The Fourth Turning...Into the Greater Depression?

Take a minute to think about your view of human history, and our continued progression as a species.

Do you believe human history is linear...always getting better...onward and upwards to a better existence?

Is it chaotic...stuff happens, people react, then more stuff happens...but there's no pattern to it?

Or...is human history cyclical...with those who neglect history destined to repeat it?

Most of the Western world subscribes to the linear school of thought. Things are always moving in a general direction - sometimes good, sometimes bad, but always moving. And I'd assume that most people believe the general trend of progress is up.

Your individual opinion may depend on your generation. Old timers are often pining for the "good old days" when morals and values "meant" something in America, you could go to the movies for a nickel, etc.

On the other hand, today's youth wants nothing to do with their parents or grandparents generational values and culture. I'm 27 years old...and the though of growing up in a 1950s Leave It To Beaver household isn't too alluring for me.

For the longest time, I held a predominantly linear view of history's progression. This very well may be biased by my own personal experiences. I run a software startup by day, and blog and trade online as a hobby...none of which would have been possible 10+ years ago. What the heck would I have done then?

On our Honeymoon a couple of years ago, my wife and I were staying in a remote hotel in Costa Rica. Very limited TV, no internet...for 3 whole days. By the time we got to a modern hotel, I was soaking up as much CNBC Europe as I possibly could...my wife asked why we had to spend our evenings with Larry Kudlow...but hey, I'm just not going to sit outside under a coconut tree and chill out. Not my thing. I like being plugged in.

So in my eyes, there's no doubt about the progression of the world...I wouldn't want to live at any other time...there are more plugs today than ever before, after all...and I'm always excited what the next 5-10 years will bring.

But are there setbacks in human progress? I mean, the world did basically nothing from 500 - 1500...except hang out in castles, work the land, pray, and tithe. That's 1000 freaking years!

How can that happen? How can the world stop moving forward for that long?

And there are more recent examples of setbacks and stalls. The Great Depression wasn't really that long ago. From 1929-1945, the US was in a major depression, then a world war. Not fun.

Can history repeat...or as Mark Twain said, rhyme? Are we "beyond" these setbacks...or are we arrogant to think so?

The Fourth Turning, by Neil Howe and William Strauss, is a fantastic book that explores US history, drawing definite cyclical patterns that date all the way back to the War of the Roses. Here's the crux of it.

A human life lasts roughly 80 years. Even though humans are living longer on average today, a full life has always been about 80 years...averages were skewed downwards in earlier times, because there were more premature deaths, but a "full life" has always been about 80 years.

At any given time, you've got about 4 generations of people inhabiting the US, separated by about 20 years each. These generations are shaped by their shared experiences...so their beliefs, their actions, etc, are really a function of the country they grow up and live in.

Now here's where it gets interesting - roughly every 20 years...going back to The War of the Roses in England, and carrying through to the Glorious Revolution in the New World...all the way to the present day...a new era dawns in America.

These eras fit into one of four categories which always repeat in the same successive order. Sounds wild...I couldn't picture it until reading the book...but here are the four eras that Howe and Strauss define:

Crisis - Oftened defined by a major war, calamity, depression, etc. Think Revolutionary War, Civil War, and Great Depression/WWII.

High - What follows the Crisis. Hey, we got through it, now things are looking up, up, and up. I think this is what Jim Rogers says he sees in Sri Lanka - the war is almost over, Crisis phase nearing an end, what a great time to invest. In the US, the post WWII baby boom, suburban migration, and Leave it to Beaver would make up the High. We can go to the moon, we can do anything we put our minds to!

Awakening - A younger generation comes of age, and resents all the rules set by The Man during the High period. Since Highs follow Crises, they are characterized by rules and structure. Think 60's America as the resistance to this - Woodstock, Tie Dye, and Free Love.

Unraveling - The Awakening uprising is integrated into mainstream culture, and society starts to split apart at the seams...hence the name. The individual rules the day. It's "me first." Old timers lament the lack of virtue and civic spirit. Prime time for Wall Street and Las Vegas.

According to The Fourth Turning, each generation is shaped by the era it was born in. I grew up during an Unraveling...so according to How and Strauss, that has shaped my beliefs. The only world I know is one of relative peace and prosperity. Depressions and major wars are things I've only read about.

So the theory goes that the farther you get away from a Crisis, the more likely you are to repeat it...because the younger generations don't actually believe it can happen again. They think the ills of the past have been fixed...and often very limited knowledge of the last Crisis in the first place...so in fact, they have the perfect personality for causing the next crisis!

Remind you of today's economists spouting off about why we can divert depressions this day in age?

Unfortunately for us...the timer's starting to tick down, and the next batch of crisis cookies are about due out of the oven here in America.

• 1773 - 1794: American Revolution

• 1860 - 1685: American Civil War

• 1929 - 1946: Great Depression...leading to WWII

• 2007 - ??? : Credit Crisis...leading to recession...leading to ???

About every 80 years, America is really put to the test. And remember, history is not predetermined. There was a genuine threat to our nation during each of these preceding crises.

Strauss and Howe believe that these crises are not only unavoidable, but that they are also necessary...to cleanse society, shake out the excesses that have built up over the past three eras, and set everything on a new course going forward.

For further reading on this topic, I'd highly recommend you check out Doug Casey's essay Foundations of Crisis. Doug is one of my absolutely favorite writers and speculators, and he does a great job at breaking down the generational roles referred to in The Fourth Turning.

It's well worth a read - an interesting, well thought out hypothesis, backed up by historical anecdotes and stories. As an investor, it's important to understand potential cycles, so that you don't get blindsided. Protect yourself and your investments, and pick up a copy.

It's Official...Government Motors

The US continues to complete the transition to a centrally planned economy. Like all socialist experiments in history, this one will not end well.

Perhaps the climax of the Crisis stage will see the complete collapse of socialism and big government in the United States. Get your popcorn ready!

In Case You Missed It...This Week's 5 Most Popular Posts...

1. This ain't your grandpa's deflation...This Week in Commodities
2. Marc Faber sees US inflation eventually nearing Zimbabwe levels
3. Jim Rogers' favorite country (surprise - it's not China)
4. Wheat, corn stocks still near 30-year lows
5. How to time the gold market

Positions Update

Big, big week for commodities! The "inflation trades" look like they are on in full earnest - the dollar is hurting, the long bond continues to rise, and the usual cast of commodity characters are all looking very strong.

I didn't make any trades this week, but am giving a hard look at adding an Aussie dollar position. We chatted on May 20th about this...with the A$ at $0.77, we thought it could keep rallying. Well...it has!

Another 3-cents in a couple of weeks - en fuego!

The trend for the A$ is up, up, up.

(Source: Barchart.com)

Current open positions:

Current Account Value: $34,358.15

Cashed out: $20,000.00
Total value: $54,358.15
Weekly return: 7.9%
2009 YTD return: -32.4% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Next Wave of Risky Housing Loans Due to Reset...Soon

Seems like just yesterday that subprime loans were blowing up like the last few seconds of a batch of microwave popcorn.  Pop-pop-pop...now you see them now you don't...keys in the mailbox, see ya later, Mr. Lender.  That loan is now your problem.

The good news is that the bulk of the subprime loans have reset to their higher rates - most of the kernels have popped, in other words.  

The bad news is that there is another bag of popcorn in the microwave...potentially an even larger bag...and it's just getting started!

So if you've been smoking too many green shoots lately, and have got a case of the munchies, pull up a seat while we snack on the next wave of potential carnage in the housing market...

***

The Second Crash – On the Way and Unstoppable
By Doug Hornig, Editor, BIG GOLD

Tuesday, October 9, 2007 started as a nice day in New York City. A lovely early fall day, with the temperature still a balmy 80° at 2:00 in the morning. By evening, though, the temperature had dropped twenty degrees, the clouds had rolled in, there was thunder and rain.

As with the weather, there were some hints of trouble here and there on Wall Street. But all in all, things could not have seemed better. Little did we know, the stormy end of 10/9/07 signaled a very large bubble that had just popped.

That was the day when the Dow Jones Industrial Average hit its historic peak. From there, it was all downhill -- slowly but steadily at first, and then violently after last August -- until the Dow bottomed (for now) on March 9 of this year. Over that span, the index lost 54% of its value.

It’s been a crushing blow to just about everyone. But it’s already being referred to as the crash. As if the unpleasantness were now all behind us. More likely, in the future it will be seen as, simply, the first crash.

Don’t believe it? In a moment you will, when you see the scariest graph of the year.

But let’s quickly recall what’s already happened. During the late, great housing boom, interest rates were at microscopic levels, while bankers were encouraged to grant home loans on little more than a wink and a nudge. In order to inflate their balance sheets, those bankers resorted to all sorts of gimmicky, adjustable rate mortgages (ARMs), whose common feature was an interest rate that would eventually reset. That is, it would balloon somewhere down the road. And those most likely to come quickly to grief were the riskiest borrowers, who held loans known as “subprime.”

“But not to worry,” borrowers were told. “Betting on ever-rising home prices is the safest wager in the whole wide world. If you have problems with cash flow when the ARM resets, your house will be worth a lot more, so you can simply sell it and walk away with a nice chunk of change in your pocket.” Uh-huh.

The bankers themselves were a little more concerned about the deterioration of their portfolios. They took out insurance in the form of credit default swaps (CDSs). These were a brand-new invention in world financial history, allowing mortgages to be sold and resold until they were leveraged 20 times over. They became the shakiest part of a huge global derivatives market, with a nominal value in the tens of trillions of dollars.

For a while, this Ponzi scheme even worked. But then, as they had to, the ARMs began resetting, and there were defaults. Then more of them. Because at the same time, the housing market was cooling off and the economy was stalling out. More and more people were trapped in a situation where they owed more on their home than they could sell it for. Many simply mailed their keys to the bank and moved on.

All of this wreaked havoc in the derivatives market. Sellers of these exotic packages could no longer establish what they were worth. Buyers couldn’t determine a fair price and so stopped buying. As the ripples spread through the world financial system, trust disappeared and liquidity dried up.

Now consider that the base cause for all that dislocation was the subprime sector. And how big is that? Not very. Subprime mortgages account for only about 15% of all home loans. Their influence has been way out of proportion to their numbers, because of derivatives. Here’s the good news: the subprime meltdown has about run its course. These loans were resetting en masse in 2007 and the first eight months of ’08. Now they’re pretty much done.

And the bad news? No one in the mainstream media seems to be asking what should be a pretty obvious question: What about loans other than subprime? Truth is, the banks didn’t just trick up their subprime loans. ARMs were the order of the day – across the board.

Now, here’s that frightening graph we referred to earlier.

Take a good, long look. You can see that from the beginning of 2007 through September of 2008, subprime loans (the gray bars above) were resetting like crazy. Those are the ones people were walking away from, sending a shockwave from defaults and foreclosures smack into the middle of the economy. Now they’re gone.

The ARM market got very quiet between December 2008 and March 2009, hitting a low that won’t be seen again until November of 2011. Small wonder a few “green shoots” have poked their heads above ground. But in April, resets began to increase and will reach an intermediate peak in June. After that, they tail off a little, going basically flat for the next ten months.

It’s not until May of 2010 that the next wave really hits. From there to October of 2011, the resets will be coming fast and furious. That’s 18 months of further turmoil in the housing market, and the beginning is still nearly a year away! (Although the months in between are likely to be no picnic, either.)

While it isn’t subprime ARMs that are resetting this time, neither are they prime loans. Those eligible for prime loans wisely tended to stay away from ARMs in the first place, as indicated by the relatively small space they take up on each bar.

No, the next to go are Alt-A’s (the white bars), Option ARMs (green) and Unsecuritized ARMs (blue). Alt-A’s are loans to the folks who are a small step up from subprime. Unsecuritized loans are a 50-50 proposition; either the borrowers were good enough that they weren’t thrown into the CDS pool, or they were so risky no one would insure them.

Those two are bad enough. But Option ARMs are the real black sheep, loans with choices on how large a payment the borrower will make. The options include interest-only or, worse, a minimum payment that is less than interest-only, leading to “negative amortization”—a loan balance that continually gets bigger, not smaller. Imagine what happens with those when the piper calls.

Once the carnage begins, will it be as bad as the subprime crisis? That’s the $64K question. Perhaps not. For one thing, subprime loans were a much larger chunk of the market when they started going south. For another, there’s been a lot of refinancing as interest rates dropped; that should help ease the default rate. And the government has massively intervened, with measures designed to prop up those who would otherwise lose their homes.

On the other hand, we’re in a severe recession, which wasn’t the case when the subprime crisis started. More people will be unable to meet payments. And the housing market has continued to decline, pressuring both marginal homeowners and banks that can’t sell foreclosed properties.

Is the stock market’s next 10/9/07 on the way? Yes. Which day will it be? That’s unknowable. It could be in a week, or not for another year.

But make no mistake about it, the second crash is coming. It can’t be prevented, no matter what desperate measures Obama and his hapless financial advisors come up with. All we can hope for is that, with a little luck, it won’t be as severe as the first one. But it will last longer. We aren’t even in the middle of the woods yet, much less on the way out.

The order of the day is to be very defensive. There will be few safe havens, but they do exist. Read our report on “48 Karat Gold,” a gold-related, conservative investment that has continued going up even while the common stock market bombed. It’s not too late to profit… click here to learn more.

Marc Faber Sees US Inflation Approaching Zimbabwe Levels (!)

"Dr. Doom" Marc Faber drops the casual obervation in this Bloomberg interview that he sees inflation levels rising in the US...in fact, eventually approaching Zimbabwe levels!

Prompted by a viewer question that asked whether it's more likely the US will default on its debt, or go into hyperinflation, Faber says he "100% sure" that the US will go into hyperinflation.  He sees inflation picking up eventually, and the Fed keeping short term interest rates below the rate of inflation to stimulate consumption.

Which will then necessitate more money printing, and - boom!  Runaway inflation train...leaving the station, never coming back.

They don't call him Dr. Doom for nothing - but ignore Faber at your own peril, he's one of the few guys to call most of the recent financial disaster properly.  The guy is a fabulous thinker and visionary, he knows history down cold, and always sees developments a few steps ahead.

Also of interest in the interview, he believes this could be more than "just a bear market rally" - as he cites money printing and deficit spending as a fundamental event that is capable of driving these types of rallies.  A "crack up" boom he calls it, that "explodes at some point."

He believes Japan's equity markets will perform very well, at least respectively, over the next 5 years, as much of the world has given up on Japan.

Asia is still a favorite of Faber's as a region to invest in...he thinks money that has been in the US and Europe for years will start to find its way over to Asia.

Final tidbit from Faber right at the end...he says Natural Gas is THE most undervalued commodity right now.

Again, you can catch the full interview here - it's a good one.

More Fuzzy Math From Our Favorite Real Estate Agent

I couldn't resist sharing some hot investment advice that just came through my Inbox, from our favorite real estate agent.

To refresh your memory, here was the last gem that was sent over - an explanation about inflation that was, honest to God, the dumbest I've ever heard.

Today's insight is not as "doom and gloom" as the last tip...in fact, perhaps some opportunity knocking for the astute fuzzy mathematician.

***

One highly overlooked opportunity is duplexes. There aren't as much competition for them, they take longer to appreciate but they do produce income. I recommend them as a possibility for a long term investment, or live in one side and rent out the other. Do the math, that's a great plan!

***

Wh-wh-what???  What freaking math?

Buy one stock, sell another - do the math, that's a great investment strategy!

Oy.

Image source: Zazzle.co.uk

Richard Russell: We're Nearing Gold's Mania Phase

Legendary investor and investment writer Richard Russell believes we're nearing the speculative, or mania, phase in gold:

Every major primary bull market that I have studied or lived through ends up with a wildly speculative third phase. This is the phase where the public and the crowd rushes head-long into the market. We saw this last in the years around 2000 when people bought any kind of tech stock. "I don't care what it is, if it's tech, just get me in!"

My belief is that we're now nearing the beginning of the third speculative phase of the great gold bull market...

Read his full piece in today's Daily Crux...

Maybe the upcoming advent of gold dispensing ATM's was enough to tip Russell over the top.

How high will gold go?  It's anyone's guess in a mania...remember tech stocks in 1999?  Casey's Jeff Clark outlines his reasoning why he believes gold will go to $2,000...and then much higher...in this guest article.

Joe Biden Explains the Virtues of Wealth Redistribution

What's the key to getting our economy back on it's feet?

Acccording to Comrade Joe Biden - it's wealth redistribution.  Here he explains "the patriotic thing to do" to Katie Couric:

The people who do not need a new tax cut should be willing, as patriotic Americans, to understand the way to get this economy back on its feet, is to give middle class taxpayers a break.

We take the tax cut they're getting, and we give it TO THE MIDDLE CLASS.

Somewhere...out there...beneath the pale moonlight

Karl Marx is thinking of Biden...and loving his words...tonight.

Jim Rogers' Favorite Country (Surprise: It's Not China)

How about Sri Lanka?

Yes, Jim Rogers loves Sri Lanka...even more than China right now. Why? Because they're close to the end of a 30-year war.

After a war is one of Jim's favorite times to invest - everything is cheap, so there's great value.

Don't worry China bulls - he still loves the Red Dragon too.

Here's the full CNBC interview:

Jim's latest book...now on sale...

How to Buy Physical Gold

How can you buy physical gold?  It's a question that's coming up more and more these days...as demand for gold bullion is going through the roof.

Jeff Clark points out a few resources that you should take a look at, if you're looking to purchase some physical gold.  And it's probably a great time to buy it - it's anyone's guess how much longer we'll see gold under $1,000.

***

Where to Find the Best Deals in Physical Gold
By Jeff Clark, Editor for Casey Research

When gold breached the $1,000/oz mark this February, the mass media were full of reports of unprecedented coin demand and long wait times for bullion buyers. You couldn't open the paper without seeing a piece about the gold rush.

Although the press has now set gold aside for hotter stories, I can tell you demand for gold coins continues at unprecedented levels worldwide, and production is still struggling to keep up. Take a look at these recent reports:

***Sales of the Austrian Philharmonic gold coin soared 544% in the first two months of 2009 (vs. the same period the year before), with production at the country’s mint running quadruple its usual volume.

***The demand for Krugerrands is at its highest level since 1986. The South African refinery recently doubled production of blank gold coins to 20,000 ounces per week.

***China, now the fastest-growing market for gold, saw 2008 sales (measured in dollars) rise by 50% over the year before – and total sales in January 2009 were one billion yuan (US$146 million), 30% more than all of last year.

***The U.S. Mint sold 193,500 one-ounce gold Eagles in the first seven weeks of 2009 – equaling the number shipped in all of 2007 and about matching the first half of 2008.

***Russia's Sberbank says it has “never seen such strong demand for investment coins.”
With this incredible interest in gold, it's worth going over where to go for the best deals in bullion… and what the stated wait times and premiums are. Here are the dealers that have consistently treated their clients (and our readership) well over the years:

Kitco (Kitco.com; 1-877-775-4826). All bullion products are available at Kitco and can be shipped within 24-48 hours of a paid order. Premiums are slightly higher than our other dealers recommended below, but what's particularly attractive at Kitco is that you can get silver for less than 1% over spot... Its pool account is currently charging only 14 cents over spot (premium fluctuates daily), which is a great way to build your silver holdings while waiting for physical premiums to come down.

The Coin Agent (thecoinagent.com; 1-888-494-8889, or email thecoinagent@gmail.com). Wayne Lemonier currently offers immediate delivery on paid orders for all gold coins except the Eagle, which takes two weeks.

Premiums for gold coins are 6% over spot for Maple Leafs, 6.5% for Philharmonics and Krugerrands, and 7% for Eagles (one of the lowest in the industry).

Silver bars are at the lowest premium we know of: A 10-ounce silver bar costs $1.75 per ounce over spot, and 100-ounce bars are only $1.50 per ounce over spot. American silver Eagles are spot + $4.50, and silver Canadian Maples are spot + $4. Shipping and handling for silver is $20 per 100 ounces.

Border Gold (bordergold.com; 888-312-2288, ext. 7). Both gold and silver Maple Leafs are readily available and can ship the day an order is paid. Border told us premiums are slightly higher this year than last because the Royal Canadian Mint raised its prices.

Premiums on gold Maple Leafs are only 5.5%, one of the lowest in the industry. Shipping and insurance is $25 for one or two coins. A one-ounce gold bar is spot + $25; 5-ounce and 10-ounce bars are available in limited quantities at spot + $22 per ounce.

The one-ounce silver Maple Leaf is $4 over spot for up to 99 coins and then $3.25 per coin. Both 10- and 100-ounce silver bars cost $2.50 above spot, with the 100-ounce silver taking a week to deliver.

ASI (assetstrategies.com; 1-800-831-0007). Gold Maple Leafs, Philharmonics, and Krugerrands can be shipped immediately upon a paid order, with American Eagles currently taking about three weeks.

One-ounce gold coins are 7.5% to 8% over spot; Eagles are 8.5% to 9%. One- and 10-ounce gold bars can be had at 6%. One-ounce silver Eagles are $4.30 over spot. A 100-ounce silver bar is $2.20 per ounce, and a one-ounce bar is spot + $2.50. Costs for junk silver vary but average about $2.20 per ounce over spot.

Some of our readers ask… why don't we recommend any of the larger dealers?

Availability and premium are the primary considerations in selecting a bullion dealer. Some of the larger houses may match the prices of our recommended dealers; however, there’s an intangible issue: the hard sell.

Many of the big dealers push high-margin numismatic coins. So while you may get good prices and delivery on your bullion coin, beware the salesman who begins talking up rare coins. You won’t experience this with our smaller dealers, and it’s this no-hassle service that gets our business. If you start to hear, “Hey, my friend, I have a great deal right now on a rare Swiss coin...,” you might want to reconsider where you shop.

Gold is the safe-haven investment in times of crisis, and more and more investors worldwide realize this. But even though gold has risen more than 140% in the last five years, there is something that can give you even higher returns: we call it Toronto’s Secret Gold Investment.

Gold Dispensing ATM's: Coming Soon (Seriously)

From Reuters:

A German asset management company plans to set up 500 "Gold-to-Go" ATMs in Germany, Switzerland and Austria this year. A gold-dispensing automatic teller machine (ATM) was on display at Frankfurt's main railway station for a one-day marketing test yesterday. A one-gram piece of gold, the size of a child's little fingernail and about as thin, cost US$42.25--a 30% premium to the spot market price.

Hey - on our way out to the bar...I'm tapped, need to make a quick stop at the old A-T-M...

Wheat, Corn Stocks Still at 30-Year Lows

Despite record harvests last year, corn and wheat stocks are still sitting near 30-year lows.  Which means, anything short of a bumper crop could send the grains skywards once again.

Here are some very cool charts, courtesy of Chris Mayer at DailyWealth, that depict the stocks-to-use ratios of of wheat and corn since 1970, versus their inflation-adjusted prices.

Investing in grains is actually pretty easy - when supplies are low, and prices are low, you know prices should eventually go up.  Then, at some point, high prices spur enough new supply onto the market that prices come down.  Ideally, that's when you go short!

You'll notice from the charts that grain stocks and prices move in fairly long cycles - about 15 to 20 years in length.  It takes time to bring new supply online, to replenish stocks...ultimately to rebalance the supply/demand situation.

This time should be no different.  China is industrializing in a big way, and its citizens have taken a liking to eating, a habit they're not likely to give up, no matter how bad the global economy gets.  Most notably, they are adopting Western style high protein diets, with lots more meat...and livestock require a lot of grains to raise.

Bottom line - it's safe to tune out the talking heads on TV when thinking about agriculture...just focus on supply and demand.  It's that simple.  When demand exceeds supply, prices will rise, until supply is able to overtake demand.  Sure, things like currency devaluation, a falling dollar, will toss fuel on the fire...but at the end of the day, it's all about supply and demand.

This Ain't Your Grandpa's Deflation...This Week in Commodities

Common wisdom holds that depressions are inherently deflationary.  The United States in the 1930's.  Japan in the 1990's and 2000's.

Combine a depression with other deflationary factors going today in the US - demographics, deleveraging, falling asset prices, even productivity - and you've got some serious deflationary headwinds.

(As a side note - I've warmed to the view that gentle deflation, as a result of increasing productivity, is the optimal, and honest, situation that promotes both savings and economic growth.  It's silly to label all deflation as "bad" or "evil"...how can deflation created by increased productivity be bad?  But I digress.)

Ben Bernanke, a student of the Great Depression, believes that the Depression could have been averted if deflation had been averted.

Determined not to repeat the mistakes of history - or what he thought were the mistakes of history - Bernanke took unprecendented measures...first, lowering interest rates as far as they would go...next, utterly trashing the Fed's balance sheet...and finally, when all else failed, he cranked up the printing presses.

Printing money always leads to inflation...in fact, printing money...or quantitative easing...is inflation.  Rising prices - which follow - are the symptoms of inflation.  

But what if you just print the money "for a little while"?  That's right - print it up, float it out there to keep the economy from grinding to a halt - and then when things are moving again, start to pull it back in.

Doesn't it sound insane?

Well, this is what is being tried.  And as hyperinflationary as this sounds, even the most fervent inflation hounds believe it will be a year or two or three before we start to see inflation creeping into the system.

Too much credit was destroyed, the velocity of money slowed down too much...logical reasoning dictated that it would take the Fed time to print enough to make up the gap...even at the rapid rate in which they were printing.

Then a funny thing happend while we were chilling out, getting comfortable, and generally not worrying about inflation - commodity prices started to move up.  The dollar started to drop.  Bond yields started to climb.

Falling Dollar, Rising Bond Yields = An "Uh Oh" Sandwich

Remember when every investor in the world was worried about the dollar's poor fundamentals?  McDonald's was poking fun at the dollar in it's commercials...music videos were flashing euros...supermodel Gisele Bundchen asked to be paid in euros rather than dollars.

That marked a bottom - at least a short term bottom - in the dollar.  Everyone was on the same side of the trade - short the US dollar.  

When world financial markets collapsed, a global "flight to safety" and massive short covering propelled the dollar up, up, and up.  

For awhile, nobody worried about the dollar's fundamentals...at least in the short term.  The Fed's printing money?  Hey, no problem, the dollar's still the world's reserve currency.  Besides, other countries are printing money too.  Why worry?

In the meantime, the dollar quiety began to slide...and the dollar index is now sitting at its low point for 2009:

It's a quiet race to get rid of US dollars once again. 

(Source: Barchart.com)

Makes you wonder if currency fundamentals do, in fact, still matter...if printing money is indeed bearish for the value of the currency being printed.

Meanwhile, what has The Fed been doing with it's newly printed dollars?  It's been buying long dated US Treasuries to keep yields down!

Nobody else is buying this trash, so it's up to our printing presses to pick up the slack.  The Fed announced this "newly printed cash for trash" program last December - when yields on the 10 and 30 year bonds were dropping, and deflation was king.

Common wisdom held that deflation, combined with these "monetization purchases" by The Fed, would continue to drive rates down...possibly all the way to zero.

But a funny thing happened on the way to Japan...rates bottomed on December 18, 2008, and have been climbing ever since!  Long dated Treasuries have been slammed throughout the first half of 2009!

30-Year Treasuries are not behaving like we're in a deflationary environment

 (Source: Barchart.com)

Uh oh...this is not good.  What a Fed to do?

If they let interest rates rise - that will surely squash whatever is left of the US consumer.  Green shoots turn into marajuana buds - game over.

But the only way to prevent interest rates from rising in the near term (short of cutting government debt, which we know is not going to happen) - is to step up their purchase of long term bonds.

So applying a little game theory to the Fed's current hand - we have to expect them to sacrifice the dollar.

The twist, I believe, is that the dollar could get trashed quite soon.  So I would strongly advise you to take a hard look at your savings and investments - right now.  

Charts don't lie.  No matter what our personal beliefs or biases are about the future, no matter what we think is going happen - we have to defer to what the markets are telling us.  And right now, the markets are starting to say "uh oh."

It could be a breathtaking move out of the dollar - it's value could feasibly get trashed in a matter of weeks, days, or even hours.  Don't be the one left holding the "Old Maid" card as the rest of the world runs for the exits. 

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How to Time the Gold Market
2. The Dumbest Inflation Explanation I've Ever Heard
3. Marc Faber: We've Begun a 15-20 Year Bear Market in Bonds
4. What is the Breakout in Gold Stocks Signaling?
5. Can Commodities Decouple From Stocks?  This Week in Commodities

Positions Update - Back in the High Life Again!

What a week put by the Aussie...while the USD tanked, the A$ soared - moving up over 3.5 cents in one week!

I believe the Australian dollar could continue to rally further from here, and will be holding this position until we see a change in the trend.  Because we know that the trend is our friend!

OJ was down slightly on the week...some rain in Florida to snap the drought.  Prices held strong though...they could be consolidating before the next move higher.  We're still at fairly cheap prices on OJ, so there is room on the upside.

Not to cry over spilt milk - or in this case, spilt sugar - but I should not have "taken profits" in my sugar positions last week.  Just goes to show that when the trend is on your side, you don't sell and wait for a pullback...because it may never come!

Shame on me, and now I sit on the sidelines, waiting for a further breakout to the upside to reinitiate this position.

Finally with a little dry powder sitting around, I decided to "punt" on a Mini Soybeans contract on Friday.  Beans have been extremely strong, driven by demand from...you guessed it...China.  The soybean complex is a favorite of the Chinese - more so than corn and wheat - and as a result, beans have leading the pack as far as the grains go.

Soybeans are on the move, driven by Chinese demand. 

(Source: Barchart.com)

Current Account Value: $31,836.61

Cashed out: $20,000.00
Total value: $51,836.61
Weekly return: 11.6%
2009 YTD return: -37.3% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Stocks Down Today...So What Commodities Did Well?

Regular readers know that we've been anxiously awaiting the decoupling of commodities and currencies from stocks.  These asset classes are historically uncorrelated.  That changed late last year when the financial world ended, and everything went down the crapper at about the same speed.

Except, of course, the US dollar and bonds...but I digress...

Today stocks were down...the DOW dropped about 100.  These are the days I love to watch...so we can pick out the notable performers.  

Good performances from today...

• Gold...up $13.80 to close at $951
• Silver...up $0.16 to close at $14.44
• Coffee...up 2.50 to close at 135.80
• Sugar...up 0.24 to close at 15.62 (this is why you never take profits, like I recently did, to wait for a pullback...it may never pullback, and you lose your position)
• Soybeans...up 6 to close at 1175

The dollar got hit today...long dated US Treasuries got slammed BIG...makes you wonder if we're starting to see a return to fundamentals.

Gold and silver look like they could be gearing up for some big moves.  Sell in May and go away?  Maybe not quite yet.

Also, it's nice to see sugar up on a day when oil was down.  It was dumb of me to give up that position...

Get Ready For Another "Lost Decade" in the US

Another "lost decade" is probably about the best Americans can reasonably hope for, based on this compelling case made by Mike "Mish" Shedlock over on his blog.

Bottom line is that, over the last 20+ years, Americans spent too much money, and ran up too much debt.  Now, like it or not, we'll be forced to start saving more money, and paying down our debts.  

When people save money and pay down debt, they have less money left to spend on $5 lattes and Vegas hotel rooms.  So expect that we'll see luxury goods continue to "revert to the mean"...this country just built too much stuff, and sold it to people who couldn't pay for it...well out of real savings, at least.

But all is not doom and gloom here at Commodity Bull Market Central!  We'll be cashing in our fat futures gains and silver bullion for discounted Vegas rooms and cheap lap dances...for pennies on the dollar...yeah Greater Depression!

"Show me you love me, baby..."

Remember when times are crappy - it's like the story of the two hunters in the forest.  One hunter is worried about outrunning this bear that is chasing them.  The other guy goes: "I don't need to outrun the bear...I just need to outrun you!"

Read Mish's full piece here...complete with some great charts...

Thanks to good friend, reader, and basketball teammate Jon Lederer for sharing this piece.

How Much Longer Can the Australian Dollar Rally?

The trend is our friend...and right now, the trend in the Australian dollar is up, up, and up.

Source: Barchart.com

A couple of weeks ago, we took note of the rally in the Aussie - and decided to initiate a position.  Boy am I glad we did...since that time, the A$ has rallied nearly 4-cents, and is currently sitting above the $0.77 mark!

Can the rally continue, or has the A$ come too far, too fast?  If you're trying to decide what to do with your position - or deciding whether you should initiate one here - I'd highly recommend checking out this informative video on where the Aussie could be heading, courtesy of INO.com's Adam Hewison.

As you may recall, I expressed concern over the weekend that the Aussie had not yet decoupled from stocks.  Well our favorite currency analyst, Everbank's Chuck Butler, believes the Aussie may be close to cutting this link:

So, as I just said, Tuesday saw the currencies trade right back to the levels they enjoyed VS the dollar last Thursday, before risk assets began to sell off on Friday. These are the types of trading patterns you normally see when the assets involved are getting ready for a break out... A jail break... Tonight there's going to be a jail break!

OK, I'm not saying that the jail break takes place tonight, I just broke out in a song from the 70's... That's all... Seriously though, I hope we're seeing a return to fundamentals.

What's the easiest way to trade the A$?  Check out the ETF FXA...that's probably your best bet.

Or, if you're looking for a way to diversify your personal savings, you can check out a foreign currency account from Everbank.

Further reading on the A$:

• Can Commodities Decouple From Stocks?
• Australian Dollar Still Kicking Ass
• A$ Hits 6-Month High...Can It's Rally Continue?

Great Quote on Why Government Can't Create Wealth

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. 

What one person receives without working for, another person must work for without receiving. 

The government cannot give to anybody anything that the government does not first take from somebody else. 

When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."

~~~~ Dr. Adrian Rogers

Editor's note - Guess what percentage of our country is a net receipient from the Federal Government...meaning they receive more in handouts than they pay in taxes?

Over 50% (!)  Uh oh...

Does the thought of government handouts make your stomach turn?  You'll love The Market For Liberty, which we reviewed here earlier this week.

Andy Kessler: You Can't "Print" Prosperity

Famed hedge fund manager and Silicon Valley guru Andy Kessler says this is a sucker's rally...you can't print prosperity, it comes from productivity.

"Bernanke's cranking the handle on the printing press to help the public fund the bank problems instead of the US government...as soon as he stops cranking the handle, the bottom falls out on this thing."

"I don't want to be the sucker buying into this market."

"You can't print prosperity."  

Pure gold from Andy, as usual.

Check out his full comments at the 18-minute mark of this video:

The Market for Liberty - Book Review

The Market for Liberty, by Linda & Morris Tannehill, is an extremely thought provoking book that asks the outrageous question:

Is government itself an unnecessary evil?

The Tannehills do not just make the case for smaller government...for less government in our lives. They make the case for NO government!

This was a challenging concept for me to grasp. Regular readers know that I'm of the mindset that less government is usually better...but no government? Isn't that...anarchy?

It's tough to imagine no central authority whatsoever. Who will settle disputes? Who will protect us from foreign aggression? Who will protect justice and keep the peace?

All of these questions are answered in a very well thought out manner in The Market For Liberty. The Tannehills describe a Laissez-Faire society that, to be honest, sounds pretty damn good. No bureaucratic regulation. No politics. Everyone is accountable to the free market, not to a central authority which can be lobbied and swayed.

If you have any libertarian leanings, I'd urge you to read this book. (And if you don't - don't bother, you won't be able to follow). For me, this book was a real tipping point in my thinking about government and the free market. To be honest, I had put off reading it for a little while, because I didn't think I was ready for it.

The entire case for the free market is very intellectually engaging and energizing. The Tannehills wrap up by asking: How can we go from government to laissez-faire? The answer may surprise you, as they do not advocate government overthrow, or even peaceful disobedience.

I'll let you read it for yourself, and then we can circle back at this space and compare notes. The book is out of print, but there are some copies available on Amazon - I've got a link below. And even better - if you don't mind reading this on your computer - here's a free PDF version (thanks to Doug Casey for finding this link).

I believe this book is more important now than ever before - and critical to our investing success.  With the amount of government intervention in the markets at levels never seen before in the US, I'm trying to figure out when we'll reach the "tipping point"...when the public sectors basically chokes or crowds out the private sector, and the economy is permanently disabled.

Why The Government Will Have To Monetize The Federal Deficit

Seems like the government has never made a deficit projection it couldn't miss.  Well believe it or not, things are about to get a lot uglier than any of us had expected.  

Casey Research's David Galland, one of the very best investment writers and thinkers in my opinion, writes that falling tax revenue is going to force the government's hand very soon.  What does it mean for your investments...and livelihood?  Read on to find out...

***

Tax Revenues Tanking
By David Galland, Managing Editor, The Casey Report

While everyone else has been focused on the banks’ stress tests and how much government is spending to bail out troubled “too big to fails,” a disturbing trend on the other side of the equation is now emerging: how much (or rather, how little) the U.S. government is receiving in tax revenues.

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

Here’s what’s going on:

• In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.

• Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

• When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.
  

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

In other words, events are rolling out almost exactly as we have been anticipating. Below, for example, are some useful excerpts from an April 3 article titled “Widening Deficits” by Casey Research CEO Olivier Garret. To quote…

In the midst of the Great Depression, the 1931 federal tax revenues had fallen by 52% from their 1929 highs. While we do not expect anything that dramatic in 2009, it would not be unrealistic to see a 20% to 25% reduction in cash flow from tax collections this tax season. Such a drop would pose significant challenges given that spending commitments are off the charts and climbing.

Later in that same article, Olivier continued,

In the absence of sizeable increases in tax revenues, it is quite clear that the lion’s share of the planned sales of Treasuries in 2009 cannot be met by demand from the market. Either the Treasury will have to raise interest rates significantly, or the Fed will need to step in very aggressively to support the planned auctions. Our expectation is that both will happen. Auctions will fail and the Fed will step in. The market will react to more printing by anticipating inflation and demanding higher interest rates. Once the cycle starts, it will be very hard to pull interest rates back.

We continue to stand by our December forecast that the 2009 budget deficit is more likely to widen to levels between $2.5 and $3 trillion rather than the CBO’s $1.8 trillion forecast. We also believe that inflation could start setting in as early as Q3 of 2009 and will accelerate sharply by 2010. Treasury Rates will start climbing and the era of cheap money will end, making it harder for overleveraged consumers, businesses, and governments to service their debt.

Olivier’s forecast of failed auctions and rising interest rates on Treasuries proved more prophetic as a May 7th story from Bloomberg reported:
Treasury 30-year bonds fell the most in four months as investors demanded higher-than-forecasted yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year.

“This is a problem,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of 16 primary dealers required to bid in Treasury auctions. “The market required a fairly significant discount to buy the bonds.”

Thirty-year bonds have lost investors 20.9 percent this year, Merrill Lynch & Co. indexes show, as the Treasury increases securities sales to help fund a swelling budget deficit. Yields climbed to a six-month high today as the auction drew a yield of 4.288 percent, higher than the 4.192 percent average forecast in a Bloomberg News survey of seven primary dealers. Demand was below average, judging by total bids.

The benchmark 30-year bond yield climbed 23 basis points, or 0.23 percentage points, the most since Jan. 5, to 4.316 percent, at 5:25 p.m. in New York, according to BGCantor Market data. It was the highest yield since Nov. 14. The 3.5 percent security due in February 2039 dropped 3 15/32, or $34.69 per $1,000 face amount, to 86 3/8.

The 10-year note yield increased 16 basis points to 3.345 percent, the highest since Nov. 24.

Two-year notes yielded 1 percent for the first time since March 18, while the rate on the three-month Treasury bill was 0.18 percent.

So, what does all this mean?

As per above, the rock-and-the-hard-place scenario we have been predicting is unfolding before our eyes. At this point, other than sharply changing course and letting the free market cope with the crisis through a brutal “survival of the fittest” scenario, the government is left with no other option than to accelerate its buying up of its own debt.

Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for the stunning rise in interest rates we are now positioning ourselves for in The Casey Report (and, you can too… learn more).

Ed. Note - I subscribe to the Casey Report myself...it's my favorite of all investment newsletters that I have.

Can Commodities Decouple From Stocks? This Week in Commodities

The biggest investing mistake I ever made was not getting out of commodities during the Great Deleveraging of '08/'09.  

I had a pretty good beat on the major trends - stocks were highly vulnerable, the US could be in for some very bad things, etc - but I failed to project the effect that a complete financial collapse would have on commodities.  I followed my stops but kept trying to re-enter the market too early.  Being on the wrong side of a trade, well, sucks.

In 2004, I read Hot Commodities by Jim Rogers, and my investing outlook and thesis completely changed.  I realized that commodities, not stocks, were the place to be for the next 15-20 years.  That spawned my foray into trading, and eventually this blog as well.

The fundamental factors of the commodity bull market are still intact, I believe.  No market goes straight up...commodity markets are certainly no exception...and now we've got a very attractive entry point for many commodities.  Prices have come down considerably, and as a result of this financial mess, supply has come offline a great deal, laying the ground work for a doozy of a boom, if/when the global economy picks up again.

Now here's the risk I see - during the Great Deleveraging, correlation of all assets basically went to one (exceptions were the US dollar and Treasuries).  So any well laid out diversification plans were all in vain.  In fact, I think we're starting to see that diversification is a load of crap, a product of the 1980's/1990's bull market in equities.  Probably something we could discuss at length in a separate piece.

Van Tharp, an excellent trading coach and author, is fond of saying that you do not trade markets - you trade your beliefs in the markets.  Every decision you make is filtered through your belief system.

So while I believe in the commodity bull market in the medium to long term - I also believe this is a bear market rally we're currently experiencing.  I believe stocks are still overvalued, and that we haven'tyet  seen the final lows on the S&P and the DOW.  I believe the DOW/Gold ratio will eventually settle close to 1, before a new bull market in stocks begins.

Now these are my beliefs.  You have your own beliefs about the market, and if they're not aligned with mine, then my trades and thinking won't make any sense to you.  (Actually if I am making sense to you, that's when we should all be worried!)

OK so here's my dilemma - stocks are going lower I think - maybe sooner, maybe later.  The last time stocks went lower, commodities got slammed.  Therefore I have reason to be nervous that the next leg down in stocks could wallop commodities as well in the process.

To test this hypothesis, I'd like to pull up some charts, and see how some of our favorite investment ideas have been performing relative to the S&P 500 - and figure out which ones, if any, have managed to decouple from stocks.  (All charts courtesy of Barchart.com)

Observations:

• I had expected a tighter price correlation between oil and the S&P
• The Aussie dollar looks like trouble!  It could be quite vulnerable to a downturn in stocks.
• OJ looks like it may have decoupled from the S&P

CONCLUSION: I think it's safe to get back in the water on some select commodities - but be careful!  I still believe agriculture is our best bet, and right now I like OJ's chances the best...especially given it's performance on crappy days for the S&P.

In Case You Missed It...This Week's 5 Most Popular Posts...

1. The Dumbest Inflation Explanation I've Ever Heard - thanks to our friends at The Daily Crux for picking this one up
2. A Bear Market Rally on Roids?  This Week in Commodities
3. Richard Russell Blasts Government Sachs
4. Jim Rogers: The US is About to Have a Currency Crisis
5. Is Oil Going to $30 or $300?

Positions Update - Feels Like Old Times!

I got out of both sugar contracts on Friday...booking a nice profit on one, and a very slight loss on the second.

My pyramid was beginning to invert - not a desirable thing - so I pared back the second sugar contract after it went negative.  Then after thinking about it, I pulled up the long term sugar chart and thought that the market, while definitely trending up, may have gotten a bit ahead of itself.

So, we'll book some profits there, and look for an attractive entry point.  

I have to admit - I much prefer having a long sugar position than not.  Having no sugar position is like my wife being out of town - a little bit of an empty feeling, like I'm incomplete.  Sugar, you complete me - let's get this price pull back out of the way quickly, so we can reunite.

By the way, I think I pretty much guaranteed myself a crappy week after my self congratulatory post last Sunday.  I was starting to feel pretty smart...which is always dangerous...in fact, here were my exact words:

What a week! And the recent weekly winning streak rolls on...in a big way...

Now that I've got my confidence back a little bit, I'm probably quite dangerous to myself at the moment!

Anytime you read crap like that from me in the future, you may want to just short everything I own - a guaranteed winning trade.

Current Account Value: $28,539.11

Cashed out: $20,000.00
Total value: $48,539.11
Weekly return: -8.3%
2009 YTD return: -43.8% (Don't call it a comeback!? :( )

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00