Dreams of Greenspan

Don't ask us why the Maestro showed up in our dream. He just did. So we took the opportunity to ask him a few questions. We've reconstructed the conversation as best we can.

"Maestro...you hardly look yourself. It looks like twenty years have dropped from your face. It must be liberating not to have to worry about inflation anymore."

"What's inflation?"

"Ah yes. About that. Why haven't we seen it yet? You've seen massive fiscal stimulus plans the world over, a huge increase in the monetary base, and lower interest rates. But no inflation. Bond traders don't seem especially worried either. They are not demanding higher interest rates because they fear future inflation. And gold? Well, it's plodding along. But shouldn't it be going much higher as the supply of fiat money explodes?"

"You're thinking is so old fashioned. It's true. Or at least it used to be true. In the days when we had a gold standard, it was a great defense against government monetary fraud (that's what I used to call inflation, before I became a central banker)."

"Oh. What do you mean?"

"If each unit of paper currency in your hand is redeemable for gold, then each holder of paper units has the power to hold the government accountable for its fiscal and monetary policy. If the government prints too much money to pay for its spending programs, unit holders can redeem their paper for gold. This draws down the governments stores of real gold, forcing it to either reduce the supply of paper money, or lose all its gold."

"Why would it worry about that if it could just print more paper?"

"Because paper is not money. And your trading partners will not accept your paper if it is not backed by either real money or the ability to collect taxes from your people."

"I'm not sure I follow. Back up a bit for me."

"Okay. Back when everyone was on a gold standard, before the Great Depression, international accounts were settled in gold. It wasn't just citizens who could demand gold for their units. Nation states could do it to. Governments who ran up fiscal imbalances would see international holders of their currency redeem those paper units for real gold. This encouraged a kind of competition among nation states, or at least a kind of accountability. If you ran up deficits and borrowed a lot of money, gold flowed out to pay your creditors and to pay for your exports. Your inflationary monetary policy cost you your national inventory of gold and silver."

"So what happened?"

"My you ask a lot of questions."

"Hurry up. I think I have to wake up soon."

"Well, under a gold standard, governments are forced to manage their monetary system for the benefit of their people. You get a stable price level because the value of the money is not fluctuating constantly with changes in the money supply. Governments want to avoid causing a run on their gold supply that would result from fiscal and monetary mismanagement."

"Why did the world go off the gold standard if it was so good? What changed?"

"Lots of things. For example, with a gold standard, governments and people must live within their means. This is deeply unpopular with politicians, who must bribe populations with bright new shiny things to get elected. Gold makes it harder to bribe your people and win an election."

"Okay. What else?"

"For whatever reason, perhaps because it is in their nature, governments like to take their people to war. It keeps them distracted from other problems, usually caused by the government. But war is expensive. To pay for a war you must increase taxes or borrow money. If you increase taxes (directly or indirectly) you risk alienating your population and causing a tax revolt (and sending a lot of economic activity underground, out of the view of the tax collectors). So you have to borrow. It's the only way to greatly expand spending without raising taxes to punitive or socially disruptive levels."

"Ah. I see. Under a gold standard, you couldn't borrow excessively without causing a run on your nation's gold. So...a gold standard was a natural constraint on a nation's ability to make war."

"Yes. That doesn't mean nations didn't go to war before there was a gold standard. It just means that if you had to pay for your war with real money, it made it an expensive proposition. And if it undermined the value of the currency your citizens held, they were unlikely to support you. In a monarchy or dictatorship, that doesn't matter so much. But in a democracy, it matters a lot."

"If what you're saying is correct, Maestro, then there'd be a clear connection between the creation of fiat money which is not backed by gold at all, and war between nation states."

"There might be. But you're still thinking too small."

"What do you mean?"

"It's true that most nations suspended the gold standard upon entering World War I. This allowed them to run up ruinous debts to private bankers. They tried reinstating it, but then the Great Depression hit. And more than ever, governments needed the ability to print money to pay for domestic 'wars' on poverty and unemployment."

"Right. And then World War Two-which was partly a consequence of the ruinous debt and reparations Germany could not repay-came along and you saw a huge explosion in government debt, this time mostly through bonds."

"That's right. Which brings us back to inflation today. When the government finances exploding debts through the issuance of new bonds, investors typically demand higher interest rates to compensate for the inflation that results from the increase in the money supply. But today, in a kind of conundrum, bond investors are not demanding higher interest rates."

"Why not?"

"Who knows? For one, they don't see inflation. They see falling prices that come with a collapse in global demand. But it could be that they fear the worldwide recession more than they fear inflation. The contraction in global trade and national GDPs has investors fleeing for the safety of bonds. This allows governments to print money and expand the monetary base with apparent impunity."

"Apparent?"

"Yes. Why, there in Australia where you're sleeping, the government is going to announce a budget in May which may include a $50 billion deficit. This is a country that had a surplus just a short time before."

"That's not as bad as my home country. In the U.S., the government is going to run a trillion dollar deficit this year. And it's told everyone that number will double. But it doesn't seem to have dented demand for U.S. bonds yet."

"No, it hasn't. And that's because without a gold standard, governments don't have to compete for capital as fiercely as they used to. They can all sell bonds to investors to finance deficits, provided the deficits aren't too jaw-dropping and provided they can continue to collect taxes to pay interest on the debt. Plus, they're colluding with one another to eliminate tax competition among countries, which gives them an even stronger grip on your wealth."

"I'm with you Maestro. But I don't see where this is going."

"Let me show you. Governments can only raise direct taxes (income taxes) so much before it negatively affects the economy (and social cohesion), which in turns lead to falling tax revenues as real economic activity slows. So a sure sign of governments that are getting desperate for revenue is an increase in indirect taxes."

"You mean like the alcopops tax here in Australia?"

"I've never heard of that. But if it's a tax that the supplier of a good or service passes on to the consumer then yes, that's exactly what I mean. It's an efficient way for the government to raise revenue without looking like it's being grubby, desperate, or just plain greedy. It can also claim the taxes are being raised to discourage socially undesirable behavior, but this is generally just a lie to disguise the need to raise revenues."

"Ah. I see. You know the alcopops tax is illegal anyway, by the way. The government collected revenue on a tax using a law that hadn't been properly been passed by the Parliament. How is that possible? What about the Rule of Law?"

"What about it?"

"Never mind. You need to finish your lecture before I wake up. When will inflation result from the large increase in the monetary base?"

"I have no idea, my boy. You see at its core, fiat money greatly accelerates the rate at which scarce resources are depleted. Land, labour, capital, and raw commodities are allocated based on a demand that isn't sustainable. If you do that long enough-let's say for the last seventy years or so-you get an entire global economy (and population) that exists because of the increase in credit. That's the world we live in. And it's all falling apart with the credit depression you've been writing about."

"Wait a second Maestro. Are you saying that the scope and scale of this economic contraction is a lot greater than anyone expects because the fiat money system itself is failing?"

"You said it. Not me. But it does make sense to say that the last twenty years or so of building national economies around the growth of residential real estate and the finance sector has greatly hastened us to a day of reckoning, as your friend Bill Bonner might say. We will find out if all that investment made by banks is merely 'temporarily impaired,' or if it represents an enormous misallocation of our collective resources and has made us poorer for years to come."

"So what should we do?"

"This is your dream. You decide."

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 I'd get aggressive about this if I were you, Shooters. Take a step toward securing your retirement income in an inflationary environment. Please do not wait till rampant inflation is all over the news. And speaking of aggressive action, a Shooter sends in this piece of advice:

Gary,
Here's an idea for you. Instead of just complaining about the expanding dole, why don't we refuse to accept the benefits? Most of us scream (sometimes pretty loud) about Uncle Sam sticking his hand into our pocket for others, but how many of us refuse to accept the loot he snatched out of someone else's? Who refuses Social Security payments or Medicaid once they're eligible? All of a sudden, "I've been taxed," turns into, "I paid into it!" Bah! A Ponzi is only a Ponzi, and what was paid in is gone ― there's no claim that justifies keeping it running 'til some younger victim gets left with the bag.
 
And that principle is true of most government largesse. When we're like a litter of puppies down there with our eyes closed pushing each other away from a teat, nothing's going to change. We need to open our eyes, go through the dog door, and go feed ourselves in the streets. Remember the days when it was an embarrassment to be on the dole, and act like we remember. It really should be an embarrassment!
 
Maybe then when we scream it will sound like outrage, instead of like we didn't like the division of spoils.

I like it! I get pretty damned sick of people accusing me of using the stuff paid for by the taxes I hate. So I try to avoid using them. I don't even use streets and highways! I instead lurk in alleys and live just a few feet from the Whiskey Bar. If you tuned in yesterday, you already know how I feel about accepting counting on the government for retirement money.

(I suggest you guarantee your retirement income yourself instead of blindly trusting social security and government rackets.)

A Shooter sends a plausible vision of the future:

Could not help commenting on Mr. Kunstler's predictions for the demise of suburbia the flight of its inhabitants to small city centers/towns or rural areas.  As we speak, the inhabitants don't realize what is coming. If they were to be airlifted to the outskirts of Peshawar or Ulan Bator or Caracas they would truly see their future. The suburbs won't be deserted and the majority of inhabitants won't flee. No, they'll stay put and transition to a rather austere and very different existence. Houses with their suburban "yards" will convert to walled mini-compounds with gardens and some sort of livestock, just as in suburban third world locales. As municipal or county agencies gradually curtail or withdraw services, neighborhood based councils will gin up voluntary services to replace them. Hey, it's not all that bad! E verybody gets together on occasion and has a few home brews and breaks bread. You get to know your fellow citizens and you all will pitch in to survive, just like they do in other countries. Cheap, unregulated bus/van/jitney service will spring up, just like rural Jamaica, Brazil etc. You won't be needing that car much; maybe you'll even share a car on your block. You'll come to find out that home raised eggs and chicken and rabbit and fresh vegetables with lots of garlic and onions really is better than expensive, highly processed supermarket "food," not to mention the pleasures of home produced beer, wine and spirits. Did I forget the smell of home-baked bread wafting over the walls in the morning? You'll convert that 2-car garage to living quarters for the family members that just can't make it on their own. "Third world" living standards are coming to a suburb near you!
 
Thanks so much for having Mr. Kunstler on your site!

You're certainly welcome! But not everyone agrees…

Gary,

James Howard Kunstler needs to lay off the NASCAR-loving, tattooed country folks in IOUSA. We are the backbone of this place. We didn't get caught up in the housing bubble, or stock bubble, or anything else. It is JHK and his left wing buddies who are the problem. I love W&G and would never stop my FREE subscription. However, if JHK keeps insulting me, I will just delete it when I see his name. I don't care how good of a writer he is or how accurate he is, the backhanded insults aren't worth it.

Sorry you feel insulted, Shooter, and thanks for speaking up. Actually, we in the Whiskey Room care very much about how good a writer Jim is as well as his impressive grasp on the confluence of debt, energy scarcity and impending collapse…but I take your point.

Say! You could tell us what you really think about James Howard Kunstler and the Whiskey bartenders to our faces.

We're planning to have our own little Tea Party in Vancouver again this year…and this one is really special. It's the Tenth Anniversary of Agora Financial's flagship newsletter, la belle The Daily Reckoning. An entire Decade of Reckoning, Shooters! There will be a slew of Agora Financial editors and special guests…and, of course, your mainstay Whiskey editors.

How a Penny Stock Could Solve the Water Crisis

The scarcest resource on the planet is something you use every single day. I'm writing, of course, about water.

Fresh water is a valuable asset. How valuable? Well, no one's really sure. That's because experts don't know how much of the fresh water supply humans can use before they begin to throw a wrench in the environment's gears… 

How many rivers can we run dry? How many wells can we drill before we destroy entire ecosystems? These questions will need to be answered in order to fully understand the scope of the global water crisis.

Despite these unanswered questions, one fact is certain: If we continue to deplete freshwater supplies, other resources will suffer as well. Of course, as the global population continues its ascent, the situation becomes more dire…

"Freshwater fish populations are in precipitous decline. According to the World Wide Fund for Nature, fish stocks in lakes and rivers have fallen roughly 30% since 1970. This is a bigger population fall than that suffered by animals in jungles, temperate forests, savannahs and any other large ecosystem," The Economist notes.

Water makes up over 70% of the Earth's surface…but less than 0.014% of this water is accessible drinking water. And this water supply is not growing. In fact, with the past 100 years of global population growth, we're depleting this limited reserve at a record pace.

Stateside, residents and experts in Las Vegas and Southern California are starting to worry about their respective drinking water situations. A recent Bloomberg article points out that Vegas' water source, Lake Mead, is approaching dangerously low levels, which could suddenly turn off at least 40% of the city's water.

However, the water situation in Vegas pales in comparison with the Middle East. With oil prices on the rise over the past few years, countries like the United Arab Emirates saw population explosions. In these desert nations, water shortages routinely make headlines.

Instead of planning for future shortages, the majority of the world turned a blind eye. Now we face a near-catastrophic situation. But not all hope is lost…

In recent years, we've heard plenty about water conservation and advanced water-filtration technologies.

But no topic has been as prevalent as desalination...

Desalination is the process of removing salt from salt water. And it's the single best way to ensure a positive outcome when it comes to the global water crisis.

Historically, the main problem with desalination efforts has been energy costs. We already have the technology to turn salt water into drinkable water. But we haven't been able to accomplish the feat cost-effectively…

There are a few different ways to remove salt from ocean water, but the most prevalent is thermal desalination, or multistage flash distillation. The way these systems work is through rapidly exposing salt water to high temperatures, which causes a portion of this water to "flash" steam, which is captured as salt-free water.

Unfortunately, it's expensive to provide the energy needed to run this type of process. Currently, it's the most widely used form of desalination. Around 85% of all desalinized water comes from these types of plants.

But another technique is rapidly gaining attention. It's called reverse osmosis ― a desalination process in which salt water is pumped through a membrane, or filter. Until recent technological breakthroughs, the membranes and pumps were both too expensive to operate economically.

The Coming Siege of Austerity

It's a curious symptom of the consensus trance zombifying the American public and its auditors in the media that something like a "recovery" is now deemed to be underway. And, as events compel me to repeat in this space, it begs the question: recovery to what? To Wall Street booking stupendous profits by laundering "risk" out of bad loans with new issues of tranche-o-matic securitized paper? This I doubt, since there isn't a pension fund left from San Jose to Bratislava that would touch this stuff with a stick, even if it could be turned out in collector's editions of boxed sets.

Does it mean that American "consumers" (so-called) are awaited momentarily in the flat-screen TV sales parlors with their credit cards fanned-out like poker hands, ready for "action?" Not too likely with massive non-performance out in cardholder-land, and half the nation's electronics inventory wending its way onto Craig's List. Are we expecting more asteroid belts of new suburbs carved in the loamy outlands of Dallas and Minneapolis, complete with new highway strips of Big Box shopping and Chuck E. Cheeses? Go to banking's intensive care unit and inquire (if you can) among the flat-lining production home- builders and the real estate investment trusts on life support when they expect to rev up the heavy equipment.

The idea that we're about to resume the insane behavior that induced the current epochal malaise of economy is so absurd it will only be heard in the faculty dining halls of the Ivy League. And if America is not picking up where it left off eighteen months ago - the orgy of spending future claims on wealth unlikely to accrue - then what is our destiny? Based on what's out there in the organs of public thinking, it seems that we don't want to think about it.

So many forces are arrayed against a return to the previous "normal" that we will be lucky, in another eighteen months, to still find ourselves speaking English and celebrating Christmas. What's "out there" is a panorama of mutually reinforcing critical problems pertaining to how we live on this continent. Like the obesity, heart disease, and diabetes that plague the public, these problems are disorders of lifestyle habits and the only possible "cure" is a comprehensive revision of lifestyle. With the onset of spring weather and the cheez doodles and monster truck rallies and NASCAR tailgate barbeques and the drive-in beer emporiums all beckoning, can the public shift its attention from these infantile preoccupations to saving its own ass?

So far, the most striking piece of the economic fiasco is the absence of any galvanizing spirit among the millions getting crushed in the tragic unwind of our relations with money. It will be interesting to see, for instance, if there is any uproar over the evolving story of Goldman Sachs' latest raid on the U.S. Treasury, after booking billions in taxpayer-funded payouts funneled through AIG, based on double-hedged credit default swaps. Such magic tricks are understandably hard to follow, but a dozen-or-so federal attorneys with a middling background in differential calculus might suss out the trail that leads from Ben Bernanke's work station to Lloyd Blankfein's cappuccino machine.

Something similar may be said in regard to revelations last week of White House economic advisor Larry Summers' connection with a number of hedge funds shoveling millions into his deep pockets for showing up once a week to cheerlead their "innovations" - not to mention his shadowy visits to the Goldman Sachs gravy train even after he signed onto the Obama campaign. As long as the stock markets seem to rally - no matter what else is really going on in America - nobody will pay much attention to these disgusting irregularities.

Since it is that time of year, and I am haunting the gardening shop, one can't fail to notice the many styles of pitchforks for sale. My guess is that the current mood of public paralysis will dissolve in a blur of blood and spittle sometime between Memorial Day and July Fourth, even with NASCAR in full swing, and the mushrooming ranks of the unemployed lost in raptures of engine noise and fried cornmeal. It doesn't take too many determined, pissed-off people to create a lot of mischief in a complex society.

On the agenda in the second quarter of '09 are ominous rumblings in the oil and food sectors. Half a year of cratered oil prices have decimated the oil industry and we're driving at 100-miles-an-hour straight off a cliff into a new kind of supply crisis - even if industrial production and global exports remain moribund. So many drilling rigs are being decommissioned that the oil industry itself looks like it's preparing for its own death, investment in exploration and discovery has withered with the credit markets, and the world may never recover from the year long hiccup in oil industry activity - translation: peak oil is biting back now with a vengeance. Its peakness will look peakier and the yawning arc of depletion beyond will look steeper and pose a threat to every globalized and continental-scale enterprise in the known world.

So many dire elements are ranging around our food production system (i.e. farming), from widespread drought and water table depletion to "input" shortages (especially fertilizers) to sickness in credit availability, that we're all one bad harvest away from something that will make Pieter Bruegel-the-elder's "Triumph of Death" look like Vanity Fair's annual Oscar Party in comparison.

Barack Obama, charming as he is, had better drop his pretensions about kick-starting the old consumer economy, fire the Wall Street clowns and parasites who are running that futile exercise, and start preparing a US Lifeboat Economy aimed at reducing the scale and scope of our outlays so we can survive the coming siege of austerity. Meanwhile, I'm glad that he finally got a dog for the White House, because the President knows full well where to turn in Washington if you want some genuine love and affection.

Fire Up the Chainsaws

With the Dow now pushing nose-bleed heights at the 8000 level, the markets have suddenly gone from worries about the next Great Depression to talk of "green shoots" and "glimmers of hope."

And in an uptrend that has seemed to defy gravity every step of the way, fear has given way to greed, causing one bad tape after another for the bears.

In fact, two weeks after I wrote about these mysterious "green shoots" myself, the markets have jumped even higher, led by the financials.  One by one now, the banks have gone on to beat expectations, giving the bulls the upper hand.

But despite these balance sheet miracles the banks have pulled off lately―thanks largely to TARP money―it is safe to say the banks aren't exactly out of the woods yet.

And by extension, neither are we.

That's because even if the banks have temporarily put their troubles behind them, the next shoe is now lining up to drop. 

I'm talking, of course, about a deteriorating commercial real estate outlook, where all signs now are pointing to a much steeper decline.

In fact, just this morning the industry was hit with a virtual bombshell, as time finally ran out on General Growth Properties Inc. (GGP), the second largest mall owner in the country with more than 200 properties. Before the bell, they filed the biggest real estate bankruptcy in U.S. history after amassing $27 billion in debt during the run up.

The Beginning of the End in Commercial Real Estate

That makes GGP the equivalent of a dead canary in a coal mine, as this cycle of distress will undoubtedly take others down with it. General Growth Properties will certainly not suffer alone.

"This is kind of the beginning of the end," Dan Fasulo of Real Capital Analytics said. "This bankruptcy will drive down the values of mall assets in the United States. It's going to put, I believe, more supply on the market than can be absorbed by investors."

Of course, this is something we have been warning our readers about for some time now.

In fact, our own Ian Cooper has been playing the downside in commercial real estate for months now, warning his Options Trading Pit readers:

"The meltdown at some of the biggest commercial REITs will be another blow to a financial system teetering on the brink of disaster. And nothing may be able to stop the slide. . . One reason for concern is that the CMBS market (commercial mortgage backed securities) has just about dried up. And if buildings can't be refinanced, we could see further distress, driving real estate values even lower."

That was two months ago. Since then it has only gotten worse, which Mr. Greenshoots himself, Ben Bernanke, admitted yesterday with the release of the Fed Beige Book.

In an otherwise "less awful" report, the Fed was considerably less rosy on commercial real estate noting:

"Nonresidential real estate conditions continued to deteriorate over the past six weeks. Demand for office, industrial and retail space continued to fall, and there were reports of increases in sublease space. Rental concessions were rising. Property values moved lower as reality 'set in.' Construction activity continues to slow, and several Districts noted increased postponement of both private and public projects. Nonresidential construction is expected to decline through year-end, although there were some hopeful reports that the stimulus package may lead to some improvement.

"Commercial real estate investment activity weakened further. Contacts said a decline in credit availability and markdowns on commercial property were keeping buyers and sellers on the sidelines." (Emphasis mine)

Commercial Real Estate Outlook

Translated, that means "look out below," an opinion shared by David Henry, president of U.S.-based Kimco Realty Corp.

Henry told the CIBC real estate conference this week, "We have a massive wave of debt maturities coming, at least in the U.S. . . and there will be a massive amount of workouts, there will be some extensions, but there will also be some very high-profile bankruptcies, and very high-profile forced sales."

In short, it's the vicious cycle all over again. And as in residential properties, the troubles in commercial real estate revolve around loans gone bad and falling property values―off by as much as 50% from the peak.  

In fact, some analysts now estimate defaults on commercial loans could go as high as 6% by 2010. Sound familiar?

One way to play this inevitable trend lower is to short sell hotel REITS, since they are doubly vulnerable these days. For them, it's not just CMBS worries but a big drop in room revenues as consumers retrench.

So, how bad has it gotten for hotels these days?  Well, here's the quote of the day for you by DRBS.

The bond rating agency recently said, "News coming out of the hotel market is, quite simply, not good. Well, bad actually. No, make that terrifying. Predicting hotel performance over the next 12 to 18 months is like juggling chainsaws while riding a unicycle."

That makes Starwood Hotels & Resorts Worldwide Inc. (HOT) and Intercontinental Hotels Group (IHG) good candidates to move further to the down side.

So, enjoy those green shoots for as long as they last. The brewing troubles in commercial real estate have really just begun.

Signs of the Recessionary Times From Stocks Market

Earlier this week, Bernanke asserted that the U.S. economy's decline was slowing. Yesterday, the Fed released the results of its Beige Book, which (surprise, surprise) backed Big Ben's assessment.

The business survey showed that the contraction is slowing or showing signs of stabilization across many regions, including San Francisco, New York, Chicago, Kansas City and Dallas.

In addition, the Beige Book said that while "housing markets remain depressed overall...there were some signs that conditions may be stabilizing," including an increase in "potential buyers."

Well, these 'potential buyers' will certainly have a lot to choose from. RealtyTrac reported today that total foreclosure filings - which include default papers, auction sale notices and repossessions - reached 803,489 in the first quarter, up 24% from the same time in 2008. Of these filings, they continue, 341,180 happened in March - a 17% increase from February and a 46% jump from March 2008.

"In the month of March we saw a record level of foreclosure activity - the number of households that received a foreclosure filing was more than 12% higher than the next highest month on record," said James J. Saccacio, chief executive officer of RealtyTrac, in a statement.

In other housing news, the Commerce Department reported today that building permits fell to a record-low level and construction on new homes dropped sharply last month, after a big gain in February. On top of that comes news that housing starts fell 10.8% in March - the second lowest rate since the 1940s.

Wowee...the good news just keeps on coming. It's amazing to think back to the housing heyday...when people thought home prices would just keep going up and interest rates would never rise.

But now, the home ATM has run dry...and the aftershocks of the 'pop heard round the world' are still being felt.

As you know, dear reader, the economic meltdown we face today was sparked by the first wave of subprime mortgage defaults. Homeowners that were in over their head with mortgages they couldn't afford in the first place began to default on their loans in droves last year.

Rob Parenteau, who has recently taken the helm of the reincarnation of The Richebächer Letter, warns that we are in for the second wave of these toxic mortgages ahead. The first time subprime mortgages reset at a higher rate was in 2008 and the subsequent flurry of defaults sent banks into a tailspin.

Well, get ready, warns Rob. We still have "Option ARM" and "Alt-A" loan resets to look forward to...and those resets will peak in 2011.

"Just like subprime," explains Rob, "these loan contracts also carry a 'reset' risk in the fine print, when already high monthly mortgage payments could as much as double - right at the height of the second biggest market meltdown since the Great Depression."

Just as his predecessor, Dr. Kurt Richebächer did, Rob is giving his readers ample time to prepare for these events - and make sure their wealth doesn't get wiped away.

Be sure to check out his new special report with details on how to shield yourself from an even bigger market downturn. Read it here:

Seven Super Hedges Against the Coming Market Catastrophes of 2009-2010

Now, we turn to Addison with more news on the Fed's Beige Book:

The mob on Wall Street is taking the bait," reports Addison in today's 5 Min. Forecast. "The Beige Book release yesterday helped push the Dow and S&P 500 up over 1.3% yesterday, their fourth rally in the last five days.

"Bad news from Intel and UBS was overshadowed by nice earnings from CSX, a dividend boost by Proctor & Gamble and this news from American Express: Growth in souring credit card loans slowed in March. It's still growing, of course, but focus on the 'slower' part... and buy!

"Even the decrepit IPO market showed a sign of vitality yesterday, too. Rosetta Stone, the folks who promise to teach you French or Swahili with software, went public yesterday at a price above its expected range. That hasn't happened in 11 months. Underwriters had set a range of $15-17 a share, but bidding ended up starting at $18 a pop.

"This morning, the stock opened at $25. Formidable!


"That's the third successful IPO in April. Not bad, considering there have only been two others since August of last year."

Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

One way you can be sure you never miss an issue of The 5 is to have them sent directly to your inbox - like subscribers to Agora Financial's paid publications do. One such publication, Capital & Crisis, will ensure that you not only get your serving of The 5 every day, but will also let you know how to earn extra paychecks...without taking on an extra job. See how here.

Now back to Kate in Charm City:

The signs of the economic downturn, whether you want to call it a 'recession' or a 'depression', are all around us.

Take, for example, 11 Times Square. This 40-story tower in Midtown Manhattan has everything going for it, reports the NYT.

"Floor-to-ceiling windows, still relatively rare for an office building; six terraces; a thick concrete core that reduces the need for view-obstructing columns; and many of the latest in energy-efficient technology."

There is only one thing this building lacks: tenants.

With sky-high rents, the possibility of this kind of space flourishing is dwindling...and it's not just this one building. The NYT cites two planned redevelopment projects in Lower Manhattan and SoHo that have been postponed indefinitely due to no construction financing - and no tenants.

Belt-tightening is happening everywhere...even in the city that was one of the leaders in the housing frenzy of yesteryear. Vacancies are climbing and rents are on the decline.

As Addison pointed out last week, "Preliminary first quarter data show a 60% annual crash in Manhattan co-ops and condos."

Recessionary signs are spilling over to New York City restaurants as well. Reports come in that once bustling restaurants are sitting nearly empty and that 'dining incentives' such as 'BYOB Night' are popping up more frequently.

How to Protect Your Family from the Greatest Economic Disaster

It's going to be a real disaster...

The current administration's economic strategy will create an unmitigated disaster - not only our country's worst financial calamity, but the greatest economic disaster in recorded history.

I first warned my readers about what was happening last December, in a letter titled The End of America:

"The coming great inflation will destroy America's economic leadership. It will lead - eventually - to the return of settling international obligations in gold instead of paper dollars. And this will happen much faster than anyone expects.

"By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the U.S. government. The price of gold will be well over $2,500 per ounce. Most importantly, commodities will no longer be priced in dollars either, but instead in the currencies of the leading producer. Americans haven't experienced anything like this since the Great Depression."

Since I wrote that first warning, I have become much more concerned and much more afraid. What the president has done is actually worse - much worse - than even the dire scenario I had envisioned. Not only is the administration planning on enormous deficit spending this year, but the current plan calls for increasing deficit spending for the next decade - spending that will more than double our entire national debt during his presidency.

The Congressional Budget Office produced the following graphic, which compares the deficits of the 1980s and 1990s to the current and future budgets. Assuming Obama remains in power over the next eight years and assuming these deficits aren't actually much larger (which almost always happens), the Congressional Budget office estimates the president's budget will add more than $10 trillion to the total federal debt by 2019 - approximately as much total debt as was outstanding at the beginning of 2007.


Obama plans to borrow more money over the next eight years than all of the other presidents - combined.

It's very hard to put this in perspective. The numbers have become so large they're almost meaningless. "Twenty trillion" has 13 zeros: $20,000,000,000,000. Nobody can think about a number that large. But consider this... In 1980, the entire federal debt totaled $930 million. Assuming we're paying 5% on our debt in 2019, we will spend more money on interest than our entire national debt of 1980.

This level of debt is going to be a huge problem because no one will want to pay the money back - ever. And it can't be financed forever. The poor will blame the rich. The rich will leave and take their wealth offshore. And absolute chaos will follow. The dollar will be completely destroyed.

Now... I know... you're thinking, "I've heard all of this before. But the end of the world somehow doesn't happen. We find a way out."

Not this time. In fact, when I wrote last year that the dollar would cease to be the world's reserve currency much faster than anyone expects, I'm sure no one took me seriously. But since then, we've heard two of the world's leading powers - China and Russia - both openly suggesting a new world reserve currency must be created. Putin is even talking about using gold to settle international trade. It will happen because no one will want to be a creditor to the United States.

As more and more people try to get out of the dollar, the government will be forced to forbid the free exchange of dollars into other currencies - and perhaps even to forbid the purchase of gold bullion. This will happen. I guarantee it. And it will happen during the Obama administration.

That's why it's critical for you to take precautions now, while you still can.

The first thing you should do, if you haven't yet, is buy gold bullion. It's easy: You just call a few coin dealers, find out who offers the lowest premium on bullion, and wire them the money. Once you have the coins, they're easy to hide, easy to store, and easy to transport. There's no law (yet) saying you can't take bullion out of the country. If things start moving that way, you should have enough time to get the bullion out before the law passes. If not... well... you can clip your coins easily and use the gold to pay for whatever you might need.

I also believe you should immediately buy gold stocks. In fact, I'm convinced you'll never have a chance to buy gold stocks this cheaply again... Gold stocks have never been cheaper compared to the price of gold itself. This is an amazing, once-in-a-lifetime opportunity. I truly hope you'll capitalize on it.

The second thing you should do is move as large a percentage of your financial assets as possible out of the country. Unfortunately, I don't know enough about this yet to offer any good advice. I'm working on it.

And the third thing you ought to do is to build a stimulus package for yourself. I realize it's paradoxical. But the coming crisis will make lots of people rich. It's not hard to generate a paper fortune in a huge inflation. All you have to do is own the most important economic assets: energy, communication, and transportation. Thing to do right now is buy the assets you know the government has to have for the economy to function. These assets will remain in private hands, and their values will increase the most.

I can tell you what happens to countries that go bankrupt. I've been to Argentina. I'm familiar with the history of Mexico and Great Britain. We'll see the same things here, shortly: inflation, huge tax increases, capital flight and, eventually, capital controls.

It will probably take decades for Americans to realize socialism doesn't work. But that clarity might not happen during my lifetime. And I don't want my assets to be stuck inside a banana republic in the midst of a huge socialist experiment. I'm graveyard serious: If you do not take precautions and prepare yourself and your family for the inevitable collapse of our currency, you will suffer incredibly over the next decade.

Tax Day Tea Parties For Stocks Market

In case you managed to forget, today is Tax Day. And according to the Wall Street Journal, "Tax Day Becomes Protest Day."

There will be rallies or "tea parties" taking place all over the United States today, to protest higher taxes and out-of-control government spending.

DR contributor, Gerald Celente, who is director of The Trends Research Institute, calls these tea parties and tax protests "harbingers of revolution."

So who are these 'revolutionaries' that are organizing these events? Turns out, not a political party or a union...just ordinary people harnessing the power of the Information Superhighway. The WSJ reports:

"The protests began with bloggers in Seattle, Wash., who organized a demonstration on Feb. 16. As word of this spread, rallies in Denver and Mesa, Ariz., were quickly organized for the next day. Then came CNBC talker Rick Santelli's Feb. 19 'rant heard round the world' in which he called for a 'Chicago tea party' on July Fourth. The tea-party moniker stuck, but angry taxpayers weren't willing to wait until July. Soon, tea-party protests were appearing in one city after another, drawing at first hundreds, and then thousands, to marches in cities from Orlando to Kansas City to Cincinnati."

As the idea gained popularity, people wanted to synchronize these events on a certain day...and Tax Day became the obvious choice. Although these protests are focused on what may be seen as typical GOP issues, they are not a Republican effort, but a popular effort. People far and wide are coming out to show that they are fed up with incessant government spending and exorbitant bailouts.

And as it turns out, the bailout money is running low. There's "only" $135 billion left at the Treasury Department for bailouts. To see which banks need the most money, the Obama administration has been doing a "stress test" of the country's 19 largest banks to see who needs the moola the most.

The administration plans to disclose the conditions of these banks, hoping to restore confidence without unnerving investors...which will no doubt end up being a tight rope act. Even by admitting that some of the banks still aren't stabilized, the government runs the risk of causing investors to panic - which is exactly what they are trying to avoid.

In his speech to the nation yesterday, President Obama covered these plans...and defended his administration's decision to prop up the failing banks:

"Of course, there are some who argue that the government should stand back and simply let these banks fail - especially since in many cases it was their bad decisions that helped create the crisis in the first place," he said. "The truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth."

But judging from these tea parties and tax protests, the American people remain unconvinced. Though there is no one organization putting on these rallies, those attending are unified on what they are up in arms about. Reports the Heritage Foundation:

"What does unite the protesting taxpayers is the unprecedented expansion of federal government power and spending that has taken place over the last 14 months. Starting with President Bush's $168 billion economic stimulus, through the 2008 housing bailout, TARP I, TARP II, President Obama's trillion-dollar stimulus, the auto bailout, etc. Americans have grown more and more wary of the ever expanding size and scope of the federal government."

Gerald Celente sees these protests as a step in the right direction, but "Nothing short of total repudiation of our entrenched systems can rescue America," he says. "We are under the control of a two-headed, one party political system. Wall Street controls our financial lives; the media manipulates our minds. These systems cannot be changed from within. There is no alternative. Without a revolution, these institutions will bankrupt the country, keep fighting failed wars, start new ones, and hold us in perpetual intellectual subjugation."

Viva la revolución!

Now, we turn to Addison for more on everyone's favorite day of the year:

"As could be expected - and just when Uncle Sam and his friends need it the most - total tax revenue among American states will be down this year by the largest percentage since the Great Depression," writes Addison in today's issue of The 5 Min. Forecast.

"State tax revenue fell 4% in the last quarter of 2008, the first decline in six years and the largest decline in over 50. Preliminary numbers suggest the first quarter of 2009 will be even worse...by a multiple of three. Average state tax collections in January and February were down 12.8% compared to the same time in 2008.


"Personal and corporate income are in the crapper. Property taxes are too. Taxes on investment profits? Heh, right. And with all the economic strife over the past year, we can only begin to imagine what tax evasion strategies, subversive returns and delayed filings must be sticking in the IRS' craw on this fine day."

Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

The 5 Min. Forecast is free to subscribers of Agora Financial's paid publications...such as the reincarnation of The Richebächer Letter. Check out The Richebächer Letter and learn not only how to protect yourself from the continuing global financial meltdown...but the best way to profit in this market climate - even when a recovery is nowhere is sight. Click here for the full report.

Now, back to Kate in Baltimore...where it is STILL raining:

Stocks fluctuated in midday trading. The Dow rose 0.3% to 7,941.29, while the broader stock indicators fell.

Looks like investors have a bad taste in their mouth following more downer data that points to signs that the economy is still in peril. The AP reports that "The Federal Reserve said production at the nation's factories, mines and utilities fell 1.5 percent in March, the fifth straight month of decline and worse than the 1 percent dip analysts expected."

On the other hand, you have the Consumer Price Index data, released today by the Labor Department. This key measure of inflation shows that consumer prices declined 0.1% in March. The index has decreased 0.4% over the last year, the first 12-month decline since August of 1955.

A lower CPI isn't great news for our favorite yellow metal, which investors flock to when inflationary fears are running high. Gold for June delivery fell $1.40 to $890.60 an ounce today.

"The lower CPI print is certainly not friendly to gold," said Brian Kelly, chief executive officer of Kanundrum Research, a commodities and macroeconomic research firm. "Couple that with a stronger dollar and we have significant headwind for the yellow metal."

But, you can take the CPI number with a grain of salt...that's what our friend Chuck Butler does. Writing in today's issue of The Daily Pfennig he says, "The government accountants want us to believe that inflation is only running at 1.7% annualized...which is hogwash!"

Whether or not a government masseuse has handled the inflation number, we don't expect the price of gold to stay this low for very long. Take advantage of the dip in the price and get some to pad your portfolio with by clicking here.

And lastly, our friends in the Far East keep popping up in the news lately...suggesting the creation of a new reserve currency...warning about U.S. Treasuries... They certainly seem a little skittish about the state of the U.S. economy in general.

But really - can you blame them? The Chinese are the largest holder of U.S. Treasury securities...totaling $744.2 billion. No wonder they want to protect their investments.

Yesterday, Dallas Fed President Richard Fisher hoped to ease fears that China would do anything to harm U.S. interests, such as dropping Treasuries. He denied that China would decouple economically from the United States, saying the relationship between China and the U.S. is 'symbiotic.'

"China cannot succeed if the U.S. does not succeed," Fisher said.

The Chinese do need Americans to keep up their appetite for geegaws and gadgets...but as we pointed out yesterday, the U.S. isn't buying much of anything - and the Chinese economy is noticing.

"Recently, China injected close to $600 billion in a stimulus in their own economy," writes colleague Bill Jenkins. "There is some evidence that it may be helping. It has also been reported that they hold close to $2 trillion U.S. dollars in their investment portfolio, and it has grown 16% over last year, a whole $7.7 billion. If the value of their U.S. holdings should fall 30%, it would roughly equal the size of its recent stimulus.

"If the whole thing went belly up, it would still only equal one- seventh of the whole U.S. GDP - and China would still be solvent. The striking facts about China relative to the United States are these: China has four times the people, but only a quarter of the GDP. If their holdings were to get washed away in a tidal wave of inflation, it would be like worrying about a roof leak while a whole tsunami is bearing down on their house. At that point stability is not likely on either side of the globe."

The “All-Natural” Way to Play Penny Pharma

The Food and Drug Administration is not looking out for your best interests. In fact, some see the FDA as a group of swindlers, thieves, and propagandists.

No one feels this way more than nutritional supplement companies. And rightly so…

Until a 1996 piece of legislation, the FDA ruled the supplement industry with an iron fist. If a pharmaceutical company developed a drug that performed the same remedy or other function as a supplement or vitamin, the FDA would approve the drug and ban the supplement nine out of 10 times.

The bill took some of the FDA's power away, but that didn't stop the agency from banning certain substances. As one industry insider notes, "With the FDA's help, drug companies take traditional herbs, extract their main actives and turn it into drugs."

[Note: By "main actives" she was referring to the chemical or compound that offers health benefits, which is found naturally in the plant.]

The drug company usually does this through synthetically manufacturing the chemical or compound to form a drug. The FDA will ban the source (the plant) and approve the drug.

As Mike Adams of Natural News notes, "It would be like Big Pharma patenting vitamin C, then the FDA claiming that all oranges and lemons were adulterated with drugs because they naturally contain their own vitamin C."

As ridiculous as this method is, it's been the agency's weapon of choice, especially when dealing with herbal and traditional supplement companies.

As recently as February of this year, the FDA banned vitamin B6, or pyridoxamine, by "declaring it to be a drug." Meaning this naturally-occurring vitamin, which is found in fish and chicken, is illegal unless a (presumably major) drug company develops it. Pyridoxamine, as a supplement, was used to prevent the progression of kidney disease.

This is nothing new; the FDA has been playing this game for years. But as the saying goes, if you can't beat 'em, join 'em. That's why a new breed of potential drugs is shaping up…

Many supplement companies are commencing clinical trials on their formulas. This recent outburst of new players probably won't fragment the pharmaceutical industry, but it does give penny stock investors a few more opportunities.

Previously, the only major catalysts for supplement companies were commercialization of its products and earnings reports. Now, they can use the FDA as a benefit instead of a burden. We already know what an FDA approval can do for a company...

The Fastest-Growing Niche Segment in the Supplement Industry

One tiny, but fast-growing, segment of this niche industry is traditional Chinese medicines (TCM). In the western world, the number of countries recognizing TCM as legitimate is increasing. According to People Daily, a China-based newspaper, more than 120 countries have set up TCM institutions or clinics. Just in the U.S. there are 53 schools of TCM.

More specifically, Chinese herbal medicine use is growing at an astronomical rate. Some estimate this growth at 20% in the western world. In the U.S., California is leading the way, with the majority of herbal clinics and practitioners of TCM. Many U.S. health insurers are now recognizing and including TCM into their coverage.

With the fast growth of herbal medicines and the recent moves by the herbal supplement industry, we see large upside for a select few companies… The next big gains from this niche field will no-doubt be a penny stock. We'll keep you updated…

Stocks Market Report: Nose Above Water

During this recession, the spike in U.S. wholesale inventory/sales (I/S) ratios has proven to be the largest since the 1981-2 recession. Despite just-in-time inventory systems, the demand shock this time around was simply too sharp and swift for firms to adjust orders and production quickly enough.

Wholesale I/S ratios tend to peak during recessions, with the bulk of the drawdown accomplished in the early recovery phase of the business cycle, when wholesale shipment growth revives. The inventory adjustment does not need to be complete to end a recession - the I/S ratio merely needs to peak, which appears under way.

Consumer credit growth remains moribund. Ratcheting up of minimum payments and interest rates is reducing the willingness and ability of households to substitute these sources of credit for housing-related credit. Bucking the trend is nonrevolving credit growth provided by saving institutions, although this has proven a very volatile source of funding for households. We do not see the private deleveraging theme ending anytime soon, as discussed in prior monthly letters. Policy to force banks to escalate lending in the face of the new frugality evident among U.S. consumers is likely to be thwarted, just as it was in the early 1930s.

 

Weekly chain store sales have clawed their way back to flat and slightly positive territory over the past month. As with the wholesale results reported above, this is consistent with a less severe phase of the recession after the Q4 2008 freefall. Tax refunds, mortgage refinancing and price discounting may be helping those households still employed in stabilizing their spending before the fiscal package hits.

The past four weeks have shown some stabilization in initial unemployment claims, right around the same spikes of the 1982 recession. Initial claims tend to peak as a recession is closing out. While employment is generally a lagging indicator, initial unemployment claims have more of a coincident or slightly leading indicator tendency at cycle turning points. Since the maximum growth shock appears to be loaded into Q4 2008, it would make sense that the layoff response would peak one quarter later. A peak in the pace of layoffs is not to be confused with a peak in the unemployment rate, which we do not anticipate until Q2 2010 at the earliest. Still, if the high for the recession is developing in initial unemployment claims, and active fiscal stimulus is about to hit, this combination should help equity investors regain their nerve.

Refi applications continue to climb to their prior highs despite a slight rise in mortgage rates. While bank acceptance of mortgage refinancing applications remains restricted, this is an important channel for households to reduce their expenses and rebuild their savings. It also adds to fee income at banks. Purchase applications remain subdued, although they have picked up a bit in recent weeks.

The monthly U.S. trade deficit is shrinking at a dramatic pace as imports implode faster than exports. Falling oil prices are part of the import reduction, but with consumption cratering, imports are off nearly 30% versus a year ago. The turn in trade is clearly more than just price effects. In fact, U.S. export price deflation is running close to a 7% year-over-year pace as producers struggle with a collapse in global trade.

From a financial balance point of view, the more dramatic the turn in the U.S. trade balance, the easier it will be for the U.S. private sector to return to a net saving position. However, that poses serious challenges to production in the export-dependent economies abroad, and we continue to see harsh production cuts coming out of Asia. We would much rather see the U.S. trade balance turning with export growth remaining robust - instead, we have global trade collapsing because so many countries geared their growth strategies to an ever-indebted Western consumer. While many institutional equity investors have piled back into emerging equity markets over the past month because they are perceived to be the highest beta play, we remain concerned that excess capacity will prove to be a serious challenge for these nations as the globalized economy adjusts to a less-leveraged Western consumer.


All in all, the message continues to be one of a still sharp recession in the United States, with mounting evidence that the most violent portion of the downdraft is behind us. Evidence of a peak in I/S ratios, a peak in initial unemployment claims, improved refi activity and a dramatic reversal in the U.S. trade balance are all consistent with a recession that is still challenging, but not as overwhelming as the free-fall state that gripped the United States in Q4 2008. This is a better setup for the fiscal package to get some traction, although we continue to believe the earliest we might expect a positive U.S. real GDP result is in Q4 2009.

Technical measures of U.S. equity indexes continue to flag an extremely overbought condition. Given the run-up in the face of "less bad is good" news, we suspect equity investors have gotten ahead of themselves as they discard disaster scenarios. As mentioned last week, weak Q1 earnings results should be a catalyst for a pullback, although we are not convinced the prior lows will be violated, as too many institutional investors want to get onboard the rally train. We also are becoming increasingly concerned about the Fed's gambit with regard to Treasury yields. Once again, 10-year U.S. Treasuries approached 3% last week, which we would suggest is the informal yield ceiling the Fed is likely to impose.

The catch, as we see it, is as follows: If the Fed is forced to accelerate its Treasury purchases to keep yields from climbing above 3%, bond investors will tend to view the subsequent expansion of the Fed's balance sheet as "monetizing" the fiscal deficit. Foreign investors are likely to be especially wary of this, and the weakness in the currencies of nations with central banks pursuing quantitative easing has been conspicuous in the past few weeks.

In addition, to the extent the Fed is suppressing interest rates, and that successfully pushes investors into riskier asset classes like equities in order to earn adequate returns, Treasury bonds become a less attractive investment. Either way, the success of the Fed in these operations strikes us as making it harder for the Treasury to sell new bond issuance to private investors. The Fed could be unwittingly setting itself up to become the largest buyer of Treasuries, which we believe would aggravate the monetizing fears mentioned above. The movement in platinum, palladium and copper of late suggests monetization fears are present even in the face of outright deflation appearing in a number of final product price measures in many countries.

This Industry Is Next...

Financial crisis? Recession? Depression fears? Fuggetaboutit.

The market just finished its best month in recent history, a surprise for even the most optimistic. And sure, a lot of buyers are beginning to step in, as expectations for earnings season are set so low, it'll be hard to disappoint.

But be cautious.

An end to our current bear market is as premature as Jim Cramer calling an end to the depression fears. Unemployment will continue to climb. Consumer spending will suffer. And housing is only expected to worsen, as more resets rear their ugly heads.

Just ask Meredith Whitney. . .

Whitney just reiterated her bearish position on the financial sector and the overall economy. And while some are forecasting recovery in 2009 or 2010, she (and we) believe that banks have still not "properly reserved against greater than expected losses in home prices."

Still, if the "geniuses" of Wall Street want to draw this "end of crisis" conclusion from Wells Fargo's preliminary numbers, that's just great. We can then stop the bailouts, stop flooding the market with cheap money, and leave banks to live or die. Sounds great to me.

And if you believe the worst is over, that's fine. But we were the same people that successfully called for the downside in:

• Subprime and housing,

• Financials with FAS and XLF puts and calls,

• U.S. Treasuries,

• Commercial and residential real estate,

• And the Casino industry to name a few.

And these days, not only are we calling for a resumption of sell-offs in the bear market, we're also calling for quick and sudden drops within the education sector.

Here's why.

The Next Scorched Sector: Student Loans

The crisis that nailed the above sectors has its sights set on student loan stocks, too. As you may be aware, the government could revamp the guaranteed student loan program that would cut out private lenders and bring all federally backed lending to the U.S. Department of Education.

And as President Obama urges an end to government subsidies for student loan providers, a number of stocks are just beginning to swan dive into falling knife patterns.

Putting an end to these subsidies could save the U.S. billions every year. And the only roadblock is congressional approval. . . but this one looks imminent.

Here's an excerpt from a recent New York Times editorial...

"The [new administration's] budget rightly calls for phasing out the wasteful and all-too-corruptible portion of the student program that relies on private lenders. And it calls for expanding the less-expensive and more-efficient program that allows students to borrow directly from the federal government. That means doing away with the Federal Family Education Loan Program, under which private lenders receive unnecessary subsidies to make risk-free student loans that are guaranteed by taxpayers."

A number of stocks are going to get battered by this. Right now, the Obama proposal would require college students to borrow directly from the federal government by July 2010.

But nothing's set in stone just yet. . . Prepare for quite a fight over this one.

Worse, just as delinquencies crushed other financials, it could crush student lenders, too. Default rates for those who recently left school rose to about 7% from 5.2% a year earlier, as the deteriorating economy weighs on borrowers.

That rate, according to Bloomberg, is based on borrowers who "were to begin making repayments between October 2006 and October 2007, and who fell at least nine months behind by late September 2008."

Of those, about 232,000 entered default, a 13% increase from the previous year and a 43% increase from two years ago. And because of these higher defaults, lenders will have no choice but to tighten belts, toughen up borrowing standards, and increase interest rates – moves that could screw borrowers, too.

But don't think for a second that this is all "bad news" for investors. If you know how to play your cards right, cashing in on failing companies - for several hundred percent gains - can be as easy as taking candy from a baby.

Truth is, members of Options Trading Pit have been doing just that since this financial collapse started. In fact, earlier today, they cashed in on another massive 338% gain - from a single play, within six trading days!

If you'd like more information on how to join this exclusive group and why we'll give you $1,000 if we don't show you at least 49 more double-digit winners by April 15, 2010. . .

Are These The Wind Energy Stocks To Own?

The American Wind Energy Association released its annual industry report yesterday.

According to the report, in 2008, the U.S. surpassed Germany as the country with the largest amount of installed wind power capacity. This, after more than 8,500 megawatts of new wind power increased the nation's cumulative total to more than 25,300 MW - representing a growth of about 50 percent.

Based on this growth rate, and assuming long-term policy support, this puts the U.S. on a trajectory to generate 20 percent of our electricity from wind energy by 2030. This is a massive jump, based on the 1.25 percent that was generated by installed wind projects at the end of 2008 - and a massive opportunity for investors.

This latest report shows GE continuing to run the turbine show, boasting 43 percent of newly installed capacity in 2008. Vestas (CO:VWS) came in second, Siemens (NYSE:SI) in third, and Suzlon (NSE:SUZLON) and Gamesa (MCE:GAM) rounding out fourth and fifth.

As far as developers are concerned, NextEra Energy (which used to be FPL Energy) owns the most wind energy assets, boasting a total of 6,290 MW - or about 25 percent of all installed capacity.

Growing In The Wind

Wind energy growth has also accelerated job creation in manufacturing across many parts of the country. Over the past two years, wind turbine and turbine component manufactures added or expanded to over 70 facilities - with 55 in 2008 alone. And once fully online, these new manufacturing facilities will represent a total of 13,000 new direct jobs and almost $2 billion in investment.

Now it should be noted that the recent economic downturn has forced some of these manufacturers to announce some layoffs recently. But as the market rebounds, especially with so much government support expected to flow into the sector later in the year - many of these workers will be rehired.

In total, the wind industry added 35,000 jobs in 2008, bringing us up to about 85,000 people employed in the wind industry. In 2007, that number was around 50,000. These include everything from manufacturing, construction, maintenance, legal, marketing and project development.

Incidentally, the wind energy industry in the U.S. offers so much potential at this point, that five foreign manufacturers - Vestas, Gamesa, Suzlon, Siemens, and Acciona - all have U.S. manufacturing presence now. And Nordex will soon become number six.

Now the truth is, the wind power industry does owe much of its growth to a new, and encouraging renewable energy policy here in the U.S. Let's recap...

The American Recovery and Reinvestment Act of 2009 includes a 3-year extension of the production tax credit (PTC), as well as a new program that allows wind developers the option of bypassing the PTC, and securing a Treasury Department grant in the amount of a 30 percent investment tax credit (ITC)

The recovery bill also eliminated the $4,000 cap on the small wind ITC, so that now investors can claim a full 30 percent on small wind development.

An additional $1.6 billion of new renewable energy bonds will also be distributed to tribal governments, public power providers, and electric cooperatives in an effort to help finance new renewable energy projects - including wind.

$3.25 billion has also been set aside for additional borrowing authority for the Bonneville Power Administration and the Western Area Power Administration. This is for transmission lines constructed after February 17, 2009 that will move renewable power.

The next order of business will be the new national renewable electricity standard, as well as legislation that will support the construction of what has been called the Green Power Superhighways - which is basically transmission that will be used to enable continued renewable energy development.

All the pieces of the renewable energy puzzle are coming together. Between new energy policies that strongly favor the full scale development of renewable energy to the basic fundamentals of supply and demand - we truly are witnessing the dawn of what will soon prove to be one of the greatest investment opportunities of the 21st century.

To a new way of life, and a new generation of wealth...

Which Penny Stocks Will Profit from Obama’s Health Plan?

There are few industries that have made people as much money as healthcare. Health stocks ― especially small-caps ― tend to go from being below the radar to above expectations in the blink of an eye. Those who had the foresight to get in early have the chance to end up with a windfall... 

There are also few industries whose fates are as directly linked to Uncle Sam. Healthcare, biotech, and medical stocks live and die by Federal health budgets, and with Obama's official health plan released to the public not so long ago, millions of investors are wondering just how the plan will affect shares of their favorite companies.

In the penny stock realm, it gets even more interesting...

In President Obama's budget, he outlined three areas where public dollars will be used to fuel sales at private companies: the implementation of health IT, medical research, and Medicare spending.

Health IT was a hot topic during the election, and it continues to draw Federal dollars now that Obama's in office. "We will make sure that every doctor's office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year," said the President.

He's following up on that by providing $19 billion in tax dollars to help hospitals go digital.

And in kind, companies that provide electronic medical record technologies (most of whom are small-caps) are seeing increased interest from investors. Two small-cap stocks that have benefited from that interest include Quality Systems (NASDAQ: QSII), up 33% in the last month, and Patriot Scientific (PTSC.OB), up 20% in the last three weeks.

Medical research is another area where small-cap stocks are seeing a resurgence of interest. There are scores of pharmaceutical penny stocks that are researching and developing the latest drug treatments for everything that ails us, and they're poised to tap into the $1.1 billion in government funding for researching medical treatment effectiveness.

Over at Penny Stock Fortunes, subscribers are seeing the effects of that money first hand. Today, they had the chance to unload shares of Dendreon (NASDAQ: DNDN) for 255% gains (to find out more about that play).

While DNDN may have been one of the bigger gainers, a number of other tiny pharmaceuticals have been up double digits this year as well.

Medicare is the final place where Uncle Sam's health dollars could trickle down to your portfolio. You see, most private healthcare and health insurance companies bill Medicare for services provided to patients it covers. Included in the mix are a number of small-cap names ― WellCare (NYSE: WCG) and Amerigroup (NYSE: AGP), for example.

When the government commits to expand Medicare funding, it means big things for these Medicare contractors. Not only do they have the chance to increase volume by admitting more government-sponsored patients, but they become ripe targets for acquisitions by larger health insurers like UnitedHealth Group (NYSE: UNH).

Want to make money on healthcare stocks? Invest your money where the government's spending theirs, and your chances of profiting from penny stocks are unquestionably higher.

Top Stocks of The Week

( CHU)
Date Purchased: April 6th
Price: $9.94
Buy Strategy: Trying to find leading stocks that have not "run away" from us is a challenge these days. However, with China Unicom, we just might have identified just such a position. Telecom has been moving up in our sector rankings (currently #4) and China Unicom has some room to run yet to the upside on a chart basis.
Active Trader Stop: $9.49

 

MCD (McDonald's Corp.)
Company Profile
We are watching many of our Success Trading Group favorites like McDonald's (Ticker: MCD) for new entry points for short term trades. We will be watching MCD for a trade below $55. Our favorite trading stocks have made some nice moves recently. Entering new positions will require analysis and caution.

 

BUCY (Bucyrus International--$18.58; +1.81; optionable): Cranes, draglines
Company Profile
After Hours: $18.56
EARNINGS: 04/23/2009
STATUS: Cup w/handle. BUCY has spent all 2009 forming a 13 week base. Nice handle this past week with a low volume fade to near support and then a breakout move Thursday on rising, above average volume. This is BUCY's first base coming off the bottom and the industrials are finally starting to make their move to join the rest of the market. Nice break higher Thursday as BUCY made a higher high on this run off the March low. Been awhile.
Volume: 3.467M Avg Volume: 2.86M
BUY POINT: $18.72 Volume=3.8M Target=$22.95 Stop=$17.41
POSITION: HBU GA - July $17.50c (65 delta) &/or Stock

 

ZLC (Zale Corporation)
Company Profile
$10 Trader hit a home run on ZLC capturing a 51% gain before the small commission in a 5 day trade! Currently there is resistance at the $5 level, but a break above there could leave room for some clear sailing to somewhere above the $10 mark, perhaps to $14 or so.

 

BRCM (Broadcom Corp.)
Company Profile
When the market makes a reversal move, either upside or downside, you hear a lot of pundits on the financial stations saying if you miss the early move you miss most of the move. Sure early moves are strong; if the trendline is good, however, so are the other moves. The key is focusing in on the leading stocks that continue to receive investor money and can make strong, substantive moves. As one of the traders here puts it, you want a strong stock that can tear off chunks of real estate in a hurry. Thus we have chronicled our trades in BIDU, ICE, CME, AAPL, GS, PCLN, AMZN, etc. in prior columns. The nice thing about strong upside runs is that new leaders continue to crop up and surge higher.

BRCM is such a leader. It took a bit longer to make the breakout as it traded in a 4 month lateral range similar to AAPL before it made its move. Of course that did not stop us from playing AAPL during that move but we also got the bonus of the breakout this last cycle in the trading range. When that breakout occurs with a strong quality stock, you often get an established run higher that gives you several times to buy both for the longer term and the shorter term trends. BRCM has been doing that for us of late.

We got onto BRCM for the most recent move in mid-March. As noted, BRCM was trading in a rolling range from 15 to 20 and we made the plays up and down during that range; very nice work if you can get it as the stock moves were 30+% up and down and our option plays were even better. In March, however, it did something different. First, it was on the fifth cycle in the rolling range; 4 or 5 cycles is a long range to play and usually by that time the range breaks apart either with an upside breakout or a collapse lower. Second, this time when BRCM hit the 20 range it did not fall right back down but started moving laterally. That had us looking for a breakout move and we put it on the report on the 3-14 weekend.

It tested that Monday and then broke over the top of the range to a new post-October high on 3-17-09. We moved in with some stock positions at $19.03 and some May $18 strike call options at $2.50. BRCM rallied to the 200 day SMA, paused and came back to tap the top of the range it broke from in a classic test, then it zoomed higher by over $2 to a new post-October high yet again.

When BRCM tested again it tested the last key level it broke, the 200 day SMA. When it made that test we put a new play on the report on 3-26, looking to catch it on a bounce off the 200 day. On 4-1 it surged off the 200 day, and when we saw the move was holding into the close we picked up some more positions at $21.10 and some May $20 call options at $2.70. The next session BRCM added $1.39, and as it was up 11% in 2 days we banked some gain on our original position, selling part of our stock position for $21.76 or a 14% gain and part of our option position for $4.30 or a 72% gain.

As has been the case on this move, BRCM tested back after that 2-day surge, coming back to near support at the 10 day EMA. In a strong trend that is establishing itself to the upside the 10 day EMA will start acting as support for bounces higher. So . . . we moved in early Wednesday on 4-8 with more positions as BRCM tested and held the 10 day EMA on an intraday test after gapping higher to start the day. Thursday BRCM gapped higher again, posting a 5% move on the session as it continues stair-stepping higher in this strong breakout from a well-formed base.

What we are doing with BRCM is adapting to the market moves as they occur. We played the trading range when it was bouncing up and down with almost clocklike regularity. Then when we saw a potential change in the pattern we readied to play the breakout. It came and now we are playing the uptrend, adding to positions as BRCM tests strong moves higher, tests that give us logical entry points for longer term and shorter term positions. BRCM's earnings are on 4-21-09 and we are looking to ride this trend as long as it holds toward earnings and then bank much of the gain. We have gains in excess of 100% on our early option positions and the others are pushing the century mark as well. Averaging up into strong leaders allows you to put your money to work on proven movers that are building strength into their moves. Have to like that.

NRP (Natural Resource Partners LP)
Company Profile
Option Trader captured a 90 cent a share gain on NRP in less than two weeks first selling and later buying back puts. This MLP remains in a trend up and looks like it may offer additional possibilities over the next week or so.

LFC - China Life Insurance Co. Ltd. is currently trading at $54.71. The May $55.00 Calls (LFCEK) are trading at $2.95. That provides a return of about 5% if LFC is not called away at expiration and about 6% if LFC is above $55.00 on expiration Friday in May.

Deflation's Return

The Dow rose 47 points yesterday...and is up around 180 points this morning. Not too much...but the rally is still on. More or less. But don't trust it...keep moving up those stops.

The state of the economy can be summed up this way, according to our friend Barry Ritholtz, author of The Big Picture blog and the forthcoming book Bailout Nation.

"Imagine you jump from a airplane - for a while, you are free falling - accelerating downwards at increasing speeds," he begins.

"After a few thousand feet, you pull the rip cord and your parachute opens up. In terms of direction, you are still heading down; In terms of speed, however, even though you are falling, you are falling at a much slower rate."

"As the parachute deploys, you are decelerating - the rate of your fall is slowing," Barry concludes.

In other words, no matter the speed of the fall, the law of gravity still applies. The economy still must eventually hit the ground...and it will.

Though in Los Angeles, where we just came from, the economy seems to still be floating along, unfazed. It turns out that the worst financial crisis since the '30s wasn't affecting the City of Angels...or so it seems.

The restaurants were full. In the streets, people ambled around, apparently buying things. The freeways were clogged with expensive autos. 

What has changed?

Nothing we could see.

But California recently joined the 10% Club - states with greater than 10% unemployment. Maybe they are mostly outside LA's old neighborhoods.

And, the rate is probably much higher than 1 in 10.

This from MSN Money:

"The official US jobless rate, now 8.5%, excludes millions of people - among them those who have given up on finding work and those forced into working fewer hours than they'd like.

"An 8.5% unemployment rate is unmistakably bad. It's the highest rate since 1983 - a year that saw double-digit unemployment, nearly 30 commercial bank failures and more than 15% of Americans living below the poverty line.

"But the real national unemployment rate is far worse than the U.S. Department of Labor's March figure, announced today, shows. That's because the official rate doesn't include the 3.7 million-plus people who are reluctantly working only part time because of the poor labor market. And it doesn't include the workers who have given up scouring want ads for seemingly nonexistent jobs.

"When those folks are added to the numbers, the unemployment rate rises to 15.6%. In March 2008, that number was 9.3%. The Bureau of Labor Statistics began tracking this alternative measure in 1995."

People who have no jobs, or fear losing their jobs, are poor consumers. They hesitate. They procrastinate. They make do.

That's why retail shop vacancies are at a 10-year high. If people aren't buying, you don't need space to store merchandise that you won't sell them.

And you don't need shop clerks either. Which causes unemployment to increase further. And it causes prices to fall. About which more below...

But first, we'll turn to Addison in Baltimore, with surprising news about home prices in The City that Never Sleeps:

"Looks like the Manhattan housing bubble is finally cracking under the strain of the credit crisis," says Addison today, taking a break from our marathon editorial meetings.

"Preliminary first quarter data released today show a 60% annual crash in sales of Manhattan co-op ands condos. Average co-op prices fell as much as 24% in the same timeframe, but condo and apartment prices are still relatively firm...for now.

"Despite a contraction in housing prices all over the U.S., apartment prices in New York City are still too good to be true. While the NYC housing market bellied up to the bar at the great U.S. housing party, the inevitable hangover never fully set in:


"Home prices in Manhattan are still outrageous - there are currently 350 apartments for sale there with asking prices over $10 million. If the first quarter rate of sales continues, that's a six-year supply of eight-figure pads. So what's more likely: sellers hold out, or lower prices? Considering the wave of layoffs on Wall Street, coming super- sized budget cuts in state and city government, and the chart above...we know what we'd do."

How can the average investor take advantage? The Lifetime Income Report's Jim Nelson made a great contrarian case for investing in certain housing sectors during the first day of our editorial meetings. He's looking at pools of home mortgages backed by the government through Fannie Mae and Freddie Mac. Since their "receivership" and subsequent propping by the Fed and Treasury, many of their mortgages are practically guaranteed to yield income. For more details, be sure to check out Lifetime Income Report.

And back to Bill in Argentina:

In our book, Financial Reckoning Day, which we wrote with Addison Wiggin, we argued that the United States was following Japan into a long, on-again, off-again slump. We wrote the book in the early 2000s and were proven wrong almost immediately. Instead of a long, Japan- like slump, the U.S. economy took off and soon turned itself into the biggest bubble the world had ever seen.

Now, that bubble has burst. Everything is beginning to turn Japanese. The financial crisis is straightening our hair. It's taking inches off our height. And it's causing us to like raw fish!

Japan never got out of its slump. Instead, asset prices in Japan are lower than ever. And the Japanese economy is contracting faster than any economy did during the Great Depression. And to make matters worse, deflation is back. Consumer prices are now falling...again.

The difference between this bout of deflation, and other periods of deflation in Japanese economic history over the last 18 years, is that now they no longer alone. Switzerland is already in deflation too. And so is China. China has lost 20 million jobs since the beginning of the crisis. Asset prices have collapsed. And now, consumer prices are going down too.

Like Japan, China and Switzerland are exporters. When Americans don't buy, China, Switzerland and Japan don't sell. And soon, their factories go quiet...and their workforce is idled.

Will the United States soon have falling consumer prices too? Will it finally follow Japan into a long slump?

Yes...and maybe no.

There is a big difference between the United States on one side and Japan and China on the other. The United States is not an exporter; it's an importer. Nor is it a creditor; it's a debtor.

When the Japanese economy fell off the truck in the early '90s, its people had savings. They could wait out the correction. They didn't have to cut spending and increase savings; they were saving enough already. In fact, when consumer prices fell, Japan's savers got richer; they could buy more things with less money.

But the United States can't wait out a correction in comfort. Its people have debts, not savings. Deflation doesn't make them richer; it makes them poorer. And in order to pay their bills, they have to cut spending and increase saving. This puts further downward pressure on the economy and creates a very uncomfortable situation for Americans. The more they save to pay their debts, the more the economy contracts. The more it contracts, the less revenue they have available to save.

Oh, wicked world!

But wait. Isn't there a way out? Isn't there some magic the Fed can perform...some abracadabra, perhaps, from Tim Geithner? What if we get a lot of smart people together in a room, as Thomas Friedman suggests? Won't they be able to figure something out?

We don't know...but we wouldn't bet on it.