Don Iron NY State Dir.(NYC/LI)'s Page

Good article about our economy and it's position in the world economy. This is from a free newsletter. *I don't suggest or recommend paid subscriptions for other products. That's up to the reader to decide (dislclaimer).* The information here is valuable, so I thought I'd post it for the benefit of the membership...

Notes from the
Investment Underground
Wednesday, March 25, 2009
Recoleta, Buenos Aires, Argentina

Who watches the watchmen? The road to financial destruction is paved with good intentions… One of the biggest permanent expansions of federal regulatory power in decades… The IRS is coming to get you…The Chinese catch on to Obama’s dollar tricks… Stocks rally… Copper’s “Ph.D.”…And more!

*** Reading today’s Wall Street Journal we are reminded of the Roman poet Juvenal. Long before “no strings attached bailouts” and $3.6 trillion federal budgets, the author of the Satires asked, “Quis custodiet ipsos custodes?” (“Who watches the watchmen?”)

*** Yesterday, President Obama used a primetime news slot to defend his $3.6 trillion budget plan. He also used the time to defend his plan to run up $9.3 trillion in debt over the next ten years. Senator Richard Shelby is right: this is the road to “financial destruction.” It’s a pity Republicans have only now begun to voice opposition to out-of-control government spending. Bush was a spendaholic. He handed over a budget deficit of $1.3 trillion. This is not a party political issue. It’s a question of the uses and abuses of power.

*** While Obama took to TV, Tim Geithner launched a bid for what the New York Times describes as “one of the biggest permanent expansions of federal regulatory power in decades.” Geithner wants to expand the government’s “control over financial institutions, like insurance companies, that are in trouble and big enough to destabilize the broader financial system.”

*** Expect the long arm of government in the form of the IRS to come knocking soon. The WSJ also reports that the Obama administration “plans to create a task force to consider elimination of corporate loopholes and subsidies, tougher enforcement against tax avoidance, and tax simplification.” "The question is whether we can be even more aggressive," said White House budget chief Peter Orszag. We don’t doubt that the government can and will be even more “aggressive” in its money hunt as the weight of Obama’s deficits continue to grow. The government has three avenues open to it: tax, borrow or print.

*** The Chinese are catching on to America’s game plan, though. If you have any doubts about this, take a look at this article on the People’s Bank of China website by Zhou Xiaochuan. Zhou is the head of China’s central bank. He’s therefore the man responsible for the biggest foreign holding of U.S. government bonds in the world. Zhou clearly isn’t a fan of the dollar’s position as the world reserve currency. What do you think Zhou’s message is for Obama and Ben Bernanke?

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand, the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities; on the other hand, they cannot pursue different domestic and international objectives at the same time.

Zhou suggests that instead of the U.S. dollar being the world’s reserve currency, nations should “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

This is the new Cold War. If China - and Russia, which backs China’s goal – gets its way the U.S. will no longer be able to finance its budget commitments. The nation will collapse under the weight of its own debt just like subprime mortgage borrowers collapsed under the weight of their unmanageable debt commitments.

*** “Although there’s a veritable laundry list of obstacles that could blunt the U.S. government’s ongoing economic turnaround efforts, its single-biggest challenge may come from its single-biggest creditor – China,” write William Patalon III and Jason Simpkins in today’s Money Morning. They say that if China stops buying U.S. government debt, the economic fallout would be “catastrophic”. Here’s what they think would happen:

The U.S. dollar would drop 15%-20%.
U.S. stocks would get hammered.
Inflation would spike and interest rates on Treasuries would jump into the 8% range.
And the economy would end up flat on its back - where it would stay, with no rebound on the horizon.
*** Meanwhile, U.S. stocks continue to rally. At the time of writing, the Dow is up nearly 2%. According to Bloomberg, the move higher is being helped by “unexpected growth in orders for durable goods and new home sales spurred speculation the economy is stabilizing.”

*** If you want to know where the economy is heading (and therefore the stock market) look no further than copper prices. Copper is said to "have a PHD in economics" because its price is a fairly reliable indicator of where the economy is headed. Brian Hunt in today's DailyWealth has this to say about copper:

Copper is building on the $1.60 "breakout" level we covered last week. Prices settled around a four-month high of $1.80 per pound yesterday. While watching this rally, please remember one of our DailyWealth mantras: Prices always lead the news. If copper can hold these levels, expect to see headlines reading "global economy showing signs of life" or "economic numbers better than expected" by this fall.

*** Although this rally could have legs in the near term your editors here at Notes believe it will be a classic sucker's rally... James Dale Davidson and his research team at Crisis Strategy Alert have figured out a way to safely ride the sucker's rally without getting wiped out when the market crashes...

*** The failure of Geithner’s new plan to relieve banks of their “legacy” assets (bad loans) could bring Wall Street back down to earth sooner than you think. This from my dad, Bill Bonner, at the Daily Reckoning.

The assets are worth what they’re worth. By all accounts, they’re worth a lot less than the banks thought they were worth originally. In a better world, the bankers would take their losses, admit their mistakes, and blow their brains out… or at least change careers. In fact, we have a suggestion: they should go into government; there they can make as many mistakes as they like and no one will notice.

But this is not a better world; it’s a world that is full of sin and sorrow… one with a fool on every corner… and an ace up every sleeve.

There won’t be three winners from Mr. Geithner’s plan. There will only be one. Whatever the toxic assets are worth, they will be sold for either more or less than that amount. If they are sold for less, investors will realize a profit. The banks – and their government backers – will lose because they will have given up an asset for less than it was really worth. On the other hand, if the toxic assets are sold for more than they are worth, it is investors who will lose.

*** Whichever way the market moves next, on April 7 one company could hand you profits of 118%. My friend Andrew Gordon’s "fake dividends" strategy identifies profitable short plays with a 90.5% success rate. Learn more about his strategy here.

*** From the mailbag…

Reacting to today's news that the government wants more power to regulate financial companies, who is going to regulate the govt? I think more transparency is what is needed. There are plenty of people watching financial events, but there is so much secrecy that no one knows what is going on, so no one can make appropriate decisions. If the public (those who care) knew all, wouldn't it provide control in the form of feedback, steering the economy clear of major disasters? Doni

Notes comment: Transparency is a nice idea. But you shouldn’t hold your breath waiting for the government to “come clean” on its plans to spend the U.S. to oblivion. There’s only one game in town right now. And it’s called tax, borrow and print.

ALL I CAN SAY IS BUY FOOD, GUNS, GOLD AND SILVER. I've never seen an analysis on HOW LONG DOES THE FOX GUARDING THE HEN HOUSE LIVE, any idea??? Lugosans.

Notes comment: We’ve long given up on predicting how long America will put up with the erosion of liberty and individual rights. We live thousands of miles away in sunny Argentina because we believe you can’t ever be too far away from the reach of the U.S. federal government. Society can’t rely on political committees and commissars to control the markets. This was evidenced by the collapse of the Soviet Union. Nor can a successful economy be based on the unlimited creation of new money on the part of governments — fiat money without any backing whatsoever.

*** Speaking of sunny Argentina, our friends from Street Authority are in Buenos Aires this week. (One of their head guys married an Argentine woman and spends part of the year here.) We met this morning in my office. It sounded like they were having a fun visit. But we also talked 'shop'... specifically about Obama's $3.6 trillion stimulus plans.

Their ETF Authority program has identified the safest profit plays in the four "Obama boom sectors." These are the four sectors currently on the receiving end of Obama’s massive cash stimulus: infrastructure, alternative energy, high-dividend income and 2nd-half '09 rebound sectors. All the details are in this special report.

Until tomorrow,
Will Bonner


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