DBA versus GLD

The top chart shows the historical trend of the agricultural index exchange traded fund (ETF) Deutsche Bank Agricultural Index, DBA and the bottom chart shows GLD since late 2005.  The DBA chart had a double top two years ago just prior to the crash of '08. Double tops are a classic technical signal of an impending decline, and it worked in the case of DBA.  I googled the DBA and found a few technicians commenting on it to the effect that it has been/is a weak stock because of the double top two years ago.  Note the contrast with GLD, which has had a relatively steady upward trend, having taken a small double top and dip during the '08 roller coaster but recovering quickly and profoundly.

I have a problem with that combination of facts, though.  If gold is going up it is because of monetary demand, that is, people want to use gold to save instead of dollars, then people anticipate inflation and therefore DBA should go up.  If gold demand has a logical foundation, then inflation is impending.  If inflation is impending, then agricultural prices should be going up. This is especially true because the inflation has been caused by over-investment in real estate due to Federal Reserve and commercial banking's counterfeiting money and then investing the proceeds in politically favored industries, namely construction and real estate.  To expand investment real estate, the supply of agricultural land had to be reduced. Hence, there would seem to be upward pressure on food prices.  Last week DBA went up six percent in one day.  Since June, when DBA hit its low, it has gone up 28%, from $22.85 to $28.52.

The technicians may underestimate the effect of the underlying process of monetary inflation on long term food prices.  I bought DBA about two years ago and I'm up about 12%. The DBA has underperformed both gold and the stock market during that period. It may be subject to further downward fluctuations (the technicians have asserted this until recently) but given the recent trend it may be that the lean years are coming to an end for DBA.

Help! America Needs Financial Advice!

Question from Reader:

>"Do not trust the socialists in power. Get out of the dollar. Buy commodities (GLD, HUI, DBA, the Euro via Everbank or UDN)."

>Dear Mitchell,

I have been hearing about collapse for over a year now. I am VERY worried. Next year when the commercial "adjustable" mortgages start re-adjusting, many claim we will spiral out of control, and at that point, nothing may be able to stop it......

>I have a bit of money from my Mom.....Lord KNOWS how hard she and Dad worked for all ten of us to have the best they could provide. I have the money in two savings accounts. Should I convert all of it to gold or euros do you think? I do not want to lose what little is left. Our retirement funds were decimated.......and I am STILL out of work with no prospects in sight. I am hoping to start a small community based business with a neighbor....but this has not been the greatest year for me....and things health wise are NOT looking any better.

>I have debated "buying down" our mortgage so that payments on the house would be much lower. We were VERY lucky to get a fixed rate mortgage some years ago at 5.5%. But the payments with taxes are high, and I don't know when I will have an income again......

>I am really worried about the dollar's collapse. I appreciate any advice you may have......GOD Bless you,

Dear Reader: Do not panic. I would advise you not to pay off your house but rather, if necessary, get on the sub-prime bandwagon and borrow up to your eyeballs. In inflation debtors win. People with cash lose, so get rid of it. Get rid of your bank accounts.

I'm sorry that you lost in the market. All investments are risky. I would advise you to purchase a range of the things in the list you clipped: GLD, HUI, DBA, UDN. I would not put all my eggs in one basket.

Some commentators are afraid of bankruptcy of commercial banks. Hence, buying Euros through a CD has that risk. But otherwise, diversifying out of the dollar and possibly shorting the stock market is a good idea.

GLD is a gold ETF and it is taxed as a collectible, at 28% rather than at the lower capital gains rate. Gold stocks, are volatile and risky. They can go up alot more than gold, but they can also be affected by a stock market collapse. I lost money in 08 because of that very problem. The gold stocks can easily go down 70%. Gold is volatile but less so than the stocks.

If you put your money in gold, you need to be able to live with a 40% decline without panicking. IF you put your money into gold stocks, the variability is larger.

There is a stock, SH, which is the short-sale equivalent of the S&P 500. It goes in direct opposite to the S&P 500. You and I wish we had bought that in summer 08. You might consider this:

30% GLD
10% UDN
10% HUI
10% DBA
10% SH
20% SPY
10% SLV

These are:

GLD= gold exchange traded fund;
UDN = dollar short exchange traded fund;
HUI=gold stock index exchange traded fund;
DBA = agricultural commodities excahnge traded fund;
SH = S&P 500 short fund;
SPY = S&P 500 exchange traded fund;
SLV = silver exchange traded fund.

Alternatively, you could try this:

Cash: 50%
GLD: 50%

or

Cash 30%
UDN 20%
Gld 50%

or

GLD 100%

or

SH 90%
GLD 10%

Shorting the market now is of course risky. It could continue to go up because of the monetary infusion last year. But it has had a good run; Americans are heavily in debt; the Chinese are ticked; and the national socialists are in power. I would not be optimistic.

You might also look at international stocks but I would wait. If there is a stock market decline in the near future it will infect the international stocks too.

I am not a prophet and cannot foretell with any certainty what the markets will do. I do think gold is going up and if you put 100% in GLD you would not be crazy in my opinion. If you are bullish and put your money in the S&P 500 you could do well from hereon in, but there is a risk of stock market collapse. I would not be an unrepentant bull at this point.

The reason for a possible market collapse is this. The stock market is going up because of a large infusion of money last year. That can continue for a while. However, it is also inflationary. As inflation starts (dollar declines) the Federal Reserve Bank is subjected to pressure to withdraw some of the dollars. This will cause interest rates to rise. When interest rates rise, the stock market falls.

But let's say the Fed doesn't withdraw the dollars. Then, inflation escalates. Interest rates then will rise because bond investors want higher returns. It seems like there's a good chance for a market decline at some point either way.

It is easy to know what will happen, difficult to know when. The rising SPY could continue for another year. The stock market could double before the collapse. No one could know this. Unless you had inside information about the banking world last year, it would have been difficult to predict that the collapse of their balance sheets would have occurred.

So I don't know what to tell you. In an inflation, borrowers benefit. The St. Louis Fed tracks money statistics, and they are scary. I cannot say for certainty that the gold market will go up.

If you want to take a risk, buy gold stocks. Check out the Kitco site each week. No one knows for sure what will happen, least of all me.

Where I am heading right now, but I'm taking my time, changing a little each week:

SPY 10%
GLD 50%
HUI 10%
SH 5%
SLV 5%
Euros CD 20%

Is the Ride to $3,000 Gold Going to Hit Air Pockets?

The graphs above are of the Power Shares DB Commodity Index (DBC) which tracks sweet crude oil, heating oil, RBOB Gasoline, natural gas, brent crude, gold, silver, aluminum, zinc, copper grade A, corn, wheat, soybeans, and sugar; the Power Shares DB Agricultural Index, (DBA) which tracks corn, wheat, soy beans and sugar; and GLD, the SPDR gold trust, which tracks gold.  On May 28 Smart Trend.com reported that the agricultural index is in a bearish trend.  

As you can see in the charts above, the DBC and DBA peaked in 2008 and have stayed off their peaks, while GLD, the third graph, has risen consistently.

Personally, I have no more faith in the word of the US Congress than I do in the word of a three card Monty dealer on 42nd Street.  Given the massive increases in deficits under President Obama and the even more massive increase in the monetary base in 2008 (and consistent increases in the US money supply ) there is no reason to think that gold and commodities will do anything but increase over many years. Ultimately, speculation and replacement of the dollar with gold by frenzied Americans trying to escape the government's legal tender law will push up the gold price further. 


But gold has increased almost five-fold since 2001, while other commodities have not kept place and have significantly fallen since 2008.  A general rule is to buy low and sell high.  It is possible that the gold market is more rational than other commodities because industrial demand is greater for oil, food and other metals than for gold. But it is just as possible that it is less rational because gold is subject to romance and speculation. The other commodities tell a story different from gold.

Gold is going up because of speculation in anticipation of inflation, and if there is inflation then the other commodities will go up as well.  Also, hyper-inflation might mean a two-fold increase in prices, but gold has already gone up five-fold.

I do not doubt that gold will continue to go up.  But if there were shortages in gold due to insufficient production in the 1990s, there ought to have been shortages in other commodities as well.  Hence, in the long run I wager that there will be continued speculation in gold and that when inflation takes off there will be a gold bubble. But I would think that other commodities where there is less speculation, romance and publicity are more reliable investments at this time.  When inflation starts, many will flock to gold, but the ride can be bumpy because there is speculation in the gold market. 

Let's say the Fed decides to increase interest rates.  There will likely be declines in the stock market, but gold could be even harder hit.  Over time the price will come back, but I find it hard to believe that without a concomitant increase in other commodities' prices the gold price will continue a secular increase. The reasoning for buying gold is that gold is a hedge against inflation, but so are the DBC and the DBA, and they haven't increased for two years. So if I were buying commodities now I would buy those and hold off on the gold.

According to Thoughts.com the dollar ought to be worth .7734 ounces of silver.  Today silver sells for $17.95 and gold sells for $1,207 per ounce.  Thus, the dollar is worth .0557 ounces of silver, 0.3% of the level at which the Coinage Act of 1792 defined it. If you think the decline in value was directed into the hands of the middle class, which William Greider claims in his book Secrets of the Temple, you're on drugs.  The money is created by banks who collect interest and they lend it to speculators, hedge funds, corporations and most of all, Wall Street. As well, it boosts stock prices because low interest rates increase the present value of future earnings.  Left wingers like Greider, who advocate Keynsianism, like to avoid discussing how their ideas support Wall Street and the banking lobby.

The additional money causes inflation, raising prices for everyone. Hence, it harms those who do not own stocks and real estate and are not bankers and helps those whose entire livelihood comes from stocks and real estate.  The middle class gets something back through increasing house prices, but those who save and work hard are penalized in favor of those who borrow.  Hence, it makes everyone poorer as the public learns that invention, innovation, hard work and creativity are for suckers, and borrowing to buy a condo is how to make a living.

The inflationary economy and the triumph of the left in terms of three card Monty government means that America's prospects are much worse than they've been.  A collapse of the financial and monetary system would seem to be a possibility. Hence, gold and silver are good bets. But I'm going to buy when they fall.

Ron Holland on the Coming Currency Crisis and Economic Viagra

Ron Holland has an excellent blog on the Lew Rockwell site about the coming currency crisis.  Holland makes four excellent points:

1. The Greek crisis may lead to a shrinking of the Euro zone as more socialist nations like Greece pull out in order to have the flexibility to inflate further.

2. Eurocrats would like increasing centralization of Europe, just as Republicrats here in the US favor increases in Washington's power.  But, Ron rightly notes, Europe "would be far better off as a confederation of sovereign states that allows competition among individual national currencies." The same is true here in the U.S.  The U.S. would be better off if the states were sovereign and were to spin off from Washington, which ought to become a loose coordinative hub like Brussels is today.

3. There will be continuing periods of dollar strength as the mania of  "dollar safety" continues to motivate investors.  Eventually, though, massive increases in the monetary base and China's and Japan's ending of their subsidization of a devaluing dollar will cause currency depreciation here.

4.  Holland concludes:  "Eventually the sovereign debt crisis will also come to the U.K. and then to the U.S., with disastrous results. The tragedy in Greece today is just a glimpse of what will happen to the sovereign debt of the United States. It will come to America, and it will come on its own schedule, so be prepared."

That means be ready to purchase gold when the price of gold falls.  I have about 5% of my total assets in gold right now and I'm planning to increase it over time, buying in the dips.  Other commodities such as agriculture (DBA) and general commodities (DBC) as well as silver (SLV) and other metals should be included in a balanced portfolio.  Gold stocks (for instance, Eldorado, EGO or GDF) and leveraged gold ETFs (e.g., DGP) are higher risk/higher return ways of investing in gold.  Similar ETFs exist for silver and other commodities.

I am currently 68% in cash and about 10% in commodities, including silver and agriculture as well as gold, and about 6% in two foreign currencies, the Canadian dollar and the Australian dollar. The rest is in a few stocks, including a Singapore ETF (EWS).

My worst positions are the Australian and Canadian currencies which have plummeted, apparently because of the Euro crisis (I don't understand why, but I also don't understand why the dollar is rising).  A buying opportunity in the making?

Do not buy and hold.  The mammoth increase in monetary reserves two years ago has motivated the past year's run-up in the stock market, and it may be that this injection is running out of steam. It is possible that the massive increase in potential liquidity (tripling of the monetary base) will continue to boost the stock market for some time, but ultimately the viagra will wear off.  Then, Bernanke, Obama and their supervisors at 85 Broad Street will need to decide whether to inject nine times the monetary base to try to "get the stock market up" another 50%. If they do, hyper-inflation will be a certainty. If not, then expect some major disappoints in the American stock market.

Bernanke's use of monetary reserves somehow reminds me of viagra.  The older the rally gets, the more viagra is needed.

Have Faith in the Federal Reserve Bank--Buy Lots of Gold

http://research.stlouisfed.org/publications/usfd/page3.pdf

Hey Everyone: Check out this graph of the growth of the monetary base. Then go out and put your retirement money into the following:

GLD/IAU
DBC
DBA
UDN

And maybe, if you're rich, buy a house in the Bahamas. It ain't gonna be pleasant in these here parts. No sireee.

Gold Hits Record High

The Street.com reports that gold hit a record high (in nominal dollars) at $1258.30 per ounce.  I view this as a speculative market driven by fear of global monetary collapse and short term investors.  I doubled my gold holding on the hunch that the bubble will continue for at least a few weeks although the market could collapse at any time.  Nevertheless, "expert" gold investors  on Kitco often quote an old saying "sell in May and go away" until the fall. But here it is mid-June and the gold market is breaking new highs.  This seems to be a very strong bull market.

As I noted a few days ago, other commodities are not bubbling like gold.  Silver has its advocates and it went up more than two percent today, but it is not moving as fast as gold.  Nor is there inflation.  According to the Bureau of Labor Statistics there was 0.2% deflation in May although prices increased 2.0 percent year over year.  These numbers are likely understated as the CPI statistics are biased against inflation to minimize social security increases.

There is reason to fear monetary collapse.  The debt that the US government is issuing will need to be repaid. If interest rates rise, then the repayments will become burdensome.  That will put pressure on the Fed to continue inflating.  If it does, foreign bond holders may sell, which would stimulate further inflation.

Modest commodity price increases in other areas suggest that other commodities may be better long term holdings than gold.   The DBA, DBC and SLV, agricultural, commodity and silver indexes, may be less speculative and require less buying and selling.  El Dorado Gold, which I sold at about 17 is now at 18 and going strong.

I don't invest more in gold than I can afford to lose half  in the short term.   In the long term gold will likely go up.  It does not seem that the centralized money supply is a system that will last.  Throughout history monetary collapse has been accompanied by inflation.  Another alternative would be the bankruptcy of the federal government. 

Americans should fear any impetus toward global centralization of the money supply.  Much as the Greek economy has dogged Germany do we really want to deal with Venezuela's economic problems, as bad as America's are?

Bill Gates and Depopulation

On a tangentially related front, there is a video circulating that has Bill Gates saying that he would like to depopulate the world. Gates holds that vaccines will cause lower population. "If you reduce childhood deaths population growth goes down."  However, the fixation on population control is like marijuana (so they say)--it leads to stronger stuff.  When the vaccines are distributed, then restrictions on human reproduction are sure to follow. The video below argues that vaccines are not enough to reduce infant mortality in the Third World.  Undrinkable water, for example, causes a large share of deaths.  So why use vaccines to reduce population? And if vaccines fail to reduce population, what do Bill Gates and the UN next have up their sleeve?

The depopulation issue seems to be related to the monetary issue. Just as government mismanagement leads the greedy government officials to call for more power, so the mismanagement of public health leads to ever greater calls for repression by health officials.  Both lead to increasing centralization. 

Unstoppable Force Versus Immovable Object: Road To $6500 Gold Paved with Failing Economic News

Kitco has some excellent commentaries.  Darryl R. Schoon discusses the likelihood of a meltdown in the dollar.  He argues that the 1971 devaluation of the dollar and removal of the international dollar from the gold standard led to a fiat currency.  He claims that traditionally fiat currencies last about 40 years, and we are now 40 years into the paper dollar regime.  The result has been trade imbalances, exodus of manufacturing from the US, and inflation. The paper dollar will become worthless in his view and the reverse will occur for hard assets. The collapsing dollar will lead to volatility and the markets will find a stable replacement for the dollar, likely gold or silver.  He predicts $3,000 to $10,000 gold.  He also argues that gold is no more volatile than tech stocks. Schoon claims that there are five stages of a gold bubble and we are in the fourth stage, where there is increased volatility.

Although I don't put much faith in the Fed or Chairman Bernanke, his message suggests volatility indeed.  Before I summarize his speech as depicted in Bloomberg, notice that silver has lagged gold and that commodities like agriculture and the general commodity index have not increased to the same degree.  One claim may be that current demand for gold is caused by its monetary qualities, that some investors are now viewing gold as money.  However, it is also true that the dollar has gone through a period, in my opinion a temporary period, of strengthening. The dollar has gotten stronger because of risk aversion directed toward the global credit and banking collapse (especially including Greece, Portugal and Spain) and because of the collapse in bubble credit here in the US.

Bernanke's talk today as reported in Bloomberg led to nearly a one percent fall in the Dow and the S&P 500. Bernanke indicates that the Fed is planning to raise interest rates, which will have a depressing effect on the stock market.  Bloomberg quotes Dean Maki, chief US economist at Barclay's Capital:

"'The Fed is not close to implementing additional stimulus.'  Expectations for additional steps were based on 'more hope than fact.'"


There is little doubt that the Fed will keep interest rates close to zero.  But continued weakness in the economy creates a logical problem.  If the Fed stimulates inflation increases.  Stimulus also fuels the short-run gold price.  Bernanke aims to begin reducing the amount of stimulus to avoid these risks.  But he risks further increasing unemployment.  The unstoppable monetary collapse meets the unmovable decline in the US economy.

Mr. Schoon is right that in the long term the current monetary regime will fail.  However, international risk and a weak economy suggest a short term strengthening of the dollar.  This could mean fluctuations of gold of 50% or more.  Ultimately, though, the Fed's "printing press" will cause the dollar to crash.  This will result in increasing commodity prices.

If you are worried about long term monetary instability, commodities other than gold might be better holdings right now.  For example, the DBC, Dunn & Bradstreet Commodity Index and the DBA, Dun & Bradstreet Agricultural Index, have hardly risen since 2008.  Moreover, silver, which can be purchased through SLV, the I-Shares silver trust, can be purchased to take advantage of silver's monetary characteristics.  The claim that gold's price increase is due to its monetary characteristics rather than short term speculation is contradicted by the relative lag in silver's price increase.  If you are hedging for a monetary skid or collapse, SLV might be a better bet than gold for now.

Over time gold will go up.  But if you can buy it at $950 why buy at $1180?

Kitco's Nadler on Markets and the Fed

Jon Nadler had written an article on Kitco a few days ago suggesting that Ben Bernanke's public statement that he would tighten this year ought to give gold bugs pause. Today Nadler writes:

"Bloomberg reports that: “A prospect of higher interest rates in the U.S., the world’s largest economy, probably will strengthen the dollar further and may take 'some of the wind out of the commodity markets’ sails,' said Royal Bank of Scotland Plc’s commodity analysts, led by Nick Moore. The dollar may rally some 15 percent this quarter, they said.”

Nadler recommends a holding of 10 percent of your portfolio in gold. The breakdown in my brokerage account now is as follows:

Cash 45%
Stocks 22%*
High-yield bonds 6%
Gold (GLD) 15%
Agricultural commodities index (DBA) 6%
Silver (SLV) 6%

*Stocks include Kayne Anderson (a gas pipeline investment trust), GE, the health industry index (IYH), a drinking water stock fund (FTSIPCE9R), and several general stock funds.

My pension account, which is 60% larger than my brokerage account, is almost entirely in cash and a GIF (interest bearing account) that TIAA-CREF offers. In addition, I hold cash in two banks totaling about 30% of my brokerage account. One of the banks, Everbank, offers international CDs such as Euros and Yen, but I have it all in the dollar now.

Nadler argues that unless you think that hyper-inflation is a possibility that gold is not a good hedge against inflation. He argues that the 1970s's gold boom was an anomaly that occurred because of the absence of investment alternatives such as small business stock funds.

However, you will recall that the inflation of the 1970s took the following path. First, the Vietnam War debt precipitated aggressive Fed policy and Nixon added inflation in the early 1970s. By 1970 the inflation rate was about 4%, only slightly higher than it has generally been during the past 25 years. But at that time people perceived the 4% as high. Today they perceive 3.7% inflation as no inflation.

The taste for gold did not accelerate until later in the decade, the late 1970s, when the Johnson/Nixon money had circulated for five to fifteen years. This occurred because of speculation that was in reaction to visible inflation approaching and exceeding 10%.

At the time that the inflation was reaching its peak, the Carter Fed under Paul Volcker adopted the monetarist policy of raising interest rates to limit monetary growth and inflation. This resulted in high interest rates occurring at the same time that inflation was peaking. High unemployment and high inflation coincided, resulting in "stagflation". Today, the monetary policy of the past two decades which was almost as inflationary as under Johnson and Nixon has been counteracted by international central bank intervention. Thus, national central banks hold US bonds. This creates a market situation that is inherently unstable in the long run. We all have faith in the rationality and dependability of governments to manage the world economy wisely because of the numerous historical precedents such as......? In other words, I am not clear as to what makes central bankers more judicious investors in the dollar than Americans were investors in Nasdaq tech funds.

In any case, the Fed has required Americans to rely on the sensibilities and market judgments of global central bankers. In response to excessive lending and apparently uncontrolled and incompetent use of derivatives in the past two decades, the banking system contracted its loan volume last year. The Fed's response was to triple the monetary base. Since 2006 the money supply has been growing at an 8% clip, more than double the recent inflation rate. Some fear a banking collapse leading to deflation, others fear increasing Fed aggressiveness in expanding the money supply. In any case, the Fed needs to balance three factors: unemployment; the prospect of the collapse of incompetently managed money center banks that rely on fresh Fed money; and inflation. Any tightening will threaten the incompetently run banks and may result in higher unemployment. Thus, the Fed will likely have to choose between short term unemployment and the risk of additional inflation in the already unstable system.

In reaction to global concerns about inflation and, as Nadler points out, tightening in China, there may be some Fed tightening in the near term, which is why I am holding dollars. Over time, however, there are obvious risks as to Bernanke's judgment.

Mr. Nadler has forwarded me some interesting comments. I had written to him this e-mail in response to an article about Ben Bernanke's statement that he is going to tighten:

"I have about 25% of my portfolio in gold and commodities at this point, about 30% in stocks and high-yield bonds and 45% in cash at this point and have been following your column for the past couple of months. The quote from Bernanke sounds compelling but I'm curious if you have (or know of anyone who has) compared Fed chairmen statements with actual policy decisions over the ensuing two years, say tracking back to the 1970s? My guess is that there have been frequent statements about tightening and austerity but much less frequent examples of actually following through. So what is the real content of a Fed chairman's statement that he will tighten? My guess is that the statements frequently do not match reality. Any opinion?

Mr. Nadler wrote the following response Q&A style:

Langbert: So what is the real content of a Fed chairman's statement that he will tighten? My guess is that the statements frequently do not match reality. Any opinion?

Nadler: Not in all cases. The most notorious example was Volcker, in 1982. There is a CPM Group report that illustrates just how much people had geared up for massive inflation but an equally massive interest rate hike sterilized any such nefarious outcomes. Surprise. In any case, I can find that text next week for you if you require.

L: If the Fed tightens and the dollar strengthens, do you think that there would be an effect on the stock market and employment, which in turn would make Obama's political position worse than it has been becoming? In that case, the guy who is investing in stocks will get creamed along with commodities.

N: Investments in anything (other than dollars and debt instruments) would probably take a hit. Commodities more than stock, likely. Foreign currencies and emerging market equities, as well.

L: Recall that in the 1930s Mariner Eckles tightened in 1935 or so and that led to the bottoming in the late 1930s that was below the initial bottom. I suspect Bernanke is aware of that history and doesn't aim to repeat it. Also, if he tightens, it might be a repeat of Carter's administration, with a tightening at the end which sealed Carter's coffin.

A: The political 'palatability' might indeed be low, but someone has to explain that you cannot rebuild and get on with it without some short-term pain. The sooner Obama makes it clear that the problem was hatched and aggravated during the Bush years, the more likely he is to succeed in selling rate hike and tax hike programs. The Fed is independent and will thus act when it sees fit, not when Obama gives the 'all-clear' signal.

Q: tightening two years into the Obama administration will lead to a couple of years of even higher unemployment and a rough ride for the Messiah. Or will the Fed respond to political pressure and tighten a bit, rescinding the tightening at the first sign of stock market declines and higher unemployment? It seems to me that the political pressure to follow the inflationary path at this point is still greater than the threat of inflation. Also, the reserves already created are going to be inflationary if the banking system decides that the risk of the problems from last year have passed. If Bernanke continues to pander to them, they will relax.

A: The liquidity will be mopped up with various tools. There is no quid-pro-quo that inflation must result from all of this injecting. What is needed more than anything is more regulation, less lobbying, and far less corporatism. Which, is, what America now has - not capitalism.

You will be all right I trust. Though it will have to be a nimble run...

I am not quite as confident as Mr. Nadler that there will be a nimble Fed and banking response to the massive liquidity that the Fed has handed to the banks or that regulation will help, but hopefully you, dear reader, and I will be nimble in responding to the current monetary risks.

More Price Ramps Ahead: How to Retire with Commodity Indexing

Jim Crum, with whom I have corresponded since the beginnings of the search for information about BO's birth certificate, has published an excellent piece with American Thinker. Jim comments on the inflation effects of the Fed's QE2 program:

The recently released BLS import and export report simply confirms what many of already knew was happening or was going to happen. Prices everywhere on nearly everything of substance are going up dramatically.

Jim adds that fuel and agricultural prices are both on the rise. American Thinker's Thomas Lifson adds to Jim's post:

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

If you are thinking of retiring, you will have to think strategically. Unlike Jim, who told me separately that he's bearish on the stock market, I am convinced that there will be a short term run up. The reason is the liquidity and ultra-negative interest rates that Helicopter Ben and the Fed are generating. One commentator on Kitco suggests that there will be a few week consolidation period followed by an additional run up in the stock market.

No increase is consistent. The silver market has been doing beautifully, and those of us who have partaken of the white metal have enjoyed the run. My portfolio is near its all-time high in February of 2008, when I had benefited from a short term run up in construction stocks that the late Howard S. Katz had recommended. However, I am not sure about silver's short term performance. Over the long term it will continue to rise, along with other commodities.

My recommendation to deal with Obama's declining America is to plan for retirement by purchasing blocks of commodities that reflect your anticipated consumption. For instance, if you are retiring at age 67 and you figure that you'll live until about age 82, you need 15 years' worth of commodities. If you spend $6,000 a year on fuel and gasoline, $7,000 a year on food, $2,000 a year on house repairs, $5,000 a year on property taxes and $5,000 a year on other consumables then you have a commodity budget of about $25,000 a year. The property taxes can be accounted for with gold or silver. The consumables and house repairs can be accounted for the with Deutsche Bank Commodity Index, DBC and/or the Deutsche Bank Agricultural Index, DBA. So you need to fund $25,000 x 15 = $375,000 in commodities investment before you retire. If you have ten years to go, you should fund $37,500 per year, $75,000 over five years, or put it all in now, depending on your theory of where the market is going to be going.

The commodities should not be used as speculation but rather as savings that you will liquidate over your anticipated retirement period. Whether commodities go up or down, your inflation risk for the funded period will be nil.

Managing Your Life in a Declining America

China's and Russia's announcement that they will use the ruble or the yuan to trade bi-laterally seems to have struck financial blogs, but few others, as important.  Market Watch writes in an understated tone:

>China and Russia will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, though the move is not meant to signal a challenge to the dollar, according to reports Wednesday. China's Premier Wen Jiabao and Russian President Vladamir Putin made reference to the new currency trade pact late Tuesday, following meetings in St. Petersburg that also saw the signing of bilateral trade and energy-cooperation agreements, according to a report in the state-run China Daily. "About trade settlement, we have decided to use our own currencies," Putin told reporters, according to the report. Earlier this week, China added the ruble to the list of currencies that can be traded against the yuan on its domestic exchange.


I searched the words "China Russia trade dollar" on Google and got 238,000 hits, but the leading hits were all financial blogs.  Moreover, the ostriches have proven eager to bury their heads in the central Asian sand.  Tyler Durden notes that Russia and China made a similar bi-lateral statement more than a year ago and nothing changed then.  Also, the dollar has risen since the announcement.

But the dollar has risen since the announcements of numerous momentous decisions that will depreciate it, such as the bailouts and the massive expansion of the monetary base in 2008. Wall Street's short-term faith in the dollar has over-ridden longer term logic since 2008. Unless the Fed decides to reverse its policies of the past ten years there is little reason to believe short term market fluctuations.  Of course, as investors we need to consider such fluctuations.     

It would seem that a decision to drop a long standing business practice will require adjustment. It would also seem that along with the dollar habit Russia and China may be concerned with US power.  How long did the abolitionist movement in the US continue before slavery ended?  Even in 1776 Jefferson wanted to include more aggressive statements against slavery than the Southern delegates to the Continental Congress allowed in the Declaration of Independence . If it took 86 years to abolish slavery, might it take a few years for the Russians and Chinese to switch to an alternative currency?  By the time they and other global players make the decision the markets will have digested the information. At that point dollars will be worth a small fraction of what they are worth today.  Hence, the head-in-the-sand response may prove to be insufficient.

There are several possible outcome scenarios to long term dollar depreciation and American economic decline.  First, the Fed's monetary expansion could work for another round. The economy will grow in a valid way, jobs will be created and the public will become wealthier.  The nation's jobs picture would improve and there would be little inflation. I don't think that will happen. The  Fed has not been successful in stimulating sound economic growth. Although the past twenty years saw considerable economic activity, most of it involved the creation of unstable, low-end retail jobs.  The high unemployment of today results from the economic illusion for which the Fed has been responsible.  The Fed not only creates illusion but also transfers a wealth to Wall Street and corporate interests as well as to privileged workers in government, construction and big business. The past 10 years have seen a massive increase in privilege to the wealthy because of Republicrat policies. But until recently the illusion has been sufficient to keep Americans happy. Blissful ignorance might continue despite the Tea Party.  If the Fed's monetary policies work, then the stock market will shoot up. I don't think that will happen in the long term, but I do think that there will be short to medium term strength in the stock market, say into 2011. After that, all bets are off. 

The second possible outcome will be that the Fed's policy works but causes significantly higher inflation. This would happen if  the commercial banks convert all of the money reserves the Fed  has created into loans. That would stimulate a high degree of unproductive economic activity similar to the sub-prime building of the last decade. Economists will say that the economy has recovered, but Americans will become poorer. If you recall the seventies, then you have a sense of what higher inflation feels like. But the inflation this time around may be worse.  This is the scenario I think will occur.

The third scenario is that the banks will not lend a multiple of the reserves that have been created and instead contract their loans. That would result in deflation.  The markets have been afraid of this scenario but it would turn out better for the average American (except for the unemployed).  Stocks and bonds would decline as would non-monetary commodities.  Gold and silver both seem to behave today as monetary commodities.  Hence, they may do as well in this scenario as under inflation.  However, agriculture, DBA would not. As well, the stock market will probably fall as profits and consumer demand decline along with the availability of money.  There will be high unemployment but the government will become increasingly paralyzed.  I do not think this will occur because there will be too much pressure on the money center banks and the Fed to purchase US debt. Even if the banks do not lend to the public, the Fed will continue to monetize the federal debt, and government will continue to spend in value-destroying ways, resulting in inflation or dollar depreciation.

A fourth scenario would be total economic breakdown.  This might occur if there is disruption to the power grid through terrorism or some other disaster and the government lacks the resources or competence to respond, a kind of global or national Hurricane Katrina.  I know people who fear this but usually what goes wrong is what you don't expect, not what you do expect.  If you have a year's supply of dry food in your pantry I personally wouldn't call you crazy but I don't believe you will need it. At present I do not have any dry food, silver bars or firearms.  But having a rifle and an ample supply of junk silver (pre 1960 coins or one ounce silver bars) might be a good idea. You likely would never need that stuff but if you have five thousand dollars to invest in an insurance policy, you might consider those steps.

It seems to me that at this point cash is still safe, although the days of cash may be drawing to a close.  Gold and silver are highly speculative because of investment or speculative demand, but their persistent rise suggests that a broader-based demand for gold-as-money is motivating the price increases.  I have about ten percent of my portfolio in commodities and I am going to allow the percentage to increase for quite a while, purchasing some additional amounts.  I am also taking care of whatever home improvements I can afford, and if I inherit an additional $100 grand will buy myself a Boxster S.  I aim to invest in what I know or plan to know.

Review of Ron Paul's "End the Fed"

 I just submitted this piece to Mike Marnell's Lincoln Eagle. It may appear in the June or July issue.

Review: Ron Paul's End the Fed

Mitchell Langbert, Ph.D.*

Ron Paul, End The Fed.  New York: Grand Central Publishing. 2009. 212 pages.

"There was no food, however, in the whole region because the famine was severe; both Egypt and Canaan wasted away…They came to (Joseph)…and said, 'We cannot hide from our lord the fact that since our money is gone and our livestock belongs to you, there is nothing left for our lord except our bodies and or land. Why should we perish before your eyes…Buy us and our land in exchange for food, and we with our land will be in bondage to Pharaoh…and Joseph reduced the people to servitude, from one end of Egypt to the other." --Genesis 47: 13-22

            I have just finished Representative Ron Paul's End the Fed.  I consider it must reading for all Americans, but especially for Congressman Maurice Hinchey and most other local politicians, Democrats and Republicans alike. For a century American citizens have chosen, ostrich-like, to avoid discussion about the Federal Reserve Bank. Their head-in-the-sand attitude is encouraged by the legacy media, all of which is owned by interests beholden to Wall Street, which, along with commercial banks, government employees and big businesses benefit from the Federal Reserve Bank's redistribution of wealth from you to them.  The Fed does this by printing dollars, making yours worth less and soon, according to Representative Paul, worthless. 

            The fact is that the richer you are the more you benefit from the current Federal Reserve Bank system, and the media is indebted to the super-rich. George Soros, for instance, just gave funding to National Public Radio. Warren Buffett owns stakes in The Washington Post and Capital Cities ABC.  General Electric and Bill Gates own MS-NBC.  Sumner Redstone owns CBS. As far back as 1912, The New York Times silenced presidential candidate Robert M. La Follette when he publicly stated that the magazine industry, like the newspaper industry of the day, had fallen under Wall Street's editorial domination.  To this day the Ochs Sulzbergers, the inheritors of The Times who oppose inheritance for everyone else but have never opposed family trusts for the super-rich, are key apologists for the Federal Reserve Bank.

            In his book, Representative Paul makes clear why you should pay no attention whatsoever to the legacy media-- NPR, CBS, ABC, NBC, CNN, The New York Times, The Washington Post, or Newsmax.  The Federal Reserve Bank is the single most important story of today, yet none of the legacy media chooses to explain what it is doing to you financially.

            In a nutshell, the Federal Reserve prints money, uses it to buy bonds from commercial banks, which then expand the amount of money up to ten-fold and lend much of it to Wall Street, hedge funds, sub-prime real estate interests, big companies, and government. The last, in turn, subsidizes special interest lobbies like government employees, the Association of Trial Lawyers (now called the American Association for Justice), and the National Lawyers' Guild.   The economics profession gains considerable prestige and power from this arrangement, and has become a vested interest just like any other. Any economist who defends the Fed, and virtually all do, is part of the economic chicanery that is bringing America down.   

            The Fed has been badly managed, and in his book Representative Paul shows why.  Big, money center banks in New York City lend the Fed's counterfeit printed money to incompetently run Wall Street firms which invest it in bubble investments that make money in the short run but crash in the longer run. Then, rather than allow the badly run Wall Street firms to collapse, economists and the legacy media clamor for even bigger investments to the badly run firms in part at taxpayers' expense and in part through more counterfeit.  Although manipulative politicians like Representative Hinchey postured about the first bailout, they know that their interests coincide with Wall Street's, hedge fund managers' the super rich's and the National Lawyers' Guild's. The success of Representative Hinchey's favorite programs depends on Federal Reserve Bank credit expansion. Representative Hinchey would likely be poorer without the Fed.

            Where does the wealth come from which is allocated to Wall Street and Hinchey-style government mismanagement? It comes from you. The Congressman whom you have been electing has benefited from the Federal Reserve Bank's fraud for his entire career, most recently by voting against an audit Representative Paul proposed that would have required the Fed to show how much wealth it is diverting from your pocket via rising prices to firms like Mitsubishi Bank, Deutsche Bank, Citibank and other trans-national banks.  Americans' real (inflation-adjusted) hourly wage hasn't risen since 1970, but lots of money has been diverted to foreign banks and corporations.   You can see why Hinchey voted against an audit of the Fed. People who have nothing to hide hide nothing.

            So, Representative Paul concludes, the dollar is going to collapse, and that will make you worse off. It might throw you out of work, or it might cause a gradual or perhaps a rapid hyper-inflation that will reduce your standard of living.  The fault clearly rests with Congress, including your representative, Maurice Hinchey.  But how do you prepare for the coming economic decline for which Americans have voted?

            For me, there are three kinds of investments that make sense. I hope to eventually retire, not to make big money through speculation.  I don't recommend this for you; rather, you need to think for yourself.  In my case I am first gradually putting a large share of my savings in gold (GLD) and silver (SLV), 20 or 30 percent.  Second, I am taking a stake in other commodities, especially agriculture (DBA) and oil (DBO).  Third, for cash income I am buying high dividend yielding stocks such as Verizon (VZ) and Philip Morris (MO and PM).  If the dollar collapses, Philip Morris will still sell cigarettes.

            Congressman Ron Paul is pessimistic about the end result of the Federal Reserve Bank's policies. If you want to pretend that what we face today is business as usual, I will buy you a ticket to an ostrich farm I know of in Big Indian, and you can plan to retire there. Meanwhile, read Ron Paul's End the Fed and face the facts-- both parties have been complicit in wrecking the American way of life. Monetary debasement has accelerated and will eventually harm you. Currency collapses end freedom, what you know as the American way of life.  We are in the endgame now. There is nothing left for Soros, Buffett, Goldman Sachs, Ben Bernanke, Alan Greenspan and the American Association for Justice (what a laugh) to steal.  If you believe the legacy media you will get hurt.

 

*Mitchell Langbert is associate professor of business at Brooklyn College. He blogs at http://www.mitchell-langbert.blogspot.com