Saturday, March 12, 2011

Chart: How JPY has Reacted to Past Quakes

This morning’s earthquake in Japan was the strongest in more than 100 years. The last time Japan experienced a quake even close to the 8.9 magnitude was in 1995 when a 7.3 quake hit the coastal city of Kobe. As we have seen in the price action in the foreign exchange market, risk aversion and repatriation flows has driven the Yen sharply higher against all of the major currencies. Although the clean up and rebuilding efforts will cost a hefty penny and the quake could temporarily paralyze the Japanese economy, the Yen could see further gains just as it did in 1995 when risk aversion and repatriation dominated the flow in the currency.

The following charts courtesy shows how the JPY rose to an all-time high against the dollar 3 months after the quake. Japanese stocks, which had already been in a downtrend continued to fall. If the same type of price action occurs this time around, USD/JPY could fall to a fresh record low.

An Introduction To Hyperinflation

Imagine taking a road trip. At the start of the day, a can of soda at a convenience store costs exactly $1. By nightfall, that same can of soda costs $3. This sounds impossible, right?

Well, for some people who have been unfortunate enough to live in the wrong place during the wrong time in history, it isn't. Almost everyone has witnessed the consequences of inflation, or what happens when prices on goods and services increase over time. But few people have had to endure hyperinflation, a term used to describe price increases that occur at a dramatically quick rate.

Defining Hyperinflation
While there is no exact definition of that rate, most economists say that hyperinflation has occurred when the monthly inflation rate exceeds 50%, or if prices on goods increase by half in just one month's time.

As you can imagine, cases of hyperinflation do grave financial harm to a nation. Life savings can be erased in a matter of days. Money can become essentially worthless, giving no one any incentive to work. And, if it happens for long enough, hyperinflation can cause people to revolt against their governments, fight among each other or, in some cases, go to war with a neighbor.

The German Hyperinflation
The most infamous case of hyperinflation came in Germany in the early 1920s. Just a decade before, Germany was one of the participants in the ruinous First World War. In order to finance its war efforts, Germany went into debt by issuing bonds and rolling out more currency via the printing press. Germany planned on having its surrendered enemies pay the debts off after the victory.

Military Surrender, Economic Ruin
However, the opposite happened; after its surrender, Germany was forced to sign the Treaty of Versailles. The treaty meant that Germany had to pay reparations to the Allies and also saw large swaths of its territory divided up. By punishing Germany in such a fashion, proponents argued that it would prevent it from ever launching another military attack. But the treaty did have its share of critics; influential economist John Maynard Keynes, who represented Britain's treasury, resigned from the conference that dictated the treaty's terms. Keynes warned that the treaty would hurt Germany too much and lead to yet another world war.

From Bad to Worse
At the end of the war, the German mark had fallen by 50% against the U.S. dollar. Germany's deficit was enormous for the era, about half of England's GDP, thus further devaluing the mark. Making matters worse, in the winter of 1922 and 1923, Germany was forced to default on its reparation payments. In response to this, France and Belgium took control of the Ruhr, Germany's industrial powerhouse.

German workers, at the encouragement of the government, went on strike in response. In order to support those who walked out, the government simply printed more money. And this pushed the economy over the brink.

Wheelbarrows of Money
Prices on goods immediately skyrocketed; unemployment soon followed. The stories of the rampant hyperinflation seem almost unimaginable: the price of cup of coffee would more than double by the time a meal was over; workers were paid daily in order to purchase any goods while they still could; infamous pictures of men using wheelbarrows to literally carry their money soon circulated. Eventually, the German treasury issued a 1 billion mark note, which soon lost any value it had. Cities and states created their own currencies in order to circumvent the mark – the mark had essentially lost all of its value.

Keynes' Dire Warning Proved Right
Prices did not stabilize until Hjalmar Schacht, the president of Germany's central bank, came up with the idea to introduce a new currency. It would be backed by the value of the nation's many assets and called the Rentenmark. But the damage had been done; millions lost their life savings and confidence in the nation's governors was depleted. In 1923, the Nazi party attempted a failed coup. But in the next election, they, along with other extremist parties, gained a foothold in the German legislature. And an imprisoned Adolf Hitler started to write "Mein Kampf," which largely blamed Jews and others for the tragedies of hyperinflation.

It wouldn't be too long until Keynes was proved right.

The Hungarian Hyperinflation
Unfortunately, Germany hasn't been the only country impacted by hyperinflation. After World War II, Hungary suffered perhaps the all-time worst cases of an out-of-control currency; during a 12-month period between 1945 and 1946, prices rose by 19% per day on average. In July, at the tail end of this ordeal, prices in Hungary tripled every single day.

Recurring Hyperinflation in Argentina
But hyperinflation isn't just a relic of the past. Argentina, for instance, has battled periodic hyperinflation throughout the past 30 years; prices rose by 1,000% from 1975 to 1983 and, at the end of the '80s, rose by 200% per month. After Argentina defaulted on its debt in the early 2000s, inflation once again hit irrational heights.

Hyperinflation in Yugoslavia
The former Yugoslavia, right as it was about to break up into several other countries, endured one of the worst recorded cases of hyperinflation the world has ever seen. According to some experts, it started in 1991, when former president Slobodan Milosevic ordered the central bank to offer over $1 billion worth of credit to his political allies. This was approximately half of the currency that was planned to be created that year. That set off a money printing spree, which quickly led to prices escalating out of control. Food supplies and gasoline were nowhere to be found. In January of 1994, the monthly inflation rate was 313,000,000%. People stood in long lines in secret markets in order to exchange bundles of the Yugoslav dinar for one lone dollar.

Hyperinflation for the New Century
Hyperinflation once again reappeared in the headlines this past decade, this time in the African nation of Zimbabwe, where it has been estimated that, at its peak, prices on goods doubled once every 24 hours. In 2008, 50 billion Zimbabwean dollars would fetch two bars of soap; three days later, that amount would only buy one. In early January of 2009, the government issued a bank note worth 100 trillion Zimbabwean dollars, which at the time was equal to 20 British pounds; at one point in history, the two currencies were roughly equal in value.

Zimbabwe's government was receiving much of its money from a German-based printer; however, the printer eventually stopped doing printing Zimbabwe's money in response to international pressure that was intended to force drastic change in the government's regime. Almost none of the nation's citizenry believed the currency to have any value and usually traded in American dollars, a crime which could result in prison time. Eventually, the government completely abandoned its own dollar and let in foreign currencies, a move which, when enacted in March 2009, finally brought some level of sanity to the beleaguered nation.

Bottom Line
Hyperinflation isn't some historical curiosity. It is a very real risk that countries and governments still struggle with today. The next time you complain about picking up the check at a restaurant, count your blessings. There have been plenty of times in history where the price at the end of a meal was nearly double what it was at the start.

Undiscovered Energy Gems Sparkle

The Energy Report: When you last talked with The Energy Report, you were more bullish on the uranium price than any other commodity. Since then, the price of yellowcake has gone from about $50/lb. to just under $70/lb. Is there much upward momentum left in uranium?

Siddharth Rajeev: Yes, we continue to believe in the uranium story. You're right, uranium prices have gone up significantly in the last six to eight months. But we still think there's upside potential, mainly because the fundamentals remain very strong.

There are four reasons we believe in the uranium story: 1) Nuclear energy is a dependable and clean power source; 2) There is no direct substitute for uranium in nuclear power plants; 3) On the supply side, the primary production of uranium must increase significantly from current levels to keep up with long-term demand because the current supply deficit is met by stockpiles; and 4) Most of the new projects that we see out there are of much lower grade than the majority mines operating currently. Lower grades imply higher operating costs.

Our research indicates that the operating cost of new projects in development stages could be about $55–$60/lb. This implies that uranium prices must be significantly higher than those levels in order for the new projects to be feasible.

TER: Do you think we could see another 2007 when prices reached the $130/lb. area?

SR: We believe the market overreacted in 2007. We don't expect prices to go that high, but we definitely see significant upside from the current price.

TER: Can you put that into more specific terms?

SR: We use a long-term price of US$80/lb. in our valuation models.

TER: What is the investment thesis for uranium juniors in light of that price environment?

SR: When uranium prices hit record highs few years ago, most junior exploration companies raised a significant amount of capital. A lot of them cut down their spending to preserve cash when uranium prices collapsed. So, when uranium prices recovered, we started seeing many juniors with quality assets in a strong cash position. Those are the kind of companies we like.

TER: Can you give us a handful of uranium juniors with upside that you're currently covering?

SR: Our top three favorites in the uranium sector are Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF), Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY) and Fission Energy Corp. (TSX.V:FIS).

Let's start with Strathmore. The company's advanced-stage Roca Honda project in New Mexico has a measured and indicated (M&I) and inferred resource of 33–34 million pounds (Mlb.) of uranium. And STM has a strong partner—Roca Honda is held 60% by Strathmore and 40% by Sumitomo Corp. (TKY:8053; OTCPK:SSUMF) of Japan. Management expects to put the project into production in the next two to three years. The company recently completed an internal Phase 1 feasibility study on Roca Honda. This project is considered one of the largest planned underground mines in the U.S. in 30 years. We definitely think Strathmore has a lot of upside potential from this project.

The company also has several other projects with NI 43-101-compliant and historic resource estimates. It's in a strong cash position, with more than $20 million in working capital and has a solid management team. We have a BUY rating on STM with a fair value estimate of $2.26/share.

TER: You mentioned an internal feasibility study. Does that mean we won't be able to see it?

SR: We might not get to see it. Feasibility is typically done by a third party. Companies generally start with an internal study and depending on those results, hire a third-party consultant to do a formal feasibility study that can be disclosed to the public.

TER: Strathmore also has the Gas Hills project in Wyoming. What is its status?

SR: STM commenced a development-drilling program at its Gas Hills project in central Wyoming with the objective to complete an NI 43-101-compliant resource, confirm and expand known areas of mineralization and advance its permit application, which is expected to be submitted in Q211.

TER: Do you think Strathmore may thin out some of those other projects?

SR: Yes, that's highly likely. Last year, the company sold its Pine Tree-Reno Creek properties in Wyoming to Bayswater Uranium (TSX.V:BYU) for US$17.5 million (cash) and US$2.5 million (shares). In November 2010, Strathmore announced plans to sell its Juniper Ridge property in Wyoming to Crosshair Exploration & Mining Corp. (TSX:CXX). And STM has definite plans to spin out its non-core projects. We think that's the best strategy because it gives the company more time to focus on and monetize its core projects.

TER: What do you think of the combination of STM CEO David Miller and President Steven Khan, in terms of uranium juniors?

SR: We've been following the STM team for several years and the management team has a great track record.

TER: You also mentioned Fission Energy, which has projects in Saskatchewan, Quebec and Peru. What's the next step for Fission?

SR: So far, results from the Waterbury Lake project in Saskatchewan have been extremely impressive. The stock has tripled since last May, and Fission recently completed a $7.5M financing.

TER: Some of the drill results at Waterbury have hit 5%–6% uranium, which is really quite high.

SR: They are exceptionally impressive. Drilling on the J-Zone uranium discovery has continued to turn up significant intersections of high-grade uranium. The main thing we see in this project is that high-grade uranium mineralization continues to be intersected at the unconformity. That's encouraging because mineralization at many of the major deposits in the Athabasca Basin, like Cigar Lake and McArthur River, occurs at the unconformity.

TER: The last of your top-three was Mawson Resources, which has projects in Finland, Peru and Sweden.

SR: Mawson's main project is the Rompas Gold-Uranium project in Finland. The preliminary exploration program completed by Mawson returned extremely positive results on the grab and channel samples. Just to give you an idea, channel samples collected on the property during last year's field exploration program gave grades of 1,424 g/t gold and 1.3% uranium over 0.95 meters, and 191 g/t gold and 0.44% of uranium over 2.05 meters. These are tremendously high numbers. From initial results, we believe Rompas has some of the highest upside potential of any early stage project under our coverage.

TER: Mawson is trading at about $1.75 right now, a bit off some price spikes as a result of those bonanza-grade samples. What's the next step for the company? Will it be drilling soon?

SR: Mawson recently applied for a winter ground-access permit for a shallow grid-diamond drilling program.

TER: Coal is another commodity that interests you. Despite growing concerns about pollution, prices continue to climb, mostly due to increasing demand from steel plants in places like China and Korea. We've even seen some recent takeovers, including Walter Energy, Inc.'s (NYSE:WLT) proposed acquisition of Western Coal Corp. (TSX:WTN). What should our readers expect from the coal market through the rest of 2011?

SR: We've always been bullish on coal because it remains the cheapest and most-abundant fossil fuel out there, accounting for 40% of global electricity supply. Despite the move toward cleaner energy, we believe it is tough to replace coal; consequently, we do not think coal will lose its significance in the energy sector at least for the next decade or so.

TER: What's your coal price range per ton?

SR: We use $140/ton for long-term metallurgical coal—well below the current price of $175–$180/ton.

TER: What are some small-cap, under-the-radar names in coal?

SR: One of our favorite stories is Compliance Energy Corporation (TSX.V:CEC), which is developing the Raven Coal Deposit 80 km. northwest of Nanaimo, BC. It has more than 130 million tons (Mt.) of M&I and inferred semisoft met coal. Its focus is on metallurgical coal, which has a higher value than thermal coal.

The company has very strong partners in LG and ITOCHU, which indicates that it has solid access to capital. Compliance issued a very positive prefeasibility study (PFS) in October 2010. Our valuation on the stock is $2/share; the current price is $0.35. The main reason we like this stock as an investment is because cash and marketable securities alone account for $0.25–$0.30/share. This indicates that the market value of the company's project is just $0.05–$0.10/share, which is extremely low for an advanced-stage project like Raven.

TER: Do you mean $0.05 per ton?

SR: No. The current share price is $0.35. Cash and marketable securities alone account for $0.25–$0.30/share, which means the remaining share price of $0.05–$0.10 is the value that the market assigns to the project.

TER: Could some of that low valuation be due to development risk?

SR: Generally, projects in BC have high permitting risk. Despite the risks associated with the project, we believe a market value of $0.05–$0.10/share is extremely low for a project with positive PFS results and an expected mine life of at least 16 years.

TER: What about some other coal names?

SR: The next one I want to talk about is 49 North Resources Inc. (TSX.V:FNR). It's Saskatchewan's first publicly traded resource investment company, with close to $65 million in assets under management. FNR invests in early stage resource projects, including minerals, oil and gas, and its portfolio also has coal projects.

One of its top-five holdings is a coal company called Westcore Energy Ltd. (TSX.V:WTR), which is a junior explorer focused on coal in Saskatchewan and Manitoba, where it has interest in over 95,000 hectares of land. Westcore's Black Diamond property has had four discoveries recently. FNR owns 30% of WTR's outstanding shares. The winter drilling program that commenced in January has thus far shown encouraging results.

TER: Another major commodity in Saskatchewan is potash, which is mostly used in fertilizer and prices show no signs of retreating any time soon. Why is potash so hot right now?

SR: Obviously, with high demand for food comes high demand for fertilizers. In addition to demand, the supply side of potash is very important to look at when forecasting potash prices. Most potash deposits are highly capital intensive and need billions of dollars to be put into production. As a result, new potash supply is hard to come by. Increasing demand and the bottleneck on the supply side are the primary reasons why we like potash.

TER: Last year, BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) made a bid for PotashCorp (TSX:POT; NYSE:POT) in an effort to get a stable potash supply in an increasing price environment. Potash One Inc. (TSX:KCL) was acquired by the German company, K+S Aktiengesellschaft (Fkft:SDF). In the last year, some potash juniors shot up as a result of this renewed interest. What are some names you cover?

SR: Our favorite potash story is a company called Western Potash Corp. (TSX.V:WPX), based here in Vancouver. Its main project is the Milestone Project in Saskatchewan, 30 km. from Regina. The company's exploring the potential of hosting a solution potash mine. Solution mines are significantly cheaper to develop and have lower operating costs than underground potash mines. Western Potash has a pretty advanced-stage project that turned up a positive scoping study in the second half of 2010 that suggested WPX can produce potash for at least 40 years at a rate of 2.5 Mt./year. That's a good source of supply for any major company or country looking for a stable source of potash.

As potash projects are capital intensive, the exit strategy of most potash juniors is either to joint venture (JV) or get acquired by a major (with access to capital). The acquisitions you mentioned, made in the last year, were mainly companies with producing or advanced-stage projects. Potash juniors typically tend to be acquired when they reach the point that the economics of their projects are known. We think Western Potash is an ideal acquisition target, particularly because it is Canada's most advanced-stage junior that has yet to be acquired.

TER: Do you have some parting thoughts on the energy markets or on the markets for energy-related commodities?

SR: We continue to have a positive outlook on uranium. We believe there are lots of opportunities in the sector—companies with quality assets and a good cash position. We are also bullish on potash. However, investors should be extra cautious when it comes to investing in very early stage potash juniors as companies have to delineate large resource estimates to cover the huge capital cost and make their projects economic. Companies with advanced-stage projects with known economics have significantly lower risk.

TER: Does that wisdom stand for uranium and coal projects alike?

SR: It is more relevant for potash projects. Uranium projects are capital intensive but not nearly as much as potash projects. Coal projects are less capital intensive compared to both uranium and potash.

TER: That's good to know, Sid. Thank you for your time.

A 216-Year Look At Commodities Suggests The Current Super-Cycle Is Coming To An End

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Doug Casey: Save, Invest, Speculate, Trade or Gamble?

For some time I've been saying that the economy is in the “eye of the storm” and that when it emerged, the weather would be far rougher than in 2008. The trillions of currency units created since the Greater Depression began in 2007 have papered over the situation, but only temporarily.

In some ways, the immediate and direct effects of this money creation appear beneficial. For instance, by averting a sharp and complete collapse of financial markets and the banking system – or by allowing a return to some approximation of normalcy in the daily lives of most people.

However, a competent economist (as distinguished from a political apologist, many of whom masquerade as economists) will correctly assess the current prosperity as an illusion. They’ll recognize it as a natural cyclical upturn – a “dead cat bounce.” The Greater Depression hasn’t been chased away by Quantitative Easing – it’s developing and about to get much more severe.

What we’re really interested in, however, are not the immediate and direct effects of “Quantitative Easing” (I love the way they fabricate these euphemisms…) but the indirect and delayed effects. In particular, how do we profit from them? What is likely to happen next in the economy? Which markets are likely to go up, and which are likely to go down?

What Now?

I’ve been looking for bargains, all over the world and in every type of market. And, yes, you can definitely find a stock here or a piece of real estate there that qualifies. But when it comes to any particular asset class, absolutely nothing – anywhere – is cheap at the moment.

You may ask, how that can possibly be? It’s almost metaphysically impossible for “everything” to be expensive, if for no other reason than that it raises the question: “Relative to what?” Nonetheless, we’re in a genuine economic and financial twilight zone, where nothing is cheap and everything is high risk. This is most unusual because there’s usually something on the other end of the seesaw.

The reason for this anomaly is worldwide “QE” on a completely unprecedented scale and by practically every government. So much money has been created in the past couple of years that it’s flowed into every sector of every market – stocks, bonds, commodities and property. Even money itself is actually overpriced – the conundrum is that it’s maintaining as much value as it is, despite many trillions having been recently created around the world and much more to come.

Many people, and most corporations, are staying in cash simply because it allows you to move quickly (which is important when you’re sitting on a financial volcano), and it seems better to suffer a sure loss of perhaps 5% per year than an unexpected loss of 50% in some volatile market. Neither is a good alternative, of course. But I’ve thought about it and feel I can offer some guidance.

Again, an economist learns to see the indirect and delayed effects of actions. But this isn’t an academic exercise. So although we want to think like economists, we want to act like speculators. A speculator is one who sometimes profits from the immediate and direct effects of actions, but that’s not his real forte; almost everyone can predict those, so it tends to be a crowded playing field. Running with the crowd limits your profit potential – the whole crowd is unlikely to make a million dollars. And it’s dangerous, because crowds can change direction quickly and trample the less fleet of foot.

Rather, the thoughtful speculator prefers to look for the indirect and delayed effects of politically caused distortions in the markets. Because the effects are delayed, we have more time to get positioned. And because far fewer people pay attention to what’s likely to occur over the horizon, versus what’s tucked up under their noses, the potential tends to be much bigger.

The fact that few tend to share his viewpoint, and that he’s not often with the crowd, makes a speculator a natural contrarian. He’s always looking for something similar to silver in 1965, when the U.S. was controlling it at $1.29, or gold in 1971, when it was controlled at $35. Although politically guaranteed distortions are best, any kind will do – especially those caused by manias, when things rise way too high, or panics, when things fall way too low.

Rothschild’s famous dictum “Buy when blood is running in the streets” is the speculator’s motto.

This concept is especially critical at the moment. You have to decide – basically right now – how you’re going to play your cards over the next few years. If you don’t, you’re going to find yourself acting in an ad hoc way in what will be a chaotic situation. If that’s the case, you’re likely to wind up as financial road kill.

There are basically three realistic actions available to you: saving, investing, and speculating. I urge you to burn the distinctions into your consciousness. When people don’t fully understand the words they use, they can’t understand the concepts they convey; the result is confusion.


Saving means taking the excess of what you produce over what you consume and setting it aside. It’s basic and essential, because it creates capital. It is capital, in turn, that allows you to advance to the next level. An individual or a society that doesn’t save will soon find itself in trouble. A major problem is looming, however, that transcends the fact that many, or most, people don’t save. It’s that those who do almost always save in the form of some currency – dollars, euros, yen, etc. If those currencies disappear, so do the savings, devastating exactly the most productive and prudent people. That is exactly what I believe is going to happen all over the world in the years to come. With predictably catastrophic consequences.


Investing is the process of allocating capital to a productive business, in the anticipation of creating more wealth. You can’t invest, however, unless you have capital, which usually only comes from saving. Investing necessarily becomes harder, more unpredictable, and less likely to succeed as government interventions – in the forms of currency inflation, taxation, and regulation – increase. And all three are going to increase vastly in the years to come. In addition, as society reorders itself to different and lower patterns of consumption, most businesses will suffer serious declines in earnings, and many will go bust. Investing, which thrives in a stable, business-friendly atmosphere, is going to be a tough row to hoe.


This is the process of capitalizing on government-caused distortions in the markets. In a free-market society, speculators would have few opportunities. But that’s not the kind of world we live in, so speculators will have many opportunities to choose from.

Sadly, speculators have an unsavory reputation among the unwashed. That’s true for several reasons. Their returns are often outsized, inciting envy. Their returns are often realized in times of crisis, which prompts the thoughtless to presume they caused the crisis. And since speculators usually act counter to the wishes of governments and counter to their propaganda, they’re made to appear anti-social.

In point of fact, I wish we lived in a world where speculation was redundant and unnecessary – but that would be a world where the state had no involvement in the economy. As it stands, the speculator is a hero, and something of an unloved good Samaritan. When everyone wants to buy, he stands ready to provide what others want. And when everyone wants to sell, he stands ready with cash in their hour of need. He’s a bit like a fire fighter – his services aren’t usually needed, but when they are, it’s typically a time of danger.

One mistake that novices make is to confuse a speculator with a trader, or worse, with a gambler. Again, let’s define our terms.

A trader is generally one who’s in the market for a living, a short-term player who tries to buy low and sell high, often scalping for fractions, typically relying on technical analysis or a read of the market’s mood at the moment. There are some extremely successful traders, but it’s a real specialty. I’m disinclined to trade for two reasons. First, it’s necessarily very time and attention intensive, and therefore psychologically draining. Second, you’re always swimming upstream against lots of commissions and bid/ask spreads. A trader and a speculator are two very different things.

A gambler relies on the odds, or sometimes just luck, in an attempt to turn a buck. While luck and statistical probabilities are elements in most parts of life, they shouldn’t play a big part in your financial activities. People who think so are either ignorant or losers who want to attribute their lack of success to the will of the gods.

The years to come are going to be tough on everybody, but the speculator has by far the best chance of coming out ahead.

The Markets

As noted above, with everything expensive and overvalued, we’ve arrived at a strange place, almost a unique place.

Real Estate

Real estate has been the worst market, of course. The leveraged markets of the U.S. and Europe still have a long way to fall, partly because unemployment rates are still rising. But even with interest rates at historic lows, property is still unaffordable for most, one of many indicators of a falling standard of living.

And property is becoming unaffordable in other ways, even as prices drop. For instance, the problems of local governments assure that real estate taxes will rise. And much higher interest rates are eventually going to put the final nail in this market’s coffin.

I think those who are bargain hunting are way too early. The markets that are still in a bubble – like China, Canada, and Australia, all of which have a lot of debt leverage – won’t be immune. Agricultural property is no longer a bargain anywhere. But many people are buying property, regardless, to get out of currency and into a real asset.


Bonds are so overvalued, they will turn into the next great graveyard of capital, after the ongoing real estate debacle. Prices are artificially high because central banks have been buying them, partly to keep long-term rates down and partly to increase the money supply – although these two intentions are ultimately completely at odds with each other.

The public has apparently been buying a lot of bonds, idiotically thinking that the 4-6% they can get as they go way out on the yield and quality curves is a great deal relative to the ½ to 1% they can get in cash accounts and CDs. But they’re going to be hit with a triple whammy, starting with the inverse relationship of bond prices to rates. As rates go up – and rates are headed higher – bonds will fall. Likewise, as the creditworthiness of borrowers continues to drop, so will bond prices. And as paper currencies descend to their intrinsic values, so will the purchasing power of the bonds. Many will be defaulted on outright. All bonds today are overpriced.


Common stocks have been holding their own, in dollar terms. But not because they’re good value. Many people are buying because of the dividends (1.85% on average). And they see stocks as a better place for money than earning essentially zero interest from shaky banks.

That said, I’m not interested. The earnings of many companies will collapse at some point as the public’s patterns of consumption change radically in the years to come. Even companies with huge cash hoards could be hurt badly when the dollar starts to plummet. Where will they put all that cash? It may evaporate before their very eyes.

The stock market will likely go higher, just in response to all the new dollars being created. But it’s not a place that should make an investor comfortable.


Commodities have been in a huge bull market, with many making at least nominal new highs. I’m not going to discuss them in detail here, except to note that the higher they go, the more will be produced, and the less will be used. Of them, I’m most friendly towards crude oil since I buy, albeit reluctantly, the Hubbert Peak Oil scenario.

Gold and silver are special situations, because their prices aren’t determined so much by new production and consumption (although they look very good from both angles) but by people’s desire to hold them. And by the fact that they’re actually money. Neither is cheap anymore, but both are going a lot higher.

Where Does That Leave Us?

Those trillions of new currency units are going to go somewhere. It took far less in the way of currency and credit than we have today to create the bubbles in stocks in the late ‘90s and in property in the ‘00s. There will unquestionably be other bubbles. But what are the most likely places for the bubbles to appear? That is a critical question a speculator must answer.

Stocks will continue to be popular, up to a point. Precious metals will be very popular. Mining stocks, however, are a double play. I suspect, therefore, at some point the public and institutions alike are going to start a real mania in mining stocks. I’ve seen several fantastic ones over the last 40 years, where the junior stocks – as a group – move 10-1, with favorites going 50 or 100-1. Or more. The odds of it happening again are extremely high, and when it does, the returns will be extraordinary. I expect something similar from energy juniors.

This is nothing new to longtime subscribers to the International Speculator, BIG GOLD, and Casey’s Energy Report. But we really haven’t had anything wild in the resource sector since the last bull market came to a sorry end with the Bre-X disaster in 1996. The new bull market started in 2000 and has long since finished the Stealth stage and is now ending its climb of the Wall of Worry. There’s every reason to believe it will end in a Mania, as classic bull markets do.

And it is a classic bull market we’re in, with a long gradual ramp-up (10 years and counting), slowly getting more recognition from a starting point of zero and based entirely on fundamentals (significantly higher metals prices). But still almost no one is involved. And the juniors, as a group, are far from being even micro-caps, they’re nano-caps.

I would be very bullish on them, even if we were only talking about the solid fundamentals, the long base building process, the low market caps, and the low level of interest in them. But what’s going to supercharge them is the tidal wave of currency units now saturating the financial landscape and the psychological reaction of millions of investors to the continuing deluge. Many more bubbles are inevitably, and predictably, going to be created. And junior resource stocks are not only the most likely bubble-to-come but also very likely the biggest.

The majors will also do extremely well, but the juniors offer the maximum leverage. When Mrs. Buggins in East Nowhere, Iowa, decides she has to get in, she’ll probably tell her broker to buy $10,000 of Barrick and another $10,000 of some highly promoted penny stock. Her purchase will have no effect on Barrick, but it alone could noticeably move the penny stock. Multiply that by billions of dollars and hundreds of thousands of buyers.

As I’ve said before and will say again before this is over, the effect on the market will be like trying to squeeze the contents of Hoover Dam through a garden hose. Having been in this most volatile and cyclical of markets for almost 40 years, I feel the dam getting ready not to just overflow but to burst.

Other bubbles? Definitely shorting distant-maturity government bonds – whose demise we’ve discussed in the past as inevitable, but which is now also becoming imminent. Beyond that, I’m not sure at the moment. But resource stocks impress me as a first-class speculative opportunity.

A good speculation, you’ll recall, is one that offers – in your subjective opinion – not only a very high chance of success but a significant multiple on capital. Resource stocks, and the juniors in particular, definitely fit the bill. They’re not cheap anymore, true, but that’s not an issue if I’m right about the coming mania.

A time will come to sell, of course. I don’t know how high they may go, or how low stocks, bonds, or property may go. What’s important is relative value, not picking absolute tops and bottoms.

I’ve often said that a signal of the top will be when Slime or Newspeak (should either still exist at the time) runs a cover showing a golden bull tearing apart the New York Stock Exchange. At that point, you’d want to sell anything to do with gold and buy common stocks.

I’ve also said that when you can buy common stocks for an average dividend of 6% to 10%, it’s time to start moving back into them; that’s also a turning point to watch for.

For real estate, I don’t expect a bottom until properties being sold for back taxes go begging or you can get about a 10% net rental return. Will they get that low, in view of the trillions of currency units chasing after them? I don’t know. But I believe it’s very unwise to get an idée fixe in your mind as to what anything “should” be worth.

Right now there are still millions of players out there looking for bargains in stocks and property; they believe this is just another post-WW2 recession, soon to be followed by renewed prosperity. I believe this isn’t just another cyclical downturn, it’s the end of a super-cycle. When the bottom actually comes, not only won’t there be anyone looking, but the very thought of looking will be hateful and ridiculous.

As for gold, the market is much better than we’ve seen for many years, but it’s still full of skeptics, and almost nobody actually owns the metals or the companies that mine them. In the next few years, everyone from Mrs. Buggins to New York traders will be piling in.

I remain of the opinion that the world is in the early stages of really massive change, bigger even than what we saw in the ‘30s and ‘40s. Your savings should be in gold and silver, in safe, neutral jurisdictions. Your investments should be limited. You should orient your psychology and portfolio toward speculations.

Someday we will look back fondly on today’s period of relative calm as the “good old days,” at least compared to what’s coming. The time to get positioned is now, well ahead of the crowd.

The Economist - 12th March-18th March 2011

click here for print version

click here for audio version

S&P 500 Closes Below Its 50-Day Moving Average

March 10, 2011

The S&P 500 closed the day down 1.89%, which puts it below its 50-day moving average for the first time since October 1, 2010. The index is 91.4% above the March 9 2009 closing low, which puts it 17.3% below the nominal all-time high of October 2007.

For a better sense of how these declines figure into a larger historical context, here's a long-term view of secular bull and bear markets in the S&P Composite since 1871.

For a bit of international flavor, here's a chart series that includes an overlay of the S&P 500, the Dow Crash of 1929 and Great Depression, and the so-called L-shaped "recovery" of the Nikkei 225. I update these weekly.

These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.

China Housing Market Bubble Bust Could be Dubai X1000

Markus Bergstrom writes: It's an eerily familiar story. Shortly before the American housing bubble burst, pundits across the globe argued that the world had reached a new plateau of economic growth, where the old rules of economics no longer applied — "this time it's different." The same has been said about the current boom in China, specifically with regards to its large degree of top-down state control over the economy, which somehow enables it to ignore the laws of economics.

Indeed, this notion seems plausible according to traditional Keynesian aggregates. After all, China's GDP growth recovered in record time and at record pace from the global slowdown in 2008, hitting a staggering 10.7 percent toward the end of 2010. While some of this growth certainly comes from true economic development, a substantial portion is driven by monetary expansion, government "stimulus," and a massive, unsustainable real-estate bubble.

In 2008, in order to get back to postcrisis growth levels, the Chinese government prescribed a favorite statist remedy for times of economic hardship: monetary expansion. This was "necessary" in order to increase domestic investment and consumption, as well as to compensate for the slowing down in exports. In November 2008 the government also announced $586 billion worth of "investment" with the very same purpose.

However, when governments claim to be "investing" in something, one should always substitute it for "spending" or "printing money." As governments rarely spend money with the hope of reaping a profit, there's no way of knowing whether it was put to productive use or not. Even when profit-and-loss calculations guide these "investments," the capital still comes from forced taxation or inflation rather than voluntary savings. Thus it's still impossible to determine whether the money could have been spent on something better.

Hello, Anybody Home?

Well-known Austrian investor Jim Rogers has long played down speculations about a major Chinese bubble. He argues that while real-estate prices in some coastal cities are overheated, a cool-down of these would leave a slight dent on Chinese growth rather than result in a major slump. The rest of the country, he says, is "hardly in a bubble."

Another well-known Austrian investor, Doug Casey, is a lot more pessimistic, arguing that China "is in an unbelievable real estate bubble," which will cause "millions of Chinese — and the banks that lent them money — [to] lose everything."

There is certainly good reason to be concerned about China. A study conducted last summer by the Beijing University of Technology reported that a typical Beijing flat costs a staggering 22 times the average income in the city, while The Telegraph reported in December that the same figure for the city of Shenzhen is 18. On a national level, the Chinese Academy of Social Sciences (CASS) concluded last year that a typical Chinese property costs 8.8 times the average income. Compare this to just 5.5 in the United Kingdom in 2007 and 4 in 2009. In the United States, home prices peaked at a little over 5 times average income during its housing bubble, according to the S&P Case-Shiller Index.

A housing development in Ordos

As in the United States, the Chinese real-estate market is plagued by overconstruction, and not just in megacities like Shanghai, Beijing, and Shenzhen. Brand-new ghost towns have sprung up all across China in recent years, the most famous of which is perhaps Kangbashi in Ordos, Inner Mongolia. That city's housing capacity can currently accomodate well over 300,000 residents, yet only one tenth of that number actually live there. Numerous other lesser-known cities also boast swaths of high-rise apartments and majestic public buildings while appearing to be entirely devoid of residents.

Jim Chanos of Kynikos Associates claims that the new office space currently being constructed in China is enough to provide a five square-foot cubicle for every single citizen in the country. And that's just corporate real estate. Finance Asia reports that some 64 million homes and apartments across China have sat empty for the past six months, enough to house 200 million people — 15 percent of the country's entire population. Along the same lines, a study conducted in 2007 by the Beijing Union University found that 27 percent of all newly sold apartments in over 50 different residential areas in Beijing remained unoccupied.

Why, then, is this mad overproduction continuing? After all, such massive discrepancies between units produced and units actually inhabited should result in falling prices. However, most new real-estate developments are actually snapped up before they're even built. The buyers are usually speculators who refrain from even renting out the properties, hoping instead that they will yield even higher profits once flipped in pristine condition in the future. Bill Powell of Fortune recalls a neighbor in Shanghai who has bought a staggering 43 homes in just three years for this exact reason.

This absurd demand is in turn enabled by the aforementioned credit expansion. Officially, Chinese M2 grew by 58 percent between November 2008 and December 2010, while total bank lending (including informal lending) is said to have doubled in 2009 compared to 2008.

Monetary Aggregates for China (measured in 100 million Yuan)
Source: The People's Bank of China (Central Bank of China)

A contributing factor to the real-estate mania is that, to most Chinese, real estate is the most lucrative and (seemingly) the safest investment option available compared to the alternatives; bank deposit rates are below CPI inflation, domestic stocks and other equity have performed poorly in recent years (to say the least), and capital controls still prevent citizens from investing overseas.[1]

More than Meets the Eye

Of course, overproduction and overpriced property weren't the only factors behind the American financial crash. Another major ingredient was the house of cards that made up the American mortgage market, which, at first glance, looks considerably different in China. For example, the down payment requirement for first homes is 25 percent, while the same figure for second homes is 60 percent (up from 50 percent in November last year) — third homes and everything beyond that require all-cash financing. Furthermore, reserve requirements for major Chinese banks were raised to 19.5 percent in January, following several increases in 2010.

Yet these factors pale in significance when viewed against China's huge informal economy. For example, recent estimates by Fitch Ratings suggest that China's banks lent out some 30 percent more credit (informally) than the government-regulated target of 7.5 trillion yuan ($1.1 trillion) in 2010. This comes despite the major curbing efforts by the government, as well as the fact that the four biggest banks in China are all — ironically enough — state-owned.

Rather than reducing the cash flow, the tighter regulations have simply encouraged banks to get creative about their credit pumping. By repackaging and selling off loans to state-owned trusts and asset-management companies, banks have been able to keep their true lending at about the same levels as before while simultaneously staying below their official quotas. At other times, the banks have turned loans into investment products and sold them to private investors, much as American investment banks did during the 2000s.

The situation is not made easier by China's lack of property rights in land, all of which is owned by the government and leased out to private and state-owned companies through so-called land-use rights. In turn, the sales of these rights constitute a vital revenue stream for local governments, providing powerful incentives for them to help spur the real-estate boom. This adds another explanation to the ghost towns all across China. Many local governments will find themselves in economic peril as revenue dries up.

Some may point out that China has both higher household savings and less private and public debt than the United States, which will help soften the blow from a real-estate slump. This is true to some extent, but things are not as simple as they first appear.

For example, Ernst & Young estimated as far back as 2005 that the total bad debt held by China's banks was then close to $1 trillion. The number today is probably several times that, given the fact that lending has exploded in the last two years. Mortgage levels are also increasing rapidly: almost half of all residential properties sold in 2009 were funded by bank loans; in 2007 it was only 20 percent.

Another example comes from Professor Victor Shih of Northwestern University's 2009 study of China's public debt. He concluded that it is more likely to be somewhere around 40 percent of GDP, rather than the official 20 percent. Even the director of one of China's state-owned research institutes put the public debt at an estimated 50 percent last summer.

Hence both public and private debt could equal a substantial portion of China's $5.7 trillion GDP.

China's $2.8 trillion foreign-currency reserves will be of little help to recapitalize banks or prop up local governments, as these reserves would mostly be good in an external debt crisis, not a domestic one (among other things, trading in these reserves for yuan would cause the currency to appreciate sharply, damaging China's exports). And, for the record, the United States of the late 1920s also held massive foreign-currency reserves, as did Japan in the late 1980s.

China's gold reserves will be of even less help, as they only amount to about 1.7 percent of the foreign-exchange reserves.

Inflation or Stagnation?

It's obvious the bust will have an impact on sectors beyond real estate and construction. Some analysts even believe that China's GDP growth will drop to around 5 percent, i.e., half of its current level. Fitch Ratings and Oxford Economics recently did a study on what might happen if this came true. Among the main conclusions was a major economic slowdown in both developed and emerging economies in Asia, with GDP levels almost halving across the continent. The sectors most likely to suffer in China and elsewhere included steel, energy, and heavy manufacturing.

The report also predicts a 20 percent plunge in industrial-commodity prices following such a scenario, which would have serious implications for countries like Australia and Canada, both of which are heavily reliant on mining exports. This is of particular importance to Austrian investors and anyone else looking to such commodities and mining stocks as a hedge against looming American and European inflation.

In China, too, price inflation is a growing concern. The official number in late 2010 was 5 percent — a 28-month high. In reality, though, this number is likely to be far higher, as food prices alone jumped by an estimated 50 percent in Shanghai last year, even doubling in other parts of the country. Li Wei of Standard Chartered expects official price inflation to reach 8 percent just in the first half of this year, while Yu Song of Goldman Sachs expects it to go north of 10 percent.

In December last year the Politburo announced it would move from a "relatively loose" monetary policy to a more "prudent" one in 2011. Apart from destabilizing the economy, the government knows that high inflation can also trigger civil unrest. This was, for example, a root cause of the Tiananmen Square protests, where the official CPI jumped from 7.3 percent in 1987 to 18.5 percent in 1988, and then to 28 percent in early 1989. Then as now, there is growing unrest in China over soaring consumer prices, yet many people reluctantly accept it — just as long as the economic boom carries on.


China may very well become "Dubai times 1000," as Jim Chanos puts it, though the jury is still out on what the actual magnitude of the crash will be.

While the economic systems of China and precrisis America are certainly different, below the surface China is plagued by staggering levels of credit expansion, speculation, malinvestment, and toxic loans — much like what we saw in America. The notion that the iron-fisted Chinese government is in control of this situation is a dangerous one. The laws of economics are omnipresent and cannot be overridden simply by force. Trying to apply top-down central planning to an economy that is more and more driven by bottom-up market forces will inevitably have grave consequences. Wild credit expansion always leads to the same things: price inflation, malinvestment, and bubbles.

Still, "this time it's different" …

America's breadbasket aquifer running dry; massive agriculture collapse inevitable

(NaturalNews) It's the largest underground freshwater supply in the world, stretching from South Dakota all the way to Texas. It's underneath most of Nebraska's farmlands, and it provides crucial water resources for farming in Colorado, Kansas, Oklahoma and even New Mexico. It's called the Ogallala Aquifer, and it is being pumped dry.

See the map of this aquifer here:

Without the Ogallala Aquifer, America's heartland food production collapses. No water means no irrigation for the corn, wheat, alfalfa and other crops grown across these states to feed people and animals. And each year, the Ogallala Aquifer drops another few inches as it is literally being sucked dry by the tens of thousands of agricultural wells that tap into it across the heartland of America.

This problem with all this is that the Ogallala Aquifer isn't being recharged in any significant way from rainfall or rivers. This is so-called "fossil water" because once you use it, it's gone. And it's disappearing now faster than ever.

In some regions along the aquifer, the water level has dropped so far that it has effectively disappeared -- places like Happy, Texas, where a once-booming agricultural town has collapsed to a population of just 595. All the wells drilled there in the 1950's tapped into the Ogallala Aquifer and seemed to provide abundant water at the time. But today the wells have all run dry.

Happy, Texas has become a place of despair. Dead cattle. Wilted crops. Once-moist soils turned to dust. And Happy is just the beginning of this story because this same agricultural tragedy will be repeated across Oklahoma, Nebraska, Kansas and parts of Colorado in the next few decades. That's a hydrologic fact. Water doesn't magically reappear in the Ogallala. Once it's used up, it's gone.

"There used to be 50,000 head of cattle, now there's 1,000," says Kay Horner in a Telegraph report ( "Grazed them on wheat, but the feed lots took all the water so we can't grow wheat. Now the feed lots can't get local steers so they bring in cheap unwanted milking calves from California and turn them into burger if they can't make them veal. It doesn't make much sense. We're heading back to the Dust Bowl."

The end of cheap food in America?

It's a sobering thought, really: That "America's breadbasket" is on a collision course with the inevitable. A large percentage of the food produced in the United States is, of course, grown on farmlands irrigated from the Ogallala. For hundreds of years, it has been a source of "cheap water," making farming economically feasible and keeping food prices down. Combined with the available of cheap fossil fuels over the last century (necessary to drive the tractors that work the fields), food production has skyrocketed in North America. This has led to a population explosion, too. Where food is cheap and plentiful, populations readily expand.

It only follows that when food becomes scarce or expensive (putting it out of reach of average income earners), populations will fall. There's only so much food to go around, after all. And after the Ogallala runs dry, America's food production will plummet. Starvation will become the new American landscape for those who cannot afford the sky-high prices for food.

Aquifer depletion is a global problem

It's not a problem that's unique to America, by the way. The very same problem is facing India, where fossil water is already running dry in many parts of the country. It's the same story in China, too, where water conservation has never been a top priority. Even the Middle East is facing its own water crisis ( This has caused food prices to skyrocket, leading directly to the civil unrest, the riots and even the revolutions we've seen taking place there over the last few months.

The problem is called aquifer depletion (, and it's a problem that spans the globe. It means that today's cheap, easy food -- grown on cheap fossil water -- simply isn't sustainable. Once that water is gone, the croplands that depend on it dry up. Following that, erosion kicks in, and the winds blow away the dry soils in a "Dust Bowl" type of scenario.

A few years after that, what was once a thriving agricultural operation is transformed into a dry, soilless death pit where nothing lives.

"The Ogallala supply is going to run out and the Plains will become uneconomical to farm," says David Brauer of the Ogallala Research Service, part of the USDA. "That is beyond reasonable argument. Our goal now is to engineer a soft landing. That's all we can do." (

Such is the legacy of conventional agriculture, which is based almost entirely on non-sustainable practices. Its insane reliance on fossil water, petroleum fertilizers, toxic pesticides and GMOs will only lead our world to agricultural disaster.

Be prepared and be safe

I want all NaturalNews readers to be prepared, informed and safe when facing our uncertain future. We know that trouble is stirring around the world, and much of it is either caused by or will lead to food shortages.

The GMO companies, of course, will exploit this situation to their advantage, claiming that only GMOs can grow enough food to feed the world. This is a lie. GMOs and patented seeds only enslave the world population and lead to great social injustice. The days of food slavery are fast approaching for those who do not have the means to grow at least a portion of their own food.

As part of our effort to help people become more self-reliant -- with greater food security -- throughout 2011 and 2012 I plan to bring you more articles, videos and webcast events that focus on home food production, self-reliance, family preparedness and sustainable living. Recently we announced a live webcast event on financial preparedness but the available seats at that event sold out in a matter of days (

Based on the huge demand for this event, we have decided to roll out a second preparedness event in April, focused on food preparedness and security. Watch for an announcement on that soon.

In the mean time, I am personally working on growing more of my own food and will be creating a new series of videos and articles based on some of what I learn along the way. From living in South America and producing quite a large amount of food there, I have a fair amount of experience on home food production, but of course there's always more to learn, right?

My gut feeling on all this is that learning to grow and store some portion of your own food is going to become a crucial survival skill over the next few years. And that means understanding water, soil, open-pollinated seeds, organic fertilizers, soil probiotics, insect pollination, growing with the seasons, sprouting, food harvesting, food drying, canning, storage and much more. It's a whole set of skills that have faded away in America in just two generations, leaving very few people who now know how to live off their own land.

What's becoming increasingly obvious from events such as the drying up of aquifers is that home food production is going to become a critical survival skill. I want NaturalNews readers to know and practice these skills as much as possible so that you can experience the comforts (and freedoms!) of genuine food security.

This could be the most important thing Porter Stansberry has ever written

Here I go again… By now, almost everyone reading the Digest knows we set aside Friday's for me to write personally. And though I've rejected the idea that people can teach anything (there is no teaching, only learning) – I can't seem to help myself. If you're tired of suffering through these lessons, you'll be happy to know my impulse to empower our subscribers by showing them a few of the more unpleasant truths about finance has cost me a lot of money.

As I knew they would, my essays about the importance of cash and asset allocation (when you buy what) resulted in a torrent of refund demands – about $1 million worth in the last two weeks.

... It is a quirk of human nature that most people don't want to learn anything new and react negatively to anyone who challenges their deeply held views (even when they're obviously wrong). You'll know I'm truly a glutton for punishment when you realize the subject of this Digest: Our country's severe financial crisis.

Writing about this topic has led to far greater problems than cancellations. I've gotten threatening letters and angry e-mails from folks who seem to believe that pointing out these dangers is tantamount to causing them.

More than two years ago (December 2008), I first warned in my newsletter that America would eventually lose its world reserve currency status and our debt crisis would lead to a massive inflation. I call this complex series of issues the "End of America." Not because I believe it will lead to the end of our political union (though it might), but because I believe we're heading into a crisis that will be far worse than anyone has yet realized. The crisis will result in a significant decline in our standard of living. These are deadly serious issues and I meant every word I wrote.

Even so, two years ago, lots of folks actually laughed at me – including a few in my own office. Not anymore. If you saw the Wall Street Journal headline yesterday ("Why the Dollar's Reign is Near an End") or if you saw Sam Zell (the most successful real estate investor of all time) on CNBC, you know many of the smartest folks in our country take my warning seriously. Said Zell:

My single biggest financial concern is the loss of the dollar as the reserve currency. I can't imagine anything more disastrous to our country… you're already seeing things in the markets that are suggesting that confidence in the dollar is waning… I think you could see a 25% reduction in the standard of living in this country if the U.S. dollar was no longer the world's reserve currency. That's how valuable it is.

So today, I want to update some key figures of my End of America report. I want you to know where we stand. This is important enough to risk the inevitable criticisms (and refunds). But I want to take one criticism out of play right now. Don't bother writing to complain about my "politics."

This has absolutely nothing to do with politics. This matter is purely about economics. The facts, as you'll see, are completely clear to anyone who bothers to learn them. We are spending way beyond our means – both publicly and privately. Worse, this spending has warped the incentives in our economy, resulting in not only debts we can't afford, but outcomes we don't seek. At the heart of this crisis, there's a knowledge problem.

Most Americans don't understand even the most basic facts about our country's financial position, nor do they take the time to consider the likely outcome of poorly structured government programs.

So please, don't write to me about politics. I don't care about the Democrats, Republicans, or even the Tea Partiers. I don't care whose "fault" it is, because these debts belong to all of us. I care about the people who live in America… people who are going to be wiped out because of feckless leadership and genuine ignorance. I can't do anything about our leadership – that's up to you. I can try to do something about the ignorance.

In our search for facts and solid financial thinking, let's start with Warren Buffett, who is neither feckless nor stupid. Buffett is the world's best investor. He got that way primarily by figuring out how to correctly value equities and allocate assets… and because he learned one of the most valuable financial secrets in modern finance: why insurance companies are so valuable. (Hint: It's the float. But that's a discussion for another day.)

Buffett has become a sort of "rich uncle" to America, giving helpful advice about financial matters. And he recently said something that struck me as profound – something I'd wager almost everyone else ignored. Buffett explained why the buyers of his mobile homes (Clayton Homes) default at rates (1.86%) much lower than the national average for homebuilders (more than 25%). That's true, even though the buyers of his mobile homes typically have low incomes, less job stability, and lower credit scores than the buyers of conventional housing. If you read nothing else in today's Digest, please pay attention to what Buffett says here:

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income.

In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind. If homebuyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes…

… A house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

Pretty simple, eh? Don't sell houses to folks who can't afford them. And make sure both the lender (who kept the note) and the borrower (who made a down payment – equity) have plenty of "skin in the game."

You don't want to create any incentive for the deal to go bad. You want both parties to have a powerful incentive to do what they've promised. After ignorance, almost all our country's core problems come back to these same issues: a lack of equity and poorly designed incentives. Remember these concepts. You'll see them again: skin in the game (equity) and properly designed incentives.

Let me take on the toughest problem first: Medicare/Medicaid. Since the government established this program in 1965, it has amassed a $5.6 trillion deficit. This program alone accounts for 40% of our government's total debt. If you could erase these debts, our most recent two foreign wars (Iraq/Afghanistan), and the losses associated with the recent financial crisis, you could eliminate more than half our entire federal debt – a debt threatening to destroy our way of life.

Whether you'd choose to eliminate these debts by eliminating these programs is a political question. I'm not going to discuss politics here. The point I'm trying to make is, regardless of what you'd choose, we have to make a choice. We can't afford to do all of these things.

Like the subprime buyers in the housing bubble, we've bought a government we cannot afford. That's a simple fact. It should be obvious to any thinking person that when government spending makes up 45% of GDP (as it does today) and there's one government employee for every six households, something has gone terribly wrong with America.

When my parents were born, America was still the land of the free. The incentives people faced were different. Before World War II, the federal government made up only 3% of GDP. It didn't provide health care. People had to maintain their health, as best they could. People didn't depend on Ponzi finance (Social Security) for their old age – they had to save. They had to take care of their families and help take care of the unfortunate in their communities.

We didn't spend a lot on the military, either… which gave us an incentive to mind our own business. In fact, back then, our presidents promised to keep us out of foreign wars. Both Wilson and Roosevelt came to power promising to keep us out of the war in Europe. They lied. Almost every other president since has sent our boys to die for others wherever they could. War is good for business… and good for the government.

Lots of people reading this will say, "I don't want to live in a country like that, where the government doesn't provide a social safety net." Other readers might say, "I don't want America to be 'isolationist.' We need more troops overseas to fight terrorism." OK… So maybe 3% of GDP is not enough for the government we will choose. But 45% of GDP is much too large – again that's not a political choice; we simply cannot afford it.

So how then will we decide? My suggestion: Pay more attention to incentives. And demand much more equity from the voters.

Here are some interesting facts:

In 1965 – when Congress created Medicare/Medicaid and greatly expanded the federal government's role in health care – about 13% of Americans were obese. Today, 32% of Americans are obese.

Before the government enacted Social Security, Americans typically saved between 15% and 20% of their incomes. Today? Almost nothing. In fact, for many years, the savings rate in America was actually negative.

Before the Great Depression, there wasn't any government unemployment insurance. Not surprisingly, there was almost zero long-term unemployment.

One more interesting fact… the U.S. didn't experience a Great Depression until the Federal Reserve was created. The main purpose of the Federal Reserve is to ensure that banks don't fail. Sounds good. But it provides a perverse incentive for banks to act recklessly, which causes bigger booms and busts – just like the one we're experiencing right now.

I'm not arguing government spending is the primary cause of any of these problems. But I am saying you'd have to be a fool to believe incentives don't play a big role in human action. Think about why all politicians try to spend more than they collect in taxes. They have a huge incentive to promise more than they can deliver – and to make up the difference by borrowing against future taxes or printing more money.

The problems created by the perverse incentives of collectivist actions are well known. They are as old as the ideas themselves. They explain why socialism and communism always lead to failure. And yet… we seem eager to pursue these policies in an almost mindless pursuit of bankruptcy. Why? That's not hard to figure out either.

What's the No. 1 reason people make bad decisions? They don't have to suffer the consequences.

Which investors made worse decisions during the mortgage bubble? Was it the private hedge-fund managers, whose entire net worth was made up of the assets in their own funds and whose friends and families had invested alongside them? Or was it the senior managers of publicly owned banks, whose creditors were protected by the federal government and who owned little of their own company's equity?

That's easy to answer, even if you knew nothing about the financial crisis. Unless people have a stake in the outcome of an event, they are very likely to choose poorly or recklessly.

The most difficult problem we face today is, far too few Americans have any equity in our government. Less than half of all Americans pay any federal taxes. Don't listen to the nonsense about how almost everyone pays payroll taxes. It's true, but it's irrelevant. Payroll taxes don't come close to covering the costs of the entitlement programs they support.

Cutting government spending will be easy compared to trying to increase the average citizen's equity in government. But we must. People will always demand more from the government until they realize how expensive government solutions really are. And the only way to show them is to share the burdens of government more equally.

Now, I know what you're thinking… I'm making a political argument to reduce the progressive nature of our tax system. I'm not. I'm pointing out a simple fact: When half the voters don't pay for any of the true costs of the government, your society is going to suffer terrible governance.

A democracy that concentrates the overwhelming burden of government on a tiny minority of the population is no different than an investment bank making bad loans and then selling them to someone else. You can't separate the people making the decisions from the costs and the risks of those decisions. And yet, that's what we've done.

We've reached a point where we can longer continue on our current path. America spends 800% more than its nearest rival on its military. We spend 200%-300% more per capita on health care than any other similarly wealthy country. Are we safer? Are we healthier? I honestly don't think so.

And even if you believe we are, can we afford it? Here are the simple numbers. Americans now owe $56 trillion in total debt, much of it held by foreign investors. We must spend $3.5 trillion each year on interest. That is already more than the federal government spends, in total. I do not exaggerate when I tell you we cannot afford these debts. We will never be able to repay these debts – already equal to roughly four times our country's GDP. The largest components of the debts we owe are government debts… and they are growing rapidly and show no signs of stopping.

The only way to stop the debt crisis we face is to reduce the total level of government spending – immediately and permanently. We have to stop giving our citizens improper incentives. We have to increase the "skin" voters have in the game by spreading the burden of government more equally. And most important, we must take away the politicians' ability to debase our currency.

You see… politicians believe, as Dick Cheney famously said, deficits don't matter. They believe these debts can be safely printed away – which is what the Federal Reserve is doing right now.

How can we accomplish these goals? I believe we need three simple amendments to our Constitution. First, we should have a balanced budget amendment. It's hard to imagine why anyone would object to this, regardless of his politics. Politicians ought not have the right to burden future Americans with debt. It's disgusting that we would leave a burden like this for our children and grandchildren.

Next, we need a constitutional amendment that ensures sound money. If you tell the politicians they're not allowed to borrow, they'll inflate instead. There is no reason Americans shouldn't enjoy the stability and safety of sound money.

Every argument you'll hear against backing our currency with gold comes from bankers and swindlers who need the ability to be bailed out so they can make risky bets with enormous amounts of borrowed money. Let's put a stop to this, once and for all.

The American government is the world's largest holder of gold. Let's put it to work for us, right away, in the form of sound money.

Finally… we need a logical way to put a stop to the narrowing of the tax base. Everyone who votes should share in the burdens of government – otherwise the incentive will always exist to vote for more government spending.

I suggest a constitutional amendment limiting tax rates and abolishing all taxes except for income tax. Tax every adult under the age of 65 20% of his income – whatever the source. Give everyone a $24,000 annual personal exemption. Above that, everyone pays. No other deductions. We could get rid of the IRS. You could do your taxes on a post card. How much did you make? Send the government 20% of it.

Why do I think 20% is the right rate? The church has always asked for 10%. Surely the government can survive on twice what God needs. And… we should word the constitutional amendment to make clear our intentions: Every U.S. citizen has the right to keep 80% of his income. Let the feds and the states fight over your tax dollars. Remember, your assets and income are part and parcel of your freedom. A man cannot have his liberty without his property and the right to his wages.

By the way, the U.S. Constitution already decrees all citizens should be equal under the law. Making the tax code truly equal will merely be living up to the obligations our Constitution is already placing on the government. Likewise, the Constitution says Congress shall have the right to coin money. It says nothing about printing or the Federal Reserve.

And finally… the founding fathers of our country once rebelled over a 2% tax on sugar, and they expressly forbid income taxes in their Constitution. Can you imagine what they would think of marginal income tax rates in excess of 50% on people in certain states? These new amendments I'm suggesting aren't really new at all: They're simply a return, a restoration, of the real America – the greatest country in history.

If you like these ideas… please share this. I'm sure it would be difficult to get these amendments passed. But if things in America get as bad as I think they're going to, maybe people would be willing to rethink our government's structure.

Sooner or later we have to learn to live within our means. Sooner or later, a preference for sound money will appear because inflation will have destroyed our currency. And sooner or later, the idea that you can live at the expense of your neighbor (through progressive taxation) will lead to a collapse. My preference would be to learn these lessons sooner, so the pain of this transition can be minimized.

I'm interested in organizing a conference about these ideas… maybe call it The Project to Restore America. I'd host it personally (and invest heavily in this effort). I don't know where yet… but I know when – sometime later this year.

My goal will be to get as many well-known people as I can to endorse these ideas and speak about them in public at the conference. I'll try to lure my friends in the media (I have a few) to join with us… plus business leaders… plus regular folks across America.

If we want the government to listen to us… we have to start talking with one, unified and loud voice. I've got a pretty loud microphone here with my publishing company, but I can't do it alone. I need your help. Please pass this around to folks who you think will be willing to read it. And if you want to get involved, please get in touch and tell me how you can help.

10 Traits That Make You Filthy-Rich

Jeffrey Strain

Saving money isn't all about whether or not you know how to score screaming bargains.

It has more to do with your attitude toward money.

Just think of those who don't fit the filthy-rich stereotype. People like Warren Buffett.

As explained in the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko, personal finance has as much to do with people's traits as it does with money. Many millionaires, in fact, have frugal ways.

Understanding how personal traits can influence your finances is an essential ingredient for building wealth.

Here are 10 key traits:
10. Patience

Patience is one of the most important traits when it comes to saving money.

This means waiting until the first wave of product hype has passed, keeping a car for an extra few years before getting another one and waiting until something you want fits into your budget instead of putting it on credit.

Patience is often the difference between creating savings and being in debt. Having the patience to wait until you find a good deal is a cornerstone of good finances.
9. Satisfaction

When you're satisfied, there is no reason to spend money on nonessentials. The sole purpose of commercials is to make you believe that buying a product or service will make you happier, wealthier, better looking or improve whatever isn't bringing you satisfaction.

People spend because they want to capture the excitement shown in advertisements. When you are satisfied with what you have and your life (not trying to live like those on TV), your finances will be in a lot better shape.
8. Organization

Being organized can make you more productive and ensure that all the many issues pertaining to personal finances are addressed.

It means not paying late fees, not buying two of everything, knowing deadlines that can affect your finances and getting more done in less time. All these can greatly benefit your finances.
7. Discipline

You need the discipline to continue to save money for specific, long-term goals every month. Personal finance isn't a way to get rich quick, but is a disciplined execution of your lifetime plans.
6. Reflectiveness

It's important to be able to look at your financial decisions and reflect on their results. You're going to make financial mistakes. Everyone does. The key is to learn from those mistakes so you don't make them again, or recognize if you keep repeating them.
5. Creativity

The economy and our earnings don't always match our expectations.

Unexpected developments wreak havoc to elaborate financial plans. When this happens, changes are needed to deal with the new circumstances. Creativity is essential to accomplish this.

Creativity allows you to make something last longer rather than purchasing it when you don't have the money. It means juggling money to stay out of debt rather than simply paying with a credit card. It means finding a cheaper alternative when money is tight.

In these ways, creativity plays a large role in keeping finances in order.
4. Curiosity

Having curiosity helps you learn, study and improve yourself.

The curiosity of wanting to know more, to take the time to study and then take what is learned and put into practice is an important process that is driven by curiosity.
3. Risk-Taking

To build wealth, one needs to be willing to take risks. This doesn't mean uncalculated risks. It means weighing all the options and taking calculated risks when appropriate.

The stock market has risks involved, but over the long term, history shows that it provides good returns on money that is invested wisely. Those who fear risk altogether end up saving money in accounts that likely lose money to inflation in the long run.
2. Goal-Oriented

The importance of setting and working toward goals is obvious. If you don't know where you are going, it's difficult to get there. It helps your personal finances immensely if you have money goals and are motivated to reach the goals that you have set for yourself.

Those who lack goals don't have a road map to take them to the financial destination they want.
1. Hard- and Smart-Working

Creating wealth and staying out of debt rarely comes about without a lot of hard work.

Many people might hope that the lottery will solve all their financial problems. The true path to financial freedom, however, is to work hard to earn money while educating yourself to continue to have more value and increase your salary.

You may not possess all of the above traits. But knowing them can help you make changes so that you nourish the ones that you have and obtain the ones you're missing.

Ultimately they will help you with your personal finances and create a plan to accumulate the wealth you desire.