Is the bond market finally catching on to the “forced risk” trade…?

AS NIALL FERGUSON never tires of reminding us, bond markets rarely react early to bad news, no matter how plain it looks to everyone else.

“In the years leading up to the First World War,” as the Harvard historian explained in 2006, for instance, “the London bond market – then the biggest in the world – appears to have become markedly less sensitive to international crises than it had been in the nineteenth century.” So despite much gnashing of teeth over the Russian/German/Yellow/Turkish threat to empire in the ever-xenophobic British press, the catastrophe of August 1914 still caught bond holders napping (holidaying in fact), oblivious to their imminent risk and the decades of negative real returns that lay ahead.

Similarly, in the 1970s, real yields – after accounting for inflation – consistently paid less than nothing, yet the bond-market sell-off only really began after nearly a decade of sub-zero returns. Bond holders again needed a lot of telling, in short. Which makes this month’s new Investment Outlook from Bill Gross – head of the world’s largest bond-fund manager, Pimco – signal.

“Central bankers have lowered the cost of money for 30 years now,” writes Gross, finally catching up with what us nutty gold bugs have long pointed out, “legitimately following global disinflationary forces downward, but also validating increased leverage [in the financial sector] via lower real interest rates.”

Today’s Fed promise of “low or negative real interest rate for an ‘extended period of time’ is the most devilish of all policy tools,” Gross goes on. Because “to rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders [savers and retirees] and giving it to another [bank bosses and the other finance croupiers].”

Negative real interest rates are nothing new, of course. As our chart shows, British cash savers have long suffered periodic bouts of sub-inflationary yields.

Absent the apparent noise of the first 125 years above, however – when real rates, denominated and paid in gold bullion of course, in fact averaged 3.8% per year – the last 140-odd years first rewarded cash savers, then whipped them wildly as the First World War  struck, and then denied them a balancing positive return to make up for their previous losses, right up until the start of the 1980s.

Paying the strongest real rates since the Great Depression, but without any hope of gold bullion to back its currency, the Bank of England – like the US Fed and German Bundesbank – finally got the inflation Gremlin back in the blender. Peace, general prosperity, and the “long boom” of ever-rising equity and bond prices ensued. Right up until those slowly declining real rates brought about a global financial bubble which demanded (or so policymakers believe) sub-zero real rates to fix its collapse.

What comes next? Bill Gross advises bond buyers to seek out positive real returns outside major-economy government bonds, basically recommending the “forced risk” trade which Japanese savers have long had to embrace. Other observers, fearing emerging-market volatility or default, might also want to consider hard assets. Because – and lacking all hard-money backing for currency – the common denominator between the last 10 years of rising gold prices and the inflationary 1970s remains miserable returns from other asset classes, most notably the negative real rate of interest paid to bank savings.

Here in the UK, for example, last month’s VAT tax increase, together with the zero returns still being offered to cash savers, have most likely taken the real return on bank deposits to new 30-year lows. The last time cash savings were losing value at this pace – worse than 4 pence in the Pound annualised – inflation stood at record peace-time levels, threatening to crush the economy. But the net effect today is just the same for retained wealth. With money under constant attack thanks to growth-at-any-cost policy, gold and silver are becoming increasingly attractive alternatives.

And for all the chatter about raising interest rates, seven of the nine policy-makers at January’s Bank of England meeting voted against hiking the base rate by even just 0.25%. Chief “hawk” Andrew Sentance will leave the committee in May, and with annual interest costs on the government’s debt set to double to £63 billion between 2010 and 2014 – and with a further £154bn of outstanding debt due for repayment by then as well – the political imperative for rates to stay low is clear, present and overwhelming. At the start of the ’80s, gross national debt was a fraction of today’s burden.

Bank depositors, in short, look set to continue paying for both the banking bail-out and the gently declining real rates of the last 3 decades which required it. Little wonder a growing number are opting out of official currency and national debt entirely, choosing industrial commodities and precious metals instead.

Adrian Ash

For Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com

The thoughts in the Sayce brain are all trying to come out at the same time. And none of it is making any sense [Reader's voice: No change there then!] So you’ll have to excuse today’s effort as it’s likely to be all over the place…

Wall Street crashes by 350 points. The Australian market is down over 10% in less than a month. And Australia’s single most important industry – resources – is being held hostage by the government.

Meanwhile, we read on from News Ltd that:

“Another $2bn for health in federal budget”

Oh the fools.

It’s all the deadbeat politicians know how to do – “The economy is booming, it’s time to spend…” “The economy is collapsing, it’s time to spend…”

But what do they care? While the ex-Fairy Ruddfather cheerily set off a resources market crash, and increased the flight from the Aussie dollar, he’s happily aware that whatever happens to the stock market he’ll still get his lovely taxpayer funded pension.

Ah, the life of a parasite. The life of a bloodsucker. The life of a stinking coercive servant.

Taking away by force money from the private sector and individuals in order to fund the playthings of politicians.

Let me make this clear, the mistakes of the Great Depression that the bureaucrats claim they have avoided, are in fact being repeated.

Only on a much bigger scale.

One day the penny might drop for these chumps. It might suddenly occur to them that you can’t consistently take money away from that which is productive and pour it endlessly into that which isn’t productive.

To take money away from the productive resources sector and hand it over to the unproductive and corrupt health sector is nothing more than an expensive guilt trip.

We can hear the spin already, “It’s only right that these super profitable mining companies should pay for hospitals. Which would you prefer, shareholders making money or lives being saved?”

Ah, a political stroke of genius.

That reader, will be the argument. And it’s a disgraceful and false argument. Spineless bureaucrats playing with the emotions of the population. Blackmailing them into handing over 20%, 30% or even 50% of their money in exchange for services they may never use.

Taking your hard-earned money when you need it the most.

But it’s not just the government, it’s the special interest groups as well. The doctors and nurses organisations that blackmail you and politicians into securing ever greater amounts of taxpayer money.

The trade unions cheering the government on to take more and more dollars from those that have earned it.

All of it under the lie that it’s being done to boost the economy and support a recovery.

As I’ve mentioned many times before, there is no economic recovery. All there is is spending of borrowed and newly printed money.

Spending which is only pushing the taxpayer further into debt.

We read yesterday that Dun & Bradstreet was forecasting thousands of people would default on utilities bills.

“Bill debt set to soar: report” says the Sydney Morning Herald.

D&B chief executive Christine Christian told the paper:

“Not paying a small bill or a non-bank related credit obligation can negatively impact a consumer’s ability to access credit for up to five years so it’s absolutely critical that every credit commitment is taken seriously.”

Alternatively the best course of action is to default on your bills. For five years you’ll find it almost impossible to go deeper into debt. Surely that’s a good thing.

We’ve encouraged the Greek government to do the honourable thing and default on its debts, rather than putting its citizens and the citizens of other nations on the hook for $150 billion.

So why shouldn’t individuals do the same thing? Default and get a bad credit rating. Imagine having to save up for something rather than applying for a loan.

Imagine having to stay in your current home rather than “upgrading” to something more expensive. In our mind that should be seen as a liberating event. Default and be free of the temptations of going further into debt.

Of course the banks won’t like that. They need more debt. The more debt the better. The bigger your debt, the bigger the bank’s assets. Bizarre isn’t it?

What’s bad for your balance sheet is good for the bank’s balance sheet. No wonder they’re so eager for you to hock yourself up to the eyeballs.

But whether – as reported – the overnight crash on Wall Street was the result of a trader error or not is irrelevant. The fact is, the market has been living on borrowed time for at least the last six months.

Stock markets and economies have been propped up by exactly the same kind of wasteful spending as the $2 billion that the government will waste on the health system.

Billions of dollars wasted on school buildings, housing insulation and home buyer bribes. Billions of dollars more to be wasted on a broadband network. Although the spin on that is that it will be a saving because it will only cost $38 billion not $43 billion!

It’s why, when the mainstream has been cheerleading for the market to go higher, we’ve been more cautious. We’ve advised Australian Small-Cap Investigator and Australian Wealth Gameplan members to make sure they’ve got a ‘Plan B’.

For Australian Wealth Gameplan members that’s involved picking a small selection of dividend paying stocks. It’s also involved using trailing stop orders. Plus we’ve recommended using covered call options as an income booster.

And finally we recommended members implement our “Exit the Dragon” strategy. You may have seen the email from Dan Denning last week.

We formed that strategy earlier this year. And while it wasn’t specifically tailored for this week’s events, it’s already paying off.

For Australian Small-Cap Investigator subscribers, the strategy was different. Last October we strongly encouraged subscribers to start using a trailing stop strategy.

The thinking was simple. Stocks had risen 50% in a very short period. That kind of price move wasn’t sustainable.

Yet, we didn’t want to completely exit the market. When you’re betting on small-cap stocks you know there’s a risk. That’s why we took some profits but then entered trailing stop orders on the remaining positions.

The result has been that over the last six months the number of stocks in the Australian Small-Cap Investigator portfolio has shrunk from twenty-nine to just three!

It means that we’ve instructed investors to get out of nearly 90% of their stock positions prior to the market collapse.

The point I’m trying to make here is that it’s pretty darn hard to pick the top and bottom of the market. Therefore your best strategy is to prepare for the worst should it happen. And that’s exactly what we’ve told readers to do since October last year.

Look, I’m not saying we’ve gotten everything right because we haven’t. And I’m not trying to claim ‘I told you so.’ But what I am saying is that the time to prepare for this week’s market crash wasn’t Monday, yesterday or today. The time to prepare for it was six months ago.

So right now, while the mainstream finance pros are falling over themselves to get out of the market, we’re looking for opportunities to get back in. But we won’t be rushed.

Again, we may not pick it completely right. Because if we get back in too early there’s a chance we’ll be forced out of a position if the stock moves lower.

But, that’s just part of the risk of punting on small caps. We’re looking to lock in big figure percentage gains. The only way you can do that is to take big risks.

However, there are some making big money on this market. Such as short sellers.

Our Slipstream Trader Murray Dawes has been short a number of stocks over the last few weeks. And this week it has paid off in a big, big way.

I can’t give you the details of what they are because he’s still got some of the trades open.

But for our part, we hope you took the opportunity to short sell Commonwealth Bank as a punt when we suggested it in early April. From memory the stock price was about $58. Today it’s trading just above $53.

It would have been a nice little punt if you got on board. An even better one would have been ANZ Bank which is down about 20% in the same period. Quite frankly we can’t believe the banks are still this expensive.

There are afterall, insolvent Ponzi schemes.

I’ll tell you what though, if you’re relying on signals from your broker or the mainstream press, then forget it.

Today’s The Age offers:

“Cash best bet as markets shudder: traders”

Maybe these traders have been saying that. But we don’t remember the mainstream press reporting it.

All we remember is the hype about the market hitting 5,000 points and how analysts had upgraded their forecasts for the economy.

And how rising interest rates was a good sign because it means strong economic growth.

No you Muppets, it means that the stimulus and government spending and buying on credit has given a false impression of a positive economy.

It’s exactly as we’ve said all along. If the government spends and if the public spends on borrowed money, eventually it all has to be paid back.

It’s just not possible to borrow and spend your way out of recession without creating bigger problems.

But where are the Keynesians now? Supposedly their spending plan was working. This is the way out of recession they said. Stoke the demand side and everything will be fine.

Gee whizz, the Greeks tried that, ask them how it’s working for them.

The UK tried it, ask them. The US tried it too. And, Australia tried it as well.

Oh, and don’t forget the biggest spending bubble of all, China.

The outcome will be exactly the same. Australia isn’t any different to anyone else. This week has proven that beyond doubt.

And regardless of the number of levers the bureaucrats think they have to manipulate the economy, one unarguable fact remains…

You can’t buck the market. Keynesians and bureaucrats would do well to remember that.

Cheers,
Kris.

The EUROZONE’S PROBLEM? In short, it’s history…precisely what the single currency was supposed to neuter, of course.

Greece’s still-pending €110bn bail-out has already cost three lives in Athens’ riots today. More bloodshed inside Western Europe would make a horrific end for this grandest of grand post-war projects…the crowning achievement of Europe’s longest-ever period of peacetime.

But thanks to history – and the very same history that built the Euro, as well – Germany cannot inflate. The rest of Europe, however, cannot do anything else. Sharing one printing press was always unwise. Now it makes UK prime minister Gordon Brown look smart for staying outside. Which really is saying something.

No “single currency” could ever reconcile history, however, because Europe’s monetary politics over the last 100 years is cleft right in two. Germany suffered first hyper-inflation…and then madness…before banishing the shame of cattle-trucks packed full of people by promising “Never again!” to wheelbarrows overflowing with bank-notes.

The rest of Europe, in contrast, and especially the PIGS of the south (but also Great Britain, you’ll note), got things the other way round. Deflation came first, thanks to the interwar Gold Standard. Victory in Europe was then followed by the victory of soft money. Time and again, devaluation worked magic to rescue over-spent nations from ever settling their debts.

So, where Germans look back and see catastrophic inflation…followed by the sins of the Führer…and finally a five-decade boom built on sound money (not to mention cream-laden lunches)…Greek, Spanish and Italian civil servants fondly recall an insane scramble for cash, only redeemed – repeatedly, and for the next 50 years – by default through debasement.

The hyper-inflation of 1919-1923 is scorched onto Germany’s collective conscience and Germany’s alone. To the west of the Rhine and everywhere south of the Alps, a very different 20th century applies. Their only memory of tight money was the disaster of the Great Depression. Sparred hyper-inflation in the 1920s, Europe outside of Deutschland slipped instead into chronic deflation the following decade. Come 1931, the world’s monetary anchor – the international gold-exchange standard – was cut loose from the Pound, forcing everyone else to do the same sooner or later.

Sooner was better, as well. Inflation worked. So did the war. Just ask Paul Krugman or Ben Bernanke.

“You owe us €70 billion for the ruins you left behind,” spits the mayor of Athens, Nikitas Kaklamanis.

Deputy prime minister Theodoros Pangalos cuts nearer the heart of the matter by adding how “The Nazis took away the Greek gold that was in the Bank of Greece. They took away the Greek money and they never gave it back.”

Germany should cough up, in short, for the sins of the Führer. Which is kind of correct, since Hitler’s greatest achievement today is a welfare state that neither the Allies or Axis could ever afford.

Compare and contrast with the crushing demands made after WWI. Denied a knock-out blow on the battlefield, the French and British sought victory at Versailles instead…squeezing the Hun for more money than yet existed in the form of gold bullion. Whereas today, “Greek civil servants are suffering because of a crisis they didn’t cause,” reports the BBC. Only they did cause it, of course – or rather, their parents did…like everyone else who survived or was born after WWII…by voting themselves a cradle-to-gravy-train welfare state that hasn’t stopped paying ever since.

The irony of Greek civil servants demanding 16 months’ wages each year from German taxpayers this runs deeper than it seems at first glance. The inevitable response by central banks takes us straight back to Weimar, as well.

“What might therefore take place in the long term?” asks French economist Patrick Artus at Natixis of the single Eurozone project. The options he sets out are nigh-on impossible:

• the launch of a federal system (taxes, spending and central control), “which is highly unlikely given Germany’s stance”;

• a continued gap between permanently depressed member states and high-growth prosperity elsewhere – “difficult to accept both politically and socially”;
• withdrawal from the Euro, ignoring the costs, by “irrationally populist governments in the countries experiencing the greatest difficulty…”

Option 1 would force that political union which Helmut Kohl first sought, but the rest of Europe refused to accept. A pan-Eurozone council would hardly help German politicians cool tabloid demands to reinstate the Deutsche Mark, either.

Option 2 is also too ugly to bear, since ignoring the growth-gap only prolongs and worsens the anger, delaying the catastrophe that is Option 3. Watching the Eurozone project – the end of history, no less, for the people who built it – collapse into social unrest inside Western Europe would be just too ironic at best. It might end six decades of peace at worst.

So what about Option 4 – which Artus ignores – by re-opening Germany’s print-shop in Frankfurt?

To date, the plan for bailing out Greece, and thus preserving the Euro, means giving Athens enough money to save it asking the markets for funding until 2014. That sum, so far, is put somewhere near €120bn. But to date, Greece’s Eurozone partners have offered up diddly squat. Italy and Spain, in particular, have gone very quiet.

Wheeling out the printing press in Frankfurt, however…and getting the European Central Bank to do precisely what Havenstein did in 1920…means Europe can pay its pensioners the same way the Weimar Republic tried to pay Britain and France after Versailles, and with the same inevitable outcome, as well.

Just like British and French pride in 1919, today’s heroic welfare promises are just too expensive. Whether sooner or later…and with or without a hyperinflation to try and pay off the victorious pensioners and civil servants…these costs from the past cannot be paid from tomorrow’s money. They’re simply too big.

Adrian Ash
for Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

HOW TO FILL the days, hours and minutes? It’s now seven decades since John Maynard Keynes peered into the future and declared that, one day, trying to scratch a living would cease being “the permanent problem of mankind.”

On the contrary, the moustachioed baron said in 1930; the problem ahead was that people would have too much leisure, too much free time, and not enough to do.

Keynes was bang on of course, as ever. His vision, detailed in Economic Possibilities for Our Grandchildren, has in fact come to pass 30 years early, despite those very wars and conflicts he thought would impair it. By 2030, and “for the first time since his creation” Keynes wrote, “man will be faced with his real…problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

And lo!

“Shoppers on a North Tyneside high street [in the UK] could be forgiven for thinking that a new business has moved into an empty retail unit in the town,” says the local council.

“The vacant Select store in Whitley Road, Whitley Bay is the first [empty shop] to benefit with a design treatment that gives the impression of a high quality delicatessen…”

Yes, the United Kingdom – seat of the industrial revolution – is now so advanced, so highly developed, it doesn’t even need real shops anymore.

Welcome to the Potemkin High Street. The mere illusion of commerce will do. How’s that for a Keynesian possibility…?

“The economic climate has forced many businesses to bring down the shutters. We need to ensure that…our high streets look attractive to both shoppers and potential business investors,” says Judith Wallace, the town council’s deputy mayor. “The colourful graphic designs – which can feature a whole range of different shop types – are either taped inside the windows or screwed to the fascia so they can be removed and re-used as required,” gushes the council on its jolly little website.

Whitley Road’s fake-shop was just one of 60 announcements North Tyneside’s government press team have put out in the last four weeks. Three press releases per day might seem a bit much for the local population of 191,000. But you’ve got to keep people busy, right? Otherwise, “Must we not expect a general ‘nervous breakdown’?” as Keynes asked back in 1930.

“We already have a little experience of what I mean – a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-to do classes – unfortunate women, many of them…who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing.”

Just how has mankind (and his bored, unfortunate wife) attained this evolutionary step change three decades ahead of schedule? Besides assembly-line production and labor-saving devices, Keynes thought the lower orders would be “deprived of their traditional tasks and occupation by their wealth.” But not quite. Hardly the wealthiest people in Britain today, even the long-term unemployed enjoy “conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages” (as Keynes once wrote of London’s upper-classes on the eve of WWI). Yet it is other people’s wealth, not their own – plus two billion low-cost workers quitting communism since 1989, of course – that has freed what used to be called Britain’s “working class” from work.

As in the West Midlands, cradle of the industrial revolution and thus another early entrant to Keynes’ brave “Post Employment” future, unemployment amongst the north-east’s ex-coal-mining population has risen to 9.8% according to the latest official data. Yet a further one-in-four people of working age on Tyneside has opted out of the jobs market entirely. Whether through choice or not (national data says only 7% of the eight million souls deemed economically inactive have taken early retirement), the welfare state – built in Keynes’ name after the Great Depression led to a second Great War – promises to feed, clothe and house people, whatever comes. So it’s little wonder that, according to one analysis, more than two-thirds of north-east England’s economy came from state spending last year, up from 59% in 2004. Nationwide, the total jobless figure has now risen to 27%, just below the historic peaks of the mid-80s, but only because the public-sector payroll has risen by 950,000 since the current administration came to power a little over a decade ago. Take away those jobs, and the horrific worklessness of 25 years ago would be back, but without the hope of falling inflation and interest rates, plus de-regulation and broadening free trade, to reduce it.

“If the gross domestic product of the entire world were distributed evenly, each of the world’s inhabitants would have more than enough to bring everyone out of poverty,” notes Nobel-winning Joseph Stiglitz, writing one of several essays recently published to commemorate and examine Keynes’ Economic Possibilities. The reason so many of us are working more hours than ever before, he guesses, is that financial rewards have been spread out unevenly. “Keynes ignored distributional issues, and failed to appreciate the extent to which global inequity would increase in the second half of the twentieth century,” as a review in the Times Literary Supplement puts it.

But what Keynes’ economic model didn’t miss, however – or at least, what the constant intervention built on his theories guarantees until the money runs out – is the chance to nip here and give away there…putting up a shop-front of busy-busy bees, just like Whitley Road’s fake delicatessen.

• “Unemployment in the UK has fallen for the third month running,” says the Financial Times of the January statistics, “but the workforce shrank sharply as young people took refuge in education instead of seeking jobs…”
• “A package of tax breaks and highway spending cleared the US Congress Wednesday,” says Reuters, “the first of what Democrats hope will be several efforts to bring down the 9.7% unemployment rate…”
• “Demand for labor has been falling steadily for decades as higher productivity has eviscerated the job count in agriculture and manufacturing,” says Edward Hadas at BreakingViews. “Leisure, healthcare and other service industries have taken up some of the job slack…but the ageing population will not necessarily change this overall trend very much.”

A keen eugenicist, Keynes once shocked his upper-class chums by demanding assisted suicide for bond holders…the “euthanasia of the rentier” in his phrase…so that taxes didn’t go on repayments, and savings could be more wisely spent by clever chaps such as himself.

How long before some new wit, faced with the economic impossibility of the West’s post-work society, suggests the same for the lower orders instead…?

Adrian Ash
for Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

And his unwavering faith in the ability of the Reserve Bank of Australia is commendable, yet completely mad. After all, the RBA is the same crowd that’s overseen the destruction in the value of your money over the last fifty years.

And here’s the proof courtesy of the RBA’s website:

They don’t even hide the fact that they’ve singularly failed in one of their main aims, to provide a stable currency.

As their inflation calculator shows you, if you had $1,000 in 1966, in today’s money it would be worth the equivalent of just $100. In other words, the RBA has overseen a 90% reduction in the value of the Australian currency in just 43 years.

And these guys are considered to be heroes by the likes of Pascoe and his fellow mainstream cronies!

But look, we shouldn’t really pick Pascoe out from the crowd. He’s not the only mainstream journalist or analyst to have neglected mathematics over the last couple of years.

If you’ve read Money Morning for a while you’ll remember our attack against government stimulus programmes late last year and early this year.

While fair-weather capitalists swiftly jumped from the “get government out of the way” camp into the “we love you government, come and help us” camp, we argued strongly that the last thing the economy needed was a whole bunch of wasteful government spending.

As you can gather, our opinion was largely ignored. The spending efforts went into overdrive. Government was begged to ‘fill the gap’ vacated by private enterprise.

If people and businesses weren’t going to spend then it was up to the government to organise things.

First there was the cash bribes. When that didn’t seem to be helping enough there was the government infrastructure spending. When that didn’t do as much as they’d hoped there were more cash bribes.

Free money and free housing insulation for almost all. Then there were the shovel ready projects. All those plans the federal government and state governments knew they couldn’t afford were suddenly vital to save the economy.

It’s obvious really, if something is unaffordable or unnecessary when the economy is booming then it must be affordable and necessary when the economy is heading for a slump.

Hmmm, that doesn’t sound right. It’s like saying, “I couldn’t afford the 75 inch plasma TV when I had a job, but now that I’m out of work this is the best time to buy one.” But never mind.

Anyway, there’s all those school buildings and hospital wings to build. Only a Scrooge would oppose the public funding of a school gym or a new hospital wing for the kiddies.

Looks like we’re a Scrooge then doesn’t it.

Only we’re not. Because if you take a look at the research Pascoe is referencing and also take a look at the front page of today’s Australian Financial Review (AFR), then you’ve a perfect example of why the stimulus programmes have been nothing short of a disaster.

But before I get onto that, we need look no further than the architect of the stimulus programmes – Treasurer Wayne Swan – for confirmation of the damage the stimulus has done and is doing to the economy.

Yesterday’s Sydney Morning Herald (SMH) had the headline: “Stimulus will still be needed next year: Swan”.

The report was on the back of the lower than expected GDP number which came in at 0.2%.

The most telling part of the GDP numbers was this:

“The growth was driven by a 0.7% increase in household expenditure and a 6.2% increase in public investment, offset by a 0.9% fall in private investment, and a strong fall in net exports. The fall in net exports was due to a 2.3% fall in exports and a 5.8% rise in imports.”

A 6.2% increase in public “investment”! However, remember that a government never invests, it only spends. An investment is where you expect to get a return on your money.

Governments don’t give a return on their “investments” because they have no profit motive. They’re given a budget and they spend it. It’s as simple as that. Everything they do is a cost to you as a taxpayer.

The fact that governments have increased spending just when the economy was attempting to contract isn’t a positive sign for the Australian economy, it’s merely a disaster waiting to happen.

The report from the Reserve Bank of Australia (RBA) that Pascoe sings about shows that business investment is up. Yes, we can see that. In fact, here’s the chart to prove it:

So now we have to ask, “Why is business investment up?”

That’s right, 1 + 1 = 2. Or in other words, ‘Free Money’ + Business Tax Break = Spending.

Now, that’s trumpeted by the likes of Pascoe and others as being proof of two things. One is that the Australian economy is much more resilient that other developed economies. And two that the government stimulus programme worked.

But as we’ve pointed out during most of the last twelve months or so, nothing comes for free. ‘Free’ money given out by the government isn’t free at all. In effect they’re just giving you a short term loan.

Eventually they’ll have to swipe it back again.

Which brings us to the front page of today’s AFR, “Business tax cuts vanish as WA budget blows out.”

What you have there is the ugly side of the stimulus programme. The handing out of cash last year and early this year was all done in the guise of Gold Coast Meter Maids, “have this lovely money and spend it for the sake of your country.”

The ugly side is where the government gets itself into a mountain of debt and has to rape your wallet and purse to get the money back. So rather than a blown kiss from a Meter Maid, it’s more like a snog from Marilyn Manson – “No it’s alright, just take the money!”

If you look at the important number in the WA budget forecast, its expenses are expected to grow by 9%. Clearly they haven’t heard of tightening the belt during a recession.

But then they didn’t have to because everyone wanted governments to spend money to avoid the recession.

And then there’s the hammer blow for WA taxpayers, and the realization that the ‘Free’ money wasn’t free. As the AFR details, the WA government has delayed the following tax cuts and benefits:

• Defer abolition of transfer duty on non-real property – $355 million
• Defer harmonization of payroll tax grouping provisions – $156 million
• Defer royalties for regions – $130 million
• Change timing of seniors cost of living rebate – $26 million
• Friend in need emergency scheme deferral – $8 million

Not that we’re in favour of government handouts. We’d rather see government keep its mitts off your wallet in the first place, rather than grabbing it and then throwing the cash around like a drunken sailor.

If there’s one thing you should have learned from recent events and history, it’s that government’s only succeed in making recessions and depressions worse. That happened during the Great Depression and it’s happening again right now.

In fact, contrary to popular opinion, much of what governments are doing now is a carbon copy of the disastrous mistakes of the 1920s and 1930s.

Granted, we’re pretty lucky not to be in the same position as the US and the UK where their governments are increasing taxes and committing the taxpayers to billions and trillions of dollars of unnecessary socialist style spending programmes.

But you shouldn’t think things here are that different. Federal and state governments have embarked on a massive spending binge despite seeing a drop in the proceeds from their tax theft.

Just how the mainstream press can believe the economy has grown on its own merit and that everything is going to be just fine, is extraordinary.

But we guess this over optimism is the reason why the same people are so happy for the government to push ahead with the billion dollar Climate Change tax. After all, with such a strong and robust economy, surely we can afford it!

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 had a pretty flat day yesterday, up by only 8 points to 4,670.30. However thanks to the lead in from the overseas markets, the Aussie is down 1.20%.

The Dow Jones Industrial Average took a tumble overnight, in what is normally a quiet period for the markets. The Dow ended at 10,308.26, lower by 132 points. Read more about the US market here.

In the UK, the FTSE ended the day at 5,217.61, down by 102 points or 1.93%. The major banks dragged the Footsie down showing concern for the proposed new rules regarding higher capital requirements for banks.

The Nikkei finished the day down slightly, to 10,163.80 lower by 13 points.

The price of spot gold dropped on a strengthening US dollar. The downgrading of Greece has spooked the Euro which pushed the greenback higher has well.

The price of spot gold in Australian dollars is trading at $1,237.50 while in US Dollars it is trading at $1,097.17. The price of silver in Aussie dollars is $19.33 and in US Dollars it is $17.14.

The Aussie dollar versus the US dollar is trading at USD$0.8868, and against the Japanese Yen JPY79.76

Crude oil closed at USD$72.70.

For the biggest movers on the market yesterday click here…

So, that’s the market wrap for a Friday. For the reader that is in wind down mode leading up to the Christmas break, have bit of fun with “Talking Kev”. You can “create” his climate change speech using some of his more popular phrases. Fair shake of the sauce bottle I say!

In this instance, the newly inaugurated “No —- Sherlock Award” goes to the US Federal Reserve’s Federal Open Market Committee (FOMC). Like the board of the Reserve Bank of Australia (RBA), the FOMC is responsible for making interest rate decisions for the central bank.

And last night the FOMC released the minutes of its November 3-4 meeting, which contained the following, hehem, wonderful lines:

“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring [sic] of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.”

Really? How surprising. Who would have thought that giving away free money would cause “excessive risk-taking”?

But it’s obviously a conclusion that any old newsletter writer, or anyone with an ounce of common sense could come to.

However, it seems to have taken the FOMC’s nine PhD’s more than a year to figure this out.

With quick minds like that in charge of interest rate policy it’s no wonder the US economy is being stuffed faster than a Christmas turkey.

The issue of excessive risk taking is something we’ve written about all year. Even as bankers and policy makers were talking about deleveraging we knew it was all a hoax.

Let’s set the record straight, there has been no deleveraging and there will be no deleveraging – well, not until the brains trusts at the central banks and in government have finished creating the next Great Depression.

In fact, from what we can see there is more leveraging than ever before.

So, seeing as it’s taken the FOMC twelve months to admit that low interest “could” lead to excessive risk taking, you should view their judgment about the “relatively low” likelihood of this becoming a problem as a genuine warning sign.

It’s this blinkered view from the so-called experts that makes investing in precious metals all the more compelling.

I touched on this yesterday when we considered whether a rising gold price was sustainable. Our conclusion was that it is, primarily due to the increasing money supply globally – including here in Australia.

But I’m going to have to break a promise I made yesterday to cover the Australian gold price today. Because it’s worth looking again at the zero effective yield being received by investors in US bonds.

Once I’ve got this out of the way I can then address the Australian dollar price of gold tomorrow.

Anyway, yesterday afternoon, the editorial team got together for a pow-wow. We were trying to figure out why on earth an investor would exchange cash for an investment that will provide no real return over a three month period.

When you think about it logically it just doesn’t make sense. If we think about this on an individual, small-scale level, what could be a reason for you taking cash out of the bank and giving it to someone in exchange for another piece of paper (a government bond) which will only guarantee you the return of your initial cash?

If we strip it back to the really basic level then arguably you would do it if you thought the government bond was more useful to you than cash.

So, what uses does a government bond have that cash doesn’t?

Well, if we take the theory back to the institutional level, for institutional investors in the US, a government bond is safer than holding cash in a bank. Bank deposits are only guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to a maximum of $250,000.

So the only real alternative for an institution is for a ‘cash like’ asset which they assume to be even safer than cash. Surely the US government couldn’t possibly renege on its obligations to redeem the bonds for cash on maturity!

But what about inflation? Don’t forget that most of the Muppets in institutional investing have either been brainwashed into thinking inflation is a non-starter, or, well, they just don’t care – it’s not their money after all.

Besides, for the big banks trading cash doesn’t generate commissions whereas trading in and out of bonds does.

Do you remember the results from Goldman Sachs? Much of their ‘profits’ from 2009 were gained thanks to their trading desk.

And that’s the key to this. It links right back to the blinkered view of the FOMC and their belated non-warning about excessive risk taking.

US treasury bonds are being used as an instrument of excessive risk.

It would seem there are two ways they can do this. First, they can trade the bonds and the bond futures multiple times to generate big returns on even the smallest market movements.

Naturally, the smaller the movement in price, the bigger the exposure required to generate returns. And with interest rates being pushed lower and lower with no expectation of the Fed increasing rates, the movements on a daily basis are miniscule.

If you click here you can compare the movements of the Fed Funds Rate in recent months compared to movements over the longer term.

Don’t forget, this rate is the basis for all other interest rates. If the Fed Funds Rate is barely moving then interest rate traders have to leverage themselves up a whole lot more if they want to maintain their trading profit levels.

And that leads neatly onto the other reason for the appetite for US treasury bonds. Typically a treasury bond is afforded the status of being the least risky asset class by lenders.

Therefore if you want to leverage yourself up as much as possible it’s only natural that you’ll want to fill your balance sheet with as many “low risk” assets as possible.

The lower the risk, the more you’ll be able to borrow against them.

And even better, why not borrow against treasury bonds in order to buy more treasury bonds which you can then use as margin for even more treasury bonds.

After all, as far as the banks are concerned, what’s the odds of a big movement in treasury prices leading to a margin call compared to a big movement in the price of stocks?

For now it’s not very likely. But as with anything, the greater the perception of safety in an investment, the greater the demand for it becomes. And the greater the demand the further the price moves away from fair value – creating a bubble.

In other words, the paradox of investing safely is in this instance creating the mother of all asset bubbles.

The Fed’s standpoint that low interest rates “could” create excessive risk taking is akin to saying a 10 tonne weight “could” crush an egg.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 ended the day in the red, closing at 4,685 down by 32 points. The Aussie market has had a flat start after an ordinary session in Wall Street overnight.

The Dow Jones Industrial Average finished down 17 points to 10,433.71. Stocks fell early in the session after the third quarter GDP report showed that the economies growth was weaker than expected. Read more here.

In the UK, the FTSE100 closed to 5,323.98, lower by 0.59%. The Footsie dropped on the open on the back of news that China’s central bank is tightening its lending policy.

The Nikkei closed at 9,401.58, down by 96 points.

The price of spot gold in Australian dollars is trading at $1,270.84, while in US Dollars it is trading at $1,168.66. The price of silver in Aussie dollars is $20.15 and in US Dollars it is $18.53.

The Aussie dollar versus the US dollar is trading at USD$0.9195, and against the Japanese Yen JPY81.38

Crude oil closed at USD$75.82

For the biggest movers on the market yesterday click here…

Not necessarily, but it’s a question worth asking.

Take a look at the chart for gold priced in US dollars below:

Even in the last two months the price has burst through the USD$1,000 level and is now trading comfortably at USD$1,164.

The story of the Australian dollar price of gold is not quite the same, but I’ll address that tomorrow. Today we’ll just look at the US dollar gold price.

We all know that the price of something can’t go up in a straight line forever. It has to ‘correct’ at some point. But is gold different? Is it possible that the price of gold can keep going up?

Well, let’s take a look at gold to see what it is.

Ask any gold bug what gold is and they’ll reply, “Gold is money.”

And of course they’re right. Gold has been used as a medium of exchange since it was first discovered – probably, we weren’t around then so we can’t know for sure.

There’s a few simple set of reasons for that. Some of which include – it’s rare, it’s non-perishable and it’s relatively transportable. There are other reasons as well, such as it’s not easy to produce more of it.

All that exploration and digging and refining takes a lot of time, effort and, yes, money.

That’s compared to paper or electronic money which isn’t rare, it is ‘perishable’ in that it can be erased by the click of a button, but it’s just as easy to produce more of it, also by the click of a button.

The one thing paper money has in common with gold is that it’s relatively easy to move it around. Although at today’s prices an ounce of gold would take up less space in your wallet than twelve $100 notes.

So arguably, gold is easier to move than paper money.

But that doesn’t really help to explain whether gold can keep going up or not.

If we look at a longer term view of the gold price, you can see that gold has had plenty of corrections over the last thirty-odd years:

In fact, following the last peak nearly thirty years ago, gold went into a long term bear market. That was until Alan Greenspan started the disastrous policy of keeping interest rates artificially low at 1% during the early 2000’s.

Since then – just as then UK chancellor of the exchequer Gordon Brown decided to sell half the UKs gold stock – gold has barely looked back.

In US dollar terms it was trading below USD$300 an ounce in 2000 (Gordon Brown’s selling price!), compared to USD$1,164 today.

In percentage terms that’s an increase of 288%.

If we were talking about the housing market or the stock market we’d quite rightly say that following such a gain it was a bubble waiting to be popped.

In that case how is it possible for gold to buck that?

Look, let me state for the record that we don’t consider our self to be a diehard gold bug. But even so, do you know what, you don’t have to be a gold bug to see that the case for gold is as compelling today at USD$1,164 an ounce as it was at USD$300 an ounce.

All you need to do is accept that gold has certain benefits when compared to paper or electronic money. Those are the benefits I highlighted above.

If you accept those benefits are valid then all you need to do is look at the policy actions of certain central banks to see how they are eroding and even destroying any remaining value there is in paper money.

And it is the action of destroying the value of paper money which is increasing the value of gold.

It’s quite simple when you think about it. The more you create of one thing, the less valuable it becomes in terms of another thing.

Providing more paper or electronic money is created than there is gold being recovered from the ground then the price of gold should rise. Of course that doesn’t mean that a bubble can’t be created in gold, it can if the price is pushed up too high too quickly.

The only issue there is at what price is the gold price too high.

Right now, even after a twenty-year 288% increase, it’s still hard to see how that price increase isn’t justifiable when you look at central bank policy actions.

I’ve already mentioned Alan Greenspan and his low interest rate party. Well, that’s continuing under Ben Bernanke. Only Bernanke is doing an even better/worse job of it.

At least Greenspan wasn’t stupid enough to push the interest rate below 1%. Bernanke on the other hand has managed to push interest rates to zero.

Which is quite funny really, because even the mainstream economists you see on CNBC and Bloomberg seem to agree that Greenspan’s low interest rates helped cause the current economic problems. Yet at the same time they laud Bernanke’s courage for taking rates down to zero.

Did I say ‘zero’, I meant to say negative. Take this quote from Bloomberg News:

“Negative Rates… For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate…”

That’s right, in the US investors are prepared to ‘invest’ in government bonds that provide a negative return. Can you believe anyone would want to do that?

In simple terms, investors are paying USD$100 for a bond with a face value of USD$100 with no coupon/interest payment. In other words they’re handing over USD$100 today in order to get USD$100 back in thirty days.

Only, thanks to the transaction costs and inflation, the USD$100 they get back in thirty days will actually be worth less than it is today.

But following on from the quote above, Bloomberg News writes:

“For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate — a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.

That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. In 1939 stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.”

The article goes on to explain that because Bernanke is a ’student’ of the Great Depression he is determined not to make the same mistakes as policy makers during the Great Depression.

The trouble is, he’s destined to make the New Great Depression even worse than the old one.

Continuing to keep interest rates at zero and creating more and more money is inflation. Inflation is already here. The next phase is the rapid price increases which will only cause an upward spiral as more money is created to combat rising prices.

Arguing that keeping interest rates at zero is the best way to prevent a New Great Depression is completely illogical.

It’s like saying you’re better off hitting a brick wall at 200km per hour than at 100km per hour.

That’s what makes the case for gold even more compelling, despite the 288% price rise.

Sure, gold may have risen too quickly in the short term – or it may not – but with the clear signs from the Federal Reserve that it is in no hurry to increase interest rates, and other clear signs that governments here and overseas are in no hurry to stop spending, buying gold, even at the current price of USD$1,164 could be one of the best investment decisions you ever make.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished up yesterday, to 4,717, higher by 31 points. After a massive gain in the US the market has opened up.

Not only did the market close up yesterday, but Alex Moffatt an adviser of Joseph Palmer & Sons was quoted saying that he is “…still confident that we might get within a hair’ breath of 4900 by the end of this year”. Learn more here.

The Dow Jones Industrial Average had a rally overnight, closing up by 132 points, ending the day at 10,450.95. This was the highest close since 2 October 2008.

In the UK, the FTSE100 gained just shy of 2% last night, finishing at 5,355.50. The Footsie is up 20.5% overall this year.

The Nikkei closed down 51 points to 9,497.68

Gold has gone to new highs yet again, with the December gold futures reached $1,174.

The price of spot gold in Australian dollars is trading at $1,260.22, while in US Dollars it is trading at $1,164.19.

Currently the price of silver in Aussie dollars is $20.23 and in US Dollars it is $18.59.

Colin Crownover, head of currency management at State Street Global Advisors is convienced that not only will the Australian dollar reach parity with the US, but will push past it to reach $1.02 – 03 within six months. Find out his reasons here.

The Aussie dollar versus the US dollar is trading at USD$0.9239, and against the Japanese Yen JPY82.21

Crude oil remained unchanged overnight closing at USD$77.47

For the biggest movers on the market yesterday click here…

Your editor is now back on the ground in Sydney, waiting for the flight back to Melbourne.

Today we’ll wrap up our coverage of the Agora Financial Investment Symposium. We’ve got a brief summary of our own presentation – we’ll try to be fair and balanced with the critique of our own efforts – plus some of the closing comments from Daily Reckoning founder Bill Bonner.

The master of ceremonies, ‘Chip’ Wood told us the first session back after the morning coffee break on the last day was the worst time to present – so that was nice confidence booster!

Anyhow, as it happens our audience swelled from about 300 at the start up to about 600 by the time we were half way through telling the audience that small caps are the best investment in Australia and whatever they do, don’t buy any Australian banks.

The content pretty much went over most of the stuff you’ve read about in Money Morning during the last ten months, so I won’t go through every part of it now.

Instead, I’ll cover the five main themes of the presentation:

1. The Australian government is doing bad things too
2. Australia has a Chinese ‘Get-Out-Of-Jail-Free’ card
3. Chinese stimulus spending isn’t any better than Australian stimulus spending – it’s just different
4. Buy into Australia’s new energy gold mine
5. Don’t diversify!

These are all things that may be covered at the Debt Summit we’re holding in Melbourne this week.

Your editor didn’t give the audience an extensive list of the Australian government irresponsibility – we didn’t have the time. But we did cover some of the most obvious.

Cheques being sent to dead people.

‘Free’ money to buy houses. We gave the example of first home buyers in country Victoria being given nearly $40,000 to build a house. And of course all this can be done with no deposit.

It reminded us of some of the tactics the homebuilders use to help people manufacture phony savings. Such as offering to pay buyers rents as a loan so the buyer can deposit the ’savings’ in an account. Most banks only want 3-6 months savings record anyway, so it’s not that hard to fake.

Home insulation for free, and the build ’stuff’ brigade. Build a bridge, roads, schools, sheds… something… ANYTHING!

Then there was the Chinese ‘Get-Out-Of-Jail-Free’ card. We’d titled our presentation, “The Greater China Co-Prosperity Sphere and How to Join it – Mate.”

Alluding to the Greater East China Co-Prosperity Sphere from the 1930s and 1940s.

We quoted from the joint declaration at the Greater East Asia Conference of 1943 as follows:

“The United States of America and the British Empire have in seeking their own prosperity oppressed other nations and peoples. Especially in East Asia, they indulged in insatiable aggression and exploitation, and sought to satisfy their inordinate ambition of enslaving the entire region, and finally they came to menace seriously the stability of East Asia.”

The statement continued with:

“The countries of Greater East Asia… undertake to cooperate toward prosecuting the War of Greater East Asia to a successful conclusion, liberating their region from the yoke of British American domination, and ensuring their self-existence and self-defense, and in constructing a Greater East Asia.”

We also wondered whether the new map of the world may be something similar to George Orwell’s vision of Nineteen Eighty-Four. Except with Australia joining Eastasia rather than being part of Oceania.

OK, perhaps it’s a stretch to compare today’s Asian economies with that which existed during World War II. But the point is that it is the Asian economies – mainly China – that are looking to exert their influence over the world.

In this case it is China instead of Japan that is leading the rest of Asia away from US economic dominance towards Chinese economic dominance.

While we’re on the subject of China, what about their economic stimulus. “Why,” we asked “is Chinese government spending good, but Australian and US government spending bad?”

We had a simple answer for that. The Western economies are spending money they don’t have. In fact, in order to pay for it, the governments have to in effect steal the money from your future earnings through higher taxes.

Surely that’s the same for China right? Not quite. Don’t forget, they’ve been saving because they have produced. And yes, they’ve still taken money from individuals by way of taxes, but now the Chinese government is giving some of it back.

It may not be perfect, but we liked it to the Chinese population getting a tax refund in the form of a TV or a fridge, rather than Western populations who were just being given a future tax debt.

Towards the end of the presentation – and also in the workshop later – we made sure the audience knew exactly where to invest if they’re serious about reducing their exposure to the US dollar and want investments that will turn in double and triple digit percentage gains.

We’ve been banging on this drum, and whistling the LNG tune since late last year both here and in Australian Small Cap Investigator.

So far it’s paid off. In fact, as you may have seen, we recently sent a recommendation to subscribers to sell Bow Energy at 95 cents which was 458% higher than the 17 cents we tipped it at.

But that’s just for starters.

Already our remaining three LNG picks are showing big gains with plenty more to come. In fact I’m convinced that one of the stocks has the potential to get to $7. Today it’s trading for less than 80 cents.

Not only that, but the LNG stock we tipped last month has already more than doubled. But again, that’s not enough. I’m hoping for a fivefold increase on this stock from where it is today!

That’s right, it’s currently trading for less than 50 cents, and it really could make it over the $2 mark by next year.

Finally, we wanted to make sure our American brethren weren’t being fooled by the biggest, fattest propaganda lie propounded by the funds management industry.

You know the one, about how you should “diversify your portfolio.” Yeah, sure let’s diversify into a whole range of different shares and assets and just leave it there.

Hasn’t performed too well in the last ten years has it?

The fact is, fund managers need you to believe that diversification is good. The more you diversify, the harder it is for you to manage your investments and therefore the greater the need there is for someone else to manage them for you – say, a fund manager perhaps?

All diversification does is lower your returns.

The reality is if you are serious about building your wealth you need to actively manage your own investments. That means you need to have a risk management programme in place, and…

It also means you need to shrewdly pick your investment and then back yourself. If you really do believe that gold is going to AUD$2,000 then why wouldn’t you back yourself and invest 20%, 30% or 50% of your portfolio in gold.

If you believe shares in supermarkets offer the best return, why wouldn’t you just invest 80% or 90% of your portfolio in Woolworths or Metcash?

Fund managers have been spreading this rumour around for years that you need a diversified portfolio. However, the opposite is the case.

Sure, it does mean you have a greater exposure if the investment moves against you. That’s where your risk management strategy of using stop orders should come into play.

If you’re serious about actively managing your investments then investors need to move away from the myth of diversification and instead back your convictions.

But it wasn’t all about your editor. There were other speakers too.

Bill Bonner, founder of the Daily Reckoning, wrapped up proceedings in the main Ballroom with a thirty minute summary of the 2008 global financial bailout fiasco.

Bill started out with “As you all know the depression is over!”

The crowd loved it, with Bill saying that “You know something is over when a bank declares it.”

The comment was in response to a recent news item that had quoted a Wall Street banker telling reporters that the recession was over.

As Bill pointed out, not so long ago, these were the same bankers that were laughing stocks. They were pariahs. Now the same news networks that failed to predict the crash are now relying on the same bankers that caused it!

Madness.

A sampling of Bill’s other comments painted out how the economic picture really looks. You know, the one that the mainstream press isn’t telling you about.

“If we calculated unemployment the same way as during the Great Depression, unemployment would be 20%, not 10%.”

He went on later with this comment about politicians and economics:

“1971 was a critical point… [President] Nixon didn’t know whether he should interrupt an episode of Bonanza to announce the closure of the Gold window.”

And then there was this about inflation and stimulus:

“Caesar Augustus got the slaves in the silver mines to work night and day so they could produce more silver. That was a stimulus. They got more silver and it created inflation.”

“Then Nero worked out he could put less silver in the coins so they could make more coins. 300 years later there was no silver at all in the coins. That was a stimulus, and it created inflation.”

“In Spain… they brought Gold back from the new world and spent it. The increased supply of Gold was stimulus. It created inflation.”

It’s amazing how many of the knuckleheads in the mainstream media and mainstream economists somehow think this time things will be different.

So, that’s it. The Agora Financial Investment Symposium is over for another year. Your Money Morning will resume normal service tomorrow.