Tuesday, February 19, 2008

Economy thoughts

The entire world, it seems, is being subjected to inflation. But various areas of the world are gaining strength and others are losing strength. Classically and historically, gold gravitates toward strength. And we see that gold is moving toward Asia. While the US accumulates debt and unfunded liabilities, Asia and particularly China, accumulate gold. While Americans are spenders and consumers, Asians are accumulators and savers.

Interestingly, the picture isn't completely logical and it isn't all black and white. Americans are free and America possesses a powerful military. Wealthy and wary citizens from nations that are not so free covet a home in the US "just in case." I see it here in La Jolla. Wealthy foreigners are buying homes in La Jolla because La Jolla is "safe" and it is "free" and it's located on the ocean and it has a great climate and top medical facilities and it's, well, it's a beautiful place to live. I walk down our main street, and I hear every language under the sun. And a LOT of Asians.

So money is coming to America from overseas. And as the dollar declines against other currencies, the US has become "Bargain City" to the world. Everything in the US looks "cheap and on-sale" to people who own non-dollar currencies.

Question -- I see what you're saying, but if gold is rising and inflation is increasing, why doesn't the Fed just raise rates as Volker did and choke off inflation?"

Answer -- Good question, and the answer is that the Fed has two objectives at this time. The first is to save the big Wall Street banks. The banks MUST BE SAVED at all costs (they're the backbone of the financial system), and that means a steep yield curve and low short interest rates.

The second Fed objective is to stave off a recession. A recession can bring on deflation -- and Bernanke doesn't even want to hear the word, deflation. Bernanke is absolutely dedicated to halting any symptoms of deflation. The way to avoid deflation is -- print money (which is inflationary) and keep rates low. Remember, Bernanke is a student of the Great Depression and he's an expert on the long Japanese recession of 1989 to 2007. And Bernanke wants no part of either of these depressing phenomena.

Question --By implication are you saying that "there ain't goin' to be no stinkin' recession"?

Answer -- Yes, that's my guess. We're obviously experiencing a slow-down in many areas of the economy, but other areas (agricultural, mining) are booming. Let me put it this way -- I don't believe we're going to be dealing with an old-fashioned across-the-board recession. We're going to be dealing with an uneven economy, some areas in bad shape, some in fair shape, and other in excellent shape.

Question -- OK, so what do we do?

Answer -- Here's one answer. A third of your "wealth" should be in gold. Another third should be in a paid-up home. And that last third should be in cash in the form of T-bills. And then we wait. You and I wait. What are we waiting for? I don't know, maybe the same thing that Hillary and Obama and McCain are yammering about -- CHANGE. And believe me, change is coming.

From: Dowtheory


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