

-- Posted Thursday, 22 January 2009 | Digg This Article | Source: GoldSeek.com



London, England

Thursday, January 22, 2009 --------------------- *** Obama - not much different that Reagan, Clinton or the Bushes�American finance: strange and preposterous, but never dull� *** A division of delusion, which led to huge bubbles�who will suffer most when the bus comes? *** One thing that Team Obama will fight to the death�countries around the world play "hot potato" with correction�and more! --------------------- We've been on Bubble Watch for the last ten years. Now, we're on Bust Watch� Tim Geithner, Obama's choice for Treasury Secretary, may not have seen the bust on Wall Street coming�but he promises action on a "dramatic scale" to fix it. That is probably what goosed-up the Dow yesterday - up 279 points. Oil rose to $43. Both gold and the dollar went down. The dollar fell to $1.29 per euro�while gold sellers got $5 less per ounce. The price of gold is $850. "The End of the Reagan Era," is how the French newspaper, The Liberation, described the handover of power to Barack Obama's team. The Liberation has it right. What we are witnessing is the end of an era. But it's not exactly the era most people think. The voters made a big symbolic change when they elected Obama. But politically, Obama is not so different from Reagan, Bush I, Clinton or Bush II. A much bigger change has just occurred - and gone almost unnoticed. This one was wrought not by the voters, but by Mr. Market. He has brought an end to the world financial system that arose during the Reagan years. For the last ten years, these Daily Reckonings have been on Bubble Watch�watching�wondering�marveling�sometimes appalled�sometimes amused� �what we were watching was the blow up of a crazy system of imperial finance, in which the world's hegemony appeared to live at the expense of its rivals�and the imperial citizens - those in the homeland of the United States of America - drove themselves into bankruptcy so competitors could continue to sell their products at a profit. It was strange. It was preposterous. But it wasn't dull. We thought it was coming to an end in 2001�when the bubble in dotcoms blew up. Then, well, you know what happened�the feds got to work�and pumped up more bubbles. Now, the Bubble Epoque is nearly over. But Mr. Obama is jumping the gun� "Starting today, we must pick ourselves up, dust ourselves off and begin again the work of remaking America," he says. Hold on�there are some huge busts that have to happen first� We're watching for busts in U.S. government debt (U.S. Treasury paper)�the dollar�and finally, after a big run-up, gold. Then, Americans can rebuild on a more solid foundation. The gist of the world economy for the past quarter century was a division of delusion, which led to huge bubbles. Americans pretended to have good money. Asians pretended to have a good customer. Bankers pretended to have good credits. And Wall Street pretended that toxic assets were good ones. Asians made; Americans took. Asians saved; Americans borrowed. Americans provided the demand. Asians provided the supply. Asians built a real economy, with real money, and real factories and real skills. America's economy was mostly a conceit, in which people became accustomed to a standard of living that very few of them could afford. But now it has come to an end. And whom do you think will suffer most? Our guess: the Chinese! Eighty years ago, America was in China's position. It was the world's young, growing, dynamic economy. Manhattan soared then as Shanghai soars now. But when the collapse came in the '30s, the demand for American goods shriveled. Foreign and domestic purchasers pulled in their belts and cancelled their orders. For a while, America was out of business. It was only at the onset of WWII that the orders started coming in again in massive quantities. This time, it's China that's going out of business. Yes, dear reader, China is going to suffer even more than the United States. At least in the short run. America will lose its position in the world. The dollar will lose its status as the world's reserve currency. Americans will be beaten up - first by deflation, then by inflation. When it is over, they will be poorer, wiser, and probably better people� With a little luck and good leadership, maybe they can sink into a graceful post-imperial poverty�followed by genuine prosperity. That is the story we'll be covering in The Daily Reckoning going forward. It is the story of BUSTS. Companies will go bust. Governments will go bust (Ireland and Iceland are already effectively broke.) Households will go broke by the millions. And, eventually, even the U.S. government itself will go bust. (A bankruptcy that will most likely be disguised by inflation�) But China! There, the story will be even more dramatic�even more dangerous�even more explosive! *** "Time to mobilize for all-out war," says a headline in the Financial Times, speaking of saving Britain's banks from themselves. But this could just as well refer to President Obama's attack on the correction. Nobody wants a correction. And Team Obama has pledged to fight it to the death. Which is why we will stick with our "Trade of the Decade." Buy gold on dips; sell stocks on rallies. This trade - announced 9 years ago - has been good to us. Gold has closed every single year ahead of where it started. From under $300 an ounce it went up over $1,000 - briefly. Now, it trades in the $800 range. What do you think, dear reader? Is the gold bull market over? Are the troubles in the world financial system all taken care of? Is it time for another bust in the gold market - the only market (aside from U.S. Treasuries) to resist last year's sell-off? "My one recommendation for the longer term," says Felix Zulauf in Barron's, "is physical gold. Consider the basic set-up: World economies are so weak that we are seeing government stimulation of historic proportions. At first this is deflationary, but it will become inflationary. Gold is the only currency that won't get devalued. It will be revalued. "If the Fed's liabilities had to be covered in gold, it would sell for more than $6,000 an ounce. We aren't going back to the gold standard, but the markets won't trust the central banks anymore. Gold is a very slow bull market�the gold market could have a shakeout in the next 6 months, and the price could fall back to $700 an ounce or below from today's $850. But two years from now it will be a lot higher. It is one of the few commodities that held up during the forced liquidation of almost everything else. " *** If the United States catches the flu�the rest of the world throws up. And now, with markets retching all over the planet, finance ministers are getting together to come up with a global solution. Somehow, demand must be stimulated in Asia. Supply must be coaxed out of the United States. Balance must be restored, they say. But don't hold your breath. Any global bailout plan is bound to be a bad one. Because what the world really needs is a correction. And no country wants one. Instead, each nation does its best to push the correction onto its neighbors. An old friend, Lord Rees-Mogg, adds further comment: "Between the mid nineteenth and mid twentieth century, there had been a vigorous debate about the causes of the trade cycle, and of the crises which had upset the growth of the world economy. "That debate had, however, never reached a conclusion. Among economists there was no consensus on what caused the crises to occur or on what measures would help to stabilise another depression� "�there are at least five different alleged causes, which are still arguable. If the Central Bankers and Treasury Ministers do not agree on the cause of the present crisis they are not likely to agree on the remedy. One needs to keep theory in mind because it influences decision-making. "However, we are beginning to see that there is a consensus developing on the policy that is needed. Economists and politicians are concentrating on the need to restore confidence. The Inaugural Address of President Barack Obama repeated the theme of Franklin Roosevelt's Address in March, 1933: 'We have nothing to fear, but fear itself.' He also attacked the greed and irresponsibility of the bankers, who had behaved just as badly as they did in the early 1930s. The practical action of Governments around the world is to increase the money supply until businesses will borrow and banks will lend. Everyone recognises that this makes a risk of excessive inflation of the money supply, but it is a risk which Governments feel they have no choice but to take. They are not trying to rebalance the world economy; they are desperate to relight the boiler. In the end they will succeed." Inflation is what they want; inflation is what they will get. Until tomorrow, Bill Bonner

The Daily Reckoning --------------------- The Daily Reckoning PRESENTS: Now that Obama has officially dropped the "elect" from his title, what can we expect from his administration�and what does it mean for the country? Byron King passes along some rather grim predictions from an "Obama insider", and gives us some advice on how to deal with the coming fallout. Read on� TIPS FROM AN OBAMA INSIDER ON THE NEXT 2 YEARS

by Byron W. King The Inauguration is over. It's PRESIDENT Obama now. So let's get back to work. My plan was to do more portfolio updates. But huh? You didn't get enough? You still want to talk about Tuesday's festivities? Yes, the Inauguration was historic in many ways. It was definitely a blend of many things. There was classic Americana, with the Stars and Stripes snapping in the stiff breezes. There was the Army's Old Guard unit marching to fife and drum, along with respectful references to George Washington and the Founding Fathers. Then there were elements of modern culture. We saw the now elderly veterans of the 1960s Civil Rights movement, as well as the more youthful proponents of hard environmentalism whose chief focus is climate change. There was even a "Green Inaugural Ball." So we saw the old and the new. I think that's a key theme of this administration. How much of each? That's the big question. So stand by. Meanwhile, what else can we discern about the incoming Obama administration? I had a long talk with an old friend who is a self-described "rabid Democrat." Let me rephrase that. He's a rabid Democrat in the way that Pittsburgh Steelers team owner Dan Rooney is a rabid football partisan. This friend of mine loves his Democratic Party. Just as Mr. Rooney wants his Steelers to win the Super Bowl, this guy's focus in life is for his political tribe to do what's right for the country. This friend of mine is also privy to the inner circles of Democratic politics. He's just plain plugged in. He's on a first-name basis with many on Team Obama. So what's on Obama's plate? "Well, the first thing the new group has to do is stabilize the banking system," he told me. "Things are still precarious with the banks. Liabilities exceed assets by a large margin. We will probably see more bank failures - small and even some large banks. That would hurt worldwide investor confidence and lead the stock markets down. We could test the old lows of last fall." This Democrat insider then got into other issues. "The housing crunch still has more rope to hang out, as well. A lot of the problem is isolated in a few states and regions of states - California, Arizona, southern Florida, the New York City metropolitan area, Massachusetts and a few other places. But it affects a lot of people. We're dealing with populous, overbuilt places. We are also on the cusp of a lot of failures of government entities, from localities and school districts to counties. We're going to have a lot of municipal bond defaults. We're going to see municipal bankruptcies. Some large states are insolvent. California can't meet payroll." And there's more from this guy. "The next big wave will be that consumer spending dries up. This will lead to a failure of retail businesses all over the country. It's going to be a huge unwinding. We spent the past 25 years spending more than we could afford. Now we as a nation have to pay some big bills. It's time to save. It's a good thing, in the big scheme, for people to save. But it's going to put a lot of pain into the retail sector of the economy. We've overbuilt retail, and everything that goes with it. Too many stores. Too many buildings. Too much inventory. Too much shipping capacity. Too many containerships unloading too much stuff made in China and elsewhere. And a lot of people are going to lose jobs. I mean a lot of people. Everywhere." Here's more from the Democrat insider. "The next two years are going to stink for the economy. Obama will face one financial crisis after another. He's going to hate Wall Street. He's going to hate bankers. Every time he turns around, the money people are going to be screwing him. He'll try to fix one problem, and five more problems will spring up like weeds. ('Only five?' I asked.) "The coming financial issues will test the ability of the legislative branch to act with integrity in the face of a media-driven clamor. States will be lining up to borrow money from the feds just to pay unemployment compensation, let alone to fund Medicaid and road maintenance. It will test the legal system as well. Expect more petty crime and a lot more bankruptcy. But fewer people will get divorced. Who can afford that anymore? "And think about the foreign policy issues that the financial crises will cause. Just think in terms that when U.S. prosperity declines, it takes the world down with it. The economic contraction is going to set some societies back by decades. Will people take that lying down? Or will they riot in the streets and burn down the capitol building? Expect a rash of failed states. We'll be surprised at some of the names that fall off the map. Wow, we might look back and wish for the days when the world hated us just because we invaded Iraq. Now they'll blame us for stealing their future. "The Republicans will make political hay out of it. Unless they are totally incompetent, which you can't rule out. Democrats will probably lose seats in the House and Senate in the 2010 elections, as well as in state legislatures and governorships. But Obama will be working his own game of building consensus. He's from a new generation of politician. He's not nearly as in-your-face confrontational as the Democrats of the 1960s and 1970s era, the Kennedys and Waxmans and Barney Franks. Obama will build coalitions out of whomever he can get on board. You might not like him on issues like gun control or abortion, but you'll deal with him on tax cuts and energy investment." So where do we go from here? Well, here's my post-Inaugural advice. Build up some cash reserves. Got that? Hold Cash! Cash in the mattress. Cash in the bank. Certificates of deposit. Don't try to get too fancy. Just save some cash where you can get hold of it in case you need it pronto. Next, buy precious metals like gold and silver. Bullion coins or bars are my favorites. But it never hurts to buy a few quality numismatic coins as well. Don't get spooked out of precious metals if we see a price dip in the near to medium term. The dollar is in serious trouble, and eventually the precious metals will come back. Precious metals are a way of preserving your purchasing power over the long term. As for stocks, in the near future, we could see some severe market declines. Initially, this might look like large trading spikes up and down. Unless you are a serious trader, be careful about trying to "play" the swings. Don't be afraid to sell any stock that makes you nervous. You have to be able to sleep at night. Until next we meet, Byron W. King

for The Daily Reckoning P.S. There are certain investment ideas that will probably work over the long term, and as I mentioned above, precious metals like gold and silver are excellent examples of this. Gold in particular is one of the best stores of wealth you can have, and acts as a great hedge against inflation. It's a pretty good bet that gold has a lot further to go in the coming years, and this report should give you a head start on how to profit from it. Editor's Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments, and editor of Energy & Scarcity Investor.

-- Posted Thursday, 22 January 2009 | Digg This Article | Source: GoldSeek.com

Previous Articles by Bill Bonner & The Daily Reckoning Crew

We'd like to offer you The Daily Reckoning, a FREE daily e-mail service written by entrepreneur and master financial newsletter publisher Bill Bonner. It offers a 'refreshingly witty, erudite... sensible' look at the day's stock news. One reader says The Daily Reckoning offers 'more sense in one e-mail than a month of CNBC.' You can begin your free subscription by clicking here , entering your email into the box, and clicking 'Subscribe'.





