Via Pension Pulse.
Ben Levihsohn and Jane J. Kim of the WSJ wrote an interesting weekend piece, How to Play a Market Rally:

Forget "buy and hold." It is time to time the stock market.
For 10 long years, market rallies have ended badly for investors. Now, with stocks up 15.6% in four months, strategists are beginning to suggest that ordinary investors start dialing back on risk.

That doesn't mean dumping shares willy-nilly. With the Federal Reserve committed to flooding markets with liquidity, it still makes sense to be in equities. But "if you've ridden the market up, you might want to do some trimming," says Steven Shueh, managing partner at Roundview Capital.

Some investors may already be starting. The Dow Jones Industrial Average has given up 2.2% from its Nov. 5 high.

The first step is to disabuse yourself of the notion that it's impossible to time the market. It turns out that sometimes you can. When markets are stuck in a trading range for an extended period, selling into strength and buying into weakness can outperform buy-and-hold investing.

If that sounds like sacrilege, it may be because mutual-fund firms have spent decades persuading you to keep your money in their stock funds through thick and thin so they could collect bigger profits.

Consider an investor with a $1 million portfolio on Dec. 24, 1998, the first time the Standard & Poor's 500-stock index was at its current level. But if the investor had merely held on, he would have seen essentially zero appreciation through Nov. 11 of this year. If that same investor instead had sold one-tenth of his portfolio every time the stock market gained 20% and allocated one-fifth of his cash to the market when stocks fell more than 10%, he would have gained about $140,000, according to a Wall Street Journal analysis.

An approach using broad valuation measures performed even better. One metric, the ratio of stock-market capitalization to gross domestic product, tracks the market's value versus that of the underlying economy. An investor with $1 million on Dec. 24, 1998, who sold 10% at the end of each month when the ratio was above 115% and bought stocks with 20% of his cash when the ratio was below 75%, produced a gain of around $365,000. (The average has been about 91% over the past 20 years.)

Of course, investing success depends greatly on when you start. If you had tried the strategy at the market low of October 2002, for example, you would have come out about the same as if you had bought and held.

Throughout this year the market has traded in a band of about 20%—far away from both its 2007 high and its 2009 low. Stocks gained 15% from Feb. 8 to April 23 on hopes that a robust economic recovery in the U.S. would sustain global growth. By July 2, it had dropped 16% to 1022.58, as disappointing economic data fueled fears of a double-dip recession.

Now stocks are up again—but for how long?

Says Tobias Levkovich, head of U.S. equity strategy at Citigroup Inc.: "Investors should be more willing to hedge."

The smartest way to do that now, strategists say, is to switch from riskier holdings to steadier stocks and dividend payers; to embrace "tactical" mutual funds that can jump in and out of asset classes; and to consider bond funds designed to benefit from rising interest rates.

Dividends

Investors looking for safer stock plays should consider companies that are initiating or boosting dividends, say strategists. Such companies tend to be less volatile than the overall stock market. According to Ned Davis Research, their "beta," a measure of volatility, is just 0.78 versus the broad market, compared with 1.08 for non-dividend payers. (A beta of 1.0 means a stock is as risky as the market.)

Dividend payers may be especially attractive at this stage of the bull market. Whereas non-dividend stocks typically trounce dividend payers during the first leg of a bull run, dividend stocks since 1974 have outperformed by three percentage points during the second leg and seven percentage points during the third, according to Ned Davis Research.

"The biggest headwind for dividend stocks occurs in the very early stages of the bull market, and we're past that in all likelihood," says Ed Clissold, global equity strategist at Ned Davis.

Some dividend boosters in the S&P 500 include Dr Pepper Snapple Group Inc., Time Warner Cable Inc., Starbucks Corp., International Paper Co. and UnitedHealth Group Inc.

Big Tech

The four-month rally has been led by the technology sector: the Nasdaq's 20.4% rise has outpaced the Standard & Poor's 500-stock index's 17.3% jump. Yet the tech sector has a price-earnings ratio of 13.7, only slightly higher than the 13.3 P/E for the market as a whole, according to Thomson Reuters data. Tech also has the fourth-lowest P/E of the 10 major market sectors.

Investors concerned that the rally is overstretched might want to shift away from highfliers and toward the 10 largest tech stocks, which Bank of America Merrill Lynch dubs the "tech titans"—Microsoft Corp., International Business Machines Corp., Apple Inc., Intel Corp., Hewlett-Packard Co., Cisco Systems Inc., Oracle Corp., Google Inc., Qualcomm Inc. and Corning Inc.

Cisco, in particular, may be a better deal now after Thursday's 16% fall.

"When bad news drives these stocks down, it makes them more compelling," says David Bianco, head of U.S. equity strategy at Bank of America Merrill Lynch. He notes that as a group, big tech has gained just 4.0% this year, versus 6.6% for the entire sector, and carries a P/E of about 12.8, versus about 16.7 for the others.

The key advantage big tech outfits hold, says Mr. Bianco, is their strong balance sheets, which should help them boost earnings even if growth slows. "They will issue bonds, buy back shares and acquire other companies," he says. "Large tech will benefit from that."

Go-Anywhere Funds

Investors who wish to take some profits on stocks and redeploy it elsewhere should consider "tactical allocation" mutual funds that allow managers to jump into and out of asset classes at will.

When the stock market trades in a band, as it has for the past decade, these sorts of funds can perform well. According to data from investment-research firm Morningstar Inc. through October, "world allocation" funds have returned 5.08% annually over the past five years and 5.78% annually over 10 years, compared with the S&P 500's 1.73% annualized gain over five years and an annualized loss of 0.02% over 10 years.

Some tactical funds handily beat traditional equity funds during the financial panic. "There were many investors in 2008 and 2009 who were disappointed by how little their fund managers could do to react to or react ahead of what was developing," says Loren Fox, senior analyst at research firm Strategic Insight.
So far this year, financial-services firms have launched 28 world allocation funds, according to Morningstar.

Steven Roge, a portfolio manager in Andover, Mass., has been moving more of his clients' money from traditional equity funds to flexible funds—such as IVA Worldwide Fund, Pimco Global Multi-Asset Fund and FPA Crescent Fund, among others—because of the managers' ability to make swift asset-allocation decisions and their use of derivatives to reduce risks.

"Asset allocation plays such a big part in the return of the portfolio that we could probably add 2% to 3% more in returns with less downside just from the timeliness of the shifts in asset allocation," says Mr. Roge, who estimates that about 40% of his clients' portfolios are in flexible funds, up from about 12% a few years ago.

The Goldman Sachs Dynamic Allocation Fund, launched in January, aims to shift between asset classes based on volatility. If, for example, the volatility of the S&P 500 increases, the fund would pare stock holdings.

"By taking some risk off the table as asset-class risk increases, that potentially sidesteps some of the downward movement in the market," says Theodore Enders, portfolio strategist at Goldman Sachs Asset Management.

Tactical funds can be unpredictable. The $25 billion Ivy Asset Strategy Fund, for example, held an 80% net equity position at the beginning of 2010, then pared it back to 18% at the end of February, only to ramp it up again a few months later.

"If you have a fund that's changing its asset allocation frequently, it can be difficult to know how to position the other funds in your portfolio," says Kevin McDevitt, a Morningstar analyst.

Note, also, that fees for these funds can be high. The Direxion Spectrum Global Perspective Fund, for example, has annual expenses of 2.55%.

Rising-Rate Funds
A typical move after a powerful stock rally is to sell shares and buy bonds. But with the Treasury markets surging to record highs recently, putting more money there could be even riskier than leaving it in stocks.

The Fed is buying Treasurys now, but not all maturities. When it said last week it would avoid 30-year bonds, their prices promptly tanked. That could be a hint of what's to come once the Fed stops buying other maturities. Its ultimate goal, after all, is to juice the inflation rate. Rising inflation is usually bad for bonds.

Instead of Treasurys, investors should consider "floating rate" funds, which buy variable-rate corporate loans—and therefore collect more money when rates rise. In 2003, for example, when the Fed started raising rates, floating-rate funds gained 10.4% while short-term bond funds gained 2.5%, according to Morningstar.
There are at least 31 open-end funds and 10 closed-end funds to choose from. Morningstar's picks in this category include the Eaton Vance Floating-Rate Fund and the Fidelity Floating Rate High Income Fund, which boast experienced management teams and solid track records.

Warren Ward, a financial adviser in Columbus, Ind., says he is considering the Fidelity Advisor Floating Rate High Income Fund for his clients because of manager Christine McConnell's experience through up and down markets. Another plus: The fund holds a considerable amount of cash, which should allow it to meet any redemptions without having to sell securities, he says.

"If rates rise, floating-rate funds offer investors some protections," says Mr. Ward.

"I would like to say go into bonds to get yourself out of stocks, but I think they're more risky right now."

Bonds are a hell of a lot more risky right now, but as Randall Forsyth of Barron's notes, Bonds Are Not Dead Yet:

Bond yields continued to climb last week even as the Federal Reserve began its bond-buying operation known as QE2. As the U.S. central bank began the second phase of its quantitative easing, heavy new-issue supplies in all sectors encountered buyer resistance.

The result was a rise in yields, especially for longer maturities, of about 45 basis points (0.45 percentage points) from their lows of early October, with about half of the increase coming in the past week alone. That translated into price losses upward of 2%, roughly equal to the give-back in the stock market.

In the Treasury market, the 10-year- note's yield rose to 2.776% from 2.538% a week earlier and a low of 2.332% on Oct. 8, the low-water mark since January 2009, Dow Jones Newswires notes. Meantime, the 30-year bond yield rose to 4.274% Friday from 4.122%, in part because of weak demand at Wednesday's auction of the issue.

That sounds relatively trivial but it resulted in the price of iShares Barclays 20+ Year Treasury Bond exchange-traded fund (ticker: TLT), a popular way to participate in the long end of the market, falling 2.2% on the week. Even the less volatile iShares Barclays 7-10 Year Treasury ETF (IEF) lost 1.4% for the week.

The corporate market also buckled under the weight of $21 billion of new issues in the first three days of the week, prior to the Veterans' Day holiday, and is bracing for $25 billion of offerings this week. The iShares iBoxx $ Investment Grade Corporate ETF shed 2% in sympathy.

The municipal market was hit as well with yields of triple-A 20-year bonds up over 20 basis points to around 3.70%. As a result the iShares S&P National AMT-Free ETF (MUB) was down 2.3% on the week. Some closed-end muni funds were pummeled by upward 7%-10%, according to Jerry Paul, who heads Essential Investment Partners in Denver, which specializes in closed-end-fund special situations. Closed-end funds' use of leverage makes them inherently more volatile. Moreover, many had been bid up to large premiums. Still, growing disquiet over municipal finances cast a pall over the sector.

But even if the bull market in bonds is dead, as declared the Bond King, otherwise known as Bill Gross, the founder and co-chief investment officer of Pimco, the manager of the world's biggest bond fund, there's an upside: higher yields.

The end of the bull market does not necessarily mean a bear market has started, counters James Kochan, a bond-market veteran whose career predates the beginning of the bond bull market and is now chief fixed-income strategist of Wells Fargo Advantage Funds. With inflation and short-term interest rates likely to remain low, bonds outside of Treasuries still provide value, Kochan says. "This is the income phase of an income-investment cycle, not the bear phase—yet," he adds.

That means looking to sectors of the bond market where income returns more than offset the risk of rising yields and falling prices. In the corporate sector, that means the high end of high-yield market with credit ratings of single-B or double-B, which provide respective yield spreads of 475 and 375 basis points. More speculative credits, with ratings of triple-C, don't offer commensurate value.

Municipal bonds also offer good value and income, Kochan adds. He prefers longer maturities because of the steep muni yield curve (that is, long bonds yield a lot more than those with shorter maturities). For instance, 30-year triple-A munis yield 4.20%, markedly more than 2.56% for 10-year bonds or 1.18% for five-year bonds.

Instead of triple-A credits, he prefers the yield pickup in the single-A to triple-B muni credits. For 10-year maturities, extra yield equals 100 basis points for single-A bonds and 150 basis points for triple-Bs. For 30-year maturities, the spreads are 250 basis points for single-A credits and 400 for triple-Bs. Quality spreads, already wide this year, have increased in the past couple of weeks, Kochan notes.

I'm not so sure about the municipal bond market where systemic credit risk is very high, causing a great deal of anxiety among bond investors. But at the end of the day, the Fed will do whatever it takes -- even buy municipal bonds -- to head off any systemic crisis.

As far as the stock market, I just see this as another opportunity to load up on shares. My personal favorites remain Chinese solar stocks which sold off strongly after most reported stellar earnings. One of my top picks in this group is LDK Solar, which smashed its estimates and then sold off (warning: these stocks are not for the faint of heart).

Tim Hayes, chief investment strategist at Ned Davis Research, spoke with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart" saying he expects a 3-5% correction in stocks in the next few weeks (click here to watch the interview). Hayes is one of the best strategists in the business, and a great guy too, and I think he's probably right. It's only normal for portfolio managers to lock in profits going into year-end, but I warn you, if you think this the beginning of some sort of systemic collapse, you're in for a big surprise.

This market is heading higher -- much, much higher. And all of you trying to time these markets will get your heads handed to you. Buy and hold maybe dead for the overall market, but it certainly isn't dead for some sectors and stocks. If you pick your spots well, you'll make decent profits as this rally still has steam. The only thing is you need to accept a lot more volatility. There is is nothing you can do about that.

Entire French Government Resigns Ahead Of Ministerial Reshuffle

From BNO: French Prime Minister François Fillon on Saturday offered the government’s resignation ahead of a long-awaited ministerial reshuffle.
“Pursuant to Article 8 of the Constitution, Mr. François Fillon presented to the President the resignation of the government,” a statement from French President Sarkozy’s office said. “The President accepted the resignation and has terminated the functions of Mr. François Fillon.”

In other news, GM IPO - meet "market conditions."

The Central bankers’ Bank for International Settlements (BIS) in 1988 in the “Basel I” regulations imposed an 8% capital reserve standard on member central banks. This almost immediately threw Japan into a 15 year economic depression. In 2004 Basel II imposed “mark to the market” capital valuation standards that required international banks to revalue their reserves according to changing market valuations (such as falling home or stock prices). The US implemented those standards in November, 2007. In December 2007 the US stock market collapsed and credit began drying up as banks withheld loans to comply with the 8% capital requirement as collateral valuations began to drop. The snowball effect of tightening credit, which reduces economic activity and values further, which resulted in further tightening of credit, etc., has produced a worldwide depression which is worsening.

Those capital standards have not been relaxed despite the crushing effects on the world economy* the credit contraction it requires has caused. Why? Because: 

Bruce Wiseman

“The purpose of this financial crisis is to take down the U.S. dollar as the stable datum of planetary finance and, in the midst of the resulting confusion, put in its place a Global Monetary Authority [GMA - run directly by international bankers freed of any government control] -a planetary financial control organization”- Bruce Wiseman

 *The U.S did modify these rules somewhat a year after the devastation had taken place here, but the rules are still fully in place in the rest of the world and the results are appalling.

“The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole… Their secret is that they have annexed from governments, monarchies, and republics the power to create the world’s money…” .- Prof. Carroll Quigley renowned, late Georgetown macro-historian (mentioned by former President Clinton in his first nomination acceptance speech), author of Tragedy and Hope. “He [Carroll Quigley] was one of the last great macro-historians who traced the development of civilization…with an awesome capability.” – Dr. Peter F. Krogh, Dean of the School of Foreign Service (Georgetown) 

The Two Step Plan to

National Economic Reform and Recovery

1. Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt. 

2. Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt.

These two relatively simple steps, which Congress has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e., fractional reserve banking). Paying off the national debt would wipe out the $400+ billion annual interest payments and thereby balance the budget. This Act would stabilize the economy and end the boom-bust economic cycles caused by fractional reserve banking.     

 For the full text of the Act click here to read the      MONETARY REFORM ACT. 

“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”  – Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.

   U.S. Rep. Ron Paul, R-Texas, introduced last month H.R. 1207, the Federal Reserve Transparency Act of 2009, a bill requiring that an audit of both the Fed’s Board of Governors and the Federal Reserve Banks be completed and reported to Congress before the end of 2010. We support Dr. Ron Paul and this bill which is gaining momentum in Washington, D.C., as more and more representatives add their names to its bipartisan support. We urge you to call your Congressmen to support this H.R. 1207. Thank you.     

Support the Monetary Reform Act – write your Congressman today!   

Alternate U.S. Dollar Index Chart

The SGS Financial-Weighted Dollar Index reflects a composite value of the foreign-exchange-weighted U.S. dollar, weighted by the proportionate trading volume of the USD versus the six highest volume currencies: EUR, JPY, GBP, CHF, AUD, CAD. The FRB Trade-Weighted Dollar is the Major Currency Index published by the Federal Reserve, with the USD weighted by respective merchandise trade volume against the same currencies.

MONEY SUPPLY SPECIAL REPORT/Practical Measurement and Analytical Uses of Money Supply in Assessing Inflation

Overview

Excess supply of a commodity or product usually is reflected in downside pressure on its price, and the same is true for money. Excessive supply of money leads to its debasement, to a decline in its value that otherwise is known as inflation. Where money supply generally is an underpinning of economic activity, it also is the ultimate determinant of prices and inflation. At present, near-record high annual growth in the broadest U.S. money measure M3 is suggesting a significant inflation problem in the year ahead.
The most common question raised by SGS readers in the last year has been along the lines of: "You are predicting rising inflation because of higher M3 growth, but what about this analysis that claims the lack of growth in the monetary base (or M1, or the Austrian Money Supply [a.k.a. True Money Supply], or some concocted measuring adding in commercial paper) is suggesting deflation."  Sometimes the question is posed in terms of the high level of credit defaults/losses collapsing money supply and causing deflation. Most recently, questions have shifted to: "How can there be inflation during a recession?" Those points will be addressed in various sections of the report.
Many of the questions raised have been based on legitimate analyses, but there also is a diehard deflationist camp out in the markets and on the Internet grasping at whatever straws can be found in order to dismiss the current inflation threat. An example that comes to mind is the argument that the collapsing commercial paper market should be counted in money supply (if so there are a number of other instruments that should be included, and the numbers would not be collapsing). Such reminds me of Federal Reserve Chairmen Ben Bernanke and Alan Greenspan touting the lowest inflation rate they could find (the core PCE deflator), irrespective of its lack of relevance for consumers, in order to demonstrate how well consumer inflation has been contained by the Fed.[1]
The following money supply analysis explores the nature of monetary theory, and why — with different degrees of success — its key components cannot be meaningfully measured in today’s economy. While M3 is not the perfect money measure, it is the broadest and best practical measure that currently is available, although no longer from the Federal Reserve.
The push for developing new money measures has resulted from the apparent breakdown in traditional relationships between money and measures of the broad economy and inflation. The problem is neither the money measure nor monetary theory, but rather meaningful redefinitions and the gimmicking of inflation and the GDP/GNP measures that have altered the apparent relationships.
The general analysis also looks at how there can be inflationary recessions and hyperinflationary great depressions, though the emphasis here is on the money relationship to inflation, not to economic activity (previously discussed in the SGS newsletters of March 2006 and May 2007).
Various money measures are compared, and I explain my preference — indeed the necessity — for using the broadest money measure available as an indicator of future inflation. While money supply measures M2 and M3 have a fairly strong correlation, the broader M3 provides the most comprehensive picture of what is happening to money in the system. That said, the behaviors of the various other measures of the money supply are not at all inconsistent with the inflation signals currently being generated by strong annual M3 growth.
We have a number of clients who use money supply estimates in their financial modeling and analyses. As always, comments and questions are invited through the feedback available at the Contact Us tab at www.shadowstats.com or by e-mail to johnwilliams@shadowstats.com.

Monetary Theory

[Much of the material in this and the "Inflationary Contractions" sections was published in the Flash Update of July 10, 2008.]
Discussion on inflation and deflation in the financial markets, the financial media and as generally discussed in the SGS newsletters usually centers on price changes in goods and services as traditionally measured by the CPI survey. Such, however, is not the same measure of price changes as encompassed in general monetary theory, where the relationship between money supply and inflation commonly is expressed as:

M x V = P x Q

In the preceding equation, M is the money supply. V is the velocity of money, as measured by the number of times the money supply turns over in a year, relative to the economy as reflected in nominal (not-adjusted for inflation) gross national product (GNP), where V = GNP/M. GNP is the broadest measure of U.S. economic activity and encompasses the more popularly reported gross domestic product (GDP).
In turn, nominal GNP = P x Q, where P is some measure of GNP deflator (prices/inflation) and Q represents some measure of physical quantity/volume, or a real (inflation-adjusted) GNP, as a measure of economic output.
So, the P, or inflation measure here, effectively is the GNP deflator, the change in which is a broader inflation measure than the CPI, since it covers costs of consumption for businesses, government and net exports, in addition to the costs of consumer spending on goods and services.  In terms of the other variables, the price equation is:

P = (M x V) / Q,

where price level (P) equals money supply times velocity (M x V), divided by real GNP (Q). Typically, increases in the combination of money supply and velocity, relative to Q (real GNP) result in higher prices. A drop in Q (real GNP), as seen in recessions, also would be inflationary, in theory, if money supply times velocity increased or otherwise did not drop as quickly as real GNP.
There’s More to Money Inflation than Money Supply (i.e. Velocity). The crude equations shown above are meant to provide a sense of some the basics of general monetary theory. Unfortunately putting meaningful hard numbers into the equations is impossible, since none of the variables are measured adequately by extant money supply, inflation or other national income (GNP) data, but the theory can help explain what likely will be happening.
While there is ongoing argument as to what should be included or not included in money supply (M), no measure constructed so far, be it the monetary base or M3, is fully adequate. For reasons discussed shortly, when assessing the inflation outlook, I prefer to use M3, the broadest and best measure available at present.
Velocity (V) is just the ratio of nominal GNP to the money supply, no better or worse in quality than the numbers used in the numerator and denominator of the calculation. Velocity is important, though. For those looking at the small annual growth in the monetary base — claiming that there is no inflation there — they can be befuddled by a sharp increase in velocity, which tends to happen when interest rates are low, and particularly when inflation-adjusted interest rates are negative, as they are now. In like manner, declining velocity could provide an offset to the inflation suggested by surging annual growth apparent in M3, but, again, circumstances suggest that increasing, not declining, velocity is more likely at present, which tends to exacerbate the inflation issues suggested by the M3 growth.
Current measurements of GNP, both real (Q) and nominal and the related implicit price deflator (P) are virtually worthless, as discussed in various newsletters and the Primer Articles available at www.shadowstats.com.  Consider, for example, the "advance" estimate numbers just published for first-quarter 2008 GDP. With official annual June CPI inflation at 17-year high, the quarterly implicit price deflator showed the lowest level of inflation in 10 years. The result was reported continued real growth in GDP for an economy that is in contraction based on almost any other measure.
In general, real GNP is meaningfully overstated, the GNP implicit price deflator is meaningfully understated, and the nominal GNP measure does not come close to measuring actual economic activity (i.e. the underground economy).
Accordingly, anyone hoping to calculate actual monetary inflation, derived from the equations used above, faces a very difficult, if not impossible, task, given the current state of the data.

Inflationary Economic Contractions — Current Environment

Market wisdom suggests that recessions mean low inflation, but as seen with the current circumstance and in at least two historical recessions in the last several decades (specifically the 1973/1975 and 1980 recessions), recessions with significant inflation are a great deal more common than is spun by Wall Street.
As the severity of the current downturn has gained broader recognition, some in the deflationist camp have started to argue that the underlying fundamentals driving the economy into the ground also will lead to lower prices, actually triggering a deflation. Quite to the contrary, despite deteriorating economic and financial conditions, my outlook remains for rising inflation well into 2009 and for a situation that eventually will evolve into a hyperinflationary great depression, as outlined in the Hyperinflation Special Report of April 8, 2008.
Slowing economic activity, by its nature, tends to reduce inflation pressures generated by strong economic demand. The current circumstance, however, is one where inflation pressures have been dominated by commodity price distortions (primarily oil) and increasingly a weakening U.S. dollar and surging money supply growth, not from strong economic demand. The current circumstance is somewhat similar to the recession officially clocked from November 1973 to March 1975, which has been the deepest standalone economic contraction, so far, of the post-World War II era. The period was one of soaring oil prices in the wake of the Arab oil embargo, a generally weak dollar and double-digit annual growth in money supply M3.
The severe downturn of 1973/1975 was accompanied by high inflation, per official CPI reporting, with annual inflation averaging 5.2% for the year leading up to the recession, 10.7% during the 16 months of the downturn, and 7.9% in the year following.
The next recession, from January through July 1980, saw even higher inflation, with annual CPI averaging 11.6% in the year leading up to the downturn, 14.3% during the six months of economic contraction, and 11.4% in the 12 months that followed, through to the onset of the next recession. This was a period that again saw significant oil price increases, near-double-digit annual growth in M3 and mixed dollar pressures.
The 1981/1982 recession saw inflation drop sharply (7.5% average annual inflation, down from 11.4% in the 12 months leading up to the recession, and against 3.2% in the year following the recession), along with declining oil prices and some dollar recovery.  The 1990/1991 recession (5.8% average annual inflation) and 2001 recession (2.8% average annual inflation) took place in somewhat milder inflationary environments, or at least under circumstances where reported CPI inflation increasingly was being suppressed by methodological changes (see the SGS Alternate-CPI measure on the Alternate Data tab at www.shadowstats.com).
No Deflation.  The U.S. has not seen annual CPI deflation since several periods of minimally lower prices in the late-1940s through the mid-1950s (the latter being outside of a recession).  Of the nine official recessions since 1950, none of them were deflationary.  The last significant deflation seen in the U.S. was during the Great Depression, thanks to a sharp contraction in the money supply, which, in turn, was due to a large number of bank failures and lost deposits.
As discussed in the February 11, 2008 SGS newsletter, and partially repeated here, Federal Reserve Chairman Ben Bernanke addressed deflation risk in a November 21, 2002 speech he gave as a Fed Governor to the National Economists Club entitled "Deflation: Making Sure ‘It’ Doesn’t Happen Here."
Attempting to counter concerns of another Great Depression-style deflation, Bernanke explained in his remarks: "I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States …"
"Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero."
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.  But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
The Fed has the will, the perceived mandate and the ability to create as much new money as is needed to prevent a deflation in the prices of goods and services, as measured by the CPI.
Low Treasury Yields Reflect Demand Distortions, Not Inflationary Expectations.  Some will argue that Treasury yields are good indicators of what the markets are expecting in terms of inflation, and that the current negative real (inflation-adjusted) yields are suggesting deflation ahead.  That generally would be true, if there were not major distortions in the Treasury market.
The primary distortion in the Treasury market of recent years has been the incredible influx of forced investment from abroad by U.S. trading partners stuck with holding excess dollars from the monstrous U.S. trade deficit.  With the bulk of net Treasury issuance absorbed by this foreign investment, yields have been severely depressed by factors other than the market’s inflationary expectations.  The Treasury market also recently has been picking up some flight-to-safety from disturbances in the financial system, which has placed further downside pressure on yields.
Heavy dollar dumping, which will be seen eventually, will tend to eliminate the current market distortions, spiking yields sharply.
Theoretical Support for Inflationary Contractions. Returning to the price equation:

P = (M x V) / Q,

it offers some simplistic examples of the dynamics of an inflationary economic contraction.
Current Inflationary Recession. In the current environment, rising oil and gasoline prices have spiked broad inflation (P) more rapidly than seen in the money/velocity growth (M x V) combination. Exacerbating an already stagnant-to-negative business environment, the higher relative inflation has been offset with a contraction in economic activity (Q).  In simple terms, consumers strapped by higher gasoline tabs also have been forced to cut back on other consumption.  More generally, incomes and debt expansion have been unable to keep up with inflation and the inflation-adjusted business activity is shrinking.
Hyperinflationary Great Depression (see the Hyperinflation Special Report).  In an environment such as was seen with Weimar Republic hyperinflation, consider the following stories that came out of that inflationary horror. At one time, when one went into a restaurant, it was common to negotiate and pay for the meal in advance, as its price would be higher at the end of the meal. Further, a fine bottle of wine ordered for dinner one night would be worth more as scrap glass in the morning than it had been as a full bottle of wine the night before. Under such circumstances, prices (P) surge ahead of money growth (M), where velocity (V) cannot possibly keep up with the hyperinflation, and basic economic activity (Q) collapses.

Various Money Measures

Shown on the following pages is series of graphs plotting comparative annual growth rates in various measures of U.S. money supply from 1970 to date. Except for the Austrian/True Money Supply measure, where the year-to-year change in the monthly average is based on not-seasonally-adjusted (NSA) numbers, all the money series reflect annual change in seasonally-adjusted (SA) terms. As with retail sales, there are legitimate seasonal variations in money supply tied to the timing of holidays, tax payment days, etc. For purposes of the comparative graphs, however, the differences between the adjusted and unadjusted series are not significant. Shown up front for comparison purposes are graphs of unadjusted year-to-year change in the CPI-U (and the SGS-Alternate CPI as discussed in the August 2006 SGS newsletter), and Money Supply M3, the broadest money supply measure, which I find most useful in assessing the inflation outlook. The plotted money series:
M3 (and SGS Continuation after February 2006)
June average (SA): $13,835 billion, year-to-year change: 15.8%
Significant correlations (year/year change): 77.4% with M2Description:M3 is M2 (56% of M3) plus large savings instruments, repos and Eurodollars. Per the Fed, the non-M2 components were balances in institutional money market mutual funds; large-denomination time deposits (time deposits in amounts of $100,000 or more); repurchase agreement (RP) liabilities of depository institutions, in denominations of $100,000 or more, on U.S. government and federal agency securities; and Eurodollars held by U.S. addressees at foreign branches of U.S. banks worldwide and at all banking offices in the United Kingdom and Canada. Large-denomination time deposits, RPs, and Eurodollars excluded those amounts held by depository institutions, the U.S. government, foreign banks and official institutions, and money market mutual funds.
The Federal Reserve ceased reporting M3 in March 2006; Shadow Government Statistics publishes an ongoing series based on continued Fed reporting of major M3 components and SGS modeling of missing components, cross-checked with quarterly flow of funds data (see the August 2006 SGS newsletter). 
M2
June average (SA): $7,687 billion, year-to-year change: 6.1%
Significant correlations (year/year change): 77.4% with M3Description:  M2 is M1 (18% of M2) plus savings and small savings instruments. Per the Fed, the non-M1 components are savings deposits (including money market deposit accounts); small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds.
M1
June average (SA): $1,386 billion, year-to-year change: 1.5%
Significant correlations (year/year change): 68.3% with Monetary Base, 49.8% with Austrian Description: M1 basically is cash and near-cash in circulation plus checking accounts. Per the Fed’s description, M1 includes currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; travelers checks of nonbank issuers; plus demand deposits (checking accounts) at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.
Monetary Base (Federal Reserve Board, Adjusted)
June average (SA): $833 billion, year-to-year change: 1.6%
Significant correlations (year/year change): 91.1% with Currency, 68.3% with M1Description:  Currency in the money stock plus reserves of depository institutions, adjusted for changes to reserve requirements. The dominant (92%) questionable Currency component (see below) makes this series of limited value. As to bank reserves reflecting Fed policy, a number of the broader money components do not have reserve requirements, and the Fed is working actively to by-pass reporting as reserves some of the cash it is putting into the system.
Currency in the Money Stock
June average (SA): $769 billion, year-to-year change: 1.7%
Significant correlations (year/year change): 91.1% with Monetary BaseDescription:  The currency component of M1. A significant portion (in excess of 50%) of this currency circulates outside the United States in "dollarized" countries and as a store-of-wealth and thus should not be counted as part of U.S. money supply. The amount circulating outside the U.S. has not been well quantified, and the distortions make both the Currency measure and Monetary Base of limited analytical value versus the U.S. economy and inflation.
MZM (Money Zero Maturity)
June average (SA): $8,735 billion, year-to-year change: 15.6%
Significant correlations (year/year change): 87.3% with Austrian (True Money Supply)Description: Calculated by the St. Louis Fed, MZM is M2 less small time deposits, plus institutional money funds. The components are items such that money is available immediately, without any investment term or withdrawal penalties. The MZM concept is similar to the Austrian measure, but the Austrian measure does not include money market funds.
Austrian Money Supply (a.k.a. True Money Supply)
June average (NSA): $5,474 billion, year-to-year change: 4.5%
Significant correlations (year/year change): 87.3% with MZM, 49.8% with M1Description:  Published by the Ludwig von Mises Institute (Mises.org). As described by the Mises organization, the True Money Supply (TMS) "consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions."
The TMS "was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply.  The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count.  MMMF [money market mutual funds] shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed…"
While the money market funds technically are as per the TMS descriptive, most holders of those funds have immediate availability to their money and view same as the equivalent of cash.  In the case of institutional money funds, the vehicles often are used to park funds overnight. Accordingly, the money fund measures are included in the broader MZM measure, which otherwise is similar in concept to the TMS.  

Money Supply Chart

The Fed ceased publishing M-3, its broadest money supply measure, in March 2006. The SGS M-3 Continuation estimates current M-3 based on ongoing Fed reporting of M-3’s largest components (M-2, institutional money funds and partial large time deposits) and proprietary modeling of the balance.

Year to Year Change
Changes in money supply have implications both for domestic economic activity and inflation, as discussed in the previously mentioned Money Supply Special Report.
Here we show year-to-year growth as a meaure of the changing money supply.
Note:  A downward slope in this growth curve does not necessarily mean that the money supply is dropping.  Only if the curve goes below zero does that show money supply having contracted over a full twelve months.

Also, for money supply changes over periods of less than a year, such need to be viewed on a seasonally-adjusted basis. Unadjusted change over short periods may show changes that are little more than regular seasonal variations. Short-term changes also may run counter to year-to-year change, as seen in the latter part of 2009, for example.

Creation of Debt As The Basis For Growth

Welfare states by regulation, a system by which growth is created with debt, money no longer a store of value, punishing savers and creating speculators, outrage over the last three US federal administrations has led to the current midterm election result, currency war, trade war, virtual fence broken

The UK, Europe, the US and Canada are different degrees of welfare states. By way of regulation, government controls via taxation. The states and their inhabitants send taxes to Washington, which takes its cut and sends funds back to the states with strings attached. You either do what we want you to do, or we cut off your funds. The states and the people are subject to extortion with government using their funds to do so. By using regulations, welfare and extortion, the federal government creates dependency.

Another phenomenon that has developed is a second dependency. People in society, not just in the US, but also in many countries, are dependent on their grandparents and parents and as years progress that situation will worsen. Earning power to maintain a previous lifestyle is no longer available with the staggering tax burden. Including income and VAT taxes in Europe, taxation averages 70%. The ability and opportunity to become successful and wealthy is more limited in today’s societies. Even the college degree has been demeaned. Almost anyone who can hold a pencil today is college material, when 60% of attendees shouldn’t even be there. Adding insult, the jobs once available to college attendees are no longer available, because more often then not illegal aliens hold them. As a result, it is far more difficult to work your way through college and as a result one graduates with a loan for $60,000 that will be paid back in many cases over a lifetime. In most cases that means most won’t be able to afford to buy a house until they are in the 30s or 40, if ever.

Since 1913 the basis for growth in America has been creation of debt out of thin air, a product of the privately owned Federal Reserve and a fractional banking system. It is considered prudent under such a system to lend nine times your underlying assets. Several years ago the figure was 70 and today it is still 40 times. Government and citizens purchase economic goods on credit. Government issues bonds and individuals borrow money.

Today money is only a method of exchange; it is not longer a store of value, especially in an environment of zero interest rates. An important characteristic of money to retain its soundness is gold backing. Today only one currency has any gold backing and that is the euro, which has about 5% gold backing. Ten years ago that backing was 15%, but gold was sold off to suppress the price of gold in conjunction with the US government and many other central banks. As a result we have a world of essentially worthless fiat currencies. The world is left with no sound money and as a result gold has again taken its place as the world’s reserve currency. If for no other reason is that it owes no one anything. Occasionally silver fulfills this role as well - both have for the last six centuries.

Financial operations conducted by government and a privately owned Federal Reserve leads to the extended creation of money and credit exceeding revenues. That leads to inflation, perhaps hyperinflation, and some times eventually deflationary depression. This is especially true when currency is not backed by gold. Having a Federal Reserve makes sound money even more difficult, because it can create endless amounts of money and credit as we have witnessed since August 15, 1971. What the banks and the Federal Reserve have done is use the fractional banking system to steal and expropriate the wealth of dollar owners. Such a system by its very nature is unsound. There is no such thing as full faith and credit, because it is not worth the paper it is written on, whether it is issued by a Federal Reserve or by a government, especially if it’s fiat or unbacked by something such as gold. This money leads to servitude because as it carries less value perpetually and the discovery leads to war and totalitarian government.

A recent manifestation of this profligacy is the urging by government for consumers to consume more with their steadily depreciating currency and to stop paying off debt. At the same time interest rates are lowered to zero to encourage consumption. Needless to say, savers are penalized with poor returns. That is for the most part the elderly. Such policy forces savers to become speculators, unless, of course, they have discovered gold and silver related investments. This process reduces the savings base and forces central banks to create more and more aggregates. It also enrages savers. The entire game has been changed and for the most part few have learned how to protect themselves.

The foregoing allows the Dow to sell at higher levels than previously because a part of those savings go into the stock market and bonds. If you haven’t noticed the bond market is in a bubble created by the Fed. You would think there was some kind of safety in stocks and bonds. Then again, desperate people do desperate things. If you want to see what safety in bonds is, just look at Britain’s bond markets since WWII. This is the sort of result you can expect when you marry corporations and government, and you end up with corporatist fascism.

By the time you read this the US congressional elections will be over and the Democrats will have lost about 50 House seats and probably 9 Senate seats. The American people are outraged over what has been done to them by the last three administrations.

As a result gold has been rising strongly, as the dollar remains under pressure. This in part is due to QE2, as well as the systemic problems facing the US economy. Spending the economy into strength again is not working. The only party increasing spending is the government. They also reflect most of the job growth. Private construction was the weakest in a dozen years.

This is reflected as well in government debt up $1.65 trillion to $13.5 trillion. The government is so deep in debt it cannot sell more debt fast enough to keep up with increases and old debt. The Fed has to purchase 80% of that debt, which cannot continue indefinitely. The result of all this is that the US lurches from one crisis to another.

As always bankers have been borrowing short to lend long, a sure recipe for disaster. That leads us to one of the greatest frauds of the century, the collapse of the real estate market and securitized mortgages. In order to survive banks are borrowing from the Fed at zero rates and lending back to them at 2-1/2%. No one says anything because no one wants the banks to fail. No matter what you call it the result is extending the debt timeline hoping something good will happen

Over the past few weeks we have seen the beginnings of trade war, which in reality had been going on for years. The statements by Chairman of the Fed, Bernanke, and statements as well by Treasury Secretary Geithner, started the ball rolling. The discussion of a possible QE2 set off wild currency volatility with the dollar falling the most and the yen, euro and Aussie dollars being the strongest. The Swiss franc shared leadership with the yen. While this transpired Mr. Geithner told the world the government wanted a strong dollar and that its lower level was just about right.

The significance of currency war is that inevitably leads to trade war. You might call it a backdoor entry. The string of competitive devaluations over the years were overlooked and tolerated by the US because cheap foreign goods held down US inflation and the dollars purchased to subdue domestic currency value were used to buy US Treasuries and Agencies. That benefit was now of limited benefit as nations bought less Treasuries and the Fed had to monetize US Treasury debt. This has and will continue to bottle up inflation to a larger degree in the US, as less hot US dollar flow goes into foreign countries. Countries such as Brazil have already implemented a tax on dollar flows into their country. We can expect more countries to follow and that will be followed by US trade taxes on goods and services. We have already started to see this in goods sold in China and the US. The US wants to increase exports and a weaker dollar makes that happen.

The Fed via stealth has been engaged in QE2 since early June via the bond and repo markets and Wall Street is well aware of that. The easing is talked to in terms of $500 billion over the short term in order to keep the economy level to slightly higher. Some $2.5 trillion will be needed over the next year and another 42.5 trillion the following year. If not forthcoming deflation will rear its ugly head and devour the US and then the world economy. In the meantime the secretive Fed has been surreptitiously lending more funds to Europe to Greece, Ireland, Spain, Portugal and Italy.

The deliberately cheapened Chinese yuan has caused a $260 billion trade deficit with China, or a 20% plus increase. That is a doubling in 10 years from 20% to 40% of its trade deficit. China says it is willing to raise the value of the yuan incrementally over the next several years, but that simply isn’t good enough. We believe trade barriers will become a major issue in the coming session of Congress. The transnational conglomerates know such a move is inevitable. The US has to find a way to solve growing unemployment, which in the real world now stands at 22-3/4%. You cannot have a recovery as long as that many people are unemployed. In addition, those numbers are headed higher, soon to reach 1930’s depression levels. This is something that should have been done long ago, but the elitist forces fought it off as long as possible. The end of free trade and globalization, as we have known it, over the past 20 years will be one of the bigger issues in congress over the next two years. When the yuan is 40% undervalued it becomes a major issue.

The flip side of the immediate problem of QE2 and a lower dollar is higher gold, silver and commodity prices, and an increase in inflation. Mr. Bernanke says we need inflation. Not a lot just a little. Official CPI figures are up 1.6%, whereas real inflation has risen 7% and is headed higher. It’s tough being between the rock and the hard place and that is where the Fed sits. It’s expanded money and credit for banking and Wall Street so no one will be too big to fail.

This issue will hit the streets prior to all the election results being known.

Just as big news will be how much QE2 will be admitted to by the Fed and besides Treasuries and Agencies, how much and what other bonds will the Fed purchase? After we find out how money will be injected into the system we then have to discern how much inflation it will foster.

The truth of the current Keynesian economic system has been taken for granted and it is in the processes of failure. That event demands that the system be purged of its excesses. As we projected back in May, the Fed and the administration will pour $5 trillion into the economy over the next two years just to keep the economy going sideways. This is a staggering amount of money and credit created out of thin air to be monetized, which will certainly depreciate the dollar. We have just seen food and other prices double again. What will happen when all this liquidity hits the economy? You guessed it, more inflation. For some reason the masters of the universe on Wall Street seem to think that somehow inflation and hyperinflation will not appear. They believe in a destructive theory that everything they believe is true. It is part of their misreading of life and its real meaning.

The US would be spending a whopping $200 million per day on President Barack Obama's visit to the city.

"The huge amount of around $200 million would be spent on security, stay and other aspects of the Presidential visit," a top official of the Maharashtra Government privy to the arrangements for the high-profile visit said.

About 3,000 people including Secret Service agents, US government officials and journalists would accompany the President. Several officials from the White House and US security agencies are already here for the past one week with helicopters, a ship and high-end security instruments.

"Except for personnel providing immediate security to the President, the US officials may not be allowed to carry weapons. The state police is competent to take care of the security measures and they would be piloting the Presidential convoy," the official said on condition of anonymity.

Navy and Air Force has been asked by the state government to intensify patrolling along the Mumbai coastline and its airspace during Obama's stay. The city's airspace will be closed half-an-hour before the President's arrival for all aircraft barring those carrying the US delegation.

The personnel from SRPF, Force One, besides the NSG contingent stationed here would be roped in for the President's security, the official said.

The area from Hotel Taj, where Obama and his wife Michelle would stay, to Shikra helipad in Colaba would be cordoned off completely during the movement of the President.

Shares of Ambac Financial Group Inc. (ABK 0.50, -0.32, -39.23%) were down 49% in Monday's premarket trading after the company in a regulatory filing said its board has decided not to make a regularly scheduled interest payment on notes due in 2023. If the interest is not paid within 30 days of the scheduled interest payment date of Nov. 1, an event of default will occur under the indenture for the notes, Ambac said. The firm has been unable to raise additional capital as an alternative to seeking bankruptcy protection and is currently pursuing with an ad hoc committee of senior debt holders a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding, according to the filing. If Ambac is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy prior to the end of the year. "Such filing may be with or without agreement with major creditor groups concerning a plan of reorganization," Ambac said.

[When Ambac insures, mostly municipal bonds, they transfer their own rating to the bonds so if a municipal has a rating of BBB and Ambac is AAA, the municipals assume a Triple A status. If Ambac goes out of business the bonds lose their AAA status and revert to their normal rating status, which might be B or BBB or AA, the bottom line is munis are going to fall in value and we predicted this would happen two years ago, and as usual few were listening. Bob]

The Transportation Security Administration is implementing an enhanced pat-down procedure at national airport security checkpoints, including in Greater Rochester International Airport.

Keynsianism Fallen Upon Hard Times

Hard times for Keynesianism, no recovery through quantitative easing,  Fed not finding the path to sustainable economic growth, policy made in stealth, purging the system a better idea, Bernanke on a suicide mission, when the Fed buys, Treasury debt debases the currency, World Bank wants Gold back into the monetary system.

The cult of Keynesianism is about to come upon very hard times. The quantitative easing plan, known as QE1, did not produce a recovery in the American economy. Now one of its staunchest advocated, Fed Chairman Ben Bernanke, has embarked officially on QE2. It is our belief that QE2 will be no more successful than QE1 and it may well be followed by QE3. You might ask why are not other policies being used the answer is the followers of Lord Keynes don’t know what else to do, and they know what they are doing does not work. They certainly must be waiting for their elitist friends to start another war, as they did in 1939 and 1941. The followers of Keynes control today’s central banks and thus have complete control over money.

Several years from now many will see through the fallacies of Keynes and the nostrums that caused its demise. In the case of the Fed its goal is sustainable economic growth and price stability and that long term inflation expectations remain contained. As we have seen stability has been relative and inflation has been with us for many years, particularly since August 15, 1971, when the US dollar, the world reserve currency, abandoned gold backing. The simple conclusion is you cannot have both no matter what Keynes postulated. Central banks, and particularly the Fed, have allowed inflation to always be present, because deflation strikes absolute terror into their hearts. That is why the privately owned Fed demands total control over the US money supply. The Fed contends that they can control the economy via the money supply and manipulation of interest rates. The result is that stable prices are impossible. Growth has to be accompanied by inflation under Keynesianism; there can be no other outcome.

For the past 8 years deflation has been a serious threat and that threat has been met with boatloads of money and credit. If it had been the case deflation would have long ago overwhelmed the US economy. As a result we have had zero interest rates for two years accompanied by quantitative easing. This has been a full throttle attack on deflation, which as usual leaves at least residual inflation. Two years ago official inflation was 5-1/2% at its peak and real inflation was 14%. Recently official inflation has been 1.6% and real inflation 7%. As this new QE2 and continued zero inflation have their affects, inflation on a real basis should climb back to 14% and perhaps higher. Only fiat money and credit created out of thin air has been able to keep the monetary system afloat and in that process savers and non-speculators have been robbed of their wealth. For two years the Fed has purchased a great part of available US treasuries. The Treasury has been funded with fiat funds and no benefit has accrued to the economy. This so-called lender of last resort has exchanged worthless paper for debt for worthless Treasury debt, and whether they like it or not, the slight of hand illusion, the Houdini act, is no longer working. The power structure that really controls the US government, the fed, Wall Street and banking are in a fight to retain their power and control and at the same time take down the world economy and force the world’s inhabitants to accept world government.

They knew the risks and confidently accepted them, but talk radio and the Internet are interrupting their march toward a new world order. The public of the world are learning who is doing what to them, and why they are doing it. They are being as stealth and subtle as possible. They do not want the public to know what they are up too and why. If enough people are informed worldwide their game won’t work, they will lose their power and wealth and perhaps their lives. Presently Mr. Bernanke is telling Americans to expect inflation and it is good, because deflation is worse. He is correct of course, but doesn’t tell his listeners the whole truth. The truth is that the only way the problems can be solved is by purging the system and if that purging is allowed to happen he and his fellow elitists will lose control. The ignorance that shrouded people’s eyes and minds is being lifted by alternative communications and that is the last thing Mr. Bernanke and his friends at the Council on Foreign Relations, the Trilateral Commission and within the worldwide Bilderberg group want. We among others are educating the masses as never before and the knowledge they are accepting is going to be their ticket to freedom from these scoundrels. The elitists believe they can keep the people ignorant, but we disagree and we are going to prove it. An example is the three class action lawsuits, one of which was a RICO suit, versus JPMorgan Chase and HSBC for manipulating the Comex silver market. There will be more suits like this, class actions versus naked shorting and front running. This is part of the educational process of which we speak. The crooks in Wall Street, banking, the CFTC and the SEC will be exposed for what they are. The days of financial ignorance are about to end.

As the creation of an additional $5 trillion in monetary aggregates goes forward over the next two years no one wants to talk about the negative results of such a policy except foreign nations.

In the meantime over the next four months the stock market is up 20%, gold is up 20% and silver 50%, all as a result of the coming creation of monetary aggregates.

Not only is the Fed implementing massive amounts of money and credit into the economy, but so are many other nations to the tune of $1.5 trillion. That means inflation is a problem worldwide as is confidence in the monetary policies of central banks and governments. The dollar is going to fall versus other currencies and all will continue to follow versus gold.

European financial leaders are terrified by what is going on. The dollar is again headed lower and the euro higher. Europe is a big exporter and a higher euro is just what they do not need. ECB President Jean-Claude Trichet is right. The time for stimulus is over, it is now time for all to tighten. This, of course, will purge the system and the elitists do not want that unless they control it and that will be difficult to do. They would rather stimulate more and if unsuccessful at that have another war, as a distraction. We can assure you if the public loses faith in government and confidence in banking the elitists will be in serious trouble and we believe that will happen and it is not to far away.

What the Fed was once capable of doing they cannot do anymore. Mr. Bernanke is on a suicide mission. He faces a dreadful economy and he knows the solutions he is using do not work. It did not work in the 1930s and it won’t work now. Speculation is rife and regulation is almost non-existent. The excesses are again where they were before at banks and brokerage houses. Risk markets worldwide, where good profit opportunities exist, are being inundated with hot dollars and that is why nations such as Brazil have put up financial barriers. They have enough inflation of their own without accommodating US dollar inflation. As one might expect all of this dollar creation forces the value of the dollar lower and dollar holders continue to lose confidence. The official introduction of QE2 and perhaps a QE3 certainly does not instill confidence. You can understand why dollar owners are purchasing gold, silver and commodities. You can also understand how the public is being crushed between higher inflation and inadequate wage increases. At the same time asset value are falling along with wealth and net worth. Bonds and the stock market are high. Can you imagine the anguish when they both eventually fall? When the Fed talks about stability and increasing employment or price stability, it is really talking about stabilizing Wall Street and the banking interest that own the Fed. Current policies will have little impact overall and the stage will be set for QE3 and then more stimulus until the dollar crashes and the game is over.

One of the fascinating aspects of all of this is that finally word is getting around that when the Fed buys, Treasury debt debases the currency. What a novel idea. The Fed has been doing this for many years but few were paying attention. They are now. The claptrap you hear from the IMF that the dollar is overvalued is enough to make one regurgitate. Overvalued against what? Not any currency we are aware of. Dollar creation has continued to aid Wall Street and banking not the US economy.

The Fed has signaled that it will buy bonds, anything they wish to buy. That in turn will force interest rates lower and encourage borrowing by business and individuals. In this process the Fed continues to expand its balance sheet, something that did not work previously. Foreign central banks cannot be counted on to purchase and incur loses and Americans won’t be buyers unless yields rise and the Fed cannot allow that to happen. That means the Fed has to mop up all bond markets and that is where the $2.5 trillion comes in. At the same time commercial banks won’t be buyers because they have to deal with Foreclosurgate and the class action and RICO suits against JPMorgan Chase and HSBC. The Fed has its work cut out for it and the result will be inflation and QE3. The Ponzi scheme goes on based on lies and the greater fool theory. The tulip mania comes to mind. The scheme is simply brazen beyond belief. Unfortunately the scheme is the only alterative for the Fed and they know it won’t work. If we are correct, then that big meeting will be held to devalue, revalue and to default on a multilateral basis. If the US has the gold they say they own then it can return to the gold standard and remain the world’s reserve currency with all dollar holders paying the price. Revealing a Keynesian system that doesn’t work, but has kept the elitist bankers and Wall Street in power for almost 100 years. This meeting will also bring down world stock markets and a 30-year bull market in bonds. The losses will be gigantic and crippling.

131 = The Number of Years to Replace Oil

It seems the panic time for both green enthusiasts and peak oil pundits.

According to a new paper by two researchers at the University of California – Davis, it would take 131 years for replacement of gasoline and diesel given the current pace of research and development; however, world's oil could run dry almost a century before that.

The research was published on Nov. 8 at Environmental Science & Technology, which is based on the theory that market expectations are good predictors reflected in prices of publicly traded securities.

By incorporating market expectations into the model, the authors, Nataliya Malyshkina and Deb Niemeier, indicated that based on their calculation, the peak of oil production could occur between 2010 and 2030, before renewable replacement technologies become viable at around 2140.

The estimates not only delayed the alternative energy timeline, but also pushed up the peak oil deadline. The researchers suggest some previous estimates that pegged year 2040 as the time frame when alternatives would start to replace oil, could be “overly optimistic".

As I pointed out before, despite the excitement and hype surrounding a future of clean energy, a majority of the current technology simply does not make economic sense for regular consumers and lack the infrastructure for a mass deployment….even with government subsidies, tax breaks, and outright mandates.

In addition, the supply chain of renewable technologies is not as green as people might think. Most alternative technologies rely on rare earths for efficiency. However, the radioactive waste produced by rare earths mining process makes oil sands look like a green energy. This overlooked (or ignored) fact just now received some attention due to the sudden shortage caused by China’s embargo and export quotas on rare earths.

Another case in point – In China, the city of Jiuquan in Gansu province needs to build 9.2 gigawatts of new coal-fired generating capacity as backup power of the 12.7 gigawatts wind turbines due to be installed by 2015.  More wind farms would need more coal-fired power plants, with little or possiblyly no carbon reduction.

Capitalism means investment naturally flows to the more profitable proposition....and vice versa. With more data and information becoming available, not much could go unnoticed by the markets, particularly in a relatively new sector such as renewable energy. And this harsh reality is clearly reflected in this new study.

Now, in its latest long term outlook, the International Energy Agency (IEA) predicts that oil demand, prices and dependence on OPEC all set to continue rising through 2035, and that global oil supplies would be near their peak in 2035 as China, India and other emerging economies keep on trucking.

So the world needs to come to a common understanding that

1. The alternative energy is not mature enough to completely repalce fossil sources any time soon. 
2. Energy security means a diversified and balanced portfolio inclusive of every bit of resource, fossil as well as renewables, just to meet the projected demand.
3. Real "green" energy is easier said than done. 

Furthermore, the increased rare earths dependency, and the latest food vs. fuel debate when the food industry slapped a law suit against the EPA over E15 ehtanol, underline some of the unintended (we hope), yet nasty consequences that often come with ill-informed and poorly-planned policies.  (In the case of E15, the EAP is an easy mark considering one in eight Americans is on food stamps.)

All this requires a balanced and unbiased government policy to guide exploration and development of technologies to unlock the new fossil fuel reserves, expanding the R&Ds of emerging technologies, while effectively practicing and promoting energy efficiency and conservation.

Otherwise, we may literally witness $300 a barrel oil before the electric vehicle could even make one percent market penetration.  Unfortunately, there's no easy fix, and the clock is seriously ticking.

Related Reading: The Alternative Fuel Vehicle and $300 Oil

MERS ATTACK!!! (Updated With Must Have Fraudclosure Flow Chart)

"GET READY FOR THE GREAT MERS WHITEWASH BILL"
"Wall Street money is pouring into the coffers of those who are receptive (i.e., almost everyone in Congress). The legislation is already being drafted under the interstate commerce clause to ratify MERS and everything it did retroactively. It appears that the Obama administration is ready to pardon all the securitization deviants by signing this bill into law. This information is corroborated by several people who are in sensitive positions — persons who would be the first to know such proposals. Fortunately, there are some people in Washington who have a conscience and do not want to see this happen."
John Carney, CNBC--"When Congress comes back into session next week, it may consider measures intended to bolster the legal status of a controversial bank owned electronic mortgage registration system that contains three out of every five mortgages in the country.
The system is known as MERS, the acronym for a private company called Mortgage Electronic Registry Systems. Set up by banks in the 1997, MERS is a system for tracking ownership of home loans as they move from mortgage originator through the financial pipeline to the trusts set up when mortgage securities are sold.
The system has come under scrutiny by critics who charge MERS with facilitating slipshod practices. Recently, lawyers have filed lawsuits claiming that banks owe states billions of dollars for mortgage recording fees they avoided by using MERS...
Now it appears that Congress may attempt to prevent any MERS meltdown from occurring. MERS is owned by all the biggest banks, and they certainly do not want it to be sunk by huge fines.
Investors in mortgage-backed securities also do not want to see the value of their bonds sink because of doubts about the ownership of the underlying mortgages.

So it looks like the stage may be set for Congress to pass a bill that would limit MERS exposure on the recording fee issue and perhaps retroactively legitimate mortgage transfers conducted through MERS private database...."