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Taipan Daily: Who Is Buying Long-Dated Treasury Bonds?

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Print Edition Whitelist us About Us Archives Investment Marketplace
Wed., September 30, 2009
Taipan Daily: Who Is Buying Long-Dated Treasury Bonds?
by Justice Litle, Editorial Director, Taipan Publishing Group

Inigo Montoya: Who are you?
Man in Black: No one of consequence.
Inigo Montoya: I must know...
Princess Bride

Again it must be asked: Who is buying long-dated Treasury bonds?

In other words, why are December T-bond futures trading at new recent highs? Why has TLT (the popular long bond ETF) decided to take graceful upward leave of its 50-, 100-, and 200-day exponential moving averages, with the 50-day EMA in particular showing notable upward slope?

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Over the past 24 hours, your humble editor has become temporarily obsessed with this question. It seems an important clue as to what is happening... and unexpected breakouts are far more interesting than highly anticipated ones. As the legendary hedge fund manager Bruce Kovner observed in Market Wizards,

The Heisenberg principle in physics provides an analogy for the markets. If something is closely observed, the odds are it is going to be altered in the process. If corn is in a tight consolidation and then breaks out the day The Wall Street Journal carries a story about a potential shortage of corn, the odds of the price move being sustained are much smaller. If everybody believes there is no reason for corn to break out, and it suddenly does, the chances that there is an important underlying cause are much greater.

In addition to Kovner’s insight, there is another reason why unexpected breakouts are worth noting. By virtue of their very unexpectedness, they tend to catch folks by surprise. The forced adjustment process becomes fuel for the ensuing move.

Earlier this week, we briefly recapped the bearish long bond case. And it’s a doozy of a case. The following data table from Sprott Asset Management does a nice job of driving the point home with a sledgehammer:

View the U.S. Government Financial Summary Chart

Total outstanding U.S. debt, 11.8 trillion dollars. Unfunded Social Security obligations, 17.5 trillion dollars. Unfunded Medicare obligations, 89.3 trillion dollars. Printing the world’s reserve currency – priceless.

A few back-of-the-envelope calculations tell us that lending to Uncle Sam at this point makes about as much sense as giving another mortgage to the house flipper in Vegas who is already juggling 19 properties on a $30K income. And yet, once again, 30-year USTs are going up, not down... hence the mystery.

We also speculated that deflation – or rather, future expectations for deflation – have something to do with the breakout. Again, though, this seems pretty goofy when one considers the time frame in question. Given the history of fiat currencies, does one really want to lend at 4% interest rates (give or take) for thirty years? Really?

The experience of other countries also belies the “deflationary expectations” thesis. Across the pond, for example, investors are expecting a serious bout of inflation down the road. As the Financial Times reported last week, “Investors overwhelmed the UK with demand for inflation-linked bonds yesterday... many fund managers are worried about prices surging out of control in the next few years.” Hmmm.

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The mystery remains. Here are a few theories as to who might be buying.

Boomers and Coffee Cans

In a recent Barron’s interview, noted analyst David Rosenberg observed that hard-up baby boomers could be the ones reallocating their capital into bonds.

When you look at the household balance sheet – and this is the largest balance sheet in the world – 25% of it is in equities. Even today, 30% is in real estate, 12% is in cash, and less then 7% is in fixed income. The remainder is mostly in life-insurance policies and pension funds. But fixed income is the part of the asset pie that will expand the most over the next five to 10 years.

When you look at the labor market, the 55-and-up age group is the only one that has posted any job growth in the past year. They aren't coming back into the workforce because they want to. They are doing it because they have to. They need the income to make up for the record amount of lost net worth that they endured. From a life-expectancy table, they can see if they made it to 52, they are probably going to make it to 82. They aren't going to make up for all that lost wealth, but there is this growing realization that the boomers are going to have to prepare for retirement the old-fashioned way – by putting more of their income into the coffee can, as opposed to buying more coffee cans.

This would naturally explain why corporate and municipal bond funds are booming. There are a number of relatively safe options out there, in contrast to the unattractive prospect of lending long to Uncle Sam. But still, why 30 years?

Perhaps nervous boomers have become fixated upon the word “safe,” to the point where lending to the government seems a good deal to them. With such a small portion of household savings (less than 7%) devoted to fixed income, there have to be at least a few frightened investors who want to avoid the next General Motors (or General Electric for that matter) at all costs, which would mean buying USTs. The risk of getting mauled by inflation may feel less immediate in comparison.

An Old-Fashioned Short Squeeze?

Another possibility relates to the overcrowded nature of the short bond trade.

The Proshares UltraShort 20+ Year Treasury ETF (TBT:NYSE) has proven immensely popular, with average daily volume above 5 million shares. TBT is designed to rise when long bond prices fall. Thus, to go long TBT is to cast a predictive vote for rising interest rates, rising inflation expectations, and deteriorating credit conditions fueling a loss of faith in Uncle Sam.

View Proshares UltraShort 20+ Year Treasury ETF Chart

The thing is, the logic behind this trade may have become too obvious. When that happens, the odds of a nasty correction increase significantly.

Markets are perplexing to the uninitiated in that, unlike high school, it is possible for an idea to be too popular. The conventional wisdom often gets pushed too far. If everyone and their brother becomes convinced that TBT is a buy (and, conversely, that long bonds are an obvious sell), that leaves no one left to take the other side of the trade... and so the trade reverses, to the consternation of many.

The Resurrection of Bretton Woods 2.0

The final possibility goes back to something known as “Bretton Woods 2.0.”

To quickly recap, the original Bretton Woods was a post-WWII agreement (ratified July 1944) that established fixed exchange rates for global currencies versus the U.S. dollar and gold. Decades later, Bretton Woods was abandoned in stages and ultimately killed by President Nixon.

“Bretton Woods 2.0” was the tongue-in-cheek nickname for the unofficial arrangement by which Asian exporters and Middle East oil interests financed the borrow-and-spend habits of the United States. In sum,

  • The American consumer spent huge sums, courtesy of inflated home prices and easy credit.

  • Dollars flowed to the Middle East and Asia to buy oil and “stuff.”

  • Asian exporters and Middle East oil interests recycled their excess dollars back into U.S. Treasuries.

  • Artificially low interest rates (sustained by Asia/Middle East UST purchases) fueled low mortgage rates and easy access to consumer credit, perpetuating the cycle for an astonishing length of time.

If you’ll remember, there was a raging debate over how long “Bretton Woods 2.0” could last. (It was in the midst of this debate that Fed Chairman Bernanke introduced the term “global savings glut,” as if to say it was the rest of the world’s fault for not having anything better to do with their savings than pump them back into an overheated U.S. economy.)

As we now know by virtue of hindsight, Bretton Woods 2.0 finally blew up when the U.S. consumer blew up... and the U.S. consumer blew up because the housing bubble blew up. Leverage and debt had gotten so out of hand, it was pretty much guaranteed to happen at some point.

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Now that long bonds are rising (and interest rates falling) yet again in the midst of speculative frenzy, your editor idly wonders... could a similar dynamic be at stake? Could this be a new, bastardized version of Bretton Woods 2.0, in which Uncle Sam is the big spender rather than Joe and Jane Homeowner?

If so, the dynamic might look something like this:

  • The U.S. government (Fed and Treasury) pumps trillions of dollars’ worth of “funny money” into the market through all manner of bailouts, asset guarantees, alphabet soup programs and whatnot.

  • Hundreds of billions’ (trillions?) worth of this “funny money” gets funneled into fresh speculative activity... winding up with, say, aggressive equity purchases in Brazil.

  • The dollars that flow into Brazil (just for the sake of example here) to buy Brazilian equities eventually make their way to the Brazilian central bank... which, in turn, recycles those dollars back into U.S. Treasury bonds (for lack of a more compelling option).

  • Low long-term interest rates (and near zero short-term interest rates) perpetuate the ongoing gaming of the system as the Fed and Treasury get ever more aggressive in their “funny money” operations, with global central banks complicit in this Ponzi scheme via fresh UST buying, and voila... a Frankenstein version of Bretton Woods 2.0 (Bretton Woods 3.0?), with the U.S. government at its heart, is born.

If this last bit of theoretical noodling is anywhere close to the mark, then we could in big, big trouble... sowing the seeds of a future crisis that makes 2008 look like a mere preseason warm-up.

And how about you, dear reader? Any insights or theories as to why long bonds are heading higher, or what the trading and investing implications might be? Inquiring minds want to know:

Warm Regards,


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Dishonesty, Intimidation, Hypocrisy and Medicare Advantage

The Newt Gingrich Letter
Newt Gingrich
September 30, 2009 | Vol. 4, No. 39

Dishonesty, Intimidation,
Hypocrisy and Medicare Advantage

by Newt Gingrich

The editorial writers at the New York Times thought they were getting the White House's back when they defended cuts to Medicare Advantage last week. In fact, they were validating the blatant dishonesty of administration and congressional officials pushing for the cuts. In their editorial last Sunday, the Times writers revealed in stunning fashion the lies that have been used to convince increasingly skeptical seniors that their Medicare Advantage benefits won't be sacrificed to pay for government-run health care.
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Dishonesty: Cuts Won't Affect Medicare Advantage Participants

In one breath, the Times claimed the effect of Medicare Advantage cuts will be "modest":
"Although Republican rhetoric has triggered fears that Medicare Advantage enrollees might lose their coverage entirely if private plans drop out of the system, the real effect of the bill would likely be modest on average."
Then, literally on the next line, the Times contradicts itself, and stumbles inadvertently on to the truth:
"The value of an enrollee's added benefits would shrink by more than half from current levels but would not disappear; they would still be worth about $500 a year in 2019 (emphasis added)."

Intimidation: Free Speech Rights of Insurance Companies Denied

Medicare Advantage was created to do what the Center for Health Transformation (CHT) has long fought for: To give all seniors more private choices of higher quality health care. It currently provides almost 11 million Americans coverage through private insurance plans. Recent data shows that these seniors have better health outcomes than those in traditional Medicare.

Current legislation in Washington will gut the program. H.R. 3200 in the House will cut Medicare Advantage by $172 billion. The bill sponsored by Sen. Max Baucus in the Senate will cut the popular program by $123 billion.

If you're just hearing about this now, here's the reason: When Humana (with whom we've worked with in the past at CHT) tried to inform its Medicare Advantage members that Democratic health care reform could lower their benefits, the government ordered them to cease and desist and opened an investigation of the company.

Sen. Jon Kyl (R-Ariz.) subsequently introduced legislation in the Senate Finance Committee to protect the 1st Amendment rights of private insurance companies to criticize health care reform proposals.

Democrats on the committee unanimously defeated the bill.

Hypocrisy: The AARP Sells Out Seniors

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But while Humana was censored by the government from talking to its Medicare Advantage enrollees about proposed Democratic cuts, another Medicare Advantage provider - the AARP - has been left free to lobby its members.

Of course the Washington leadership of the AARP is working closely with Democrats on health care reform. Incredibly, the self-appointed voice of America's seniors supports "reforms" that will cut the benefits - if not the entire Medicare Advantage coverage - of millions of seniors.

How can this be? It's simple. The AARP is a liberal interest group like any other, and it cut a deal with the party in charge in Washington. In exchange for selling out the seniors it claims to represent, the AARP will get potentially millions in lucrative insurance contracts, and quite possibly something more.

Tell Your Friends We're Not Going to Take It Anymore

No plan that has to be advanced through dishonesty, intimidation and hypocrisy has the support of the American people.

But all that is required for these tactics to prevail in Washington is for good people to sit back and do nothing.

As debate in Congress continues, here's what you can do: Send this newsletter to a friend, a co-worker, or a relative who isn't yet aware of what Washington is doing.

Send this newsletter to your senators and representatives. Let them know that, despite the dishonesty, the intimidation and the hypocrisy, we know what they're doing.

And we're not going to take it anymore.

Your friend,
Newt Gingrich
Newt Gingrich

Newt's Quick Links:

Newt Gingrich Real Change

RedState Morning Briefing

RedState Morning Briefing

For September 30, 2009

Sign up to get the morning briefing by email here.

1. Obama Administration Condones Sex With Minors.

2. Don't Get Sick or Die Quick

3. Respect Authority!

4. Even The New York Times Notices That The Health Care Bill Has An Abortion Problem

5. Rockefeller Amendment for a Public Option Fails 15-8

6. Common Sense Outlawed in Indiana

7. Absentee ballot fraud in Troy, NY

8. Ten For 10 is a Great Idea.


1. Obama Administration Condones Sex With Minors.

People with low IQ got to see Whoopee Goldberg defend Roman Polanski on the View yesterday. Goldberg had no problem with the man filling a thirteen year old girl with alcohol and drugs before raping having sex with her.

I say "people with low IQ" because demographically those are the only people who watch the View save for those few people forced to watch the show as part of their job.

In any event, Goldberg's blasé attitude about raping having sex with drug filled children and the implications of statutory rape has spilled over into the Obama administration, which is taking the position that statutory rape is of no great consequence and should, if the child consents, be encouraged.

There is no other way to look at Barack Obama's appointment of Kevin Jennings, the President's "safe schools czar" who, the Washington Times reports unapologetically encouraged a homosexual relationship between a fifteen year old boy and much older man who, the boy reported to Jennings, picked the boy up in a bus station bathroom and promptly took the boy home.

Considering Jennings wrote about this in his one and only published book and spoke about this prior to his appointment, we can only assume the Obama administration knew about it and has no problem with it.

Please click here for the rest of the post.

2. Don't Get Sick or Die Quick

Republican district. Alan Grayson sees the writing on the wall. He knows he is going to be out of Congress after 2010, so he's letting it all hang out.

Alan Grayson believes the Anti-Defamation League is "a crazy racist institution."

He also believes the U.S. military is a treasonous organization that will "undermine Obama unless he pursues neoconservative policies."

He also believes Senator John McCain is a "crazy cancer-ridden dishonest madman."

And today Alan Grayson took to the floor of the United States House of Representatives to tell us what the Republican health care plan is. According to Grayson, the Republican health care plan is "don't get sick." If you do get sick, Grayson says the Republican health care plan is "die quickly."

More precisely, "If you get sick, America, the Republican health care plan is this: DIE QUICKLY. That's right - the Republicans want you to DIE QUICKLY if you get sick."

In August, Barack Obama told the nation, including the Democrats, "where we do disagree, let's disagree over things that are real, not these wild misrepresentations that bear no resemblance to anything that has actually been proposed."

Guess Grayson didn't get the memo.

If you have a radio show, you are going t want to play the audio from this video. The rest of you just watch . . .

Please click here for the rest of the post.

3. Respect Authority!

Hey, remember when the Left's big slogans were all about "Question Authority" and "Speak Truth to Power" and all that? Well, here's the perfect gift for the left-wingers you know who have had those bumper stickers during the Bush years and want to get their mind right with the new Administration:


Yes, the shirt says "Respect the President of the United States." And no, you just can't get more rebellious and counter-cultural than that, now can you? That'll show The Man!

Please click here for the rest of the post.

4. Even The New York Times Notices That The Health Care Bill Has An Abortion Problem

Today's New York Times essentially owns up to what conservatives have been saying, and what President Obama branded a lie during his joint address to Congress: federal funding for abortion is very much on the table in the health care debate. Let's take a look . . .

Please click here for the rest of the post.

5. Rockefeller Amendment for a Public Option Fails 15-8

Senator Rockefeller's public option amendment offered in the U.S. Senate Finance Committee went down in flames today.

The implications for Speaker Pelosi are profound. Her insistence on a public option in the House bill will force even more Democrats to vote no, and the chances that it will become law are small.

Rockefeller is threatening to offer the same amendment on the Senate floor, but now Rockefeller is between a rock and a hard place since he has publicly said he will not vote for any health reform bill that does not have a public option.

Senator Cantwell made the same threat. But, meanwhile Senator Harkin claims he has whipped his Democratic colleagues and he says "we have the votes" for a public option.

Please click here for the rest of the post.

6. Common Sense Outlawed in Indiana

Being a moron should be a disqualification for a wide range of occupations. I think we can all agree that having morons as physicians is a bad thing. But morons are perfectly capable holding down useful employment, take for instance actors, sportscasters, and Keith Olbermann. It would seem that as a society we've determined that you can be both a moron and a politician without undercutting the republic to any great extent.

I'd like to add two additional occupations to the banned list: law enforcement officials and prosecutors. Now our system of government can only survive morons in those positions if chance doesn't intervene and we end up with morons holding both those positions in the same jurisdiction. If you want a case study in what happens when you run afoul of a moron cluster, look no farther Vermillion County, Indiana.

Please click here for the rest of the post.

7. Absentee ballot fraud in Troy, NY

Every once in a while Democrats and the media assert that there's never any election fraud or that it rarely results in cast votes. This is false. My favorite example is the 2003 Democratic Mayoral primary in which 32 people were convicted of voter fraud, and the election was subsequently thrown out by the court.

It turns out that the Troy, NY municipal elections are highly contested this year. And when elections are close, and especially in primaries, the stakes get high. And the fraud starts. In this case, the fraud was over the Working Families line. And the ballots themselves explicitly link the fraud to Democratic Party officials and Working Family Party officials to that fraud. From the Albany Times Union . . .

Please click here for the rest of the post.

8. Ten For 10 is a Great Idea.

Here's the problem: Republicans are winning right now just because they are not Democrats. That won't help us though, long term.

At some point we are going to have to have ideas. People forget, though, that the Contract With America did not come about until the end of the 1994 campaign season. It was the summer of 1994 and it did not get traction until after Labor Day in 1994.

Laura Ingraham is being pre-emptive. She has come up with a fantastic idea: Ten For 10. Ten For 10 is about ten ideas to run with for taking back Congress in 2010.

Please click here for the rest of the post.

Sincerely yours,

Erick Erickson

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Tuesday, September 29, 2009

A big week...Friday National Town Hall Meeting To Tell Congress Hands Off My Health Care

Americans for Prosperity

Dear Brad,

Public Option Defeated Today in Senate Finance Committee

While the above headline was good news, the fight against a government takeover of health care is far from over.

As Congressman John Shadegg pointed out on our national tele-town hall meeting last week, Speaker Pelosi is planning an all-out effort in the House of Representatives to pass a bill containing some form of this government-run health insurance plan. As Speaker Pelosi has repeatedly said, the Left is demanding this provision stay in the bill. They know the public plan is the fastest, clearest path to killing private health insurance and forcing all Americans into a government plan.

President Obama and liberals in Congress are also moving forward on a number of government mandates that will over time give Washington complete control over our health care. Under an individual mandate, politicians and bureaucrats would get to define what counts as "health insurance." They would decide what it takes in order to qualify for the mandate and decide, based on political considerations, what must be covered and what won't be covered, what the reimbursement policies will be, and potentially every aspect of your health care.

Vast new government subsidies will also be required to ease passage of a bill that would otherwise slam lower-income citizens - those subsidies mean businesses and the middle class will be slammed twice - once to pay higher premiums for the now-legally-mandated purchase of health insurance, and again, with higher taxes to subsidize coverage for others.

There is now word that President Obama and liberals in Congress are secretly considering using a rare parliamentary procedure to get what they want. Yes, the Senate is planning to attach Obama's health care bill to an unrelated bill passed by the House. You can expect that the Left will try to push this through without giving citizens a chance to review the bill or scrutinize it.

This is what happens when you have the Left thinking they must get their way at any cost. But you and I cannot let them.

Congress is now back in session. The Obama Administration and thousands of lobbyists are squeezing members of Congress like an anaconda. The mainstream media drumbeat for doing something -- anything -- is in full roar. The Washington Post -- not surprisingly -- is running stories that push for the Washington brand of reform. The liberal special interests, and sadly the AARP and many corporate interests, have sold out and are actually running ads FOR the government health care takeover.

Defeating this monstrosity is up to grassroots Americans -- like you and me.

We've got to maintain our momentum. This weekend in Washington, AFP will hold our "Hands Off My Health Care" town hall meeting at the Capitol as part of the 3rd annual Defending the American Dream Summit™. CLICK for DETAILS

After our "Hands Off My Health Care" town hall meeting, we will divide up by state delegations and go hit the Senate offices in person to deliver our message once again. You should try to join us. CLICK HERE. Or, at a minimum sign the petition we will be delivering on Friday.

On Friday evening at Americans for Prosperity Foundation's Defending the American Dream Summit™, we'll hear from nationally syndicated radio host and FOX News contributor Laura Ingraham at the Tribute to Reagan Dinner.

Our goal with the "Hands Off My Health Care" Town Hall meeting is to make sure that right now -- as Pelosi, Obama, Reid and Company are moving forward with their health care takeover -- we have committed grassroots activists from across the nation at the Capitol showing our opposition.

One or two thousand Americans from across the nation showing up at the Capitol on a quiet Friday at such a crucial time and then actually going into Senate offices does wonders for delivering our message!!

Here's the bottom line: we must keep up the pressure. We've got to keep working and fighting.

Many years ago I saw a sign in a football locker room that said something I'll never forget: "to go where you've never gone, you must be willing to do what you've never done."

I'm sure the athlete was talking about winning championships in his sport. But I think it applies to us in defending our freedoms now at this decisive time.

You and I have to be willing to sacrifice, to work, to persevere in a way we have not done before if we want to protect our freedoms.

We're Americans -- I believe we're up to it.

Tim's Signature

Tim Phillips

PS: Join us this week at our "Hands Off My Health Care" town hall meeting at the Capitol on Friday at 2pm. Or, make sure you visit our website on Friday afternoon to see footage and pictures of it. We'll also have pictures and footage up Friday night and Saturday morning of AFP Foundation's Tribute to Reagan dinner and Saturday morning session with special guests like Laura Ingraham, Rep. Mike Pence, Speaker Newt Gingrich, The Wall Street Journal's Steve Moore and John Fund, Sen. Jim DeMint, Larry Kudlow and many more. For more information CLICK HERE.

Americans for Prosperity (AFP) is the nation's premier grassroots organization committed to advancing every individual's right to economic freedom and opportunity. AFP believes reducing the size and scope of government is the best safeguard to ensuring individual productivity and prosperity for all Americans. AFP educates and engages citizens in support of restraining state and federal government growth, and returning government to its constitutional limits. AFP has more than 700,000 members, including members in all 50 states, and 25 state chapters.

For more information, visit

The Battle of the World Financial System Drags On; Puru Saxena Tells us that Inflation is Our Future

Celebrating A Decade of Reckoning
US Edition Home Contributors Media & Testimonials archives DR's 10th Anniversary DR's 10th Anniversary
The Daily Reckoning
Tuesday, September 29, 2009

  • The war in the world financial system drags on...
  • You don't win votes by denying voters what they want...
  • A recovery of some kind in global trade...
  • Puru Saxena tells us that inflation is our future...and more!

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    The Battle of the World Financial System Drags On
    by Bill Bonner
    London, England

    The rally may end any day, but it didn't end yesterday. Stocks rose 127 points, as measured by the Dow. Oil closed at $66. Gold rose $2.50.

    We said we were doing some serious thinking this week. Maybe it is the season. But more and more, our thoughts become grayer. Less black. Less white. Less hard. Less soft.

    A few years ago, it looked to us as though the world financial system had gone to war. We cheerfully awaited the victory parade. We figured Mr. Market would whup the feds good and hard. It hasn't happened so far.

    On one side, are the forces of a natural market correction...following a long, long period of expansion. The easier money gets, the more people tend to misspend and mis-invest it. Then, inevitably, their mistakes must be corrected. That's what bear markets and recessions are for.

    But the feds don't like bear markets or recessions. And at least since the Keynes outlined his general theory back in the early 20th century, they've believed that they don't have to put up with them. Keynes took a page from the Old Testament. Government should act like an enlightened Egyptian Pharaoh, he didn't say, but should have. It should run surpluses in the fat years and deficits in the lean years...thus flattening out the pattern of boom and bust.

    Pharaoh was no dope. He stored up grain for seven years, when the harvests were bountiful. Then, when the seven lean years came, he released the grain to the people. Problem solved.

    Keynes believed that modern government could do the same thing. But Pharaoh was not running a democracy. He had no voters to answer to. So, if he wanted to store grain in the fat years, he could do so.

    In theory, the US government could do the same. But, in fact, it never runs significant surpluses. There are too many people who want too much bread and too many circuses. And you don't win votes by denying the voters what they want. So, in practice, the feds run deficits even in the fat years! Last year, before the downturn really started to bite, the US federal government ran the biggest deficit in history - nearly half a trillion dollars.

    Now, let's imagine how that would work for a bad Pharaoh. He would give out grain in the fat years. This would encourage farmers to produce less grain. Then, when the lean years came, Pharaoh would have no grain to give out...and the farmers would have less grain stored up themselves, since they grew less during the boom years. The famine would be worse than ever.

    Then, if we can imagine that Egypt was trading with China at the time, perhaps Pharaoh could borrow grain from the Zhou dynasty to help ease the peoples' pain. Perhaps he could mortgage the pyramids. Whatever, he - and the Egyptian people - would have been in much better position if he had done as Joseph told him in the first place...lay up stores in good times, draw then down in bad times. How difficult is that?

    But Bernanke didn't see the famine coming. Neither did Geithner. Or Greenspan. Or any of the other savants Pharaoh interpret his dreams. None of them expected hard times. None of them warned the public. None of them encouraged the government to save money for the recession. Nassim Taleb asks why Bernanke was reappointed after he clearly failed the most critical test. But heck...the federal government is an equal opportunity employer. Employees aren't let go just become they're incompetent.

    Anyway, getting back to our thoughts... looked like a battle to us - between the forces of inflation (the feds)...and the forces of deflation (the market). But battles usually have clear winners. One side is master of the field and the other retreats. One side is victorious; the other is defeated.

    Alas, some wars produce no hosannas of success...and no wailing widows of failure. Some end in draws...or in confusion...or in disgrace and bankruptcy for both sides.

    Like the bad Pharaoh, the feds saved nothing. Now, they have to try to work their Keynesian magic on credit. This puts them in a weak position; like a government that wages war on borrowed money. They can continue their campaign only as long as lenders allow them. They can't wage the war as effectively as they'd like. Then again, maybe they can't lose it as spectacularly as they might.

    For the moment, their credit is still good. The bond market foresees an inflation rate of less than 2%. Bankers, taking money from the government, are happy to lend it back to them.

    But the forces of the correction are giving up little ground. While stocks rally, the real economy remains in a funk.

    "Sharp drop in start-ups," is a news headline from yesterday. New business start-ups are a major source of new jobs. Bad omen.

    Even glamour publisher Conde Nast is forced to make cutbacks. It has told employees that they may not spend more than $1,000 a night when they are traveling.

    A Pimco economist says savings rates are still going up...and may exceed 8%. This represents hundreds of billions of dollars taken out of the consumer economy. Oddly, while it makes the slump worse, it also helps finance the government's battle against it. Savers buy US debt (albeit indirectly).

    So, the battle is still going on...and the outcome is still in doubt.

    [We may not know how this battle is going to turn out, but we do know one thing: it most likely won't turn out well for you...which is why we have made a financial defense strategy available to our readers - free of charge. Get it here.]

    More news, from The 5 Min. Forecast:

    "Pop quiz: what happened a year ago today?" writes Ian Mathias in today's issue of The 5. "Here's a hint:

    House Veto of Stabilization Act

    "The House put the kibosh on the first rendition of 'The Emergency Economic Stabilization Act of 2008' - Former Treasury Sec'y Hank Paulson's three page request for a $700 billion blank check for his buddies on Wall Street.

    "'Investors' threw a tantrum, crashing the Dow 777 points - it's biggest point loss in history. Approximately $1.2 trillion in Wall Street shareholder value was wiped out, also a record. This day a year ago, the real market pain began. The S&P fell about 20% over the next two weeks.

    "The House eventually passed a package - aimed at cleaning up 'toxic assets' on big Wall Street balance sheets, but also rife with pork barrel spending. A year later...the stock market has recovered, Congress has spent plenty o'money, but has anything been done to stave off future CDO or mortgage-backed calamity? No.

    Toxic Assets

    "Time and clever accounting has put us deservedly back to square one...right? Or, as Addison argues in his latest investment report, is this the 'biggest financial swindle in world history, engineered by none other than Wall Street and Washington, DC.'"
    And back to Bill, with more thoughts...

    Our own Addison Wiggin was interviewed by The Daily Bell on his beginnings at Agora (working on an old laptop on a desk he shared with your editor in Paris), whether or not the West can save itself - and on this 'war' between inflation and deflation.

    On the latter, here's what Addison had to say:

    "'Deflation now, inflation later' is a mantra we've adopted at The Daily Reckoning. The Federal Reserve, through it's program of quantitative easing, is busting the seems of it's own balance sheet in order to fight a deflationary trend in the West. At some point, the tide will shift. Mr. Bernanke assures the world he's watching inflationary indicators like a hawk. We have our doubts whether those indicators will do him any good. As Paul Volcker, the great inflation slayer of the early 1980s, said when we interviewed him for I.O.U.S.A. 'Once inflation gets started, it's very hard to stop. And there's a strong flavor of that at the moment.'

    [To read Addison's full interview, see here.]

    "Global trade rose at its fastest rate in more than five years in July," The Financial Times reports, "suggesting the economic recovery is feeding through into commerce."

    "I've been worried about the effects of protectionism in shutting off different markets and making a weak economy even worse off," says colleague Chris Mayer. "Commodity markets especially need open markets to function well. The EU, for example, just put a 40% tariff on Chinese made steel pipe. That's not good for steel pipe demand and hence, the steel makers and the commodities that go into steel. If we see widespread adoption of such measures, we'd have to re-think some things.

    "But so far, it looks like we've got a recovery of some kind in global trade. When I look at the global economy, many of the bright spots stem from surging trade along old trade routes (such as China and Arab world)."

    [For more from Chris, and to learn about a resource breakthrough that could change the face of America's dependence on foreign oil, see here.]

    Racehorse prices are in freefall, says a report out yesterday. But collectible cars are still doing well.

    Yesterday, we saw someone drive by in a huge, gaudy pink Cadillac from the 1960s. It had magnificent fins and enough chrome to stagger a blind man. In it were a middle-aged man and woman, looking very comfortable and proud. They were traveling in a rolling sculpture.

    Old cars are not only holding their values, they're still going up. But not all old cars. Detroit's muscle cars have been falling in price for the last three years. Not very green?

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning

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    The Daily Reckoning PRESENTS: At present, there is a lot of confusion amongst the investment community and opinion is divided as to whether we will witness inflation or deflation. Puru Saxena looks at both sides, below...

    Inflation is Our Future
    by Puru Saxena
    Hong Kong, China

    On one hand, the deflationists are claiming that given the extremely high debt levels in the West, further inflation is impossible. On the other side of the argument, many proponents of inflation are calling for Zimbabwe style hyperinflation. In this business, everyone is entitled to their opinion; however it is my contention that we will get neither deflation nor hyperinflation. If my assessment is correct, once business activity picks up, our world will have to deal with high inflation.

    Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

    For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

    In fact, the recent weakness in the US dollar is a sign that central- bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

    Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

    So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn's panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.
    "...when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own. If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio."

    Now, unlike some of the die-hard gold bugs, I don't believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

    However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

    If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

    You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this 'stimulus' money hasn't permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

    Long-term clients and subscribers will recall that about two years ago, I highlighted gold's tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold's bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

    Figure 1: Is gold about to shine?

    Gold Price

    So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

    Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

    As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold's bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.


    Puru Saxena
    for The Daily Reckoning

    Editor's Note: In a good year for gold, silver could bring in some pretty major gains. Find out how to include this precious metal in your portfolio. See here.

    Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm, which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

    Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here.

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