Monday, December 21, 2009

Food Shortages Around the Corner

I linked to an article last spring about the catastrophic drop in food production in the 2009 growing season. Any disruption of the global food harvest was predicted to cause shortages.

Well, we had a poor harvest over many areas of the world, including the United States midwest.

Long and short of it, this blogger's analysis of the harvest information shows that we basically don't have enough food to make it through to the harvest next fall. That fact will not be immediately apparent, but if this information is correct, we should see significantly higher food prices in the U.S. and Europe, and shortages in developing countries.

Now is the time to stock up. Don't buy things you won't eat, just buy non-perishable goods and canned goods, and frozen goods if you've got an extra freezer or two. We just bought half a cow and half a pig from the meat processor in my wife's hometown in Iowa. The beef costs $2 a pound. Of course, we've got about 350 pounds of it, but it's awesome. The pork is even better. I think it was about $1.75 a pound. We got sausage, bacon, roasts, pork chops, etc, etc. The freezers are full. We're very happy. This is the cheapest way to buy meat, and it's much better meat than grocery store meat.

If I'm wrong, no harm, no foul. Eat what you've stored away. If I'm right, you'll be glad you did. Rice, oats, wheat flour, cooking oil, soy products, and corn will be more expensive and there will be spot shortages. Beef, pork, and poultry will increase in price because we feed them on corn and soy.

Also, plan on putting in a garden this spring. You'll help yourself a bit and the food will be healthier. Learn to can. Learn to freeze. Maybe talk to your church about using part of the church grounds for a community or congregational garden. We've kicked around the idea of a fenced garden plot with a chicken coop contained in another perimeter fence around the garden. That way the deer stay out, and the grasshoppers have to run a chicken-coop gauntlet in order to get to the garden. Both deer and grasshoppers are a serious threat to gardens in western South Dakota.

The markets are bumping along as predicted. Expect nothing dramatic to happen until after the New Year. Gold is continuing to correct, now below $1100. It's still got lower to go, IMHO. As long as it stays above $920, this is a correction in the bull market and thus a buying opportunity.

Blessings,
Brian

Friday, December 11, 2009

Gold and Markets Update

Well gold has not gone parabolic, which is a good thing. The anticipated correction is here, wiping out almost 10% in just a few days. This is also a good thing. Gold has had an amazing run in the last few months. It needs to take a breather. Likely gold is done for a few months at least. It could decline to as low as $920 and the bull market will still be intact. If it goes below that, something else is going on and we will need to reassess. It would still not be a bad thing to sell at least some of your physical gold and take some profits, even at this level. It's up to you.

The stock markets seem to be working on a topping pattern. They've basically been moving sideways for the last few weeks. This is a season which is generally strong and which usually results in "the Santa Claus Rally" The fact that the markets hit my 10,500 Dow target and then began moving sideways in this generally positive season does not bode well for future rises. Look for positive to neutral behavior from the markets until after New Year's Day.

The economic numbers are being massaged and then spun by the media. The latest jobs report is a prime example. There is all kinds of seasonal hiring around the holidays, which always results in a dip in the unemployment numbers. But the numbers (even the officially massaged numbers) are still bad. The rate of increase in unemployment is "slowing" and this is supposed to be cause for celebration. Look for revisions in the next couple of months, which is the Powers That Be saying "Oops! We made a mistake. The numbers aren't as good as we thought." This is standard operating procedure when the authorities are trying to manipulate mass sentiment.

Keep to your plan. Prepare for the worst, hope for the best, and trust in God.

Sunday, November 22, 2009

Gold Going Parabolic

I think Gold is going parabolic. We're likely to get a price spike like we saw in oil two summers ago. I'm thinking $1300-$1500. Maybe higher. I strongly recommend you either buy gold immediately with the idea of reselling it in pretty short order and realizing some profits, or else waiting to buy until after it corrects (and it will be a nasty correction.) If you want to buy and resell quickly, I recommend you consider using the exchange traded fund, GLD. Physical gold has some costs associated with selling that paper gold doesn't have.

I also strongly recommend if you currently own gold that you sell it when you see the chart go vertical. Don't try to call the top or squeeze the last 5% out of it. Be happy with the profits you've got.

The correction is liable to take a year or two. It will come on fast and furious, knocking off 10% or more within a day or two. Gold and silver are both prone to extreme behavior that would absolutely freak the stock markets out if it happened there. There are wild and volatile swings.

Silver is behaving in an interesting fashion. It's finally getting warmed up. I think it will make a run at its old high. I think it will beat its old high and rise in sympathy with gold.

I think I'll be a seller of both gold and silver when and if we see the flagpole formation on the charts.

The stock markets are still looking toppy. The spike in gold could indicate a further sympathy rise in the stock markets driven by inflationary fears. This is not, repeat not, a new bull market in stocks.


Thursday, November 19, 2009

Société Générale tells clients how to prepare for potential 'global collapse'
Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.
by Ambrose Evans-Pritchard

In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

Related Articles
'Debt levels risk another crisis'
"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank's "Bear Case" scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).
The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.

Monday, November 16, 2009

What's Causing the Stock Market to Rise?

In my opinion, the stock market rise is not connected with reality.... the so-called fundamentals. The fundamentals are terrible. Unemployment keeps rising, retail sales are extremely uneven, and would be terrible if you took away the artificial sugar high of the government's stimulus, like Cash for Clunkers and the $8000 tax credit for first time home buyers. The real numbers are very bad. Worse than they've been since the Great Depression. Look at sales tax receipts, for example. That's a pretty accurate summary of the buying and selling activity. Consumer credit is down and continues to trend down. People aren't borrowing money to buy things. They're scared to. They're retrenching and paying off debt (or defaulting on it.) That is deflationary, not inflationary.

I thinkt he mechanism behind the stock market's rise is fairly straightforward. It is due to three factors.

1. Foreigners with American dollars in their pockets are expecting inflation. I think those foreigners are wrong, but what they expect rules the roost for now. In an inflationary environment, you want to be out of cash and cash equivalents, like bonds, and into "things." Rather than repatriate their dollars or buy bonds (which are bad to buy in an inflationary environment, since the depreciation of the currency eats up the gain of the interest accrued), they are choosing to trade their dollars for "things" in anticipation of a steady devaluation in the purchasing power of the dollar. One of the "things" they can buy is stocks. In an inflationary environment, stocks generally do pretty well. Foreigners are buying stocks, thus driving up the market. They are also buying gold, thus driving up the market. Thus inflationary expectations create a rise both in gold and stocks. We saw my prophesied correction in gold, or at least the first part of it. Gold went from $1120 to $1100 before rocketing to new highs on Sunday night. I confess I am stunned. This is a powerful upward move. More powerful than I anticipated. Gold is still ripe for a correction, but the price of gold indicates stocks will continue to rise for the near term as well. I need to rethink my Elliott Wave count concerning gold a little bit. It's still ripe for correction. It's still a buy when it corrects. Silver hasn't matched gold's new highs, but if you look at silver's performance in the last 12 months, percentage-wise it has actually outperformed gold. It was at about $8.50 in November of 2008. It's now sitting close to $17.80. It has more than doubled. Gold, on the other hand, went from $710 to $1120+, approximately a 60% increase. Though silver has yet to make new highs, $1000 invested in silver in November of 2008 would be more than $2000 today. $1000 invested in gold at the same time would be a little more than $1600 today.

2. Banks and institutional investors are taking government money, loand through the Fed via the TARP program and similar programs, at essentially no interest, and investing it for a return. One of the places they are investing it is the Treasury bond market. In other words, they are borrowing money from the government and less than 1% and then reloaning it to the government at about 4%. Nice, huh? I wish I was a banker.

But they are also speculating in stocks with it, and that drives up the price of stocks.

3. Joe Six Pack, or what some investors call "Dumb Money" sees the rise in the markets and chases it. He throws his cash in, but is usually a "late adopter" and ends up buying just as the move is finished. The "Dumb Money" is in with both feet right now and is uber-bullish. The "Smart Money" is turning bearish, but is not there yet. The markets generally operate in such a way as to fleece the Dumb Money and give the proceeds to the Smart Money. That is, after all, why they call them the Smart Money. When the Dumb Money jumps in with both feet (and they have) then the end is nigh.

Topping is a process. We are getting there. We are not there yet, I think.

This is still a bear market. This is still a Depression, not a recession. This is still a cyclical bull market in a secular bear. This is still a nice and useful rise in confidence in the midst of a terrible economic situation. Enjoy it while it lasts, profit from it if you can. I still am expecting deflation, and not inflation. This market rally will end, and it will end sooner rather than later.

Get out of debt. Save money. Live frugally. Buy a little gold and a little silver. Don't buy the "Green Shoots" lie to your own harm. The green shoots are just weeds.

Peace.

Wednesday, November 11, 2009

More Up

The stock market correction since March is not over. More upward movement at least in the near term. My bad. Sorry.

Gold has completer five waves up from the apex of the triangle, which was the start of this latest bull market move over $1000. With today's new highs it is starting to look like it will be an extended fifth wave. Once that exhausts itself, gold will correct and take a breather. A drop back below $1000 is a real possibility. This is a buying opportunity in my opinion. Gold is still in a bull market.

Tuesday, November 10, 2009

Gold and Silver Correction Imminent

Gold and silver are ready for one of their periodic nasty corrections where 10-20% is knocked off the price in a matter of a few days. If you want to sell and rebuy at lower levels, this would be a good time to think about it.

I'm not sure what's up with the stock markets. The new post crash high in the Dow was not confirmed by the S&P or the Nasdaq. Today's action should tell us more, but I think it means my gut was wrong last week. More up for awhile.

I'll post more after I've thought about it more.

Wednesday, November 4, 2009

Free Week at EWI

Please drop by Elliott Wave International (www.elliottwave.com) and check out their resources this week during free week. You have to register, but they don't do anything funny with your information. I was a paying customer for several years and have been a club member for even longer. Prechter is not inerrant, but he is very astute.

The wave correcting last week's decline is unfolding slower than I had anticipated, but I think it's now over. I have to do a little chart work to confirm my opinion, but it "feels" right just watching today's action on TV.

We should start heading down again tomorrow or Friday.

Blessings,
Brian

Monday, November 2, 2009

Markets and UNG

UNG looks ready to bounce. I think last month's low will hold.

The stock market action today, which looked like a bunch of see-sawing, was actually instructive. The downward moves unfolded in five clear waves and the upward moves were in three-wave corrective sets. Tomorrow should be a down day unless we move quickly through a first wave and have a second wave correction all in one day.

The primary direction is down for now. There will be rallies, of course. Probably sharp ones, but they should be relatively quick. If my Elliott Count is correct, we've got the fifth wave to go in this first downward series, and then should come a pretty healthy rally which could even retrace 100% of the previous move, but should retrace at least 62% of it. Then we will hit the third wave, which is usually the longest and strongest wave.

A crash is quite possible within the next 4-6 weeks.

If you haven't gotten out yet, and still want to, I think I'd wait until this next downward move completes and we get our larger Wave II bounce. You do your own due diligence and make your own decisions, of course.

Friday, October 30, 2009

The Kondrateiv Cycle was discovered by Soviet economist Nicholas Kondrateiv. He was tasked by Stalin to prove that the Marxist dialectic view of history was true and that capitalism would soon self-destruct. Instead he discovered that capitalism is essentially self-renewing. So Stalin put in in the gulag.

In Kondrateiv theory, capitalism goes through 4 cycles which are analogous to the seasons of the year. This cycle repeats every 70 years or so. We are now beginning the K-Wave winter, the cycle of deflation, depression, and destruction. This will last several years and lay the groundwork for the K-Wave spring, when renewal begins.

What follows is a pretty good article from a Kondrateiv perspective. I agree wholeheartedly with his view of gold. It was originally found here.

If you can preserve your capital, or even part of your capital, through the K-Wave winter, you will have excellent "seed corn" to plant in the K-Wave spring. That should be your goal. Don't worry about return ON your investment. Right now it's time to worry about return OF your investment.


P.S. If my Elliott Wave count is correct, next week should be ugly.



Ian Gordon
October 2009

Gold has withstood the test of time in terms of its density, malleability and lustre. The price of gold was first standardized in 1717 by Sir Isaac Newton, then Britain's Warden of the Royal Mint. In coinage and as backing for paper (fiat) money, gold's value has fluctuated with world crises and market forces. When no longer pegged at $35 (U.S.) per ounce after 1971, gold became a freely traded commodity. Gold is money! Gold represents wealth and for many reasons, this has never been truer than at the present time. Gold is currently trading at a price of $1,065 (U.S.) per ounce and LongWave Analytics is forecasting that gold bullion will climb to the $4,000 (U.S.) level per ounce and beyond over the next few years.
The entire world is now in an economic depression which always occurs at this point in the Longwave Cycle. The cycle is approximately 60 to 70 years - essentially a 'lifetime'. Thus, each point in the cycle is a new experience, something we have never lived before during our adulthood.

An understanding of the Longwave Cycle, however, enables us to identify where we are in the cycle. More importantly, this understanding allows us to recognize each season in the cycle and, critically, it allows us to determine the move from one season to the next. That determination enables us to make correct investment decisions. There are good and bad investment mediums appropriate to each of the seasons. Typically, investments that perform well in one season do poorly in the following season.

In the Longwave cycle there is always a deflationary depression and this occurs in the winter of the cycle. The onset of winter is signaled by the peak in stock prices which ends the biggest stock bull market of the cycle. During the Longwave winter, debt is purged, which causes huge stress and significant bankruptcies to creditors and debtors alike. In order to protect ourselves from the financial and economic onslaught that ensues, we buy precious metals, particularly gold and the gold equities of producers and explorers.

Gold is the only financial asset that is not someone else's liability, and all paper money is simply debt. When the economic and financial systems are collapsing, people turn to gold because it's the only financial asset that they can trust. They lose all trust in paper currencies; that is, fiat money and all assets valued in paper money (stocks, bonds and real estate) except precious metals companies, since the underlying assets of these companies are the metals themselves. Most people only equate a rising gold price to a rise in inflation, but the price of gold also appreciates during a deflationary depression because investors turn to gold as the ultimate money. People did that during the Great Depression of the 1930s and they are doing it now. However, the real panic buying of gold lies ahead, since the banking system faces renewed pressures as the debt bubble, particularly in America, continues to grow. In point of fact, during a deflationary depression, gold is the most liquid asset.



In addition to investors losing their faith in fiat currencies, there are other reasons why gold will perform well over the next several years and why investment risk in gold will be minimal during this time. So much of the world's gold supply has been mined within the last 50 years that the globe's richest deposits are fast being depleted in South Africa, Australia and the United States; new discoveries are becoming rare. The world's largest mining companies are now aggressively pursuing gold on a global basis. Giant Newmont Mining now operates open pit gold mines on five continents - from the rainforests of eastern Indonesia to the mountain ranges of Peru and to the lowlands of Ghana. The challenge for large producing gold companies like Newmont is the replacement of their annual gold production. Newmont produces approximately 7 million ounces per annum. To replace these ounces, it must effectively discover approximately 8 million ounces every year since production is never 100% of the gold mined. This is an impossible task. There have been very few discoveries of this size over the past several years. Furthermore, the timeline from discovery to production is approximately 10 years. This means that large gold producing companies ought to have a significant discovery in the pipeline every year. (We do like Agnico Eagle's growth profile.)

In August 2009, a majority of European central banks entered into a new agreement to lower the ceiling on annual sales of gold bullion, from the current limit of 500 tonnes to 400 tonnes, over the next five years, beginning October 1st. Meanwhile the Swiss central bank announced that it has no plans to sell gold bullion in the foreseeable future. In addition, last month the Executive Board of the International Monetary Fund approved gold sales in a size strictly limited to 403.3 metric tons at a time, representing 1/8 of the Fund's total holdings. Managing Director Dominique Strauss-Kahn states that "these sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market." These announced IMF sales have always been introduced as a means to hold down the price of gold. This charade has been ongoing since 1978 and has only temporarily capped the ongoing upward move in the gold price. Anyway, one must suspect that the IMF may not have the gold it purports to hold.

In recent days, we have witnessed the price of gold futures appreciate to the record high price of $1,065 (U.S.) per ounce. The primary engine of this current price surge is the steady, inexorable decline in the U.S. dollar. As stated in our Winter Warning of September 28th. - The American Greenback Will Be Cast into the Hazard, since March of this year the U.S. Dollar Index Future - Spot Price, which Intercontinental Exchange Inc. uses to track the American currency against the yen, euro, Swiss franc, British pound, Swedish kroner and Canadian dollar, has steadily fallen by nearly 15% to the 76 level. Investors are finally beginning to understand that the U.S. dollar is not the safe haven they perceived it was even a few years ago and concurrently, neither are U.S. Treasury notes and bonds. Given the American national debt and deficit problems, from both a fundamental and technical perspective, the U.S. greenback still has the potential for considerable downside. Ergo and by axiom, gold bullion has significant upside potential to $1,500 (U.S.) per ounce over the short to mid-term time horizon of 1 - 2 years and $4,000 (U.S.) per ounce over the longer term.

While the dollar continues to decline against all other major currencies, we must remind ourselves that these currencies, like the dollar, are fiat too; in most cases better managed than the dollar, but paper none the less. As such, they are not viable monetary alternatives to the dollar. Paper money is in an unparalleled crisis. Never in history has the entire world been subjected to fiat money. The experience of all fiat currencies is their ultimate demise.

Given gold's recent activity, predictably, other analysts and strategists in the investment community have bounded into the fray. "Gold demand is coming almost exclusively from the investment side" commented Eugen Weinberg, an analyst at Commerzbank. "Gold reaching an all-time high is attracting new investment. This momentum can take us to even $1,100 (U.S.) an ounce. As long as we don't see a sustainable rally in the U.S. dollar, I don't think gold's rise will stop." Nicholas Brooks, head of research and investment strategy at ETF Securities (Exchange Traded Funds), states "The surge in demand for gold does not appear to be short term in nature, since we have been seeing very rapid growth of investor holdings of gold through our ETCs (Exchange Traded Commodities) for over a year now."

Put Not Your Cart Before The Horse

During this recent surge in gold activity, there appear to be many investors getting aboard because they fear a return of the demon inflation. They perceive that many economies are on the road to recovery from the recent economic downturn and credit crunch, thus they are looking for an insurance policy as a hedge against an inflationary outbreak. As previously mentioned, gold can also appreciate in value within a deflationary economic environment. While inflation may rear its ugly head at some juncture well down the road, it is a deflationary outlook that Long Wave Analytics is embracing as the most realistic probability to unfold over the near to mid-term time horizon. Witness the Japanese deflationary experience which is still unfolding.

Understanding inflation and deflation is critical to making the right investment decisions. Strictly speaking, inflation is simply an increase in the supply of money and deflation is a decrease in the money supply. Most financial advisors are now calling for inflation to resume and even hyper-inflation to run rampant in the United States, because of the Federal Reserve's current effort to circumvent deflation by excessive money printing. We are of the opposite, and certainly the minority, view. We believe that central banks will be unable to forestall deflation and that when it arrives, it will be unprecedented in magnitude. This conclusion is based upon three factors:

Once the debt bubble is unwound, it is deflationary in nature because it is painful and results in bankruptcies on both side of the ledger. Actually, it takes money out of the system and during our Kondratieff winter, trillions of dollars of debt will be expunged. Total debt in the United States is now approximately $58 trillion. If we exclude government debt, which is approximately $15 trillion, this leaves $43 trillion of consumer, corporate and financial debt underpinning the U.S. economy. How much of that is destroyed is anyone's guess, but it is likely to total at least $22 trillion. This money is effectively destroyed.


Under these circumstances, banks won't lend money. Those banks that survive bankruptcies, and most won't, will conserve it. Consumers and corporations won't be able to borrow money, even if they so desire.


The velocity of money will essentially come to a standstill, since there will be none to spend. Money will be hoarded, either under the mattress, or in banks that consumers believe will survive the debt deflationary onslaught. During inflation, as in the 1970s, the velocity of money increases as people spend today, rather than pay higher prices tomorrow. In deflation, as in the 1930s, those few people with money curtail their spending in the knowledge that prices will be lower tomorrow, next month and next year. As the early 19th Century saying goes 'money like manure, does no good till it is spread'.


Between October 1929 and April 1933, despite the desperate efforts of the Federal Reserve to reflate the economy, money supply contracted by 28%. The argument today - supported by Ben Bernanke, the current Federal Reserve chairman - is that the Fed didn't do enough at that time. Speaking at a 90th birthday dinner for Milton Friedman (another proponent of the 'do nothing Fed' during the Great Depression,) Mr. Bernanke stated, "I'd like to say to Milton and Anna (Anna Schwartz, who co-authored with Milton Friedman, A Monetary History of the United States), regarding the Great Depression, you're right. We did it. We're very sorry, but thanks to you, we won't do it again." This interpretation is at best false and at worst dishonest. All strenuous efforts by the Federal Reserve to overcome deflation failed because the amount of money coming out of the economy, through bankruptcy and bank failure, overwhelmed the Federal Reserve's attempts to reflate.

In his book, America's Great Depression, Murray Rothbard uncovered the erroneous reasoning of those who subscribed to the Fed's inactivity at the time. "If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try and cure the depression by inflating further. It stepped in immediately, to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash (the final week of October, 1929) and in that brief period added almost $300 million (U.S.) to the reserves of the nation's banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million (U.S.) to reserves and it discounted about $200 million (U.S.) more for member banks … As a result, the weekly reporting member banks expanded their deposits during the fateful last week of October by $1.8 billion (U.S.), a monetary expansion of nearly 10% in one week …" pp.191.

We are gold bulls and deflationist but most gold bulls are inflationist. How do we explain this dichotomy? During inflation, the price of gold rises along with all other 'things', such as out-of-print comic books, art, antiques, etc. Why? Because as we have just explained, during inflation the price of everything rises and people buy today because prices are cheaper than they will be tomorrow. In these times, gold is viewed primarily as a commodity, although it does still perform a minor monetary role versus the dollar, which is being debased through monetary inflation. In the inflationary summer there is absolutely no threat to the banking system because debt is not that high and there is no threat to the economy because money is plentiful and easy to access. So, when the threat of inflation passes, as in 1980, the prices of gold, commodities, comic books and antiques fall.

However, deflation is another kettle of fish, since it comes about through the destruction of the financial system and the economy, because of the bursting of the debt bubble. When that occurs as in 1873, 1929, and now, there is fear and panic. In all panics, there exists an instinctive will in all of us to survive and succour loved ones. We instinctively turn to the people and things we trust. When it comes to money, people always go to gold. It was thus during John Law's Mississippi scheme in 1720, when following the crash, the run to gold by French investors was enormous; so much so that the government tried to outlaw the ownership of gold on pain of death. Eventually, the French government's rule on paper money was quashed in favour of gold. Similarly, during the French Revolution, when the revolutionary government introduced the paper Assignat, French farmers refused payment in paper money for their produce. Like always, the paper money system collapsed and gold replaced it.

The same is true of the American Confederate dollar. The over zealous printing of paper money always leads to monetary inflation, which is then followed by monetary deflation and a demand for gold as real money. This was true of the early 1930s when the great credit expansion of the 1920s collapsed, bringing down the entire U.S. banking system with it. As American banks failed, the race to own gold grew exponentially. The trust in paper money, which was responsible for financing the proliferation of debt in the 1920s, was shattered. As the U.S. economy and stock market collapsed, the flight from paper to gold gathered momentum. Indeed, by the time that President Hoover was about to leave office, his Treasury Secretary told him that the U.S. was running out of gold to support the dollar. One of the first things that his successor, President Roosevelt did upon arriving at the White house in March, 1933, was to denounce the gold hoarders and confiscate their gold, in order to replenish the U.S. Treasury.

This only fuelled the alternative method to own gold, which was via the ownership of gold mining shares. All that was left of money fled to invest in gold equities. Capital flowed to gold producers and exploration companies throughout North America and South Africa. In Canada, the Abitibi greenstone belt, Red Lake, and central British Columbia became the main areas of focus for exploration and many mines in these locales were financed into production. We've come full circle. These same areas are garnering dollars for exploration and many significant discoveries have been made. New discoveries will accelerate, since money flows almost exclusively to gold during these deflationary times. In the United States, gold exploration is centered in Nevada and to a lesser extent in Alaska. Moreover, throughout the U.S., so much money flowed to gold during the 1930s that, according to the U.S. Bureau of Mines, by 1940 there were 9,000 operating gold mines in America.

We are now in the Kondratieff winter deflationary depression and in this time frame, gold will become the money of trust. Fiat or paper money will become totally discredited. We believe Antal Feteke, who recently penned an article entitled "The Supply of Oxen at the IMF," posted at www.lemetropolecafe.com, where he wrote, "Only the gold basis will tell you whether you can reasonably expect physical gold to be available tomorrow and the day after. Or, whether it is more likely that one day soon, we wake up to find that 'gold is no longer for sale at any price.' Gold mines will hang out the notice: 'Holders of dollars need not apply'. This is going to be the exact replica of what happened to holders of assignats, mandates, Reichmarks and more recently, Zimbabwe dollars."

The coming scarcity of physical gold will lead to much higher gold prices, and like the 1930s following President Roosevelt's confiscation of gold, investment in gold companies will become the principal means to obtain an ownership in the physical metal itself.





Written By: Ian Gordon & Christopher Funston
www.longwavegroup.com/home.html

Wednesday, October 28, 2009

Proceeding As Expected

Things seem to be unfolding as predicted
The dollar has finished five waves down in both small and larger degree, and the expected rally is underway. If you are a foreign reader who is traveling to the U.S. soon, it would be better to buy your dollars now and sit on them. They will be more expensive soon. How much more depends on your own currency's relationship to the dollar.

Gold has corrected some $40 from its highs and has further to go. Gold should be beaten down for several months now. It will almost surely break below the $1000 mark. It's a buying opportunity, IMHO. We should see gold at $1500+ by this time next year.

My gut tells me the markets have topped. My model says we could still see 10,500 Dow.

This week marks the 80th anniversary of the 1929 Wall Street Crash. The last few days have been marked by some persistent selling in the stock markets. As I look at the futures this morning (it's 5 a.m. now) they're off sharply. Wouldn't it be ironic to have the Crash of '09 on or about the anniversary of the Crash of '29?

As the markets decline, the economy further slows, and fear begins increasing, I will begin to write less on technical analysis and more on the practical side of dealing with things. I've done what I've done on purpose. When the optimism side of the equation rises (as it does periodically and predictably, thus leading to bear market rallies) fewer people pay attention to posts on frugality and simplicity and living with inward peace and trust in the Lord.

Rather than fall silent and melt into obscurity for a period of time, as many bearish bloggers do, I choose to use these periods of optimism to lay my method and its fruits before my readers and try to predict as best I can what will happen. I certainly am not inerrant, and I'm more than willing to admit where I am wrong, but I think I've got a pretty good handle on things. Good enough at least to give a kind of broad advice that might be helpful to you. Hopefully this will increase your confidence in my advice when you might really need it.

Just to recap, my advice has always been the same:

1. Get out of debt. This is a deflation and debt kills you in a deflation. Hyperinflation may well be coming, but it is not on the horizon anytime soon. I think at least a decade.

2. Save money. If you are a two income family, cut things until you can live on one income and save the other. You will be thankful in the long run. I know this can be done. My wife and I did it. We lived on my smaller salary and used her salary to pay down debt. When it was time for us to move to Sturgis to take a church, we were able to take a 60%+ cut in pay (plus having go from having company provided health insurance to having to buy our own on the open market.) It was hard psychologically, but we did it, and made it just fine.

3. Discipline yourself to live beneath your means, frugally and simply. Learn how to fix things. Buy plain, sturdy, and cheap items. "Use it up. Wear it out. Make it do, or do without."

4. Buy some gold and silver. I think I wouldn't buy now. I think I'd wait a few months for the price to go down more.

5. Trust God. Learn to lean on him. He can and will supply all of the needs of the Christian when the Christian "seeks first his Kingdom and his Righteousness." Get involved in a Bible believing church and work at forming a community of mutual care and concern there. It's God's will for us that we love each other and bless each other.

Monday, October 26, 2009

UNG Retesting

UNG, the natural gas exchange traded fund, is retesting its recent lows. It's off 4%+ today. This is not unexpected, and I don't particularly care if it violates its lows. It's still either bottomed or is in the process of forming a bottom.

It's a second chance to pick it up at a discount.

The markets are looking very toppy. I think the decline begins soon, or is already underway.

Sunday, October 25, 2009

Watch It!

I watched this about 11 years ago, the last time it was shown on PBS. I vividly remember watching a interview with a man in this series. He said, "Young people need to understand what happened and how to cope, because it could happen again."

It's coming up again, and it's well worth watching. Check your local broadcast schedules.

http://www.pbs.org/wgbh/americanexperience/

Thursday, October 22, 2009

Another Email from a Reader

I got an email today asking me to explain how I arrived at my Dow 10,500 target. What follows is my explanation.

It's somewhat a well-informed guess/gut feeling.

Normal retracement is often a percentage that's based on a fibonacci ratio. 61.8% is the most common one, but 50% often shows up as well. So does 75%.

The Dow, the S&P, and the Nasdaq all move together (i.e. have very similar wave structure) but the magnitude is often different. The Nas usually is the most volatile and has the greatest percentage moves both up and down, followed by the S&P, then the Dow. The Nasdaq is sitting at approx 60.2% retracement, the S&P is at about 47%, and the Dow is at about 46%. There's also a basic guideline that the move often retraces to the middle of the previous wave IV. On the Dow that would be the 10,350-ish level.

Put it all together, the Nasdaq is almost at it's .618 retracement, and is liable to exceed it. My guess is it will hit 75% retracement max. The S&P is only slightly outperforming the Dow, but if the Nas hits 75% it would be reasonable for it to hit 61.8%. That leaves the Dow as the laggard. 50% retracement would be in the 10,300 range. I decided to give myself an extra couple of hundred points to the upside..

Of course, these are guidelines. A Wave II can retrace 100%. But I see mass sentiment shifting towards the pessimism, so I don't think the "animal spirits" are there for too much more than what we've got. The only thing that might skew that is if we drift sideways or upwards into the holiday season. Sentiment always shifts to the positive then (i.e. the Santa Claus Rally) and that could give us enough ooomph to vault higher than my guestimate.

Under normal circumstances, I would think that pessimism was too high to lift the markets much more, but I think there is a greater pessimism acting as an opposing force. I think some of the money piling into the market reflects inflationary or even hyperinflationary concerns. Look at a stock chart of Zimbabwe or Weimar Germany. Their markets went through the roof in nominal terms, due to the depreciation of the currency. If we had a high inflation or hyperinflationary environment, our stock markets would skyrocket, too.

However, I don't think those concerns are valid. I think we're in a deflationary environment. Too much debt for people to want to take on more debt, too much stuff laying around that needs to be bought, not enough money to buy it. That's massively deflationary.

The attitude towards the dollar is overwhelmingly bearish. (Prechter notes that sentiment is often more extreme at the bottom of a wave II than it was at the previous start of wave I. This is true now for the dollar. Sentiment is more bearish now at 74 and change than it was in March of 2008 when it was at 71 and change.) Couple that with my dollar wave count, and it leads leads me to expect a sharp dollar reversal to the upside very soon.

That will relieve inflationary fears and stoke deflationary ones, which will lead to an abandonment of the stock market and a further piling in to the bond market. That's when we'll get our selloff, imho.

The only wildcard in my mind is gold. Clearly some of the rise in gold is due to inflationary expectations. Historically the relationship between gold and the dollar is not clear cut at all. I think it's gold's time, regardless of what the dollar does. That's my broader view. However, the rise in the dollar will have some effect on gold and silver. Enough weak hands have piled into gold that it's time for a nasty correction to shake them out.

Sunday, October 18, 2009

Interesting Chart

I got an email today from a Reformed guy in Wyoming named Paul Haller. He is a trader and runs a subscription-based Technical Analysis website. He showed me a pretty interesting chart that he'd drawn up.

Technical Analysis (TA) is a set of tools used to analyze charts of markets or individual stocks or commodities. For years it was dismissed as voodoo or the equivalent of astrology by the mainstream, but it is proving to have some predictive value and explanatory power. For instance, Marketplace, a program produced by American Public Media, had a story on within the last 6 months about academic enquiries into TA. They talked about the surprising validity they found when they subjected TA to scrutiny. TA works. It's not infallible, and some aspects of it are judgement calls, but TA works. Elliott Wave, which I follow with interest, is a species of TA.

Trendlines are an important TA tool to help judge entry and exit points. For instance, some of you might remember a TV commercial for a company called Channeling Stocks.com. They made recommendations based on drawing two basic parallel trendlines to make what is called a trend channel. You bought at the bottom of the trend channel and sold at the top. Theoretically, you make money no matter if stocks are going up or down. It works until the stock breaks out of the trend channel to the downside. Caveat emptor.

Well, look at all the trendlines on this chart:



I frankly have never seen a trendline chart like this. I can't quite digest all that this means yet. I haven't had time to study it very carefully.

But I will say that I don't think it's good. Time to get out my Edwards & Magee and start reading.

Caveat emptor. Better to stay out of the markets for now.

Friday, October 16, 2009

A Reader's Question

A faithful reader wrote to ask me to explain how it is that we've got a metaphorical gun to the head of the Chinese where our currency is concerned, and why I expect that the dollar will actually rally from here:

When you finance your home with the bank and don't pay, the bank takes your home. The US is rich in oil and natural gas reserves, to name a few. We haven't even begun to mine our gold, silver and other resources...including coal. If the Chinese have financed us and we're unable to pay, what keeps us from exchanging our resources for our debt? Why would they keep lending when they're certain we can't pay? Unless we can?

Well, the analogy is true, but it's not complete. They can't repo the U.S. the way that a bank could repo a house. The system is a closed loop, with everything interrelated. If you change one thing, it effects everything else, including things that those who desire the initial change might not want affected.

Fundamentally, if the Chinese want to sell things over here, they have to sell them in exchange for dollars, because that is our national currency and it's illegal here to sell anything in any other currency here. So they take our dollars. What can they do with them?

1. They can trade them on the open market for their currency, the yuan (i.e. buy yuan from people who have sold things to them and have yuan that they'd rather convert into something else) but as they go and buy yuan, then there is a pernicious effect. The more they buy, the smaller the available supply of free yuan. That has the effect of increasing the "price" of the remaining yuan, so their currency rises in value. This they do not want to happen. If the yuan appreciates, then their export goods get more expensive and their exports drop. That also causes the free supply of dollars on the open market to grow, meaning each one is worth less and less. So the dollars they've still got in their pockets become worth less and less. This also affects them in the same way as an increase in the value of the yuan. Their goods become more expensive over here and their exports drop. Their expedient has been to peg the yuan to the dollar and maintain a relatively fixed exchange rate which works in their favor as exporters. We've been demanding for years that they let the yuan "float" (i.e. appreciate to a level set by the market) which will protect our industries from competition a little more. This they have refused to do because it will also decrease their exports. Decreased exports mean slow business in Chinese factories, which means layoffs, which means social unrest. The Chinese government is terrified of social unrest.

2. They can trade them on the open market for yen or euros, or some other currency, but everyone else has the same problem that the Chinese do. They don't want their currencies to become more expensive relative to the dollar, so they would take countermeasures, both monetary and political, to stop this from happening.

3. They can buy commodities they might need later and stockpile them, since the dollar is the international reserve currency, everything is sold in dollars. They have done this. This is why gold, silver, oil, copper, coal, natural gas, iron, rubber, tin, soybeans, wheat, etc have gone up over the past few years. But there's only so much of this stuff you want to buy and store, and some of it is only good for so long. This also causes the remaining supplies of raw materials to go up in price, which harms business and in turn threatens Chinese social stability.

4. They can buy things within the U.S.... assets or companies. They've done this. IBM is now Lenovo, a Chinese company. One of the major oil companies was bought by Petrochina. They've also bought one of the appliance manufacturers... I can't remember which one. This raises all sorts of domestic political trouble, though. We don't like things like mines and oil companies owned by the government of a potential enemy and someone we will probably be at war with in the next 50 years.

5. They can buy assets or companies in other countries, and they've done this. Oil fields and agricultural production facilities and other natural resources have been bought by the Chinese. One of the largest deposits of lithium in the world was bought by the Chinese. It rests in some South American country that I can't remember... Ecuador, or Bolivia I think. But there's still the problem of changing those dollars for whatever local currency, and still the problem of too many dollars flooding the market. These countries usually have pretty fragile currencies as well, and if their currencies appreciate, it's bad for them as exporters. So that will factor into any decision they make about what they will let the Chinese buy within their borders.

6. They can buy U.S. treasury bonds. This is mostly what they've been doing. When lots of money is chasing after a bond, it causes the effective interest rate to drop. The demand for the bond is such that the bidders are willing to take a smaller and smaller interest rate in exchange for their money. That keeps our interest rates low because much of our credit system is tied to treasury bonds. This enables us to borrow and spend beyond our means. The U.S. government would have to default on its sovereign debt (which is not likely) in order for the Chinese to actually be ripped off. We're still the strongest government with the strongest military in the world. Our government still has vast revenue collection abilities and America still has a lot of money to collect (i.e. new and higher taxes.) But if we quietly and consistently depreciate the dollar, then their puny 1% interest rate actually causes them to lose purchasing power. They'll still get $101 for every $100 they lent us, but that $101 will only buy $90 worth of stuff compared to what it would have bought earlier.

It's a closed system, and the only escape hatch is to pour that money into something that nobody really needs to survive... something that it doesn't matter if the price goes to the moon. Gold is the only safe outlet. Apart from some electronics, jewelry, and some space exploration needs, it's really not necessary to our survival. Silver has less of those properties, but it is still a pretty good outlet, too.

All of this is predicated on an inflationary outcome to the money printing the U.S. is doing. So far that has not been the case. Most people assume it will happen. I say it won't. That makes me a deflationist.

However, that doesn't mean that the Chinese won't try to pour at least some of their dollars into gold. That's part of the reason I'm one of the few deflationists who is also a gold bug.

Makes your head spin, doesn't it?

Tuesday, October 13, 2009

The Dollar, Gold, and the Markets Pt. 2

Just a quick note today.

1. The dollar has almost completed five waves down. Look for it to rally soon. All the bearishness in the dollar is actually a bullish sign. It's nowhere near its recent lows (71 and change in May/June 2008) but bearish sentiment is higher now than it was then. This is bullish for the dollar. A strong dollar is a key component of the deflationary case. So far, so good.

2. Gold and the dollar have NOT been moving in opposite directions for years, as the financial media seems to assume. Just get a chart of each one that goes back 30 years and compare one chart to the other. There is a very weak correlation. However, there is some correlation. Since the mythical dollar/gold inverse relationship is fixed in gold investors' minds right now, and because gold has also come close to completing 5 small waves up, expect gold to correct in price. Any corrections should be viewed as buying opportunities, IMHO.

3. The markets are struggling upward towards my 10,500 DOW target, but are losing breadth and conviction. They may not make it, peaking out just above the psychologically important 10,000 mark. Just a reminder, the bear market is NOT OVER. This correction from March to now is just a very predictable (and not even all that powerful) bear market rally. The markets spent a full 50% of their time in rally mode from Oct 1929 to their final bottom in August of 1932. These are bull-trap rallies. Unless you're a Player (and I doubt many Players read this blog) the stock markets are to be avoided right now. Keep your money in a treasury-only backed mutual fund in anticipation for the day when a few thousand dollars invested properly can make you a millionaire 20 years down the road.

4. My UNG recommendation continues to grind slowly higher. I still think it's a buy and short term hold (6-12 months).

Tuesday, October 6, 2009

Gold, the Dollar, and the Markets

We were greeted this morning to an article in the British Press about a secret agreement between the Arab states and China and Russia to move out of the dollar in 9 years, and begin selling oil in some other currency or basket of currencies. Gold promptly rocketed up and has been as high as $1044. Since this would be inflationary, the markets rose in a sympathy reaction.

If the Dow rises above 9850, or the S&P above 1070, then the scenario that I spoke of in the last post is in play... one more multi-week move up to probably around the 10,500 level and that will be the end of this bear market correction that's been in effect since March 6 of this year. If they fail to break that resistance then we'll turn and head down from here.

I do not think that the abandonment of the dollar as the reserve currency will happen as the Russians, Chinese, and Arabs have planned. I think this morning's reaction is designed to remind them that they are all sitting on huge piles of dollars that will diminish rapidly in value should the dollar be abandoned as the world's reserve currency. As someone once said, when you owe the bank a thousand dollars and you can't pay, you have a problem. When you owe the bank a billion dollars and you can't pay, the bank has a problem. These countries have been, in effect, the "bank" for the U.S. for years. We have a gun to their head. They cannot sell very many of their dollars without simultaneously driving the value of their remaining dollars down. The Chinese have tried. They're buying everything they think they'll need and stockpiling it in an effort to get rid of their dollars, but the pile of dollars is so large, even that doesn't really make a dent. It also tends to drive the prices of those things they are buying into the stratosphere, which depresses business even further. They're stuck. It's not nice. It's not very neighborly, but international politics is a ruthless game. This is why this was recently said:

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”


The only out is gold, which the Chinese government is buying at a consistent but measured pace. They have also switched a longstanding position concerning their population. It used to be illegal for individuals to hold gold in China. Now not only is it legal, the government is encouraging its citizens to buy gold and hold it. However, if everyone on the planet decided that they wanted to buy an ounce of gold, then there is not enough gold on the planet to satisfy that demand.

The world economy is in a death spiral. Everyone is intricately connected with everyone else, and everyone is especially connected with us and our dollars. They're desperate to cut ties, but they can't. At least not so far.

Added at 8:06 pm mtn standard time:
Gold closed well above its old intraday high, closing at almost $1040 in both London and New York. The gold bull is intact and confirmed. Any pullbacks from here (and there may be sharp ones) should be seen as buying opportunities. Next stop $1350-$1500. Silver should rise in sympathy and with even greater gains percentage wise than gold.

Saturday, October 3, 2009

Reality Check

A constellation of events is taking shape and bringing clarity to the big picture.

1. The unemployment rate is now officially 9.8%, but in reality the government has so many "hedonic adjustments" to the statistical models that it's meaningless. Real unemployment is admitted to be 17%

According to ShadowStats.com, the actual unemployment rate, if it were measured the way it truly ought to be, is about 22%.



We reached 25% unemployment during the depths of the Depression of the 1930's using more honest measures and statistical models like the ones used at shadowstats.com. We're almost there now, and we haven't even really begun the Second Great Depression in earnest.

I warned my readers months ago here and here that a surge in optimism was coming, and that the surge in the stock markets was a harbinger of it. I warned you that it was temporary, and not to get suckered into it. The spike in mass optimism had its usual effect. This was a time to sell things and not to buy them. People went back to their freespending ways as much as they could as soon as they felt better. Peter Schiff writes:

"There is no question that the sense of panic has temporarily subsided. In recent interviews, Treasury Secretary Geithner has been almost giddy in his descriptions of the recovery - all the while crediting his own policies for averting disaster. Americans are once again taking the government's bait by spending money they don't have to buy things they can't afford. Evidence of this trend was contained in data released earlier this week which showed that even while income growth was largely stagnant, U.S. consumers showed the biggest month-over-month increase in personal spending in ten years! With the same report showing a 25% drop in the savings rate, the source of the spending money is clear. But depleting savings and increasing borrowing does not a recovery make."

I hope you made hay while the sun was shining and gathered your proverbial crops into the barns. It's about to start raining again. Then it will turn to snow. Then a blizzard.

The stock markets are setting up in some patterns which are errily similar to the post crash bounce and bust of 1930. I would not be surprised to see a freefall crash within this month, especially if we violate the March 2009 lows. If we follow that model, then we are looking, ultimately, at a 90% drop in the markets. That's somewhere around Dow 1400 and S&P 160. No, that is not a typo. If you think that is extreme, stop and consider, it has happened before. It happened in my grandparents' living memory. It has happened in countries all over the world that aren't much different than our own. It's rare. But it happens.

If you have money then, even a few thousand dollars, and the courage to go against your strongest feelings and plow it into the markets when the sense of despair is so palpable that nobody is recommending the stock markets anymore, you can take a few thousand dollars and become a millionaire in 20 or 30 years. It will be a once in a century opportunity. But it will not be easy. First you have to hold on to what you have, then you have to buy the right things at the bottom.

Bottom line, this is a depression, not a recession. The causes of this mess are totally different than the causes of a recession. This is a system-wide failure and reboot. It will not be over in a few months. It will probably take a decade. There will be rallies (and very sharp rallies) along the way. The Dow spent 50% of its time in rally mode from October of 1929 to November of 1932 when the markets finally bottomed for good. These rallies are known as "bull traps." If you are a smart and nimble trader, you can make money in these rallies, but you can get completely wiped out, too. Better to squirrel your cash away in a safe place in anticipation of the opportunities that arise after the hurricane has passed. Personally, I'm not sure I'm that smart. I know I'm not that nimble.

My advice still is my advice:

1. Get out of debt. Secure your income as best as you can. Live beneath your means and save money.

2. Buy used where possible, and buy only what you need, and when you buy, buy for usefulness and sturdiness rather than cheapness or bling-bling. Better a $10 handsaw that will last for decades than a cheap remanufactured chainsaw that will blow up in a couple of years at best. Better sturdy jeans and tough, comfortable shoes and flannel shirts than foo-foo and fashionista purchases which will be out of style in two years. Better a used Chevy or Ford than a new Mercedes or Lexus. Better a sturdy bicycle than a new dirtbike or snowmobile that you use three or four times a year.

3. Learn to fix things rather than throw them away. Cancel your cable. Use your local library.

4. Take care of your body. So many bankruptcies happen because of huge medical bills. So many of our illnesses could be prevented or mitigated with a good diet, a little exercise, the dropping of bad habits, and a good night's sleep each night.

5. Trust in God who always provides. Keep tithing. It will break the spirit of idolatry that often comes over those who wish to be frugal. It will turn your frugality into greed and fear if you don't keep it in check.

6. Families must help each other out and learn to take pleasure in each other rather than seeing each other as a burden. The ridiculous trend of a giant house inhabited by four people who all go off into their private spaces every night, and only text and IM and email each other when communication is required, is over. Hell is not other people. Your family can be your greatest joy if you learn to own your own mess and be tolerant of everyone else's.

7. Buy a little gold and a little silver. It's God's money, after all, and I have the distinct impression that when your paper and electronic dollars finally revert to their intrinsic value (zero) these God-ordained media of exchange will still be going strong.

8. Get deeply involved in a good, Bible-teaching church. Create a Christian community of mutual care there. In the church I pastor, we have all the skills necessary to take care of each other, from canning and gardening to medical care to dentistry to auto repair and construction. We love each other. We serve each other. We bless each other with our spiritual gifts.

Thursday, October 1, 2009

I Rarely Do This

Consider as one of your few longs, buying UNG, an exchange traded fund (ETF) that plays the natural gas market.

I generally don't like giving specific advice. But sometimes it's worth doing. This is a low risk setup.

Consider buying into the natural gas market via an Exchange Traded Fund (ETF) that goes by the symbol UNG.

It dropped 86% to its low a few weeks ago. It's due to go back down and retest its lows. The market is close to panic and despair. They've run out of storage space for natural gas and are contemplating dumping it on the market, further suppressing its price, making everyone pessimistic about the future. However, it has really fallen off a cliff in the last year or so, and the seasonals are very positive (i.e. winter is coming and people will be burning more natural gas.)

I don't think I'd buy and hold it for the rest of my life, but there's money to be made here.

Once again, do your own due diligence. You are responsible for yourself. Don't put all your eggs in any one basket.

I own it, having put about 20% of my eggs in this particular basket. I bought at $9 and change a few weeks ago, right about at what is (so far) the low.

Wednesday, September 30, 2009

Wall Street Meltdown Dead Ahead

The US money supply shrank at an unprecedented rate in July. I expect August, with the massive influx of Cash for Clunkers funny money, will show a better result. That will quickly fade, though. Deflation is here. As a general rule, get your money out of "things" (i.e real estate, commodities, stocks) and into cash, cash equivalents, and ultra safe bonds. Most of all, get out of debt.

Gold thus far is acting like money and not a commodity, meaning it is increasing in value. Keep a sharp eye on it because that assertion is yet to be proven.

The original link to the story can be found here:

Sharp US money supply contraction points to Wall Street crunch ahead

By Ambrose Evans-Pritchard
Published: 12:01AM BST 19 Aug 2008

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March.

"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.

The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.
Household debt is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s.

The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.
Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein. He cautioned that the three-month shifts in M3 can be highly volatile.

M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover.

The University of Michigan's index of consumer sentiment has fallen to the lowest level since the 1980s recession.

The US economy is without doubt facing severe headwinds going into the autumn.
Richard Fisher, the ultra-hawkish head of the Dallas Federal Reserve, warned over the weekend that growth would be near "zero" in the second half of the year.

Tuesday, September 29, 2009

The Top?

By my reckoning, either the top of this rally is in, or there will be one more brief (i.e. less than a month) advance up to exhaustion which will end this rally. Either way, one who has become habituated to discerning mass sentiment can see a subtle shift in mood and tone from the headlines and the way people are talking. It is a calmer, deeper, more settled sense of pessimism, very unlike the sharp but shallow increase in pessimism (and subsequent decline in the markets) that occurred last month.

Anyone who desires to get out of the markets should consider doing so now. You make your own decisions, of course. Do your own due diligence. If I am wrong and the markets are going to continue to rally and the bear market is over, then you can jump on the elevator at the second floor instead of the ground floor.

Gold is holding up well, though it still has not definitively broken out and confirmed that the bull market is intact. It must close over $1030 in order to do that. It was quite overbought, and due for a correction. Thus far it seems like it will work off the excess of positive sentiment with more or less sideways action. $960 is quite possible. I still say that if you see gold go below $920, that it's time to consider selling at least some of your physical gold. Since doing that is often not like selling a stock (i.e. click a mouse and it's done) it would be good to know beforehand how you would like to unload it quickly if you should feel the need to do so.

We are now entering or are about to enter the terminal phase of the bear market. It will be lengthy, relentless, and frightening. The real economic numbers will begin to deteriorate sharply through the Fall and Winter. The subtle deterioration is already present. We will probably get our usual bump at Christmastime (i.e. the Santa Claus Rally) as people ramp up spending a bit in anticipation of the holidays, but that pop in sentiment will exhaust itself in January with the opening of the Visa bills and the layoffs that come after the holiday business rush is over. Take whatever steps are necessary to protect yourself, your family, and your position in the world.

Thursday, September 17, 2009

Frugality and Simplicity Lead to.... Happiness?

We human beings are chronically dissatisfied creatures and can even grow weary of the best things this life has to offer. This is, of course, sin. We must learn to be content in what God has provided and "set our minds on things above, not on earthly things." (Colossians 3:2) Any pursuit of the good things of this world which is "inordinate" (i.e. the thing pursued or the pursuit itself departs from its God-given place and function in our lives and becomes more important or takes a higher place than it should) is also the sin of idolatry. What seems less evident to most people is that it also makes us chronically unhappy.

In his science fiction book, Perelandra, C.S. Lewis creates for us an Eden on the planet Venus, complete with a new, unfallen (and green) Adam and Eve. This Eden is different than ours was. This Eden is a world mostly covered with water, but with floating "islands" which contain fruit-bearing trees and plants, and abundant wildlife. These islands drift from place to place as the waves carry them. The few spots of fixed land which exist may be trod upon by this Man and Woman, but they may not dwell there. They may not even spend the night there. That is the command they must not transgress. Of course, the Devil enters in to the picture (hitching a ride on a demon-possessed professor from an earth which is under heavenly quarantine.) This demon-man tries to get the Woman to transgress the command. Why would God (Maledil) command such a silly thing? After the test has been passed succesfully, and the Woman reflects on her experience she says:

"The reason for not yet living on the Fixed Land is now so plain. How could I wish to live there except because it was Fixed? And why should I desire the Fixed except to make sure - to be able on one day to command where I should be the next and what should happen to me? It was to reject the wave - to draw my hands out of Maledil’s... to put in our own power what times should roll towards us... as if you gathered fruits together to-day for to-morrow’s eating instead of taking what came. That would have been cold love and feeble trust. And out of it how could we ever have climbed back into love and trust again?"

Part of the reason I welcome the Second Great Depression is that the limits it imposes will cause at least some of us to re-evaluate our lives and how we've been spending them. We will rediscover the joy and delight of simple things... plain food, sturdy clothes, an evening in with the children, good books, time spent with friends and loved ones. "Special" things will become special once more because of their rarity. The child in wartime Britain who couldn't get a chocolate bar because of the rationing savored the rare Hershey bar that he did get. Such a chocolate bar might have been his only Christmas present. I, who can have as many Hershey bars as I like (and far more than I need) do not particularly enjoy them. Indeed, I do not consider them a "good enough" chocolate bar. To really enjoy a chocolate bar, now I have to have one made by Ghirardelli or Godiva, which is five times the price. Too many of those and I will cease to enjoy them as well. I will seek something more exotic and expensive. It is a true fact about me that I get less pleasure now out of a cup of Starbucks coffee than my ancestors got out of a cup of Maxwell House, which I will generally refuse to drink and label "mud and not coffee."

We have the opportunity here, if we will but see it, to re-learn the art of enjoying the good things God has gives as he gives them. We must learn to accept the wave that comes and seek neither to control the waves, nor even to seek to erect the experience some especially thrilling wave from our past as the norm to which all other experiences must conform. If we do this we lose the ability to enjoy the experiences we do have. We reject the good that God would give us now and demand that he recreate some other good in its place instead. It is a double curse. We find ourselves unable to enjoy the different goods God does give, and after having built up the past experience as the height of pleasure, we find that it does not satisfy when we do actually manage to re-wrangle it into our lives.

If we see frugality and simplicity as a burden, as something which we chafe against, and long to return to our former spendthrift ways, we will be miserable for the next decade, and perhaps far beyond. But if we accept that our lifestyle is going to be curtailed, and we thank God for the good things that he has already let us enjoy, and we set our hearts to be content wherever we are, and count our blessings and take every good thing as a precious gift from His hand, then we shall be much happier and able to take great delight in the more commonplace gifts all around us.

Below is a story about a family in Chicago who is learning just that.

Battling recession with frugality, positive attitude

By Allan Chernoff
CNN Senior Correspondent

CRYSTAL LAKE, Illinois (CNN) -- Karin Kubacki no longer buys clothing or toys for her 7-year-old son, Max.

She avoids driving her 8-year-old Honda Civic unless absolutely necessary and has no plans to repair a second vehicle, an 11-year-old Ford F-250.

Bubble baths and Hershey bars are now her few luxuries.

These are among the cost-saving measures Kubacki is taking to make her 13 weeks of severance pay last a full year.

Kubacki, the family breadwinner, was laid off July 1 from a job she loved -- software project manager at Accenture, where she had worked for 15 years. At first, she was stunned. "I had this impression that someone had grabbed a big vacuum and sucked all the air out of the room. It was like I couldn't get my breath," she said.

Her husband, a former schoolteacher who is a stay-at-home dad and a woodworker, feared for the family's financial future.

"At first there is the panic, 'Oh my gosh, we are going to lose the house tomorrow and live in a cardboard box,' " Chris Kubacki recalled. VideoWatch the Kubackis discuss how they've handled Karin's job loss »

Yet his wife was determined to make her loss an opportunity to spend more time with the family while taking time to find another job she would love as much as the one she had just lost.

So the Kubackis are trying to make Karin's severance, unemployment checks and some extra cash Accenture provided to pay for an extension of her health insurance last a full year. They are determined to keep paying the mortgage on their home in Crystal Lake, Illinois, a Chicago suburb, and not dig into savings -- all on an expected pre-tax income of $54,000, a little less than half of the family's normal earnings.

"We have been frugal people, and we have tried to save as much as we can, and that is one of the reasons why I have been able to stay home with Max," said Chris, who builds wooden toys for his son.

But never have the Kubackis been as frugal as they are now.

For the first time, the family is living by a strict budget. They are saving by:

• Biking and walking rather than driving, whenever possible

• Rarely going out to restaurants

• Finding enriching community activities for their child that cost little or nothing

• Taking out books from the library

• Purchasing only absolute necessities and buying what's on sale.

"There are no luxuries now. Before, we had a lot more where we could say, 'Let's go do this.' Now it's a lot more careful," Karin said.

"When I had a job, when I shopped, I would make impulse purchases. Now, no way."

Not only is diminished consumption not as painful as it might seem, the Kubackis say, but the change has also brought a fuller and more enjoyable lifestyle than at any time when Karin was earning a regular paycheck.

"We can have all kinds of fun doing things that don't cost anything," Chris said.

Chris concedes he has felt internal pressure to get a job, but the couple agrees that for now, they prefer to avoid that to be able to spend as much time together and have Chris available for Max.

After adopting a frugal lifestyle, the Kubackis say they now really appreciate life's little luxuries.

"If you pick just a couple of luxuries like Hershey bars, then you really enjoy 'em. And if you have a lot of luxuries, then they become necessities. But if you only have a couple, boy are they terrific," Karin said.

Even though neither Karin nor Chris now hold jobs, they are still giving 10 percent of Karin's unemployment check to their church. Living only a few doors from the neighborhood food pantry, they see frequent reminders of their blessings.

"So I don't have a job right now," Karin said. "We've got a house. We've got cars, we've got food. We have nothing to complain about."

Tuesday, September 15, 2009

More Ammo for the Deflationary Case

Ah, I love the British media. They're not nearly the lapdogs, lackeys, and lickspittles that the U.S. media are.

The Telegraph, a British Daily has just published an editorial essay by Ambrose Evans-Pritchard on U.S. economic information which our newspapers have conveniently ignored.

The inflationist case is predicated upon the fact that the trillions of dollars that the Fed is creating will eventually work their way into the economy. There are several paths via which it could do that. One is simply large cash gifts to the U.S. population. But when they tried that, we mostly either saved it or paid down debt. That doesn't help at all. The government can spend money on massive public works programs. This is what the WPA and the TVA and the RFC and all of FDR's alphabet soup was about. But they are very slow to get any cash to these "shovel ready" programs. So far not much has been accomplished. They can offer incentives to go out and purchase things (i.e. cash for clunkers, etc) and that will boost certain sectors temporarily, but it's actually harmful in the long term because it steals from tomorrow's sales and brings them forward to today.

The best way to get things going again, according to generally accepted economic theory, is for consumers to desire to borrow and banks to desire to lend. But the Powers That Be cannot make the banks lend (and they've tried) and they can't make people borrow. So money does not get created and circulate, people don't buy things with their newly borrowed dollars. Store shelves stay full of the goods that people aren't buying, and those manufacturers and retailers lay off staff. The staff who have been laid off and those who are afraid they're about to be laid off go into what we might call "butt-pucker mode" and stop spending on anything but necessities. They certainly don't go out and borrow $20,000 for a shiny new car or $200,000 for a new home.

And so the the process repeats. The economy stagnates in a vicious cycle. Once people get well and thoroughly into butt-pucker mode, they don't come out of it for a long, long time. Known any survivors of the First Great Depression who compulsively save used tin foil and plastic bread bags? I used to pastor a lot of little churches mostly comprised of little old ladies. If you went into the kitchens of these churches it was a lesson in frugality.... "use it up, wear it out, make it do, or do without" was the motto of the place. There were lots and lots of drawers full of plastic bread bags, rolls of string cobbled together, and balls of rubber bands, and used tin foil, cleaned and neatly folded for reuse. I even found a box of Jello from the 1950's. I kid you not.

I knew one old farmer in Ohio who had several 55 gallon drums full of used spark plugs. He said he couldn't afford them in the Depression and he couldn't buy them during the rationing in WWII, and his family almost went broke because they couldn't keep the farm equipment running without spark plugs. So he was never going to be in need of a spark plug again if he could help it. How would you like to be a spark plug merchant and have a few million people just like him to try and sell to? These are the factors, both economic and psychological, which create deflationary events.

Well, we'll get some nice statistical bumps from the various cash for clunker type programs in the coming months, but where the rubber meets the road, in the consumer credit segment, things are far from rosy. Consumer credit has crashed at a rate not seen since (wait for it, here it comes again!) THE GREAT DEPRESSION.

Everything that has been tried before and didn't work after a whole decade of trying is being tried again. It won't work now either. It will probably make things worse. The recession is not over. The Depression is just beginning. Save money. Delay gratification. Learn frugality. Learn to be content with what you have. Get out of debt. Buy a little gold and silver at the next correction, which should be coming soon. You'll be glad you did. If you sign up for Club EWI, they'll give you a free 60 pages primer on how to survive a deflation. All they do is send you an email every once in awhile trying to get you to buy more of their services. They don't sell your address or anything like that. I've been a member for years and it has been helpful.


US credit shrinks at Great Depression rate prompting fears of double-dip recession
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.


By Ambrose Evans-Pritchard, International Business Editor
Published: 11:59PM BST 14 Sep 2009

Comments 114 | Comment on this article
US Federal Reserve on February 12, 2009 in Washington
FedRes: Ben Bernanke has been appointed to a second-term at the helm of the US central bank, the Federal Reserve Photo: AFP

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886 bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

Sunday, September 13, 2009

You've Got to Admit It's Getting Better, It's Getting Better All the Time

NOT!!!!

This rally is really mature, though it still has a bit more to run IMHO.

I'm starting to get a touch nervous about gold and silver. The COT came out yesterday. Based on the COT (Commitment of Traders Report) the big money boys are heavily short, meaning they are betting on the price plunging. They throw enough money around that they actually have the ability to make their wishes come true, at least in the short term. Gold is overbought, and silver is more so. As I said yesterday, I will not breathe a sigh of relief until gold closes above $1030. I expect a nasty shakeout soon, though. Especially in silver. I'm still holding. Remember my advice. If $920 goes by on the downside, think about getting out. Or, be prepared to be in the red for a period of time.

On the other hand, the seasonals are positive for Gold and China has just advised their citizens to buy gold. The Chinese government is apparently buying it with both fists, trying to trade their paper dollars for something more tangible and useful. They glutted themselves on oil, then copper, now gold and silver and lithium seem to be the next targets. We are witnessing two mighty battles. One between inflation and deflation (I think deflation will win short to intermediate term) the other between those who think gold is a commodity and those who think it is money (I think it's money. That's why I'm one of the few deflationists who is also a gold bug.) We live in interesting times.

Below is an article about an interview with Joseph Stiglitz. He's not a happy camper. The long and short: the banks are in worse shape now than they were before Lehman went belly-up. Not only has the financial system not been saved (as our Dear Leader boasted in his Labor Day speech in Cincinnati) things are worse and we've flushed literally trillions of dollars down the crapper to boot. You'll no doubt enjoy telling your children and grandchildren why we shafted them and saddled them with this monstrous debt. Enjoy!

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman

By Mark Deen and David Tweed

Sept. 14 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

G-20 Steps

“We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz, a Columbia University professor. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

G-20 leaders gather Sept. 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce bonuses and linking compensation more closely to long-term performance.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

Global Economy

Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Stiglitz gave the interview before presenting a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favor of broader measures of prosperity.

GDP’s Shortcomings

“GDP has increasingly become used as a measure of societal well being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said.

Assessing government’s contribution to economic output, which ranges from 39 percent in the U.S. to 48 percent in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.

Similarly, increased household debt may drive up output numbers, even though that doesn’t amount to a real increase in wealth, he added.

While Stiglitz doesn’t recommend dropping GDP altogether, he wants governments to consider such matters, along with issues of environmental sustainability, in policy making.

“Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism,” he said. “The message is to encourage political leaders away from that.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.netDavid Tweed in Paris at dtweed@bloomberg.net
Last Updated: September 13, 2009 18:00 EDT