Investing and Financial Doomsday – Page 8

Volatility Continues

The market sure is doing some crazy things lately. The Dow was up over 12% or so on election Tuesday. Then, after the candidate who was favored to win actually won, it fell 5% or so for the next two days in a row. I’m starting to miss the good old days when the market just moved in steps of .5% a day instead of big five and ten percent moves. Gratefully, my Barrick stock only lost a couple of percent yesterday, which was much better than the broader market. Today it did not hold up so well, losing 7.3% compared to the Dow’s 4.8%. I was expecting that the announcement of Barrick’s earnings would stabilize their stock performance, but it doesn’t seem to have had any effect. Instead, I just read some analyst writing that the lower gold price impacted Barrick’s earnings, but that’s not quite accurate.

If you dissect Barrick’s Q3 earnings, you’ll see that their income for the third quarter was, in their words:

In third quarter 2008, net income was $254 million, compared to $345 million in the same prior year period. Net income includes impairment charges on investments totaling $97 million, principally due to a write-down of our investment in Highland Gold whose share price declined from $3.49 on June 30, 2008, to $1.21 on September 30, 2008, and was recently trading at around $0.76. Excluding special items, net income was slightly higher than the prior year period, as higher gold prices were partly offset by higher gold and copper total cash costs. Although gold production was higher than the prior year period, gold sales volumes were lower due to a temporary increase in unsold finished goods inventory at Goldstrike and Bulyanhulu due to the timing of shipments. We expect to sell this production in fourth quarter 2008, generating an expected profit contribution of approximately $27 million.

So it wasn’t the price of gold that impacted Barrick’s earnings as much as the dramatic drop in the price of the common stock in gold companies- specifically they lost their shirt’s in their investment in Highland Gold. But that does seem a one-off event that isn’t likely to be impacting their earnings going forward.

And what of the price of gold. Well, mining analyst and geologist Éric Lemieux has this to say about the price of gold:

The decline in gold prices flies in the face of every theory. The U.S. dollar has been appreciating and the U.S. economy is going through a recession. Gold should be increasing in value in the face of all this uncertainty. To see the price of gold going down right now is almost unexplainable in my opinion. It begs the question, is this due to some type of manipulation, either directly or indirectly?

… I believe we’re experiencing the results of probable financial industry fraud. Time will tell who was responsible. I hope we will hold the perpetrators accountable. Unfortunately, I think certain elements are trying to sweep all this under the rug.

I agree with him that the decline in the price of gold flies in the face of everything that SHOULD be happening at this time of uncertainty regarding gold prices. I also agree that there is manipulation going on and that that will probably be revealed in time. And, as previously mentioned on this site, there is an ever growing disconnect between the price of physical gold and the COMEX price of gold futures for immediate delivery (i.e. “the spot price”). Theoretically, these prices should be within $50 of each other or so because the gold coin would sell at a premium over the spot gold price reflecting the cost of minting the coin itself. Today, the COMEX price for gold for gold closed at roughly $725, while gold listings on ebay in the last week are selling for $940.

That’s a difference of over $200 between those two prices, and that’s indicates that something is just not right. Somehow, the COMEX price for gold does not reflect what people are actually paying for it. Whether that’s due to market inefficiency or outright manipulation by the banking system and their paper claims to gold is left to the reader’s discretion, but I do feel that we’re going to see a strong upward move in the price of gold in the months ahead. Let’s also not forget that the President Bush and President Elect Obama are going to be attending a multinational meeting on November 15th; this promises to be the first of many meetings regarding the current economic crisis and gold has already been mentioned by French President Sarkozy as the answer that will bring “discipline” to the market. So factor in a lot of world leaders paying lip service to gold in a couple of weeks and I don’t see how the price is going to continue to gold down, manipulation or no.

Ben Bernanke’s Kick…. It’s Good!

Today the Fed announced that it was lowering the Fed Funds rates to 1%. The market rallied strongly late in the day, and then gave it all back to close at a loss. Barrick Gold, the stock I follow and am an investor in, announced that they were doubling their dividend and rose nicely to close the day up some 12% or so. Combined with a similar rise where Barrick mirrored the entire stock market in a 10% rise and I’ve had a couple of good days. The strange thing is that, outside of the announcement of this dividend today, Barrick has not had any newsworthy events or announcements for the entire month yet their stock has fallen from $37.36 on October 1st to trade at $18.14 on October 27th. When a company with a good balance sheet loses 50% of its value on absolutely no news, you know it’s a volatile market.

I feel the stock’s going to make it all back though, so I’m not particularly worried. Still, as someone who’s been watching stocks for ten years or so, I’m not used to this kind of volatility. Usually if a stock loses 50% of its value, it’s because it announced it was being investigated by the SEC or something, but in today’s market it seems like anything goes. To try to understand what’s happening, you have to understand that basically the price that a stock trades at is really just a game being played by various players. Everyone comes to the game with money, but they borrow a lot more because that’s how big profits (and loses) get made. When someone in a leveraged position (i.e. they bought stock with borrowed money) takes a big loss they will often face having to liquidate their entire position just to pay off their creditors, and I believe we are seeing some of that happening with Barrick’s gold price.

In Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation he discusses the stock market of the late 1800s- the so-called “Gilded Age of the Robber Barons.” This was back before the days of the SEC; in fact, the SEC was created in part to stop the very activities that these guys would engage in. The market had various players, men like Jay Gould or JP Morgan, and each was playing with plenty of leverage. These men would often take interests in thinly-traded stocks because their stock price was easier to manipulate. Such stocks came to be known as “footballs” because they would be kicked by the various players to almost whatever price was desired. Fortunes where made and lost on these manipulated stock prices of these footballs.

Fast forward more than a century, and it seems like the rules have changed, yet the game remains the same. Except now, instead of thinly traded stocks, the world market for everything from the price of oil to gold to the stock market seems to be kicked about by the various players of hedge funds, central banks, and governments. So I wasn’t too worried much about the loses I’d taken on Barrick this month. I figured it would only be a matter of time before one player or another would kick the stock back into play, and along came Ben Bernanke to cut the Fed Funds rate to 1%. Thanks Ben! I needed that.

Of course, I’m not sure that was the right now for the American economy as a whole. Fundamentally, we just need to get our house in order. Both our government and our people need to start spending less money than they take in for starters, and I’m afraid your interest rate cut is actually just an attempt to get them to do just the opposite. Making it easier for people to borrow money by lowering the key interest rate just discourages savings, and that’s actually the opposite of what needs to be happening now. But, what’s bad for the US Dollar is good for gold. It also seems to be good for the sales of books related to the collapse of the American Dollar.

Volatility Continues

Well, as Mandelbroit says, volatility begets volatility. The stock market was up a lot on Monday only to give it back again on Tuesday and gold stocks were no different. My actively trading/market timing friends are telling me that I should have sold back when certain trend lines were crossed, and I, if things keep going the way they do, I suppose they are right. Trend following works well when markets all move in one direction, as they are doing lately, but tends to generate lots of trades for small losses when the market drifts from one direction to the next and back again. Once, I used to be a trend follower, but I found I started underperforming the market at large.

Then there are people like Warren Buffet They don’t really try to follow the market. They just feel that they are going to buy good stocks that will be “weighed” correctly in the long run. Or, as Bill Bonner puts it, “things that are out of whack have a tendency to get back in whack.” And that’s how I feel about gold stocks. Specifically the one gold stock I am invested in is Barrick gold (ticker symbol ABX). I hasn’t been doing to well lately and it’s down another 8% or so this morning, but I’ve found I’m not particularly bothered by its performance. Instead I’ve taken refuge in the slogans that I used to feel described bad investors- specifically that “it’s only a loss when you sell.”

“What if it keeps going down,” some might ask. Well, in that case, I am prepared to buy more. I have a lot of money in bonds which is maturing in about three weeks, and I wouldn’t mind loading up on more Barrick gold. The company has been around since the 1980s, and is currently trading at the same price it was back in 1994. Since gold was bouncing around in the $200-$300 range around that time, and since its now bouncing around the $750-1000 range, I feel pretty confident that I’m making a good investment. In fact, I doubt I will be able to but it come mid-November for the price its trading at today, since they announce their earnings at the end of this month, but who knows. A recession may be on, but gold is still above where it was a year ago, even on that crazy COMEX market. So the company has been able to sell all the product it produces at prices higher than it did then, and it has expanding capacity coming up next year. So I’m not worried. Things will get “back in whack”.

It does beg the larger question about trading philosophy. In essence, would you rather invest like a Warren Buffet who picks good companies and sticks with them or like a George Soros who made his fortune by being on the right side of particular trades. There is no right answer to that question, its just a matter of personal preference. The advantage of being an investor with a longer time horizon is that you don’t have to monitor the market as much, but you do need to do your homework about the stocks you do like: study their markets, read their literature, listen to their conference calls.

The one thing I would say though, is that if you are a Warren Buffet style investor, then you need to hang out with others of a similar mindset and vice versa. If a value based investor starts exchanging notes with an active trader, then they’re just going to mix each other up. It’s like a two dancers coming together and expecting each other to do radically different dances. And they tend to mess up each others timing. The value based investor will want to buy when stocks are down because, in comparison to their earnings, that’s when stocks are on sale. The trend following investor will never want to “catch a falling knife” and instead will admonish their friends never to buy a stock when it’s at or near it’s 52-week ago. So when these two get together and talk one is saying that a stock is a buy based on Price-to-earnings and the other is saying its a sell based on technical analysis of the chart. The result of a collaboration between the two styles leads to the absolute worst kind of stock investing: buy high, sell low.

I think what happens to the investing public at large is that they would like to be like Warren Buffet but don’t quite understand exactly what that means. They don’t read books like Buffett: The Making of an American Capitalist but instead just jump right in with the sense that they inherently know how this investing thing is supposed to work. So they go out and buy companies they like. When they go up, they feel good and talk about investing for the long term. When they go down, they get scared. “What if this company goes out of business?” they wonder. They talk to their friends about it. Eventually, they end up scared to death, so they sell out at what ends up being the bottom.

John Maynard Keynes said that “the market can stay irrational longer than you can stay liquid.” I suppose that’s true, but if liquidity isn’t a problem, then you can afford to wait. That’s the way I look at it anyway. Or as Bill Bonner put it, he buys stocks because he “feels bad for them.” That they are so neglected and unloved. Well right now the market is neglecting gold stocks. They are unloved and abused. No one will return their phone calls… except me.

A Day off from the Liquidation

Gold stocks, and the stock market at large, were up nicely today. I asked Dr. Janice Dorn, the trading doctor, why gold stocks were getting particularly hammered last weeks and she said that there was a lot of forced liquidation from hedge funds. A fair number of hedge funds had taken large positions in gold stocks and as that market dropped, many of them were forced to liquidate. That is the problem with massive amounts of leverage: even if you’ve might the correct long term bets, you can still get washed out in a short-term leg down.

Market Technicians, formerly called chartists, like to study the price movement of charts and make predictions based on how the chart is moving. In his book The Misbehavior of Markets Dr. Benoit Mandelbrot said that markets could not be predicted this way; that market data was chaotic but would seem patterned. Doug Wakefield, of Best Minds Inc, has been in the business for years and feels that Mandelbrot is wrong on that particular point.

No one knows the truth. I can tell you that I got a unsolicited email three weeks ago telling me that it was a great time to buy gold. Then last week I got another unsolicited email from the same service telling me to short gold. As I mentioned in a prior post, I believe that the gold market is intentionally manipulated by the central banks in order to discourage people from owning the stuff. They know that people follow trading methodologies based on what the chart looks like, and they are therefore able to knock the gold market around in order to paint a picture that tells the world to sell.

For me, I think that the market is as Warren Buffet said, “A voting machine in the short run, a weighing machine in the long run.” Gold has a wonderful future ahead of it, and I believe that’s why gold stocks rallied over 10% today. I’m crossing my fingers hoping that today marks the end of the forced liquidation of gold stocks but who knows. I was just happy to see a lot of green in my account today.

I do know that if world leaders keep making noise about going back to some form of the “Bretton Woods” agreement that gold is going to go crazy. For any country to return to Bretton Woods it would have to acquire a fair amount of coin to back it’s currency, not to mention that value of the dollar would fall significantly as it was displaced as the global reserve currency.

Strange Days in the Gold Market

The Dow and NASDAQ were both down some 7-8% respectively. Today, they’re up roughly 5%.

As I mentioned previously, volatility begets volatility.

One of the most curious developments lately has to be the market for gold and gold mining stocks. The demand for gold bullion’s gone through the roof in the past couple of months as the financial system has fallen apart — so much so, that bullion dealers are simply out of stock on most coins. German bullion dealers have stopped taking orders because they’re so swamped and have no product to offer. The US Mint itself has suspended production on the Gold Eagle and Buffalo coins; they simply can’t get the gold on the open market at a cheap enough price to profitably make the coins at the prices for which they’re currently offered.

Which just begs the question: why doesn’t the US Mint just raise the price on the coins?

I’ve discovered that this is a rabbit hole question — the more you study it, the more questions you come up with. When you finally do manage to piece together an answer that makes sense, you’ve arrived at the conclusion you’re looking at the result of some kind of conspiracy.

Now, I realize that conspiracy theories regarding gold are the stock of Libertarians everywhere — not to mention, the kind of thing that makes traditional people regard us as freaks. But — I’ve come to believe that that is exactly what’s going on.

Here are the facts that are difficult to explain without invoking some form of conspiracy:

WHY … has the US MInt suspended the sale of gold coins rather than just raise the prices on the coins they offer?

WHY … had the electronic market of gold futures come about with a “spot” price of gold (that’s fallen quite a bit lately — 5.1% today) at a time when gold bullion dealers haven’t been able to keep the stuff in stock?

WHY … is Barrick Gold (ticker symbol: ABX), one of the world’s largest gold miners with a solid balance sheet, a good pipeline of new mining projects, and more production coming online next year, trading at a Price-to-Earnings ratio of 11.5 today — down over 10% today alone?

What on Earth is going on here?

Well, the COMEX (Commodity Exchange) is the marketplace where futures contracts for gold and silver, and what is traded are paper claims to the metal. Very little actual metal is delivered in all of this paper trading of gold and silver on the COMEX exchange.

In days of old, a large portion of the paper claims to gold and silver were ultimately backed by “forward selling” based upon mining operations. In other words, there were paper claims floating around to gold and silver that were backed by nothing more than the promise of a mining operation to deliver it at some point in the future. That makes some sense, but given that some mining operations were selling up to 10 years in the future, it’s not hard to see how this could be used to create the illusion of an abundance of gold when the actual precious metals themselves are quite rare.

Consider the recently settled lawsuit brought against Morgan Stanley.

Morgan Stanley was charging clients a service to store physical silver in their vault for them. The problem was, there was no actual silver ever stored. Eventually, the clients caught on and sued them for fraud.

Their defense? That it was merely carrying out “industry standard” practice.

Since the paper claims to gold and silver are for precious metals that are supposed to be stored in bank vaults, Morgan Stanley has since let us know that it’s the banking industry’s “standard practice” to claim they have gold and silver that they actually don’t. Is it such a far fetched idea that the COMEX paper market has attempted to “create” gold out of paper by inflating more physical claims to paper than actually exist? If the COMEX spot prices for gold and silver are truly representative of the actual demands for the physical metal, then why can’t the US Mint buy the gold it needs to fill its orders? Instead, since bullion dealers have stopped taking orders, Ebay has become the main exchange for gold and silver coins — which are trading at far higher prices the COMEX says it should.

This situation represents a vast fraud perpetrated against global investors seeking to protect their wealth against inflation. The Morgan Stanley lawsuit in particular shows how callously “industry standard” practice treats its clients. The fiat money game is all about how the banking industry can pervert the free market system and siphon off wealth to themselves. Apparently, out and out fraud is not against their interpretation of the rules, and that just goes to show you, as far as they’re concerned, this is war — a war they certainly fight aggressively.

Dr. James Conrad wrote regarding this issue:

“At any rate, you initially issue a lot of claims to fake metal, and so many futures contracts are written, in a very short time period, that they flood the market on exchanges like COMEX and the London Metals Exchange, where almost all the transactions are on paper, and real metal rarely changes hands. Meanwhile, if you are the big bullion bank, you know what you are doing. You issue just enough subsidized precious metal paper to automatically trigger stop-loss orders. The price starts going down as the sell orders are filled. That triggers yet more stop-loss orders, and the process becomes one of dominos, falling one after another, until the price collapses. If the operation is successful, and the collapse is big enough, market confidence is destroyed, on a wide scale.”

I believe that we are clearly witnessing yet another attempt to destroy confidence in gold and silver as a hedge against inflation.

Further evidence for this: as discussed in the video of the Gold Antitrust’s Gold Rush 21: A Historic Gold Conference Exposing the Manipulation of the Gold Market, the gold market has declined at many times of high political tension, such as when Iraq invaded Kuwait.

Why would the price of gold decline when you would expect people to increasingly demand it except that the banks of the world flood the market with false paper claims in order to drive the price down to discourage people from looking at precious metals as a safe haven at all? The financial market is falling apart and the price of gold fell 5% today. Yet, there’s not enough physical gold to go around?

Beware, dear reader. Something is very rotten in the state of Denmark.

Volatility in the Dow

The Dow is up a breathtaking 11.08% today (936 points at close). For me this is another reminder of Benoit Mandelbrot’s The Misbehavior of Markets. Mandelbrot is the mathematician who discovered chaos theory as well as fractal geometry. In that book he examines the stock market for mathematical patterns: a task that many mathematicians have tried to do and failed. Mandelbrot discovered that the market is far wilder than finance theory takes it for, and he also made some other interesting observations.

For one, he discovered that volatility begets volatility. If one day had a wild swing up, the next day would tend to have another wild swing. It might be up, or (more likely) it might be down, but it would tend to be of far greater magnitude than the average market return. This disproves one of the tenants of the Efficient Market Hypothesis which assumes that each day is independent from each other day, and it is a principle that we are seeing in action today. Mandelbrot proved that, as he puts it, “markets have memory.” He further proved that markets are a bit like elephants in that they never forget.

Last week the Dow was down far more than it ever had been in any one week period regardless of whether you measured it in percentage or nominal points. So I had figured that today at least we would probably see a large move to the upside, and what a move it was. As a betting man, I’d say that tomorrow might bring a rather large move to the downside, or it could be up again. But either way, the magnitude of the move should be much higher than we say the market moving just a few weeks ago. Volatility begets volatility and vice versa. Right now the movements of the Dow more closely resemble those of a high flying tech stock in the 99-00 market than that of the 30 most solid blue chip companies in America; I should point out that the Dow lost one of its member companies with AIG had to get a government bailout, so being a Dow Jones company is no guarantee against suddenly going bankrupt in this economy.

As I’ve stated before and in my book, the Dow will continue to lose ground against gold. It did well for itself today, but the long term trend is clearly for it to continue to lose against the yellow metal. The only money to be made off of these huge moves in the Dow is for traders: this kind of volatility is a traders dream come true, provided he or she is on the right side of the move! For all others, I’d encourage all readers to seriously reconsider leaving their money anywhere near the American stock markets. The worse is yet to come.

Seven Days of Loses Makes One Weak

Ouch! The poor Dow Jones Industrial Average has continued it’s rout for the last 7 days. Falling from 10750 to close today at 8579. That’s a decline of roughly 20% in one week. If we go back one full year, the Dow closed at 14164 on 10/9/07. A loss of roughly 40%. Put those two numbers together and we see that the Dow has suffered half of its 40% decline on the year in the past seven trading days.

Gold closed the day at $910. For those of you who have read my book and are interested in the Dow-Gold ratio, gold was priced at $730 an ounce one year ago. It’s $910 today. So the Dow-Gold ratio has fallen from a ratio of requiring 19.4 ounces of gold to buy 1 “share” of the Dow a year ago to only requiring 9.43 today. That’s a decline of roughly 51% in one year. Any way you slice it, stocks have been an absolute bloodbath.

It’s been a good market for us bears, and it will continue to be. I am predicting that the Dow-Gold ratio will continue to fall all the way to a bottom of two or three. That’s another 70%+ loss or so, but I don’t think it will come this year. I think the stock market is do for a snap back. The carnage will take a breather and it will lull in people who feel it’s a good time to buy. People who do so hoping to make a good long term investment are going to be sorely disappointed. You might see some short term gains, but it’s still a long way down. It’s a traders market.

I haven’t seen many stories today discussing these market declines in terms of the Efficient Market Hypothesis (EMH). In years past, whenever you’d see these market declines a Hedge Fund somewhere would suffer some huge loss. Typically the press would ask the manager for a comment and the manager would say something like, “The market activities of the last couple of weeks of market activity are so extraordinary that they were impossible to predict. These types of market only occur once every 1000 years.”

Those statements were based on predicting stock market returns as a normal distribution about a daily average with each day having no influence on the days following it. As we’re seeing, that’s just not the case. The last few days along have seen a string of huge loss after huge loss one right after the other. That’s not bad luck; that’s a bear market.

I have a hairstylist friend who works in a very expensive hair salon. She keeps my book at her station and has noticed a lot of people asking about it lately. It prompted one of her clients revealing that she and her husband had lost the entire $250,000 investment they had made in a hedge fund just a few months prior. Which just goes to show that old story about a fool and his/her money.

Short term corporate bonds are going for unheard of yields. The search on my Scottrade account is showing annualized yields of 80.9% for National City Corp bonds maturing in April of next year, and that’s but one example. There are plenty others. Those National City Corp bonds have an A3/A- rating, but it seems no one is trusting the rating agencies anymore. And why should they. Washington Mutual bonds were rated as investment grade until just a couple of weeks before they became worthless. With events happening like that, April of next year can seem a long time away indeed. But it does represent a good opportunity for the Michael Millken’s of the world who can sift through the financial statements and sort out the goods bonds from the bad. Then again, with all the accounting shenanigans and off balance sheet Structured Investment Vehicles, who can really tell the junk from the gold anymore.

That’s the problem with markets that aren’t transparent. No one knows what’s good, so they abandon everything. Until we start to see the yields on these bonds coming down, credit markets will continue to be frozen. That means capital is at a premium and stocks are going to have real trouble doing well. What the next market development is is anybody’s guess.

The Central Banks Have Spoken

Four central banks acted in concert today to each lower their benchmark interest rates by 50 basis points (that’s half a percent to you and I). That leaves the Federal Reserve’s rate for overnight lending at just 1.5%. The central bank of Japan applauded the move, but couldn’t go along with a 50 basis point cut itself because to do so would be to return to an interest rate of zero. In a statement that seemed designed to both drive sales of my book and prove that Keynesianism was far from dead, chief economist at High Frequency Economic in Valhalla, New York, Carl Weinberg said, “We are now looking at the first page of the global- depression playbook. The only solution is to cut rates as close to zero as you dare… pump money into the banking system…hand over fist… and increase government spending.”

So there you have it folks. It turns out that the Vapors had it right all along. We really are turning Japanese– the whole world this time. I don’t suppose it occurred to Carl Weinberg or anyone in power that Keynesianism doesn’t work. Despite following the Keynesian playbook as closely as possible, Japan remained in a depression that still hasn’t really lifted to this day. Not to mention it didn’t do much for us when we faced our own depression. Never before have I seen a theory be so utterly disproved time and again, yet continually embraced as the truth.

It’s not like economists haven’t known. When Keynes first introduced his ideas he had a number of detractors. Keynesian theory was beautifully destroyed piece by piece in Henry Hazlitt’s Failure of the New Economics and that was originally published over 40 years ago. In that book, Hazlitt goes page by page through Keynes’s General Theory and points out the logical fallacies, the ever shifting definitions, and where he makes a prediction that flies in the face of what we know of the world. And yet here we are, decades later, ready to dust off Keynes’s playbook yet again to see if it can bail us out of this predicament. A predicament that was arrived at precisely through following Keynesianism to begin with.

It would seem that we are incapable of learning as a people. That somewhere in our genetic code we are hardwired with the desire to believe that we really can get something for nothing. Paper money systems have been tried many times without history and always ended in failure. Yet here we are trying it again. Convinced we can do it this time because we have a theory that, though flawed and easily disproved, contains enough math to choke a horse. Anything that is expressed in the form of calculus seems to escape our understanding, and when the professor gets finished filling up the black board with incomprehensible symbols and equations, he turns to us and says, “See. You can get something for nothing. Fiat money can be printed with no limit and interest rates lowered to make money cheap for everyone.” It’s a lie that we want to believe.

That we are faithfully following the road to the poorhouse is tragic, but there’s little we are do about it except prepare ourselves as individuals. Buy gold. Gold stocks were up 15% today alone. The market seems to know that when the world’s central banks are acting in concert to destroy their money together, gold is the logical place to turn. I’ve made a rather tidy sum on that move today, and I feel certain that this is just the beginning. As the system gets worse and more money gets printed and thrown at the problem, gold will just become increasingly attractive. The physical demand for it is already so intense that the gold coins are getting increasingly hard to find with bullion dealers. I believe that not only will the situation get worse, but that there is a very real possibility that the government may move to limit people going into gold. Get yours while you still can.

In terms of investment opportunities, I feel that the stock market is still a poor buy right now. It has further to fall when measured in real buying power. US government bonds are still yielding less than 2% for bonds under two years. That’s a rate that’s less than heavily doctored official inflation figure that the government has trotted out. The reason the yield is so low is that if investors with lots of money to protect are worried that the US banking system is so unstable that they can’t leave their money their. So they instead plow their money into short-term government bonds knowing that they are at least guaranteed to get their money back.

Other bonds can be attractive short term investments. I bought $20,000 worth of bonds in Citibank that are set to expire in one month. The effective annual yield on that purchase was over 27%. So there can be some profit opportunities in corporate bonds, but there is also some risk there- just ask the bondholders for Washington Mutual. On the investment front, gold is the only thing that I really feel strongly about. For a list of all the different ways you can invest in gold, I’d encourage you to pick up a copy of my book.

Till next time.

Restaurant at the End of the Empire

The American stock market is continuing to melt down. At one point yesterday the Nasdaq was down over 9% and the Dow was down over 8%. Stark numbers indeed. So far today both indexes are down over another 4%. Gold was up both days. This is turning into the mother of all bear markets, and I must confess I am enjoying watching the carnage unfold exactly how my book describes. We bears love nothing more than saying, I told you so.

Unfortunately, most Americans do not seem content to just let the collapse happen without doing something foolish and tragic. CNN reported yesterday that a man with an MBA in Finance killed himself, his wife, his mother-in-law, and their three children. A story which makes me miss the old days of the depression when husbands merely killed themselves so that their family would have the life insurance money. I would guess that the majority of Americans are not crazy enough to do something like that. Instead they suffer from a milder form of insanity that prompts them to look to the government to help them through this crisis. This seems strange to me because most Americans seem to realize, at a gut level anyway, that it was the government that got them into this mess in the first place.

Without the government’s fiat money, further exacerbated by the government created Federal Reserve, and the cozy attitude of deregulation when it came to Wall Street firms (and their lobbyist’s money) this crisis simple could never have gotten this out of hand. But now the people are looking to the very culprit who caused the problem to fix it somehow. This scares me far worse than the collapse of our economy. “Desperate times calls for desperate measures” would seem to be the slogan of government intervention, and Obama, our next President, has been preaching all of the rhetoric of the next FDR.

I sincerely believe that Barrack Obama is a good man. He seems honest, decent, and concerned. But he also seems to be operating out of the wrong tool-box. It seems to me that he looks at the mess we’re in and doesn’t see how the powers that were given to the government to solve the crises of yesteryear have simply made far bigger ones today. Instead he looks out at society and feels that the power has been held by the wrong hands. If only the power were taken from those hands and put into wiser ones, this crisis could be solved. I believe Obama’s administration will see a replay of many of the failed policies of The New Deal. The New New Deal. And that’s really got me worried.

Obama will inherent a country that is overrun by inflation, but instead of return to sound money I expect to see laws passed that aim at price controls. Unemployment will be on the rise, so I expect Obama to embrace more public works programs. The prices of housing and the stock market will be falling, so I expect the government will attempt to enter into some sort of price maintenance program. I expect that each of these policies will be tried, and, just as always happens, each of these policies will fail. The situation will become even more desperate as angry mobs start to demand action. What happens next… I do not know.

One thing I do know, the American Empire will not survive this crisis. As has already been predicted by international voices as diverse as Iranian President Mahmoud Ahmadinejad to the German Minister of Finance. I can only hope that we allow our empire to go into that long good night gracefully and with dignity. Perhaps have a wake where we can sit around and talk about the good times: reminisce about when we saved the world from Fascism; speculate about how things might have been difference if we had taken different actions during the Cold War; laugh out loud at the absurdity of our “War on Terror.” That is a fitting end to an empire. Not going out in a blaze of glory as we muster up our military for one last hurray, but instead having a sense of good humor about the thing. To celebrate the event, and not fight it. I can only hope.

Peter Schiff’s Predictions for How the Bailout Will End

Peter Schiff, author of the book Crashproof, was recently interviewed on CNBC debating Stephen Leeb. Peter’s position was that the US economy was crashing just as he had predicted, but, in regards to the bailout, the cure would be far worse than the disease. Schiff correctly points out that the money for this bailout will have to come from somewhere, and that somewhere is going to be the Federal Reserve’s printing press. Schiff in further on target when he says that we got into these positions by bailing out the economy before, and that what we really need in this country is a recession. My favorite point of Schiff is how eleoquent he is in simply pointing out that “We’re broke.” That sums up our position pretty well. When you look at it, how can we bail ourselves out of the poor house? Isn’t it just going to take the long hard road of saving your earnings? That’s what household’s have to do. Shouldn’t it be that way for nations as well?

I had real problems with Stephen Leeb’s position, and I wanted to go through it point by point. First, he argues that at the cost of only $700 Billion, the US taxpayers would have the chance to make an investment in something that might just show a profit. He’s not specifying whether he’s talking about a nominal profit or a real one. Just showing a nominal profit (i.e. you receive more dollars than you purchased it for) means very little in a highly inflationary scenario. It’s only a real profit that counts, and how exactly are we going to show a real profit by using the printing press to go further into debt to buy other people’s debt?

Leeb’s main position was that this $700 billion bailout would somehow save trillions of dollars for the owners of real estate and equities. What Leeb doesn’t explain, is how $700 billion is going make up for the trillions lost. Is it really that easy to make money for everyone? Just throw some money into a bailout and far more than that will be made on secondary markets? How will that work? If it’s really that easy, why haven’t we been doing it all along? The truth is, it’s never that easy. You can’t predictably add some money to one side of the equation, and far more money to be made on the other side. And since that isn’t the case, the question becomes why exactly we the taxpayer need to share in the loses for foolish homeowners and bankers. I’m not even going to reply to Leeb saying that the market will be freer from government control by empowering the Treasury to directly intervene in it.

Lastly, Leeb makes an open appeal to preserving the American Empire. When countries such as Russia have stopped backing down, it’s a sign that we need to… to… bailout Wall Street? Leeb’s position is very insightful here. We need to bail out the American markets so that our international competitors will continue to bow to our will. Should our markets fail, we won’t command the necessary stature on the world stage. All we’re missing here is Leeb making an empassioned plea with tear in eye as he looks to the camera and says that “We must bail out Wall Street… for America.”

But what is it that makes America so great? Why do we deserve to be able to command other nations of the world? If it’s because of our freedoms, as our President likes to say, then we shouldn’t worry about losing our stature so long as our freedom is not endangered. If it’s because of our society is the greatest bastion of capitalism ever, then let the participants in the market place learn that they need to be able to look after themselves and not count on handouts from the US taxpayer.

On the other hand, if it’s just because we’re the biggest and strongest right now because we’ve used a stretched a fiat currency to its breaking point financing the largest military in the world, then we have no moral grounds upon which to command the rest of the world to do our bidding. And perhaps a bailout will help to prop up the empire as Leeb is arguing, but there can be little doubt that the ultimate fate of all this will be exactly as Schiff predicts. A total collapse of the US dollar and the economy that relies on it.