In 1998, Long-Term Capital Management (LTCM) lost $4.6 billion in less than four months. Although the hedge fund was led by Nobel Prize winners, noted professors, a Federal Reserve Vice Chairman and well-known Wall Street arbitrage experts, it made two basic, but costly, investment mistakes.

Investing always carries an element of risk. But even the smartest investors can greatly reduce their exposure to unnecessary losses by avoiding common, but often overlooked errors.

Over the Labor Day weekend, I was invited to speak at the annual Lone Star Mensa Conference. Mensa is the largest and oldest high-IQ society in the world. My talk was entitled “The Top 12 Mistakes Made by Brilliant Investors.”

Of the 12 mistakes I covered in my talk, three are especially prevalent — and potentially costly — in today's market. They are not difficult to understand nor are they hard to fix. But it is crucial that investors step up to the plate and tackle these issues right now.

1. Raise cash when you need it the least
One mistake LTCM made was probably the most common mistake smart investors make. It ran out of cash at the wrong time. The hedge fund got caught in one bad investment. To get themselves right again, it had to sell off sound investments. In the end, it turned one loss into many.

As investors, we've been made to believe that to maximize our returns we need to have every penny of our portfolio actively working for us. If we're not fully invested, we equate that with being inefficient or overly cautious. LTCM fell into that same trap. In its heyday, it had the chance to take on more cash and more investors and turned it down. When the “you-know-what” hit the fan, the hedge fund couldn't find the cash.

You can find an investment professional who will sell you on anything — stocks, bonds, real estate, gold, structured products and annuities. But you won't find many who talk about the advantages of cash. It's probably because they don't make a commission on cash.

Gold performed well during the last market crash. Guess what? So did cash. I made money on my cash. I increased my cash position near the top of the market in 2007. Was I a genius? No. I've just been riding in this rodeo a long time.

The better things get, the more you want to be thinking about cash. Cash allowed me to sleep through the night. It also allowed me to pick up bargains at the bottom of the market, without having to sell off my other positions at a loss.

2. Stop protecting your downside risk by limiting your upside potential
Mark Twain once said, “The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won't sit upon a cold stove lid, either.”

Almost everyone who was in the market in the last five years got burned. The silver lining is that if we didn't know what our tolerance for risk was — we do now.

But this revelation jarred some investors. They withdrew from the market. In Godfather parlance, they “took to the mattresses.” And unfortunately, they missed out on much of the recovery.

If you got burned, it doesn't mean you have to stay away from the stove. You just have to develop ways to measure your tolerance for heat and the temperature of the stove. I didn't make big changes in my investments. I did, however, change in how I manage those investments.

Just because I was more sensitive to risk than I thought I was, I didn't plow all my money into bonds or CDs — although I do own both. I did, however, start using more tools to protect my gains and limit my losses on riskier assets.

For instance, I bought shares of Olin Corporation (NYSE: OLN) for $12.92 a share for my Stock of the Month portfolio. At the time, about two-thirds of Olin's revenue came from chemicals, making it a very volatile holding. But the remaining third of Olin's revenue was coming from ammunition sales. At the time, ammunition was in tight supply — most stores resorted to rationing just to keep a small inventory on the shelves.

I was down -11.4% on OLN in July of 2009 and set a stop loss to protect against a potential -17% loss. The stock rebounded and I reset my stop loss to protect a +20% gain. As the stock continued to climb, I continued to bump up my stop.

I was finally stopped-out of my Olin position at $19.62 per share in May 2010. Including dividends, I had a total return of +58.0%.

3. Don't invest in what you know best
Peter Lynch became a superstar managing Fidelity Investment's Magellan Fund. From 1977 to 1990, the fund returned an average of +29.2% annually under his watch. One of his famous investment principles was to “invest in what you know.” But this can lead to another common, but costly, error.

Research has concluded that investing in what you know best isn't such a great idea. A recent study looked at 10 years of stock transaction data, comparing it with investors' jobs. The expectation was that individuals' investments in the industries they worked in should outperform the market. After all, they had better access to information and could better understand the significance of that information. But that's not what the data showed.

Instead, all of the study's estimates showed that in cases where investors put money into stocks within their own industries, they underperformed the market.

It's hard to be objective about our own area of expertise. A software developer may get really pumped up about a new application he or she is working on. But maybe a competitor has a better product waiting in the wings. Or even if the new application is successful, the rest of the company's product line might be under pressure.

Sometimes even knowing your company is trumping the competition isn't enough. Industries are cyclical and even the top dog can languish on a down cycle. For instance, Ford (NYSE: F) has had the upper hand on most of its rivals, but all automobile stocks were hit hard going into the recession.

The last thing you want to do is invest solely in what you know or where you work. Many Enron employees had all their investment eggs in the energy company's basket when the company went bankrupt in 2001.

A side note about Peter Lynch and me: I worked summers at Brae Burn Country Club in my home town to earn money for college. Although I got my high school letter in golf, I decided not to work as a caddy. Caddying was hard work and I wasn't exactly big and strong. Instead I worked on the kitchen staff.

Peter Lynch, however, was a caddy at Brae Burn. He ended up working for Fidelity after caddying for Fidelity's president. I ended up putting on four pounds. This was a case where I probably should have invested — at least my time — in what I knew best.

Action to Take –> Remember: Cash is not the enemy. It is your friend. And the time to think about cash is when things are going well — not after the bottom falls out. And even though you might be more sensitive to risk than you once thought, you don't have to sacrifice upside potential. Learn to manage the risk of riskier assets with simple tools offered by almost every brokerage service.

Uncategorized

At the end of this year, a series of tax cuts implemented by George W. Bush and his administration between 2001 and 2003 are set to expire. In what now seems like an entirely different era, the cuts were approved at a time when the U.S. government budget was in a surplus and the motivation was to return some of this excess to taxpayers and jump start a tepid economy.

Also at that time, a lack of a clear majority to approve the cuts was a concern. As a result, a special provision was used to ensure the passage of the cuts. Unfortunately, a condition of using this unique provision (and the same one that was used to push dramatic healthcare reforms through earlier this year) was that the federal budget could only be altered for the next 10 years.

Well, the decade since the cuts were put in place flew by and the United States finds itself in a deficit scenario, a Democratic majority, and an economy that is recovering from one of the worst financial crises in history and could slip back into recession at any time.

Luckily for investors, pro-business sentiment has improved and is swaying Congress to consider extending many of these tax cuts. The current belief is that most of the Bush cuts will be extended, except for high-income individuals and families. High income means the 2% of households with incomes above $250,000 per year or individuals making more than $200,000 annually. However, nothing is set in stone and until an agreement is reached, the safest conclusion is to hope for the best but plan for the worst.

Here is a recap of the most important changes that will occur if Washington reaches gridlock and a full expiration of the tax cuts occurs. Starting at the lower end of income levels, the 10% tax bracket will revert back to 15%. The 25%, 28%, and 33% rates will all increase 3%, respectively, while the 35% rate would revert back to 39.6%.

From an investment standpoint, long-term capital gains taxes will go back to 20% from 15% for those in the middle and upper tax brackets. The taxes on dividends will go up dramatically, reverting back to regular income tax rates from the current 15%.

Estate taxes will return with a vengeance and will reach up to 55%. More generally, standard deductions will decrease for married couples, the child tax credit will fall by half to $500, and other exemptions for individuals with high incomes will no longer be allowed.

Statistics abound over what these changes will mean to taxpayers. If everything expires, middle class taxpayers are predicted to see an average rise in taxes of $1,500 each. The average tax rate for all income classes would raise to about 23.5% if everything expires, which would be up from 20.8% currently. If the President gets his way, however, this blended rate will rise only slightly, to about 21.4%.

Action to Take —> With that, there are a number of ways you can position your portfolio. For starters, consider shifting income-producing investments into retirement accounts and other buckets that may provide a shelter from taxes. For the biggest bang for your buck, consider high dividend-paying stocks, high-yield bonds, master limited partnerships (MLPs) or bonds picked up on the cheap during the height of the credit crisis.

Other strategies to consider consist of taking capital gains before the end of 2010 or even selling higher-yielding investments for those with total return potential focusing on price appreciation, so that capital gains can come from unrealized gains.

There are plenty of options for investors looking for appealing opportunities. For more individual strategies, here is an extremely useful report that can help you generate ideas. Specifically, it offers approaches that can allow you to avoid getting hit by any coming tax hikes and collecting above-average income at the same time.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

OPTIONS, Uncategorized

Investors have got the fever. After seeing 3PAR (NYSE: PAR) jump from $10 to $30 a share and ArcSight (Nasdaq: ARST) zoom ahead from $25 to $43 in the last month, they are pushing up shares of any name they think might be the recipient of the next sweet buyout offer. And now investors have set their sights on Akamai Technologies (Nasdaq: AKAM), pushing its shares up from below $40 in late July to a recent $51. Trouble is, shares were likely overvalued before that surge began, and are now very overvalued when measured against the fundamentals. If a suitor doesn't emerge — and it's not clear that one will — then shares could give back all of the recent gains.

A CDN pioneer
Akamai helps major web sites provide very fast response times to users located anywhere in the world. If you're downloading a popular video in Madrid, there's a decent chance that a local Akamai server is serving up that file, eliminating the need to transmit that content over long distances while the user sits and waits. And in recent years, the company has developed other software tools to help customers stay on the cutting edge with its Content Delivery Network (CDN).

As consumers looked to consume more media and entertainment online, demand for Akamai's services exploded, helping sales rise at an average of more than +30% per year from 2004 to 2008. But success — and an increasingly large industry opportunity — has a way of attracting new competition. And that began happening in recent years, which helps explain why growth cooled to less than +10% in 2009. Akamai's shares, which hit $50 in early 2007, fell below $15 in late 2008 as investors realized that the CDN industry had become crowded and very cost-competitive.

A 2010 and 2011 rebound
Akamai is once again on the upswing as renewed industry growth, along with a push into ancillary services, is offsetting a steady decrease in CDN pricing. (These companies get paid monthly fees for providing CDN services, and contracts are usually renewed at ever-lower prices). The favorable industry trends are likely to push Akamai's sales up nearly +20% this year and another +15% in 2011.

But more headwinds loom. Companies such as Amazon.com (Nasdaq: AMZN) are vowing to make a bigger push into the CDN business, and major telecom operators such as AT&T (NYSE: T) also realize that their networks are ideally suited to carry higher volumes of CDN traffic. As a rule of thumb in this industry, increased competition invariably leads to faster CDN pricing declines.

None of this suggests that Akamai is in real trouble. Demand for CDN services will keep growing, the company has a very strong balance sheet, and many of its customers are likely locked in for the long-haul. But this is not a great long-term story from a revenue growth perspective, thanks to those ever-present price decreases.

Yet shares have zoomed ahead to levels that give the impression that Akamai is a young fast-growing upstart. Shares trade for more than 30 times next year's projected profits and close to 20 times EBITDA, on an enterprise value basis. The shares are currently trading just below $51 — analysts at Maxim Group think fair value is closer to $35. Citigroup's analysts are slightly more bullish, assuming a $42 target price, noting that shares deserve to trade no higher than at 25 times next year's profits.

Action to Take –> Shares of Akamai took a big hit in 2008 as investors realized that this is becoming an increasingly crowded business with real price pressures, so potential buyers are unlikely to pay much of a premium after the recent run-up. It's not even clear that any potential acquirer could justify buying the company now and make the deal work from an EPS growth perspective. For that matter, who knows if Akamai is in play at all?

If you've been holding Akamai in your portfolio, this looks like a great time to exit that position. If no buyer emerges for the company in coming weeks and months, then shares are likely to move back toward those analyst price targets. Moreover, shares are so richly valued that they have created an excellent opportunity for shorts, which may see this stock move back below $40 as a deal fails to materialize. The main risk to the short thesis is an actual buyout, which again, appears unlikely.

– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

This article originally appeared on StreetAuthority
Author: David Sterman
A Great Time to Short This Overvalued Stock

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A Great Time to Short This Overvalued Stock

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Everywhere I turn, I see headlines about the “bond bubble.”

“The Great American Bond Bubble” — August 18, 2010, The Wall Street Journal

“The Unstoppable Bond Bubble” — August 16, 2010, Fortune

Clearly, the demand for bonds has been rising — pushing prices up and pushing yields down. The Investment Company Institute reported that from January 2008 through June 2010, bond funds saw an inflow of $559 billion. Equity funds, in contrast, experienced withdrawals of $242 billion.

But are bonds overpriced? Do they represent more risk? Are they bubbling?

The chart below shows the yield spread between the 10-year Treasury note and corporate bonds rated “Baa.” According to Moody's, “Baa”-rated bonds are investment-grade, but still carry moderate credit risk.

As you can see, the difference between corporate bond yields and Treasury note yields grew during the financial crisis. In December 2008, corporate bonds were yielding 8.4%. At the same time, investors clamored for the safety of U.S. Treasuries. The yield on the 10-year Treasury fell to 2.4% — 600 basis points lower.

As the financial credit crisis improved, the yield spread narrowed. But it still sits above pre-crisis levels. The “Baa” corporate bond yield in August was 5.7%, just about where it was five years ago. The yield on the 10-year Treasury, however, is 150 percentage points lower than it was five years ago.

If I had to pick a group of bonds that may be a little pricey, it would be U.S. government debt. I understand why investors may be reluctant to buy equities. It takes a strong stomach and an acute eye to withstand the rocking and rolling of the U.S. equity market these days.

But I'm a little stymied at why investors would settle for the 2.7% yield on a 10-Year Treasury note — or the 0.12% yield on the 3-month Treasury bill.

Corporations are Stronger
The U.S. economic recovery may be slowing, but companies have strong balance sheets. The non-financial companies in the S&P 500 are sitting on $837 billion in cash at last count — which is much higher than normal — and +26% more than they had last year.

The default rate on even the most speculative corporate bonds has dropped this year. In June, the ratings agency Fitch reported that the default rate on high-yield bonds was running at a full-year rate of roughly 1%. In 2009, the default rate for speculative bonds was 13.7%.

Many Non-U.S. Economies Are Stronger
While U.S. economic growth could slow, other economies in the world continue to show strength. Vietnam's economy grew +6.4% in the second quarter of 2010 and could grow by +7.0% this year. The International Monetary Fund expects India's economy to grow +9.4% in 2010. And Chile just reported its best quarter of economic growth in five years.

It's true, other countries are leaving the U.S. economy in the dust, and paying our significantly higher yields on their government debt. [Read: How to Lock in 8% Government Yields]

Action to Take –> While U.S. debt is considered a classic safe haven, the price of safety may have become just a little too high. There is not much upside potential left for U.S. Treasuries. And there certainly is little yield compensation — especially when compared to the 8.0% yield of the PIMCO Corporate Income Fund (NYSE: PCN) and other bond funds.

Bonds are in demand; there is no denying it. But there are some good reasons to like corporate and foreign debt.

Inflation is low — increasing just +1.2% in the last 12 months. The U.S. equity market is being stingy with returns — the S&P 500 is up just +2% year-to-date. Many corporations and emerging markets have healthy balance sheets, easily carrying their debt burdens. And baby boomers are growing older, ensuring a continued demand for fixed income securities for the foreseeable future.

Uncategorized

A 10% yield is high in any market. In today's market, it's stratospheric. The S&P 500 is only yielding 2% and a three-year CD currently pays about 1.77% on average.

Is a 10% yield too good to be true?

Often it is. A yield that high usually just means that the stock price has plummeted because of deteriorating earnings and fundamentals. But, could there be 10% yields out there with strong earnings and fundamentals behind them? If so, they are a tremendous find in today's flat markets. After all, a 10% yield not only provides an income but also gives investors a +10% return per year, even if the stock price does nothing. That beats the S&P 500's return during the past 10 years by about 11% per year.

There are special risks and opportunities associated with these high dividend payers. But, here are three high yielders worth a second look.

PennantPark Investment Corp (Nasdaq: PNNT) is an interesting high yield play from the world of business development companies (BDCs). This company makes money by finding promising medium-sized private companies in need of capital and loaning them money at high rates of interest.

BDCs are strong dividend payers because they do not pay income taxes at the corporate level. PennantPark has paid steadily rising quarterly dividends since its IPO in 2007 and the last payment increased in April to $0.26 per share. At the current rate, the stock yields a not-too-shabby 10%.
Can the company keep it up?

Lately, PennantPark has been raising money to grow earnings in the capital markets.

Real Estate, Uncategorized

At present, perhaps the biggest element of tension between the US and China arises from Beijing’s sluggishness in allowing the yuan to strengthen appreciably. The debate is at times heated in both the East and the West, and now, a China-based think tank has gone public with its analysis of a potential trade war which, unsurprisingly, suggests “the US is in decline and that China’s rise as an exporter of goods and capital give it the upper hand.”

According to the Telegraph:

“However, the mood is hardening on both sides of the Pacific. The dispute risks escalating if China’s trade surplus with the US climbs further and more US jobs are lost. US Treasury Secretary Tim Geithner, who has taken a softly-softly line in the past, said on Friday that China had done “very little” to correct the undervaluation of the yuan since ending the dollar peg in June.

“Mr Ding [Yifan, a policy guru at the Development Research Centre,] reflects thinking among some in the Poltiburo, who seem convinced that the US is in decline and that China’s rise as an exporter of goods and capital give it the upper hand.

“‘They are utterly wrong,’ said Gabriel Stein from Lombard Street Research. ‘The lesson of the 1930s is that surplus countries with structurally weak domestic demand come off worst in a trade war.’ He described the implicit threat to sell Treasuries as ‘empty bluster’ because Beijing’s purchase of these bonds is a side-effect of its yuan policy. ‘Bring it on: it will weaken the dollar, which is what the US wants. The interest rate effect can be countered by the Fed.’”

This finding should least surprise US trade strategists, given that the Pentagon has already run economic war games between the US and China showing that a trade war would likely “spell disaster” for the States. Of course, the economies of both countries would be damaged extensively, so it hardly seems prudent to suggest China “bring it on.” It’s probably too much to hope for, to have such a levelheadedness prevail… what’s one more war anyway?

You can read more coverage in a Telegraph article on how a Chinese think tank is warning the US it will lose in a trade war.

Best,

Rocky Vega,
The Daily Reckoning

China-Based Think Tank: China Would Crush the US in a Trade War originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
China-Based Think Tank: China Would Crush the US in a Trade War

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Coal is the second largest overall source of energy and has witnessed demand grow at rates higher than oil and natural gas over the past few years and is expected to continue do so paving the path to opportunity for the Market Vectors Coal ETF (KOL) and the PowerShares Global Coal Portfolio (PKOL).

One of the reasons coal is attractive is that it is cheap in relative terms.  When compared to crude oil, the average price of coal over the past fifteen years is roughly one-third the price and is less than half the price of natural gas.   

Another reason coal is attractive is the wide distribution of coal reserves.   In fact, coal has a better worldwide geographical distribution than petroleum and is expected to continue to do so.  Coal is a complex natural resource that is primarily used to fuel power or cement plants, two commodities that are expected to see increases in demand as global populations increase and per-capita income in developing nations increase.

Increased demand for coal is already being seen in China, which accounts for nearly half of global coal demand and being used for power generation and metallurgical coal to produce steel.  Additionally, increases in demand are expected to be seen in India, which currently only accounts for 7.5% of global coal consumption, but is far less than China’s consumption on a per-capita basis. 

Lastly, although renewable energies continue to make headlines and have boasted rapid growth, renewable only account for a very small proportion of the world energy mix and coal continues to lead consumption growth in the energy sector for the sixth consecutive year.  As for the near future, coal is likely to remain the fossil fuel of choice for energy production due to its low costs and availability.

As mentioned earlier, some ways to play the coal markets include:

• Market Vectors Coal ETF (KOL), which includes Peabody Energy (BTU) and coal producer Alpha Natural Resources (ANR) in its top holdings
• PowerShares Global Coal Portfolio (PKOL), which gives global exposure to the coal markets and includes Peabody Energy, China Shenhua Energy Company Limited and Consol Energy (CNX). 

When investing in coal, it is equally important to keep in mind the inherent risks that are involved with investing in such a volatile commodity.  To help mitigate these risks, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be seen is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

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The Future Of Coal ETFs Remains Prosperous

HERE IS YOUR FOOTER

Commodities, ETF, Uncategorized

Cut the deficits? Not in Zombie Nation.

As we mentioned last week, zombies took over the nation in 2008, with the election of Barack Obama. He was the zombie candidate.

Now comes word, from The Washington Post, that there’s been a sharp rise in disability filings at the Social Security Administration. People who were perfectly capable of doing their work before the financial crisis hit in ’07 have been thrown onto the unemployment roles. Desperate for income, they find they have not just lost their jobs. They’ve been disabled.

That gives them a way to get money from the taxpayer even after their unemployment benefits have run out. They become not just temporary zombies, in other words, but permanent ones.

The trouble with zombies is that they’re expensive to maintain…and inherently dangerous. Which is to say, the welfare state works fine as long as there’s enough money to keep the zombies happy. But when you get too many zombies…and not enough money to feed them properly…you’re in danger. Well, the welfare state itself is in danger.

Imagine. More than 200 million zombies. If each one ate two eggs a day it would take 400 million chickens to keep the zombies supplied.

“But wait…hold on there, Bill…you’re not seriously saying that every unemployed person is a zombie. Many people lose jobs through no fault of their own. They live on savings…then go back to work. That is hardly the mark of a zombie.”

Yes, of course…Mr. Compassion and Sensibility…

Don’t get us wrong. We love zombies. Some of our best friends are zombies…and a lot of our relatives! Heck, we might be one too if they paid us better.

We’re not saying that everyone who loses his job becomes a zombie. But that’s what makes this Great Correction actually worse than the Great Depression of the ’30s. There were fewer zombie supports back then. So people HAD to work. And they did. They worked on farms. And then, when the war started, they worked in factories.

The point is, they couldn’t become zombies because – even with all Roosevelt’s efforts to create a zombie economy – there just wasn’t enough money to support them.

This is, of course, why there are so few zombies in the emerging markets too. Not that there aren’t a lot of people who would like to zombies…and they’ll get their turn!…but right now, the emerging markets are still too poor to be able to afford a large class of leeches.

In the ’30s in America, as in most of the emerging economies today, people had to work. They might have worked cheap. They might have done work they didn’t want to do. They might have had bad backs and weak knees…but they went to work anyway. They couldn’t afford to be disabled.

If you go to China or Vietnam or one of the industrious emerging markets…you won’t even see people sit down. They don’t have time.

Work…work…work…work for wages…work for relatives…work for food…work for fun…

…it’s what you do, when you have no choice.

Regards,

Bill Bonner
for The Daily Reckoning

Emerging Markets: Working Hard While Others Hardly Work originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Emerging Markets: Working Hard While Others Hardly Work

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Cut the deficits? Not in Zombie Nation.

As we mentioned last week, zombies took over the nation in 2008, with the election of Barack Obama. He was the zombie candidate.

Now comes word, from The Washington Post, that there’s been a sharp rise in disability filings at the Social Security Administration. People who were perfectly capable of doing their work before the financial crisis hit in ’07 have been thrown onto the unemployment roles. Desperate for income, they find they have not just lost their jobs. They’ve been disabled.

That gives them a way to get money from the taxpayer even after their unemployment benefits have run out. They become not just temporary zombies, in other words, but permanent ones.

The trouble with zombies is that they’re expensive to maintain…and inherently dangerous. Which is to say, the welfare state works fine as long as there’s enough money to keep the zombies happy. But when you get too many zombies…and not enough money to feed them properly…you’re in danger. Well, the welfare state itself is in danger.

Imagine. More than 200 million zombies. If each one ate two eggs a day it would take 400 million chickens to keep the zombies supplied.

“But wait…hold on there, Bill…you’re not seriously saying that every unemployed person is a zombie. Many people lose jobs through no fault of their own. They live on savings…then go back to work. That is hardly the mark of a zombie.”

Yes, of course…Mr. Compassion and Sensibility…

Don’t get us wrong. We love zombies. Some of our best friends are zombies…and a lot of our relatives! Heck, we might be one too if they paid us better.

We’re not saying that everyone who loses his job becomes a zombie. But that’s what makes this Great Correction actually worse than the Great Depression of the ’30s. There were fewer zombie supports back then. So people HAD to work. And they did. They worked on farms. And then, when the war started, they worked in factories.

The point is, they couldn’t become zombies because – even with all Roosevelt’s efforts to create a zombie economy – there just wasn’t enough money to support them.

This is, of course, why there are so few zombies in the emerging markets too. Not that there aren’t a lot of people who would like to zombies…and they’ll get their turn!…but right now, the emerging markets are still too poor to be able to afford a large class of leeches.

In the ’30s in America, as in most of the emerging economies today, people had to work. They might have worked cheap. They might have done work they didn’t want to do. They might have had bad backs and weak knees…but they went to work anyway. They couldn’t afford to be disabled.

If you go to China or Vietnam or one of the industrious emerging markets…you won’t even see people sit down. They don’t have time.

Work…work…work…work for wages…work for relatives…work for food…work for fun…

…it’s what you do, when you have no choice.

Regards,

Bill Bonner
for The Daily Reckoning

Emerging Markets: Working Hard While Others Hardly Work originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Emerging Markets: Working Hard While Others Hardly Work

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

I wearily wrote, “Dear Diary, I am even more convinced that we are freaking doomed because the Federal Reserve has created So Freaking Much Money (SFMM) when it allowed the creation of So Freaking Much Debt (SFMD) to finance So Freaking Much Consumption (SFMC), both public and private” whereupon I stopped, demoralized after realizing that there was nothing else to write that didn’t seem so, you know, anticlimactic.

So I just finished it off with, “P.S. Still looking for an easy road to perfect health without all that exercising and diet crap. No progress to report. Still hopeful.”

After I re-read my entry, I was saddened that my “deepest diary thoughts” seemed so depressing, shallow and brief, especially that unfortunate part about the lack of results in my search for the easy road to perfect health and a glorious He-Man body of rippling muscles, the heady pheromone of raw testosterone practically oozing from every pore.

That ain’t, of course, a-gonna happen. But my despondency, pouring out of my broken heart and into my diary, is caused not by the aching loss of my lifelong dreams of effortlessly achieving the idealized Mogambo, Muscular Love-God (MMLG) who proves to be irresistible to hot-looking women wherever he goes, and who can have any woman he wants just by asking, “Hey, baby! Want to take a ride to paradise on the Mogambo Hot Love Express (MHLE)?”

No, my sad despair is, instead, caused by the thought of the government raising taxes, any taxes, on anybody, for anything, at any time, and especially at this particular point in the economic cycle, which is a path I have arbitrarily called The Path To Doom (TPTD) only because all the other potential names contained some vulgar profanity about the morons we elect, the morons who elect them, and the morons at the Federal Reserve and the Supreme Court, whose corrupt rulings about what constitutes “money” (fiat money instead of gold and silver) are at the root of all – and I mean all – of our problems.

Just about the time I am so depressed that I am thinking of putting a bullet in my head just to have some peace and to stop worrying about how the Federal Reserve is destroying us by creating so, so, so much, much, much money that it makes consumer prices soar in a horrible, devastating inflation, I am cheered to suddenly remember that I am ALWAYS despondent and fearful when taxes are raised!

And usually with good reason, too, QED, so I have to ask myself, “Why I am so especially upset this time, except to look for a reason to be upset with the Idiots In Charge (IIC) just because that is my nature as an outraged, cynical, insulting, vengeful guy?”

I was further chastised for my seemingly ridiculous, unfounded paranoid fear after I read Casey’s Daily Dispatch newsletter, which referred to a report by The Heritage Foundation, which, using data from the Office of Budget and Management, found that federal tax revenues have been, using inflation-adjusted dollars, roughly flat since 1997! Thirteen years!

So, tax revenues have been, on average, flat, with, however, some oscillating up and down in a rather wide $500-billion channel. Nonetheless, tax revenues remained relatively constant, while spending has – horrors upon horrors! – increased a zillion-fold, with only some exaggeration!

Spending has been going up Year After Year (YAY)! More And More (MAM)! Taxes Upon Taxes (TUT)! Constantly More And More (CMAM) until I am exhausted from the bewildering barrage of gratuitous, stupid acronyms and absolutely horrified that annual federal spending, here in 2010, is a whopping $3.69 trillion, which is now estimated to total $1.54 trillion more than the $2.15 trillion in tax revenues, a deficit that lines up pretty well with the increase in the national debt, which is up about $1.6 trillion in the last 12 months! “Gaaahhh!” I scream. “We’re freaking doomed!”

I thought I was maximally outraged that the government is spending $3.69 trillion a year, when the entire Gross Domestic Product (GDP), which is the entire sum of all the goods and services produced by this country in an Entire Freaking Year (EFY), is a measly $14 trillion! “Gaaahhh! We’re freaking doomed!” I naturally figured!

But I was wrong! Boy, was I wrong! The statistic that surprised me the most, and outraged me the most, and terrified me the most, was the one that showed that state and local governments are now spending $47,000 per household (with the federal share being $30,000 per household and the state share $17,000), which is approximately equal to the average household gross income of everybody in the Whole Freaking Country (WFC) as it is! “Gaahhhh!” I scream again, only this time with more undertones of fear and panic.

Gagging on my own vomit and blood at the sheer horror of such a bizarre, cancerous, twisted, incestuous and disgusting economy, I call forth a Mighty Mogambo Effort (MME) to cry out in mortal pain and anguish, “And now taxes are going up? We’re freaking doomed!” but which came out sounding like “Ah ha taha go uh uh? E e un oon!” because of all the, you know, vomit and blood I was gagging up, which spewed over everything, which made the whole experience that much worse, as you can imagine.

And it gets worse, as Ty Andros, in his TraderView.com newsletter, writes that “Christina Romer, currently Chairman of the Council of Economic Advisers in the White House, and her husband David, when they were at Stanford, conducted exhaustive research which concludes that tax increases are highly contractionary. Their estimates imply that the tax increases will shrink economic output by more than three dollars for every dollar in new taxes.” Yikes!

“So,” I say to myself, “perhaps this is why economic activity goes down when taxes are raised!”

Mr. Andros, to whom this “the woeful results of raising taxes” stuff is rookie material learned a long time ago on Day One of Economics 101, and who now has even less respect for me than he ever had before, because it seems new to me, concludes that “The sun-setting of the Bush tax cuts and new healthcare taxes beginning in 2011 will generate a projected 300 billion dollars a year in new taxes. Using the Romer Multiplier implies a 900 billion dollar decline in economic activity next year”!!

The double exclamation points as punctuation were added by me as a clever way of indicating special emphasis, as, indeed, it is, as a $900 billion decline in GDP is a 6.4% drop in GDP!

Few outsiders know that double exclamation points are also a Secret Mogambo Code (SMC) that all Junior Mogambo Rangers (JMRs) instantly recognize, wherever they are found, as a signal to “Buy gold, silver and oil!”, which they do because it is the Right Thing To Do (RTTD) and it is the easiest thing you can do, too, so that we squeal with childish delight, “Whee! This investing stuff is easy!”

The Mogambo guru
for The Daily Reckoning

The Woeful Results of Raising Taxes originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Woeful Results of Raising Taxes

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

I wearily wrote, “Dear Diary, I am even more convinced that we are freaking doomed because the Federal Reserve has created So Freaking Much Money (SFMM) when it allowed the creation of So Freaking Much Debt (SFMD) to finance So Freaking Much Consumption (SFMC), both public and private” whereupon I stopped, demoralized after realizing that there was nothing else to write that didn’t seem so, you know, anticlimactic.

So I just finished it off with, “P.S. Still looking for an easy road to perfect health without all that exercising and diet crap. No progress to report. Still hopeful.”

After I re-read my entry, I was saddened that my “deepest diary thoughts” seemed so depressing, shallow and brief, especially that unfortunate part about the lack of results in my search for the easy road to perfect health and a glorious He-Man body of rippling muscles, the heady pheromone of raw testosterone practically oozing from every pore.

That ain’t, of course, a-gonna happen. But my despondency, pouring out of my broken heart and into my diary, is caused not by the aching loss of my lifelong dreams of effortlessly achieving the idealized Mogambo, Muscular Love-God (MMLG) who proves to be irresistible to hot-looking women wherever he goes, and who can have any woman he wants just by asking, “Hey, baby! Want to take a ride to paradise on the Mogambo Hot Love Express (MHLE)?”

No, my sad despair is, instead, caused by the thought of the government raising taxes, any taxes, on anybody, for anything, at any time, and especially at this particular point in the economic cycle, which is a path I have arbitrarily called The Path To Doom (TPTD) only because all the other potential names contained some vulgar profanity about the morons we elect, the morons who elect them, and the morons at the Federal Reserve and the Supreme Court, whose corrupt rulings about what constitutes “money” (fiat money instead of gold and silver) are at the root of all – and I mean all – of our problems.

Just about the time I am so depressed that I am thinking of putting a bullet in my head just to have some peace and to stop worrying about how the Federal Reserve is destroying us by creating so, so, so much, much, much money that it makes consumer prices soar in a horrible, devastating inflation, I am cheered to suddenly remember that I am ALWAYS despondent and fearful when taxes are raised!

And usually with good reason, too, QED, so I have to ask myself, “Why I am so especially upset this time, except to look for a reason to be upset with the Idiots In Charge (IIC) just because that is my nature as an outraged, cynical, insulting, vengeful guy?”

I was further chastised for my seemingly ridiculous, unfounded paranoid fear after I read Casey’s Daily Dispatch newsletter, which referred to a report by The Heritage Foundation, which, using data from the Office of Budget and Management, found that federal tax revenues have been, using inflation-adjusted dollars, roughly flat since 1997! Thirteen years!

So, tax revenues have been, on average, flat, with, however, some oscillating up and down in a rather wide $500-billion channel. Nonetheless, tax revenues remained relatively constant, while spending has – horrors upon horrors! – increased a zillion-fold, with only some exaggeration!

Spending has been going up Year After Year (YAY)! More And More (MAM)! Taxes Upon Taxes (TUT)! Constantly More And More (CMAM) until I am exhausted from the bewildering barrage of gratuitous, stupid acronyms and absolutely horrified that annual federal spending, here in 2010, is a whopping $3.69 trillion, which is now estimated to total $1.54 trillion more than the $2.15 trillion in tax revenues, a deficit that lines up pretty well with the increase in the national debt, which is up about $1.6 trillion in the last 12 months! “Gaaahhh!” I scream. “We’re freaking doomed!”

I thought I was maximally outraged that the government is spending $3.69 trillion a year, when the entire Gross Domestic Product (GDP), which is the entire sum of all the goods and services produced by this country in an Entire Freaking Year (EFY), is a measly $14 trillion! “Gaaahhh! We’re freaking doomed!” I naturally figured!

But I was wrong! Boy, was I wrong! The statistic that surprised me the most, and outraged me the most, and terrified me the most, was the one that showed that state and local governments are now spending $47,000 per household (with the federal share being $30,000 per household and the state share $17,000), which is approximately equal to the average household gross income of everybody in the Whole Freaking Country (WFC) as it is! “Gaahhhh!” I scream again, only this time with more undertones of fear and panic.

Gagging on my own vomit and blood at the sheer horror of such a bizarre, cancerous, twisted, incestuous and disgusting economy, I call forth a Mighty Mogambo Effort (MME) to cry out in mortal pain and anguish, “And now taxes are going up? We’re freaking doomed!” but which came out sounding like “Ah ha taha go uh uh? E e un oon!” because of all the, you know, vomit and blood I was gagging up, which spewed over everything, which made the whole experience that much worse, as you can imagine.

And it gets worse, as Ty Andros, in his TraderView.com newsletter, writes that “Christina Romer, currently Chairman of the Council of Economic Advisers in the White House, and her husband David, when they were at Stanford, conducted exhaustive research which concludes that tax increases are highly contractionary. Their estimates imply that the tax increases will shrink economic output by more than three dollars for every dollar in new taxes.” Yikes!

“So,” I say to myself, “perhaps this is why economic activity goes down when taxes are raised!”

Mr. Andros, to whom this “the woeful results of raising taxes” stuff is rookie material learned a long time ago on Day One of Economics 101, and who now has even less respect for me than he ever had before, because it seems new to me, concludes that “The sun-setting of the Bush tax cuts and new healthcare taxes beginning in 2011 will generate a projected 300 billion dollars a year in new taxes. Using the Romer Multiplier implies a 900 billion dollar decline in economic activity next year”!!

The double exclamation points as punctuation were added by me as a clever way of indicating special emphasis, as, indeed, it is, as a $900 billion decline in GDP is a 6.4% drop in GDP!

Few outsiders know that double exclamation points are also a Secret Mogambo Code (SMC) that all Junior Mogambo Rangers (JMRs) instantly recognize, wherever they are found, as a signal to “Buy gold, silver and oil!”, which they do because it is the Right Thing To Do (RTTD) and it is the easiest thing you can do, too, so that we squeal with childish delight, “Whee! This investing stuff is easy!”

The Mogambo guru
for The Daily Reckoning

The Woeful Results of Raising Taxes originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Woeful Results of Raising Taxes

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

No, it wasn’t a one-day wonder. Gold is holding its own after reaching a record high.

The yellow metal’s spot price jumped $25 an ounce yesterday, topping out near $1,275 before pulling back – but not much. This morning, it sits at $1,268.

The immediate catalyst appears to have been some conference call chatter by Jan Hatzius, the chief US economist at Goldman Sachs. He speculated another round of quantitative easing is on the way, with the Federal Reserve buying up more Treasuries. He threw out the number $1 trillion, and a target date of November or December.

Traders acted on the theory that if this is coming from Goldman, it might as well be coming from a Fed governor, or Ben Bernanke himself. Buy!

Then again, Hatzius merely confirmed suspicions that have been building for a while. Connect all the dots, and it adds up to much higher gold prices. Maybe not this week or this month, but sooner, rather than later…

For starters, gold and the dollar appear to be reverting to their traditional roles – one goes up, the other goes down. Certainly, that was the case throughout 2009, but we noticed in early February that this trend had begun to take a breather. Gold and the dollar became unusually well correlated.

But that correlation started breaking down in mid-June and fell apart a few weeks later.

“The dollar has benefited from the troubles in other countries [like Greece] in its role as a relative safe haven,” says US Global Investors chief and Vancouver favorite Frank Holmes.

“But ‘relative’ is the key word – roughly $10 trillion is expected to be added to the US federal debt burden through 2019, and the US trade imbalances are huge. These trends stand to weigh on the dollar and support gold’s safe-haven status over the longer term.”

“Faced with voter anger at the failure of monetary and fiscal stimulus to stimulate, the Obama administration and the Federal Reserve are doubling down,” Alvaro Vargas Llosa explains further. He’s a senior fellow at the Independent Institute, and one of the experts Addison interviewed for his current documentary project.

“If almost $1 trillion of fiscal spending and a tripling of the Fed’s balance sheet have not done the trick, leaders should realize by now that the process of economic healing – paying down debts; liquidating redundant assets; saving; and, eventually, investing and consuming again – cannot be altered by political diktat.”

About that fiscal imbalance: On Monday, the Treasury Department said the federal deficit for the first 11 months of the fiscal year totaled $1.26 trillion. (Treasury lied. According to its own website, Uncle Sam ran up the national debt by $1.53 trillion.)

It’s only going to get worse, judging by figures out just this morning from the nonpartisan Tax Policy Center…

• 44% of Americans live in a household where someone is receiving government benefits. That compares to 30% in 1983
• An estimated 45% of US households pay no income tax, compared to 39% just five years ago
• 13% of households pay neither income tax nor payroll tax.

If numbers like that don’t awaken the bond vigilantes from their slumber now, it’s just a matter of time. Steven Romick, manager of the well-respected FPA Crescent Fund, reminds us that 48% of US debt outstanding is due to mature over the next two years.

That’s $3.7 trillion that needs to be rolled over, on top of a ballpark $3 trillion in new debt Uncle Sam will run up during the same period. Who’s going to buy all that? “Will it be the foreigners who already own half of the US debt?” asks Alvaro Vargas Llosa. “At what point do they realize that the US government can actually go broke?”

That’s what’s dawning on the people buying gold now.

Dave Gonigam
for The Daily Reckoning

Why People are Buying Gold Now originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why People are Buying Gold Now

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

No, it wasn’t a one-day wonder. Gold is holding its own after reaching a record high.

The yellow metal’s spot price jumped $25 an ounce yesterday, topping out near $1,275 before pulling back – but not much. This morning, it sits at $1,268.

The immediate catalyst appears to have been some conference call chatter by Jan Hatzius, the chief US economist at Goldman Sachs. He speculated another round of quantitative easing is on the way, with the Federal Reserve buying up more Treasuries. He threw out the number $1 trillion, and a target date of November or December.

Traders acted on the theory that if this is coming from Goldman, it might as well be coming from a Fed governor, or Ben Bernanke himself. Buy!

Then again, Hatzius merely confirmed suspicions that have been building for a while. Connect all the dots, and it adds up to much higher gold prices. Maybe not this week or this month, but sooner, rather than later…

For starters, gold and the dollar appear to be reverting to their traditional roles – one goes up, the other goes down. Certainly, that was the case throughout 2009, but we noticed in early February that this trend had begun to take a breather. Gold and the dollar became unusually well correlated.

But that correlation started breaking down in mid-June and fell apart a few weeks later.

“The dollar has benefited from the troubles in other countries [like Greece] in its role as a relative safe haven,” says US Global Investors chief and Vancouver favorite Frank Holmes.

“But ‘relative’ is the key word – roughly $10 trillion is expected to be added to the US federal debt burden through 2019, and the US trade imbalances are huge. These trends stand to weigh on the dollar and support gold’s safe-haven status over the longer term.”

“Faced with voter anger at the failure of monetary and fiscal stimulus to stimulate, the Obama administration and the Federal Reserve are doubling down,” Alvaro Vargas Llosa explains further. He’s a senior fellow at the Independent Institute, and one of the experts Addison interviewed for his current documentary project.

“If almost $1 trillion of fiscal spending and a tripling of the Fed’s balance sheet have not done the trick, leaders should realize by now that the process of economic healing – paying down debts; liquidating redundant assets; saving; and, eventually, investing and consuming again – cannot be altered by political diktat.”

About that fiscal imbalance: On Monday, the Treasury Department said the federal deficit for the first 11 months of the fiscal year totaled $1.26 trillion. (Treasury lied. According to its own website, Uncle Sam ran up the national debt by $1.53 trillion.)

It’s only going to get worse, judging by figures out just this morning from the nonpartisan Tax Policy Center…

• 44% of Americans live in a household where someone is receiving government benefits. That compares to 30% in 1983
• An estimated 45% of US households pay no income tax, compared to 39% just five years ago
• 13% of households pay neither income tax nor payroll tax.

If numbers like that don’t awaken the bond vigilantes from their slumber now, it’s just a matter of time. Steven Romick, manager of the well-respected FPA Crescent Fund, reminds us that 48% of US debt outstanding is due to mature over the next two years.

That’s $3.7 trillion that needs to be rolled over, on top of a ballpark $3 trillion in new debt Uncle Sam will run up during the same period. Who’s going to buy all that? “Will it be the foreigners who already own half of the US debt?” asks Alvaro Vargas Llosa. “At what point do they realize that the US government can actually go broke?”

That’s what’s dawning on the people buying gold now.

Dave Gonigam
for The Daily Reckoning

Why People are Buying Gold Now originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why People are Buying Gold Now

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

What a wonderful time to be on the South American continent!

The cafés are filling up again after the early week slumber. The sun is back, peering through the clouds and pushing back against the stubborn winter chill. Songbirds in the courtyards sing a merry tune, oblivious as to whether the country around which they fly is destined to succeed despite its government’s best efforts, or to fail because of them. Argentina’s flamboyant capital comes alive late at night and late in the week. And spring is just around the corner…

In entirely unrelated news, stocks in the US went just about nowhere yesterday. Not so for gold, however, which scooted to a new nominal record. History’s anti-dollar hedge is still only about halfway to its “real” record – adjusted for inflation, that is – but it’s a start.

“Why now?” is the first question that might pop into a gold bug’s mind. After all, the underlying market realities upon which gold buyers place their bets hasn’t changed one iota; the west is still accruing debt faster than it can sell it; currency abusers at the world’s central banks haven’t budged from their inflationista tendencies (and, if anything, look set to soon redouble their efforts); and the stock market bounce, posing as it did for a short while as “genuine recovery,” appears to be coming apart at the seams.

Why then should gold be shooting for the moon only now? And, if a lunar landing is on ol’ Midas’ medium-term “to-do” list, is there still time to buy?

Your editor has no firm answers to these questions, Fellow Reckoner…but we do have hunches, suspicions and two eyes wide open.

Market trends, for one thing, do not change overnight. It takes time for them to unfold and broken egos to nourish their metamorphosis. Fortunately for Mr. Market, he has nothing if not the length of days and the arrogance of man on which to feast.

Long time readers know the story already and may wish to skip ahead a couple of paragraphs, but for those unfamiliar with our oft-repeated themes, a quick macro recap…

For the better part of the last half-century, the world, particularly the western, “developed” hemisphere, embarked on a debt-financed party cruise. It was “full steam ahead” as credit expanded, the economy “grew,” and consumers came to see the trappings of a sophisticated lifestyle as their God-given right. Pretty soon, everyone had a plasma television on their wall and a shiny new ride in their driveway. Folks came to measure their wealth by the thread count of their sheets rather than dollar amount in their banks. In other words, “stuff” came to replace savings, and the delusion of wealth – borrowed from today’s foreigners and tomorrow’s Americans – came to replace actual wealth.

By the time the ship hit the great iceberg of ’07, welfare costs in both the private and public sectors had grown to such gargantuan levels that spaces for extra digits had to be added to calculators.

At the private level, companies like General Motors and Ford found themselves crippled by union-won legacy costs. In the days following the collapse of Lehman Bros., these giants of yore found for themselves new homes on the penny listings and in the arms of a mollycoddling, welfare-prone government. But this weight was nothing compared to the load with which the state had saddled itself.

What began as President Hoover’s “a chicken in every pot and a car in every garage” had, over the course of the century, grotesquely morphed into “a non-worker for every house and an SUV for every non-worker.” The terrible twins of mortgage lending, Fannie Mae and Freddie Mac, had, with governmental carte blanche, driven the cost of borrowing down and the price of homes to all time records. Sallie Mae, as Eric Fry explained in “A College Education of Diminishing Returns”, did likewise for the education sector, sending the cost of obtaining a tertiary qualification higher even than the aspirations of the starry-eyed students in attendance.

Having gorged itself on the borrowed earnings of others for over five decades, it is little wonder that an overstretched, underfunded economic system should begin collapsing beneath the burden of its own obligations. Smaller wonder still is the fact that a handful of long-view investors should seek refuge from the inevitable fallout by purchasing the only investible currency that is, by its very nature, free of any such onerous obligation.

But at yesterday’s nominal record of just over $1,270 per ounce, surely gold is approaching bubble levels, right?

Maybe…but probably not. As Adrian Ash, former correspondent for The Daily Reckoning’s London office and now head of research for the indispensable BullionVault, puts it, “No one’s obligation and no one’s liability, gold owned outright is quite literally the opposite of debt.”

“Gold from here is a speculation,” Adrian wrote in his essay “Speculating In Gold” last week, “but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.”

Joel Bowman
for The Daily Reckoning

Ruminating on Recent Market Trends and Gold’s All-Time High originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Ruminating on Recent Market Trends and Gold’s All-Time High

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized