Southwest Ranch Financial, LLC
July 2008 Update
The S&P500 is at 1280 on 30-June-2008

This page can be linked to at   ( www.swranch.net/emails/2008-07.htm ).

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

Year to date, the S&P500 index is down 12.0% and the SWR Balanced Portfolio is down -1.9% (with half the stock market risk.)

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

As of 6/30/08

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.

What a Month
I read that June 2008 was one of the worst months for the stock market since the 1929 Depression. I wouldn't call that a meaningless comparison. I've been warning about the stock market since last September and my stock model went negative in January 2008. It's been brutal. Will the balance of the year and 2009 be better? I'm afraid the tough times are not over because this isn't just a business cycle downturn. Directly ahead of us is a period of great wealth destruction. The assets holding up my Balanced Portfolio are commodities and fixed income.

The Cause of the Recession
The US is in a recession and the evidence for a severe recession is growing by the month. We're witnessing a huge contraction of credit with falling asset prices like homes, cars and business valuations. At some point, businesses will decide to reduce costs and this will lead to much higher unemployment and a spiraling cycle of falling consumer spending and more business retrenchment.

The root cause for a prolonged recession is clear. The US economy has been stimulated for 30 years by expanding federal debt which pushed vast amounts of money into the economy. The article on my web site makes this fact very clear. Debt was responsible for the 1980s stock market recovery and the buoyant 1990s market. The flood of money allowed consumer incomes to expand. Households spent freely and even reduced savings to spend more thus greatly enhancing the economic expansion. Business off shored manufacturing to enhance profits. Eventually, the expansion reached its apogee and the rate of expansion began to decline. The economy tried to take a rest in 2000 but the Federal Reserve lowered rates to historical lows and the administration doubled the national debt which together caused a massive blow off in new consumer borrowing and home equity spending as home prices soared.

This tidal wave of cheap and plentiful money aborted the 2000-2002 recession but created massive fiscal and monetary imbalances. Our debt is now 300% of US GDP and exceeds the GDP of the entire world. Although the blame is often laid at the Fed's doorstep, the political forces behind the Fed's actions are the core cause. The combination of debt expansion, cheap credit and war was only made possible by cheap energy and the recyling of petro dollars within the US banking system. This era is coming to an end. I'm certain that history will judge the recent "guns and butter" path as one of the greatest economic blunders in modern history. But, it won't be unique. Time and again, great powers have become careless. They borrow from foreigners and spend lavishly and ignore the shifting sand under their own castle.

The current recession is caused by debt. Don't let that cloud the bigger picture. Energy is the more important issue and will prevent the debt problem from being resolved. To pay off debt you need income and with the economy poised to keel over where is the income going to come from?

Our financial incompetence is secondary to our truly catastrophic decision to ignore the impending world oil production decline and to continue our oil intensive lifestyle. We had the opportunity to create a better mix of energy sources. The oil problem was known by Washington strategists well before 2000. Rather than begin to transition our economy we went to war to grab Iraq's oil. We could have championed new energy technologies and offered incentives to our industry to innovate. Our leaders failed us.

We are heavily dependent on imported oil and have no energy plan. Offshore drilling on the coasts and in Alaska will not solve the problem though more domestic production is needed. In 2007 we gave oil producing countries $400 billion dollars - half our trade deficit . Oil has now doubled to $130 which means our cash outflow is bankrupting us. And Iraq? The country pumps less oil now than in 2003. There is simply no way the US economy will maintain any sort of growth trajectory resembling the past with prices at these levels. It's impossible.

What's the Bush administration's response to rising oil prices? They want the Saudis to produce more oil and are now in open conflict with them over oil production. At the recent oil summit in Saudi Arabia our Energy Secretary Samuel Bodman demanded they produce more oil. The Saudis basically said they can't do it and they're telling the truth. Books like Twilight In The Desert by Matt Simmons document the Saudi oil problem. They are at the geological limit of production. They want to retain their remaining oil to ensure cash flow for future generations. They intend to use their oil internally to develop their own economy. Can you blame them or should they accept more of our declining dollars? What would you do? The Bush administration's position shows desperation and reveals the weakness of a US plan based on permanent dollar dominance backed by the military.

Would our planning have been better with Al Gore as president? It's hard to imagine it being any worse. However, in 2001, if Gore had talked about oil depletion no one would have believed him if he even was personally aware of the problem. A shift in awareness could have gradually occurred.

The situation now is dire. The US government cannot increase the rate of deficit spending without destroying the dollar. It can't print mountains of money without destroying the dollar. Consumers are tapped out and banks won't lend. Thus, the debt ball has started rolling backwards. It's now crushing the banks, next come the consumers and eventually the government itself that set it all in motion.

Consumer spending must contract to again be in proportion to incomes. Government spending must contract to be in balance with tax revenues. Our lifestyle must transform to adapt to available energy. If history is our guide, governments in this situation never acknowledge their diminishment. They continue spending on the military and giving cash to the angry citizenry. Unless good sense comes forward, the US will follow the path of failed empires past. Power is shifting to oil producing nations who are the beneficiary of our oil dollars. Year by year, they'll buy up our buildings, our corporations and eventually our most talented people.

Resource Wars and the Inevitability of Economic Contraction
I predict a severe recession due to high energy costs. Debt is very serious but secondary. We could work through our debt if we had much higher economic growth but that isn't going to happen. Even if the Saudis and all of Opec decided that saving America was their #1 priority and pumped oil like crazy it wouldn't do the trick. The world produces 85 million barrels of oil a day and it's not possible to increase the total output. Oil production peaked in 2005 and is depleting faster than new oil can be found. Some experts say that total oil production could decline by more than 4% per year going forward. Conservation is already kicking in but this lowers economic activity. A new source of cheap energy would solve the problem but that's not likely over the next decade. It takes 10 years to build a new nuclear plant. I don't see a way out unless world population falls.

Americans have long enjoyed having the dominant world currency and pricing oil and other commodities in dollars helped a lot. In the 1970s, the US struck a deal to protect the Arab oil dictatorships in exchange for the newly formed OPEC only accepting dollars. That system worked fine until oil depletion kicked in. Oil is getting scare and the price is going up while the dollar is getting weaker. The world has enough dollars and other currencies provide better stability. Major oil producers want to change the old rules. The costs of the Iraq war and America's debt bubble have fractured the dollar banking system and countries need more flexibility. Foreign nations have a multi -trillion dollar overhang of offshore dollars which cannot receive an adequate rate of return due to low rates of interest paid by the US government. The system is coming undone. Things are going to change in the post petro-dollar world.

The Iraq war only makes sense if viewed as an energy strategy. This energy conflict was predicted by Michael Klare in his excellent book "Resource Wars" back in 2002. Iraq has 10% of the world's remaining oil reserves. The Bush administration knew about Peak Oil prior to the war. Dick Cheney held secret energy meetings immediately after being elected and won't release the list of attendees or topics discussed. The planning for the war started immediately after Bush's election. This isn't a biased or "liberal" perspective on my part and I don't really understand why some people get angry when it's discussed or why they continue to push the WMD story.

Saddam Hussein refused to accept dollars for Iraq's oil. The fear of a breakdown of the petro dollar recycling system incited the war because it would have serious consequences for the US banking system and dollar dominance. What Saddam tried to do in Iraq, Peak Oil is now doing to all of Opec.

I suspect the Bush administration pumped up the economy after 2001 because a war with a recession would prevent public acceptance of the Iraq war strategy. The error was not pursuing alternative energy and changes to the nation's infrastructure in the meantime. Oil depletion occurred faster than they anticipated and the Iraqi resistance prevented development of the oil fields. Meanwhile, we didn't have a plan B. We got the war, we didn't get the oil (yet), and we're saddled with enormous debt. Even if we could start pumping Iraq's oil today and at full capacity, it still wouldn't prevent falling world oil production. It will take years to rebuild Iraq's pipelines and energy infrastructure and by then world depletion will be quite advanced.

Iran also has a lot of oil and their infrastructure is in terrible shape. Iran claims it needs nuclear power plants to supplement its oil. That's probably true. It's a signor to the Nuclear Non-Proliferation Treaty and they have a clean slate since 2003. Iran could eventually divert materials to make nuclear weapons but it's not happening at this time according to the IAEA. It's perfectly acceptable for the US to be highly suspicious and to demand safeguards so that Iran can't manufacture nuclear weapons. Nukes though aren't the only issue. There's clearly a lot of power politics going on between Iran and the US.

The political issue with Iran is largely about nationalism. It's creaky religious leadership sees itself as the future leader of the Middle Eastern nations. The Iranians are trying to break the link between OPEC oil and the dollar. A"Euro for oil" Iran is an obstacle to petro dollar dominance. Iran is also a problem due to geography and it ability to influence Iraq's politics. And there's also the fact that Iran has 9% of the world's remaining oil reserves and it won't let the Western oil firms in.

Look at it this way and put personal politics aside. If the US is willing to go to war in Iraq and Afghanistan (borders Iran) to secure oil and the US is willing to threaten Iran with war and the US is willing to take the Treasury to the brink of bankruptcy to enable this strategy then you must conclude that the threat to the US economic system is severe. If so, then my economic analysis makes sense and you should pay close attention to what follows later in this eletter.

Oil depletion stops the growth game. Without continuing economic growth, US debts can't be paid off and excess dollars can't be mopped up. With oil in depletion and with the current level of world energy usage, a decline in world economic activity is imminent. That means no growth and falling stock markets. It means resource scarcity and higher costs to retrieve natural resources. It means competition for remaining resources.

This scenario is playing out right now. The debt, world banking failures, asset devaluations, and war are all linked to the dollar and slowing growth. It's only a matter of time before the world tries to isolate itself from the US currency. The debt implosion is really a warning sign of a systemic petro dollar collapse.

Europe has raised rates while the US has lowered rates thus ratcheting up the currency pressure. Iran is resisting US pressure for dollar hegemony. The very recent European Union mellowing of relations with Bush seems to indicate an acceptance by the Bush administration that its efforts to repress the Euro is in trouble. Before long, oil may also be priced in Euros. The NeoCon power play has very little time left. We shall see what happens.

Is a Depression Possible?
It's not only possible, it's probable for three reasons. They are Debt, Depletion, and Demographics. Investors need to understand that this recession will be like no other. Even if we could solve the debt problems we're still faced with rising energy prices due to peak oil. The cost of oil will continue to increase over the years because net world oil production is falling. This is irreversible and it will impact every aspect of the economic cost structure. Our financial markets will have to contend with an aging population becoming more adverse to stock market risk and more susceptible to financial stress.

The world economy is poised to contract until economic activity reaches a sustainable equilibrium with energy costs. This is the defining issue and even trumps debt. That means that the US and the world will experience a far longer and deeper recession than most anticipate. In the US it will be very jarring because we built our cities out rather than up; we use trucks for transport and have neglected our freight and passenger train systems. We stopped building nuclear plants and our autos are gas guzzlers. Europe will do better than America. Poor nations will really suffer. Before the decline reaches its nadir, we're likely to see more military conflict. The entire planet will have to find its energy equilibrium point.

It's my belief that the United States is in the early stages of a very severe recession that could devolve into a depression. I define a depression as an extended period of declining economic activity spanning years. It's characteristics include an overall decline in GDP, corporate earnings, and household and business net worth.. A classic depression is deflationary with falling prices as measured by an accurate consumer price index. Within a fiat money system not backed by gold, it's possible for inflation to become a dominant feature. In that case, the level of corporate profits may appear to rise in a nominal currency measure but actually decline when prices are inflation adjusted. (A depression with an economic decline in excess of 10% is called an economic collapse).

Despite huge debt and a recession, the US can't cut spending to the bone or raise taxes too much. This would cause a severe and immediate economic contraction in an economy already under great stress. Therefore, if federal spending and debt continues to expand, the result will be further dilution of the value of the dollar. The US will have to let sovereign wealth funds recycle their trillions of dollars back into the US economy or raise interest rates so those dollars can get a decent rate of return.. We'll have to let them buy us up or they won't accept our dollars for oil. If this recycling of dollars isn't allowed to happen then the dollar will collapse. Unfortunately for America, our weakening economy means our asset prices are falling while their dollar hoards are growing larger. Thus, those offshore dollars can buy more US assets as time goes by.

Investment Strategy
We are entering a prolonged and difficult period for the world economy. The first phase will be deflationary with falling prices on most assets. The second phase will be a financial capitulation where the government does what it must to eliminate the debt burdening the citizenry. The government will expand poverty programs and create job programs. They'll push money out to people while running up bigger deficits. Globalization will slow dramatically. This means higher inflation. Our $11 trillion national debt can be reduced rather quickly with rapid inflation. Of course, if inflation is too high, no one will sell us oil unless we pay in gold.

Stocks are at great risk. Without a big and sustainable dividend yield, there really is no floor for a stock price and that includes the biggest companies. The current dividend yield for the S&P500 is 2% - that's totally uncompetitive with even treasury bills. There is no floor under the stock market.

In the textbooks they say that in the deflationary stage "cash is king". Americans are in double jeopardy because the value of cash is presently being destroyed by inflation rates above the rate of interest paid on safe investments. Our currency is not a safe haven.

What does all this mean for investment strategies? First, weak consumer spending and falling earnings mean that the long term outlook for the broad equity indexes is not good. Congress will have to continue deficit spending because prolonged debt and economic distress often leads to social upheaval and a change of the political system. That means dollar spending dare not end.

At some point, the dollar will no longer be the world's reserve currency. Eventually commodities will be priced in baskets of other currencies. This will happen sooner if we don't let foreign sovereign wealth funds buy up our assets.

Nations with strong and stable currencies will enjoy significant advantages as their currencies will be required for commodity trade weightings. Europe is preparing for the new era. New regional currencies will emerge in Asia. The transition will be unstable and tumultuous.

Higher domestic inflation is likely in the years ahead. Something must be done about the debts we can't pay. If economic growth slows, as I'm certain it will, then reduced government payments to the elderly, and higher taxes is imminent. It's hard to imagine how the dollar could possibly appreciate as the nation's economic strength wanes. The wise person will act promptly to position assets for uncertainty with the understanding that they won't be able to time the economic cycle perfectly. The right mix of assets can maintain purchasing power over time.

Things to Watch For
I expect things to move quickly from this point forward. There are two possible dollar paths.

Path One: The US will begin to allow its allies and major trade partners to dispose of their overhang of dollars. China, Japan and Arab states will be allowed to buy US assets like real estate and our corporations through sovereign wealth funds. A trickle of foreign investment will become a flood. Once they own the assets, the profits earned on the holdings will be exported overseas. The net effect will be much less US economic dominance and a lower standard of living for Americans. So, watch for reports of large purchases by foreign firms. Arab states will use corporate fronts in other nations to avoid raising fear among Americans. This will stabilize the dollar but will hollow out our tax base.

Path Two: If congress resists a sell-out then we'll see a fast switch to a commodity currency basket. Watch for nations requiring commodity payments in Euros or a mix of currencies. Under this scenario the dollar will decline very rapidly.

The middle path is a mix of the two. A falling dollar is also certain under that scenario.

Right now the dollar is holding stable. After the election, a decision will be made. Bush and Congress have resisted the sovereign wealth funds while doing nothing on energy. The dollar declined 40% in five years. McCain is more of a realist so I'd expect the middle path while he buys time. I don't see the Democrats allowing a wholesale sell out. I think Obama would tend towards a middle path also.

The Great Asset Deflation
Regardless of what happens with the dollar, the US economy is destined to contract due to debt and rising energy prices.

Assets classes will decline worldwide as the US economy contracts and the mountains of exported, securitized debt are marked to market. Already, stock markets related to China have suffered enormous losses as people unload securities to raise cash. The dollar is currently being supported by a need to raise cash to pay down debt and to buy commodities. So, for the last several months the dollar has stabilized. You might wish to believe the Pollyannas who say things are going to be ok. This will be short lived. When the debt liquidation phase is done, the inflation phase will accelerate.

If commodities are no longer priced solely in dollars, demand for dollars will fall. US interest rates will rise as the US will have to pay a higher rate of interest to attract debt buyers. Under that scenario, the asset class most at risk is US bonds.

Oppenheimer analyst Meredith Whitney predicted the Citi Group dividend cut and has been correct about other banking problems. In an Atlantic Free Press story on America's Deflationary Death Spiral and on Bloomberg she is quoted:

"The real harrowing days of the credit crisis are still ahead of us and will prove more widespread in effect than anything yet seen. Just as strained liquidity pushed so many small and mid-sized specialty finance companies to the brink, we believe it will do the same to the US consumer. We believe losses will only accelerate further and far worse than the most draconian estimates."

Ms. Whitney is saying that the consumer is in big trouble and the effects could be far worse for the financial industry than the most negative forecasts yet made.

The real implication of Ms Whitney's prediction is that the stock market is headed south as the consumer rolls over. The banks will choke on mountains of defaulted consumer paper and the fraudulent loans they haven't yet disclosed.

Stock Indexes Are Not The Answer
The stock market is forward looking. It's the ultimate leading indicator of the economy. I'd be very cautious on foreign stock markets and, in particular, Asia. If the massive US economy is headed into the tank and we are the world's biggest consumer nation, then how is that going to help China or Korea or the other nations we buy from. Commodity producing nations like Canada and Brazil will do well but but, in general, stock markets all across the world are struggling. Most have terrible dividend yields and their firms lack the consistent commitment of US firms to steady dividend increases.

I do not believe China will ever become dominant economy for the long term on their current development path. They are heavy users of energy and not producers. They could be natural allies with the US in developing new energy technologies. We have the same problem so lets work together. Things can only change if we move away from militaristic dominance and stop wasting our resources on warfare. Our very survival as a United States is at stake.

Look at what is actually happening to world markets. Economies across the globe are seeing their stock markets losing value.

Compare that to the energy producing countries of Canada and Brazil. These nations have more ability to manage their future. This trend clearly shows who will be winners and losers in the years ahead. It's also important information as we plan a portfolio for our defense against a possible depression and a further weakening currency.

How to Build a LifeBoat Portfolio
Holding cash all in dollars is very risky for reasons previously explained. Holding treasury bonds is very risky. The stock market has further to fall. So, what to do? Holding the right assets now will make sense later.

There are three options.
Option One: Continue with the buy and hold portfolio of 60% stocks and 40% bonds recommended by most financial advisors. Use index funds to lower costs.
Option Two: Try to time the recession/inflation cycle by holding dollars until rapid inflation starts and then switch to real estate and gold.
Option Three: Assume you can't perfectly time the market cycle. Understand the risks of asset over-concentration. Hold a balanced mix of assets that does well with a weak dollar and rising inflation but provides offsetting assets in case you're wrong.

As you already know, I think Option One will be a disaster. Option Two is only for a specific personality type. Option Three is the only one certain to preserve your capital.

The late Harry Browne (investor, author, and libertarian) came up with the idea of the Permanent Portfolio over 25 years ago. I was in the bullion business at the time and subscribed to his newsletter Harry Browne's Special Reports. I'll never forget his 1981 newsletter titled "Farewell to Silver" where he said it was time to exit silver coins. The silver market crashed soon thereafter. I should have listened. I sold my bullion but had two bags of Comex silver at my office and lost 50% on it within a couple of weeks. I hope you don't make the same mistake and stay in traditional investments much longer. At least some major investors are changing their tune.

Last month I stated that the US inflation numbers were phony and that bonds were the last place you want to invest. In his June eletter, Bill Gross of Pimco now says the government consumer price index is dubious and investors are being under compensated for holding bonds. Pimco is a major player in bonds so this is significant. He concludes:

What are the investment ramifications? With global headline inflation now at 7% there is a need for new global investment solutions, ... we would suggest: 1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS, while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies are obvious choices for investment dollars.

Mr. Gross is saying be cautious with bonds and move more money into the currencies of commodity economies. So, if you doubt SWRs advice then listen to Pimco. Folks, get the hell out of treasury bonds and that includes TIPS. Do not hold long term US treasury bonds. They currently pay below the rate of inflation thus making it very obviously a terrible investment.

I'll now show you how to build my LifeBoat Portfolio of diversified assets using managed funds. This will be similar to PRPFX (The Permanent Portfolio) as described in their fact sheet but with lower costs. The PRPFX fund is quite a bit different and better than Browne's original idea. Remember, Browne's ideas predated the introduction of index funds. He was way ahead of his time. You can view the Browne version results from 1970 to 2003.

The LifeBoat Portfolio
25% GLD/IAU ETFs or US Gold Eagle Coins/Buffalos (I much prefer 1oz coins over the ETFs)
10% Swiss Francs using FXF
7% World Real Estate via a Reit fund with international exposure
8% Natural Resource Fund VNR, IGE, FNARX and others are options (Do not use a gold stock fund)
15% Aggressive Growth Stocks mostly via International Stocks
20% US Short Term Bonds using VBISX
15% Managed Bonds using Loomis Sayles Bond (LSBRX). This is a very good opportunistic bond fund.

The equity portion could also be invested in managed mutual funds with a history of doing well in tough times. I'd suggest FPACX, OAKBX, PRWCX.

Year to date PRPFX is up 5.4%. I'll expand my information on this LifeBoat concept in future eletters with more specific fund recommendations.

This is an excellent portfolio for the years ahead. Feel free to adjust the percentages a small amount. Do not ignore the US dollar based investments and don't assume the dollar will collapse. We have no idea how things will play out with certainty. The LifeBoat Portfolio will under-perform during a strong stock market period like in the 1990s. The LifeBoat wil greatly outperform during a currency collapse, inflation, or deflation. Do not place all your money in just US currency or gold.

I've been suggesting that people reduce stock positions and transition assets. It's not to late to act. I expect the combination of inflation, recession and rising rates to eventually cut the PE of the US stock market to under 10 from the current 17. Some segments of the stock market will do well but most stocks will do poorly.

If your assets are very limited than constructing a LifeBoat portfolio isn't necessary. A good safe haven is the Permanent Portfolio Fund (PRPFX). Another option is owning some currencies in a managed fund like Merk Hard Currency Fund (MERKX).

Where is Vanguard Going?
The major mutual fund companies offer few safe places for their clients to protect their money. A Vanguard LifeBoat fund would be an immediate winner and much appreciated by their customers. The only mutual funds of most fund families showing positive returns in ytd 2008 are energy, precious metals and the money market funds. Vanguard's metals fund is closed to new investors unless they have over $1 million invested with the firm. Vanguard should step forward and offer a safe money portfolio. They are the standard bearer for low costs and integrity. John Bogle spent decades building Vanguard's reputation by looking out for the average Joe/Jane and providing a sound investment philosophy and low costs.

Someone at Vanguard is trying to move the firm away from its roots and trying to gain higher net worth investors by limiting access to popular funds. Fishing for whales is fine with me but I suspect Vanguard is getting exclusive with its mutual funds at the wrong time. I like index funds and even wrote a book on constructing no-lose portfolios. In this bear market, index funds will provide on the downside exactly what they provide on the upside; average market performance in each indexed asset class. If the trend is down then you are guaranteed to lose money holding index funds and you'll lose even more sticking with buy and hold.

Our nation's demographics caused a surge into stocks as the baby boomers invested in the 80s and 90s. It will work in reverse during a bear market. When the general public figures out what's going on it will cause a run for the exits and massive disinvestment from index funds. People need escape-hatch funds. Vanguard and the others need to act assertively to protect clients. Vanguard should offer the world's first low-cost, safe-money index fund. I even have a symbol for it - VFMIX. People need a structured mix of offsetting assets that can preserve purchasing power.

In a down market, active portfolio management and alternative investments are essential. As in an up market, it's critical to hold a diversified mix of assets. This is the time when great fund managers and money managers earn client loyalty for a lifetime by recognizing the danger and acting to preserve client wealth. Very few fund managers and advisors will be up to the task.

Does it Matter Who's Elected President?
I don't think so. Under the best circumstances, we're in for at least a decade of high priced oil and weak or negative economic growth.

After eight years of incompetence, war, malevolence, and debt expansion under Bush, the public will probably give the Democrats a landslide victory in congress this November. The public's anger is growing and will only intensify as unemployment rises.

Corporate managers have looted from the public for decades with excessive pay packages. As asset erosion accelerates, the mood of the working classes will turn very sour; especially when they learn that the rich guys including Warren Buffett and Bill Gates have off-shored a lot of their money. You can see it coming already.

Hundreds of United employees, including pilots, flight attendants and machinists, rallied last week in Southern California to protest the management's decision to set aside stock worth about $130 million to fund a new incentive plan for executives while the company plans to cut routes and lay off up to 1,600 employees.

The public mood will give the Democrats plenty of rope. If Obama doesn't immediately keep a tight rein on congress, things could go downhill fast. Congress supported Bush's deficit insanity 100% and even went along with his wars because he let them spend. I have no doubt they will keep spending and will raise taxes on anyone with assets to pay for it.

Here's an example of legislation that democrat Senator Chris Dodd is pushing. He tacked in onto the planned emergency housing bill. If this goes through, they'll be able to aggregate every online and credit card purchase you make. It requires credit card companies, Ebay, Google and others to provide all sales data over a small threshold to the government. One implication is if you buy gold or silver coins online with a credit card or via ebay, the dealer will have to report it and the government would be able to single you out in the future. Will that information be abused in the future? What do you think? From the proposed legislation:

Senate Housing Bill Requires eBay, Amazon, Google, and All Credit Card Companies to Report Transactions to the Government
Payment Card and Third Party Network Information Reporting. The proposal requires information reporting on payment card and third party network transactions. Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee. Reportable transactions include any payment card transaction and any third party network transaction.

Freedom Works is spearheading opposition to this law.

As the gold price rises ever higher, the democrats will likely concoct a national sales tax and tax gold heavily to stop "speculators" trying to dump the dollar. Or, they'll know who bought gold and silver and will require an imputed tax on any yearly paper gain. This is already done with bond zeroes and some other investments so there is a precedent. So, if you intend to purchase dollar alternatives, I'd suggest that you act sooner rather than later and before they have a record of all your purchases.

It's Time to Act
I mentioned the mutual fund FPACX earlier. FPA is the management for the fund family is keenly aware of the wrongheaded path we're on. In a March 30, 2008 piece titled Crossing The Rubicon the leadership of FPA states:

.... the partners of FPA came to a unanimous conclusion that the recent Federal Reserve actions and the potential new Congressional policies under consideration are likely to lead to a significantly higher level of long-term inflation in the U.S. We are more than disappointed in the substandard decision making that has taken place within the Federal Reserve and other governmental entities these last several years. The misguided monetary policies of the former Chairman of the Federal Reserve, Alan Greenspan, created an era of “too big to fail” that has led to two major asset bubbles. With each successive bubble, the policy actions available to the Federal Reserve to reduce financial system risk have been systematically reduced. The extraordinary actions taken by the Bernanke Federal Reserve reflect acts of desperation rather than long-term policy solutions. The rapidly changing events within the capital markets are forcing the Fed to adopt policies that have the potential of long-term negative consequences. These recent events, and their fundamental changes to the U.S. financial system, are forcing the leaders of FPA’s product areas to reassess their present portfolio allocations. In essence, we believe we have “Crossed the Rubicon” into a new financial era.

It's only a matter of time before the major mutual fund families start offering funds with an allocation to gold and silver. If I'm right about the direction of stocks and bonds, they'll have to create mutual funds that balance traditional assets with hard assets. Otherwise, the over 50 crowd will move their cash somewhere else rather than lose it.

Shayne McGuire, is the director of global research at the Texas Teacher's Retirement System. He's a professional money man and responsible for protecting the retirement money of everyday people. In a recent interview for his book "Buy Gold Now", he said:

I have lived through two currency collapses (in Mexico) and I hope we will be able to prevent one. But the outlook is not good. Currency collapses are always caused by excessive debt, and no nation has ever accumulated more than we have. Our debt is larger than global GDP, and that is without including the tens of billions in unfunded federal liabilities.

Gold is the most underowned major asset class; it is almost completely absent from the vast majority of major funds in the world that exceed $100 million in value, of which there are hundreds if not thousands. Today, these funds can invest in gold with the click of a mouse and a great many of them are beginning to do so. The global asset market is worth around $140 trillion. If one percent of that moved into the miniscule $5 trillion gold market—less than 5% of which actually trades each year—gold’s value would skyrocket. Lacking a P/E or some other conventional investment metric with which to measure its value, I think gold will rise as high as the market will allow it, and I think we will have a speculative craze, just as we had with the Nasdaq. I think $10,000 an ounce is possible. But who can say what the limit is for an asset that has no P/E? Obviously, there will be a time to sell, but I think that is years in the future.

A Little Humor Break
This eletter isn't very optimistic about the economy. Let's loosen up a bit before concluding. I'd like to make a peace offering to my subscriber, Mel, who occasionally and gently lets me know when I get it all wrong, like last month for insulting conservative Republicans. No Mel, I'm not a hippie and I actually do believe the US put men on the moon. I received an honorable discharge from the US military - can you believe that. In the interest of fairness, here's an opposing point of view praising the president. This video is a compelling defense of Bush's integrity and blasts the traitor schmuck Scott McClellan for his nogoodnick expose book on Bush.

When Will the Stock Market Be Cheap?
I get a chuckle out of Bill Gates. Bill likes to fly around the globe and give his cash away to poor people. I'm sure it makes him feel good. That's commendable and it sure beats being a miser. It would have been nice had he given some more cash to the shareholders of Microsoft. The crummy 1.6% dividend is an insult yet people continue to hold this sideways stinker of a stock. Over the years, large firms gave away plenty of shares to corporate executives yet, overall, dividends for the S&P500 are at 2.1%. That's about the lowest in history except for the recent bubble years. They don't share the profits with the people who own the company. The executives get a big payoff in shares and cash each year and the shareholders can only hope. That's the state of most publicly traded shares today.

Corporations today are seeing higher input costs due to rising commodity prices. At the same time, consumers are seeing their disposable income falling because of flat incomes and higher living costs. Corporations may have good balance sheets and that's good but, if they hit a profits squeeze, that money trickles away rather fast. We're headed into a severe recession that will be deep and prolonged.

Stocks will be cheap when they offer more than the hope that prices will go up. Stocks will be cheap when the dividend yields of good companies are routinely around 5% and PE ratios are well under 10. As for Microsoft, it's a very good company and the stock is currently at $27. Cheap today would be under $15. You think that's ridiculous? That's only a 3% yield and it's all the company can afford to pay since it would be 50% of profits. Cheap is when I'd buy Msft and cheap is when you want to buy and hold the broad market indexes.

Good yields may only happen if Congress changes the tax law and doesn't penalize shareholders by taxing dividend distributions twice - once when the corporation earns it and again when the shareholder receives the dividend. There is currently no incentive for companies to pay dividends. Without dividends we have to rely on steadily increasing earnings to maintain share prices. Earnings will be hard to grow in the years ahead. Or, corporations could boost the yield by buying shares in the open market and thereby reduce the number of shares. Earnings can be manipulated and share buy backs often are promised but never done. We need dividend transparency so we know what to buy.

Why should you invest in stocks when you don't get paid well for holding shares. Why invest when the risk is high like now? Rich people generally don't own a lot of stocks. Did you know that? They own companies and receive profits. They invest the profits in municipal bonds and super safe investments. They don't need to invest. Investing is for the aspiring middle class. The smart rich don't take unnecessary risks.

For the last 30 years America has stimulated the stock market with massive spending via federal debt and massive consumer spending via personal debt. Most investors were then in their 30's and are now hitting 50 (and higher) and are worried. So, what do you think will happen to share prices without spending and debt stimulus? What will happen to earnings with oil prices relentlessly increasing? Why do you think Paulson and Bernanke are buying up all the bank debt? They know what will happen to stocks and pension funds and municipal finances and taxes as the debt game ends. They're praying they make it to the November election.

Globalization has failed America and the people know it. It was pushed to an extreme with easy money and even then only made sense if oil was cheap enough to transport sneakers and TV sets from the other side of the world. Globalization immensely enriched corporate executives and Paulson's banking cronies on Wall Street. Wall Street was the biggest contributor to congressional elections and so the politicians pushed globalization. The execs off shored the jobs to gain short term profits and patted themselves on the back and got more free shares. Americans got cheap prices on foreign manufactured products but most never saved for a rainy day.

Debt and excess has created a huge disequilibrium. Inflation is rising overseas and imported goods won't be so cheap in the future. It will settle out eventually as jobs slowly return to America but first the Arabs and Chinese will buy our companies with our oil and trade dollars. The executives will profit again. The wives of congressmen will continue to sit on corporate boards and get big salaries. The politicians will retire and then lobby for industry. We can't trust them to do the right thing unless the incentives are removed for doing the wrong thing.

Energy prices are headed higher and it will take many years for our economy to adjust. You want to own stocks only after the share prices adjust to the new reality.

In the last depression, stocks started falling in 1929, recovered a bit and then crashed for a couple more years. The market hit a solid bottom in 1934. The depression continued for many years but investors who bought low did well. In 1974 the PE ratio of the market hit 7. In 1934 it hit 5. The PE is now about 17. Stocks will get cheap before the economy bottoms. Don't ride the indexes down because you'll never be able to recover.

When Should We Buy Stocks Again?
My stock market timing model has successfully caught the major turning points in stocks. It can successfully buy and sell even in a falling market. If you don't trust proprietary models then try a simple moving average tool. It's a bit rough but should keep you out of trouble.

We need to see a reversal of trend before committing or removing money from broad index funds. Simply view the 200 day moving average of an asset and wait for it to go sideways for at least six months. It will move up and down through its 200 day average. This isn't a useful tool for trading stocks or indexes but can be of value for identifying broad cyclical turning points.

Let's look at the S&P500 and at Gold.

The S&P500 is in a downtrend. It rises at times but bounces off the bottom of its 200 day moving average.

Gold as tracked by GLD is in an up trend. it falls at times but bounces off the top of its 200 day moving average.

I think you should view these three short videos on YouTube. They explain in simple terms the linkage between the Federal Reserve, PetroDollars, and Peak Oil. They suggest where the dollar is headed and what it means for you.

Peak Oil, Monetary Policy & the Petro Dollar

Part 1
Part 2
Part 3

Subscribers know I've been warning about the stock market since last Autumn. My models were right on stocks and right on gold. Last month I showed how the spread between the 10 year treasury bond and corporate bonds was often (but not always) predictive of rising long term interest rates. This is coming. The S&P500 is down 12% year to date and gold is advancing.

We're plagued by poor leadership. The dollar will likely lose its reserve currency status. Our nation's assets will probably be sold off to pay our debts. Oil depletion means we can't grow our way out of this trouble.

Nobody can predict the future with certainty so it's important to hold a diversified mix of assets. We can be fairly sure that the US will never allow deflation to get the upper hand because it's the kiss of death for a debtor nation. However, this means inflation and dollar weakness are a problem. Therefore, if you have investments, get some of your cash out of dollars as soon as possible. Use PRPFX or invest in strong companies in other countries, in gold, and in other currencies. If you're not an investor, get out of debt and maintain a cash reserve.

People, get your cash to safety. The stock market is going to grind slowly lower and the dollar is in trouble.

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
Tom Gleason has degrees in finance and information systems. He's worked as a bullion dealer, fraud investigator, real estate appraiser and financial analyst.

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Disclaimer:.
The views expressed are the opinions of Southwest Ranch Financial, LLC. SWR is not a registered investment advisor and nothing published by SWR should be considered personalized investment advice. Investing involves risk and the future performance of the SWR models cannot be guaranteed. You may lose money following the recommendations. Any investment recommendations made by SWR are for informational purposes only and you shouldn't act on a recommendation without consulting with your investment advisor. It's your responsibility to review the prospectus or relevant financial statements.  SWR does not receive any compensation for mentioning stocks, funds, or financial products. SWR may have bought or sold investments prior to publishing its research.

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