10-12-09
 

What Columbus Sees

America was an idea long before it was a country...

The idea was beautifully simple: life, liberty and freedom. A place where a person could be left alone to do their own thing as long as it didn't harm others. Private property ownership. Free enterprise. Small and non-invasive government. Self-sufficiency of the population. Gold would be the only money allowed by law. Governments would be answerable to the people so to keep any would-be dictators in check.

If Columbus and the founding fathers could see what has become of their dream, I wonder what they'd think.

Anyway, moving on from my Columbus Day salute, let's weigh up what's been happening...

The Dow closed to a new recovery high on Friday, but the Transport index has yet to confirm with a new high of its own (we need both to be sure the rally will continue).

We're now into October and earnings reports are due out. October could well be an 'up' month with earnings reports being released that could reveal some positive 'surprises'. Remember, the market reacts to a company's results based on what was expected; they may be bad, but as long as they're better than expected, that's a reason to buy in their book. Meanwhile, Main St. certainly doesn't feel like this is a recovery.

Besides that, I feel this is very much a traders market and anyone who is playing with their 401k needs to have the bulk of that on the sidelines in cash and gold. Only 'fun money' should be remaining in this game; there could easily be more upside, but it's getting limited now and the downside risk is just too great.

With gold hitting a record high this week of $1,061 an ounce, my continual hammering on the table about the inflation/deflation debate being THE most critical outcome that will affect YOU, has been brought into the spotlight.

Fortunes will be made or lost by getting this right, no in betweens and nobody is unaffected. Well done for ensuring you get quality information on this rather than just sticking your head in the sand like everyone else...

It's essentially all about how governments, particularly the US government, will fund their way out of their borrowing mess. Words like 'deficit' are deliberately used to make your eyes glaze over and go back to sleep, but it's nothing more than borrowing and balancing a checkbook much like any individual has to do.

It's considered normal for governments to be in deficit and so it's tolerated. But does this have to be the case? Norway isn't in deficit. Debt is the reason for this boom and bust cycle we're constantly subjected to, not capitalism.

I now hear the word 'trillion' banded around when discussing government deficit as if it was nothing. If you counted to a trillion at a rate of one number per second, it would take you over 33,000 years to do so. If you stacked a pile of a trillion dollar bills up, it would go to the moon and back and then some.

That's the first thing.

Second, government money is not government-created money. This money has been 'donated' by the American people (taxes), it has been loaned by kind strangers (Treasury bonds) and more alarmingly, it has been created out of thin air by the Federal Reserve (quantitative easing/printing money).

And these 3 avenues are the only ones available for getting out of debt and each of them will make you poorer unless you defend against them!

Which one(s) will our leaders take...?

1) Taxation.

No doubt, taxes will raise. They have to. And don't think it will be just for rich people and corporations. They're now proposing a national sales tax- hmmm, I wonder how that will help the recession?? But if they want to get a second term, they are very restricted in what they can do here. Taxes don't get votes.

2) Borrowing from strangers.

Okay, this can happen to an extent, but China, the biggest 'stranger' is now cutting back their purchases in response to the devaluation of the dollar. More to the point though, the more debt you issue, the higher the interest rate you will pay (in theory) and this affects mortgage rates. High interest rates don't win votes.

3) Printing money.

If you eliminate the improbable (or least probable) as we just have in 1 and 2 above, whatever you're left with, however crazy it sounds, is the likely scenario. Printing money won't cost votes because it's not obvious to the average voter why they're 'mysteriously' poorer at election day- things just seem to cost more and inflation is just a fact of life, right? Yeah, I blame those lousy bankers!

I'm not a cynic, just a realist. What I outlined above would be a perfectly normal conversation in Washington today.

And that's why I'm inclined to believe inflation will be the ULTIMATE outcome. That's what has sent gold to a record-high this week.

So that's it? Inflation? We just load up on gold, real estate, stocks and anything tangible with our cash before it isn't worth anything?

The trouble is, the politicians everywhere are patting themselves on the back now for saving the world and are talking about reigning in their loose monetary policies. In short, the greatly underestimate the huge deflationary forces in the market today.

Government counterfeiting = Inflation = tangible assets are king.

Current low demand for stuff = Deflation = cash is king.

Please tell me if you agree with a quiet but massive change I'm observing in the population psyche today: people everywhere are cutting back, being cheapskates, closing their wallets, growing tomatoes etc. etc. etc.

Are you seeing it too?

That's deflation. In an economy that's geared up for people buying $50 key chains in Juicy Couture and enjoying fine-dining twice a week, that's a very bad thing.

This year has been all about smoke and mirrors; governments, corporations and the media are trying to paint a much better picture than there really is. And understandably so- trust me, we had better pray inflation is the one of those two evils to happen.

We've been enjoying a free lunch for years now and now it's time to pay the bill. The longer this day is postponed, the bigger the bill will be.

Ben Bernanke- the Fed chairman- is a Monday Morning Quarterback regarding the Great Depression of the 30s by his own admission, indirectly. His understanding was that if the government of the day had printed money and lowered interest rates back then, the depression wouldn't have been so severe.

And he's right. But back then, there was the Gold Standard which prohibited such an act. Economies had to suffer the consequences of their actions. But now, there's a printing press and Bernanke's plan to avoid Great Depression II was remarkably simple: do what they didn't do in the 30s and flood the world with funny money.

If only it were that simple Bennie.

Trouble is, the Princeton professor hadn't considered how the foreign creditors like China would feel about such an act, or perhaps, that there are in fact other countries outside America. But he doesn't care; he's the proverbial Ahab with deflation as Moby Dick. The greenback will be the casualty ultimately though, not Ahab.

So what this means I believe, from an investing scenario is that both deflation and inflation are in our future. First, we see deflation as natural market forces make government efforts thus far look pathetic. Then, the Fed reaction will be dramatic and swift. Inflation can come fast and without warning- remember those news reels of people fleeing Argentina?

In short, prepare for both scenarios. Eliminate debt, build cash reserves and keep a foot in some tangible assets like gold, real estate and stocks.

No cash around when you need it, right? Now's the time to get some sideline income streams going...

Until next time...

Mark Patricks
 

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