Inflation AND Deflation

Antal E. Fekete completed an excellent analysis of the banks and economic crisis.

He states what I have said here in this blog before. You can have a hyperinflationary deflation. And it looks like it is coming to the US.

Complete Article click here

More Investment advice from China

China has doubled its gold reserves since 2003.

China is a very patient and long term investor, unlike the United States. It understands that in order to become a world power, it will need food for its people, infrastructure for its cities and a strong currency. It is building that frame work RIGHT NOW, when others are selling everything at any price. It is buying commodities, raw materials, and gold with the overabundance of US Dollars it is holding.

Gold Rises On Gold Reserves

It is my opinion that we all follow China’s lead. Move out of US Dollars and into commodities and precious metals for long term investments.

Markets Are Headed Down Again

S&P 500 Trend

This chart doesn’t look good. The market is going to go down more before hitting bottom. Although the media spin is, “things are looking better”, it is just spin. Don’t listen.

It looks like Martin Armstrong is correct…market move down and gold up in June. The only question now is next leg-down (to 600 range) or waterfall-effect off the edge. The waterfall looks something like the middle of the chart, but it just falls off the page. We shall see. Let’s take a look at some of the details.

This chart from Chart of the Day says it all. The S&P 500 is testing the trend, but with what?

The credit market is still frozen. Two of the Big 3 will be in bankruptcy before summer. The dollar took a huge hit this week. The “good news” of solid balance sheets and 1st quarter profits of the banks is beyond comical. The bank stress tests are clearly a complete government spin. The IMF has nothing but negative news for the global economy and harsh words for US handling of the the crisis. Unemployment is still rising. Global attacks on the USDollar as a global reserve currency. Another 4 banks closed on Friday, right in line with the FDIC controlled implode of the banking system.

I have taken some small bets on inverse funds against banks and real estate for the next few months.

We have not hit bottom, continue to prepare for more of the same. If you have not protected your 401K or retirement funds for downturn, do so now before the next leg down in the economy.

On the positive side, gold is headed up amidst the chaos.

Health of Your Bank

The banking industry is still not healthy. How do I know?

The government decided to do “stress tests”.

The government is handing over those results to the banks today, so they can create a little spin before next week.

The government delayed results.

If there were real, or easily manipulated stats to release….they would have released them.

Here is an article by Daniel Wagner, examining the facts in more detail:

Stress Tests for Banks

“The question is, will the market accept the stress test as a realistic case?” said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co.

Recent economic indicators show the economy is approaching the more severe of the government’s two scenarios, Miller said.

The future looks the same as the last 24 months:

• The Financial system is broken and banks are NOT safe.
• The market will continue down, before it hits a bottom. It can not hit a bottom, until the health of the banks recovers. NO matter what anyone says. This is simple Economics 101, our financial system is built on a healthy banking system that can create lots of credit.
• The credit industry is still frozen.

We are probably looking at more deflation, especially in credit and debt areas, and then inflation.

How to preserve capital?

• There is a big difference between investing for deflation vs.  inflation, except, one thing…..precious metals. They may go down, but not as much as the rest of the market.
• Use only money you can lose, if you are going to try and time this market bottom. Invest for inflation, i.e., commodities, oil/gas, agriculture, if you don’t mind possibly losing and then gaining, while the market finds a bottom.
• Make sure your cash is spread over 2-3 banks, they are not giving us any clues on the next FDIC takeover.

IRAs, Roth IRAs and Estate Taxes-some changes

The government has made some changes that may impact your retirement investment vehicle.

As you may know I am not in favor of 401Ks or IRAs, as I believe that taxes will rise by the time younger people get to retirement age. Roth IRAs are good, as you are not taxed on capital gains once in the account. Roth IRAs are more flexible in many ways.

When the rules change, your investments may need to change.

New Roth IRA rules.Traditional IRAs are funded with pre-tax dollars and defer taxes until the funds are withdrawn. Roth IRAs, by contrast, are funded with post-tax dollars but investment gains are not taxed. Once you’re 59 1/2, funds can be withdrawn whenever you wish, and the accounts may pass on in your estate so that your heirs enjoy the tax exemption as well. Moderate household income ceilings have prevented lots of people from creating Roths or converting traditional IRAs into Roths. Next year, however, the income ceiling for Roth conversions will be dropped, allowing anyone to convert as much of their qualifying retirement accounts into Roth IRAs as they wish. Of course, they will have to pay income taxes on their fund balances when they convert. But steep investment reversals in many retirement accounts may make that tax hit easier to take. And, should a market rebound in investment values occur, the gains will never be taxed if funds are switched into a Roth account. Also, the government is allowing conversion taxes to be spread over two years: 2010 and 2011. Taxes stemming from conversions made after 2010 will be fully due in the year of conversion. Make sure you speak to your tax account before making this change.

Mandatory retirement plan withdrawals suspended. Last year’s stock market collapse collided with rules requiring mandatory retirement plan withdrawals at the age of 70 1/2. Forcing retirees to cash in money-losing securities seemed especially unfair. Investment experts were widely advising people not to sell their securities at steep losses or risk losing out on any future market recovery. Congress agreed, but it was too late to waive the withdrawal rule for 2008. However, it will be in effect this year, so investors will have the choice of whether or not to take withdrawals from their plans. Investors should contact their retirement plan administrator for the steps to take if they decide to reduce withdrawals this year. The withdrawal decision can affect tax returns due in 2010.

Estate tax changes. Under current law, there is no estate tax next year. But in 2011, it reverts to the 2001 level, with tax rates of up to 55 percent on all but the first $1 million of an estate. No one thinks this approach will prevail. Democrats want this year’s estate taxes to be made permanent. This would exempt the first $3.5 million and levy tax rates of up to 45 percent on the rest. Estate taxes have long been an ideological battleground and nothing less than rhetorical war should be expected as President Obama’s tax-reform tax force develops recommendations that are due at the White House by early December.

With inflation and hyperinflation in our future, $3.5 million may not be that much in purchasing power. Keep an eye on this and adjust your estate planning as needed.

Some options: have assets held by companies rather than personally and assign your children members of the company. Give away money to each child. It’s up to $22,000 per child per year for a couple. If you are concerned about needing cash in your old age, and you don’t trust your children. Create a Trust in the child’s name and give money annually (under the $22,000 annual, one million life-time limit). Have someone other than the child be executor until your death. The trust can “loan” you money as needed before your death. All these suggestions require professional tax accounts and attorneys. Make sure your paperwork is in order and up-to-date.

When the law changes, some people lose money and some people gain money.

John Williams from ShadowStats latest letter

John Williams came out with his latest updates on the overall economic condition. You have to pay for the detail (well worth the money in my opinion), but here is the introduction to his 44-page report:

The U.S. economy remains in a deepening

depression that will prove to be particularly

protracted and unresponsive to traditional

stimuli. A few indications of possible bottom bouncing

at a temporary plateau of low business

generally were flawed. Deteriorating patterns of

year-to-year contraction in key economic series

have continued, setting post-World War II lows.

Despite all efforts by the Fed and Treasury to

debase the U.S. dollar, broad money growth has

stalled anew, suggesting an intensifying solvency

crisis, with new or expanded Fed actions likely.

Broad money growth should pick up, however,

with escalating Fed monetization of Treasury

debt. Although the U.S. dollar generally has

held its recent relative strength in the currency

markets, global investors increasingly will shun

the greenback, and intense dollar weakness

eventually will push dollar-based prices such as

oil much higher, igniting consumer inflation that

ultimately will feed into a U.S. hyperinflation.

Bolded type is mine.

Prepare your investments for the coming hyperinflation now. I am growing more and more concerned that after this deflation of debt, the coming inflation and then hyperinflation will seem to come out of left field and surprise many investors. There may not be time to rearrange your investments when this change becomes clear to everyone.

Check out the public (free) portion of John’s website on my blogroll.

Why I Fired My Broker, by Jeffrey Goldberg

Here is a great article from The Atlantic:

Why I fired My Broker?

I have nothing against brokers. But they are salemen (and women) and not professional investors. Professional investors make their money off of their own investments, not yours.

Never invest all your money with one broker, one bank, one stock…understand the trend here? Even if you are getting a fabulous return from one investment, never put more than 10% of your net worth in one place. Think Madoff. Currently, it is my opinion to only have 10% of anything with an individual broker or an individual bank.

If you read my blog than you already know I like precious metals, as I believe we are in the middle of a 20-year bull market. But having said that I have over 50% of my investments in precious metals, but not in the same way, not in the same place and not with the same broker or bank.

Regarding putting all of your net worth into a house or a 401K or IRA. I also feel strongly that these investments should not be more than 40% of your net worth. If they are more, you could get wiped out when these investments go south. All investments go south at some point. Make sure you are treating these investments as investments and get out before they go south. Some people have already learned this lesson the hard way in the last 18 months.

401Ks are not the end all, be all of retirement investment. Limit them to 40% or less of your net worth, especially if you are under age 35. It is my opinion that 401Ks are not the best investment vehicle for retirement for 3 main reasons.

First, they are very limiting in what you can invest in, mainly just the stock market and its derivatives.

Secondly, taxes will rise in the future. You might be in a better position in the long run to pay taxes now, rather than in the future when you take the money out.

Thirdly, right now, at a certain age, you are required to take money out, no waiting for the market to get better.

In general, 401Ks are limiting in every way for the true investor.

Stansberry on the Coming Collapse

“The wise man does at once what the fool does finally.” – Baltasar Gracian, (1601-1658)

Porter Stansberry wrote an article entitled How to Protect Your Family From the Greatest Economic Disaster in Recorded History.

Porter’s full article at The Daily Reckoning

I highly recommend this article. Here are some of the highlights:

By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the U.S. government. The price of gold will be well over $2,500 per ounce. Most importantly, commodities will no longer be priced in dollars either, but instead in the currencies of the leading producer. Americans haven’t experienced anything like this since the Great Depression.”

The first thing you should do, if you haven’t yet, is buy gold bullion. It’s easy: You just call a few coin dealers, find out who offers the lowest premium on bullion, and wire them the money. Once you have the coins, they’re easy to hide, easy to store, and easy to transport. There’s no law (yet) saying you can’t take bullion out of the country. If things start moving that way, you should have enough time to get the bullion out before the law passes. If not… well… you can clip your coins easily and use the gold to pay for whatever you might need.

I also believe you should immediately buy gold stocks. In fact, I’m convinced you’ll never have a chance to buy gold stocks this cheaply again… Gold stocks have never been cheaper compared to the price of gold itself. This is an amazing, once-in-a-lifetime opportunity. I truly hope you’ll capitalize on it.

The second thing you should do is move as large a percentage of your financial assets as possible out of the country. Unfortunately, I don’t know enough about this yet to offer any good advice. I’m working on it.

And the third thing you ought to do is to build a stimulus package for yourself. I realize it’s paradoxical. But the coming crisis will make lots of people rich. It’s not hard to generate a paper fortune in a huge inflation. All you have to do is own the most important economic assets: energy, communication, and transportation. Thing to do right now is buy the assets you know the government has to have for the economy to function. These assets will remain in private hands, and their values will increase the most.

I can tell you what happens to countries that go bankrupt. I’ve been to Argentina. I’m familiar with the history of Mexico and Great Britain. We’ll see the same things here, shortly: inflation, huge tax increases, capital flight and, eventually, capital controls.

Start protecting yourself now. The financial industry, talking heads, and government officials will not warn you that  these measures are coming.

Taking some Investment Advice from China

Ambrose Evans-Pritchard’s latest article A “Copper Standard” for the World’s Currency System?

Ambrose’s recent article

It seems that China is not dumping its dollars on the market directly, as that would devalue its other USDollar holdings. They are on a shopping spree for raw materials. Buying oil, copper, anyhting countries will sell for US Dollars. China knows what it is doing, they are planning for the next 50 years.

Take some advice from the Eastern investment theories. I would since they are actually in the red, not black, like the US.

Buy raw materials, energy, and all precious metals with your dollars now. Because your US Dollars will soon be worthless in the global economy and worth less at home.

Alf Fields on Gold Wave 3

As Alf Fields predicted last fall, $699 was the low. So, we are definately in the 3rd Elliott wave up to $3,500. It could be a few years before we get there. Time will tell. I publish this quote, so the large dips in gold don’t bother you. We would have to dip BELOW $700 to break this wave. (Update: November 13, 2009, we are still in wave 3, we now must fall below $730 to break the trend.) No margin, use dips to buy in, never sell. This is your insurance for currency crisis, deflation and hyperinflation. It covers everything. If you want to sell a portion of your gold during wave 4, that’s OK, but do not miss holding the majority of your savings in gold/silver during wave 5. Wave 5 will be quick in action.  If you think you might miss it, hold gold through the wave 4 decline. Wave 5 is the currency crisis, super-hyperinflation period.

Assuming that the $699 low on 23 October 2008 turns out to be the actual low point of the correction, and that remains to be proven, then we can conclude that we have seen the low point for Major TWO. That will allow us to update my original “back of the envelope” template to much higher levels, as follows:

Major ONE up from $256 to $1,015 (actually 4 times the $255 low);

 

Major TWO down from $1015 to $699, say $700 (a decline of 31%);

 

Major THREE up from $700 to $3,500 (a Fibonacci 5 times the $500 low);

 

Major FOUR down from $3,500 to $2,500 (a 29% decline);

 

Major FIVE up from $2,500 to $10,000 (also a 4 fold increase, same as ONE)