Thursday, September 22, 2011

Is the US Monetary System on the Verge of Collapse?

Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward.

Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.

Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again.

Monetary Madness

Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.”

That’s because for the last 40 years – since Nixon canceled the dollar’s gold convertibility in 1971 – the global monetary system has been based on nothing more tangible than politicians' promises not to print too much.

Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability.

Such programs invariably surged during political campaigns and on downward slopes in the business cycle when politicians hearing the cries of the constituency to “do something” tossed any concern about balancing budgets out the window of expediency. After all, the power to print up the funds for debt service whenever needed makes moot any concern over deficit spending.

Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”

Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.”

Of course, Greenspan and Summers were referring to an overt default – of just not paying – and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too-big tailings pile and taking the monetary system down with it.

Importantly, the debt shown in this chart whistles past the government's unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would more than triple the US government’s acknowledged obligations – to over $60 trillion. (more)

Apple Is Everyone’s Favorite Blue-Chip Stock — But Which Companies Come Next? : MCD, IBM, V

You just can’t go wrong with Apple (NASDAQ:AAPL) stock these days. Just look at these recent returns:

  • 50% gains for AAPL stock in the past year
  • 120% gains for AAPL in the past two years
  • 190% gains for AAPL in the past three years
  • 455% gains for AAPL in the past five years
  • 4,600% gains for AAPL in the past 10 years

Given the dominant nature of the gadget giant, the $12 billion in cash on its balance sheet and its track record of innovation, it’s easy to see why a great many investors agree that Apple simply is the best stock out there.

But if you want diversification, you can’t put every cent in Apple alone. Where else, then, should you stash your cash?

Even though there aren’t a lot of other growth options out there — and certainly no large-caps that have the explosive potential of Apple — there are a handful of other blue-chip stocks that are incredibly attractive buys. If you already own Apple and are looking for other investments to fill out your portfolio, consider these picks as the second-best stocks to buy right now behind the Silicon Valley superpower:


McDonald’s (NYSE:MCD) isn’t quite as dramatic as Apple when it comes to stock performance. The company has “only” doubled since 2007 and “only” tripled since 2005 — compared with 330% gains since 2007 and 900% gains since 2005 for Apple.

But you have to admit, those gains still are incredibly impressive — especially for a mammoth blue chip like McDonald’s that is dominant worldwide.

Also worth consideration is the fact that, since 2007, McDonald’s has paid dividends totaling $9.26 per share. Since McDonald’s stock was trading around $45 four years ago, that means on top of doubling your money via the share appreciation, you would have gotten back about 20% of your initial investment via dividends alone. Or if you reinvested those funds, you really could have supercharged your returns even more.

Looking forward, McDonald’s shows no signs of slowing down. It has surpassed analysts’ expectations in four of its past five earnings reports, most recently with second-quarter numbers boasting a 15% increase in profits. While its revenue has risen at a modest 3.6% annual rate during the past five years, net income has surged at a 14.6% annual rate — proving MCD can maintain margins and grow profits even if sales don’t soar.

McDonald’s, like Apple, knows how to deliver small-cap gains despite its blue-chip size. That makes this pick a keeper.


While hip consumer tech stocks like Apple are in favor and laggards like Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) are the butt of many jokes, it’s worth noting that the legacy names in the technology sector aren’t all dead money. Consider IBM (NYSE:IBM), which has doubled since Jan. 1, 2009. That’s more than three times the broader stock market.

Why is IBM stock doing so well right now? Well, earnings are a big reason. IBM earnings have been up year over year every single quarterly report for more than half a decade.

And look at this yearly EPS growth based on the past four fiscal years and the forecast for fiscal 2011:

  • 2011 estimate: $13.40, forecasted up 16%
  • 2010: $11.52, growth of 15%.
  • 2009: $10.01, growth of 12%
  • 2008: $8.93, growth of 24%
  • 2007: $7.18, growth of 18%
  • 2006: $6.06

Growth like that is simply stunning. Big Blue still is picking up steam, too, with blowout Q2 earnings in July that boasted big EPS and revenue gains along with strength in all four divisions — technology services, business services, software and systems.

It’s a high-tech world, and IBM continues to be a mainstay for many businesses even as the economy remains largely sluggish. Apple’s consumer focus is great, but there’s a lot to be said in the stodgy old IT industry via an investment in IBM.


Despite a very rough 2011 so far, payment processor Visa (NYSE:V) is right there beside Apple with gains of nearly 30% since the first of the year. Visa stock continues to set 52-week highs and is within striking distance of new all-time highs above $97.

Visa doesn’t have quite the track record of many blue chips, having only gone public in 2008. However, there are some big reasons to expect that the recent growth is not just a flash in the pan.

For starters, the demographic trends are hard to ignore. The percentage of cashless transactions continues to rise. Despite rapid growth from fees for payment processing, 40% of all transactions in the U.S. still are done with cash or paper checks. That’s to say nothing of rapid growth of debit and credit card business in emerging markets. Visa’s logo is everywhere and will only be accepted in more places as the months go by.

And don’t forget, Visa is not a financial stock. Service fees account for more than one-third of revenue — meaning the stock is little more than a toll-taker on the road between a merchant and a customer’s checking account. It is not exposed to bad debt the way financial stocks like Bank of America (NYSE:BAC) and others are.

Visa has seen year-over-year earnings growth every single quarter since going public, and it should keep up that growth. Additionally, revenue was up 17% from fiscal 2009 to fiscal 2010 and is forecast to jump another 12% in fiscal 2011.

There is big growth to be had at Visa. It might not be Apple, but its strong growth potential and dominant brand make it a go-to stock for large-cap investors.

4 Misleading Pieces of Personal Finance Advice

There are a few pieces of seemingly fail-proof advice that personal finance experts like to give when they are asked about important habits you should develop to retire well, but blindly following them can still get you in trouble. Here's why retirement isn't a sure lock even if you follow these pieces of advice to the letter.

Don't buy a latte every day. Coined by author David Bach, the "latte factor" quite simply points you to the fact that investing $5 a day for 40 years will earn you close to $1 million if you manage to get a return of 10 percent. Yet not drinking coffee doesn't mean you will become a millionaire automatically. If you can't hang on through the ups and downs of the market (even for decades at a time), you will never get the average annual return of the market. If you don't buy a latte but instead buy other things, you won't even save that $5 a day. And if you stop contributing once you feel like you are quite rich even before you become a millionaire, it's much harder to get there.

Live below your means. One of the most important habits to develop in order to retire well is living below your means, but it's not enough to merely live below your means if you want to retire well. To come up with the monthly savings you need to deposit into that retirement stash, you need to go above and beyond. I mean, having $1 left over on every paycheck is living below your means, but you can clearly see that you won't ever get ahead.

Stick to your asset allocation and diversify. Asset allocation and diversification work their magic over time because you are forced to buy low and sell high. However, you need to be careful because you can be very diversified with the recommended asset allocation for your age and still miss the boat. For example, a person who is young can own a ton of individual stocks and still fit the asset allocation recommendation, but if all of the individual stocks are duds, he will never get ahead.

Don't keep up with the Joneses. One of the fastest ways to deplete your future retirement savings is by keeping up with the Joneses, but merely ignoring those around you isn't enough to rack up enough savings to retire comfortably. How about actually keeping up with the Joneses, but just the ones who work hard to make money and diligently save? When you hang out with people who are motivated to save for their own future, you will be encouraged and the good vibes will rub off on you.

It's hard to find the discipline to save for retirement, but when everybody you know is doing it, you will, too.

Uncertainty: Corporate Insider Buying Has “Disappeared. Almost Overnight.”

What’s next for the stock market? In the grand scheme of things, it really doesn’t matter to those of us who have taken our assets off the table and have chosen instead to “get physical.” But there are still millions of Americans who are depending on stocks for their livelihoods and retirements. So, for those who are wondering what the sentiment is on Wall Street, consider Why the insiders have quit buying stocks:

Chief executives. Board members.

The head honchos. The people who know.

Just a few weeks ago, they were out in force, buying up shares in their own companies with both hands.

No longer. They’ve disappeared. Almost overnight.

“They’ve stopped buying,” says Charles Biderman, the chief executive of stock market research firm TrimTabs, which tracks the data. “Insiders aren’t buying this rally.”

Insider stock purchases, which surged above $100 million a day in the market slump last month, have now collapsed to just $13 million a day.

Meanwhile the ratio of insider sales to purchases has skyrocketed. Today insiders are dumping $7 in stock for each $1 that (other) insiders are buying. That’s a worrying ratio. Six weeks ago the amounts of purchases and sales were about equal.

What’s up?

The executives and their customers are back at their desks after the summer vacations. They’ve had a chance to look at the forward order books.

Or maybe they’re just worried about the big picture.

Greece. China. The U.S. economy. The budget. Any number of things could cause the stock market to throw a wheel.

Biderman blames uncertainty. “It looks to me that insiders are uncertain as to what’s happening,” he says.

There’s that word again, and one we’ve oft repeated in our commentaries. Uncertainty.

The stock markets have no doubt been on a wild ride, especially for the last three months, but the winds of sentiment across the nation, and not just in corporate insider circles, may very well have shifted to the point that stocks may buckle and correct, potentially even crash, in the near term.

Insiders and business owners are uncertain. So, too, are financial analysts and media pundits. The average American is certainly confused, irritated and concerned with what the next wave of crisis may bring. And now, key government leaders, are using it as a talking point:

“There is no question that the private sector in America right now sees all of this uncertainty coming out of Washington: new rules, new regulations and no idea what the tax rates are going to be at the end of next year.”

“I was with a group of employers in my own district yesterday who are very concerned about investing more in their business at a time of great uncertainty and I think government needs to help bring some certainty.”

House Speaker John Boehner (R)
September 21, 2011

Uncertainty is what is keeping insiders out of the market, because as business leaders they have absolutely no clue what the government and their central banking cohorts will do next. More taxes? More printing? More regulations? No one knows, and compounding the problems is that the businesses landscape in the U.S. and Europe literally changes daily – sometimes from one hour to the next.

And now that this talking point has gone mainstream it will become embedded in the social consciousness, so much so that it may trigger the next wave of the crisis, which will undoubtedly include severely panicked investors, in the very near future.

It is this uncertainty that leads to fear, and if insiders and large financial institutions, as well as the investors who following them get scared, you can say good bye to that 401k, IRA and pension fund, because this stock market will drop like a defunct NASA satellite – and we’ll have no idea where it’s going to land.

21 Signs That Something Big Is About To Happen In The Financial World

Will global financial markets reach a breaking point during the month of October? Right now there are all kinds of signs that the financial world is about to experience a nervous breakdown. Massive amounts of investor money is being pulled out of the stock market and mammoth bets are being made against the S&P 500 in October. The European debt crisis continues to grow even worse and weird financial moves are being made all over the globe. Does all of this unusual activity indicate that something big is about to happen? Let's hope not. But historically, the biggest stock market crashes have tended to happen in the fall. So are we on the verge of a "Black October"?

The following are 21 signs that something big is about to happen in the financial world and that global financial markets are on the verge of a nervous breakdown....

#1 We are seeing an amazing number of bets against the S&P 500 right now. According to CNN, the number of bets against the S&P 500 rose to the highest level in a year last month. But that was nothing compared to what we are seeing for October. The number of bets against the S&P 500 for the month of October is absolutely astounding. Somebody is going to make a monstrous amount of money if there is a stock market crash next month.

#2 Investors are pulling a huge amount of money out of stocks right now. Do they know something that we don't? The following is from a report in the Financial Post....

Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

#3 Siemens has pulled more than half a billion euros out of two major French banks and has moved that money to the European Central Bank. Do they know something or are they just getting nervous?

#4 On Monday, Standard & Poor's cut Italy's credit rating from A+ to A.

#5 The European Central Bank is purchasing even more Italian and Spanish bonds in an attempt to cool down the burgeoning financial crisis in Europe.

#6 The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank have announced that they are going to make available an "unlimited" amount of money to European commercial banks in October, November and December.

#7 So far this year, the largest bank in Italy has lost over half of its value and the second largest bank in Italy is down 44 percent.

#8 Angela Merkel's coalition is getting embarrassed in local elections in Germany. A recent poll found that an astounding 82 percent of all Germans believe that her government is doing a bad job of handling the crisis in Greece. Right now, public opinion in Germany is very negative toward the bailouts, and that is really bad news for Greece.

#9 Greece is experiencing a full-blown economic collapse at this point. Just consider the following statistics from a recent editorial in the Guardian....

Consider first the scale of the crisis. After contracting in 2009 and 2010, GDP fell by a further 7.3% in the second quarter of 2011. Unemployment is approaching 900,000 and is projected to exceed 1.2 million, in a population of 11 million. These are figures reminiscent of the Great Depression of the 1930s.

#10 In 2009, Greece had a debt to GDP ratio of about 115%. Today, Greece has a debt to GDP ratio of about 160%. All of the austerity that has been imposed upon them has done nothing to solve their long-term problems.

#11 The yield on 1 year Greek bonds is now over 129 percent. A year ago the yield on those bonds was under 10 percent.

#12 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.

#13 Italy now has a debt to GDP ratio of about 120% and their economy is far, far larger than the economy of Greece.

#14 The yield on 2 year Portuguese bonds is now over 17 percent. A year ago the yield on those bonds was about 4 percent.

#15 China seems to be concerned about the stability of European banks. The following is from a recent Reuters report....

A big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday.

#16 European central banks are now buying more gold than they are selling. This is the first time that has happened in more than 20 years.

#17 The chief economist at the IMF says that the global economy has entered a "dangerous new phase".

#18 Israel has dumped 46 percent of its U.S. Treasuries and Russia has dumped 95 percent of its U.S. Treasuries. Do they know something that we don't?

#19 World financial markets are expecting that the Federal Reserve will announce a new bond-buying plan this week that will be designed to push long-term interest rates lower.

#20 If some wealthy investors believe that the Obama tax plan has a chance of getting through Congress, they may start dumping stocks before the end of this year in order to avoid getting taxed at a much higher rate in 2012.

#21 According to a study that was recently released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

When financial markets get really jumpy like this, all it takes is one really big spark to set the dominoes in motion.

Hopefully nothing really big will happen in October.

Hopefully global financial markets will not experience a nervous breakdown.

But right now things look a little bit more like 2008 every single day.

None of the problems that caused the financial crisis of 2008 have been fixed, and the world financial system is more vulnerable today than it ever has been since the end of World War II.

As I wrote about yesterday, the U.S. economy has never really recovered from the last financial crisis.

If we see another major financial crash in the coming months, the consequences would be absolutely devastating.

We have been softened up and we are ready for the knockout blow.

Let's just hope that the financial world can keep it together.

We don't need more economic pain right about now.

The Price Is Right for Wal-Mart Shares: WMT, FDO, NDN

An improvement in the retailer's same-store sales can help turn around a cheaply priced stock that has been dead money for too long.

In the lost decade of investing that has characterized the last 10 years or so on Wall Street, few stocks have been stuck in the wilderness quite as long, or as stubbornly, as Wal-Mart Stores. A $50-a-share stock in the late summer of 2001, it's still mired at near that price.

Long gone are the whirlwind days when Wal-Mart (WMT - News) locations sprouted like the kudzu in the southeastern U.S., where Bentonville, Ark.-based Wal-Mart is headquartered. Instead, domestic store openings — especially its bedrock full-size locations — have stalled.

Many investors have felt ripped off by Wal-Mart over the past decade. One joke perpetuated among institutional investors traces the lifeline of the Wal-Mart investor thusly: You start out buying the stock. You move on to shopping at the stores. Eventually, you end up working at one.

But at its current depressed level, Wal-Mart's stock, like the company's cheaply priced merchandise, seems like a value that shouldn't be missed.

While anybody can see that its price has leveled off for a decade or more, Wal-Mart's price/earnings multiple has absolutely collapsed. Thanks to continued growth of both sales and profits, it's much, much cheaper today than a decade ago, when investors were paying 42 times trailing profits to ride the Wal-Mart sports vehicle. Today, it's an economy ride, but one that only costs 11 times trailing earnings to board.

Part of that equation, of course, has been the aggressiveness with which Wal-Mart has gone about retiring its shares. James Grant, editor of the influential Grant's Interest Rate Observer, has quoted statistics that suggest that, over the last eight quarters, 445 million shares of Wal-Mart have been repurchased by the company. (At the current rate of buybacks, Grant figures, it'll take 15 years to retire all but one share of Wal-Mart stock, a share that — based on its current market capitalization — would be worth $181 billion. At least, theoretically.)

Meanwhile, even amid thin margins, Wal-Mart absolutely gushes cash flow — cash that it's happy to share with investors. Over the last four quarters, one analyst says, it's paid about half its $10 billion in cash flow to shareholders in the form of dividends. Right now, the dividend yield is 2.8%, well ahead of a 10-year Treasury yield.


Earlier this year, it raised the dividend by just over 20%. Even if it doesn't grow its business — a dubious proposition, given its growth initiatives — it could double its annual dividend payment in the coming years.

Still, even as it's generating a generous yield, most investors also want to see some share appreciation. And it's here that Wal-Mart hasn't delivered. Year-to-date, shares are actually off 3%, while the average "dollar-store" merchant — such as Family Dollar Stores (FDO - News), up 8% this year, and 99 Cents Only Stores (NDN - News) , up by 27% — has been a big winner in a declining market.

Peter Benedict, a retail analyst who follows the company for Robert W. Baird & Co., has an Outperform rating on Wal-Mart shares, largely because it's one of the cheapest stocks in his coverage universe. But, as investors recognize, cheap stocks can be like a law of physics: They can stay that way a long time, as Wal-Mart has.

"Wal-Mart's got to show improving trends," Benedict says.

That, he believes, is happening. While Wal-Mart is one of a handful of retailers that chooses not to release monthly sales results, Benedict believes Wal-Mart is shortly going to end what some analysts have pegged as an eight-quarter stretch of negative domestic same-store sales comparisons.

One sign of the changing times: Wal-Mart's announcement earlier this month that it is reviving its layaway program for electronics and toys this holiday season.

Meanwhile, Wal-Mart, which has tacitly acknowledged that the domestic market has been saturated with its "classic" store model, with an enormous square footage and wide selection of products, has been aggressive in opening smaller stores more closely tailored to the local community's appetites.

Management also has reversed a previous decision to winnow its product offerings at large stores, reaffirming its long-standing wide-selection reputation.

"It isn't that Wal-Mart hasn't grown earnings," Benedict insists. "It's just the P/E that's collapsed."

"But what's going to drive this stock is positive same-store sales, and that's what we find so intriguing now," he adds.

Daily Market Commentary: Bull Trap Nasdaq 100

Troubling action in the indices. Large Caps escaped relatively unscathed despite the heavy loss as channel support held. Tech have a little more support to work with but also suffered distribution. Small Caps were just kicked in the teeth with areas of support running out.

I had talked about the importance of the Nasdaq 100 but today's distribution selling looks to have generated a 'bull trap'. The selling brought the index below its 200-day MA, although the 50-day MA remains available as support. However, the damage looks done and shorts will be looking to take advantage of any low volume retest of 2,337.


McAlvany Weekly Commentary

The Final Days of the Keynesian Utopia: An Interview With Hunter Lewis

A Look At This Week’s Show:
-Keynes fooled an entire nation into believing that we could spend our way to recovery. Today’s news proves that this is as wrong as it initially sounded.
-Keynes said, “Drive down interest rates” which in the final analysis leads to a whirlwind of inflation, bubbles and busts.
-The biggest obstacle in changing the flawed status quo in government is not the voting public, but rather special interest groups refusing to give up privilege.

About the Guest:
Hunter Lewis has contributed to many newspapers and periodicals including the New York Times, the Times of London, the Washington Post, and the Atlantic Monthly, as well as numerous websites such as He is also an author and editor of books on economics and moral philosophy. His works include: Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts, Are the Rich Necessary?: Great Economic Arguments and How They Reflect Our Personal Values.

IMF: Financial risks rising in US and Europe

The International Monetary Fund says the global financial system faces more challenges than at any point since the 2008 financial crisis.

Europe's debt crisis is spreading to its banks, which hold government debt and may be forced to pull back on lending to conserve cash, the lending organization said Wednesday.

The U.S. economy is being restrained by its depressed housing market. Many homeowners owe more on their mortgages than their homes are worth. That has limited their ability to spend and is holding back growth.

The IMF urged European banks to raise more capital to shore up their finances. If necessary, governments should provide it. And it said the U.S. government should help homeowners reduce their mortgage debt.

"Risks are elevated, and time is running out to tackle vulnerabilities that threaten the global financial system and the ongoing economic recovery," the IMF said in its semi-annual Global Financial Stability report.

The crisis in Europe is entering a dangerous new phase. Fears are growing that Greece may default on its debts. That would destabilize other debt-laden European countries, such as Spain and Italy. It would also cause substantial losses at French, German and other banks.

European leaders should quickly implement an agreement reached in July that provides the region's bailout fund with more flexibility, the IMF said.

The agreement allows the bailout fund to purchase bonds issued by debt-strapped countries such as Greece and Ireland, and would make it easier for Europe to resolve its debt crisis.

And Europe's larger banks, which hold substantial amounts of Greek and other troubled government bonds, should boost their capital reserves, the IMF said. That would protect them in case the bonds lose more of their value or Greece defaults on its debts.

The capital should come from private markets, the IMF said. But if that isn't available, governments should provide the funds.

European banks face potential losses of $274 billion (200 billion euros) from shaky government bonds, and $410 billion (300 billion euros) if the risk of losses on loans to other banks were included. The IMF said the figure didn't represent the amount of capital banks needed to raise.

In the U.S., about one-quarter of homeowners owe more on their homes than they are worth. Reducing that debt burden would improve consumer demand and support growth.

"Restoring confidence in the stability of the U.S. housing market is the key to bolstering the prospects for U.S. banks," which have been hurt by slower growth, the report said.

But U.S. lawmakers are focused on cutting spending rather than enacting new programs to aid homeowners. And President Barack Obama didn't include any new measures to bolster the depressed housing market in a jobs package he proposed earlier this month.

The IMF's recommendations also face stiff resistance in Europe.

The fund's stance that European banks need more capital is at odds with that of the European Central Bank. The president of the ECB, Jean-Claude Trichet, has said that banks have trillions in securities they can pledge as collateral for loans from the ECB.

European stress tests earlier this year flunked eight banks and found 16 with barely enough capital to weather a new downturn. Governments have in many cases resisted pushing for recapitalization, instead disputing the methodology of the tests.

Recapitalization of banks can be a painful process, since shareholders are pressed to put up more money or see their holdings diluted, and share values can fall sharply. Hard-pressed governments are reluctant to put up the money themselves, after pouring billions of taxpayer euros into bank rescues during the earlier years of the crisis.

On Tuesday, the IMF sharply cut its growth forecasts for the global economy, the United States and Europe for this year and 2012.

The 187-member group is holding its annual meeting at the end of this week in Washington. The meeting brings together finance ministers and central bankers from around the world.

How Far Can Gold and Silver Climb?

With gold a stone’s throw away from $2,000 and already up 27% on the year, the objective investor might begin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted 1980 high – and that peak was a spike that lasted only one day.

So, how much return can we realistically expect in each metal at this point? And is one a better buy than the other? There are dozens of ways to calculate price projections, but I’m going to use data based strictly on past price behavior from the 1970s bull market.

First, let’s measure what today’s inflation-adjusted price would be if each metal matched their respective 1980 highs, along with the return needed to reach those levels:

Returns Needed to Match Inflation-Adjusted Price
Percent Climb to
Match 1980 High
As of 9-19-11

Based on the CPI-U (the government’s broadest measure of inflation), gold is a couple of jumps away from matching its 1980 high of $850. Silver, meanwhile, has much further to climb and would return over three times our money if it reached its former peak.

But the CPI is a poor measure of real inflation. Let’s use John Williams’ Shadow Government Statistics calculations. His data are much closer to the real world, and the statistics are calculated the way they were during the Carter administration, stripped of later manipulations.

Check out how high gold and silver would soar if they adjust to this level of inflation:

Returns Needed to Match ShadowStats Alternate CPI
MetalPrice to Match
ShadowStats CPI
Percent Climb to
Match ShadowStats
As of 9-19-11

Clearly, both metals would hand us an extraordinary return from current prices. Those are some admittedly high numbers, but keep in mind that’s what the CPI figures above would register if government officials had never changed the formulas. What’s tantalizing about these levels is that we’re not even halfway to reaching them.

Let’s look at one more measure. I think another valid gauge would be to apply the same percentage gain that occurred in the 1970s. From their 1971 lows to January 1980 highs, gold rose 2,333%, while silver advanced an incredible 3,646%. The following table applies those gains to our 2001 lows and shows the prospective returns from current prices:

Returns Needed to Match 1970s Total Percent Gain
MetalPrice to Match
1970s Total % Return
Percent Climb to
Match '70s Return
As of 9-19-11

Gold would fetch us two-and-a-half times our money, while silver would provide a quadruple return.

Regardless of which measure is used, it’s clear that if gold and silver come anywhere close to mimicking the performance of the last great bull market, tremendous upside remains.

One might be skeptical because these projections are based on past performance, and nothing says they must hit these levels. That’s a valid point. But I would argue that we’re in uncharted territory with our debt load and money creation – and neither shows any sign of ending. We had a lot of problems in the 1970s, but our current fiscal and monetary abuse dwarfs what was taking place then. The need to protect one’s assets gets more pressing each day, not less so. That to me is the key signaling this bull market is far from over.

One may also be skeptical because the media continue to claim gold is in a bubble. To date their proclamations have been nothing but a great fake-out, every time. Want to know when we’ll really be in a bubble? When they stop saying it’s one and actually start buying and recommending gold. When they begin running 15-minute updates on the latest gold stock. When you are sought out relentlessly by your friends and relatives because they know you know something about all this “gold and silver stuff.”

All told, I think the baked-in-the-cake inflation – rooted in insane debt levels and deficit spending – will be one of the primary drivers for rising precious metals this decade. This means the masses will look for a store of value against a plunging loss of purchasing power. Enter gold and silver.

The current correction may not be over, and we can count on further pullbacks along the way. But the data here suggest the upside in gold and silver is much bigger than any short-term gyration – or any worry that may accompany it.

Stocks plunge after Fed announces stimulus steps

The Federal Reserve did what investors expected -- it said it would buy Treasury bonds to help the economy. Stocks then plunged because investors saw a grim forecast behind the Fed's plans.

The Fed said Wednesday it would buy long-term Treasurys and sell short-term ones to help the economy regain momentum. It surprised investors when it said it would include more 30-year bonds in its purchases than expected.

Financial analysts said stocks dropped as investors came to the conclusion that the Fed expects the economy to take years to recover.

"It's being viewed as perhaps an admission that this is a longer-term issue that the U.S. economy is facing and not one that's going to be solved over a couple of years," said Oliver Pursche, president of Gary Goldberg Financial Services.

The major indexes fluctuated as they often do after major Fed announcements. The losses accelerated in the last hour of trading.

The Dow Jones industrial average lost 283.82 points, or 2.5 percent, and closed at 11,124.84. The Standard & Poor's 500 index fell 35.33, or 2.9 percent, to 1,166.76 The Nasdaq composite fell 52.05, or 2 percent, to 2,538.19.

The yield on the 10-year Treasury note fell to a record low of 1.86 percent from late Tuesday's 1.93 percent.

After a two-day meeting, the Fed said it would buy $400 billion in 6-year to 30-year Treasurys by June 2012. Over the same period, it planned to sell $400 billion of Treasurys maturing in 3 years or less. The move is intended to drive down interest rates on long-term government debt, and could lower rates on mortgages and other loans.

Those purchases are intended to send long-term rates down. The inclusion of more 30-year bonds than expected indicated that the Fed sees a need to keep rates lower for an extended period. And that took investors by surprise, Pursche said.

"When the Fed decides to take this type of action, it's because things are serious," Pursche said.

Wednesday's trading recalled the sharp losses the market has suffered this summer as investors feared that the country was heading toward another recession.

The Fed had some bleak remarks about the state of the economy in the statement that accompanied its decision to buy more bonds. The Fed said the economy has "significant downside risks." One of those risks is the volatility in financial markets around the world. It also listed a number of problems that won't be easily solved: high unemployment, a depressed housing market and consumer spending that is growing only at a slow pace.

There are also concerns about problems overseas, including the debt crisis in Europe that investors believe could affect the U.S. The International Monetary Fund said Wednesday the global financial system is in its most vulnerable state since the 2008 financial crisis. In a semi-annual report, the IMF said the risk to banks and financial markets has grown in recent months.

The Fed's new bond buying plan has been dubbed "Operation Twist" because it is designed to "twist" long-term rates relative to shorter ones. The last time a similar program was used was in the early 1960s, when the twist was the rage on dance floors.

This is the third major bond-buying program by the Fed in less than three years.

"That is perhaps a recognition that the Fed is running out of firepower and resorting to some arcane techniques resurrected from the vault of history," said Lawrence Creatura, portfolio manager at Federated Investors.

Investors may also be doubting the Fed's ability to drive down Treasury yields much more from their current levels.

"Let's face it: with a 10-year Treasury offering 1.90 percent, there's not a whole lot of room for there to be a major impact," said Mark Lamkin, the head of Lousiville, KY-based Lamkin Wealth Management.

While initial investor reaction to the decision was negative, it's common for stocks to change direction in the minutes, hours and days following an important Fed announcement, said Phil Orlando, chief equity market strategist for Federated Investors.

"It's not unusual for the market to drop a percent or two after the decision, then it may rally the next day, then it may fall again. People are confused, they don't really know how to settle it in," said Orlando.