Economic Growth Slows to a Near Halt

Goodbye Speedy! Reality eventually catches up and the economic slowdown is a reality. "Never bet against the U.S. consumer". "This is a temporary pause so that businesses can catch their breath". Yada, yada, yada. Cycles are forever. Recession may be right around the corner if it's not already here (discounting manipulated government statistics).

Economic Growth Slows to a Near Halt in First Quarter in Worst Showing in 4 Years

WASHINGTON (AP) -- Economic growth skidded to a near halt in the first quarter, with the worst showing in more than four years raising concerns about how long the country's sluggish spell will last.

The Commerce Department reported Thursday that gross domestic product increased by just a 0.6 percent pace in the January-through-March period, much weaker than estimated a month ago. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main forces behind the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

"We got close, but the economy did not slip under the waves in the first quarter," said Joel Naroff, president of Naroff Economic Advisors.

What largely prevented the economy from going under: consumers, who showed an even bigger appetite to spend.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

The economy's 0.6 percent growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5 percent pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke says he doesn't believe the economy will slide into recession this year, nor do Bush administration officials and many economists. But ex-Fed chief Alan Greenspan has put the odds at one in three.

In fact, many economists believe the first quarter will probably turn out to be the weakest point for the economy this year.

"I think the worst is behind us," said Richard Yamarone, economist at Argus Research. "While we did have a miserable quarter in the first three months of the year, it doesn't look like it will be repeated any time soon."

The National Association for Business Economics predicts the economy will expand at a 2.3 percent pace from April through June. If that happens, the economy would have staged a rebound but would still be growing at a pace below its average, which is around 3 to 3.25 percent, analysts said. Yamarone, however, thinks the economy is poised for a bigger bounceback in growth.

Broke in America

Maxed Out's James Scurlock and Elizabeth Warren on Nightline.

The Chinese Stock Buying Frenzy

It's been all smiles lately as Chinese investors have been living the dream of making fast money and becoming millionaires. Everything is great until the market turns, as it always does. The Chinese Government has never experienced a market meltdown but they are keenly aware of the history of stock market crashes in other parts of the world and are doing everything in their power to cool the market down. Yesterday was another big step in the right direction. Will the Chinese blow off another big down day and keep buying? Stay Tuned...

Chinese Stocks Fall for 2nd Day Amid Government Efforts to Cool Boom

BEIJING (AP) -- Chinese stocks fell Thursday for a second straight day after the government raised a tax on trading in an effort to cool a market boom amid fears of a price bubble.

The benchmark Shanghai Composite Index opened down 1.15 percent at 4,006.28 points. The Shenzhen Composite Index for China's smaller second market fell even further, opening down 3 percent at 1163.88.

The main index plunged 6.5 percent Wednesday after Beijing tripled the "stamp tax" on trades in an effort to cool a market boom that has seen prices rise by more than 50 percent this year.

The impact on markets abroad was muted, in contrast to February's global sell-off triggered by a Chinese decline.

The Chinese Finance Ministry raised the "stamp tax" from 0.1 percent to 0.3 percent, effective Wednesday. The official Xinhua News Agency said the ministry was trying to "cool (the) stock market."

Economists have warned of the danger of a growing bubble, while Chinese authorities have expressed concern that a fall in prices could hurt novice investors rushing into the market.

Millions of first-time Chinese speculators have opened trading accounts in recent months, dipping into savings, mortgaging homes and tapping retirement accounts to buy stocks.

But the direct impact of Chinese price swings on markets abroad should be limited, because Beijing keeps its markets largely isolated from global financial flows.

Most foreigners are barred from investing in the main class of Chinese stocks, while financial controls limit the ability of Chinese companies and families to invest abroad.

China's stock gains have been fueled by strong corporate profits and a flood of fresh money from millions of new investors sinking their savings into the stock market amid a scarcity of other investment options. Chinese banks pay just 3 percent interest on deposits.

Economists say a fall in the markets should have little impact on China's economy, because growth is driven by exports. Also, households have much more money in savings than in shares.

The stamp tax was set at 0.6 percent when it was introduced in the early 1990s but has been cut repeatedly to encourage the Chinese public to invest in stocks. It was cut to 0.1 percent in 2005 to lure investors back to then-sluggish markets.

Taxpayers on the hook for $59 trillion

I never thought that I'd live to see the day that the MSM actually reported the truth about the U.S. National Debt. I've been talking about it for years and bloggers have been reporting it as part of a mainstream conversation about the horrendous state of the U.S. Balance Sheet. However, if the MSM suddenly jumps on the bandwagon, ordinary citizens might actually become concerned and get motivated to do something about the problem.

My cynical side tells me that this was an orchestrated move to prepare Americans for the "bad news" that's coming. Politicians don't usually do anything to prevent problems. They usually wait for a loud enough public outcry, before they take action. That way, they are responding to the concerns of their constituents rather than introducing controversial legislation that could be perceived as damaging to the public good.

The federal government recorded a $1.3 trillion loss last year — far more than the official $248 billion deficit — when corporate-style accounting standards are used, a USA TODAY analysis shows.

The loss reflects a continued deterioration in the finances of Social Security and government retirement programs for civil servants and military personnel. The loss — equal to $11,434 per household — is more than Americans paid in income taxes in 2006.

"We're on an unsustainable path and doing a great disservice to future generations," says Chris Chocola, a former Republican member of Congress from Indiana and corporate chief executive who is pushing for more accurate federal accounting.

Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later.

The federal government does not follow the rule, so promises for Social Security and Medicare don't show up when the government reports its financial condition.

Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. By comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined.

Unfunded promises made for Medicare, Social Security and federal retirement programs account for 85% of taxpayer liabilities. State and local government retirement plans account for much of the rest.

This hidden debt is the amount taxpayers would have to pay immediately to cover government's financial obligations. Like a mortgage, it will cost more to repay the debt over time. Every U.S. household would have to pay about $31,000 a year to do so in 75 years.

The Financial Accounting Standards Advisory Board, which sets federal accounting standards, is considering requiring the government to adopt accounting rules similar to those for corporations. The change would move Social Security and Medicare onto the government's income statement and balance sheet, instead of keeping them separate.

The White House and the Congressional Budget Office oppose the change, arguing that the programs are not true liabilities because government can cancel or cut them.

Chad Stone, chief economist at the liberal Center on Budget and Policy Priorities, says it can be misleading to focus on the government's unfunded liabilities because Medicare's financial problems overwhelm the analysis.

"There is a shortfall in Medicare and Medicaid that is potentially explosive, but that is related to overall trends in health care spending," he says.


BALANCE DUE

The cost per U.S. household of unfunded promises made by federal, state and local government:

Medicare $255,280

Social Security $144,251

Federal debt $43,380

Military benefits $25,863

State and local debt $17,537

Federal civil- servant benefits $14,374

State and local retiree benefits $13,114

Other federal obligations $2,548

Total $516,348

Source: USA TODAY research; numbers rounded

Party Like It's 1999

Robert McHugh at Safe Haven reports on the eery similarities between the Dow today compared to the Dow in 1999.

While the following charts are meaningless for predictive purposes, what they do tell us is we currently have a price pattern set-up eerily similar to the price pattern leading up to the January 2000 major top in the Dow Industrials.

(Click to enlarge)

In 1999, prices staged a dramatic 2,750 point rally over a one-year period, that had folks talking about Dow 35,000, with no end in sight for the glorious bull market. To be bearish was ridiculous. However, the unthinkable happened. In January 2000, a major Bear market started, which lasted through March 2003. Just prior to this historic top on January 14th, 2000, the DJIA rose 2,750 points over a 12 month period, with a significant correction about two thirds the time and price move through this extraordinary rally. Following that correction, the Dow Industrials rose another 1,750 points in a parabolic ascension over three months.

In 2006/2007, since July 2006, we have seen a 2,850 point rally over a ten month period, which has folks talking about Dow 35,000, with no end in sight for this glorious bull market. To be bearish seems ridiculous. About two-thirds the way through this time and price move, a significant correction occurred (late February 2007), which has since been followed by another 1,689 points in a parabolic ascension over three months. The point is, there is historic precedent for a major bear market to start immediately after such a price pattern.

A Real Estate Agent Crash Course in Ethics

Click here to view the unbelievable video.

It might be funny if it wasn't so sad that the Virginia Association of Realtors had to produce a video like this. Is anyone really surprised that so many Americans are facing the reality of foreclosure in light of "professional advice" from Realtors?

Biggest Price Drop Since 1970!

Some housing bubble news from Wall Street and Washington. “Purchases of new homes in the U.S. unexpectedly surged in April by the most in 14 years, ignited by the biggest decline in median prices since 1970. Compared with a year earlier, new home sales were down 11 percent, today’s report showed.”

“The median price of a new home dropped 11 percent last month, the biggest decline since 1970, to $229,100 from $257,000 a year earlier, today’s report showed.”

So, is the glass half full or half empty?

US Looks Set For Trade War With Chinese

As I've written many times, it's tough to bully your banker but the inevitable confrontation between China and the U.S. is nearly at hand. The Chinese have grown so quickly and the trade imbalance between the two countries is simply unsustainable. Regardless of the "band-aid" fixes that China is attempting to implement to slow things down, and prop up their currency, it is already too late. The Chines proverb, "May you live in interesting times" certainly applies to our current reality.

US looks set for trade war with Chinese

TALKS between half the US and Chinese cabinets starting today in Washington look unlikely to head off US legislation that would trigger a trade war with China.
The Chinese Government's triple attack yesterday on its own over-exuberant economy: introducing raised interest rates and bank reserve requirements, and broadening the potential trading band of the yuan - intended to demonstrate its responsiveness to US concerns - was shrugged off by its own markets.

Instead, the Shanghai market powered on, climbing 1 per cent.

The 14 Chinese ministers, led by Vice-Premier Wu Yi, appear not to have brought any concessions strong enough to satisfy the growing US anti-China lobby.

Democrats who now control the US Congress complain about China's $283 billion trade surplus with the US last year, claiming it is substantially due to an undervaluing of the yuan that helps China's exporters, and are calling for a revaluation of up to 40 per cent.

A week ago a trade panel voted to impose special duties of up to 44.3 per cent on imports of polyester fibre from China. A few weeks earlier, the US imposed duties on glossy paper imports.

Several items of new legislation, including one that would impose a 27 per cent tariff on all Chinese goods, and five concerning currency issues alone, are on the table. Their introduction would lead to a full-scale trade war.

New York Democrat senator Charles Schumer said of China's measures, including allowing the yuan to trade higher: "This is a nice gesture, but in the past, most of their gestures have not produced any concrete change."

House Ways & Means Committee chairman Charles Rangel said: "The time for talk has passed; we must now act to end this unfair trade practice that cripples American industries."

A Case Of Stock Fever For Chinese Investors

Despite Government intervention, the Chinese are determined to blow the Shanghai stock bubble as big as possible. The rise makes the late 90's Nasdaq bubble look puny in comparison. The Government has warned its citizens but they are being ignored. How big can this bubble get? It's impossible to predict but, as always, it will end it tears...or worse.

Millions of first-timers are getting involved in the frenzy as Shanghai's main market gauge continues to post eye-popping gains

Key Article Points:

1. Wanting a "piece of the action"
2. Opening an account but not knowing what stocks to buy... "I don't know. I'm still learning."
3. Mortgaging homes to buy stocks
4. Dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."
5. "We are opening 40 to 50 new accounts a day. Six months ago, it was four to five a day."
6. Stock prices are 30 to 40 times earnings
7. "Earnings growth is very, very strong"
8. Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics in 2008.
9. "We hear that before 2008 the government won't let prices fall"
10. "We're not afraid."

Regarding that last point, BE AFRAID! BE VERY AFRAID!

Associated Press
Published May 15, 2007

BEIJING—After watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action.

The 45-year-old office worker stood in line at a bustling brokerage last week to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up more than 51 percent this year.

"We still can make money," Ding said as she stood at the counter at Tiantong Securities with the paperwork for her new account. Asked what stocks she would buy, Ding said: "I don't know. I'm still learning."

China is in the grip of stock market fever. Shares are changing hands in record numbers as first-timers pour in new money. Some are mortgaging their homes or dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."

This year's 50 percent surge in the main market measure, the Shanghai composite index, comes on top of a 130 percent increase in 2006. The market shrugged off a one-day drop of nearly 9 percent in late February that set off a decline in stocks around the world.

Last week, the Shanghai index passed the 4,000-point mark for the first time, and economists say it could break 5,000 in a month. It closed Monday at 4046.39.

Economists say the government should take steps to moderate the price surge or risk a sharp fall that could hurt small investors.

"This is a very critical time. If policy adjustments take place now, the market can still have a sustainable development," said Hong Liang, a Goldman Sachs economist. "The longer they wait, the harder the eventual landing will be."

Enthusiasm for stocks is fueled in part by a lack of other investments in a heavily regulated economy. Famously frugal Chinese families save up to 40 percent of their incomes, but bank accounts pay just 3 percent interest, less than the rate of inflation. Some have made fortunes in the booming real estate market, but the government is cracking down on speculating to rein in soaring housing costs. Interest on bonds is low, and currency controls prevent most families from investing abroad.

"We are opening 40 to 50 new accounts a day," said Zhang Jun, deputy manager of the Tiantong Securities branch. "Six months ago, it was four to five a day."

Nationwide, the number of trading accounts has soared 30 percent over the past year, to 95 million, one-sixth of them opened in the past four months, according to the China Securities Depository and Clearing Corp., which is owned by China's two stock exchanges.

Stock prices are 30 to 40 times earnings, an unusually high ratio for many major markets, which some say makes them unrealistic.

"But that is not paying attention to earnings growth, which is very, very strong," said Goldman Sachs' Hong Liang.

And many investors believe Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics in 2008.

"We hear that before 2008 the government won't let prices fall," said Ding's sister, Ding Jingxian. "We're not afraid."

Housing is Falling Much Faster than Reported

John Burns reports on the housing market declines and the research that supports the fact that policymakers are being fed incorrect data. His appeal is to the Fed to lower interest rates to try and ease the decline. Unfortunately, the U.S. Dollar continues to tank and inflation is showing up in a much more substantial way. Therefore, the Fed is really powerless to stop the freefall! Look out below!

The housing market has softened much more than is being reported. We have been advising our retainer clients for more than one year about misleading national sales information, both with the Existing Home Sales and New Home Sales data. We are now going public with our concerns because we are concerned that policy makers are relying on national data to conclude that the housing market correction has not been severe.

Here is our support:

* Closing Data: We purchase and compile actual home closing data for approximately 181 counties across the country, which captures the counties where about 55% of the U.S. population lives and a significant percentage of all of the counties where the large home builders are active. This data shows that sales have fallen 22% if you compare sales over the last 12 months to the prior 12 months. On a straight year over year comparison, the decline is much more.

* Mortgage Bankers Association (MBA) Data: The MBA Seasonally Adjusted Purchase Application Index, which is a measure of the number of people filling out loan applications to buy a home, is down 18% from its peak in September 2005.1 With presumably more applications being filled out by borrowers who now have to shop around for a loan, how could sales have fallen by less than 18%?

* Builder Data: The nation's two largest homebuilders, D.R. Horton and Lennar, are reporting that orders have declined 27% to 37%, year-over-year. 2 3 D.R. Horton and Lennar have dropped prices significantly in many markets to generate sales, while the resale market has not. How could their sales have fallen more than the resale market, even if new home communities tend to be in fringe areas?

* Realogy Corporation Data: Realogy, which is the parent company of Century 21, Coldwell Banker, and ERA, participated in roughly 1.9 million brokerage related transactions in 2006 compared to 2.3 million in 2005, representing a year-over-year decline of 18% nationwide.

* 2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28% drop in Florida, 24% drop in California, and a 28% drop in Arizona. Our data, however, shows the sales have probably dropped by 34%, 27% and 38%, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested.

* New Home Data: The Census Bureau calculation of new home data does not calculate sales net of cancellations, and cancellations are running much higher than normal right now, which is why the sales numbers overestimate actual sales.

The preponderance of evidence shows that the housing market in vibrant areas where home building is prevalent has corrected much more than some people believe it has.

In summary, we believe that the Fed should know that the housing market correction has been quite steep and is also not showing signs of bottoming out, as evidenced by all of the above information, as well as significant additional research we have conducted. While the Fed has far more to consider than housing, they should know that the housing market could sure use some lower interest rates to help achieve stability soon.

Any Suggestions For The 2007 Edition?

David Lereah's book may need some more revisions for the 2007 & 2008 editions. The National Association of Realtor's "Chief Economist" AKA "Paid Shill" was recently interviewed by Robert Siegel of National Public Radio and was hit with some hard questions regarding the title of his book. Of course, he took no resposibility for the title of his own book and blamed his publisher.

ROBERT SIEGEL, host: But to put this in some context, you have been a positive voice for real estate. So much so that a couple of years ago, you published a book in 2005 whose original title was "Are You Missing The Real Estate Boom" .... the subtitle of that book was "Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade." What went wrong? Where was the point where you stopped seeing real estate values going up through 2010 and something happening to it instead?

Lereah: Great Question! First the boom was Double Day Random House Word that ..

Seigal: that your publisher, you are telling me

Lereah: .. put on the title. It wasn't my title unfortunately. So it was a poor choice of titles.

Siegal: You are not the first person with that excuse in this studio.

Lereah: But if you actually read the book. I say the boom is not good, it cannot sustain itself. I actually redefine boom to be a healthy expansion.

Siegal: Well wait a second. But in the cover of the book you said it would be the "golden age' of real estate.

I'm afraid that "The Age of Accountability" ended many years ago.

Gold Demand Grows Despite High Price

China, India Feed 22 Percent Growth in Worldwide Gold Demand to $17.38 Billion in 1Q

Gold got back some of its glitz in the first quarter following soft sales a year ago, as buyers in China and India flocked back to what has become a calmer, albeit pricier, market.

Globally, buyers spent $17.38 billion on gold in the first quarter, the World Gold Council said Wednesday. That's up 22 percent from $14.21 billion a year earlier, when sharp price swings scared off buyers who waited for the market to gain direction.

This past quarter, buyers settled into a market with average prices about $100 higher, around $650 an ounce.

The absence of the extreme volatility of early 2006 increased gold's appeal, said council spokesman George Milling-Stanley.

"It's not the absolute price gold reaches," he said. "It's how it gets there. A volatile price makes consumers all over the world hang back."

Demand growth came from the jewelry and industrial markets, while investor spending on gold declined as the growth of newer investment vehicles such as exchange traded funds slowed.

Jewelry demand swelled 38 percent to $11.97 billion, according to the report.

Buyers in India, the world's largest consumer of gold, devoured 50 percent more gold in the recent quarter than they did a year ago amid robust economic growth and a strong start to the wedding season. Chinese consumption jumped by nearly a third amid robust buying during the New Year's celebration's in mid-February.

Gold demand for industrial applications and dental fillings increased 18 percent to $2.34 billion.

Meanwhile, investor interest in gold fell 13 percent to $3.07 billion from $3.55 billion as last year's excitement about gold investment subsided. The volatility that repelled jewelry buyers in 2006 was a boon to investment demand at the same time.

Ron Paul Might Be Catching Fire!

He may be the only real chance of a return to true Government fiscal conservatism. Regarding Giuliani, his comments were, "If you're at the bottom of the rung of the ladder, you don't get attacked like that. Evidently, he considers me a threat."

This Is Like Deja Vu All Over Again

The famous Yogi Berra quote certainly applies to today's markets. Todd Harrison, founder and CEO of Minyanville, highlights the similarities of today's markets with the 90's Bubble from our very recent past. It is amazing how quickly investors forget.

Seems like old times
Commentary: The more things change, the more they stay the same


NEW YORK (MarketWatch) -- The more things change, the more they stay the same. Such is the story of life, and so it is for the markets as well.

I've been trading for 16 years, through Orange County derivative disasters, Asian contagions, new paradigms and lost fortunes.

Yeah, it's safe to say that I've chewed through a lot of markets, some very well and a few I'd like to forget.

When I sat down to scribe today's vibe, I weighed a choice of topics.
There are the all-time highs on the Dow, but that's old news despite the daily dance.

There's the risk in the system, from housing to debt to geopolitical fret, but nobody wants to read about that while the screens are green.

And there's private equity and merger mania but alas, we've seen that movie before.

Indeed, it seems as if we've already seen many of our current story lines, albeit different iterations. We call it Vuja De in Minyanville, the strange sensation that we've been here before but nobody remembers the ramifications.

To wit, when comparing the late-1990s, pre-bubble mindset to the modern day perception, it seems as if the names have changed to misdirect the innocent.

Back then, globalization was the justification for growth. Today, it is the root of isolationism and a path toward nationalization.

Back then, there was margin. Today, there is credit.

Back then, folks flocked to day-trading firms. These days, condo-flipping is in vogue.

Back then, politicians were targeting corporate America. Today, they've taken aim at lending practices.

Back then, we had the Greenspan put. Today, we've got the Bernanke helicopter.

Back then, Dan Dorfman moved markets with his opinions. Today, Jim Cramer is a self-proclaimed equity evangelist.

Back then, corporate malfeasance was being fingered by the misdirected masses. Today, insider trading is in the wake of the blame.

Back then, we had venture capitalists. Today, we have private equity.

Back then, we rationalized dot.com valuations. Today, we're collectively cool with debt levels.

Back then, Nobel Prize winners could do no wrong. Today, Goldman Sachs pedigrees are viewed in the same vein.

Back then, there was a scramble into index funds. Today, there is a race to chase the hedgies.

Back then, the FOMC walked the tightrope. Today, they're fitting a noose.

Back then, Julian Robertson capitulated. Today, Richard Russell is seemingly doing the same.

Back then, we had a financed based economy. Today, we have a finance-dependent economy.

Back then, Gordon Gekko was a financial icon. Today, or at least in production, he returns as a hedge fund manager.

The Return of Gekko!

20th Century Fox is making a sequel to 1987's Wall Street. Michael Douglas will return as the just-out-of-jail Gordon Gecko and make his way to a hedge fund... Considering that the first one came out just a few months after the 1987 crash, perhaps this is the beginning of the end of the latest bull run...

Bull Market Fortune Cookie?

Despite the deteriorating economic fundamentals, the bull market may, in fact, continue to charge forward based on a potential massive infusion of liquidity. Interesting timing on the part of the Chinese, to say the least.

Is the best yet to come ... from China?
Commentary: Huge influx of capital could power U.S. stock boom

ANNANDALE, Va. (MarketWatch) -- More than a few of you expressed incredulity this week upon learning that Richard Russell was now envisioning an unprecedented global economic boom.

Russell, of course, is well known as the granddaddy of the investment newsletter world, having published his Dow Theory Letters since 1958, nearly 50 years ago - longer than any other investment newsletter editor publishing today. It's also well known that Russell has been bearish on the stock market's major trend since late 1999, treating the market's impressive strength over the last four-plus years as a counter-trend rally within the context of a primary bear market.

But a week ago, Russell changed his tune, becoming bullish in anticipation of an "unprecedented world boom (that lies ahead." His primary reasons were technical: The not one, but two, trading days during April in which each of the three major Dow averages closed at a new all-time high.

The bears among you who e-mailed me took Russell's conversion as a sign that the stock market had topped, on the contrarian theory that a sell signal is triggered when the last bear throws in the towel. The bulls among you were happy to have Russell in your camp.

But none of you seemed able to accept that a huge bull market was imminent. Even the bulls among you were more inclined to believe that the current bull market is getting rather long in the tooth.

This inability to envision an unprecedented global boom got me to wondering if one could tell a plausible story that explained what it was that Russell's technical analysis was envisioning. It would have to be major, of course. Something that might qualify would be an early end to the war on terror, including a peaceful resolution of the Iraq war and of tensions with Iran and North Korea. Yet, though anything is possible, I know of no investment adviser, even in his wildest dreams, who is forecasting that this is about to happen.

So ever since Russell's conversion, I have been on the lookout for plausible stories of this magnitude. I think I found one that at least comes close.

To be sure, just because a story is plausible doesn't mean that it will play out as envisioned. But until I came across this one, I didn't think a story could be told that was even remotely plausible.

I owe the story to Dennis Slothower, editor of a newsletter called On The Money. In his hotline Friday night, he pointed out that the China Banking Regulatory Commission, in an attempt to cool its overheated stock market, had ruled that Chinese banks "can now invest as much as 50 percent of funds in overseas stock markets."

Slothower calculates that this means that "up to $2.3 trillion in China monies ... can now move out of China."

To put a sum like that in perspective, consider that the total value of all publicly traded stocks in this country is around $15.1 trillion, according to Wilshire Associates. If even a modest fraction of the $2.3 trillion makes its way into U.S. stocks, we could see a "further parabolic advance in equities," as Slothower puts it.

I hasten to repeat that there is no guarantee that the future will play out this way, just because a plausible story can be told. Slothower, for his money, remains only cautiously bullish, with 30% to 40% of his model stock portfolios in cash.

I nevertheless find it noteworthy that a story can be told about the stock market that provides plausible grounds for believing that maybe, just maybe, the best in the stock market is yet to come.

Turning Japanese?

I'm dating myself but if you recall the 1980 hit by The Vapors, it may be ringing true today:

I'm turning Japanese I think I'm turning Japanese I really think so
Turning Japanese I think I'm turning Japanese I really think so
I'm turning Japanese I think I'm turning Japanese I really think so
Turning Japanese I think I'm turning Japanese I really think so

Editor sees U.S. stocks going parabolic like Nikkei of 1980s

The respected Gartman Letter, marketed to investment institutions and not monitored by the HFD, has a chilling explanation of what's going on.

Editor Dennis Gartman wrote in the past week: "We stand in awe of the sheer majesty of this rise." But Gartman's response is to review what he wrote about an earlier unstoppable bull: the Japanese stock market of the late 1980s.

As Gartman remembers: "Shares there were running skyward even as the economies of the rest of the world were tanking. The Bubble was going "parabolic," and every modest decline was met with huge new buying, that soon took shares to incredible new highs as the Nikkei soared toward 40,000."

Gartman explains: "Already trading at incredibly over-bought levels when it had risen from 4,000 in late '75 to 8,000 by the mid-'80s, in reality the rally had only just begun! From '83-'85, the Nikkei rose 8,000 to 18,000 ... and still the rally had only just begun! From '86-early '88, it rose from 18,000 to 28,000 ... and still the rally had only just begun, for in those last two years, the Nikkei moved from 28,000 to 40,000, with the last 7.000 points coming in the final weeks of '89!"

Gartman draws this moral: "We must remember that when markets go parabolic (and they do indeed go parabolic from time to time) it is important to remember one of our oldest trading aphorisms: that the final 10% of the time frame of a bull market can, and often will, encompass 50-75% of the price movement. We may be in that environment now. Things seem to want to go "parabolic." What may seem like insanity may be nothing more than history repeating itself once again."

Gartman is not predicting that U.S. stocks are on a permanent high plateau, rather the reverse: "As we have said, this will stop when it stops and not a moment before. It will stop of its own volition; it will stop suddenly; it will end in tears, but it can and likely shall continue to move higher nonetheless.'

Gartman's conclusion: "Speculators are advised not to try to catch falling pianos, and not to try to stop rockets in their initial push higher."

Remember, There is No Inflation!

Thankfully, The Bureau of Labor Statistics(BLS) doesn't include food or energy in it's Consumer Price Index(CPI) calculation. Otherwise, inflation might actually be over 8% annualized. As long as consumers refuse to eat or fill up their car with gas, everything will be just fine.

A Superbear Turns Bullish

ANNANDALE, Va. (MarketWatch) - Has Richard Russell finally thrown in the towel on his long-standing bearishness?

You be the judge.

Richard Russell, of course, is editor of Dow Theory Letters, and the granddaddy of the investment newsletter world. He has been editing his newsletter continuously since 1958, nearly 50 years ago, longer than any other newsletter editor still publishing.

He's seen a lot of bull and bear markets, in other words. And his long-term record is superb. According to the Hulbert Financial Digest, his timing signals for the stock market's major trend rank at the top for risk-adjusted performance since 1980, when the HFD began monitoring the industry.

Nevertheless, Russell has failed to extend diplomatic recognition to the bull market that began in October 2002, arguing instead that a major bear market that began in late 1999 was still in progress. Fellow columnist Peter Brimelow even took to referring to Russell as a "grump."

Now read what Russell wrote last night on his website:

"We saw something that is extremely rare [on April 20 and April 25], in fact I can't remember ever having seen this before. What I'm referring to is that on those two dates all three Dow Jones Averages -- Industrials ($INDU : Dow Jones Industrial Average, Transports ($TRAN : Dow Jones Transportation Average, and Dow Jones Utilities Index actual values closed at simultaneous historic highs. To me, a fellow steeped in Dow Theory for over half a century, this was like a clap of thunder... My take on the situation is that the stock market (and the Dow Theory) told us that an unprecedented world boom lies ahead."

Russell acknowledges that what he has written will surprise many who are accustomed to his long-standing caution about the stock market. He imagines that we will want to respond by saying "But Russell, you're usually so conservative, so restrained. How can you possibly talk this way? Now you're talking about a worldwide boom. Are you smoking something we don't know about?"

Russell's response:

"I stopped smoking over 40 year ago. No, I'm simply relating to you my interpretation of what the market is saying. I believe the markets talk in their own secret language. And when the market does something that has never been done before, that serves as a 'kick in the pants' for me. It's telling me, 'Russell, wake up. Something very unusual is going on. Get up out of your chair -- and pay attention'."

Straight Talk From a Presidential Candidate?

Kitty Pilgrim seems quite surprised to hear straight talk on the issues from Ron Paul. If the Mainstream Media start waking up to the sudden interest in Ron Paul, he could catch fire.

Peak Oil, Smoke and Mirrors!

We Did Some Stupid Things

It's "fess up" time for the bankers. Really, what choice do they have?

Bank of America's Lewis Calls for Lending `Sanity'

Bank of America Corp. Chief Executive Officer Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.

``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''

Lewis isn't the only U.S. bank executive who expects that credit conditions will change. Wells Fargo & Co. Chief Executive Officer Richard Kovacevich said in December that ``I am not a forecaster of the future; I'm a historian. And history says this will blow up. It always has. And there will be some blood on the street.''

Some bank executives, including Barclays Plc President Robert Diamond, say the credit rally may run longer.
``I think the liquidity is probably a little bit more sustainable than he would think,'' Diamond said in an interview today. ``Only time will tell.'' He said bond yields are increasing and volatility ``will be back.''

Stay Tuned!

Money As Debt

This is "required viewing" for anyone who truly wants to understand the nature of money. (video takes approximately 20 seconds to load)

Pinocchio Finally Comes Clean!

Finally, David Lereah speaks the truth. After millions of Americans lives could potentially be ruined, due to the Housing Bubble that Lereah cheerleaded right to the end, Lereah admits that housing is headed for a recession. Good timing! He admits that he misrepresented the truth as he heads for the exits.

Housing cheers turn gloomy

Long criticized as too upbeat, Realtors' departing economist now sees recession

On his way out the door, the housing industry's self-described "cheerleader" is making one last economic forecast -- a sober one at that.

"We're in a real estate recession," said David Lereah, chief economist for the National Association of Realtors, who surprised many this week when he announced he would leave the Chicago-based trade group on May 19."I'm projecting the first [nationwide] price drop since the Great Depression," he said. "We're going to have negative home prices in 2007."

His comments seemed uncharacteristic for Lereah, whose mostly blue-sky forecasts have long been criticized for stoking the fire as home sales bubbled to stunning -- and unsustainable, even by his own account -- levels. He had been the public face for the Realtors since the housing boom began in 2001.

"The media regularly turns to him for real estate quotes," said David Jackson, who created the hypercritical David Lereah Watch blog because he believed the economist was churning the housing market. "Lereah tells half-truths and manipulates facts and figures. He cannot be trusted, as he is a paid shill."

"He promotes housing," said Washington economist Dean Baker, an outspoken housing-market bear. "Certainly, people who were making decisions to move, they either heard David directly or from someone who heard from David that home prices will never fall, don't worry, the market will stay strong. So they paid too much for a house."

Lereah, in an interview Wednesday, shrugged off the criticism. "I feel confident I did a very good job forecasting and reflected what was happening in the marketplace," he said."But the Realtor, the lender, the title attorney, they all got wrapped up in the frenetic pace of the boom," Lereah said.

Lereah is leaving the Realtors to head a new subsidiary of Move Inc., which operates online real estate services, including the industry's most popular site, Realtor.com, for the NAR. He and others in the company declined to discuss the venture until it debuts in August.But first he has one more public appearance, at a Realtors' conference in Washington.

He warns that his speech will not be cheery."I am going to say, look, guys, we all have to face the music," Lereah said. "We strayed from [economic] fundamentals, and we're paying for it. It's not an all-out bust, not a crash in real estate, but it is a recession. This is going to cleanse the markets and in the long term this is what we have needed."

In characteristic cheerleader style he demurred when asked whether he ever felt pressure from within NAR to skew forecasts in a positive direction."You'll have to talk to me about that in two or three weeks," Lereah said. "I work for NAR now."

Chart of Pompous Prognosticators

This is an old chart but a timely one. It is always good to remind ourselves that we are all fallible human beings and even the so-called "experts", are clueless when it comes to the direction of the market. Focusing on fundamentals is the most important discipline. When a market seems like it is too high, it can always go higher but ultimately, when the fundamentals no longer make sense, an inevitable correction occurs.

Chart locations are an approximate indication only

1. "We will not have any more crashes in our time."
- John Maynard Keynes in 1927

2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

"There will be no interruption of our permanent prosperity."
- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
- Calvin Coolidge December 4, 1928

4. "There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"This crash is not going to have much effect on business."
- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."
- Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
- R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

"Buying of sound, seasoned issues now will not be regretted"
- E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
- R. W. McNeal, financial analyst in October 1929

7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."
- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

"Hysteria has now disappeared from Wall Street."
- The Times of London, November 2, 1929

"The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
- Business Week, November 2, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929

8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
- HES, November 10, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."
- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect."
- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

"I am convinced that through these measures we have reestablished confidence."
- Herbert Hoover, December 1929

"[1930 will be] a splendid employment year."
- U.S. Dept. of Labor, New Year's Forecast, December 1929

10. "For the immediate future, at least, the outlook (stocks) is bright."
- Irving Fisher, Ph.D. in Economics, in early 1930

11. "...there are indications that the severest phase of the recession is over..."
- Harvard Economic Society (HES) Jan 18, 1930

12. "There is nothing in the situation to be disturbed about."
- Secretary of the Treasury Andrew Mellon, Feb 1930

13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

"... the outlook continues favorable..."
- HES Mar 29, 1930

14. "... the outlook is favorable..."
- HES Apr 19, 1930

15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
- Herbert Hoover, President of the United States, May 1, 1930

"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
- HES May 17, 1930

"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
- HES June 28, 1930

17. "... the present depression has about spent its force..."
- HES, Aug 30, 1930

18. "We are now near the end of the declining phase of the depression."
- HES Nov 15, 1930

19. "Stabilization at [present] levels is clearly possible."
- HES Oct 31, 1931

20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."
- President F.D. Roosevelt, 1933

Colin J. Seymour, June 2001
http://www.users.dircon.co.uk/~netking
20 June 2001

Ron Paul - Is The Term Smart Politician An Oxymoron?

After 6 years of "Bushisms", hearing a smart politician speak is incredibly refreshing. Although Congressman Ron Paul is not "high profile" enough to ever become President, hopefully his involvement in the debates will force the other candidates to deal with "real" issues.

Dow: Longest bull run in 80 years

Hmmmm. What happened after the bull run 80 years ago. Oh-Oh! These types of headlines are traditionally responsible for the last suckers trying to join the party "before it's too late". Greed is the motivating factor.

What is driving this latest bull market? Is it an industrial revolution? How about a technological revolution? We know how that collapsed. Is it manufacturing growth? Does the U.S. have vast resources that the world needs to drive global growth?

Obviously, it's none of these factors that is driving the Dow to "record" levels. As you have read in earlier posts, the "record" is a complete farce as the Dow is, in fact, negative, adjusted for inflation, since 2000.

So what has driven the Dow to this "record". Debt, more debt, even more debt, and "Up to your eyeballs in" debt. Without the liquidity that has been driving this market, there would be no "record". With the subprime and Alt-A mortgage implosion currently underway, a contraction of liquidity is an almost certainty. Once that happens, you can say bye-bye to the "record" and get ready for lower levels on the Dow. We may see 14,000 or even higher before that pullback occurs but even at those levels, investors would have had no rewards for over 7 years of investing in the Dow.

Beware the Mainstream Media Hype!

NEW YORK (CNNMoney.com) -- The Dow Jones industrial average squeaked out another record high Friday, making this the longest bull run in 80 years, as investors cheered tame inflation numbers, talk of big mergers and a jobs report that appeared just right.

The Dow (up 23.24 to 13,264.62, Charts), in its fourth record close in a row, ended up about 0.2 percent. The blue-chip leader also set a new intraday high of 13,284.53.

The Dow has now risen in 23 of the last 26 sessions, marking its longest bull run since the summer of 1927, when the indicator ended higher in 24 of 27 sessions, according to Dow Jones.

The broader S&P 500 (up 3.23 to 1,505.62, Charts) index also rose about 0.2 percent after ending the previous session above 1,500 for the first time since the third quarter of 2000. The S&P 500 is not far from its all-time high of 1527.46 hit in March 2000 at the tail end of the 1990s tech-boom-fueled bull run.

The tech-heavy Nasdaq composite (up 6.69 to 2,572.15, Charts) ended up about 0.4 percent, at a six-year high.

Oil fell more than a dollar, while bonds and the dollar gained.

For the week, the Dow is up about 1.1 percent, while the Nasdaq gained 0.6 percent and the S&P about 0.8 percent.

Next week traders will look forward to the Federal Reserve's policy statement, a report on retail sales and wholesale inflation figures.

The Fed's policy statement is expected to be the most closely watched item, according to Michael Parness, head of the trading and research firm Trendfund.com.

Parness said retail sales have been disappointing lately but still may not drag down stocks.

"When you have a bull market mentality, people will look at soft sales as an indication the Fed will lower rates," he said.

Also on tap next week: earnings from Cisco Systems (Charts, Fortune 500) and Walt Disney (Charts, Fortune 500) Tuesday after the bell, News Corp (Charts, Fortune 500). Wednesday morning, Viacom Thursday morning and American International Group Thursday after the bell.

Here's what moved the markets Friday:

Stocks rose in the morning, extending the recent rally as investors welcomed the April jobs report, lower oil prices and talk of a Microsoft-Yahoo merger. But after pushing the major gauges to the new highs, investors backed off a bit, and stocks traded near even until late in the day.

"I think people are thinking it's the weekend, and there's a lot of money that's been made recently," said Parness. "But I'm certainly not going to call tops here."

The run has reflected stronger than expected first-quarter earnings, the spate of mergers and other deals news and economic news that suggests that growth is slowing at a moderate pace and that inflation is moderating.

"It's pretty much playing out according to the plan that [Fed Chairman] Bernanke laid out for a soft landing," said Douglas Roberts, managing principal at Channel Capital Research.

The jobs report Friday seemed to support the so-called soft landing scenario, Roberts added.

Employers added 88,000 jobs in April, the smallest monthly number in more than two years and short of forecasts for 100,000 jobs added. Employers added an upwardly revised 177,000 jobs in March.

The unemployment rate, generated by a separate survey, rose to 4.5 percent from 4.4 percent, as expected.

Average hourly earnings, the report's inflation component, rose a smaller than expected 0.2 percent after rising 0.3 percent in March.

Taken as a whole, the report seemed to suggest growth is slowing enough to take the edge off inflationary pressures but not so much as to drive the economy into a recession, all of which raised bets that the Federal Reserve might cut interest rates later this year.

Fed policy-makers are meeting next week and are expected to hold rates steady at 5.25 percent for the seventh meeting in a row.

Best Quotes of April 2007

Jeremy Grantham, Grantham Mayo Van Otterloo

Everything is in bubble territory. Everything. From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time! The bursting of this bubble will be across all countries and all assets.

Richard Daughty, The Mogambo Guru

I'll say it again, as if I haven't said it enough already: The dollar is going down because we acted like idiots, and so load up on gold, silver and the shares of oil companies to save yourself. This Mindless Mogambo Strategy (MMS) has worked like a charm for quite awhile now, and so it IS "the trend." And as everyone knows, "the trend is your friend!"

Bill Fleckenstein, Fleckenstein Capital

Wall Street continues to view stocks as one-way bets, with positive outcomes. Every day, I am more and more astounded by the bravado/denial that I see. If you told this crowd that the world was going to end on Friday, they'd be buying stocks in anticipation of the rebound they would expect to occur after its demise. How anyone can be sanguine about how this movie ends is beyond me.

On a side note, operators in the LBO world seem keen to IPO themselves because they can see that valuations are so stupid. Thus, they're in the process of trying to have it both ways: getting paid huge fees to take companies private, while preparing to take themselves public based on their huge fee income.

Mark Kiesel, PIMCO

One question my friends and colleagues have asked me repeatedly over the past six months is: Are you still renting? Yes! I sold my house over a year ago and continue to rent. Based on the current outlook for housing, I will likely be renting for one to two more years.

Housing is today’s leading indicator of economic growth and risk appetite. An extended downturn in housing will likely lead to slower job creation, softer corporate profit growth, tighter lending standards and weaker consumer and business confidence. The Fed should lower the Fed Funds rate as soon as we have confirmation that the employment situation is deteriorating. By that time, credit spreads will have already anticipated the fact that risk appetite is set to turn for the worse.

Paul Lamont, Lamont Trading Advisors

When the effects of inflation have been extracted, the DJIA is much more cyclical than Wall Street promoters would care to admit. After optimistic peaks of 1834, 1906, 1929, and 1966 the DJIA subsequently moved to the bottom of the long term trend channel. These bear markets were either inflationary, such as the 1966-1982 bear market or deflationary such as in 1929-1932. We have also noticed that inflationary/deflationary crashes tend to alternate. We suppose this is because Mr. Market likes to fool even the bears. Today we are again at the top of the trend channel. How will we fall? Most bears remember and fear the stagflation of the 1970s. However with debt levels currently high, inflation cannot be maintained for an extended length of time. Debtors would merely file for bankruptcy or foreclosure (as they have begun recently). Instead a deflationary spiral similar to 1929-1933 or 1834-1842 is likely. It appears the rule of alternation will continue.

John Mauldin, Millennium Wave Advisors

Rising prices create their own kind of self-fulfilling momentum. As more and more people throw caution to the wind and jump into the market, hoping to capture some of the profits they see their friends making so effortlessly, you finally get down to the last bear standing. Mr. Market will do whatever it takes to prove the most people wrong. And one of his favorite things to do is to create momentum markets which defy the logic of the underlying fundamentals. It then ends in tears.

Mike Maloney, GoldSilver.com

Why does everyone think the Dow is going up, when it is actually going down in value?

According to the Minneapolis Federal Reserve, total inflation from 2000 to 2007, using the Consumer Price Index, is just about 20%. This means the Dow would have to be at 14,100 just to break even. And that's if the CPI wasn't a made-up, hocus-pocus, voodoo fabrication (which it is). Here's why.

In calculating inflation, the Bureau of Labor Statistics (BLS) takes a basket of goods and services and tracks their prices throughout the years. This worked just fine when they would track the actual price of the same items year after year. The problem is they no longer use the actual price, and they no longer track the same items year to year. If the price of an item has gone up so much that it might make whichever administration that is in power look bad, they simply drop that item from the basket of goods (deletion), switch to another item (substitution), or make up their own price (hedonic adjustment). Yes, the BLS has become just another division of the governments "Ministry of Propaganda". Its job is to manipulate the numbers, so as to paint smiley faces all over the economy.

…[This kind of] “invisible crash” is a product of a fiat currency system and/or rampant credit creation. It requires a rapidly expanding money supply to obscure the fact that an overvalued asset class is correcting and reverting back to fair value or less. It cannot happen on a gold standard with conservative fractional reserve banking practices. Therefore, it didn't happen in the United States until the 1970s and today. But it has happened numerous times throughout history once a country leaves an asset backed currency standard. The stock of the Mississippi Company of John Law's France, and the German stock market during the Weimar hyperinflation come to mind.

Michael Nystrom, BullNotBull

When I was about 9 years old, my father took my elder sister and me to see a performance by a famous magician called Blackstone. What I remember most about the show is when Blackstone, with a flourish of his cape, made an elephant appear onstage out of thin air. It was an astonishing feat, and the crowd - including me - went wild with applause. I had no idea how he did it. After the show however, as we were exiting the theater, my elder sister said, “I didn’t see what was so great about that elephant. It just walked onto the stage and everyone started clapping.”

My sister’s revelation was just as amazing as the trick itself, which suddenly made perfect sense. Blackstone had used some kind of sleight of hand, distracting the audience over here while he got the elephant to walk on stage over there. With this simple, well-known magician’s tactic, he managed to fool just about everyone.

Yesterday, as the Dow “smashed its all time high,” closing above 13,000 for the first time in history, I was strangely reminded of Blackstone’s performance that day some thirty years ago. The Dow’s current levitating act is the result of another well-known sleight of hand trick used by central bankers. It's called inflation. Even so, most everyone is mesmerized by the performance. Everyone seems transfixed, clapping in amazement at this spectacular feat.

Rob Peebles, PrudentBear

After four years of rising stock prices a person might wonder how private equity investors can keep finding companies cheap enough to deliver decent returns on their investment. According to Thomson Financial, private equity firms bought 654 U.S. companies last year. But were they bargains? Were they bought cheap enough to produce a decent return on their $375 billion cumulative price tag?

Here’s the answer: It doesn’t matter.

That’s the great thing about being a private equity investor. It doesn’t have to be about the Return on Investment or the ROI. There’s always the RFP, or Return From Pillage. So far, RFP has come in the form of “management” fees and “dividends” paid by recently-privatized companies to the privateers who privatized them.

Wall Street Journal reporters Greg Ip and Henny Sender described these innovative forms of compensation in a July 25, 2006 article using Burger King as an example. Here’s how private equity investors got it their way with Burger King: First, Burger King paid the private equity folks $22.4 million in “professional fees,” apparently for shepherding the company from the public wilderness into the loving arms of private equity owners. Then, after three years of restructuring and other voodoo, and three months before releasing Burger King back to the public, Burger King paid the investors a $367 million dividend.

After reviewing such a transaction, a person might exclaim, “Zowie, what a turn around to be able to afford to pay yourself almost a gazillion dollars!” But that person would be exclaiming in the wrong direction. That person should be exclaiming, “Zowie, you loaned money to Burger King to pay almost a gazillion dollars to their own owners!” That’s because Burger King borrowed the money for the dividend, the sort of thing that apparently is possible at the late stage of a credit bubble.

Ron Paul, Texas Congressman

The fiscal year 2008 budget, passed in the House of Representatives last week, is a monument to irresponsibility and profligacy. It shows that Congress remains oblivious to the economic troubles facing the nation, and that political expediency trumps all common sense in Washington. To the extent that proponents and supporters of these unsustainable budget increases continue to win reelection, it also shows that many Americans unfortunately continue to believe government can provide them with a free lunch.

Peter Schiff, EuroPacific Capital

As the Dow burst through the 13,000 milestone this week, few understood the hollowness of the achievement. Measured against the rising dollar-denominated prices of just about everything else on the planet, the Dow has actually lost value over the past seven years. Measured against the truest benchmark, the price of gold, the record high for the Dow was set back in January of 2000 when its price equaled approximately 43 ounces of gold. Today it is only worth about 19 ounces.

To better appreciate just how much of stock gains can be attributed to inflation, consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold. So despite all of the hoopla and a thirty-fold increase in stock prices, the Dow has actually gained no real value during the past eighty years. The entire rise from 360 to 13,000 has been an illusion made possible by the magic of inflation. So much for the concept of stocks being a “can’t lose” long term investment -- unless you feel that eighty years is not quite a long enough time horizon!

Jay Taylor, J Taylor's Energy & Energy Tech Stocks

We Americans have come to think it our natural-born right to be able to drive huge SUVs while most of the world lives in relative poverty. But our materialistic view of the world is on a collision course with a new reality that will be forced on us and will reduce our standard of living. The new reality I speak of is derived from a combination of declining production of oil, especially cheap oil, and rising competition from huge numbers of middle-class people from places like China and India as well as other lesser-developed countries. We are going to continue to pay much more for oil, as various geopolitical interests compete for dwindling supplies of oil, and as central bankers print more and more money in a self-deceptive move to try to pretend to society that we can afford expensive oil.

Jim Willie, Hat Trick Letter

A powerful gold and crude oil rally is soon to be unleashed. The gold push will be unwanted, but demanded by a weak USDollar. The oil push will be secretly ordered.

Three sources have supported the gargantuan US credit appetite in the last several years. The Asian trade surplus recycle has essentially disappeared, without publicity or fanfare. The Persian Gulf petro surplus recycle is going in full bore, under the shroud of accounting diversions, with little attention paid. The USGovt printing press has been turned loose in unprecedented fashion, without the harsh light of tracked M3 Money Supply statistics. Look for a higher crude oil price, like one to hit $80 per barrel, and a higher gold price, like one to hit $750 per ounce, in the coming months. Look for mindboggling creation of new money to come also, under the cover of darkness, to paper over the mortgage bond black hole, to avert associated credit derivative accidents underway. We are in the Weimar Age of modern money. Good prefers light; evil embraces darkness. In full light, the gold rally would be afforded greater tailwind. Even in darkness, gold will thrive since confidence erodes in darkness. Darkness is the constant theme to both the current financial system which manages the USDollar, and to a lot more of the national drumbeats.

Martin Weiss, Safe Money Report

Forgive me if my message to you is both brief and blunt:

The U.S. dollar is sinking into the toilet.

No one is able or willing to come to its rescue.

Investors who fail to take protective action could get hurt badly.

And those that act promptly stand to make some of the greatest fortunes in recent memory.

Greenspan Views in 1966

The article speaks for itself. My only question is, when did the pod people come to earth to kidnap Greenspan. The man who wrote this article is not the same person as the Federal Reserve Chairman that helped create and sustain two of the worst asset bubbles that the world has ever known.

Gold and Economic Freedom
by Alan Greenspan
[written in 1966]

This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand's Capitalism: The Unknown Ideal

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Alan Greenspan
[written in 1966]