Adam Sharp - Angel Publishing

Inflation in (Mostly) the Wrong Places

It is often claimed that inflation is a benign, even positive, force. People assume that prices, wages, and assets will all rise together...

In the real world, inflationary episodes don't play out that way.

Wages don't keep up, and bubbles form in unexpected (and unwanted) places.

In America, compensation is clearly stagnant.

And the outlook for future pay raises is not good, as this chart from David Rosenberg shows:

Contrast that with this next chart, which shows the percentage of companies planning to raise prices:

Combine stagnant wages and slow growth with high unemployment and rising prices, and you get a recipe for stagflation.

This scenario is being played out around the world.

In the UK, consumer prices rose 4% in 2010. As noted by the Financial Times, wages aren't keeping up:

The prices of everyday goods and services are rising about twice as rapidly as average wages, Tuesday’s inflation figures confirmed — which means that the standard of living of many Britons is already falling.

According to the Bank of England, average pay at the end of this year will be able to buy no more than it could in 2005. It is the first time that the purchasing power of earnings has fallen so far since the 1920s.

I expect this trend to continue as long as the Fed's mad experiment is ongoing.

The thing about Central Bank "easing" is you never know where inflation will pop up...

Easy money will always fuel speculators, who have little skin in the game, to find another bubble to "invest" in.

Silver, gold, oil

With printing presses switched "on" for the foreseeable future, we remain bullish on precious metals.

Silver is holding above $30 today and could hit $37.50 on the next leg up.

Coal, oil, and natural gas investments should continue to do well. And as my colleague Nick Hodge of Energy and Capital says, "Buy it if it burns."

If you're not yet convinced that Fed printing is directly related to rising commodity prices, examine the following chart. (The solid blue line represents the Austrian Money Supply (AMS), and the solid teal line represents commodity prices (IMF Commodity Index)):

Note: The version of money supply shown (AMS) is the Austrian, True, or Rothbard (named for its creator, Murray Rothbard) Money Supply.

Austrians use a different means to gauge money supply than hiveminded mainstream economists do.

One thing is clear: With data like this coming out, it will become increasingly difficult for the Fed and its apologists to defend loose money policies.

But defend they will. So the ponzi goes on, for a while.

Chairman Paul's First Fed Hearing

Wednesday was a good day for Fed skeptics.

On Capitol Hill, Rep. Ron Paul chaired his first Monetary Policy Committee Hearing.

That's right. The Chairman charged with "oversight" of the Fed's monetary policy doesn't believe the Fed should exist at all (or the entire fractional-reserve system, for that matter).

Paul's latest book was titled End the Fed, after all.

Watch the Bernank

To have a good chance at success in today's markets, you need to know what the Fed is up to. What their likely next move is, and how to interpret the latest spin.

Stocks, precious metals, food, bonds. These are liquidity-driven markets, and the Fed is injecting more juice into punch into the bowl than we've ever seen before. They're no longer the buyer of last resort. In some cases, they are the market.

The massive and unprecedented monetary easing programs underway affect literally every market in the world.

So I ventured to Capitol Hill to witness this historic, largely ignored event.

Seeing Austrian economists sitting on a panel, at a Fed hearing, was worth the trip alone.

Right before security shooed us away. Says "Mr. Paul, Chairman".

Three PhD economists sat on the expert panel: two from the Austrian, or libertarian, school and one neo-Keynesian (think: Paul Krugman).

The two Austrian panel members, Dr. Richard Vedder and Dr. Thomas DiLorenzo, are both involved with the Mises Institute, an Austrian Economic organization.

I liked Dr. Vedder's comment on how interest rates are actually prices too, and any good economist will admit price controls don't work. Keynes versus Hayek. Spend versus save. Print versus cut.

I'd say each member of the panel had their moments, and did a good job presenting their case.

I happen to agree with DiLorenzo and Vedder, but the more traditionally-slanted Dr. Bivens did a solid job for his side. I like that Paul to picked an intelligent representative to present the opposing case. He's a fair-minded guy.

Daniel Gross and Aaron Task of Tech Ticker did a nice interview/write-up with Rep. Paul after the hearing. It's the only decent mainstream coverage I've seen.

Takeaways?

Mr. Paul and the Austrians made a strong case that Fed easing doesn't really create jobs. It may create temporary jobs, while the money is flowing. But it distorts the entire economy, punishes savers, and creates uncertainty — all of which fuels long-term unemployment.

In essence, Austrians believe the Fed's medicine actually makes the illness worse. As Rep. Paul noted in his introduction, $4 trillion (one estimate of total bailout costs) is an expensive price to pay for stubborn unemployment and inflation. Moral hazard also allows bad businesses to exist longer than they naturally should. This slows down the transformation of the economy.

There's also the fact that they can't keep rates low forever. Bond vigilantes will get restless, as inflation creeps in.

After the hearing, I'm more convinced than ever of the bankers' determination to print money. Media still largely dismisses Paul and the Austrians as economic quacks, unfortunately.

Bankers are dug in for a long fight. And the Federal Reserve's current path leads straight to QE10.

Unless something changes, hyperinflation is not out of the question... 10% annual, real inflation? I bet the board of governors would be just fine with that, unofficially.

We'll stop printing when things get better. Oh, look, we stopped and things slowed down a bit. People are saving money. Quick, print!

The Fed and its allies are still calling the shots. But the grassroots resistance, led by Ron Paul, is growing. There was a respectable showing of support at the hearing Wedensday, around 40 people I'd guess — mostly young locals from groups like Campaign for Liberty.

While it's good to see the 18-25 crowd getting involved, from an investing perspective, it's important to realize that the Fed is still winning. As long as they are printing, precious metals and other commodities will likely keep going higher.

The equity run seems extended here, but I don't expect stocks to drop much with Brian Sack and the NY Fed injecting so much liquidity, at least three days a week, via POMOs...

I plan to reconsider (and reallocate) when it starts to look like the Fed is accepting defeat, which is only a matter of time.

Nonetheless, it could be a ways off. And by that time, Americans may have all become unwilling millionaires. A burger combo might run $500, but at least we'll all be fabulously wealthy...

For hyperbole's sake, I will conclude with a citizen's account of hyperinflation during the 1920s in Weimar Germany:

It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty. You could buy nothing with your paper money.

— from Ralph Foster's Fiat Paper Currency: The History and Evolution of Our Money,
via Shadowstats.com

And a few images I found while writing today's piece:

Image sources: Baghdad Bernanke: Melting Pot Project; Zimbabwe Pics: John Williams' Shadow Stats; Billionaire chart: Economist; Monocle-wearing gent: Unarticulate.com

Why Egypt Matters

Experienced investors follow politics. It's practically required today, as economy and politics are increasingly, and disturbingly, intertwined.

Budgets in the United States and EU are hitting the breaking point. Dictatorships in the Middle East are being overthrown.

Now is a time to pay attention, and ensure one's financial affairs are in order.

The next few years will be a transformative period for the world. It could be every bit as big and important as the fall of the U.S.S.R. — bigger, maybe.

Imperialism, oil, and the dollar. These are the trends that matter for the next decade. How events are (mis)handled by politicians means everything — for investors and the world.

The gold bug lesson

Back in 2000, what led early gold bulls to buy at around $300?

Primarily, an understanding of four things:

Fed easing and moral hazard fueled the bubble.
People are in denial about fundamental problems.
Politicians are dependably stupid and short-sighted in nature.
Further money printing is easier, in the short term, than more rational alternatives.

Few recognized the meaning of these observations at the time. Wall Street didn't. I certainly didn't (in my defense, I was 20 years old and didn't have a care).

In the 11 years since, gold has gone from under $300 to north of $1300. The Fed, gold, and inflation remain a key theme today.

But the amazing speed with which revolution is sweeping the Middle East has taken center stage. The implications are impossible to overstate.

Revolution in the ME and oil

Yesterday, the price of Brent crude for March delivery surpassed $100.

The same contract traded for $76 in August of 2010, as this chart from ZeroHedge.com shows:

If Egypt isn't a major producer of oil, why are prices spiking on unrest?

Three words: House of Saud.

If the regime in Egypt is overthrown, Saudi residents may start to rethink the state of the Kingdom. And if analysts get a whiff of revolt in the Kingdom, oil will go through the roof.

For now, I suspect oil is the best investment angle. My colleagues at Energy and Capital have been all over the oil story for years.

But there are other opportunities emerging.

Waiting to invest in Egypt

If a real democracy takes hold in Egypt, the investment opportunity will be tremendous. An economy never reaches its full potential under martial law.

So one investment I am watching closely: EGPT, an Egyptian ETF. Egypt has the potential to be a vibrant, growing economy — one with 2.5x the population of Canada.

But for now, I'm waiting for confirmation that the revolution will succeed. Obstacles remain, but some signs are encouraging.

As I write this, some reports say over a million Egyptians are rallying in and around Liberation Square in Cairo.

Everything I hear from the ground indicates a peaceful, even euphoric atmosphere. Volunteers are manning checkpoints, handing out food.

That shouldn't come as a surprise. These are an educated and secular people who were subjected to the rule of a tyrant for 30 years.

For now, Mubarak isn't backing down. Neither is the U.S. in their backing of him. If he is forced out, America appears poised to push for transition to his top consigliere, Omar Sulieman. That certainly won't do the trick, but it appears to be the game plan for now.

The TV is on in the background, and I hear a CNN anchor. She is focused on chaos and fear, rather than hope for democracy. The U.S. just ordered the evacuation of all non-essential personnel from Egypt.

Let us hope the comparisons to Tiananmen Square do not prove accurate.

Fighter jet fly-overs — a hundred feet over protesters' heads in Tahrir Square — do not inspire confidence. Only fear and anger.

We will continue to watch these events unfold with great interest.

-Adam

The Great American Snooze Button

I've been known to hit the snooze button on occasion. My long-suffering editor can attest to that.

Just ten more minutes, then I'll...

Imagine if each press of the snooze button made the next BEEP-BEEP-BEEP happen a little bit sooner than the last.

Eventually, you wouldn't be able to sleep at all. Time to either wake up or smash the alarm clock.

America has been hitting the fiscal snooze button for the last 30 years. The alarm is getting shriller these days, and it beeps more often than it used to.

So, what's the plan?

In essence: smash that stupid alarm clock to bits and worry about consequences later.

Social Security, and pensions, and Medicare, oh shit my!

In 2011, Social Security will pay out $130 billion more in benefits than it collects in revenue.

The program's deficit this year would have been a paltry $45b, if not for Obama's one-year deal lowering SS payroll deductions from 6.2% to 4.2%...

The CBO admits the system will be completely drained by 2037. But even their own analysts don't buy that, as reported by the Christian Science Monitor.

By the way, did America really enact a tax break that lasts one year?

Yes, we did.

The social security payroll tax cut is a 12-month deal — for now. Short-sightedness is at all-time highs in D.C.

Now don't get me wrong; I would much rather throw away 4.2% percent of my income, given the alternative of 6.2%. But why, exactly, are we cutting funding to Social Security when the program is already running on fumes?

Can't say for sure, but I suspect they are attempting to cushion a blow that's set to fall.

Yes, we did raise the retirement age to 82. But you got a tax cut, baby!

Medicare finds itself in a similar predicament, having burnt through surpluses which were supposed to pay for increased cost in the future.

Pensions are woefully underfunded, as evidenced yesterday when New York State seized control of Nassau County's finances.

Time to face facts. Get on with the belt-tightening already! It must happen, one way or the other.

It's not the end of the world; far from it. It is simply economic reality.

All this political bickering over budgets is nauseating to watch, but the fact that it's happening is a very good sign.

Oh-so slowly, the world is starting to accept that the status quo is untenable...

Ticking faster

In the golden age of kick-the-can economics, Feds were able to stave off the next crisis for a decade or more. But they're not going to pull it off this time.

Their actions have become increasingly desperate. The Federal Reserve is actively monetizing Federal debt.

Not everyone understands the significance of this fact. Hell, just a year ago, Bernanke stated flatly, "We will not monetize the Federal debt."

If history is any guide, this marks a turning point. Once the printing presses get fired up, it is very difficult to pull the plug.

Call it what you will: quantitative easing, credit creation, whatever.

It is printing money, and will have consequences — some of which we're beginning to see play out now.

TANSTAAFL

There ain't no such thing as a free lunch, as Robert Heinlein once wrote.

The buffet America has been gorging on for 30 years wasn't free, of course. It was highly-subsidized with debt, loose money, and various accounting frauds.

This time, those re-flation efforts are doomed to fail.

When they do, it will be a great day for Main Street... even if it doesn't seem so at the time.

For Wall Street? The opposite of great.

But the rest of us will finally be allowed to get our collective house in order, and back on a path to sustainable growth.

Editor's Note: We recently launched a new free newsletter, Wealth Wire. Each day, our editorial team puts together a list of must-reads for the financial crowd, and delivers it straight to your inbox. It's absolutely free, and you can sign up here.

-Adam

The New Leaders in Mobile

Mobile is set for another big year in 2011, but the hierarchy of tech giants is shifting.

A year ago, Android was just a promising upstart in the sector. RIMM was barely holding its own, while NOK and PALM/HP were struggling.

Motorola was showing signs of life, as it looked like their bet on Android might pay off.

Apple, of course, was undisputed king of smart devices.

Fast forward to today, and this chart by Millennial Media says it all:

They've got a ways to go yet, but Google is starting to run away with this one.

Wildly profitable

Apple shares are up more than 3500% over the last 10 years.

As long as we're cherry-picking dates, from September 1985 until today, AAPL shares notched up 18,885% gains.

Mr. Jobs and his team have shown us just how profitable gadgets can be, but the stock's run is getting long in the tooth.

In July of 2010, I proposed Apple is at or near its peak for this cycle.

I may have been a little early — I did mention that only a madman would short it — but I stand by the theory.

Why?

For years, AAPL had the only "fun" smart phone on the market. This is no longer the case.

Android is a game-changer. In the long run, increased competition will compress margins and reduce Apple's piece of the pie (yes, the pie itself is growing larger).

No company stays Wall Street's darling forever. Upside in AAPL here is limited for the near- to mid-term, and the downside risks are increasing.

It's a great company, but there are simply much more attractive opportunities out there...

Rotate into GOOG

The new mobile growth story is about Google.

Now I'm not necessarily bearish on AAPL. But it is among the most widely held stocks in the world, and millions of investors are sitting on big gains.

When all those shareholders and money managers take profits, Google would seem a logical stock to rotate into. And this rotation effect could give Google shares a nice boost throughout 2011.

This scenario appears to be playing out today, as Apple shares are down about 3% on news of Steve Jobs' medical leave, and Google shares are up 2%.

Motorola's time to shine

Google is a relatively safe bet in mobile. It still only makes up a small percentage of their business (for now).

Motorola, on the other hand, is more of a high-risk, high-reward play. Their Android-powered Xoom tablet knocked the cover off the ball at CES. They expect to ship 800,000 units by April.

Motorola's line of Droid phones are also selling well, and the company just split in two. The new firms trade under separate tickers, Motorola Mobility Solutions (NYSE: MMI) and Motorola Solutions Inc (MSI).

The split is good news for investors looking seeking a pure play in the mobile space, as MMI is just that.

Quality of Motorola products has been on the rise, as well. The WSJ recently noted that a survey of smartphone consumers showed promising results for MMI:

71% of MMI's [Motorola Mobility's] customers were very satisfied, only six percentage points fewer than the 77% of iPhone customers, according to ChangeWave Research. HTC, an Android pioneer, had 63% satisfaction...

Improving product line, sales, combined with low R&D costs (a benefit of using open-source) and a solid brand. That's what makes MMI my second-favorite tech pick.

Like I said, it is relatively high-risk. The company is expected to lose money for a few quarters, as new production ramps up. But with $3.5 billion in cash on the balance sheet — and zero debt — they have time.

Those eye-popping Apple gains have me searching high and low for the next big consumer electronics play. I like Motorola's chances.

Adam Sharp
Analyst, Wealth Daily

disclosure: long GOOG, MMI, and MSI

The Fed Blows a Cupcake Bubble

The number one cupcake play in America is going public.

Crumbs Bake Shop operates 34 cupcake stores from New York to California, humorously billing itself as "creator of the gourmet cupcake."

Owners stand to make up to $100m from the IPO, and the deal could price higher, with cupcake-mania hitting a fever pitch.

At $100m, investors would be paying about $3 million per cupcake store.

Management is betting on aggressive expansion to fuel growth, and plan to open hundreds of new stores. Naturally, growing a chain of stores from 34 to 300 is no easy task.

Recall the great donut bubble of 2003...

Krispy Kreme (NYSE: KKD) was the darling of Wall Street.

Its shares peaked at near $50 from a split-adjusted IPO price of $3.50, giving the donut maker a sky-high valuation of $3b (pdf). Shares trade around $7 today, up from a low of around $1.

KKD expanded too fast, took on too much debt, and nearly went bankrupt. They also had some accounting issues, but those likely were probably just a side effect of a business-plan gone bad. Today Krispy Kreme is still muddling along, closing stores opened just a few years back.

Expansion is always risky — especially when financed with debt and equity offerings.

Hopefully Crumbs can avoid a similar fate, and follow the glorious path of Chipotle instead, which is up 436% since its IPO in 2006.

In any case, I wish them well; I've heard their cupcakes are delicious.

The larger point here is about what this cupcake IPO says about the state of markets. After all, it almost certainly wouldn't be happening without all that Fed-injected liquidity sloshing around.

Back in July 2008, The Onion published a prescient piece titled, "Recession-Plagued Nation Demands New Bubble to Invest In":

What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future.

Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to begin encouraging massive private investment in some fantastical financial scheme in order to get the nation's false economy back on track.

Even Jonathan Swift would have to appreciate satire so pointed.

Unfortunately, the bit reads a lot like a Fed policy statement. Change the title to "Encouraging Risk Investment During Recession," and any good Fed economist would nod along in agreement. The sentiment is identical.

Bernanke has often stated that he wants to create a "wealth effect." Push stocks higher, the theory goes, and people will spend more because they feel richer. Long-term thinking, truly...

It's been two and a half years since the Onion piece was written.

Not only did we get one bubble; we got a handful of them. Notably in commodities, metals, food prices, and treasury bonds.

Malinvestment and moral hazard ride on in 2011

One of the nastier side effects of "easy money" policies is known as malinvestment.

It almost sounds harmless... mal-investment (mal = bad). After all, everybody has a loser every now and then, right?

The problem with easy money is that it inevitably spurs not just bad, but dangerous investments. During the tech bubble, it was countless doomed tech IPOs.

In the most recent crash, low rates fueled the housing bubble. Now we have unaffordably high housing, and 25% of Americans underwater on their mortgages.

Loose money also increases prices for consumers, and endangers the retirement security of millions of Americans through pitifully-low rates on CDS and treasury bonds. To tap it all off, the pithese losses are taxed, to top it all off). Often, they have no choice but to buy much riskier assets. There goes retirement security.

This is all solid economic policy, according to the U.S. Federal Reserve. Until real bank reform is achieved, we will continue to see bubbles in new areas of the market.

Some bubbles are still new, like cupcakes. Others, like treasury bonds, are getting long in the tooth.

Efforts to re-flate existing bubbles will become increasingly desperate over the next few years, as reality sets in and the funding crisis begins in earnest.

Eventually, politicians will do the right thing and reform our broken financial system. Right after they've exhausted every other option.

Adam Sharp
Wealth Daily

Finding Unclaimed Financial Assets

I was always skeptical of those stories one hears about a forgotten relative and a pile of cash waiting to be claimed. It reeks of a con.

But a few weeks ago, a relative found an old life insurance policy from the 1940's on missingmoney.com, a site that tracks unclaimed assets, and makes them easily searchable.

The policy was purchased for my relative's husband at birth, but somehow it was forgotten over the years. 60+ years later, they received a check for $4200.

The principal paid on the policy was only around $750, but there was five times that much in interest. This particular policy was what is known as a "whole" life insurance policy, which can grow over time (unlike term-life policies).

Insurance claims are just one type of asset that can be found. Recent technological advances, along with better cooperation between state governments, have vastly improved access to these records.

In most U.S. states, unclaimed assets are transferred to state treasury depts after three years. Some remain in the hands of financial institutions, like banks and insurers.

To learn more about lost money, I contacted David Milby, who runs the National Association of Unclaimed Property Administrators (NAUPA).

He was nice enough to answer a few questions.

AS: Can you give us an idea of how much unclaimed money is out there?

DM: A total of at least $32 billion is currently being safeguarded by state treasurers and other agencies for 120 million accounts. Approximately $2 billion returned to the rightful owners each year from over 2 million accounts.

AS: Do you have any data on the average size of a successful claim?

DM: State agencies report that most claims are under $100 but of course there are exceptions where a person might be owed a relative’s life insurance policy or stock proceeds that can be tens of thousands or even hundreds of thousands of dollars. You can find out more on our website.

AS: Is there any statute of limitations, or time requirement for locating lost funds?

DM: Claims can be made into perpetuity in most cases — even by heirs.

Thanks to David for taking the time.

Readers should definitely check out their site, www.unclaimed.org. It's a great tool for finding lost assets, along with missingmoney.com. And this section of IRS.gov offers yet another way to find lost money — in the form of unclaimed refund checks.

If you find something, let us know. It's worth a look, no matter how unlikely you think your chances are.

There's $32 billion just sitting out there, unclaimed — it's a free lottery, with better odds.

Besides, it's a great excuse to do some ancestral research. And remember to check those maiden names. I'd wager that maiden name mix-ups have been responsible for more than a few lost assets.

I've been doing some searching of my own, and will report back with any interesting findings. If I find something really good, though, you'll probably never hear from me again. I'll be on a beach in Fiji, and my iPhone will be sitting in a trashcan outside the local BB&T.

One warning: Steer clear of firms who charge fees for performing this type of research. There are plenty of free resources out there for anyone willing to do a little legwork.

Happy New Year!

Adam Sharp
Wealth Daily

The Scariest Thing about Bernanke

"The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt."
— Bertrand Russell

"One hundred percent."
— Ben Bernanke, on his confidence that the Fed will control inflation

Lately, I can't help but reflect on Ron Paul's End The Fed (ETF). It's been over a year since I finished the book, yet I keep pulling it off the shelf. Throughout, Paul writes insightfully about politics and money in America.

Like this part about the Bernank:

Some people have been surprised by Bernanke's irresponsible conduct of monetary policy. There was no reason to be surprised. He was on record promising unlimited amounts of inflation should the need arise.

If Greenspan was cocky about the genius of central bankers, Bernanke is even more so.

Congressman Paul — unlike some — is careful with his words. You don't get many sexy sound-bytes out of the Rep. from Texas.

So when he says Bernanke is worse than Greenspan (my interpretation, based on this and other passages in ETF), it's noteworthy.

To be sure, moral hazard flourished under his predecessor. The notorious "Greenspan put" offered an implicit backstop to banks and kept monetary conditions plenty loose.

Bernanke and the current monetary regime, though, are taking things further. They are determined to keep rates lower than any time in history, indefinitely. This will lead to pervasive malinvestment, bank bonuses, and price inflation. Meanwhile, retirees will continue to collect pitifully low income on their CDs.

But don't worry; Wall Street bonuses are safe. Any bank that can't make money in this environment should have their damn head examined. Borrow money at 0%, buy higher-yielding assets. Dip into various gov't giveaways, let the bonuses flow, change accounting rules to conceal losses. Rinse, repeat.

Financial sector profits are back up to 42% of all corporate profits in the United States — an absurdly high level. None of this should come as a surprise I guess, with Bernanke, William Dudley, and a few others at the helm of the Fed.

Clearly, "the Bernank" has even less of an issue with moral hazard than Greenspan did, and under his leadership the Fed is even more determined to "ease" monetary conditions.

Robbing the middle class and savers blind and enriching the banks are just unfortunate consequences of what's good for the economy — or so they'd have us believe. I see it more as a direct transfer of wealth.

Why Bernanke is such an economic nightmare

One big reason the magnificently-bearded one is so frightening is his arrogance. With a track record as miserable as Bernanke's, a cavalier attitude is a job requirement. Big Ben is not a humble man, despite pretenses that suggest otherwise. Watch his 60 Minutes interview if you haven't yet.

There's also the nagging fact that the core of the Fed's mission can be summed up thusly: "Shoveling money to the banks fixes anything." It's just absurd. If you must devalue the dollar and goose spending, just send everybody a check for $100k and get it over with.

More extreme than Greenspan

During the Greenspan era, Ron Paul spent years sparring with the Fed over monetary policy. Yet in ETF, Paul describes a sort of understanding with that Fed Chair:

He [Greenspan] was always aware of exactly where I was coming from... Although frequently annoyed, increasingly so as the years went on, he never seemed quite as annoyed or dismayed as Ben Bernanke is with my questions.

After all, Greenspan was once a proponent of the gold standard, as he famously outlined in Gold and Economic Freedom, an essay he wrote in 1966 for Ayn Rand's Objectivist newsletter:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value… Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Greenspan's philosophy clearly changed over time as he adopted a more pragmatic, bank-friendly approach. I'm sure he had plenty of guidance from the establishment, as well. But at least he held some insight into the other side's argument.

Bernanke is a different animal altogether. He's a purebred monetarist, weaned on liquefied greenbacks from birth — all the bad parts of Milton Friedman; little of the good.

If the Fed under Greenspan represented a shift towards moral hazard, under Bernanke it is taking crony-capitalism to new heights.

This economic vandalism is why some analysts are calling for $5,000 gold. I suspect the Fed's mad experiment will be halted before then, which would likely mark the end of gold's bull run this time around.

But is $5k gold really possible? Absolutely.

Remember, we're only on QE2. If they can get away with it, I am sure the Fed — under the leadership of Bernanke or otherwise — will eventually orchestrate QE3, 4, 5, 6, 7, 8...

At some point many, myself included, expect gold to go parabolic. We haven't seen that yet. The mania phase of this bubble has not even started yet. When it does, smart money will begin selling metals into strength. I'd guess that's still a few years off, but things may change.

Adam Sharp
Analyst, Wealth Daily

P.S. A recent editorial by Paul Krugman sums up much of what I see as wrong with partisan economics today. He lashes out against the "free market fundamentalists" for propping up zombie banks. Mr. Krugman should know better. The central and private banks are anything but "free-market"; in a true free market, banks would be allowed to fail and bond defaults would be allowed to occur. You can't call the banksters "free market" anything. It's ridiculous.

If Mr. Krugman wishes to learn about true free market economics, I suggest he revisit Hayek, Hazlitt, Mises, and especially Murray Rothbard. Readers interested in learning more about the Austrian school of Economics should start at Mises.org, where you can view books by these authors (and others), free.

Debt Riots Break Out in Greece

Today is the anniversary of the Boston Tea Party.

In Greece, demonstrators staged a protest of their own. Thousands took to the streets yesterday, rallying against government cutbacks and corruption.

The protests started out as peaceful affairs; by afternoon, things had gotten nasty.

When the mob arrived at the Greek Parliament building, they spotted a well-known politician, Kostis Hatzidakis (pictured right).

His fellow Athenians proceeded to stone the former MP. That's right, they stoned him.

The politician survived, but Greece and the EU may not. Not as we know them anyway.

The riots were violent, as shown in this footage. Riot cops can be seen clashing with large groups of protesters.

Gov't troops launch volleys of tear gas at protesters, who are busy launching their own attack — a barrage of Molotov cocktails.

In another display of populist anger, English protesters attacked a Rolls Royce carrying Prince Charles and his wife last week.

Some in the crowd could be heard chanting "off with their heads".

The Royals escaped unharmed, save some damage to their Rolls Royce; rowdy protesters did manage to bust out a side window and ding up the exterior.

There are lessons for the EU and United States in this mess.

Bond holders versus the populace

Social unrest like this isn't supposed to happen in the Western world. Yet, here we are.

Confusion remains about about how we got here. This is primarily a story about bonds, and who owns them.

Who owns the bonds of at-risk EU nations?

First and foremost: European banks. The banks are so exposed to EU debt that a default by just one nation would lead to a chain of events that would likely crush them.

By securing a "rescue package" for a troubled borrower nation, banks simply ensure that they are not forced to eat losses.

Debt is transferred directly onto the public's lap, preferably. In the case of Ireland, they did so by raiding the public pension fund to the tune of $35 billion.

But these rescues are likely to fail. Once a nation is in need, its alternatives to default are limited. You can only squeeze a bad debtor so much. At some point, bad debt must be forgiven.

Default is the risk banks take when they lend money to nations in the form of bonds, and it's happened countless times throughout history.

Games like the ones being played now by the EU only delay the inevitable for a few years, and spread the pain around a bit.

The Iceland example

Imagine if Greece had followed Iceland's example, telling creditors, "Sorry, we don't want to be saddled with unpayable debts for eternity."

I suspect we'd all be better off if they did default — and the sooner the better. Their debts are unsustainable; far too costly to maintain.

Banks would fail and need to be nationalized. Bond holders would take losses. The EU would be forced to evolve or dissolve.

Public sector jobs would take a hit. Low-productivity jobs (like many government positions) would begin flowing to sustainable industries. Smith's invisible hand would do its work, and after a few lean years, sustainable growth would return.

Take the case of Iceland. One of the first victims of the financial crisis is already recovering...

By turning down the big banks offer, the country has set itself up for growth. It's population, unlike much of Europe, won't be saddled with the massive debt spawned bailing out zombie banks.

Meanwhile, banks remain firmly in control in Europe and the United States...

Interesting times ahead

Unfortunately, I see riots in Europe as a sign of things to come.

The U.S. should expect similar unrest within three years. States are broke, pensions are horribly underfunded, and a Medicare disaster looms on the horizon.

Something has to give.

And when it does, social programs will be slashed along with everything else. Unemployment, welfare, food stamps — all these things will face cuts. Do you want to be in Detroit when that happens? Or any major urban center, for that matter? Nothing against Detroit, of course. It's my dad's hometown. Unfortunately, it's the hardest hit city in America, and would be vulnerable to social unrest.

My goal isn't to frighten anybody; it's to underscore the importance of these issues.

Because so far, nothing fundamental has changed (oh, the irony of that word change), nor has anything been fixed. TBTF banks are more fail-proof than ever, lining their pockets at 2007 bubble levels.

The power-elite financiers remain in control: the same group of Bob Rubin devotees who set the stage for the meltdowns of 2000 and 2007 — Tim Geithner, JPM & Goldman, and of course the Bernank, among others.

Paul Volcker has gained a little more respect in the Obama administration, which is a positive development. Even the Fed has a few rational folks, like Hoenig and Fisher. But they're outnumbered 20-1 by banksters, of course.

On the verge

Not to be overly dramatic, but we stand at a historic crossroads. If we choose the right path, America and the world could be on a path to sustainable growth in as little as two to three years.

If we choose the wrong one — the road we're currently on, by the way — we're looking at least a decade of poor growth, likely negative growth in real terms (after inflation).

As asset prices rise due to Fed printing, living costs will increase. Wages will not keep up — they never do. Corporate margins will be squeezed and compressed. Not a pretty outcome.

Unfortunately, stagflation, the economist's worst nightmare, seems increasingly likely in America.

The answer lies in drastic gov't spending cuts, starting with military. But the wheels of progress turn slowly in DC, and they usually turn in the wrong direction.

The only consolation prize from this scenario, as I see it, is the bull market in precious metals. Metals should continue to gain until pressure finally forces the Fed to change course, which I suspect is still a ways off.

And that's why we've been advising readers to own gold and silver for the last five years.

Play the hand you're dealt, not the one you wish you were.

Adam Sharp
Analyst, Wealth Daily

Google's Endless Ambition

It's an exciting time for Google investors.

Over the last few years, the company has positioned itself brilliantly.

And it's starting to pay off.

Not only did they maintain their massive lead in search, they managed to grow it.

And management made shrewd investments in other key areas.

For example, in 2005 Google bought a little startup named Android.

In 2005, most of us didn't realize how quickly the smartphone market would take off. Google did, apparently. They moved into the space at just the right time.

Google's latest branded phone, the Nexus S

Here we are five years later, and Google's early investments are paying off in spades.

Every day, 200,000 new Android devices are activated worldwide. Units sold rose 1373% in Q3, compared with the same period a year ago. That's 20 million units sold last quarter, versus 1.4 million in Q3 of 2009.

That is simply explosive growth.

Dozens more Google-powered gadgets are in the pipeline at big manufacturers like Motorla, HTC, and LG; smart phones, e-readers, and tablets.

They also just announced the Nexus S — their second Google-branded smart phone — a follow-up to the mediocre Nexus One. The new phone is the product of a partnership with Samsung. It does some unique tricks, like 3d graphics and some Nintendo Wii-like sensor functions.

It's slick-looking too, vastly more polished than its predecessor. Having a slick product is critical, as Apple has taught us. Tech retail isn't easy, but Google is learning fast. PC World has a nice writeup on how the Nexus S stacks up against the iPhone 4 here.

The S will be sold directly by Google, as opposed to most Android-powered phones, which are marketed independently.

Best Buy secured the exclusive deal to sell the phone. I expect it to do well, especially with all the recent attention Android's been getting.

Google stands to make money from each Android-powered device sold by partners, as well.

What's that you ask? If Android is open source (free), how will they make money off it?

Mobile ads, for one. Smartphone ad revenue will top $1 billion this year, and is growing at an incredible pace.

With their dominant Adwords search platform, and their recent acquisition Admob, a leader in mobiles ads, Google was already set to dominate this market. Android's success expands their reach in the space even further.

Their apps marketplace will be another revenue driver. Apple has been making a killing selling apps and games for years, and Google is finally catching up.

Android will drive revenue in other ways, too. But Google isn't getting greedy, they're focused on grabbing the most market share possible.

Smartphones are still a young market, hard as that is to believe. Android could be a significant growth driver for decades to come. Getting the lead early, and keeping it, will be critical.

Don't think they forgot about you, Microsoft

Nokia, Apple, and RIM aren't the only companies in Google's crosshairs. We already know that Google is dominating Microsoft when it comes to search and mobile. That match is a rout.

I nearly snorted coffee all over my keyboard when I first heard that YHOO and MSFT would merge their search engines a few years back.

The logic of combining two laggards to take on the reigning champ 1v1 escapes me. And what a clunky process the merger has been, allowing Google to break further ahead of the pack. The aging tech-bigwigs probably stood a better chance apart.

Of course, Google's ambitions go way beyond mobile and search. They are determined to infiltrate every corner of Microsoft's most lucrative businesses.

Docs, for example, is Google's MS Office killer (or so they hope). The office productivity software industry is a big space, with sales of around $20 billion annually.

Since its launch in 2007, Docs has made major progress. It's now part of Google's Business App offerings (not to be confused with the mobile apps marketplace).

Google Business Apps is a complete suite of office/productivity software. Apps offers companies branded e-mail, security, word processing, spreadsheets, presentation software — the whole package, all hosted by Google on their cloud, allowing workers to collaborate online and share documents seamlessly. 3 million businesses already use Apps, according to Google.

Microsoft's worst nightmare, perhaps.

To get their foot in the door with businesses, Google is giving away free versions of nearly all its services. Businesses can then upgrade to premium services — and pay for them on a per-year, per-user basis, similar to Microsoft's corporate sales model.

Have to say, I love the long-term thinking here. Microsoft is thoroughly entrenched in the software space. Wedging them out of there won't be easy, so to get traction, Google is getting dirty and innovative. As they should.

These two projects alone — Android and Docs/Apps — are set to steal billions' worth of market share from tech giants Apple and Microsoft.

But the Holy Grail for Google may be PC operating systems.

Microsoft's bread and butter is their pervasive Windows OS, which accounts for the majority of its $60b+ in yearly revenue. Google has made it clear that they aim to shake things up in this space, and I trust they will.

Developing an OS is no small task though, even with thousands of PhDs and brilliant research and development scientists available. PC operating systems are yet another long-term, big-potential project for Google. I'd guess 1-2 years till it's out of beta, minimum. They can't bomb the first major OS release, it needs to be near-perfect.

There are dozens more potential blockbusters in the pipeline, all at varying stages of development: e-books, Google TV, self-driving cars, travel, renewable energy, and cloud computing, to name a few.

In 15 years, we may think of Google as a different kind of company. I'm confident that at least a few of their promising mega-projects will pan out, as some already are.

In fact I think the primary factor that could hamper Google's ascension is the "monopoly" card. Hopefully by boosting lobbying efforts, they can combat these anti-monopolistic attacks, which are likely fueled by competitor complaints.

Unsolicited advice for Google

And finally, I'd like to submit a humble proposal to Google's executive team.

As a 0.0000000000000013% owner of the company, I feel entitled to voice my crackpot ideas. Here's one.

Google should:

Buy Barnes and Noble for $1.5 to $1.8b.
Install Google Stores inside each of the 1,000 B&N retail locations.
Sell Android phones and other Google gadgets.
Utilize Nook e-reader to expand e-book share.

For less than $2 billion (rough estimate), they could gain a legitimate retail presence to sell Android products, plus other Google services. Not to mention a huge boost in the e-bookstore market.

Having a competitor to Apple's wildly popular retail stores could be a very positive development, if well-executed. It may ruffle some feathers among retail partners, but that shouldn't stop a potentially lucrative deal from happening.

With $30 billion plus in the bank, Google could easily afford the deal.

Hey, it's just a thought.

Adam Sharp
Analyst, Wealth Daily

disclosure: long GOOG
chart via The Economist

Wikileaks to Banks: You're Next

I'm starting to wonder if Julian Assange will be around much longer.

The man could almost be a James Bond villain: highly intelligent, cunning, arrogant.

And like every Bond nemesis, Assange is being hunted by MI6.

Today British authorities announced that they know the location of Interpol's new "Most Wanted" man. Assange is reported to be somewhere in England.

Any time now, he could be arrested and promptly shipped off to Sweden to face rape charges, which carry a potential 4 to 6 year prison term.

Yet in the wake of these charges, and massive fallout from their "diplomatic cable" release, Wikileaks isn't backing down.

They're ramping up the operation.

This week Assange announced the target of Wikileaks' next "megaleak", saying it will be a "big U.S. bank."

In a rare interview with Forbes, Assange teased the release...

"I mean, it could take down a bank or two."

(Just in case he hadn't pissed off enough powerful people this week.)

Mr. Assange compared the data to those notorious e-mails that helped expose Enron:

This will be like that. Yes, there will be some flagrant violations, unethical practices that will be revealed, but it will also be all the supporting decision-making structures and the internal executive ethos that comes out, and that’s tremendously valuable.

The NYT is reporting Bank of America may be the target of this leak. The basis for their hunch is a statement Assange made in 2009 regarding 5GB of data they had obtained from a BofA executive's hard drive.

5GB is quite a bit of data (if we are dealing with the same file Assange referenced in 2009). One can only imagine what sorts of interesting things could emerge from that much email -- as many as 600,000 documents according to the NYT piece.

And the way Wikileaks is hyping the release, I'm betting it will contain some juicy nuggets.

Assange says Wikileaks plans to release the bank info early next year (assuming they still exist).

Bank of America stock was shaken up a bit earlier this week on speculation over the leak. And while the Wikileaks catalyst makes BAC a tempting short candidate, I'm staying on the sidelines.

Bank stocks have shrugged off some pretty horrific news over the past year, and they could certainly do so again. Not to mention that we don't know for sure which bank is the target, or how damaging the data will be. Too much risk, too much downside to shorting banks here, to my mind.

Besides, there are more intriguing opportunities to be found. I still like the short-treasuries trade, which I covered in detail here.

And Goldman Sachs just upped their long-term target for Gold to $1750. That's nice. GDXJ, the junior gold miner ETF, looks good on any pullback.

Palladium is on another tear, passing $760/ounce today. When we recommended palladium to readers last November, it was trading around $315.

Precious metals remains the most interesting sector in this market, for me anyway. Wikileaks and the banks are just an entertaining sideshow at this point. But it is quite an entertaining sideshow.

Adam Sharp
Analyst, Wealth Daily

Wikileaks' Next Target: A 'Big U.S. Bank'

From Andy Greenberg's interview with Julian Assange (Forbes):

These megaleaks, as you call them, we haven’t seen any of those from the private sector.

No, not at the same scale as for the military.

Will we?

Yes. We have one related to a bank coming up, that’s a megaleak. It’s not as big a scale as the Iraq material, but it’s either tens or hundreds of thousands of documents depending on how you define it.

Is it a U.S. bank?

Yes, it’s a U.S. bank.

One that still exists?

Yes, a big U.S. bank.

The biggest U.S. bank?

No comment.

When will it happen?

Early next year. I won’t say more.

Fortunately, Assange did say quite a bit more about the reasoning behind this upcoming release, comparing it to leaked Enron emails that damned Ken Lay.

What do you want to be the result of this release?

[Pauses] I’m not sure.

It will give a true and representative insight into how banks behave at the executive level in a way that will stimulate investigations and reforms, I presume. Usually when you get leaks at this level, it’s about one particular case or one particular violation.

For this, there’s only one similar example. It’s like the Enron emails. Why were these so valuable? When Enron collapsed, through court processes, thousands and thousands of emails came out that were internal, and it provided a window into how the whole company was managed. It was all the little decisions that supported the flagrant violations.

This will be like that. Yes, there will be some flagrant violations, unethical practices that will be revealed, but it will also be all the supporting decision-making structures and the internal executive ethos that cames out, and that’s tremendously valuable. Like the Iraq War Logs, yes there were mass casualty incidents that were very newsworthy, but the great value is seeing the full spectrum of the war.

You could call it the ecosystem of corruption. But it’s also all the regular decision making that turns a blind eye to and supports unethical practices: the oversight that’s not done, the priorities of executives, how they think they’re fulfilling their own self-interest. But it’s also all the regular decision making that turns a blind eye to and supports unethical practices: the oversight that’s not done, the priorities of executives, how they think they’re fulfilling their own self-interest. The way they talk about it.

(highlighting mine -AS)

Wikileaks is nothing if not media savvy. The way they're building this up, it sounds like the bank in question will be a big one. We'll be monitoring the story closely.

Update: NYT is speculating that Bank of America may be target of leak. Based on comments made by Assange in 2009, when he mentioned that they have 5GB of data from a BAC executive's computer.

In an October 2009 interview with Computerworld, Mr. Assange said that he had obtained copious amounts of data from a Bank of America executive’s hard drive.

Insiders Head for the Exits

If insider selling is any indication, we appear to be nearing a top in equities.

Over the last six months, corporate insiders sold over 120 million shares, while they bought just 38,000 (per CNBC).

That's 3,177 times more sells than buys.

Insider sales hit a fresh high just last week, when 8,279x as much stock was sold as bought.

The chart below tells the story from a long-term perspective.

The top section shows the price of the S&P 500 index.

The middle graph shows a "score" representing the ratio of insiders buying to selling; a high score indicates insider buying, and a low score means insiders are selling.

The bottom graph shows net volume ($ value of transactions, buys minus sales)...

Data by InsiderScore.com, via SentimenTrader.

Insider selling is useful as a market indicator because it gives us a gauge on sentiment among top business execs.

When they're bullish on the economy and their company's prospects, they buy. And vice versa.

With that in mind, a few things stand out here:

Note how strong selling volume was from late 2005 to late 2007, as insiders sold at the top.
And see how the buy ratio spiked from late 2008 to early 2009? Insiders nailed it again, buying near the market bottom.

The highlighted section of the last graph is especially noteworthy. Insiders selling at record levels may be a sign: WARNING! Correction Ahead.

Then again, the Fed is goosing U.S. markets full force. Timidness will not be tolerated, as pitifully low bond and CD yields chase investors into riskier investments, retirees be damned.

So while insider sales do look bad, there are other factors to consider. The liquidity being pumped into the banks should help prop up stock prices, at least temporarily.

But the macro concerns continue keep mounting, chief among them the EU debt disaster.

European debt hits home

After months of pressure, Ireland has been talked into accepting an aid package. Although, calling it an aid or "rescue" package is a bit of a stretch...

The Irish people are not the real "rescuees" in this operation; banks are the ones being rescued, as they refuse to take losses on their Irish debt.

Ireland cannot pay its debts, just as Greece cannot, short an economic miracle.

They should default on their bonds and force the ones who lent the money to take losses.

Instead, the debt risk will be shuffled around, and generally transferred from banks to Irish citizens. They'll be paying for it for decades.

As we know, modern economic theory dictates that bond investors should not be held liable for bad investments. The fact that this violates every principle that makes capitalism work is a moot point, seemingly.

Unfortunately, there are other (significant) clouds looming over markets...

Insider trading scandal, bank balance sheets

Back in the States, that hedge fund insider trading scandal just keeps getting bigger.

Just today, a number of prominent hedge funds and investment firms announced they are being investigated by Federal authorities. If investors start to pull cash from hedge funds, a snowball of redemptions could start a cascade of selling in all sorts of (mostly high-beta) securities.

Bank stocks also have been wavering, and for good reason, frankly.

There's foreclosuregate, the bank problem that just won't go away.

Mortgage bond putbacks also threaten bankers' well-being. A "putback" refers to the option given to mortgage bond buyers in the event that loans go bad.

So far, investors including Freddie Mac and Pimco have demanded banks buy back faulty mortgage securities, essentially putting them back onto the bank's balance sheet.

These are some of the more severe factors that could adversely affect markets over the near-mid term. We'll keep you updated as we learn more. If you haven't signed up for our free daily newsletter yet, you can do so here.

Good investing,

Adam Sharp
Analyst, Wealth Daily

Urgent Special Situation

Because of a one-time reclassification, one company will soon pay a ~30% dividend to its shareholders.

Government rules say it must purge 90% of its retained earnings... and give them to shareholders as a one-time payout.

The only catch?

You must be in by the end of the month to be eligible...

Full details here.

Time to Short Treasuries Yet?

Back in February Nassim Taleb suggested that, "every single human being" should short U.S. Treasuries.

He's right, of course. Treasuries are a bubble of epic proportions.

And when that bubble pops, a lot of money will be made on the short side. For retail investors, that means using ETFs like TBT, which short t-bonds with leverage.

But getting the timing right on this trade has proven tricky. Bond prices just keep going up, pushing yields to absurdly low levels.

Investors who bought TBT back in February, when Mr. Taleb made his "every single human" statement, are down about 20% on their trade.

The yield on 10-year Treasury has fallen to a paltry 2.8%. In April, the same bond was yielding 4%. In 2000, before the tech bubble burst, the 10-year was paying a substantial 6.7% annual dividend.

Take a gander at this 5-year yield chart:

With inflation expectations rising — and the dollar falling — why on earth would anyone loan America cash at 2.8%? They wouldn't, of course.

The only thing driving demand for treasuries is the Fed. And chinks are starting to show in their armor, for the first time, well... ever, really. (More on the Fed's eroding credibility here.)

How long can the Ponzi last?

I don't imagine that Chairman Bernanke cared much for the world's reaction to QE2. In case you need a refresher on the case against QE, this should do the trick:

And every investor should read this commentary by Bill Gross.

Here are some of the juicier tidbits, though I do recommend reading the entire piece:

Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme.

The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next.

Pay attention to that last one, as Gross is clearly hinting at something important when he describes QE2 as possibly being Bernanke's "last move."

When Mr. Gross speaks, investors listen. And for good reason. Bill Gross is the kind of guy who can move markets with an off-hand comment. So the fact that he is blatantly calling the U.S. economy a Ponzi scheme does not bode well.

Gross has even dubbed the system a "Sammy Scheme," with our own Uncle Sam reprising the role of Charles Ponzi.

QE2: Fed curtain call?

QE2 should succeed in temporarily pushing yields down further, but it's not guaranteed by any means.

Bond holders may well see this as the perfect opportunity to sell their bonds to the Fed at a healthy premium. For managers looking to unload large quantities of assets, it's a potential windfall.

Anyone who has owned U.S. bonds already has a big paper-gain. Why wouldn't they take some profits?

Over the next eight months, they know Bernanke will be "on the bid" almost every day, gobbling up $900b worth of treasuries.

But after QE2 ends, all bets are off. This could be the last good chance for money managers and central bankers to dump their treasuries.

Don't get me wrong; QE3, 4, 5, 6, are certainly possible. If Bernanke and the doves get their way, the printing won't end any time soon. And even the might of the Fed may not stem the tide for too long.

But if inflation starts to look worrying, or the political situation changes, the printing presses could come to a screeching halt. If that happens, bond shorts stand to make a killing...

Verdict

It's time to test the waters. Last week, I opened a small position in TBT, a double-short treasury ETF.

I'm just dipping my toes in at this point, and will watch closely for changes to the situation.

Why go short with the Fed buying? It certainly violates the investing maxim Don't Fight the Fed...

I'm aware of the risks, and am starting the position because I suspect that when the snowball starts rolling, the move will get quick and violent.

As a bonus, funds like TBT act as natural hedges to gold, as shown in the chart below (gold in blue, TBT in red).

So those with large precious metals positions may get some downside protection in their portfolio by shorting treasuries.

In a world where attractive investments are in short supply, shorting treasuries is looking better every day.

Adam Sharp
Analyst, Wealth Daily

A Note about Wealth Wire
We just launched a free service for investors called Wealth Wire. Our editors compile all the must-read financial news of the day, and package it in a brief, easy-to-read format. You'll also get exclusive commentary from our team of editors: Ian Cooper, Christian DeHaemer, and Steve Christ, among others. Learn more here, and watch for new features to be rolled out shortly.

Bernanke Has Lost All Credibility

On June 3, 2009, Fed Chairman Ben Bernanke made a simple statement before Congress, under oath: "The Federal Reserve will not monetize the debt."

Oops.

If any doubt remained that the Fed will do just that, Dallas Fed President Richard Fisher squelched it last Friday when he bluntly stated in a speech, "For the next eight months, the nation’s central bank will be monetizing the federal debt."

Zing.

As I see it, there are two possible explanations for Mr. Bernanke's mis-statement:

He lied.
He's a vacuous bank-puppet with absolutely no business running a donut shop, let alone the Federal Reserve.

I can't decide which is worse... Either way, a good old fashioned impeaching is definitely in order.

It won't happen, of course. But a man can dream, can't he?

The good news is that Bernanke's credibility is stretched razor-thin at this point. If you aren't convinced yet, watch this video on YouTube.

Eventually, the banksters will be exposed and restrained. Hopefully that happens sooner rather than later.

Unfortunately, we'll need a big catalyst to spur real change; that catalyst will probably not be something pleasant.

At least we won't have to suffer through more ridiculous editorials about Fed "exit strategies." There is no exit strategy — only a desperate fight to prop up TBTF banks at all costs.

Extend and pretend, the bonuses must flow. Wall Street firms will pay out a record $144 billion of them this year, by the way.

Savers and retirees will continue to bear the brunt of this greed and recklessness, another point Mr. Fisher slammed home in his speech:

But I take no comfort, and see considerable risk, in conducting monetary policy that has the consequence of transferring income from the poor and the worker and the saver to the rich. Senior citizens and others who saved and played by the rules are earning nothing on their savings, while big debtors and too-big-to-fail oligopoly banks benefit from their subsidy.

It is refreshing to see such blunt criticism coming from a sitting Fed President, but Mr. Fisher and his hawkish allies are hopelessly outnumbered by doves at the Fed.

Bernanke and William Dudley (NY Fed Pres, Goldman alum) run the show for now. As long as they do, the beatings printing will continue.

When inflation rears its ugly head, they'll sheepishly defend their actions as "necessary to prevent yet another Great Depression"; that they "couldn't have seen it coming," and things would have been unfathomably worse, had they not acted.

It's a easy argument for them to make, as it is impossible to disprove.

The precious metals owner's conundrum

As much as I despise the Fed, with this run we've seen in precious metals I'm tempted to send a gift basket to Maiden Lane.

Silver is trying to break out above $28, gold is setting fresh highs, and palladium continues its parabolic move up — all due to those mad economists at The Fed, who precious metal longs like me have a love/hate thing going on with.

The move in silver has been freakishly strong. So much so that I suspect there's something at play here besides the obvious money printing angle.

Readers may remember a story we told you about in May. Silver was trading in the $18 range at that time, and news broke that JP Morgan was being investigated for fraudulently manipulating the silver market.

Back then I wrote, "But if the allegations prove true and banks are forced to cover massive short positions, a relatively thin silver market could see a big squeeze — and far higher prices."

We don't know if this short squeeze caused the latest runup, but silver is up almost $10 since — higher than even my most optimistic guesses, and $50 silver seems more realistic every day. If it gets there, those dollars in your pocket will be well on their way towards parity with toilet paper.

Adam Sharp
Wealth Daily

Mortgage Bankers Assoc. Defaults on Loan

Classic bankster hypocrisy, exposed as only The Daily Show can.

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Mortgage Bankers Association Strategic Default

www.thedailyshow.com

Daily Show Full Episodes

Political Humor

Rally to Restore Sanity

Back in February '10, when the MBA announced they would be shutting down HQ, they wouldn't say whether they would pay off the full amount of the loan. From the WSJ:

John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. "We're not going to discuss the financing," he said. A spokeswoman for the MBA added that the MBA has reached "an agreement with all relevant parties" regarding the outstanding amount on that loan but declined to provide any details.

Guess we know now that they skipped out on the loan, as they urge millions of homeowners to fulfill their promisary notes.

Interesting note from the WSJ piece: Looks like the MBA bought in 2007, at the peak of the commercial real estate bubble.

Avoid Banks Like the Plague, Buy Tech

At dinner parties, I generally avoid talking finance.

America's looming funding crisis doesn't make for good small talk — according to my wife, anyway...

Apparently the sheeple would rather shove their fingers in their ears and chant nah nah nah.

But this past Saturday, we were at a friend's house for dinner in Bethesda. The typical D.C. business crowd was chatting over drinks when I heard someone talking about how cheap bank stocks are...

I probably should have kept my mouth shut, but I couldn't resist.

The bank-bull turned out to be a young broker from a big investment firm. When I joined the conversation, he was explaining to the group how cheap Bank of America (BAC) stock is.

"BAC is a $25 stock," he told the circle of D.C. suburb-dwellers. The fact that it's trading at $12 means it's a bargain, obviously.

"What happens if banks are forced to use mark-to-market accounting? What about that big subprime portfolio?" I asked.

Deer, meet headlights.

It was clear he had no idea what I was talking about.

I brushed off my questions as insignificant accounting stuff, and changed the topic to something easy: football.

(My wife breathed a sigh of relief.)

He turned out to be a decent guy, and we had a nice chat about recent NFL action. He was a Patriots fan, and I was willing to overlook that.

The thing that bothered me was his bullishness on bank stocks, combined with the fact that he knew zilch about shady accounting practices and loan books.

Who knows, Bank of America may be a good deal at these levels... But that's not the point.

The point is that we don't know, really.

U.S. banks are a big fat unknown.

And I'm fairly certain one of the first lessons in Investing 101 is don't buy what you don't (and can't) understand.

"Mystery Meat" balance sheets

Buying U.S. bank stocks is sort of like buying a gyro from a street vendor.

There's no way to tell what you're getting.

"Exactly what kind of meat is this, sir?"

"It's just meat; it's good" he assures you, nodding and grinning.

That's about as much clarity you'll get on bank books these days.

Changes to accounting rules have made balance sheets in the sector a farce. Like the change that allows banks to value holdings at what they say they're worth, rather than what somebody would actually pay for it.

It's known as mark-to-imagination accounting. That's opposed to mark-to-market accounting, in which securities are valued based on what people will actually pay for them.

These accounting changes were supposed to be temporary, but like Milton Friedman said, "Nothing is so permanent as a temporary government program."

So the game is extend and pretend.

It can't last forever, of course, which is why I'm steering clear of bank stocks.

Now don't get me wrong — banking is a good business to be in. You borrow money at 0% (thanks, Ben!), buy t-bonds that pay 3%, do some lending at 5%, and charge 25% APRs on credit cards.

But once you pay all those huge bonuses — and factor in uncertainty over future losses — it's unclear how profitable these banks really are.

There are simply too many unknowns.

Example: JP Morgan Chase just set aside $1 billion in reserves for bad loans it sold to Freddie Mac and Fannie Mae. Now that the loans are going sour, the bank is obligated to buy them back from the government.

This and other issues — like Foreclosuregate — will continue to plague U.S. banks.

I'm steering clear of the financial sector altogether. I don't want to be short, but I sure as hell don't want to be long.

The tech oasis

Spend an hour trying to dissect a bank balance sheet, and you should have new appreciation for companies with clean books...

Companies like Google, which we've been pounding the table on for months now. They knocked the cover off the ball last Thursday with a strong earnings report. The stock closed up 11% Friday, and is up another 2% today.

It's a business investors can understand: Transparent accounting; $100/share of cash on the books; the company is growing revenue more than 20% annually.

Zero debt, great technology, reasonable valuation.

Why would anyone speculate on bank stocks with alternatives like GOOG out there?

It's baffling.

Hard assets: Another oasis

If tech isn't your thing, precious metals and commodities remain great alternatives. Gold and commodity stocks should continue to outperform over the next five to ten years.

Getting exposure to gold miners has never been easier. You can buy GDXJ, the junior miner ETF. It's an easy way to own a diversified basket of small gold mining companies.

Hard assets of all sorts should do well in the coming currency wars, as the Fed and other central banks try to out-print each other in order to support zombie banks, devalue currency, and boost exports.

Good investing,

Adam Sharp
Analyst, Wealth Daily

New American Oil Boom Breakthrough!

Reuters says this innovative new technique "brings vintage oil and gas wells to life."

It's even considered to be safer than traditional fracking. And it could make some savvy investors a killing as it rejuvenates America's shale revolution.

Click here now for the complete details.

Google Invests in Automated Cars

Last Friday, Google raised some eyebrows when they announced their latest project: Cars that drive themselves.

Google's robocars are already operating on California public roads. Apparently, GOOG has been working on this project in stealth mode for a while.

They currently have 7 customized robocar prototypes: 6 Prius hybrids, and 1 Audi TT.

And according to the NYT, the fleet has already logged 140,000 miles with only "occasional" human intervention — and 1,000 miles with zero human input.

There is a driver behind the wheel at all times, of course. No mid-road trip naps just yet...

The driver can take control of the car from the computer at any time, similar to disengaging cruise control.

The cars can smoothly merge into highway traffic, navigate city congestion, and spot potential hazards.

There's only been one accident so far, and that happened when one of the Toyotas was rear-ended at a stoplight.

To accomplish this impressive feat, Google uses an array of sensors and processors.

Here's a quote from the company's official blog:

Our automated cars use video cameras, radar sensors and a laser range finder to “see” other traffic, as well as detailed maps... to navigate the road ahead. This is all made possible by Google’s data centers, which can process the enormous amounts of information gathered by our cars when mapping their terrain.

Talk about a game-changer...

If Google pulls this off, it will be a huge win for investors.

The technology is probably ten years away from being commercially viable, but Google is one of the few companies with the skills and engineering to get it done.

Imagine, ten years down the road, Honda dealers might be selling Accords equipped with a Google Auto-Pilot option...

If robocars become widely adapted, the revenue we're talking about is massive. Billions annually. There are around 50 millions cars sold every year, worldwide. It's a big, big market.

But robot cars are so far outside Google's core competency — search — that some are scolding Google for getting distracted with "side projects."

Henry Blodget of Business Insider had this to say:

Why is Google spending the $10+ million of shareholder money per year the project consumes (15 engineers, plus drivers, plus the cars)? Isn't there something closer to its core business that Google could spend this money on?

I usually enjoy Mr. Blodget's writing, but couldn't disagree more with him here.

Skeptical investors said the same thing about Google Apps; when the company bought YouTube; and when they launched their wildly successful Android mobile OS...

They said it would distract the company from search. They were wrong.

Google is still light-years ahead of the competition in search, and those little "side-projects" are already paying huge dividends.

Google CEO Eric Schmidt recently announced that advertising revenue from Android has already completely covered the cost of development. And YouTube is doing around $1b in ad revenue a year.

Plus, Google has $29 billion in cash laying around. I'm glad they're investing in potentially-lucrative projects like this one.

The Google Kingdom

As a company, Google is structured like a dictatorship. Every share owned by the founders has 10 votes, while common shares only have one. They intentionally structured the IPO so that investors have almost no input in managerial decisions.

So they can do whatever the hell they want. They will shrug off critics of this and other side-projects. They run the show. And I'm fine with that.

If you don't like the company's direction, don't buy the stock. I'm staying bullish on Google and will continue to own it.

Improved safety, efficiency

Back to the benefits of robocars — namely, safety and efficiency.

Every day, without fail, I see dozens of bad drivers and brake-riders on I95.

They hit the gas too late, brake too early, and slam brakes at first sight of a cop (even when they're already doing 10 under). 75,000 text-messaging, makeup-applying, Facebook-status updating, nose-picking maniacs operating on a crowded four-lane highway.

It's all horribly inefficient, not to mention dangerous. WHO says 1.2 million people die in automobile accidents every year.

Automated cars will likely revolutionize the way we travel. They will vastly improve MPG, reduce road congestion, and hopefully save millions of lives.

If Google executes well on this, it'll be a major victory. It's projects like this that help make GOOG my #1 U.S. equity pick.

Robocars may not be a reason to own Google in and of itself, but it's a nice bonus for shareholders — a relatively cheap bet by the company which could pay off 10,000 times over, a few years down the road.

Adam Sharp
Analyst, Wealth Daily

ForeclosureGate: Another Bank Scandal

Dylan Ratigan offers one of the best explanations of the bank foreclosure scandal I've seen. I especially enjoyed the commentary by Karl Denninger, who appears around the 4:30 mark.

This scandal isn't going away any time soon. It's going to be an interesting one to watch.

Visit msnbc.com for breaking news, world news, and news about the economy

Good News is OK, Bad News is Better

Markets have reached a point where fundamentals don't matter much.

These days, when nasty economic data comes out, stocks are more likely to rise than they are to fall.

Why?

Because ugly data means the Fed is likely to "ease" further — i.e. pump more cash into the economy. That money inevitably finds its way into the markets.

The logic is perverse; but to be a successful investor today, you need to focus more on what the Fed is up to than anything fundamental.

Morgan Stanley's Jim Caron summed it up nicely in a recent note to clients:

Investment decisions across many asset classes today are tantamount to an educated guess on what the Fed decides to do regarding QE. In the near-term this trumps fundamentals, valuations and almost everything else.

If you believe in any sort of free market, it's all very frustrating to watch. This market is dependent on a few bank-biased individuals — not ideal, to say the least.

But there is a bright spot in this mess: precious metals, of course.

Gold, silver, palladium, and platinum have all benefited from the Fed's quantitative easing (QE) experiment.

The rationale for owning these assets is simple: If you believe the Fed will print more money, you should buy physical PMs and miners.

Major inflation doesn't even need to occur for gold to rise. As long as the Feds keep eroding the dollar's purchasing power and running huge deficits, gold and other metals should perform well.

Back in December of 2009 — in a piece called "Why I'm Buying the Gold Dips" — I wrote, "There's simply no way the Fed can stop propping up the market."

Gold was trading around $1065 then, and it's over $1300 today.

The long-PM strategy has worked for years, and I don't see that changing in the near future.

Budget woes and financial uncertainty aren't going away any time soon, so precious metals should continue to outperform.

Especially now that QE 2.0 is beginning to be accepted as inevitable.

Analysts are finally realizing that deflation will not be allowed to occur. The Fed printing presses are just warming up...

They will continue to devalue the dollar, goose the stock market, and monetize America's debt for as long as they can get away with it.

Like I said, it's not ideal. But it's the hand we've been dealt.

Precious metals remain a great way to play it.

Good investing,

Adam Sharp
Analyst, Wealth Daily

Fat is Your Friend

For years, we've been fed the idea that a low-fat diet is essential for weight loss and good health.

This is WRONG!

It's much easier than you think to eat large portions and still be healthy and thin.

Here is the "missing link" you've been waiting for. Every day counts, so act now and start truly enjoying your life today.