being watched by the markets like a hawk… The SNB has lost so much money intervening… But I think the threat is enough to keep the markets from going “all in” on francs (CHF)… And the BOJ may very well pull the intervention card out of its hat if yen (JPY) gets below 76…

I see where Norway announced a HUGE oil discovery… There had been some recent talk that Norway’s oil fields were drying up… Well that talk can now be put to bed! And the country with the absolute best financial balance sheet will continue to remain at the top of that list!

We’re turning Japanese, yes, I really think so! Turning the page back to the ’90s when Japan cut interest rates to the bone and kept announcing budget stimulus, just plain stimulus, job packages, quantitative easing, and what did it get them? Nothing, absolutely nothing! Unless that is you’re talking about a government debt that has exploded…

And now here we are in the US we’ve gone down the stimulus road a couple of times now… We’ve cut interest rates to the bone… We’ve gone down the quantitative easing road a couple of times now, so what’s next? Ahhh, grasshopper… The US president announced yesterday that he will present a jobs package next month… So, as of next month, we will have gone down every road the Japanese went down…

And then there was this… As reported in The Wall Street Journal

Major websites such as and have been tracking people’s online activities using powerful new methods that are almost impossible for computer users to detect, new research shows.

The new techniques, which are legal, reach beyond the traditional “cookie,” a small file that websites routinely install on users’ computers to help track their activities online. Hulu and MSN were installing files known as “supercookies,” which are capable of re-creating users’ profiles after people deleted regular cookies, according to researchers at Stanford University and University of California at Berkeley.

Many of the companies found to be using the new techniques say the tracking was inadvertent and they stopped it after being contacted by the researchers.

You know… The majority of Americans, like me, just want to be left alone, no big brother, no government prying into our personal lives… This privacy invasion by everyone is becoming a real problem…

To recap… The currencies enjoyed a strong performance yesterday, only to see the rug pulled out from under them by some weak Asian data… Malaysia’s GPD was weaker, and Singapore’s overseas sales slipped… These two ripples led to an Asian stock sell off and that was handed over to Europe, who kept the weakness going… Gold however, has taken its place now as THE safe haven currency, and has rallied this morning. It will be a busy day for the data cupboard today.

Chuck Butler

Gold Stocks that Think They’re As Good as Gold

Gold Stocks that Think They’re As Good as Gold


08/18/11 Baltimore, Maryland – In the first five minutes of trading this morning, the Dow fell 300 points. It fell a further 40 in the ensuing 25 minutes. Then shed another 150 the moment the Philadelphia Fed announced grim news for manufacturing at 10:00 a.m.

As you might expect, the “safety trade” is back on.

At the opening, it sure looks like today will be the day gold breaks $1,800… and sticks. At last check, the Midas metal is up to $1,822.

This morning’s initial shock in New York began in Europe. Major indexes in London, Frankfurt and Paris all shed 3-4% during their sessions.

No specific event set things off… except perhaps “the realization is that [officials] don’t really have a clue” one waggish analyst explained it to MarketWatch.

Banks across the board are taking the biggest hit. Good thing officials banned short-selling financial stocks in France, Italy, Spain and Belgium last week, isn’t it?

With the Dow’s 450-point plunge, all the gains since a week ago today are gone. Ditto the S&P and the Nasdaq.

As we mentioned, The “Philly Fed” – a Federal Reserve measure of manufacturing in the mid-Atlantic region – plunged deep into negative territory, to a grim level last seen in March 2009…

Philadelphia Fed Survey Since 1995

A hit list of additional domestic economic numbers in the US isn’t helping much:

  • The consumer price index (CPI) is up 0.5% from June to July. Gasoline drove about half of that increase, with food and clothing accounting for much of the rest. The year-over-year increase is 3.6%…
  • First-time unemployment claims rose 408,000 last week. After a one-week respite, we’re back above 400,000, the critical number under which wonks like to think the economy healthy…
  • The National Association of Realtors (NAR) reports existing home sales fell 3.5% between June and July…

Add all these data points up you get a giant sigh of disgust from economic pundits across the nation. Every one of these numbers was worse than the “consensus estimate” of economists polled by outfits like Bloomberg and MarketWatch.

Likewise, the “safety trade” is driving money into Treasuries… forcing yields down. The yield on a 10-year Treasury note set a record low this morning.

At last check, Uncle Sam will give you a whopping 1.98% return on money you lend him for the next decade – even less than during the panic low on Dec. 19, 2008.

Perspective: On that same date, gold went for $840 an ounce. Treasuries have a newfound companion when it comes to the safety trade.

“I think we’ve reached a stage,” says First Eagle Funds’ Jean-Marie Eveillard, “where [gold is] not just a hedge against inflation, it’s a substitute currency.”

“Investors look at issues in Europe and in the US, in Europe the problem with the single currency and in the US there is the problem of the ballooning government debt because of gigantic budget deficits.”

“We have had a pure paper money system for 40 years when Nixon closed the gold window in ’71. That system, or what passes for a system, is fraying at the edges and gold becomes a hedge and some kind of insurance policy.”

Even our favorite Latin American caudillo has figured that out. Venezuelan president Hugo Chavez nationalized the country’s gold mines yesterday.

Well, the ones that weren’t nationalized already anyway. Not that Venezuela is much of a gold producer to begin with.

Lost in the noise surrounding this announcement is something we find a lot more significant: Chavez is repatriating much of Venezuela’s gold held overseas – about $11 billion worth.

The Bank of England, J.P. Morgan Chase, Barclays, Standard Chartered, the Bank of Nova Scotia… all of them recently got a request from Chavez asking that the gold he has stored with them be shipped home.

“We’ve held 99 tons of gold at the Bank of England since 1980,” declared Chavez. “It’s a healthy decision” to bring it back.

So where does gold go from here? In the options market, traders are making some extreme bets.

There’s a high amount of open interest – 14,532 contracts, says the Financial Times – in December 2011 gold calls with a strike price of $3,000. That’s a lot of people counting on nearly a double in four months.

There are 189 contracts for December 2012 calls at $5,000. December 2012? That’s the Apocalypse trade.

The stock market is dragging down gold stocks today, but not much. The GDX ETF of major gold miners is down about 2/3 of a percent.

Over the last 10 trading days, gold stocks have performed a lot more like gold than stocks:

Gold Stocks vs. Gold Price vs. Stock Prices

“Here we are right now with a very interesting set of circumstances,” said Byron King during our teleconference this week, released to Reserve members last night. “The price of what they sell has gone up a lot, and a big part of the cost of what they do, which is energy, has gone down quite a bit.”

“So you’ve got higher income from your gold sales and you’ve got lower cost from cheaper oil and cheaper energy. That ought to go to the bottom line, and from a pure valuation standpoint, that ought to be good for the gold mining stocks.”

The breakout of gold stocks in recent days marks the reversal of a stunning trend as shown on this chart, courtesy of our friend Bill Baker and the crew at Gaineswood Investment Management and the Marlmont Fund:

Correlation Between the Gold Price and the XAU Index of Precious Metals Stocks

This shows the correlation between gold and gold stocks as represented by the Philadelphia Gold and Silver Index, commonly known as the XAU.

“During the second quarter of this year,” says a new report from Marlmont, “shares of precious metals companies behaved strangely, actually going down in value when gold appreciated.”

“This negative correlation has never existed in the data that extend as far back as we could access, to 1992. There have been very short bouts when the movement of miners and the metal did not move well in unison, but never this.”

Their conclusion: “We frankly could not conjure up a more convincing case for owning companies that search for and produce precious metals – especially now that in recent decades these have underperformed gold bullion as dramatically as only seen in the meltdown of 2008.”

Addison Wiggin

Armageddon Can Wait

Armageddon Can Wait


08/19/11 Poitou, France – Until August 15, 1971, wealth was tallied in units of a real and natural thing – gold. It measured out the world’s other real things – its resources and its output. Its main advantage was that it couldn’t be diddled. That turned the authorities against it; they couldn’t make more of it.

Nuestra Senora de Atocha, a Spanish galleon, sank in a storm off the Florida coast in 1622. When it was found in the 1970s, its treasure of gold doubloons was just as valuable as it was when the ship left Havana 350 years before.

But, post 1971, we have a new, avant-garde money system. Wealth is counted up in pieces of paper…or as electronic ‘information.’ Each unit has no real value of its own. It only represents a claim against real goods and services. And each year, it purchases fewer of them.

What is most remarkable about this freakish new money system is that it is always on the road to Hell but never seems to get there. Since 1971, paper currencies have lost value at a breakneck speed. You’d think their necks would be broken by now. In 1972, we bought a gallon of gasoline for 25 cents. Now, it is 16 times that much. Gold has gone up 50 times…for a 98% loss to the dollar holder. If this pattern continues for another 40 years, a gold doubloon will buy about what it does today. A dollar will buy nothing.

And then, along came S&P with more bad news: not only is the dollar disappearing, but if you lend money to the US government you might not get it back. The stock market took the news badly. But bond investors bought with even more lusty recklessness than before. It was as if they really didn’t want the money back anyway. Yields on US 10-year notes fell from around 3% to scarcely more than 2%, giving investors a negative real yield.

But the fall in yields should not come as a surprise. Japan’s government debt lost its Triple A status in 2002. Yields did not rise. Instead, they stayed between 1% and 2%. Then, last week, Japanese 10-year notes – IOUs of the most deeply indebted nation on earth – reached an all-time high. Yields fell below 1%, briefly.

You may think that investors have lost their minds. But no more than usual. It’s not the nominal rate that investors care about; it’s the real rate. For 20 years, stocks and property in Japan have gotten hammered. Bond buyers are the only ones who’ve made any money. Deflation takes prices down. Even a zero interest rate gives them a positive return. And it isn’t even taxable.

And now the US Fed follows in Japan’s footsteps. The Fed announced last week that it would continue to lend money for two more years, asking little more than a ‘thank you’ in return. Zero is the going rate at the Fed’s lending window – just as it is in Japan.

When Richard Nixon implemented his new monetary system, 4 decades ago, he set in motion a huge expansion in the world’s supply of cash and credit. Gold was limited. Paper money was left to run wild. Ben Bernanke famously announced how it worked in a 2002 speech, entitled “Deflation: Making Sure it Doesn’t Happen Here,” he explained:

…the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Bernanke made it sound like a piece of cake. He should have appended a footnote. Inflating is easy when the credit cycle is expanding. When an economy transforms itself from grasshopper to ant, it gets harder. People switch from borrowing, spending and investing to exterminating debt and hoarding cash. That’s why none of the stimulus measures – fiscal or monetary – has done any significant good. And it is why no policy adjustment, short of debt cancellation or hyperinflation, will make any damned difference.

The whole situation is one for the history books. Four decades of paper money – with effectively no limit on credit expansion – have created mountains of debt in all the developed countries. Now, private sector debts are being sloughed off and asset prices wobble – making investors fearful and skittish. The more they sweat, the more they seek the safety of US Treasurys, and the lower interest rates go. Low rates delay Armageddon…if Japan is any indication…almost indefinitely. The economy continues on the road to Hell…and picks up speed. When it finally arrives, we don’t know. But we bet the price of gold will be higher when we find out.


Stocks and Gold Point to a Hellish Outcome

Stocks and Gold Point to a Hellish Outcome


08/19/11 Poitou, France – Wow…another whack.

Wall Street got whacked hard yesterday. It had begun to look as though things were getting back to normal. Then…whammo!

Yesterday, the Dow took a 419 point hit. Gold rose $28 to close decisively above $1,800.

We keep an eye on stocks and gold. Stocks measure the value of America’s businesses. Gold measures the value of America’s – and the world’s – money. What are these measures telling us?

That we’re on the road to Hell!

Of the two measures, gold is harder to figure out.

Stocks are obvious. America’s businesses aren’t worth 20 times earnings. They’re not worth that much because we’re in a Great Correction. And after the action of last week…and yesterday…it is becoming clear that this correction will probably last a long time.

Layoffs are increasing. Home sales are falling. And consumer prices are rising at a 6% annual rate. The New York Times:

The Philadelphia Federal Reserve Bank’s business activity index fell to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July.

That was much worse than economists’ expectations for a reading of plus 3.7. Any reading below zero indicates a contraction in the region’s manufacturing.

A second report showed sales of previously owned homes fell 3.5 percent in July, to an annual rate of 4.67 million units, the lowest in eight months. Economists had expected home resales to rise to a 4.9 million-unit pace.

Separate data from the Labor Department showed initial claims for state unemployment benefits increased 9,000, to 408,000. Another report from the department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June.

So don’t expect most businesses to increase sales. And don’t expect profits to go up. Businesses have already done a very good job of squeezing costs in order to survive the downturn. That helps keep up profit margins. But it’s murder on the economy. One business’s costs are another business’s revenues. While profits rise, revenues fall. Not good for the long term.

The biggest single expense for most businesses is the payroll. People are expensive. So, if you’re a good businessman, you try to get rid of as many people as possible – and not hire more of them. Even when you think business is improving, you try to service the new sales with the same staff. A little more over-time…streamlining administration…making the enterprise more efficient.

In that regard, computers and modern communications technology have been helpful. They make it easy to fire people! But they don’t seem to lead to the kind of GDP boosts that you need to create jobs and increase standards of living.

That’s why the 10 million or so jobs that disappeared in this downturn won’t come back. And it’s why the real unemployment rate in the US hasn’t been this high since the Great Depression.

If that weren’t enough, there are other reasons to expect stock prices to go down. The main reason is because that’s what stock prices do. They go up. Then, they go down. Sure, they have a lot of reasons. But people usually only find the ‘reasons’ after the fact. Like commentators and analysts this morning…struggling to find the ‘reasons’ for yesterday’s 419-point drop.

The only thing we really know is that markets go up and down. And yesterday, Mr. Market wanted to go down.

Here at The Daily Reckoning we’ve been expecting lower stock prices for a long time. Wall Street has never completed its ‘rendezvous with disaster’ that began in January 2000. As we see it, stocks began a bear market almost 12 years ago, after an 18-year bull market. But the bear market was never allowed to fully express itself. Instead, the feds came in – like rap stars into a late-night party. They turned up the music. They poured drinks for everyone. They brought drugs and hookers. And pretty soon, the party was going louder and wilder than ever.

But now the party’s over. The feds are still opening bottles. But nobody’s drinking.

The bear market is back. By our reckoning, the Dow should fall below 5,000 before it is over. Most likely, it will not be a short, quick collapse. Instead, it will be a long battle…stretched over many years…with the feds fighting over every inch.

Anyhow, that’s our story. That’s been our story for many years. Seeing no reason to change it, we’ll stick with it.

But what about gold? There…well, we admit to a certain feeling of ‘I told you so.’ But it was one thing to tell Dear Readers to buy gold when it was selling for $300. It’s another thing to suggest it at $1,800. Gold was a steal at $300. At $1,800, it’s probably close to fair value.

That doesn’t mean it won’t go higher. In fact, we think it will go much higher. But it’s a rare bull market that makes it so easy for investors. But gold is harder to figure out.

If the economy is really in a Great Correction…

…and if it will be in a funk for years…a Japan-like slump…

…and if investors are fleeing stocks and buying dollars and dollar-based bonds…

…then, why is gold going up?

Are investors really looking ahead to the feds’ reaction to a double-dip recession? Are they thinking that Bernanke et al will panic…and print more money? Are they worried about higher rates of inflation?

Or maybe investors figure – with interest rates so low – they might as well hold their money in gold. Who knows what could happen? Who knows what the feds will do? Who knows anything?

At least gold is something you know won’t go away.

Possibly. But we don’t think investors are that smart. Or that forward-looking.

Zombie, zombie in the night…

Ah, modern technology comes to the aid of looters. Right in our home state, too. Here’s the report:

(CNN) – A “flash mob” believed to have been organized on the Internet robbed a Maryland convenience store in less than a minute, police said Tuesday, and now authorities are using the same tool to identify participants in the crime.

Surveillance video shows a couple of teens walking into the Germantown 7-Eleven store Saturday at 1:47 a.m. Then, in a matter of seconds, dozens more young people entered and grabbed items from store shelves and coolers. Police said the teens left the store together, without paying for anything.

“At least 28 different individuals” have been confirmed on the video, Capt. Paul Starks told CNN Tuesday.

Although investigators have said they ‘“can’t confirm how this (robbery) was organized,” Starks does believe the Internet was involved.


Bill Bonner,

Warren Buffett’s Worst “Investment”

Warren Buffett’s Worst “Investment”

Joel Bowman
Reporting from London, England...

Look Right...Look Left...No Smoking...No Running...No Loitering...Mind The Gap...

You can’t trip over your own shoelaces in this country without breaking a law or rule of some description. Every decision seems to offend the sensibilities of one group or another. And at every turn, every juncture, there’s a nosy official waiting to tell you what you should or should not be doing. They sneak out from behind telephone booths, they cross the street to correct your every move. A tsk-tsk here, a tut-tut there. A wag of the finger is never more than a minor public infraction away.

But just try asking them Why? or Why Not? and you’ll draw a stare as blank as a politician’s conscience. Then, after a long and confused silence, they’ll remember the appropriate response to such questions of authority. And they’ll recite, blindly, from some deep, dark place in their unquestioning little brains, “Because that’s the law.”

We’re exaggerating, of course, taking a little editorial license. The English people are, in general, a rather cheery a grey, overcast kind of way. There are plenty of good, kind-hearted people here. And there are world improvers, do-gooders and various other nosy geezers too. It’s the same as anywhere else really...except the beer is warm and the weather is not.

Your editor is currently sitting at Heathrow Airport, drinking one of those warm beers while awaiting a flight back to Buenos Aires. We’ve spent the past few weeks in the U.K. and Spain on our little “partial PIIGS tour.” More on that when we get home. But for now, let’s turn our attention back to the self-aggrandizing antics of the world improver crowd on the other side of the pond...

Warren Buffett is a gifted investor. No doubt about it. Over a career spanning roughly six decades, he’s amassed a fortune for himself upwards of $50 billion. As the primary shareholder, chairman and CEO of Berkshire Hathaway, the “Oracle of Omaha” has also done well for his investors. Those who bought shares of his investment company back in 1990 have since made over seventeen times their money, or more than 14% per year. Even though that return has fallen to about 5 or 6% per year over the last decade, Berkshire has still handily outperformed the market. As such, his annual shareholders’ meeting draws an adoring crowd large enough to make most rock bands blush.

Last year, according to his own accounting, Mr. Buffett earned a “taxable income” of almost $40 million. It goes without saying that most of us will never see that kind of money in our lifetimes. Not by a long shot. You’d think, therefore, all would be “good in the hood” for one of America’s richest men.

But Buffett has a big problem: Taxes. He is unhappy with the amount he pays. It’s not enough, he says. Nor is the amount paid by his super wealthy friends. Earlier this week, Buffett’s odd desire to keep less of what he earns led him to pen an op-ed piece in The New York Times in which he decried Washington for “coddling the super- rich.” Perhaps you saw it.

To his apparent disgust, Buffett benefits from an array of “tax advantages” conferred on he and his high net worth mates by members of Congress.

“Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’” he confessed, “thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long- term investors.”

In 2010, Buffett paid almost $7 million in taxes to the federal government, about 17.4 percent of that whopping “taxable income.” Despite his immense earnings, that percentage came in considerably less than the 20 other folks working in his office. “Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent,” he wrote.

This discrepancy sits uneasily on Buffett’s mind. And perhaps it should. But rather than advocating a less-onerous tax burden for the “little guys” he says he wants to help, Buffett wants the ends to meet from the other direction. He wants to pay more in taxes himself. And he wants his high earning friends to do the same.

At first glance, Buffett’s impulse might appear to be a charitable one. He wants to give more. Certainly there is nothing wrong with voluntary acts of charity. But what is a voluntary act...and how does it square with taxes? Put simply, it does not.

Charity is not consistent with coercion. Any individual, having come about his earnings by honest, voluntary dealings with others, ought to be able to save, invest or otherwise exchange his property in any way he sees fit, provided it does not infringe on any other persons’ ability to do likewise. This goes for the mega rich as it does for the rest of us.

If Buffett wishes to give his money to one institution or another, that is his own business. But by advocating higher taxes, Buffett is not asking that his fellow high earners donate money to causes he sees as worthy. He is not imploring them or otherwise trying to convince them. Instead, he is seeking the hired gun of the government to demand it from them. To steal it. To expropriate it without their consent. To be clear on this point, there is no such thing as “voluntary taxes.” It is either theft...or it is not.

Moreover, if, as Buffett asserts, his goal is to help the poor and middle classes of America, to alleviate some of the economic hardship they are currently enduring, one could scarcely imagine a worse institution to support than the federal government, an institution that so tirelessly works toward impoverishing them.

Readers of these pages will be familiar with the many and varied ways politicians go about oppressing those they affect to serve, so we won’t go through them all here. Suffice to say that financially enabling an institution that actively steals from the poor and middle classes (both directly, through taxes, and indirectly, through inflation), debases the integrity of their mandatory, unchallengeable currency, pursues reckless fiscal policies at home, promotes costly, immoral military adventures abroad and regulates small and medium businesses to within an inch of their lives, to name but a few of its primary offences, is anything but charitable and compassionate. It’s feeding the beast that burdens a productive society. Nothing more. Nothing less.

But let’s ignore these “abstract” contentions for a moment and get down to the numbers. The main problem here is that they just don’t add least not to much.

In 2008, the aggregate income of the highest 400 earners in the nation equaled roughly $90.9 billion. At present, the government steals about one-fifth of that, some $19.1 billion.

Let’s say for a moment that Mr. Buffett’s friends feel the same as he does, and that they wouldn’t mind kicking in a bit more in taxes. In fact, just for sake of argument, let’s say they wouldn’t mind working for nothing, contributing their entire yearly income...the whole shebang...100%. What does that come to? In an era of $1.5 trillion-plus annual deficits – projected out for the next decade, at least – $90 billion is barely enough to cover a fraction of the ever-increasing interest payments on the national debt. This year the government will spend $3.89 trillion (according to their own budget). That’s around $10 billion per day, give or take. In other words, soaking the mega rich wouldn’t even keep the lights on for two workweeks. And that’s assuming the highest earning individuals in the land are even willing to go along with a 100% tax. Not likely.

But it’s not only his super rich buddies Buffett would like to see cough up.

“[F]or those making more than $1 million – there were 236,883 such households in 2009 – I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains.”

According to Jeffrey Miron, senior lecturer and director of undergraduate studies at Harvard University and Senior Fellow at the Cato Institute, the income earned by these 236,833 taxpayers in adjusted gross income was about $727 billion. “Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue,” writes Miron, “only about 2% of federal spending. And $73 billion is optimistic; the super-rich will avoid or evade much of the surcharge, significantly lowering its yield.”

But let’s go even further. Let’s say these folk, like Buffett’s super-rich friends, decide to give the first million they earn to the state. There’s another 237 billion. And folks who make over $10 million – there were 8,274 in 2009 – they hand their first ten million in cash over too. Another $82 billion. So far we have only about one fifth of this year’s budget deficit. About 8% of total spending. Even if you doubled those “contributions,” you’d still only cover one in six dollars the government currently spends. So you triple it...and still only cover one in four dollars spent. You see where this is going...

And in the end, what would the middle and poor classes get for all this? The richest quarter of a million people in the country, having surrendered their entire incomes to the state, have invested in nothing productive. They have not backed a single startup company, a single business, neither in America nor elsewhere. They have not opened a single factory or employed a single worker. They have not invested any of their capital in the stock market, bought a single American product, a house, a car...nothing. They have slaved for the state, yet still it sinks at a rate never before matched in its history...and with nobody left to bail it out.

Warren Buffett is a brilliant investor, yes. But that only makes us wonder: If the American government were a private company – with a balance sheet in tatters, sky-high debt and a management team made up of crooks and eggheads of every stripe – would he still invest in it? More importantly, would you?

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