Southwest Ranch Financial, LLC
September 2008 Update
The S&P500 is at 1282 on 31-August-2008

This page can be linked to at   ( www.swranch.net/emails/2008-09.htm ).

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

Year to date, the S&P500 index is down 11.4% and the SWR Balanced Portfolio is down -3.5% (with half the stock market risk.)

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

As of 8/31/08

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.

Inflation, Debt and Asset Prices
Inflation pressures will likely abate going forward as recession bites the economy hard. That's what the folks at the Economic Cycle Research Institute are saying. ECRI has a flawless record on forecasting recessions. Their Future Inflation Gauge is worth following. Inflation isn't going away but the rate of increase will slow down - for a while.

We're still in the deflation stage of the "Big Markdown" with falling prices on houses and financial assets. During this stage we'll see great wealth destruction. Our objective is to preserve wealth and purchasing power until the contraction phase passes. Longer term, natural resources and energy remain good bets but can't go straight up.

There are simply too many dollars offshore in the hands of governments. They reinvest that money in US treasury bonds keeping our interest rates low. They're gradually coming to understand their predicament. Since 2001, the US national debt has grown from $5 trillion to $15 trillion with the addition of the socialized debt from Fannie and Freddie. There is more to come. These numbers are so huge that our creditors must certainly know that they'll never be paid off in good money. They're stuck holding a bag of US securities and wondering what it will be worth next year.

At this point, it's foolish for foreigners to hold more dollars and they'll try to diversify any way they can. China is already buying up natural resource companies in other nations and trying to get that cash into something of value. America will debase the currency but it will be done in a clever and political way. One tactic is to restructure some debt into 30 year bonds from the current short term durations. Creditors we like will be allowed to gradually invest in US companies and the other guys who don't play nice will get the bonds. In any event, America will just inflate the money much faster in the future, bail out their banks and stiff everyone else. They'll push inflating cash into the hands of citizens, debase the money in the hands of enemies, and reward allies with equity in American firms. The end result of our debt economy will not be good for America because stock ownership and tax revenues will flow offshore. It won't be good for enemies because they'll be stuck with depreciating debt.

During the deflation stage you want to hold liquid assets, some gold and stocks of natural resource firms - preferably foreign. It's too risky to hold only dollars because the US economy is in grave danger of a catastrophic event or a series of events that could cause the dollar to fall a lot and with short notice. I'm not saying this will happen but it might. In the inflation phase, you want to be in select stocks, physical assets, and gold. We have to accept the volatility that comes with uncertainty and be hedged for various outcomes. There's no other choice unless you have the type of gambler personality that can make a one way bet and never worry about it.

I believe stocks and bonds are overpriced considering the current conditions. Look at the financial state of this country.

• The stock market is selling at a forward PE ratio of 19 while the economy slips deeper into recession. There is no possibility of an economic recovery looking out six months because the leading economic indicators are plunging. The LEI growth rate has dropped to the lowest level since 1980. This look-ahead measure will manifest as weakening economic activity after the election.
  
  
• Inflation is higher than the rates paid on safe investments. Negative interest rates cause money to flow into riskier investments like stocks as it seeks a yield. That's why stock indexes are holding their value despite financial turmoil. My analysis shows stocks to be over valued.
  
  
• Teasury bonds yield under 4% so there is little potential gain possible unless we go into a deflationary depression. I believe Tbonds are over priced and could experience ruinous losses if rates rise a lot. Already there is a +2% yield spread between 10 year treasuries and triple A corporate bonds. Over the last 50 years, this only occurred once before in 2001-2003 when the financial system almost collapsed only to be rescued by trillions in deficit spending. The normal spread is .8%. A high spread indicates a flight to safety amid increasing fear of corporate defaults.
  
  
• Houses are still falling and will fall until rental income provides cash flow. If we get rising unemployment then the housing downturn could be amplified and extended. Banks are still failing and the government is propping up the banks and housing hoping to sustain asset prices. This is very unlikely to succeed.
  
  
• There is no plan and no possibility for making good on the future $65 trillion in Medicare and Social Security obligations - at least not with sound money.
  
  
• Oil is in depletion, prices will continue to rise year over year and raise production costs. It addition, oil depletion is a source of military conflict

America has to start talking straight about overseas commitments, energy and the domestic financial situation. People have lost faith in the leadership in the White House and Congress. Regardless of who is elected president or who runs congress, the options for resolving the situations are not cheerful but must be undertaken.

A good strategy for now is hold a balanced portfolio and restrain from trading and chasing prices down. Another approach is to own some gold and hold cash. Cash may depreciate by 3% yearly but it's better than possibly losing it at a 10% clip in stocks and bonds. These are difficult times - admit it and hunker down. The best time to buy assets in a market like this is when they are extremely distressed and with such good potential cash flows that the risk/reward payoffs are compelling. Raw land and real estate can be good investments anytime if you buy right but that's hard to do when prices are falling - but not impossible.

As I watch the unraveling of America's debt economy, it struck me as ludicrous that our government is bailing out the giant banks with taxpayer money. Aren't these banks the same idiots that caused the debt problems. They need to just fail and go away. The longer we string out the unsustainable asset bubble the longer it will take for markets to become readjusted. Therefore, I'm starting a national initiative.

Break-A-Bank For America

A subscriber sent me an article that stated "we're not in a subprime crisis, we have a subprime economy". That's true. We also have a subprime government run by incompetents. The biggest deadbeats are the Department of the Treasury and the Federal Reserve. The Treasury is presently cheating its own citizens by propping up bankers and paying for their bad loans with taxpayer money.

The Federal Reserve is engaged in outright theft from the public. They're holding the Fed Funds rate at 2% which sets the base rate on savings accounts and CDs. You get only 3% on a CD while inflation is close to 6%. Your savings dollars allow the corrupt and incompetent major banks to borrow at 2.25% from the Fed and buy treasury bonds paying 4+% thus earning risk-free profits to liquefy their balance sheets. This free money comes directly from the pockets of taxpayers. This is theft from savers and people living on their savings. This is theft from every day people and a giveaway to the least deserving. It's a gift to the banks who engineered the financial fiascos that are destroying the fabric of this nation. They don't deserve that gift. They hope you're too uninformed and beaten down to take notice and to step forward and defend your family.

Savings rates should be much higher considering inflation. A savings rate below the inflation rate is called a "negative interest rate". Presently, the negative interest rate is -3%. That means that your savings lose 3% in purchasing power every year. This will destroy the saved wealth of America's working and retired people. It will go on for years unless we stop it. This government didn't ring up trillions in national debt because it's smart or conscientious. Make Wall Street, the super-rich and the war profiteers pay - not the working people and the retired.

I believe the biggest banks should be allowed to fail and go bankrupt. Let another group of mid-tier banks step up and take over the money center roles. We need ethical bankers and they exist in cities all across America. We need honest leaders and common sense regulations that reward free enterprise and prevent abusive leveraged finance. Join my campaign to place pressure on the Wall Street banks and the Federal Reserve. Let them know we won't tolerate being cheated. Do your part to help the Wall Street bankers go broke. My approach is simple, very effective and you will make money doing it.

Move your money from big banks like Bank of America, Chase, Citi and the other bloated, boardrooms on Wall Street to a non-profit credit union. Your money will be invested in your own community and won't be sent to Wall Street. You'll get lower costs on loans, higher rates on savings, no crazy and criminal fees, no/very low minimum balances on your checking account and you'll be doing your part to bring down these gigantic, vampire organizations. You win and they lose.

The American Bankers Association has been trying to limit credit union growth because they don't want competition from non-profits that offer low cost banking services. The credit unions have hung tough and fought back. Let's all pitch in and help those who want to help us. There are no downsides to banking with a credit union. You can get every service offered by a bank except at much lower prices. With recent law changes, most anyone can join a credit union. The cash and the jobs created all stay local.

Americans have been complacent about torture, the wars, the erosion of civil liberties, and the bad financial policies of this government because citizens feel the system can't be changed. We've seen manufacturing jobs off shored to further enrich executives. The US government ignored common sense and let the banks create trillions in bad debt. We don't get pay raises and now they're giving our cash to the bankers. Are you going to stand by and accept being cheated on your savings? Stand up and help your family.

Folks, my Break-A-Bank initiative is effective fun that both liberals and conservatives can enjoy. Move your money out of the big banks and tell them why. Go across the street to your community credit union and sign up.

We can't change the politics in this country by voting because too many politicians don't really care what the public thinks. They do care what their cash contributors think. We can choose not to fund the congressional paymasters - Wall Street.

Here's the list of the 50 largest banks in America. Don't do business with the top 20. Here's the link to find a credit union in your community.

Break-A-Bank for America - Join a Credit Union

Send this link to your friends and family. Let's get an email campaign going during the election season.

On Timing the Stock Market
A subscriber emailed me about an article he read about the era from 1966 to 1982 where stocks ended up where they started after 16 years. The article concluded that in a range bound market an investor is better off to stay out. He thought market timing could be advantageous in a volatile sideways market. I agree. In fact, it's the only way to play such a market. I feel the article understated the danger of a market going sideways. Considering inflation, from 1966-82 a stock investor would have lost 2/3 of his purchasing power due to inflation. The situation today could be equally as dire.

Could the worst range bound market in US history have been successfully timed? I say yes. What follows is my research of a method of market timing that an investor could use today. First, let me issue my caveats. One of the most frequently hit links on my web site is my research paper on market timing using moving averages. I proved that a simple MA timing method can beat buy and hold over long time periods. However, I think using such a timing method is dangerous because it causes many whipsaws. Moving Averages systems have frequent buys and sells and you lose money on many trades. A successful timing method should win 80% of the time or more. You must be fairly certain that you'll win all the time or only suffer very small losses.

A moving average timing system must include more than just a price variable!! The ideal timing strategy would include variables for Price, Value, Momentum, and for Emotion to wring out the maximum gain. Even a two variable system will easily beat the best MA system over any time period. Since the long-term direction of the stock market is up, a timing method must buy quickly and be slow to sell. This contradicts the fact that markets usually fall much faster than they rise. Therein lies the flaw and the danger in trend following MA systems and why they suffer so many small losses.

Here's how the Gleason Moving Average Model works. Use a moving average calculated monthly. Get the S&P data here. Combine that with the monthly Leading Economic Indicators from OECD. Buy when the S&P500 moves above the MA and if the LEI is up. Sell when the price falls below the MA. I'm not providing all the logic but it should be obvious if you work the data and have any talent whatsoever for mathematical models.

I'll show you the results for the aforementioned 1967 to 1979 disaster years below using my moving average model. This includes four complete buy and sell trades. It was a terrible period for stocks with high inflation and tremendous volatility. The S&P500 started 1967 at 87. In February 1979 it was at 96. That's a total gain of 9 points or 10% over 22 years or about 1/2% per year - essentially nothing.

The Gleason Moving Average model gained 60 points or 70% ( 3% yearly over 22 years) over the same period. But, it was only in the market 107 of those 234 months - 45% of the time!! It earned very high interest rates averaging 7% yearly in the out months that totaled 11 of the 22 years. That means money would have doubled just on the interest during the out years whereas stocks lost money in those years. The model had only 4 trades (one loss) and they earned respectively 5%, 11%, 13%, 0% per each year in the trade. The model avoided the 73-74 market crash. This is powerful stuff. And folks, this is an inferior model that I would personally never use!

Keep in mind that this model only has variables for price and a sloppy measure of economic momentum. You cannot successfully time the market well using either variable individually but combined they work. The most important variables are absent - valuation and investor emotion. The right mix of variables is why my proprietary SWR Market Alert model crushes any stock market timing model I've every seen.

Gleason Moving Average Timing Model

My MA method also worked very well in all other time periods. From 1963 to 2008, it was in the market 75% of the time and beat buy and hold by 34%. The S&P went from about 100 to 1300 or up 1200%. The model was out of the market for a total of 12 years of the 48 years. I estimate money would have easily doubled at only 6% for those 12 years since interest rates were quite high during the out months. Thus the actual return of the timing model was twice buy and hold and with less risk.

From 1982 to 2008 the Gleason MA Model had 6 winning trades and 1 loss (in 1987) that earned respectively per year in the trade: 14.2%, 20.4%, -10.0%, 6.0%, 10.2%, 13.0%, 11.5%. My MA model gained 1511 points whereas the S&P gained 1180. That's 28% better and in the market only 80% of the time.

The model exited the stock market in December 2007 with the S&P500 at 1468 and is still out. Not bad!

This is simple stuff but if I give the exact steps it will be on financial blog sites within a week with guys claiming they have a variation of the model that does even better. Any fool can concoct a model that mines the data and works well on the past but fails real time.

My web site publicly times stocks, bonds, and gold real time and I have a willingness to expose myself to ridicule if I make a mistake. Many web sites claim to have expert knowledge but how many actually do what I do with no retractions or excuses?

During these difficult times, my point in presenting this information is to build confidence in site subscribers when I say my SWR Market Alert model is vastly superior to the Gleason MA Timing Model and the many defective timing tools touted on the Internet. I don't claim that I'll always make money in the future. But, I do know a thing or two about market timing and approach the subject in a scientific manner.

The US stock market will not advance until inflation is pushed into the hands of the consumer so nominal prices can rise. This is coming. Until then, we must try not to lose money on stocks and bonds.

Foreign Stock Markets
I have timing models for some of the world's major stock markets. All the ones I track are in down trends. There are no safe havens in equities. I've considered publishing my forecasts for foreign stock markets but wonder if there's much interest in this information. As the world becomes less dollar-centric, I think other markets will be able to move more in divergence with the US.

Books
I read a couple books over the last few weeks that are quite interesting.

The Trillion Dollar Meltdown by Charles Morris
This short volume discusses the major financial instruments that are causing so many financial failures and why it will be so difficult to correct our problems. I'd recommend this to financial people wanting a quick understanding of the major issues. Morris says financial market regulation cycles between liberal and conservative controls. The present cycle of conservative ideology with little regulation has led to this financial turmoil and a swing back is already in motion. The world will move away from the dollar.

The New Paradigm for Financial Markets by George Soros
Soros calls himself a failed philosopher. Most of the book discusses his theory of Reflexivity where he states that it's impossible to know or understand all elements of a system because you're a participant in the system and biased by experience or limited data. I don't care much for his philosophical interests because they strike me as rather obvious. I do like Soros because he's honest about his intentions and mistakes. He states that American finance cannot be repaired to its previous state. Many changes lie ahead including a move away from American dominance of commerce and the dollar as the reserve currency. Russia will never advance because it strips assets rather than investing in infrastructure.

Caspian Oil, War, and the Way Away From War
Last month I wrote about the Caspian Sea area and the oil and natural gas pipelines. I discussed how the Iraq and Afghan wars were about pipelines and oil. Within one week of my eletter arriving in your inbox, Russia would tangle with Georgia over the pipelines. It does prove my point about what's going on over there. The US propaganda news has Russia as the aggressor in this confrontation but that's not true. Pat Buchanan lays out the facts very well in his article about the Georgia/Russia conflict. I have a lot of respect for Buchanan's analysis and his willingness to step apart from the Republican party when he feels strongly about issues. This is the mark of a confident man and a statesman.

Russia is now drawing a line in the sand. They will not allow the West to move in on their energy game in the old Soviet outback. It's their turf they're saying. They now have control of the only oil pipeline to the West from the Caspian.

Bush is powerless over Russia on this issue. We're overextend militarily in the current wars. There will be no attack on Iran although a blockade is possible. Our government refuses to acknowledge that the world energy scene has changed and other powers are moving away from the old petrodollar rules. Our currency and economic leadership position is in for a long term decline. We pumped up the economy in 2001 with massive debt and spending so Bush could have his NeoCon PaxAmericana wars. They have failed. Our situation is far worse now than 8 years ago. Things are not going back to the good old days and you know that's true. There's the very real possibility of a dollar collapse or a major war if our leadership in Washington doesn't come to its senses.

The uni-polar era of American dominance of finance and an unchecked military is coming to an end. The Russians know that and so does Europe and China. The world is waiting for a resolution of the global debt problems which requires American leadership. This will take a while since there's near a hundred trillion dollars in problematic derivatives floating around. Once the financial situation is resolved by defaults, write downs and bailouts then the world will know who is broke and limping. There will be a reshuffling of power and a redistribution of influence.

Meanwhile, innovation is still alive and well.

The Innovation Wave in Energy
Clayton Christensen in his book The Innovator's Dilemma showed how disruptive innovations change industries. A disruptive technology or disruptive innovation is a term describing a technological innovation, product, or service that uses a "disruptive" strategy, rather than an "evolutionary" or "sustaining" strategy, to overturn the existing dominant technologies or status quo products in a market.

Existing firms and business models are very profitable but a disruption can appear and soon take out the least profitable segment of the business. Improvements to the innovation gradually move up the profit chain and increasingly take out more business. Eventually the old business model succumbs to the innovation and the old firms fail. They're making so much money doing things the old way that they fail to act early to defend themselves from the innovation or to adopt the innovation.

A classic case is Western Union who could have bought all of Alexander Bell's telephone patents for $100,000 but didn't. They made huge amounts of money on telegraph messaging which could go transnational while the early voice telephone was wiring intensive and only useful for local connections. They didn't recognize the telephone as a disruptive innovation. The telephone evolved and soon dominated communications.

Even if a disruptive innovation is recognized, existing businesses are often reluctant to take advantage of it, since it would involve competing with their existing (and more profitable) technological approach.

We've all seen the ads from T. Boone Pickens pushing wind power and solar and natural gas as an alternative to imported oil. Solar and wind power fed onto a power grid are relatively new technologies but are used only at the margins for energy use. Energy from wind and solar is competitive once properly scaled. The major problem is you can't cost effectively store solar energy for use at night and wind power energy when the wind isn't blowing. Thus, we can't eliminate fossil fuel power plants because they're needed for most energy needs and at least as supplements to alternative energy.

An innovative disruption may be taking place right now to make solar energy cheap and immediately useful.

MIT announced a significant discovery this past month that has implications for storing energy derived from solar energy. I'm no scientist but this discovery is said to be big stuff. There is now a cheaper method of splitting water into hydrogen and oxygen so energy can be stored for off peak use. Fuel cells may not be the future of automobiles but are realistic as a home power plant. MIT says every home could have a fuel cell energy system and perhaps independence from the energy grid. This makes energy storage cheap and ideal for charging electric cars. It will work on a small and large scale. Kiplinger's Market Letter says this technology could be ready for home use within five years.

Here's the story from MIT .

'Major discovery' from MIT primed to unleash solar revolution

In a revolutionary leap that could transform solar power from a marginal, boutique alternative into a mainstream energy source, MIT researchers have overcome a major barrier to large-scale solar power: storing energy for use when the sun doesn't shine.

Requiring nothing but abundant, non-toxic natural materials, this discovery could unlock the most potent, carbon-free energy source of all: the sun."This is the nirvana of what we've been talking about for years," said MIT's Daniel Nocera, the Henry Dreyfus Professor of Energy at MIT and senior author of a paper describing the work in the July 31 issue of Science. "Solar power has always been a limited, far-off solution. Now we can seriously think about solar power as unlimited and soon."

Energy innovation is occurring in our own back yard and offers a way out and away from self destruction if we'll only have the courage to adopt a new way of thinking. The nations that survive during the depletion phase of oil will be those that transform their economies and their energy infrastructure. In the short term, oil will still have many advantages but solar will gradually peck away and slowly move up the value chain. Our nation's leadership needs to recognize the innovations in alternative energy and offer everyone the incentives to adopt it.

We should make a national commitment to go with solar and wind power and require the plant and infrastructure to use US made components and labor. Let's also consider coal liquification and other technologies that will get America over the hump. Again, let's keep the jobs and investment in America.

Yes, nations that stay 100% on petroleum will appear to be winning for a while but increasing energy costs will eventually make their economies uncompetitive. If we continue fighting oil wars and delay adoption of disruptive technology, we may fail to make the transition. We can only hope that a more sensible leadership comes to power before more craziness is unleashed.

Gold
I received some panicky emails from subscribers worrying about the falling price of gold. If precious metals make up a sensible percentage of your assets, just hang tight. It's perfectly natural to be worried in times like this.

Here's what I told subscribers who sent me emails: A person has to hold the line in this correction phase to build the necessary confidence and fortitude for the even more turbulent times ahead. Corrections are natural in all bull markets. The only other option is being locked continually in the failure cycle of  Buy, Panic, Sell.   In times like this, the mind and action must be led by reason rather than fear.

My gold model remains in the market. Gold is in a long secular up trend. It will be punctuated by severe volatility along the way. I have no idea how high gold will go or how long the trend will last but feel it will have a long run. A lot of that depends on the incompetence of our elected officials. Here's a video with Paul Van Eden on the fair market value of gold and mining stocks. I like this guy because he's a data wonk and publicly states his positions.

So, what's going on with the dollar and gold? Here's my analysis. The US and Europe both have huge amounts of toxic debt from subprime and bad mortgages. Their banking systems are tightly intertwined. Europe is being hurt by a high Euro. Canada and Australia and Britain all have weakening economies. I believe the central banks coordinated a massive currency intervention to set new price levels for the dollar and other currencies. They're creating a sort of peg system - at least for a while. They need currency stability to rescue their endangered banks without any one currency becoming too highly valued.

I said last month that gold was easy to manipulate and, sure enough, that's exactly what happened within days of my eletter. A couple of big banks forced down the price of gold with short selling. Were they acting for their own accounts or for the Treasury? I don't know.

"As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. "Between July 14 and August 15, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38 percent.

"For gold, three U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and three U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an 11-fold increase and coinciding with a gold price decline of more than $150 per ounce. "As was the case with silver, this is the largest short position ever by U.S. banks in the data listed on the CFTC's [Internet] site. This was put on as one massive position just before the market collapsed in price."
Source: SilverSeek.com (Ted Butler)

Personally, I think it's great. They're giving my subscribers a chance to buy gold. Demand from the public is huge for gold coins.

I think it's sensible to have 20% of your investments in bullion and held in your personal possession. A person on a fixed pension should have at least the yearly pension payout amount in gold. This will prevent the loss of purchasing power in the event of very high inflation (I don't expect hyperinflation although it's possible). Dollar hedging is a form of insurance.

America's economic problems could go on for generations. There is no easy way out. Read this article on Jim Rogers discussing gold and commodities. Don't believe the crap you hear on cable about how oil is plentiful again and how gold is past its peak. It makes no sense. As I explained last month, we wouldn't have pipeline wars in Georgia and the Iraq war if oil was still easy to obtain. The cost to obtain oil is going up and supply is in decline due to depletion. Oil prices are going up!! The same is true for gold. Mining costs are going up and good mines are hard to find. Meanwhile, currencies are plentiful and the cost to produce paper notes has never been cheaper. Pushing down gold will only work for a while but at some point a critical mass of people will see through the sham. That's already happening.

U.S. Mint Runs Out of 1-ounce Gold Coins as Demand Jumps
The U.S. Mint says it has run out of 1-ounce American Eagle gold coins because of rocketing demand. That may have helped fuel a sharp rebound in gold futures prices Thursday, although the metal also got plenty of help from rising U.S.-Russia tensions, a falling dollar and renewed buying of commodities across the board.

The Mint told coin dealers last week that its inventories of 1-ounce Eagles had been temporarily depleted because of 'unprecedented demand.'  The Mint sells only to a small number of dealers, which then distribute the coins to other sellers, such as coin shops. The prices retail investors pay change daily and are based on the market price of gold plus a small premium.

The government has sold 60,000 1-ounce gold coins this month, up from 47,500 in all of July and just 13,000 in June. Sales of U.S. silver Eagle coins, meanwhile, have been hot all year, leading to rationing of those coins by the Mint. Coin dealers confirm that they've been swamped with orders over the last month as the price of gold dived from $977.70 an ounce on July 15 to $786 last Friday, the lowest since December."
Source: Los Angeles Times 22 August 2008

I've read stories saying that the bullion coin shortage results from dealers not wanting to sell coins because the price is lower than their inventory cost. That story is probably not true. I worked as a bullion dealer and always sold into the market at the prevailing price and never speculated on my inventory. I'm sure that these dealer businessmen view it the same way as I always did. The coin shortage is due to high demand and the Treasury limiting coin production. South Africa has run out of Krugerands so the demand is worldwide. The dealers can't sell if there's no inventory to buy.

I've also read stories saying the dollar is coming back and gold is on the run. To believe that you'd have to also believe that the US government will somehow pay down its mega-trillion dollar public debt rather than push it up even higher. You'd have to believe that the government will allow a massive deflation with falling prices that will increase the value of the dollar and they'll somehow be able to pay the creditors while not expanding money printing. You'd have to believe that a new wave of economic growth is directly ahead and oil is in abundant supply. You'd have to believe that the wars in Iraq, Afghanistan, Darfur, and the Caspian Sea area have nothing to do with tight energy supplies. In other words, you'd have accept the idea that there are no upward pressures on oil and enough growth ahead to grow away the US debts. These assumptions don't line up with the facts.

There are two facts you must know.

1) Every debtor nation in history, with the ability to do so, defaults on its debts or debases it's currency. And, never before in history has a nation had a level of debt and unfunded liabilities like the US.

2) Oil is not going down in price and higher energy costs are inflationary.

The course of current events, history and human nature are on the side of our dollar hedges. The recent push down in gold to $800 may set a new floor for the metal. Alan Greenspan in Age of Turbulence said inflation would run 5% or more every year for the next 20 years. At a minimum I expect gold to rise by 5% yearly and that is the absolute best case scenario for the dollar. I expect volatility but, year over year, gold and oil will trend higher.

Life After Debt
At some point the gold bull run will be over and financial assets will outperform. I am not a fanatic on the yellow metal or a doomsayer who thinks we're headed back to the stone age. I do believe the world economic system is at the start of a long transition and it will evolve into something with much less dollar dominance. This trend could be very positive for world economic balance and very good for America. This nation has tremendous positives: the rule of law, a first rate education system, a tradition of empowerment and achievement, lots of land and fresh water, and an innate sense of fair play. We have to move past the debt culture of the last thirty years and the slippage into fascism over the last eight. We can do it and will emerge a better nation as a whole but with a lot of people left cold and broke as a result of the necessary changes ahead.

The ongoing concentration of power in the hands of the president, the concentration of wealth in 1% of the population, the concentration of media control by corporations - these are indications of a breakdown in democracy. Inducing fear and paranoia is very effective at turning weak minded people into sheeple ready and willing to be led by demagogues. Straw-man targets like racial and religious minorities and more recently "liberals" and other vague bogeymen are classic demagoguery. Many folks can't see how they're being used by fear mongers right now and how the nation has drifted into dangerous waters. I am quite amazed that some of the most conservative and America-loving people applaud these trends as good because these are not traditional conservative values but quite the opposite.

Real conservatism is about a small federal government, financial solvency and a reluctance to engage in foreign wars. Change can be threatening to fearful people. Well, if change means moving away from debt, war, financial irresponsibility and the reckless abuse of power, then I say "bring it on". If America continues on the wrong path then forget about losing money on your portfolio - we are doomed as a nation.

Stay Alert
People like George Soros, Alan Greenspan, and reputable economists are warning that the dollar will lose it's reserve currency status and hence the ability to buy commodities using its own currency. We have hundreds of military bases around the world and what happens when we can't pay for their upkeep by just printing money? US economic and military influence is destined to contract not expand. The NeoCon wars are efforts to take by force what we can no longer gain by diplomacy and finesse. This is the end game of a failed finance economy. Get prepared for big changes. I'm not saying to sell your house and IRA and hide in a bunker. I'm just saying to recognize the facts and take sensible precautions to maintain purchasing power until better opportunities become available. Open your eyes and act with a clear mind.

Trust your senses and what you see actually happening and not what they tell you on CNBC or Fox Business. These news programs are hosted by dolts and many of the "news" stories are planted rubbish. The major networks do little investigation on the planted stories given them - that's why they all carry the exact same news. The major tv and radio networks are all owned by the same five corporations. They don't care about real facts; they care about entertainment ratings and revenues. People need to seek out foreign news and alternative news aggregation sites. I regularly review a wide variety of sources from around the world. Honest information is available but it's iffy on the networks.

Here are some excellent sources of information.

Financial Sense News : Jim Pupulva provides up to 5 hours weekly of audio programming with experts on finance, energy and geopolitics. Load the programs onto your mp3 player and go for a long walk or listen on the drive into work. Pupulva is a San Diego financial advisor but never pushes his firm's services in his programs. The quality of these shows is A++ with the finest experts presenting their opinions. This is one of the best money sites on the web or anywhere in the world.

The Jeff Rense Program: This site provides an eclectic mix of the offbeat and the profound with news issues on politics and money along with UFOs, anti-zionist rants, and conspiracy theories. You have to sort through some of the more bizzare topics but there's information here you'll find nowhere else. The graphics on the web site are often hilarious.

Euro Pacific Capital : Peter Schiff wrote the book Crash Proof which I recommend. Schiff has been correct on the direction of the economy, housing and the mismangement of America for years. His weekly one hour call-in audio program can be downloaded or listen to it live. I'm uneasy with Peter's investment theme of buying foreign dividend stocks at this time - I think it's a bit early but he may well be right. Schiff is one America's best economic thinkers and an outspoken and honest man. He pushes his firm's services heavily but he calls a spade a spade and is objective.

Lew Rockwell : If you like Ron Paul, libertarians, Austrian School economics and in your face opinions from great writers, then this is your place. He calls his site a source of "anti-war, anti-state and pro-market" news. It cuts through the lies of the politicians.

Drudge Report : Matt Drudge is the most famous news aggregator on the web. He's very pro Republican but presents a balanced mix of news and gives time to other opinions.

Safe Haven : This is a hard money site with a harvest of news from around the world and geared to capital preservation.

Asia Times : More of a traditional newspaper and news site but with a broad world news focus. Excellent analysis by market experts but tinged with its own bias and not ashamed of it.

I'm a big, big believer in common sense and simple analysis - an Occams Razor sort of guy. Nations take the most expedient path out of trouble that they can get away with. It's easier to stiff your foreign creditors than your citizens because the creditors don't vote. These actions have severe repercussions. America has to deal with its problems and readjust its economy and institutions. Nothing substantive will happen until after the election. The next president will try to resolve the problems quickly rather than let them linger for years. This will be very hard to accomplish. We'll have a clearer picture by year end.

George Bush was not to blame for the 2001 recession and stock market decline. That was already baked in the cake by the Clinton crew. The next president will have a similar problem but on a much bigger scale. We're presently in a window of calm purposely manufactured for the election season. I suspect 2009 will not be a good year for the financial markets. The risk of warfare is also growing.

Many investors are wondering if the future holds dollar deflation or inflation. Deflation is only possible under a gold or silver financial system. Paper and base metal currencies inflate because printing money is easy and that's been the case throughout history. Why would it be any different in the future?

I believe the best approach is one of balance using asset allocation but avoiding the markets when the odds are stacked against certain asset classes. At present I see little potential gain in stocks and believe bonds are a time bomb. Rising energy prices will constrain economic growth and cause inflation. I believe strongly that now is the right time to take necessary action to protect your future.

Who's Been Bad
Finally, here's a useful web site that let's you check if someone has ever been convicted of a crime anywhere in the US. CriminalSearches.com is a free service!! Check on your daughter's boyfriend, a babysitter, prospective business partners or the neighbors. Crimes are listed by type of offense and provide enough detailed information to keep you entertained for hours.

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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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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