Southwest Ranch Financial, LLC
June 2008 Update
The S&P500 is at 1400 on 31-May-2008

This page can be linked to at   ( www.swranch.net/emails/2008-06.htm ).

The Southwest Ranch Financial Market Alert Timing Model is out of the stock market. 

Year to date, the S&P500 index is down 3.85% and the SWR Balanced Portfolio is up 2.39% (with half the stock market risk.)

Here’s the year to date performance of the SWR Balanced Portfolio by asset class.

As of 5/31/08

Market Alert Model
The SWR core model is out of the stock market.

Year Ahead Timing Model
The YAT model is used to indicate periods of buy opportunities within the Market Alert Model’s timing cycle. The SWR Market Alert Model always trumps the YAT model. The YAT model is neutral.

Interest Rate Model
The SWR Interest Rate model is negative on interest rates and long bonds.  

Gold Model
The SWR Gold Model is positive on gold.

The SWR Balanced Portfolio continues to pull away from the S&P500. All the SWR portfolios are positive year to date. For readers of my book, here's the returns.

Safety #1: +2.8
Safety #2: +2.7
Safety #3: +0.96
Safety #4: +2.94
Smart #1: +2.39
Smart #2: +3.58
Smart #3: +5.57
Gold: +1.68

A Simplified Timing Approach
An easy way to apply my timing methods is to use a once a year investment decision. At the beginning of each year, allocate your money to stocks, bonds and gold based on the traffic light signals on the web site. For stocks I used VFINX and for bonds BTTRX (30 year zero bond fund). The gain/loss was calculated from January 1 through December 31 of each year.

For testing purposes, I assumed one would allocate money equally between stocks, bonds, and gold. The simplified SWR model moves an asset to short term bonds (vbisx) as a proxy for cash if the signal for that asset is negative. For example, in 1999, the model was negative on stocks, long bonds and gold. Thus all money was in short bonds. Now, 1999 was a boom year for stocks due to the stock market bubble and my stock model was out. At year end 1999 this may have looked pretty dumb but the decision was vindicated over the next few years.

Table A shows the historical returns for stocks, bonds, and gold for the last ten years.

Table B shows the In or Out position of the SWR models at the start of each year using the simplified timing rules.

The next table shows the actual returns by asset class for the SWR model applying the In or Out rule at the start of each year. If Out of an asset class, that money is moved into short term bonds. In 1999 for example, the SWR models are out of stocks, bonds, and gold so all three allocations go into short term bonds.

Finally, we get to the point of this experiment. Over ten years, stocks returned 7.1%, bonds returned 9.2% and gold returned 10.8% but each had losing years as you can see in Table A. The traditional 60% stocks and 40% bond portfolio returned 8% and with two losing years. The three asset portfolio had only two losing years and returned 9.1%. The simplified SWR timing method had zero losing years and returned 11.3%. This experiment clearly shows the value of asset allocation and timing over having all your money in just stocks or bonds. Volatility is greatly reduced. The simplified SWR timing model adds much additional value and eliminates losing years.

At the start of 2008, the simplified SWR Timing Model was in stocks, out of bonds, and in gold. At June 2008, the actual SWR model is out of stocks, out of bonds, and in gold.

Holding 33% of assets in gold/commodities is more than most people can stomach. You can create a simple four asset portfolio by adding a mix of foreign currencies (fxy, fxe, fxc, fxa, fxf). This portfolio will have lower returns but is a good choice. The Permanent Portfolio (PRPFX is up 5.4% YTD) is another good choice. A broad mix of assets with more hard assets will be essential in the years ahead considering the massive US debt problems and the consequences of federal fiscal mismanagement. As I've discussed previously, countries have gone from great to bankrupt in thirty years repeatedly in the past. Prior to the downslide, cracks in the foundation appear everywhere. You only have to objectively observe America's unwise use of military power, financial problems, and the breakdown in civil liberties to see a nation losing its confidence and thrashing to maintain control. I doubt the situation will improve quickly regardless of who's elected. Some may take a stand and say that the Iraq war and domestic spying are necessary national security issues but that doesn't negate the reality of our nation's financial spiral.

What About Oil?
Long time readers know I'm a believer in Peak Oil - the idea that world oil production is in decline and prices will go much higher due to depletion. I'm also a believer in common sense. The recent run up in oil futures prices looks troubling to me. In a normal supply constraint market, prices will trend upward. In a bubble, prices shoot up in a parabolic manner and are fed by a buying mania. In the last year oil prices have risen from $60 to $130.

This bubble idea in petroleum is in wide discussion among economists and oil traders and most say there is no bubble and it's a combination of factors from high demand to refinery problems.

I suspect, but can't be certain, that oil futures are in a speculative phase. This points out a remarkable fact about bubbles that others have made. You are never sure you're in a bubble real-time because the facts seem to support the pricing. The good news is that gold is not in a bubble. Whereas oil has risen 40% since February 2008, gold is flat.

Some commentators have used the high oil price to justify their expectations of gold rising much higher to match "the historical 10:1 price relationship of gold to oil". Supposedly, gold should sell at ten times the price of oil. 10 x $130 oil means gold should sell at $1300. Long term that may be true but I don't know if this relationship is justified by a correlation analysis. Gold is a monetary commodity and has unique characteristics. Regardless, if oil futures prices decline, gold may temporarily fall in sympathy. This coming event may offer an excellent opportunity to purchase a gold etf or coins.

So, what's causing the oil price run up? Peak Oil is now getting public press. Pension funds are loading up on commodity index funds and others are trying to lock in prices by buying in the futures market. Nations and big oil users are hoarding. No doubt, hedge funds and speculators are active in the oil market. Fundamentally, the root cause is cheap money, a declining confidence in the dollar, and few good alternative investment options. Chasing returns usually has disastrous results so I'd be cautious.

Paul Van Eeden in his essay "Sue Opec" states the run up in oil is the direct result of an expansion in the world supply of dollars. In short, the US government is directly responsible because it's running the printing presses. His graph is rather compelling. It shows the expansion of the M3 money supply alongside the price of oil. It's important to note that the government stopped reporting the M3 money supply in 2005 just before it went parabolic.

Per John Williams commenting in 2005 on why: The ultimate solution likely will be Fed monetization of debt, which would tend to increase the money supply as reported in M3. In turn, the heavy monetization would evolve into a pattern of accelerating inflation .... What game the Federal Reserve is playing will become clear soon enough.

Mr. Williams was right on that. Look what happened.

Source: www.paulvaneeden.com

Mr. Van Eeden made a good argument on CNBC - the video is now on YouTube.

The Fed has, again, created a situation of negative interest rates where short rates are far below the rate of inflation. This causes money to seek a rate of return and induces speculations. Bubbles are pricked by rising interest rates which make it very expensive to hold non-interest paying investments. Commodities pay no interest just as most stocks don't pay a dividend. I showed a chart last month that showed how interest rate spikes prick stock market bubbles. This event is proceeded by an unusual spread between treasury and corporate rates. The spread has been exceptional since the beginning of 2008 and indicates that interest rates may rise soon. Check out the Yield Spread Chart.

Long term, oil prices are headed higher. For now, be cautious on commodity investments and don't let them heavily over-weight your base allocation. As investors, the factors driving oil prices makes for an interesting discussion. More important is that interest rates are negative and this situation will have to reverse. Both short and long rates are headed higher and interest rates are the discount mechanism for all other investment classes. Rising rates will impact stock and commodity prices.

Is the US Government Lying About Inflation and More?
A recent article in Harper's Magazine (May 2008; Numbers Racket - Why the Economy is Worse Than We Know). The excellent article by Kevin Phillips discussed the government's systemic misrepresentation of many statistics including inflation rates. Another good source is ShadowStats which is a site run by John Williams. He tracks the phony accounting of the government. Williams states that inflation and unemployment are far worse than reported.

Is the government lying? Of course it is. The truth has become something to fear. Again, trust your senses and use some basic observation. There's all sorts of ways to misrepresent data. Food prices are rising at a dramatic rate but the government understates its effect. The CPI index says food makes up only 10% of the average American's disposable income whereas the real figure is closer to 20%. This is by design. If they were honest about inflation, they'd have to pay more interest on the national debt and bigger payments to social security recipients. The official numbers aren't accurate but don't count me in the camp of critics who claim consumer inflation is running at 10%. Consumer price inflation is probably understated by 1-2% and GDP is equally over stated. A +5% inflation rate is absolutely destructive to anyone on a fixed income. The fact that the Fed and the highest officials in the land can't be trusted to tell the truth should cause you to immediately take action to protect yourself.

Lying seems to have become a prerequisite for high public office and it's generally tolerated. There's an underside to the smug deception so expertly crafted by worms like Karl Rove and other political strategists. This isn't clever or smart or skillful.  It's using a postion of trust to deceive.  It's no different from the trusted bank officer who uses his knowledge to cheat his customers.  Look at the effect this is having.

People increasingly don't trust the federal leadership. Look at 9/11. A high percentage of people don't believe the official story of what happened that day. Some believe Bush and Cheney knew in advance of the events and let it happen in order to justify their Iraq war. Others say it was a government "inside job". They say the collapse of the 42 story WTC 7 building looks like a controlled demolition. You think these folks are conspiracy nuts? Well, there's a lot of them.

In mid 2006 only 16% of Americans believed the official story about 9/11 according to a New York Times scientific poll. 81% believe the government is lying or hiding something. These figures are stunning and I'm certain it's gotten worse since then.

"Do you think members of the Bush Administration are telling the truth, are mostly telling the truth but hiding something, or are they mostly lying?
Telling the truth 16%
Hiding something 53%
Mostly lying 28%
Not sure 3%"

Some reputable engineers and scientists are also asking questions so you can't say it's confined to a lower socio-economic class. Do a web search on "911 inside job" and you can spend all day reading the theories and seeing the videos. This one is especially good where a city official and a fireman talk openly.

I mention 9/11 as a tie-in to the lies and perceived lies about the economy because it shows a growing estrangement of the public from the people in authority. Think of the implications of this 9/11 suspicion as an undercurrent within society. A large number of people believe that US officials are complicit in the murder of thousands of their fellow citizens. How is this viewpoint spreading?

The news media is owned by large public entertainment companies. Watch the evening news and flip channels. They all carry the same news stories and show commercials at the same time. Sure they "report' but it's only spoon fed press briefings from officials with an agenda to mold public opinion and followed by a human interest angle. No wonder veiwership is falling like a rock - they're irrelevant. It's amazing how the Internet is now molding public opinion independent of the major news networks.

For example, right now, president Bush is traveling the country telling folks the economic stimulus package is going to work. The news media follow him around blabbering the official story line. Instinctively, citizens understand that this is all charade and not totally true. So, they look for an alternative spin on the Internet to get the "truth".

Many financial professionals know the federal government is in terrible financial shape. They don't believe the economic garbage heard on CNN and finally will talk openly about their concerns. The astute ones know that the federal numbers about deficits and budget plans is packaged deception.

"We're running deficits in the trillions of dollars, not the hundreds of billions of dollars we're being told," says Sheila Weinberg, chief executive of the Institute for Truth in Accounting of Chicago. The reason for the discrepancy: Accounting standards require corporations and state governments to count new financial obligations, even if the payments will be made later. The federal government doesn't follow that rule. Instead of counting lifetime benefits for programs such as Social Security, the government counts the cost of benefits for the current year.

The Coming Big Corporate Sell Off
Public debt has doubled to $11 Trillion since 2001. We're so deep in a hole that the only way out is to inflate it away because it can't be paid back. Doubtless, the Fed will print money and stiff the creditors through gradual inflation. The joke won't be on foreigners as some suggest. It will be on the average American.

The Chinese, Saudis, and Japanese are huge creditors and are quite aware of the situation but don't care because they have a Plan B prepared with the US Treasury. They will use their dollar hordes to buy our major corporations through sovereign wealth funds.

A sovereign wealth fund is an entity of a foreign government - it's not a group of investors. It's sole purpose is to recycle a dollar surplus. Expect to see a torrent of activity after the election. It's interesting that Washington complains about foreign governments acting in concert with private firms to provide an unfair competitive advantage. Why no vocal concern about the coming invasion of foreign government cash to buy up our assets? Simple, a deal has been cooked.

The US will be forced to let foreigners recycle their cash into our domestic corporations because otherwise the creditors won't continue to buy our mountain of treasury debt. It's no different from a financier providing a cash infusion to a business in exchange for a large percent of ownership. The big payday is coming soon and will occur in a controlled manner. Watch and wait. You'll hear "free market" commentators like Larry Kudlow blathering about how this is good for America and it will help the balance of payments (trade deficit) and keep firms solvent. In a narrow sense, maybe that's true. It will indeed serve to repatriate dollars and it will support stock prices. The reality will be very negative for the average American and the long term prosperity of our nation. $3 trillion dollars will buy up a lot of American companies. Think of it as the sale of 65 firms the size of beer giant Anheuser-Busch.

We'll buy beer from a foreign firm and those dollars will flow offshore as profits. US tax collections will gradually fall as the profits go overseas. Good paying domestic jobs will be lost. As tax revenues decline, the US military will shrink and taxes will go up. A lower standard of living for American citizens is certain. With weak tax collections, US interest rates will rise as the money printing accelerates to pay off the $65 trillion in entitlements due US citizens from social security and other federal programs. This is the consequence of incompetent leadership, reckless spending and moving manufacturing overseas. This is what happens when a government serves its handlers and not its citizens.

Things I Don't Believe to be True
This past month we've seen some interesting stories in the news. A little bit of reality is starting to seep through as the crumbling Bush administration loses its power to intimidate. I'm going to ramp up to my controversial conclusion so don't turn that dial.

I don't believe Scott McClellan is a nice guy. His book came out. What Happened: Inside the Bush White House and Washington's Culture of Deception. He states that Bush ignored facts that contradicted his opinions. The Iraq war buildup was based on propaganda and the war was unnecessary. McClellan proves my point discussed below about the culture of silence. The story he tells is true but look at the damage people caused by playing along with this administration and the PNAC crazies. A lack of courage and integrity is at the root of corruption. I stated in 2004 that Bush was unstable and caught a lot of flack and cancellations to this eletter. I knew somebody would spill the beans on this crew eventually.

I don't believe the press in America is honest or effective. On Wednesday night, CNN's Jessica Yellin talked to Anderson Cooper about Scott McClellan's tell-all memoir and agreed with the former press secretary that White House reporters "dropped the ball" during the run-up to war.

The press corps was under enormous pressure from corporate executives, frankly, to make sure that this was a war presented in a way that was consistent with the patriotic fever in the nation and the president's high approval ratings," Yellin said.

"And my own experience at the White House was that the higher the president's approval ratings, the more pressure I had from news executives — and I was not at this network at the time — but the more pressure I had from news executives to put on positive stories about the president, I think over time...."

That also was rather obvious watching the news in 2003 and 2004. It proves my point that entertainment companies have killed off good reporting. More lies from another pack of self-serving cowards. You can also place in that box the news anchors at the major networks, MSNBC, and the entire team at Fox News.

I don't believe the economic numbers from the US government.
I think many economic numbers are indeed accurate but the headline data is undoubtedly cooked. The same corruption that permeates the Bush administration and the press corps has also finally rotted out the leadership of major US agencies. As discussed above, the Fed is holding short rates below the rate of inflation to save the lizards on Wall Street and impoverishing people on a fixed income. What else can you expect when the Treasury department is run by a former honcho from Goldman Sachs who believes the world revolves around his cronies. He wasn't placed in that job to act as an advocate for the average citizen.

I don't believe the military is under funded
"For 45 years of the Cold War we were in an arms race with the Soviet Union. Now it appears we're in an arms race with ourselves." - Admiral Eugene Carroll, Jr., U.S. Navy (Ret.)Deputy Director Center for Defense Information

Eisenhower warned about the military-industrial complex being a danger to America. We should have listened. The amount of money we spend on war machines is bankrupting us and can only continue as long as the Arabs and the Chinese keep buying our debt. The defense establishment says it needs more money to protect against Al Qaeda and a growing Chinese military expansion. Ok, we'll borrow more from the Chinese and Arabs to defend ourselves against them. Makes perfect sense to me.

We need an effective military that's flexible and professional. We don't have to give them everything they ask for. The path we're on is irrational. Want some numbers?

Source: Center for Defense Information

I don't believe Al Qaeda was ever the threat to world civilization that Bush/Cheney claimed
I do believe it's a murderous terrorist organization with a degenerate agenda.  I do believe its necessary to hunt them down and coordinate international cooperation for the purpose of arresting them and preventing loss of life.  I don't believe Al Qaeda ever had anything near the strength or range of operation that the Bush crew proclaimed.

Al Qaeda is a stateless and loosely organized fanatic muslim group with varying objectives among its membership. Much like the vast differences between college educated Republicans and poorly educated Rush Limbaugh Republicans, there is no consensus on what's the right path of action. Both Al Qaeda and Rush Limbaugh agree that "liberals" are the problem. With Al Qaeda, its liberal Western values threatening their idealistic religious society. Extreme US right wingers want creationism taught in the schools plus government funding for their faith-based agenda. Both groups have a hang up with confident, educated women. My somewhat ludicrous point is that extremist belief systems exist everywhere - even in your own neighborhood. That doesn't mean they can destroy half the world.

Jeb Bush, Cheney, and Rumsfeld were all certified members of PNAC (The Project For a New American Century) which defined its objective as a Pax Americana with the US becoming the dominant and perpetual power in the world. Yes, that's true folks and it is documented. Their stated goal was to create a military and political dominance that could never be challenged by another country. (And you wonder why France and other nations wouldn't join the "Coalition of the Willing").

If you intend to create an enormous military machine and dominate the world then you need a scary enemy. Otherwise, how will you garner public support for massive military expenditures. You must induce fear. In the 1960s TV show "The Man From Uncle" our heroes were fighting against THRUSH, a stateless group of evil doers. Maxwell Smart in the TV show "Get Smart" fought against KAOS, a stateless group out to destroy civilization. James Bond fought against SPECTRE which Ian Flemming described as a transnational terrorist organization. Fantasy evil groups have a long tradition in the American media conciousness.

9/11 conveniently provided the opportunity. Elements in the government figured Al Qaeda would meet their bad guy needs and turned it into a Darth Vader personality. They elevated Al Qaeda into a world class, transnational, stateless, terror organization with a worldwide reach and unlimited funds and with the objectives of spreading fanatical Islam, getting nuclear weapons and destroying the West. Bush said Saddam Hussein was linked to Al Qaeda and he was certain Saddam now had WMD. The wag the dog Global War on Terror was off to the races.

These Al Qaeda guys are described as living in caves or compounds deep in the mountains of Pakistan yet somehow have a worldwide reach and mole agents everywhere ready to strike. Scott McClellan got out front on a podium at the White House press room and mouthed the story. The trusting American public bought it hook line and sinker. The press never questioned this baloney by their own admission. Now we have a failed war, 4000 dead, tens of thousands of dead Iraqis, we're ridiculed internationally, and we'll be out two trillion dollars before it's over. Iraq is pumping less oil now than 5 years ago due to constant sabotage which means that our vaunted military can't even pump and protect petroleum. Pax Americana, my butt. And all because this nation chose to believe in a bogeyman story. In the patriotic fervor of the time, anyone who challenged the lie was denounced as not supporting the troops or soft on terror.

Look at the reality. Bush can accuse a stateless group like Al Qaeda of anything he wants and there's no one to answer the charges. He can concoct stories to invade nations and justify emptying the public purse. There's no debate, there's no proof - there is nothing. Yet this straw man enemy is the basis for an expanding military budget and increasingly anti-democratic policies at home like wire-tapping of US citizens, scanning all our emails and massive databases of your web searches and phone calls. Doesn't it dawn on anyone that perhaps things just don't add up?

With Bush's legacy flagging and in disrespect worldwide, suddenly the tide in the Global War on Terror has changed.

30 May 2008: Less than a year after his agency warned of new threats from a resurgent al-Qaeda, CIA Director Mechael V. Hayden now portrays the terrorist movement as essentially defeated in Iraq and Saudi Arabia and on the defensive throughout much of the rest of the world, including in its presumed haven along the Afghanistan-Pakistan border.

"On balance, we are doing pretty well," he said, ticking down a list of accomplishments: "Near strategic defeat of al-Qaeda in Iraq. Near strategic defeat for al-Qaeda in Saudi Arabia. Significant setbacks for al-Qaeda globally -- and here I'm going to use the word 'ideologically' ...

Sounds good to me. What's on TV tonight?

There is No Code of Silence Just Fear and Greed
I know what some of you are thinking. How could anyone believe there is official collusion to produce phony government statistics or a plan to sell off America, demonize a straw man enemy, or spin tales to get enormous increases to the defense budget. People who believe any of this must be nuts, right? Too many others would know about it and you can't keep stuff like that a secret. Not true. People in the know don't talk because they're afraid or just greedy. Few people really know what's all involved and any outraged worker bees that do exist are scared to come forward. The higher ups are getting some sort of financial benefit. It's not that complicated and follows the basic rules of human nature. Fear/Self Preservation is a powerful motivator.

I worked as a fraud investigator and have some experience observing incompetence, complicity and duplicity. It's easy to scam shareholders and the public with lies and phony numbers and to provide sweetheart payoffs to each other. Even if you are the employee who figures out "the plan" and goes public, nobody will support you. Going to the press or the police often will not produce the expected result. Have you got documents to prove your suspicions? Where's the smoking gun to prove a conspiracy? Once you talk, friends will turn on you. You'll never be promoted or allowed an acceptable transfer. The authorities and the press may believe you but proving it in court is another matter.

That's why the only people ratting out the glaring failures of the Iraq war are senior retired military officers with no post-military ambitions and insiders with book contracts. Enlisted men are ignored. Many retired generals get hired by defense contractors after leaving the miliatry. Politicians and administrators get hired by think tanks and lobbying firms. If you talk, they yank your security clearance - no job for you or anyone close to you. The same holds for research scientists, police officers, economists, and other experts with insider knowledge. You will pay a heavy price for talking. There will be no corroboration from others - only denials and accusations that you have "problems", are incompetent or a "disgruntled former employee".

Most people in government don't make big money; they have modest savings and need their pension. Many of the executives see false virtue in their involvement. They'll tell themselves they're acting for a higher good, protecting the system or whatever excuse they must concoct to self delude themselves. But really, it all comes down to money for these guys and keeping the big paycheck and their status. Corruption like this is the root cause of failures within school districts, great corporations and even nations.

If you intend to fight the system, you better have an ace in the hole and don't tell anyone what it is. They have to believe that coming after you may mean getting cut off at the knees. I hope Scott McClellan knows that. His book is the first breach by an insider and more will follow. It's an important first step in ending years of duplicity and hopefully getting this nation onto the right track. It will be a challenge.

Asset Analysis
It's near impossible to fake a dividend. Good dividend stocks are hard to find at current price levels. I check the market weekly looking for a combination of "A" rated financial quality, an attractive dividend, and a long history of increasing dividends. Blue chips with long stable dividend payouts like Bank of America and Pfizer are at risk with payouts now over 80% of net profits. That percentage usually signals major changes ahead and often a dividend cut. Yet, you still see PFE as the most recommended stock by many advisors. Many firms will be damaged by a pullback in consumer spending as oil prices continue to rise in the years ahead. Earnings need to improve and that will be a challenge and especially for banks. It's very possible that a decline in oil prices prior to the election could cause a surge in stock prices but I suspect that will be temporary.

Houses: How far will house prices fall? In many urban markets there is a surplus of houses. Prices will drop until the rental income covers the monthly mortgage payment. This was the situation in the early 90s in Las Vegas and Phoenix. House prices could then go even lower if interest rates spike up as I suspect will happen. Higher interest rates increase monthly mortgage payments. People want to own a home but houses will have to fall to levels where buyers can afford them. Stay away from housing as an investment vehicle. A house is a place to live.

Bonds: Investors are too willing to loan the government their money at rates below inflation. There is a bubble in bonds because no rational person lends cash at 4% when inflation is at 5%. That's exactly what is going on. This bubble will pop when enough people challenge the government's economic numbers. Avoid bonds.

Stocks: PE ratios are just too high to justify owning the broad market indexes. The current forward PE on the S&P500 is at 20 whereas the historical average is 16.5. I don't see any value there. I expect the market PE to eventually fall to under 10. Dividend stocks will offer value as prices adjust. There's always segments of the market doing well as others falter but it takes a lot of skill to work that angle. Purchases of large US firms by sovereign wealth funds will support stock indexes for a while but recognize what's really going on and the implications for future tax revenues and employment.

For the average investor, chasing after gains under the current market conditions is just asking to lose money. Massive imbalances in the stock and bond markets have to be resolved. Be patient and wait. This is no time for taking risks you don't fully understand. It's far better to accept a low rate of return on cash than to risk a catastrophic loss.

Too Much Money
Bubbles and over priced markets can only exist when there is too much money chasing too little value. The current high prices for stocks, bonds and commodities indicates too much cash is available. A lot of money has to be lost before capital and value are in balance. A tremendous amount of money will disappear in the coming years.

George Soros predicts a coming recession deeper than anything in our lifetimes. We're talking deeper than the 1970s recession.

"This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made. ... I think this is probably more serious than anything in our lifetime. ... I think the dislocations will be greater because you also have the implications of the house price decline, which you didn't have in the 1970s - so you had stagflation and transfer of purchasing power to the oil producing countries, but here you also have the housing crisis in addition to that."

We are only partly through the Big Markdown. The real impact will hit when the US government is forced to admit its insolvency and actually confront its problems. This is coming with certainty. Declining tax revenues and rising unemployment along with high federal and personal debt levels is a terrible combination. The situation is very dangerous. Inflation is likely because they must pay off the national debt with bad money. The best hope for the Fed is to engineer enough money into the system until nominal wages rise so fixed debt becomes more affordable.

I Think I Hear a Train Whistle
The current climate of negative interest rates is outright theft from savers. They say its necessary to bring us back to prosperity. Baloney. The money goes to liquefy and pay off Wall Street banks and the ultra-rich stake holders. The US Treasury benefits because it now pays less interest on its national debt which is mostly in short term notes. Meanwhile, granny can't pay her bills because her CDs offer little interest. Take solace grammy, you're helping America.

I have no doubt that the Fed is trying to suppress the price of gold. One way to do this is by lending out gold to major dealers at a very low rate of interest. This can't go on forever because they're running out of gold.

"Lending of gold by central banks depresses the price and the only possible reasons for the secrecy around it are manipulation of the gold market and the enrichment, through inside information, of the financial houses to which central banks lend their gold..."

At some point the phony US economy will be exposed but not before the November elections. The real danger is what happens after the house price debacle bites the real economy and discretionary consumer spending puts on the brakes. Unemployment will rise. They're doing everything they can to prop up the economy. They seem to think the solution is to feed Wall Street money. They want to continue buying up bad mortgages for Wall Street while shorting main street investors with artificially low rates. Per a Bloomberg story:

Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank... Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize. Such channels would stay open ``either on a standby basis or operating at a very low level,'' he said in a speech in New York yesterday.

In other words, the government says it may buy Wall Street's bad investments indefinitely with our tax dollars. This can't go on forever but it can continue until November. Meanwhile, it's causing more bubbles and rising discontent with the public.

We've been subjected to an incredible con job by the Bush administration. When enough insiders start to talk and expose the deception, the public will finally understand the massive misallocation of our resources to Wall Street, the Iraq war, and all the other sinkholes this pack of incompetents has engineered. It's not solely the fault of this administration. Our congress is equally to blame. We have a bloated military and a political system funded by corporate contribution dollars. The political contribution system ensures that people with abnormal values and motivated by greed dominate congress and become president. Wall Street is the biggest contributor to politicians. Corruption has paid the salaries of legions of now wealthy retired politicians.

The US economic system required a manic culture of consumer debt to provide rising corporate revenues and hence taxes. We have off-shored our manufacturing to make money for Wall Street and executives. When America's corporate ownership is off-shored and given to the sovereign wealth funds, tax revenues will decline and so will American influence in the world.

The housing collapse, Wall Street bailout, oil prices, and unsustainable negative interest rates are a very loud train whistle warning you of danger. These things aren't a market adjustment or the free market system correcting itself. It's a financial train wreck caused by debt and political corruption and greased with greed and its sliding into your Hooterville. Some will see the train coming and get off the tracks and others won't.

*************

President Bush is now saying everything is going to be fine and the economic stimulus package will cause growth to resume. You can believe that story or you can consider that we are in an age of diminishing oil production, dubious government data, rising inflation, a collapsing housing market and falling corporate profits. Meanwhile, guys with a reputation for rational thinking like George Soros and Warren Buffett are telling a different story and warning the public that we're in recession and it will be prolonged. The economy is hitting a severe head wind from the unwinding of debt induced spending. There is no way our economy is going back to the good old days because the debt and credit leverage game is closing up.

Consumer spending is weakening due to incomes not keeping pace with inflation and rising oil prices. It's very possible that the economic numbers and the oil price situation may appear to improve towards autumn but be cautious. The stimulus package passed by congress will provide a temporary surge but its impact will dissipate in 2009.

This nation won't be able to deal effectively with its financial problems until it addresses its deficient leadership. That will require the public funding of elections and taking the power away from Wall Street to select our political leaders. It's called Democracy. It will take years to reorganize our institutions. Then we have to get a grip on our military budget and social spending. There is yet no will to even discuss the truth about the nation's finances. I'm afraid we'll have to hit bottom before we can rebuild. We need a new leadership based on rationality and public service. The public will have to become intolerant of duplicity and demand financial solvency and good government. Over the next ten years or sooner the recoil from the current culture of greed and malevolence will either bring a better government or a dangerous political populism with a payback vendetta.

My stock and bond models are negative indicating there's little upside potential to either indexed asset class. I'm suggesting that you get conservative and be cautious for another year. The economy will need to find its equilibrium point and we've just started the adjustment process. At some point stocks will be cheap and bonds will pay attractive yields. We need a return to positive interest rates before asset prices can adjust. Those who manage to keep their cash intact may do well. A lot of wealth will be lost before things are back in balance.

Best Regards,
Southwest Ranch Financial, LLC    (www.swranch.net)
Tom Gleason, Manager & Researcher

Author of: How To Invest If You Can't Afford To Lose

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