In July of 2008 the price of oil skyrocketed to a $147 per barrel. At that time grain prices were going through the roof, the Chinese economy was overheating, the general population of the undeveloped emerging economies were on the verge of revolt, US consumers were practically revolting about having to pay $4.50 per gallon of gasoline, stocks were heading lower every time oil prices were making new highs, and to top it off inflation was the main concern for just about every economic policy maker. My my my, how quickly things have changed. Who’d a thunk it? Oil would drop down to as low as $32 a barrel, the DOW down to the 6000’s, copper at less than $1.50 a pound; and now it seemed that the entire capital market structure was on the verge of collapsing. What a scary time it was not just for investors, but for anyone who had a bank account. I remember having conversations with my friends and family, wondering if their nest eggs would be safe in their 401 K’s, IRA’s, equity holdings and even in their savings accounts. Panic and fear was everywhere there for a few months.,Then with a few actions from the Federal Reserve, US treasury, revisions in the mark to market accounting rules, and a massive $850 Billion stimulus bill, VIOLA, confidence was “restored” . Banks balance sheets improved, toxic assets held by the banks suddenly disappeared (through accounting magic of mark to market), and artificial stimulus was provided through the America Recovery and Investment Act. Unprecedented global government spending wasrunning rampant, 0% interest rates were provided for the banks, and furthermore $1.4 Trillion worth of Quantitative Easing through the purchase of mortgage bonds and US treasuries from the Federal Reserve was enacted. The Dow climbed from the 6443 to as high as 11,205. The CNBC stock cheerleaders were proclaiming a firm “recovery” was in place and that we could expect a V shaped recovery.,It never made sense to me. I told my clients that there wouldn’t be a V shaped recovery and that I strongly advised them not to get caught up in false indications. Take everything that was said with a grain of salt and just remember who they are and what their functions are in their professional lives. I told my clients that the reason there wouldn’t be anything resembling a V shaped recovery in any shape or form was that we had way too many structural headwinds for this to occur.,Summers “has this concept of escape velocity,” El-Erian said Oct. 9 2009 at a meeting of financial-market professionals in Toronto. “We don’t have enough to achieve escape velocity.”,One day, just the same way the bond vigilantes (bond holders) held these southern European economies accountable for their reckless spending binges; they will undoubtedly turn their ire towards us if we don’t act in a timely manner. And who here has confidence that Congress or our president can do what it takes to get our fiscal house in order? Not me. I truly believe that the great majority of our elected leaders, or for that matter many of the rest of us, know the consequences of this risk. Let’s put it this way; it basically would be like a run on a bank, except it is a run on the United States. Rates would soar, it would punish consumers, corporations, small businesses, the dollar would take a great fall, global confidence would fall apart, and there would be a whole new round of systemic risk that would shut the capital markets out which would affect every single securitized investment on the planet. One of the few investments that would gain value would be gold, and it would most likely soar 3, 4, and 5 times its value in a relatively short period of time.,TO RECEIVE YOUR COMPLIMENTARY GOLD INVESTMENT PACKET CLICK HERE,The point of the preceding really hasn’t been to highlight the risks of sovereign default or the fear of one happening, but more so to give you an idea of where our economy stands and the challenges we face moving forward. The latest GDP growth figures for the second quarter clearly demonstrates that our economy has been slowing down for three consecutive quarters.,PIMCO’s chief, Bill Gross (another one of my favorite economists by the way) said deficit spending by governments that seek to maintain artificial levels of consumption “can be compared to flushing money down an economic toilet.” He then further said, “Deficit spending will be unsuccessful because under the “new normal” scenario, deleveraging, re-regulation and de-globalization produces structural headwinds that lead to slower growth and lower-than-average investment returns.” As I’ve noted, our problems with the labor market are structural, and the idea of spending to fill the gap just isn’t working. I want you to think of the Stimulus Strategy as a bridge. On one side of the bridge is pre-recession on the other side is the recovery. The bridge is the stimulus and the idea was to build that bridge long enough to lead us to recovery. The problem is that the distance between the two is much further than most economists, and more importantly, the White house, had woefully anticipated, AND that we don’t have the resources ($$) to build a bridge long enough to get us from one side to the other. Now that stimulus funds are tapering off, and state and local government jobs will be laying off thousands of workers, there is a very good chance that over the next 2 quarters our GDP growth will be around the 1% -1.5% area which most likely means the real unemployment rate will go higher. So what will this administration or the Federal Reserve do to try to get this economy going in the right direction in a meaningful manner?,Congress and the White House have just about exhausted all of their political capital and don’t have the will to push through another stimulus bill, and if they do it will be very limited, and I am certain that it would be destined to fail simply due to the fact that they just don’t understand that there is no quick fix solution and their attempts of staving off this downturn are ill-conceived. So that leaves the Federal Reserve. The Federal Reserve has already stepped up in an enormous way by lowering the Fed funds rate to 0%-.25%, with $1.4 Trillion of Quantitative easing through the purchase of Mortgage bonds and US treasuries; essentially printing money to buy our own debt with the purpose of providing more liquidity to the capital markets and lower mortgage rates. In regards to its effectiveness, that can be debated for both sides. It has brought down rates and it has provided liquidity, but it hasn’t increased lending in an appreciable manner, and that my dear friends, is what it’s all about.,Here’s what I believe what the Federal Reserve will do, and I am of the opinion that it will happen sometime in the second half of the year. The options are:,All these strategies carry heavy inflationary risks, but the fear of deflation is greater than that of inflation. When the Federal Reserve made their announcement of the $1.4 Trillion mortgage and Treasury purchases, the value of the dollar dropped 11% and the value of gold increased by 25% and silver 55% in a six month time period. Considering that we are now entering into the strongest time of the year for precious metals (Please see www.gold-observer.com, Newsletter “When to buy Gold”) and we anticipate the dollar to get hammered because of these actions, we strongly advise our clients to increase their precious metal holdings. TO RECEIVE YOUR COMPLIMENTARY GOLD INVESTMENT PACKET CLICK HERE.,I honestly don’t see how these actions will help spur bank lending; as noted earlier the problem isn’t liquidity or rates, it is confidence from the banking sector to lend. The risks of expanding the Fed’s balance sheet are tremendous. The size of the Fed’s balance sheet has exploded; it’s never ever been as close to as large as it is today. Every time there has been a large expansion of the money supply from central banks, inflation has always followed. Now the whisper on the street is that the Federal Reserve could expand its balance sheet by another trillion dollars.,The money supply that was created can sit there for quite some time, with latent price inflation. If banks don’t lend money, then it doesn’t matter how much money was created, there will be very little inflation. In order for inflation to come about, the money that was printed has to circulate into the real economy. However, the more money that is out there being held by the banks, the more POTENTIAL inflationary implications and risks most certainly may occur. Psychology from consumers and banks can suddenly change, and the “velocity” of that money can release its way into the economy at a very great rate, catching policy makers off guard, allowing inflation to take hold.,To make things worse, we see this scenario unfolding within the next few years, WITH a high unemployment rate, most likely around 7-8%, with GDP growth in the 1-2% area. This would be a very bad development for the economy known as stagflation, which can be defined as low growth with high inflation. There wouldn’t be too many investments that would thrive in this scenario other than precious metals. Investors should protect themselves by diversifying, and precious metals can certainly be a part of your investment strategy. Once again, I thank you for the time you have taken to read this newsletter; I hope it helps.,For your financial future please see the opportunities provided in the following link:,TO RECEIVE YOUR COMPLIMENTARY GOLD INVESTMENT PACKET CLICK HERE,www.gold-observer.com,Matthew Goldfuss,
