Aggregated Awareness

When it comes to the US Economy, there aren’t so many questions. Nobody doubts the full faith and credit of the US government. Not yet anyway. And nobody doubts the Fed will backstop America’s public debt...by printing as much money as it needs to.

Trouble is, the thing they count on to save them from having to ask questions comes with a whole bag of question marks too. When the Fed starts printing again, investors will begin to wonder how long it can continue...before all Hell breaks loose.

We don’t have an opinion on it. And we don’t need one. That’s a question, as the judges say, that’s not ripe for a decision.

So let’s move on...

And here’s another question. What gives? Bread...or circuses? Social Security, Medicare, and other domestic spending. Or, the military circuses abroad? In order to bring federal deficits under control...and avoid the bankruptcy of the country...something has to go.

You’d think the military spending would give way. Who really cares what happens in Iraq? Or the South China Sea?

But here we have another unstoppable force running into another immoveable object. And we’ll make a prediction. Neither will give way. Neither the bread nor the circuses. The super committee will not be willing to battle it out with the voters...nor with the military contractors. And if it did, it would get no support from the president...or Congress.

Social Spending Cuts in the US Economy

Polls show more than 75% of Americans oppose any cuts to Social Security or Medicaid. Since it takes only a majority of voters to decide an election, the chances of any candidate winning on a “cut social spending” platform is nil.

Cutting Military Spending in the US Economy

But don’t expect any candidate to win on a “cut the military” platform either. The social services may have the votes, but the military has the money. That’s why major Republican candidates are trying to out-hawk each other with preposterous claims and absurd proposals. They’re all Teddy Roosevelt mixed with Thomas Friedman...blowhards and dimwits, almost every one of them.

Small wonder. The campaign contributors demand it. The lobbyists insist on it. And the voters deserve it.

But won’t the bond vigilantes stop them from borrowing a trillion dollars + a year? Won’t the dollar’s guardian angels prevent them from printing money to cover America’s deficits?

Oh, dear reader. How long have you been reading these chronicles? If you’ve been reading for a while you know that the gods — and Mr. Market too — are fun loving, mischief-makers. What kind of a trap could they set that didn’t let their prey get in it? What kind of a flim-flam could they play if their mark always showed good judgment?

US Economy Budget Cuts

The Super Committee is considering budget cuts of between $330 and $400 billion per year over the next 10 years (you can bet that any cuts they come up with will be heavily loaded on the backend of the 10-year period). First, those sums are peanuts. The feds will probably run deficits in excess of a trillion a year even if they make those cuts. Second, the cuts are not from current levels of spending but from projected levels...higher levels, that is. And those projections are worthless. They systematically underestimate expenses and overestimate revenues. Third, they ain’t gonna happen anyway.

This will leave the feds in need of lots of money. But with so many question marks in the Eurozone, investors think they can sleep easy at night by moving their money to America. All things considered, the dollar and the US bond market looks like the best games in town. This makes it easy for the feds to continue borrowing at low rates...continue going into debt...and keep their bread and circus program going almost indefinitely.

The end of this phase may be many years ahead. Japan has been at it for 20 years. The US economy could pile up debt for another 10 years. But when the end comes...it will be something to see!

Regards,

Bill Bonner
for The Daily Reckoning Australia

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The Eurozone is crumbling away.

Dow down again — 134 points. Oil back below $100.

We’re back in the USA after 5 months in Europe. What a delight it was to be Europe. It’s always a pleasure to watch something fall apart.

How far apart the Old World will fall, we don’t know. But it looks as though big chunks of the continent must be cut adrift...or the whole of it will sink.

Sometimes things come together. Sometimes they fall apart. You make money, generally, when they come together. When they fall apart, it’s harder. Because everyone begins to ask questions.

In a boom, question marks disappear. In a bust, they come back.

“What’s this stock really worth?” people want to know.

“Who’s on the other side of the trade?” they ask.

“When the check comes back marked ‘insufficient funds,’ who are they referring to, us...or them?”

The bond holders want to know if the Euro-feds are going to bail them out...the Euro feds want to know if the Chinese are going to bail them out...and the taxpayers want to know how long their pension checks will keep coming.

Angela Merkel gave an answer yesterday.

“If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen,” she said in a speech.

The question she was answering was when the ECB would step in to buy more bonds and bail out the bondholders. Apparently, that’s not a question worth asking, she says.

What the Germans really want to know is whether the Greeks and Italians can act like Germans. What the Greeks and Italians want to know is when the Germans are going to stop acting like Germans.

And what the French want to know is where to get a good piece of fois gras and a good bottle of Bordeaux.

And everybody is counting on something impossible happening. Governments spending has to fall...or at least cease growing. While tax receipts have to rise...or at least, cease falling. And the economy has to grow at 6% per year so that tax receipts can increase enough to support the level of debt. How does the economy grow at three times today’s rates with no boost from government spending...when everybody is cutting back, trimming debt and saving money? You tell us!

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Out of the Swamps of Nothingness…

Well here we go again. It's another week into the interminable Credit Depression. We wish we could write about happier subjects. Or tell light-hearted jokes. But the situation is still pretty serious.

To be fair, life on planet Earth is probably neither better nor worse now than it's ever been. The sun goes up. The sun goes down. People live. People die. Injustice is rife. Some people try and fight the good fight. And everyone gets up to do it again the next day.

What makes today different is that there are so many people on the planet. All of them are integrated, more or less, into the same financial system. And that financial system is buckling. It's the kind of situation that doesn't allow you to kick back and relax. And in fact, the more unstable the situation is, the more erratic, emotional and unstable the behaviour of the people in the system becomes.

MF Global's Australian Break Down

Take just one example that bears directly on Australian stock prices and the value of the Australian dollar. The collapse of broker-dealer MF Global Holdings Ltd. The firm declared bankruptcy on October 31st after making a $6.3 billion bet on European government debt. And that was the good part of the story.

The bad part of the story is that prior to declaring bankruptcy, some $600 million in client funds went "missing". They may have been transferred to the firm's own proprietary trading arm. Investigations continue. Meanwhile, some $3 billion in customer assets are still frozen as liquidators try to and clear things up. And the Australian branch of MF Global was shut down over the weekend after no buyers for the business could be found.

There's a lot to be worried about here. The alleged and outright theft of customer funds is hard to fathom. Australian customers have had funds locked up. And Australian employees of MF Global are now out of work. Those are two direct impacts.

But there are indirect impacts too. The bad bet on Italian debt is sadly familiar (think LTCM). But the systemic issue is how many other firms are sitting on bad sovereign debt bets. And how many other firms are using government bonds for collateral?

MF Global and the Future of Markets

The big systemic risk is that a blow-up in Europe forces a big unwind in futures markets. MF Global's problems were caused by making the wrong call on government bonds. But thousands of traders and hundreds of firms and dozens of banks have their balance sheets stuffed with those same European government bonds.

If the value of those bonds falls - and every day you get a new European government watching its bond yields go over 7% - then the owners of those bonds will watch their assets fall, their equity get wiped out, and their capital base shrink. The very small pile of assets supporting a much bigger pile of leveraged positions in financial markets will become even more unstable.

This status quo is what makes it hard to take the current market action seriously. It really is like dancing to the band on the Titanic playing "Nearer, my God, to thee" as the boat went under. They went to their maker in style.

By the way, there WILL be dancing at the Doomers' Ball this Friday at the Windsor Hotel, but only if you're one of the 300 ticket holders. The event sold out quickly. But one reader would only confirm her purchase of a ticket if we could guarantee dancing. There will be a pianist. And if your editor has anything to say about it, there will be dancing.

If we were on the Titanic, we couldn't guarantee we'd get across the ocean of time that stands between now and Friday. But as our feet are firmly planted in St Kilda, we'll take the rest of the week to look at what other systemic issues beset the financial system, and whether there are any chances to wring a profit out of it (get a lifeboat).

Until then, we trundle along in the wake of the bewildered policy makers. They are trying to solve the world's big debt problem with more debt and leverage. You do what you know, after all. But it reminds us of an image used by the German philosopher, Friederich Nietzsche.

Nietzsche was writing about a particular problem, which he described as trying "to pull oneself up into existence by the hair, out of the swamps of nothingness." Europe is trying to maintain the existence of its single currency and its political union by pulling off just such an impossible feat. They have to try it. But it probably won't work. More tomorrow on why.

Dan Denning,
for The Daily Reckoning Australia

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A cynic would point out that both the new Greek and Italian leaders are Goldman Sachs insiders. As is the new European Central Bank president, Mario Draghi. Press Europe has the details:

Draghi was Goldman Sachs International's vice-chairman for Europe between 2002 and 2005, a position that put him in charge of the "companies and sovereign" department, which shortly before his arrival, helped Greece to disguise the real nature of its books with a swap on its sovereign debt.

Monti was an international adviser to Goldman Sachs from 2005 until his nomination to lead the Italian government. According to the bank, his mission was to provide advice "on European business and major public policy initiatives worldwide". As such, he was a "door opener" with a brief to defend Goldman's interest in the corridors of power in Europe.

The third man, Lucas Papademos, was the governor of the Greek central bank from 1994 to 2002. In this capacity, he played a role that has yet to be elucidated in the operation to mask debt on his country's books, perpetrated with assistance from Goldman Sachs. And perhaps more importantly, the current chairman of Greece's Public Debt Management Agency, Petros Christodoulos, also worked as a trader for the bank in London.

But why does Goldman Sachs' influence matter? Remember, in 2008, Treasury Secretary Hank Paulson, also from Goldman Sachs, just about staged a coup to bail out US banks. He had to threaten politicians with the notion that their salaries wouldn't be paid if the financial system ceased to exist. That got them moving. Transcripts of the many phone calls Paulson made to Goldman Sachs' CEO at the time would make for interesting reading. All we know is that there were a lot of calls between the two during the crisis.

So the Goldman boys have rigged the deck in their favour in Europe too. Bankers have positioned themselves to pull off another bank rescue. But it doesn't always work out well for them. Goldman Sachs CEO alumnus, Jon Corzine managed to run the enormous brokerage firm MF Global into the ground on European sovereign debt recently. The bankruptcy has hit several of his Goldman buddies too. Not to mention many Aussie investors.

Nick Hubble,
for The Daily Reckoning Australia

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Are you tired of seeing European politicians meddle with the value of your share portfolio on a daily basis? Their bickering is unleashing waves of optimism and pessimism around the world.

Hedge fund manager Kyle Bass pointed out to the BBC 'you know how screwed up Europe is when you have a German Pope and an Italian central banker.' The poor pope!

You've heard all about Europe's economic problems for a while now. What of solutions? Here is our attempt to sum them up for you: This round hole won't fit into its square peg. In other words, they've got it wrong and backwards.

Now on to the details.

How does changing your political leader change your economic situation? It doesn't. But that's what the Greeks and Italians propose will solve the debt crisis. They've reshuffled their heads of state. The Italians have appointed a cabinet with - get this - not one politician. They didn't vote for a single member of the new government. And you thought Berlusconi ruled inappropriately!

But maybe an autocracy is just what the Italians need... after Berlusconi...

That's how an optimist could interpret it anyway.

Economic Problems Will Catch Up With Politics

What's remarkable about the political shenanigans in Europe is that the stock markets buy it. Literally and figuratively. That's why the stock markets have resembled a seesaw lately. Up on good political news. Down on the bad. Ending nowhere.

When the political news cycle determines the price of your stocks, it is going to end badly. The seesaw is going to turn out to be a Korean Plank; someone will be launched into the air and land hard. And that means the fun will be over for whoever is left on the other end of the seesaw too.

But who is in for the most spectacular crash?

One thing history teaches us is that a real crash comes from somewhere unexpected. Does that count Europe out? Maybe. Europe is in for an economic crisis. But stocks around the world have discounted that to some extent. That's a snazzy way of saying they have factored it into the prices of investments. To what extent they have discounted the severity of the crisis is another question.

Less obvious crises you should proof your portfolio against include a Chinese economic collapse and an Australian housing bubble pop. To find out how to proof your portfolio against them, click here.

By the by, we've left the Americans and their mess out of our list of things to worry about because it's difficult to make heads or tails of them. Here is an example of the nincompoopery coming out of the US central bank... affectionately known as 'The Fed'.

Bloomberg, November 14th: 'Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy is "poised for growth" going into next year and that he sees a declining likelihood the central bank will need to ease further.'

Bloomberg, November 14th: 'The odds of a U.S. recession in early 2012 exceed 50 percent as a result of Europe's debt crisis, according to researchers at the Federal Reserve Bank...'

Yes, on the same day, two research groups from the same institution managed to completely contradict each other. It's not clear what they are smoking at the Fed these days, but it's definitely working. We prefer a stiff drink when thinking about the $14 trillion - no, wait - $15 trillion dollars of debt everyone seems to expect the Fed to inflate away.

Ultimately, economic problems catch up with politics. Sometimes in a good way, like the fall of the Soviet Union. But it isn't always pleasant to have economic law pull you back to reality by the ear. It can lead to a world war, for example.

Whether the world reacts badly to the realisation that welfare states don't work is still up for grabs. On the one hand, times will be tough. But when times are tough, the tough get going. We could see a resurgence in economic growth once debt troubles force deadbeat governments to downsize. And that forces people to work hard.

What has become very clear this week is that economic problems are accelerating. Finance guru's blogs are running hot. Derivates are fluctuating all over the place. Swiss credit default swaps rallied (worsened) 50% in a single day! Downgrades are sucking Germany's banks into the crisis. And American banks are just discovering their exposure to Europe's economic problems, while their own nation teeters with its own debt problems.

So economics is stepping up the pace. It's catching politics. And it's going to win.

Nick Hubble,
for The Daily Reckoning Australia

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We’re headed back to the US today. No time to write. But here’s the latest...

The Dow down 190. Oil over $100.

And the US hits another milestone on the road to Hell. This, from Stephen Dinan at The Washington Times:

The Treasury Department said Wednesday that the federal debt has climbed to a record $15 trillion — a staggering figure that caps a precipitous decade-long rise.

The exact total stood at $15,033,607,255,920.32 as of the end of business Tuesday, marking a jump of $56 billion over Monday’s tally. All told, federal US debt has risen $4.407 trillion since President Obama took office. It stood at $5.7 trillion in 2001, when George W. Bush moved into the White House.

“Today marks an infamous day in American history,” said House Budget Committee Chairman Paul Ryan, Wisconsin Republican.

The announcement was made a day before Congress was poised to pass a bill that would continue the high rate of spending into 2012, and as a special committee continued to talk about ways to slow the steep rise in deficits projected for the foreseeable future.

None of those efforts would cut the US debt, but would slow the rate of growth.

Republicans say that underscores the need for immediate spending cuts to get a handle on the budget.

They said Congress will have that chance this week when the House votes on a balanced-budget amendment to the Constitution.

Democrats were silent on the $15 trillion debt milepost, though on the broader issue of deficits they say the economy is so weak that it needs more spending in the short term.

In the longer term, they argue, government cannot be cut down to the size it was for most of the post-World War II era, and instead must raise taxes to pay for all of its promises such as Social Security and Medicare while funding defense, education, food stamps and other basic domestic needs.

Mr. Obama has proposed several debt-reduction plans this year, but Republicans have rejected each of them for not tackling the long- term growth of entitlement programs and instead relying too heavily on taxes. In contrast, House Republicans’ budget this year focused on entitlements and didn’t increase any taxes. Senate Democrats haven’t brought a budget to their chamber floor in more than two years.

That leaves the two parties deadlocked, as borrowing continues apace.

Mr. Obama is averaging a US debt increase of more than $1.5 trillion a year during his term in office, compared with an average of $612.4 billion for Mr. Bush and $192.5 billion a year under President Clinton.

By late Wednesday, the House and Senate Republican campaign committees began to use the US debt figure in attacks on Democrats seeking election next year.

Texas Gov. Rick Perry, who is seeking the Republican presidential nomination, said the new figure underscores the need for a fiscal conservative to bring “responsibility back to our nation’s capital.”

What? Wasn’t George W. Bush supposed to be a ‘fiscal conservative?’

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Don't doubt for a moment that China's growth is not a sham. When a country produces economic growth via the actions of self-interested individuals producing goods and services with a profit motive, the growth achieved is usually sustainable. (Provided its not financed entirely by debt)

When a country like China directs investments for the sake of employment and social cohesion, with no regard for the profit motive, the economic growth produced is unsustainable. It is just money being funnelled into a black hole.

Granted, this sort of stuff can go on for years and make naysayers like us sound like idiots. If you're long commodities, you probably think we are an idiot. But do yourself a favour and look through the history books. If you can find any centrally planned economy that prospered due to its leaders' wisdom and disdain for free markets, drop us a line.

Now even BHP Billiton is getting a tad concerned. At yesterday's AGM, the board indicated the mess in Europe is beginning to have an effect on Chinese customers. That sounded like a convenient excuse to us.

China's Growth Slows

China's steel producers are likely to be more worried about a tightening of the money taps in China than issues in Italy. China's construction of railway lines and bridges to nowhere is slowing because, surprise surprise, the departments overseeing the work are running out of money.

Earlier this week the Shanghai municipal government issued bonds for the first time in 20 years or so. The central government wants local governments to raise money transparently - instead of through off-balance-sheet arrangements as they have been doing.

The bonds were issued at rates of 3.1 per cent and 3.3 per cent - the same as borrowing rates for the central government. It was interpreted as a success. But given China's Ministry of Finance pays the interest on these bonds (the local government obviously can't afford to) it's little wonder they trade the same as China's central government debt.

China's Debt Grows

The point we want to make is this: China's government debt load is much bigger than most people think. According to the IMF, at the end of 2010 China's government debt was 34 per cent of GDP. But that doesn't include all the local government debt that the central government implicitly backs.

It's the local governments that have driven the credit boom. Using land as collateral to borrow to fund infrastructure projects, they have amassed hundreds of billions in debt. And because the projects they built are uneconomic, the local governments can only pay interest by raising more debt. It's a classic ponzi scheme.

So China's central government is on the hook for all these debts. According to Dragonomics, an independent research firm specialising in China's economy, the government debt to GDP ratio is closer to 90 per cent.

Even that is just a guess. The credit boom resulted in the establishment of thousands of finance companies as cover for local governments to go deeper into debt. Who knows what the actual amount of liabilities are? As the credit tide slowly goes out, we'll get a much better idea.

Perhaps that's why China has shown little interest in bailing Europe out. It knows it has plenty of problems in its own backyard.

As does Spain, Italy, France and just about everyone else in Europe except Germany. Europe's crisis is heating up - again. After a few days of delusion about the ability of 'technocratic' (puppet) governments to soothe worried bond markets, the battle is back on.

On one side you have a bunch of economic illiterates trying to make something work that clearly can't. On the other side you have the 'market' - the collective wisdom of people trying to protect their wealth - telling these fools their game is up.

It doesn't matter what your prejudices or preferences are, the Eurozone as we know it is breaking apart. The break-up can be managed and contained as much as possible, or it can be a complete disaster. Right now, the 'managed and contained' outcome is not looking good. The only thing keeping markets from all out panic is a belief that the European Central Bank will hand out free money and make everything alright. Talk about clutching at straws!

If you haven't had a chance to check out Slipstream Trader Murray Dawes' latest market update on YouTube, take 10 minutes to watch it right now. He's already predicted today's sell off. As one reader said, he's 'scarily accurate'. Click here to find out where the market's heading next.

Have a great weekend!

Greg Canavan,
for The Daily Reckoning Australia

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Has he gone yet?

Good. Hopefully he's taken his platitudes with him.

'The future belongs to the free', is the headline in today's Australian. Puh-lease.

It must be great having a job where you can wander around, say stuff that is meaningless and still make people feel good about themselves.

In reality, the future should belong to the free market.

But if the future does belong to the free, there's not many people left in this debt-soaked world who can claim it. As Andrew Jackson, a US president who came well before Obama said, 'when you get in debt you become a slave.'

As we pointed out yesterday, US government debt just breached the $US15 trillion mark. That's around 100 per cent of GDP. Add in household and business debt and you get nearly $40 trillion of IOUs. That's around 265 per cent of GDP.

How does the Australian debt pile stack up? According to the Australian debt clock, which was sent to us by a reader a few weeks ago, total debt amounts to $2.14 trillion. This equates to around 160 per cent of GDP.

It's not in the league of the US or Europe (or the UK and Japan, among others) but its nothing to be proud of. The rest of the world has been happy to lend to us, because they believe China's boom will help us service our debt.

But when our creditors wake up to the fact that China's GDP growth is a sham - unproductive and uneconomic - they are likely to reassess Australia's capacity to repay.

On Wednesday, Slipstream Trader Murray Dawes predicted today's market sell-off... To find out where he believes the market's heading next, click here to watch his video market update.

Greg Canavan,
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Survivors of concentration camps report that the secret to staying alive was often simple: those who were near the kitchen made it; those who were not didn’t.

In our modern, degenerate form of capitalism the secret is the same: you want to be near the kitchen...the place where the food is handed out. You want to be near the government. That’s why there are so many lobbyists in Washington. And why the only city in America where property prices are going up is Washington, DC.

The politicians collect money from all over the country. They give much of it away in the Washington, DC metropolitan area. Montgomery County, Maryland and Fairfax County, Virginia are two of the richest counties in the country. Why? They’re right next to the kitchen.

Here’s a segment from 60 Minutes titled “Insiders”, which aired on November 13:

The next national election is now less than a year away and congressmen and senators are expending much of their time and their energy raising the millions of dollars in campaign funds they’ll need just to hold onto a job that pays $174,000 a year.

Few of them are doing it for the salary and all of them will say they are doing it to serve the public. But there are other benefits: Power, prestige, and the opportunity to become a Washington insider with access to information and connections that no one else has, in an environment of privilege where rules that govern the rest of the country, don’t always apply to them.

Peter Schweitzer: This is a venture opportunity. This is an opportunity to leverage your position in public service and use that position to enrich yourself, your friends, and your family.

Peter Schweizer...says he wanted to know why some congressmen and senators managed to accumulate significant wealth beyond their salaries, and proved particularly adept at buying and selling stocks.

Schweizer: There are all sorts of forms of honest grafts that congressmen engage in that allow them to become very, very wealthy. So it’s not illegal, but I think it’s highly unethical, I think it’s highly offensive, and wrong.

..For example insider trading on the stock market. If you are a member of Congress, those laws are deemed not to apply.

The fact is, if you sit on a healthcare committee and you know that Medicare, for example, is — is considering not reimbursing for a certain drug that’s market moving information. And if you can trade stock on — off of that information and do so legally, that’s a great profit making opportunity. And that sort of behavior goes on.

The buying and selling of stock by corporate insiders who have access to non-public information that could affect the stock price can be a criminal offense, just ask hedge fund manager Raj Rajaratnam who recently got 11 years in prison for doing it. But, congressional lawmakers have no corporate responsibilities and have long been considered exempt from insider trading laws, even though they have daily access to non-public information and plenty of opportunities to trade on it.

In mid-September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

These meetings were so sensitive — that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.

Of course, hanging around the kitchen is not the most productive thing you can do with your life. The more people who do it, the less productive the economy becomes.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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The Symbiotic Relationship of Feds and Insiders...

Since the beginning of time, the insiders have always had an advantage. That’s why people want to be insiders; they know that’s where the money is.

In actual fact there’s a very special form of ‘inside trading’ going on where the feds and the insiders work together.

In business and investment, it is perfectly normal, healthy and unavoidable. The people on the inside always know more than the people on the outside. So, you tend to listen to the insiders. You hope you can trust them. And when an insider wants to sell you something...beware. Caveat emptor.

But along came the feds. They tried to pretend that insiders and outsiders were on a level playing field. They wanted the outsiders to feel that they could give the insiders their money without worrying. There was nothing to worry about.

The insiders give the feds jobs and money.. The feds look out for the insiders too. Putting in place a heavy and expensive regulatory system, the SEC helped them from competition. It also shifted income from productive, profit- making activities to the zombies — the lawyers, administrators, and regulators who, not entirely by coincidence, are the feds themselves.

Since then, the parasites have multiplied...and the insiders have done better than ever. People on Wall Street used to earn about as much as similar people in other industries. Now, they earn far more. As a percentage of the nation’s total for public companies, Wall Street profits rose 3 times — from 10% to 40% since the ’70s. Tyler Cowen reports that in the mid-2000s “the top 25 hedge fund managers combined earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning over $100 million a year was nine times higher than the public-company executives earning that amount.”

And corporate CEOs, who used to earn 40 times as much as their lowest paid employees in the ’70s, now earn 400 times as much.

This field is tilted so far in the insiders’ favor the outsiders can barely stand up.

The Pittsburgh Post Gazette reports:

For the three decades between 1949 and 1979, family incomes in America rose evenly for every fifth of earners, from the bottom 20 percent through the top 20 percent. In other words, a strong economy lifted all boats at about the same rate.

Since then, the rich have pulled away from everyone else. A new study by the nonpartisan Congressional Budget Office showed that between 1979 and 2007, after-tax income for the top fifth of earners went up by 103 percent, compared with 40 percent for the middle three-fifths of earners and just 18 percent for the bottom fifth.

The greatest benefits went to those at the very top. Research by economists Emmanuel Saez and Thomas Piketty shows that the top 1 percent of earners increased their share of pre-tax income in America from 8 percent in 1979 to 18 percent in 2008, the highest level that group had garnered since 1928, the year before the Great Depression began.

There is a hotly contested, unresolved debate over what caused the rich to get so much richer over the past three decades, and whether that is a bad thing.

Intellectuals may be debating what caused the rich to get so rich. No one else cares. They just know they don’t like it. And they want to do something about it. Probably, just the worst thing.

The average person may not sit still for an explanation, but how about you, Dear Reader? Want to know why the rich got so rich?

Well never mind. But if only the feds had allowed capitalism to do its work 3 years ago! It chewed up Lehman Bros and was about to go after Goldman, Bank of America...GM...and then it would have bankrupted businesses, banks, and households all over the world...leaving a lot of CEOs out of a job. Talk about contagion! The whole capital structure was about to get sick.

If the feds had allowed creative destruction to continue...there would be a lot fewer rich people around today. And we wouldn’t be having this discussion.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Yesterday when the markets closed the price of oil was only 66 cents shy of $100. What a come back. We expected oil, stocks and gold to sink down deep...and not come back for a long time. So far, we’re wrong about that. People are still sending money to Wall Street to buy stocks and gold.

Where is all this money mail coming from? We don’t know exactly, but there are foreign stamps on many of the envelopes. Foreign stock markets are down. Many of the leading foreign bonds are down too. Investors look at Italy; they see Vesuvius. They look at France; they see Dunkirk. They look India; they see a Black Hole.

Investors are afraid. They look to the USA for safety.

But oil? Hmmm... We don’t know the cause, but we have a pretty clear idea of the consequence. High oil prices make it harder for oil- dependent US households to make ends meet...thereby reinforcing the slump in consumer spending.

Yes, the Great Correction proceeds. Low levels of consumer spending, high unemployment, with periodic bankruptcies, blow-ups and financial crises.

And what else do we see ahead?

...falling real estate prices...they could go down another 30%, or so

...the sell-off in the stock market (hasn’t happened yet)

...more zombification of the economy, with greater “investment” in unproductive industries — health care, education, and war

...more resentment towards the rich...tax increases...revolution...and repression...

...growing corruption as people become more cynical... “Get it while you can,” they will say.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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The Eurozone continues to dominate the mood of the market and it will do so until it breaks apart. The European Central Bank is under mounting pressure to buy unlimited amounts of Italian and Spanish bonds to keep the Eurozone together.

Apparently that will fix things. But the problem is these countries' competitiveness relative to the German economy. Bailing them out and forcing reforms that call for internal devaluation to restore competitiveness just won't work.

But that won't stop self-interested politicians from wasting billions more euros in trying. German chancellor Angela Merkel is even prepared to sacrifice German sovereignty to Brussels to help 'solve' the crisis. We wonder what her people think of that?

The European leaders are like a bunch of two year olds trying to jam a piece of the puzzle in where it doesn't fit. An adult needs to come along and tell them to go and play outside where they won't hurt anyone, or themselves This is a slow-motion train wreck of epic proportions.

But right now this doesn't seem to be worrying the Aussie market too much. After all, our banks are strong and China will be able to engineer a 'soft landing', meaning the good times should continue rolling for resource companies.

Or maybe it's just the Obama effect. But he's leaving da house soon, so where does that leave the US …and us?

According to Murray Dawes' latest free market update, markets are precariously positioned. You can check out what Murray has to say here.

Until tomorrow...

Greg Canavan,
for The Daily Reckoning Australia

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Big Dog in the Pac

US President Obama is in da house! And he's received a pretty warm welcome since stepping through the door. (Although China isn’t over the moon about his trip to Australia) it's a nice change for the president. He's not too popular at home.

That's because he's, err, presiding over the highest unemployment levels since the great depression. Obama's level of spending makes FDR look like a tightwad.

Since Obama assumed power in January 2009, total US government debt has grown by $4.4 trillion. It just crossed another moving line in the sand - the $15 trillion mark. It's now just $200 billion below the recently increased debt 'ceiling'.

At the rate the US government is spending money to prop up a structurally deficient economy, the old debt ceiling debate will be back in the headlines within a couple of months.

But Australians (we don't mean you, dear reader) are largely ignorant of Obama's failings. He appears to be a good bloke so we take him at face value. Perhaps we (like the people who voted for him) want to believe that good guys can succeed in politics.

But in politics, good guys who try to make a difference are dangerous characters. They try to shape society based on how things should be according to them. And because they get to spend other people's money to do so, they rack up enormous debts in the name of trying to make things better.

As the saying goes, the road to hell is paved with good intentions.

What is Obama doing here anyway? On the surface, it's a symbolic visit to deepen military ties on the 60th anniversary of the defence treaty between the US and Australia.

At another level, it's about the US reasserting its power in the Pacific. It's a direct show of intent to China that the US intends on being the big dog in the region for decades to come.

This is an important point for Aussie investors.

US Speaks Mind to China

US President Obama has displayed some pretty strong language towards China recently. He's told China it must play by the rules and grow up. He's committed to building up a small but symbolic military base in the Northern Territory over the next few years.

This suggests a change in US perception of China's strength. A few years ago the US would never have used such language. Now, in a post-credit-crisis world, the US is by default looking relatively strong, while the fragility of China's centrally planned economy is becoming more evident.

The US knows it too. China's inflation problem, while subsiding, is directly related to its loose peg to the US dollar. Bernanke's QEII policy exported inflation to China and forced it to tighten monetary policy. These tightening steps have now pricked the property and fixed-asset investment bubble.

China's economy has historically unprecedented imbalances. While the central planners will try to sustain these imbalances for as long as possible - and therefore provide an illusion of growth - the reality is that most of China's growth is uneconomic. That is, the returns on investment are less than the cost of capital. When that happens, assets turn 'bad'.

This is happening at the same time as China's famed export powerhouse weakens. Its largest customers are tightening their belts. In the three months to September, China's current account surplus came in at U$57.8 billion, a 43.5 per cent fall on the previous year.

In more signs of overcapacity in China, Bloomberg reports of low hotel occupancy rates:

China's occupancy rate was 61 percent in the first nine months of this year, the same as the year-earlier period and the lowest in Asia after India among 15 countries tracked by STR Global, a consulting and research group. In Shanghai, only about half of hotel rooms were filled, compared with more than 80 percent for Singapore and Hong Kong, it said.

But everything is ok according to a recent report from the IMF…sort of. The organisation said a recently conducted stress test of the 17 largest banks in China suggested they would be 'resilient to isolated shocks.'

Actually, isolated is the important word here. The following is from the IMF's explanation of the stress tests in the executive summary.

Such shocks included a sharp deterioration in asset quality, a correction in the real estate markets, shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted

What are the chances of just one of these things occurring? Exactly.

But the China implosion is a story for 2012. In the meantime, we have the Eurozone implosion.

Greg Canavan,
for The Daily Reckoning Australia

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-- “Very little has changed in the last week,” writes Slipstream Trader Murray Dawes.   “European bonds continue to implode and the Equity market is continuing to ignore it at their peril.  When credit markets and equity markets diverge it is uncanny how often the credit markets are right and the equity market is wrong.  It is only a matter of days before we see the S+P 500 testing 1200-1220.  Below there is where the fireworks will begin.”

--Murray’s latest market update is now up over on YouTube . His written summary concludes, “If the S&P 500 manages to rally strongly above 1320ish then I have to reassess my view. We are seeing the selling pressure where I expect to see it so I am comfortable remaining strongly bearish at the moment.” To watch Murray’s market assessment in full, go here

--Your editor just flew in from Sydney where we spent two full days talking about gold. There’s a lot to recap. But in the interests of getting the Daily Reckoning out in a timely manner today we’ll give the short version: gold is going higher.

--Of course that’s exactly the sentiment you’d expect at a gold conference. It was the unanimity of the sentiment that caught us off guard. We felt pretty sure of our position too. But the fact that everyone felt so sure struck us as...worrisome.

--It’s not that any of the arguments were faulty. On a supply/demand basis the argument for gold is bullish. Central banks are becoming net buyers. Europe’s sovereign bond markets are within a whisker of a major crisis. And the whole dollar standard system in place for the last 40 years is in jeopardy.

--But one thing we’ve learned in nearly 15 years of watching and writing about the markets is that Mr. Market will always challenge your conviction. If the gold bulls see that victory of the field of monetary battle is in their grasp—that market forces are remonetising gold and marking down the value of sovereign credits—this is just the moment when you need to watch for treachery.

--We don’t know what form it will take or when it will come. But that it will come...we’re as certain of that as anything. The interventionits, central bankers, and politicians of the world all have a huge stake in the preservation and expansion of the current system. And with nothing but chaos to replace it, they’re not going to give up their privileged position voluntarily, or without a fight, if it comes to that.

--But let’s not talk of fighting. Australia’s Prime Minister is playing host to the American President today. We had hoped to meet with President Obama on his Australian visit and remind him to stress those qualities which make a nation fair, free, and prosperous. But he must have lost our mobile number.

--Had we caught up for a beer and a burger, we would have no doubt agreed that sound money, low taxes, private property, free trade, and the rule of law are the simple rules that allow a complex market economy to grow, flourish, and enrich everyone. It’s the kind of system that can even accommodate a huge number of parasites who are interested in siphoning off wealth in order to spread it around.

--Speaking of adversarial relationships, we had a great conversation last night with a wine grower from the Hunter Valley over coal seam gas (CSG). As you know we’ve written extensively about how the birth of the US shale gas industry has already changed the world’s geopolitical energy landscape.

--Shale gas and CSG are not the same. Shale gas is produced from gas bearing shale formations that typically exist much further underground than the stranded coal seams that are mined for their gas. But both energy sources share the same production method: horizontal drilling with hydraulic fracking.

--We asked the Hunter Valley wine maker if the story was really as contentious as it’s made out to be in the papers and on the TV. He said yes, but not for the same reasons. He said what concerned local wine makers and farmers is how the whole process of exploration and production is supposed to work.

--He added that several of the exploration companies have obtained permission for exploration in a deceptive way, by having college aged kids dressed like farmers to knock on doors and ask if they can “look around.”

--This doesn’t sound like a very sound legal way to obtain permission to explore for gas. But the whole issue seems to have been complicated by the influx of new players in the CSG field trying to capitalise on the rush. It’s pitting the companies against the communities, unnecessarily it seems to us.

--Meanwhile, yesterday’s Financial Review reports that BHP Billiton couldn’t be more excited about the future of shale gas. Mike Yeager, the leader of BHP’s petroleum unit, says shale gas is, “going to be a game changer across the world and for BHP to not be part of this is irresponsible we think.”

--But BHP’s shale strategy has nothing to do with Australia. Its two major acquisitions in the shale space last year were Chesapeake Energy’s Fayetteville shale gas assets and the $15 billion takeover of Petrohawk Energy. BHP reckons that US based shale gas will add 90 million barrels of oil equivalent to its annual production.

--Aussie shareholders (and how many superfunds in Australia don’t own BHP?) would be happy that BHP is supplementing its coal and iron ore earnings with oil and gas earnings. But we’re more interested in the question of if the shale gas industry in Australia will follow in America’s footsteps. You can get our research on the subject here. Until tomorrow....

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More pieces are coming together. Day by day, the puzzle takes shape. Not a pretty picture.

An epic battle is taking place. Between the forces of...

..inflation and deflation

..growth and depression

..credit expansion and credit destruction

..centralization and de-centralization

..politics and markets

..managed paper money and gold

..managed capitalism and the real thing

..control and wealth

..bull and bear

..greed and fear

..zombies and real working people.

Yes, dear reader, it’s quite a fight. Better than Frazier vs. Ali. And who’s gonna win?

Europe faces its “toughest hour since WWII,” says Angela Merkel. What does she propose? More centralization. Centralization got Europe into this mess — harmonizing interest rates so that the Greeks and Italians could borrow more. And now, more centralization, she believes, will get it out.

Europe is taking no chances. This debt problem is a slugger. What to do about it?

Who knows more about debt problems than anyone else? The people who cause them, of course. So, under great pressure from the centralized European authorities, Greece got rid of its Papandreou, after the man had the gall to suggest letting democracy work. He wanted the people to vote on further austerity measures. It replaced him with Papademos...a guy who won’t make the mistake of deferring to the masses. After all, he was vice-president of the European Central Bank for years. And he taught at the Kennedy School of Government at Harvard.

Meanwhile, Italy too has been forced to get rid of its popular, but difficult to control, elected leader — Silvio Berlusconi. It has put in a company man. Yes, a company man. What company? Goldman Sachs, of course. The new fellow, Mario Monti is an ex-Goldman guy. And so is the new fellow at the European Central Bank, Mario Draghi. Monti was also an EU commissioner. Draghi ran the Bank of Italy as the nation built up one of the world’s biggest piles of debt. Then, when Italy’s cost of borrowing shot over 7%, in came Monti and Draghi.

It is almost as if they planned it that way. Who’s the biggest seller of debt on the planet? We don’t know...but Goldman Sachs has to be up in the rankings somewhere. You’ll recall it was Goldman that helped Greece structure its debt so that it could abide by the letter of its treaty engagements with Europe but totally thumb its nose at the spirit of it.

And now the debt has blown up...and the Goldman boys are on the job, managing the mess they were so instrumental in creating.

What’s their solution? Oh come on...dear reader, you should know how this works by now. They propose more centralization, more management, more paper money, more debt, more inflation, more of everything you see on the right hand of our column above.

In other words, they believe that they know better than the people...or the market. They believe that their sanitized, homogenized, pasteurized Capitalism-in-a-Can works better than the real thing. Besides, they have a reason to believe it. This claptrap is the source of their power, status and money. Who knows, maybe their wives married them because of it.

Rather than renounce the program on which their reputations, careers and fortunes depend, they try to shore it up. They open up the can and see what they can use. They promise to reform the system, not reject it.

But every reform — unless it merely dismantles one of their previous reforms — is a manipulation...a price fix...and a scam. For example, they are proposing tax incentives to employers who hire youths and women. Good idea? Why not just drop some of the regulations and taxes that make it so expensive to hire youths and women in the first place? Nope. Then, they’d be giving up control. They’d be letting market forces decide who gets what.

Here’s another proposed reform, as reported in The Financial Times: “Wider social safety net to help those made redundant (laid off) and encourage labor mobility.” Typical rubbish. Spread a wider safety net and you discourage people from doing the hard work of finding new careers. But here’s one that will be popular with the managers: a “crackdown on tax evasion.” Are you kidding? Tax evasion is the only thing that keeps these economies going. People prevent their government from squandering their money. They spend it themselves. But the new Goldman guys won’t like it. They’ll want to get their hands on as much of that ‘black money’ as possible.

Meanwhile, what’s going on in the USA? Alas, the US economy is the hands of the same sort of people. The people who caused the mess...who did not see it coming...and who have not had a clue what to do about it. They’re still running US economic policy. These illustrious incompetents — such as Larry Summers of Obama’s National Economic Council and Tim Geithner, his Treasury Secretary — have proven that they wouldn’t know a Great Correction if it bit them on the behind...

So, they just keep adding more debt, more spending, more management, more ‘reform’ measures, and more centralization.

Ultimately, the elite managers of Europe and America all went to the same schools (Harvard, Yale, MIT...)...all read the same newspapers and magazines (The Financial Times and The Economist)...all worship the same gods (money and power)...all speak the same language (mid- Atlantic English)...and all want to control the world.

So far, they seem to be making great progress towards their objectives. They stuff the world with debt. It blows up. Then, they push out democratically-elected leaders...gain new power and authority...and take charge of the rescue.

Of course, everything isn’t smooth sailing for the manipulators. There are storms to reckon with. The Telegraph reports that there is revolution in the air. From Ambrose Evans Pritchard:

Italy’s youth are turning. Watch the footage of students chanting “democracy” and brandishing their “95 Theses” of Wittenberg revolt as poet Van Rompuy tried to speak in Fiesole.

“No to Austerity,” starts the Luther List: “Troika out of Greece”, “IMF and ECB out of Italy, Ireland, and Portugal”, it goes on.

“The EU has become ever less accountable to the people of Europe. The undemocratic structures have infiltrated the very structures of the Union,” they said.

Behold “the EU’s furious reaction to the Greek government’s effort to seek popular consent over the financial stranglehold imposed on the country. No longer are expressions of popular consent simply ignored, it is now impermissible to consult citizens.”

“The game is getting dangerous,” said Il Sole. Some suspect that the Berlusconi camp would not do too badly in snap elections, if allowed, campaigning against the “hated euro and EU bosses”. Is that why Brussels is now so afraid of Italy’s voters?

If Mr. Monti relies on the Left, how can he comply with EU orders to break the power of the trade unions and impose “Anglo-Saxon” wage- bargaining? A large bloc in parliament will die in a ditch to defend Article 18 of the labour code.

Labour minister Maurizio Sacconi warned last week that careless handling of this issue threatens to unleash another round of terrorism in Italy. It is only nine years since Marco Biagi was assassinated by the Red Brigades for threatening the sacred cows of the Sindicati.

In 2009 the European Commission praised Italy’s “spectacular job creation” and its “greater resilience to external shocks”. In 2008 in said Italy was making “good progress” on the Lisbon reform agenda. In 2007 it said Italy’s debt sustainability risk was “broadly in line” with France and Germany.

Italy’s four sets of pension reforms were held out as a shining example. Finance minister Giulio Tremonti was feted in Brussels, lauded for his iron discipline and primary budget surplus.

And now these same EU bodies tell us that Italy’s failure to grasp the nettle of reform and tackle its debts is so egregious that Europe must step in to overthrow an elected government.
Regards,

Bill Bonner
for The Daily Reckoning

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“Europe is in one of its toughest — perhaps the toughest — hours since World War II,” German Chancellor, Angela Merkel declared yesterday.

Who would argue with her?

The Second World War crippled the European economy. The victors suffered almost as much as the vanquished. Nearly ten years after the war ended, the British were still rationing sugar and meat.

Notwithstanding these hardships, however, the history of the post- WWII European economy is mostly a story of economic renaissance. From the rubble of war, the European Continent produced decades of economic growth.

Attempting to perpetuate and enhance that growth trajectory, the leading economies of Europe thought it best to pool their resources. So they formed the “European Union” and abandoned their national currencies in favor of the euro.

Nice idea. But the execution may have been flawed.

Just like a “group project” in junior high school, there’s usually an A-student in the mix...as well as an F-student. So what happens? The A-student does all the work to make sure he gets his habitual A. The F-student does nothing, but still receives the “A” he never could have earned on his own.

That’s the European Union.

Unfortunately, the F-student is on his own most of the time. He still has to get passing grades in his other courses...like “Tax- Collecting I” and “Remedial Budget-Balancing.” When the F-student fails to get a passing grade, there’s very little anyone can do to change the transcript...other than writing over the F’s to make them look like “B’s.”

That’s the European Union’s rescue plan. Every kid gets a passing grade, no matter how awful his homework may be.

But out in the school of hard knocks, an “F” is an “F.” Greece has failed already...and several of the other “students” are close to failing as well. The leaders of the euro zone are trying to change the transcripts. But that gambit will likely fail. A curriculum without absolute standards is a curriculum of no value.

The moment the EU began bailing out the Greeks, it abandoned the absolute standards that rendered the euro viable. If the EU had applied absolute standards and booted Greece out of the euro block, the euro’s credibility would have been validated. Without those standards, the euro’s value becomes as dubious as an online degree.

That’s why the Greek crisis has become a euro crisis. In fact, the entire system of currencies-backed-by-nothing may be lurching toward a crisis.

“If ideas could file for bankruptcy,” James Grant muses in the latest edition of Grant’s Interest Rate Observer, “the modern model of money and banking would have beaten MF Global Holdings to the courthouse. The concept of leveraged finance in a world of paper money and socialized risk deserves rehabilitation under an intellectual Chapter 11.”

The world’s monetary model is bankrupt — both intellectually and in fact. But if ever there were an institution that was too-big-to- fail, it is the institution of paper currencies. It is too-enormous- to-fail, which is why the world’s central bankers will stop at nothing to rescue it.

In general, the central banks are borrowing and/or printing money to buy “distressed assets.” By removing these distressed assets from the marketplace, the central banks hope to clear away some of the rot in order to “stabilize” the financial system and, by extension, the value of the currencies they print.

But since central banks are functionally outlawing bankruptcy for every large institution and government in the Western world — along with a few of those in the Eastern world, the rot remains...and it’s spreading. The rot is not only undermining economic activity, it is also undermining the entire global monetary system.

Throwing good money after bad — even newly printed, pretty good money — does not really clear away the rot; it merely smears it around...like a dry windshield-wiper smears bird-droppings.

Bankruptcy clears the rot away. Nothing else will do.

But since bankruptcy has become the ultimate non-option, the world’s largest central banks are all printing currency in the name of alleviating economic stresses. And they are swapping this currency for troubled assets.

For example, here in the States during the 2008-9 crisis, the Federal Reserve purchased hundreds of billions of dollars’ worth of mortgage-backed securities. It still owns them. Today, the European Central Bank is busy buying up the dodgy debts of Greece and Portugal.

Even the Chinese are in on the game. China’s sovereign wealth fund recently announced that it was “investing” in four of the largest state-owned banks in order to stabilize their share prices and support their operations.

The central banks dress their brutish market manipulations and backdoor bailouts in the elegant vernacular of ivory tower economics. Thus, “counterfeiting” becomes “quantitative easing,” while “using my influence at the Treasury Department to bail out my buddies at Goldman Sachs” becomes a “Troubled Asset Relief Program.”

But at the end of the day, the central bank manipulations are as clumsy, counter-productive and/or illegal as they appear at face value. And the worst of it is that these multi-trillion-dollar interventions do not remove the rot from the financial system; they merely relocate it from the private sector to the public sector.

The European Central Bank (ECB), for example, holds sub-AAA assets equal to 14 times its equity. Large portions of those sub-AAA assets are the very sub-AAA government bonds of Greece, Portugal, Italy and Ireland. If these assets, in the aggregate, were to lose 7% of their value, the ECB’s equity would be zero. (For perspective, the government bonds of Greece, Portugal, Italy and Ireland have already lost 30% to 60% of their values).

But don’t lose any sleep over the math; that’s what printing presses are for — to paper over the asset values the financial markets take away.

Observing these phenomena, Grant concludes: “There are better ports in a monetary storm than government securities denominated in paper money.”
Eric J Fry
Daily Reckoning Australia

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Researching gold stocks takes up a big chunk of my time. So as editor of Diggers and Drillers, you might ask why I'm not attending the annual Gold Symposium in Sydney with your regular editor, Dan Denning.

The truth is I'd love to have gone. Some of the best and brightest in the gold sector are presenting. The timing of the conference is excellent as well. Gold spent most of last month out of the spotlight, finding strong buying support in the $1600s. But it has quickly bounced more than 7% in recent weeks to be closing in on $1800 again.

So why didn't I make it to the conference?

Well, I've just stepped off a plane from Latin America. I'm a big believer in the value of taking the time to visit a company if I'm going to recommend it. Many Aussie juniors are now exploring overseas to get 'fresh dirt', as well as to seek refuge from tax-hungry redheads.

So if a stock passes all my number crunching research, and the management team is up to scratch, it's normally time for me to get a cab to the airport.

The company I've just looked at in Latin America impressed me. It is just a few months from first production of around 65,000 ounces of gold a year, with 600,000 ounces of silver as well. Yet the company is still valued cheaper than most explorers. And this stock has some hot looking exploration projects lined up. I think 2012 will be its year to shine.

West Africa has been the hot destination for Aussie gold exploration for years. Many Aussie juniors have had great results over there, and the list of hopefuls gets longer all the time. The four gold explorers I tipped there over the last two years have come in with average gains of 85%. And there are more are on my radar.

The region is still full of potential. But South and Latin America is shaping up as the next 'West Africa'. There are so many promising areas that are still wide open, and valuations are still cheap in comparison.

I've been tipping more gold stocks in that region recently to prepare for when the market shifts its gaze in this direction. One stock I tipped is off to the races already, sitting on 110% gains in just six months. I'm convinced this is just the start, and I reckon investors could easily double their money from here within the next six months.

Being able to speak a bit of Spanish has helped get around this part of the world. But I definitely need some more practice before my next visit to the region. I was chatting with one of the host company's drivers, who mentioned he had a family of four. So I asked whether his children were boys or girls.

After some confusing back and forwards discussion, he bluntly told me that: 'No, Sir. I am DEFINITELY the father of ALL the children in my family'.

Who knows what I said. But it was something of a conversation killer...

Investing in promising junior gold stocks is one way to accelerate your gains from a rising gold price. But I'm a big believer in holding physical gold as well. (I'm an even bigger believer in storing it safely too; i.e. with a bullion dealer, or in a non-bank safety deposit box.)

I've been getting more emails from readers who are having a tough time getting physical gold and silver. Perth Mint told clients last month that demand was:

'... currently running at unprecedented levels and we have been inundated by high levels of web and telephone traffic from clients all around the world."

"It's not just them. KWN reported that:

' ...Peter August, CEO of Australian Bullion Company, Melbourne Australia, which is one of the largest and most respected bullion dealers in the country told KWN, "We have never, ever seen these levels of demand for physical gold and silver. "'

There is every reason for the gold price to keep rising.

The media is rightly focused on the accelerating unravelling of Europe. Every week we get a 'big solution'. Yet each 'solution' is destined to fail like the others. The latest plan is a new leader for Italy, Mario Monti. But even if he could walk on water, he still has a country in a complete mess to get to grips with, as well as Europe's biggest sovereign debt to resolve.

So what to do? Well – of course the country issued more debt last night. And the yield was a record high of 6.29%.

But don't let the media distract you from the bigger sovereign debt story.

The US is almost back up to the new-and-improved debt ceiling. This story will be back on the radar again by Christmas. This is important to the gold price, as where the US debt level goes, gold follows.

Gold (in red) following the US debt ceiling level (in black) for the last 15 years Source: zerohedge

The US is also due to have a debt-reduction debate later this month, which could be a trigger for the gold price rising ahead of reaching the debt ceiling.

For want of a better phrase, gold is a 'no-brainer'.

But don't forget silver. Diggers and Drillers readers will know that I'm also big on gold's little cousin. It has been outperforming gold in recent years and I expect it will continue to do so. It has had an eventful year to say the least, with a massive rally followed by a couple of big falls. Despite the snakes 'n ladders, it is still up 37% in 12 months.

Better still, I suspect it is just a week or two from its next rally. Crossing over its 50-day moving average has marked the start of each rally over the last few years. In the last few weeks it has been closing in this level, and just broke it yesterday before retreating.

When silver breaks the 50-day moving average we usually see a move up

Click to enlarge Source: Stockcharts

So if we see if get comfortable above $35 in the next week or so, then I suspect we could move very quickly up from here – particularly after moving up from so far under the 50-day moving average.

Next stop would be the 'war-zone' of the $42–45 range. If buyers get past it this time, it's a quick road to $50–60. And I expect silver stocks would follow...

Dr. Alex Cowie
for The Daily Reckoning Australia

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What happened on Friday? A “moment of truth” arrived for Europe. But what is the truth? We’ll have to wait to find out.

The Dow rose 259 points. Gold was up $28.

But who cares? Up, down...up, down... Every day brings more ‘truth.’ But what we want is a truth with legs. We’re not day traders. Not week traders. Not even year traders. We want a long, sure...mega trend. We want the Dow at 900 in 1983. Or gold at 260 in 1998.

What is there today that is equivalent? How about 10-year US bonds at 2.20% yield? For upside, we can’t think of a single other thing. US bonds have been in a long, long uptrend — basically — since they’ve existed. From 1791 to the present, they’ve gone up. Of course, there have been some major problems along the way, notably in the ’70s when it looked like the Fed had lost control of inflation. Otherwise, bond yields have gone down as prices have gone up.

Is it time for a turnaround? Maybe not just yet. We’re still in a Great Correction. Bonds should continue to go up — for a while. But just wait...this is a truth that won’t go away: US debt is expanding...as its ability to pay declines.

Meanwhile, the big trend for the US stock market is probably down too. Just a guess, mind you. Why? We’ve given you the reasons...but since you seem to have forgotten, we’ll give them to you again:

..After 60 years of credit expansion, credit is contracting. That means less household spending, which means lower sales and fewer profits

..A bear market began in January 2000. It never reached its rendezvous with a real bottom. Ergo, the ultimate bottom still lies ahead...

..Stocks rose since 1982...since 2000, they’ve been going nowhere. Now, it’s time for them to go down.

..Most of the ‘growth’ in the last 20 years has come from more and more debt at the household level. Now that debt is shrinking...growth should shrink too...

..There are 70 million baby boomers who desperately need to save money for their retirements. They used to borrow and spend...now, they will have to pay back and save.

..As credit grew, it took more and more credit to produce an extra unit of output. Adding more credit now will not help the real economy expand...

..The feds can’t engineer a recovery, because unlike a recession, the problem is not that debt is too expensive, but that they have too much of it already...

..As the economy softens, the feds take more and more of it into custody. The feds invest badly, leading to less real output...which must supports more and more zombies...

..The European economy is sliding towards another recession; this will hurt the US economy too...

..The whole world economy is weakening; it could drop into a worldwide depression...

..Higher, persistent unemployment undermines consumer spending...

..House prices are still falling, which will further reduce household net worth and reduce both spending and risk-taking...

..Energy use in the US is falling...more inputs of energy do not produce enough extra output to pay for themselves...

..But energy use in the emerging markets is increasing, supporting energy prices and putting more pressure on US household budgets...

..What else? Want more reasons? Stay tuned...

“I don’t have to spend money.”

Damien, our gardener, invited us for dinner on Saturday. We drove over, under a full moon. The little village only has about a dozen houses, all built of stone. It once was the site of a relay station, where travelers could stop, get fresh horses, or spend the night. Now, there are only houses, gardens, and a little stream.

Damien’s house was warm...a pleasure to come in from the cold night air. The fire in the fireplace, contained in a steel firebox, heats the entire house.

We were admiring the fire.

“I don’t spend any money because I heat with wood, which I cut myself. There’s nothing better than wood heat. And I eat things that I grow in my garden...and meat that I get by trading with local farmers. Tomorrow, I’m going to slaughter a pig. I cut up a side of beef a few days ago.”

“Do you have room in your freezer for all that meat?”

“Oh yes...no problem. I’ve got two of them, anyway. All I spend money on is my truck...and electricity. But even on them, I don’t spend very much. You really don’t have to spend a lot of money, if you don’t want to.”

Damien did not mention the alcohol. He also has a vineyard. He uses it to make wine and alcohol...which he concocts into local aperitifs, “Puces d’epines” and “Pineau.” Both begin as grape juice, reinforced with alcohol — typically, from distilled grape juice — with local flavoring added, such as the early flowers of the hawthorne bushes that grow alongside the roads and fields.

“Damien...what did the doctor say?”

“He said it wasn’t cancer. That was the good news. They’re going to do an operation in February. They say I eat too much rich food and drink too much.”

“You probably do.”

“Well, maybe...but in my family, the men always die young. It’s hereditary. Nothing I can do about it.”

“Maybe the men in your family always eat and drink too much.”

“No...I don’t eat and drink any more than everyone else...”

A knock at the door. Mickey...pronounced Mee Kay...came in, wearing a jacket with Mickey Mouse on it. Mickey, a slight man of 58 with a very narrow jawbone, explained why France is in financial trouble.

“I’m the reason France is going broke. I worked for the Post Office. I’ve been retired for 3 years. It doesn’t really make any sense. I earn almost as much as I did when I was working. Statistically, I’ll live for another 25 or 30 years. They’re going to pay me all that time for doing nothing. At least, that’s the idea. But they’ll go broke long before that.

“These retirement systems were set up a long time ago. The unions fought for more and more benefits — earlier retirement was a main one. They won. They wanted better and better retirements. And now the people coming along after me will be lucky if they get any retirement at all.

“You know why Bismarck invented the public pension system? He needed to get elected. And he wanted to take votes away from the Socialist candidate. So, he came up with the pension system. You call it ‘Social Security’ in your country.

“But he set the retirement age at 77, I think. And then, the average worker only lived to be about 65. So, you understand...it was designed only to support the very few old people who lived long enough to get it. But, of course, the politicians found they could get votes by making it better and better. And now it’s so good they can’t afford it. They’ve already begun to change the terms in France. I probably got out just at the right time. I could retire at 55...and live for another 30 years at public expense. What a deal!”

Mickey doesn’t look French. We asked him where his people came from.

“Oh...you’re right. My mother is French. She’s still alive. But my father was a refugee during the war. He came from the Ukraine. My family name is Zacycincaz. Nobody knows how to pronounce it. Or, when I’m on the phone, I always have to spell it out. I like spelling it out. It makes me feel different.

“My father died a year after I was born. I don’t know anything about his family. I probably have relatives in the Ukraine. But I don’t know how to find them.”

“Just go on the Internet,” said Damien. “You can find anything on the Internet.’

“I’m not going on the Internet. I’m an ex-post office guy. A letter carrier. I’m not going on the Internet. It would be disloyal.”

“Then, you’re not going to find your family.”

“I don’t know if I want to find them anyway... Hear that? ”

“It’s Ludovic!”

Damien opened the door.

“Ludovic...come in!” he yelled. “I’ve got Mickey and Mr. Bonner here. Come in and play for us.”

“A boy of about 15 came in. He looked at Mickey. He smiled. He shook our hands...but didn’t look directly at your editor. His mother and father came in after him. Sturdy people. The father had a stiff brush of black hair, with tips of gray...and a large mustache. He was short and jolly. The mother had a finer face...a little on the plump side. Attractive. Friendly. Both were dressed simply. Without pretension. They could have been farmers. Truck drivers. Or, perhaps, school teachers.

“Play something for us...”

The boy began to play. It was the music of rural France — La Musette. Gay. Charming. His first song sounded almost Irish.

He concentrated. His fingers worked the keys on one said...and the buttons on the other. He sang happily. He was a musician at heart...connected with the music in some deep way. He did not have to think about it... He just kept himself in that unique space that all good musicians inhabit, where some inner spirit guides the fingers and the voice.

We clapped and cheered when he finished.

Then, he began a series of songs. One was a lament...like a sad waltz; but it was the waltz of short, country people in farm outfits, not the waltz of tall Viennese noblesse. Lugubrious. Almost whining. And then, perhaps to please us, he played “When the Saints Go Marching In” and “She’ll Be Comin’ Round the Mountain.”

He seemed to have a large stock of songs. We all listened with pleasure and watched in admiration.

Finally, he stopped, bowed to us all as we applauded...and began to take his leave.

“He’s a gifted musician,” we said to his mother.

“Yes...but I don’t want him to go into music professionally. It’s too hard to earn your living as a musician. I told him to train as a pastry cook...or a farmer...and play music for fun. That’s what everybody does around here.”

When the musician had left, we returned to our meal...

..terrine of deer meat...with two glasses of Pineau... to start...

..then, a fish dish (we didn’t understand what it was) with a white sauce...with a bottle of white wine.

..then, rabbit in a mustard sauce and string beans in olive oil...for the main course, with two bottles of red wine.

..then, came the cheese...local....undefinable...with more red wine....

..salad...

..a dessert of clafouti...made of prunes in a custard, on a light, flakey crust...with a sweet wine the color of amber...

..and finally, coffee.

When we had finished we had pushed our chairs away from the table and were leaning back, not sure if we could get up.

“How about a drink...eau de vie or whiskey... as a digestif,” asked Damien?

Regards,

Bill Bonner
for The Daily Reckoning

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A month ago, at an investment conference in Baltimore, my colleague Eric Fry asked if I think there’s another “bubble” out there that’s going to pop. My reply was that I believe the “education” bubble is destined for doom. It’ll be just one more thing to smack down the US economy, and makes for another reason — as if we need more — to hold precious metals as portfolio protection.

In the US, there’s over $1 trillion of “student loan” debt on the books. This is money that people borrowed from banks and government agencies (Sallie Mae comes to mind). The funds flowed through the “education” landscape and cash flow mills, paying for faculty, administrators, buildings, overhead and much else.

This gusher of student loan money over the past two generations (!) has been a key factor — THE key factor — in the super-inflation of the cost of education. That is, the more money that goes for loans and grants, the more leeway and incentive the schools have to raise tuition and let internal costs soar.

At the student level, some people borrowed to pay the tuition at impressive universities, where they received things like medical degrees and Ph.D.s in physics. Good for them.

But at other times and places, students borrowed funds to attend school and major in things for which there’s not much of a demand in the true, competitive economic marketplace. You know what I mean, right? Courses with the word “studies” appended to the end come to mind.

How bad is the student loan situation? Currently, around 9% of student loans are “slow pay,” if not in technical default. That’s after two years of alleged economic recovery from the crash of 2008- 09. To make matters worse, it’s next to impossible to discharge student debt, even in bankruptcy.

So I don’t have a warm feeling about this student debt bottomless pit.

Let’s think it through. We have a generation of young people, many of whom with sizeable student debts, along with their underwater basket weaving degrees and such. They are unable to obtain the jobs they believed their degrees would accord them.

So there’s a lot of resentment and bitterness, which I witnessed firsthand during a recent walk through the “Occupy Pittsburgh” crowd downtown. I saw a lot of protest signs concerning student debt. It’s a very raw nerve.

The bottom line is that a lot of US young people will never find suitable employment that aligns with their education. Consequently, they’ll never earn enough to repay their student loans. Yet due to the banking lobby, and how that particular cabal has gamed the legal system, the indebted young basket weavers of the nation can’t get a classic “fresh start” in bankruptcy.

Something has got to give, and I believe we’ll see some sort of crash in the student loan markets. The student debt sector has failure built into it, down to the debt-DNA.

Also along the lines of the education bubble popping, I’ve been pondering where and when the first pin would penetrate the latex. Just this week, I believe we may have seen it: The Penn State scandal.

I’ve always had a high regard for Penn State, which is one of America’s great public universities. But if you’re following the news, you’ve likely seen where Penn State President Graham Spanier and iconic football coach Joe Paterno were just fired.

Neither Messrs. Spanier nor Paterno personally committed any indecent act. But they, apparently, knew that a subordinate within the university hierarchy — within the nationally ranked football program — was totally out of line (and I’ll spare you the disgusting details on that).

In a manner reminiscent of how certain churches cover up bad acts — “for the greater benefit of the institution,” goes the excuse — Penn State never properly handled its issues. After a period of time, however, the pot boiled over. A grand jury convened, and people testified.

This week, several Penn State officials and a former high-level Penn State coach were arrested. The Pennsylvania attorney general announced a major prosecution. All around, it’s a bad time for the Nittany Lions.

Yes, this may just be an “isolated” incident of one bad guy doing something bad, and several other people sweeping the issues under the proverbial rug. But the larger story here tells another tale of how some things in the university sector have gotten just too darn big — as in “too big to fail” — until they fail.

With Penn State, we’re seeing Big Football fail, and take down Big Coaching — as in Joe Paterno. This failure is taking down Big University Management too — as in, the president of the institution.

University managements — and, I hope, their boards of trustees — across the country had better be watching the Penn State scandal and looking hard in the mirror. They had better be asking themselves the hardest questions and looking under those lumpy rugs.

This Penn State scandal is not just some issue of having an academically ineligible kid playing linebacker for a few minutes in the fourth quarter. Or even that the star quarterback “borrowed” a Corvette automobile from some car dealer who’s a major football booster.

No, when people start to dissect this Penn State thing, they’ll have to follow the money. At Penn State, Big Football meant Big Money, and it spawned an entire culture that affected everything — permeating the overall university culture.

And while people are dissecting the Big Football money, they had better check out the Big Student Loan money, too — courtesy of government grants and loan guarantees. What ELSE is going on in the dim shadows of the locker rooms and shower stalls, what with all that money at stake? What’s going on with the fundamental mission of the education institutions of this nation?

The Big Money, provided so liberally by the student lending institutions, created lots of excesses and corruptions — great and small — that are just beginning to unwind.

Big Money means that people wind up doing whatever it takes to keep the cash flowing. It means that people will find some way to justify cutting corners, even ethical, moral and criminal corners. Until it all blows up.

Don’t sell your gold.

Regards,

Byron King,
for The Daily Reckoning

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Editor's note: Today's Reckoning comes from Money Morning Editor Kris Sayce, currently up in Sydney at The Gold Symposium talking about all things shiny and yellow with your regular editor Dan Denning...

Live from the Gold Symposium in Sydney...

There are six keynote speakers, including Eric Sprott, chairman of Sprott Asset Management. And our old pal, Daily Reckoning editor, Dan Denning.

Plus there are 15 company presentations... Ranging from unlisted Tamar Gold Ltd and $2 million market capitalised Invictus Gold Ltd [ASX: IVG] through to $134 million Gold Road Resources [ASX: GOR] and $657 million Silver Lake Resources [ASX: SLR].

Tomorrow's line up is similar. Four keynote speakers, including Alf Field from Gold Chartist, Ben Davies from Hinde Capital, and an end-of-day panel chaired by your editor. On top of that there are another 20 company presentations.

It's a lot to get through. But if the standard is even half as good as it has been so far then we're in for a bumper couple of days.

But what we want to know is: how high will the gold price go?

Gold Set for 2,677% Gain

Opening speaker David Evans, founder and managing director of GoldNerds Ptd Ltd, was the first to put his neck on the line. His forecast for the gold price?

$50,000 an ounce... by 2028.

But what if you can't, or don't want to wait that long? How does $3,800 by 2015 take your fancy?

Now, before you get too excited about a 2,677% gain over 17 years... or a 111% gain in four years, just remember real gains will only make up part of the price rise. The rest is inflation.

For instance, David Evans says $50,000 in 2028 will be the same as $8,400 in today's money.

Even so, that's not a bad return in a world when all other asset values are likely to fall in real terms.

Because looking ahead, it will be just as important to protect your money as make money.

But as we say, it's always good when a speaker puts their balls on the line with a price prediction. But we could tell the crowd was looking forward to the next speaker - the first of the international big guns spoke - Eric Sprott from Sprott Asset Management...

Where is the Gold Coming From?

Mr. Sprott didn't have his own specific gold price target. Rather than talking in dollar terms his focus is more on the gold/silver ratio. But more on that in a moment.

Because the important thing to remember is predicting the gold price isn't the whole story. Just as important is the supply of gold. And it prompted Mr. Sprott to ask himself two questions:

"Who is not buying gold today who was buying it in 2000?"

And:

"Where is the gold coming from?"

In other words, is there a whole bunch of investors or organisations selling the stuff... happy they've locked in a big gain? No. In fact there are more buyers today - many more - than there were in 2000.

Central banks are now net buyers of gold. In 2000 they were net sellers.

Exchange traded funds (ETFs) barely existed in 2000. Today, the SPDR Gold ETF is one of the biggest holders of gold - fifth largest behind the U.S., Germany, Italy and France... and ahead of China and Switzerland.

So where is the supply coming from to meet the demand? After all, the increase in gold holdings can't come completely from new production. As Mr. Sprott said:

"Mining production has hardly gone up for 10 years... we're only adding 1.4% to the pool of gold each year."

Mr. Sprott says he has the answer to his own question:

"I would argue very strongly that the central banks are surreptitiously leasing their gold. Gold lease implies they lease it to the bullion dealer, the dealer sells it in the physical market. [And] it gets consumed in the sense savers like you buy it."

Mr. Sprott is effectively arguing that some, many, or all central banks don't hold the physical gold they claim to hold (this is a view held by another gold guru, James Turk). And that the central banks have leased out their gold to bullion dealers or speculators.

In return, the central bank earns a small fee. Trouble is, if those organisations that leased the gold then sell it on to someone else, suddenly the central banks don't hold the physical gold... and nor do the firms they leased it to. All the central bank holds is a claim to the gold.

It's no wonder there's a concerted effort by the banking establishment to talk down gold... to deny it's money.

Gold is Money

Remember U.S. Federal Reserve chairman Dr. Ben S. Bernanke's comment that gold isn't money? That the only reason central banks hold gold as reserves is because it's "tradition".

Can you imagine what would happen to the gold price if Dr. Bernanke said, "Sure, gold is money." The price would take off and the scramble would be on for central banks to reclaim the gold they'd leased out.

Perhaps they're already doing that - hence why central banks are net buyers of gold.

Now, while Mr. Sprott didn't offer his own gold price prediction, he did quote someone whose view he respects - James Sinclair.

At the recent Gold Anti-Trust Association (GATA) conference in London, attendees asked Mr. Sinclair for his next price target. The reason they asked him was because in 2000 Mr. Sinclair had pinpointed $1,650 as the target.

But now the price has breached that level, investors wanted to know where it's going next. His reply cheered attendees of the GATA conference:

"Well, if it goes through $1764 my new target will be... $12,000."

This morning the gold price is trading at USD$1,794.

Despite the efforts of governments and central bankers, the gold price climbs higher. If you want to hold real money, it's not about choosing between U.S. dollars... or Aussie dollars... or Japanese yen and Swiss francs.

Forget all that. The only choice is gold. Mr. Sprott said:

"I believe the market has already determined gold is the reserve currency. The markets decided that. Not the central banks. Not the Treasuries. The markets made up their mind that gold is the reserve currency. It's up 600% versus almost every currency...

"The stuff we have to listen to every day: the dollar versus the euro, the yen versus the dollar... they're all crap. It's like, who's the prettiest horse in the glue factory!"

Look, we know. We're at a gold conference. Asking attendees and speakers to be bearish on gold is like expecting a central bank convention to admit they've screwed things up.

The key question you have to ask yourself is this: who do you believe?

Central bankers who have a vested interested in keeping the current fiat money system going (expanding credit, stoking inflation and bailing out banks), or the vested interests in the gold camp who believe the current money system is broken and can't be fixed (and who just want governments and central bankers to stop stealing individuals' wealth).

We've seen and heard both sides of the argument. And we know which camp we're backing.

As Mr. Sprott said about current central bank policies:

"I bet we will look back ten years from now and say that [Zero Interest Rate Policy - ZIRP] was the most ridiculous policy. It does not exist in any text book. It is the creation of this decade."

More from the Gold Symposium tomorrow.

Cheers.
Kris.

Editors note: Kris Sayce is editor of the Money Morning free daily email. He also puts together the monthly " target="_blank">Australian Small Cap Investigator newsletter. Kris is a fully accredited adviser in shares, options, warrants, and foreign exchange investments. He began his financial career 15 years ago in the City of London as an equities broker specialising in small stocks listed on the London Stock Exchange. After that, he moved to Australia to work for one of the country's leading private wealth management groups, before joining us in 2008.

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