-> SOMETHING BIG IS ABOUT TO HAPPEN! -Craig R. Smith
-> TOP 5 INFLATION FIGHTERS -Linda Stern, Reuters
-> WHAT I EXPECT TO SEE -Jim Puplava, Financial Sense
-> WHY A DOSE OF INFLATION IS GOOD -Niel Kadlec, TIME
-> THE PERFECT STORM -Tom Dyson and Addison Wiggin, DR
-> NO TIME FOR A GREAT DEBATE -Jonathan Darman, Newsweek

"The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If 'Thou shalt not covet' and 'Thou shalt not steal' were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free."
-John Adams

ATTN: COIN COLLECTORS -- SPECIAL OFFER
SS REPUBLIC SHIPWRECK COINS NOW AVAILABLE!
May 17, 2004

The SS Republic was a sidewheel steamer lost in deep water in 1865 after battling a hurricane for two days. The ship, en-route from New York to New Orleans, was reportedly carrying $400,000 in gold and silver coins (1865 face value) when it sank. The ship's fascinating history includes service in both the Confederate and Union navies during the Civil War.

Odyssey Marine Exploration discovered the shipwreck in the summer of 2003 nearly 1700 feet below the surface of the Atlantic Ocean approximately 100 miles off the Georgia coast. 51,212 coins have been recovered as of April 2004, including 2,620 $20 Double Eagles, 1,496 $10 Eagles, 47,094 Half Dollars and 2 Quarters. The retail value of the coins recovered to date is estimated to be over $ 75 million. Read more:SS Republic Shipwreck Silver Coins

MARKET NEWS DIGEST

Oil, Gasoline Surge on Concern About U.S. Fuel Supplies

May 19 (Bloomberg) -- Crude oil rose and gasoline futures surged to an all-time high after the Energy Department said U.S. stockpiles of the motor fuel increased less than expected.

Gasoline supplies gained 1.2 million barrels to 203.7 million. Thirteen analysts in a Bloomberg survey expected an increase of 1.5 million barrels, according to the median of forecasts. Stockpiles in the week ended May 14 were 2.3 percent lower than a year earlier. Crude-oil reserves fell 1.1 million barrels to 298.9 million barrels.

``Once you review the report it becomes clear that our substantial gasoline problems aren't solved,'' said Phil Flynn, senior energy trader for Alaron Trading Corp. in Chicago. ``We didn't get as substantial a build in gasoline supplies as expected. We need to see much bigger increases at this time of year.''

Crude oil for June delivery rose 96 cents, or 2.4 percent, to settle at $41.50 a barrel on the New York Mercantile Exchange. Prices settled at $41.55 on Monday, the fourth straight session a record was reached. Prices were up 44 percent from a year earlier.

Gasoline for June delivery jumped 6.34 cents, or 4.6 percent, to settle at $1.4503 a gallon in New York, the highest closing price since the contract began trading in 1984. Futures were 70 percent higher than a year ago.

Gasoline prices have become part of the U.S. presidential campaign. Democratic presidential candidate John Kerry has called for the government to stop adding barrels to the Strategic Petroleum Reserve.

President George W. Bush said he opposes tapping the reserve to address rising gasoline prices, and said prices could have been lower if Congress had passed his energy plan.

`Play Politics'

``We will not play politics with the Strategic Petroleum Reserve,'' Bush, 57, said after meeting with his Cabinet at the White House. ``The idea of emptying the Strategic Petroleum Reserve would put America in a dangerous position.''

The Bush administration has said the reserve, located in deep salt caverns along the Texas and Louisiana coasts, is for national emergencies, such as a severe disruption in the supply of oil.

http://www.bloomberg.com

Bush renominates Greenspan -CNNfn
President taps 78-year-old Fed chief for another term with just a month left to go in his old one.
May 18, 2004

NEW YORK (CNN/Money) - President Bush has renominated Federal Reserve Chairman Alan Greenspan to another four-year term as head of the nation's central bank, the White House said Tuesday.

White House press secretary Scott McClellan made the announcement just before Bush met with the 78-year-old Fed chief.

"Alan Greenspan has done a superb job as chairman of the Board of Governors of the Federal Reserve system and I have great continuing confidence in his economic stewardship," McClellan said, reading a statement from Bush, according to Reuters.

The move could help Bush in his efforts to win re-election in 2004. Keeping a popular central bank chairman, believed by many to be a "maestro" of economic policy, could quiet some of the critics of Bush's handling of the U.S. economy, which was slow to recover fully from the 2001 recession.

Greenspan was first appointed chairman of the nation's central bank by President Reagan in 1987. His current term as chairman runs out next month -- at the height of the presidential election campaign.

http://www.cnnfn.com

RELATED STORIES:
"Greenspan has created is a huge financial and asset bubble everywhere in the world, but no real improvement in the US economy, which is like a drug addict and requires more and more credit to stay afloat. As someone once said, in order to avoid a hangover, you must keep on drinking..."
Read: THE BUBBLES MR. GREENSPAN HAS CREATED! -Marc Faber, Safehaven.com
Read: GOLD AND ECONOMIC FREEDOM by Alan Greenspan

Dow slips below 10,000 -CBSMW
Crude dips below $40 per barrel on Saudi comments
By Tomi Kilgore & Mark Cotton, CBS.MarketWatch.com
May 21, 2004

Dow slips below 10,000 Crude dips below $40 per barrel on Saudi comments By Tomi Kilgore & Mark Cotton, CBS.MarketWatch.com Last Update: 3:14 PM ET May 21, 2004

NEW YORK (CBS.MW) -- U.S. stocks were well off their best levels of the day in late Friday trade, as a rally sparked by hopes for a rise in OPEC oil production was braked by light volumes.

The Dow Jones Industrial Average was up 14 points, or 0.1 percent, at 9,951, off its intraday high of 10,036.78.

Twenty-three of the Dow's 30 components were in positive territory. The blue chip barometer hasn't closed above the 10,000 level since May 14.

The Nasdaq Composite was up 5 points, or 0.3 percent, to 1,902, below its intraday high of 1,918.

The S&P 500 Index tacked on 1 point to 1,090 and the Russell 2000 index of small-cap stocks gained 0.2 percent to 542.09.

The market slid off its early highs in unusually light volumes, with many investors reluctant to take on positions after a choppy trading week.

There was support from July crude futures, which dropped 85 cents to $39.95 after Saudi Arabia said it would suggest to OPEC members at an informal weekend meeting to raise oil production by more than 2 million barrels per day. Saudi Arabia had earlier proposed a hike of 1.5 million barrels.

Brian Pears, head of equity trading at Victory Capital Management, said lower oil and interest rates were helping stocks, as was the fact that the market "hasn't gotten anymore bad news."

In the broad market, the number of advancing stocks trounced decliners by a 20 to 12 margin on the NYSE and by a 16 to 14 score on the Nasdaq exchange.

http://www.cbs.marketwatch.com

Rates Rise, Changing Face of Home Sales -NYT
By JENNIFER BAYOT
May 20, 2004

As mortgage rates climb, fewer home owners are refinancing their old loans, and potential purchasers are reconsidering when - or whether - to buy. Their choices could reshape the housing market ahead, economists said, and even affect other spending decisions.

Refinancings, which accounted for more than half of all the home loans last year, are shrinking fast. After three years of easily switching to better terms on their mortgages and frequently taking out cash, consumers can no longer rely so heavily on refinancing to shore up their family budgets and maintain their spending.

The Mortgage Bankers Association said yesterday that refinancing activity fell 17 percent last week to its lowest level since the start of the year, as the standard 30-year mortgage rate has risen to 6.2 percent since flirting with 45-year lows in mid-March. In the intervening weeks, refinancing activity has fallen almost two-thirds.

"What consumers are seeing for the first time is a rapid rise in rates," said Anthony Meola, executive vice president for home loans production at Washington Mutual, a big servicer of home loans.

The sharp appreciation in home prices that consumers have come to rely on for household wealth will probably diminish if rates continue to rise, though the National Association of Realtors estimates that the 30-year rate would have to rise to 8 percent to seriously impede home sales. Rising rates make homes more expensive for consumers and will damp total home sales and home prices.

At the average fixed rate of 5.34 percent recorded last March by the Mortgage Bankers Association, a monthly payment of $1,000 would have covered a 30-year mortgage of about $180,000. Using last week's rate of 6.21 percent, that $1,000 payment could handle $164,000.

http://www.nytimes.com

Gold above $385/oz on covering -Reuters

May 21, 2004

Gold was above US$385 a troy ounce on Friday afternoon for the first time in two weeks, due to short covering ahead of the weekend, as well as a firmer euro and yen against the US dollar.

Spot gold was quoted at US$385.85 an ounce, up $5.85/oz from Thursday's New York close of $380/oz.

The euro was quoted at $1.2036 from $1.1963 in late New York trade on Thursday, while the US dollar last traded at 112.09 yen, down 0.54 yen from Thursday's late New York trade of 112.63 yen.

"Ahead of the weekend, gold has benefited from position squaring. The stronger euro has also caused players to buy back some of their positions. If the euro goes through $1.2070, more stop losses could be triggered and that could push the metal rapidly through $390/oz," said a Switzerland-based trader said.

Gold has broken through recent resistance at $383/oz and this suggests that a short-term bottom is in place with further gains on the cards and the metal could move towards $390/oz to $395/oz, investment bank JP Morgan said in a note.

http://www.reuters.com

NEWS FLASH:
Three Banks Control 99% of Precious Metal Derivatives -Trader Dick, SATC
May 19, 2004

I was just reading through the Comptroller of the Currencies Derivatives Report for year end 2003, and I was interested to see that only three US banks hold 99% of the US contracts for gold and other precious metals.

They are: JPM, Citibank, and HSBC.

JPM has the most gold derivatives by far, controlling 53.4% of the total, with Citibank holding 21.1% and HSBC with 25.4%. HSBC increased their gold derivatives the most since the 2002 year end report, with a whopping 18.6% annual increase.

JPM alone has 42 billion in gold derivatives.

That's a lot of ounces of gold. In tonnes, thats about 3,278.

According to the April 2004 GFMS, the TOTAL global production of gold in 2003 was 2,593.

That's JPM alone.

The non-gold precious metals derivatives market is signficiantly smaller than the gold market, by almost a factor of 20. in non-gold precious metals contracts, HSBC is by far the leader with 63% of the total derivative contracts, which are not broken down among silver, platinum, palladium, etc., increasing their business by 60% in one year. JPM actually decreased their exposure by 26%, but Citibank, which is by far the smallest player, increased their non-gold derivatives exposure by 928%!

Further Reading ...
U.S. Gold Commemoratives are up!
Morgan Silver Dollars are also up!

Rising Prices Alter Consumers' Inflation Outlook

May 17 (Bloomberg) -- Mary Jo Keffer, a high school teacher in Rockford, Illinois, says she sees inflation coming back.

Gasoline now costs her $1.99 a gallon, up from $1.43 six months ago. Milk is $2.39 a gallon, up from $1.99 in November. It costs her more to eat out and to get her hair styled.

``I'm sure the cost of living is going to rise'' now that the economy is getting stronger, Keffer, 59, said in an interview. ``Americans want everything we've always had, and we're willing to pay the price for it.''

Price increases have become so prevalent that Friday's University of Michigan's preliminary May survey of consumer sentiment showed that Americans expect an inflation rate of 3.2 percent a year from now, matching April's figure as the highest such forecast in nine years. In July the survey showed consumers predicted a rate of 1.7 percent in mid-2004. Some 17 percent expect rising prices to hurt their finances, the most since 1992.

So far this year, consumer prices are rising at a 4.4 percent annual rate, compared with a 3 percent increase at the same time last year. If that pace held for the entire year, inflation in 2004 would be the fastest since 1990's rate of 6.1 percent.

Bond investors also expect more inflation, said David Rosenberg, chief U.S. economist at Merrill Lynch & Co. in New York. The yield gap between regular 10-year Treasury notes and 10-year Treasury inflation-protected securities, or TIPS, reached 2.7 percentage points Thursday, the widest since September 1997.

FULL STORY

Related Stories:
White House: Inflation Not a Threat -- Fri May 21 -- NEW YORK (Reuters) - A persistent inflation problem is not building in the economy and the Federal Reserve will take all steps necessary to keep any price pressures contained, a top White House economic adviser said on Friday..."Fed officials understand what needs to be done and I am confident they will do the right thing, and markets understand they will do the right thing."
Fed's Mcteer says higher US inflation a concern- Reuters - USA, HOUSTON, May 20 (Reuters) - A recent rise in US inflation has raised some concerns but monetary officials are not unduly worried, Dallas FederalReserve Bank ...

BLOOMBERG INFLATION UPDATE -- 5-18-04 -- Richmond Federal Reserve Bank President J. Alfred Broaddus Jr. said he's ``dusting off my old inflation hawk feathers'' to deal with rising inflation risks that the central bank will have to meet through a policy of ``measured'' increases in interest rates.

``The inflation picture has changed significantly,'' Broaddus told the Maryland Bankers Association. ``The rapidity of the apparent bottoming out of core inflation, and its subsequent upswing, has naturally gotten the attention of all of us who are determined to contain inflation and preserve the price stability it took almost 20 years to achieve.''

When 5 Cents Is Worth $3 Million -WSJ
By THADDEUS HERRICK, Wall Street Journal
May 20, 2004

The 1913 Liberty Head V Nickel is to coin collectors what an important Picasso is for collectors of art. Today, a New Orleans retailer is expected to announce the sale of one coin for $3 million in a private transaction.

A rare coin with a storied past, the nickel provides a glimpse at the rising value of rare U.S. coins, up at least 20% in the past two years. Experts say coin prices tend to follow the price of gold, with both rising on inflation fears. The last sale of a 1913 Liberty Head in 2001 garnered $1.8 million.

Like art, the Liberty Head V nickel represents more than a good return to collectors. Five were thought to have been minted on the sly in 1913, when the U.S. switched to the Buffalo nickel after 30 years later under a cloud of suspicion and have generated considerable intrigue ever since.

“This is arguable the most famous U.S. coin,” says John Albanese, president of Albanese Numismatics, in Far Hills, N.J., who worked as an intermediary broker for a New Orleans retailer. “I could see this being a $10 million coin someday. After all, we’re living in a world of $100 million paintings.”

The 1913 Liberty Head V five-cent piece, shown at 1.5 times its actual size; the three most expensive coins bought in U.s. sales:

The $3 million transaction is believed to be the largest ever of a U.S. coin by a retail brokerage house to a buyer. Still, the 1913 Liberty Head V isn’t the priciest U.S. coin. In 1999, an 1804 silver dollar sold for $4.14 million in an auction. Two years ago, a 1933 $20 gold piece went for $7.59 million at an auction.

A decade ago, those two coins probably would have been the only coins to have traded for more than $1 million, says Mike Sherman, vice president of the Professional Coin Grading Service in Newport Beach, Calif. Today, Mr. Sherman says, a dozen U.S. coins probably could go for that.

After peaking in the late 1980s, the market for rare coins fell off in the 1990s as investors flooded into the stock market. The coin market has gained momentum as the stock market stalled during the past several years. Investors, spooked by steep losses in the stock market, have sought to deploy assets in other, more tangible realms, such as art, coins and houses.

In some cases, recent price gains in rare coins have outpaced growth in gold prices, in part because a little buying makes a big impact in the relatively small collectible coin market, which Mr. Sherman estimates at no more than $3 billion. “It’s like a boulder falling into a bathtub,” he says, adding that investments of as little as $50 million can move the market.

But Mr. Albanese says that like art, coin collectors who manage the best returns are those who buy with investment as an afterthought. “The objective has to be building a great collection,” he says.

http://www.wsj.com

Related Stories:
Mysterious nickel has it all — including a $3 million price tag
May 20, 2004 By MARY FOSTER, The Associated Press
1913 Liberty Head PF64 sells for $3M -CNN

Market for coins not easy to predict -Denver Post
By Kristi Arellano Aldo Svaldi and Jennifer Alsever
May 19, 2004

Buyers have snapped up coins and collectibles for the past several years, driving up prices. But experts are divided on whether those red hot markets are about to cool off.

"Looking at the long-term, I don't think (a fall is) a probable outcome," said Chris Cipoletti, executive director of the American Numismatic Association in Colorado Springs. "As long as people have an interest in art, in history and in economics, there will always be an interest in numismatics. The collector mentality is not going to be tied to the stock market or what the Fed is doing."

Professional Estate Buyers Group said in advertisements that ran in Denver this week that "many experts are predicting that higher interest rates could cause dramatic declines in the prices of jewelry, coins and collectibles." The group, which is hosting a week-long buying event at the Hilton Hotel in the Denver Tech Center, suggests that people "act quickly. This may be the best time in decades to sell at some of the highest prices ever."

The majority of coins are tied to the value of the metal they contain. Metal prices influence the coin market because at the very least, coins can be melted down for the gold and silver they contain, said Jason Perry, an economist with Federal Reserve Bank of Boston.

The certified 1-ounce gold American Eagle, for example, increased in value 63 percent from late August 1999 through January of this year, according to Bloomberg. It has fallen about 10 percent in the last few weeks due to lower gold prices.

The prices of rare coins are tied to their historic value and not their metal content.

The rarer the coin, the more it is insulated from shifts in commodity prices, Perry said, and the greater return it provides over time.

FULL STORY

[ED. NOTE: WHILE PREDICTIONS ARE ALWAYS DIFFICULT ... MARKET TRENDS ARE EASIER TO SPOT, ACCORDING TO KEVIN LIPTON ..."OVERALL U.S. RARE COIN DEMAND IS UP -- at every level; wholesale, retail and auctions. I see more retail buyers at auctions shopping for value. Supply is not keeping up with demand, which will drive prices higher in 2004 and beyond."
Now read:2004 RARE COIN MARKET TRENDS - By Kevin Lipton

COMMENTARY

SOMETHING BIG IS ABOUT TO HAPPEN! -Craig R. Smith, SATC
May 17, 2004

On March 19th of this year, oil was $29 a barrel now it is $41. That is a 41% increase. FORTY-ONE PERCENT INCREASE! The street is now talking about $50 oil! The few times oil spiked over $40, it started a recession.

Something is going to give. Greenspan can't keep rates at 1% forever. Interest rates could go up 2 full points by the end of the year. How is that going to effect the game?

NO INFLATION? HA!

Nonsense! It's to an insult anyone with an I.Q over 50.

The debt, oil, the dollar, and the markets in general are getting ready to break. I took the time to read the whole transcript of the speech that Greenspan gave to a group of bankers in Chicago and he made it clear that 10 years ago you couldn't break the rules the way we have without a total meltdown of the system. His own words are that "a day of reckoning is coming". [Transcript]

We are headed for a collapse that will likely be a inflationary collapse. When this thing collapses, it ain't going to be pretty.

Greenspan's term is up in a few months. Will Bush reappoint him? Will he accept another term? The White House is trying to delay the deadline. They know rates are going up. What is that going to do to the housing market? How about variable mortgage rates?

Something is getting ready to give. Look at debt levels. Look at deficits, trade imbalances, consumer debt, record bankruptcies, record foreclosure rates and most important, oil.

THE PERFECT STORM IS COMING!

Gold is holding at the $375 level for now against incredibly powerful forces who want to move the price lower.

Videotapes of Americans getting their heads cut off and yet Congress is arguing about how we should treat the people who slaughter us and teach their children how to strap on bombs and blow themselves up and kill innocent people. It is insane and something is going to give.

The storm coming. I don't sleep anymore. I spend most of my time reading and searching for info on what is happening. One thing I know for sure - Gold and coins are going to be essential to getting through this thing financially.

The game cannot continue, as Greenspan said in his speech, without a huge "correction" in the market. It took a while for his "irrational exuberance" remarks to come to pass with the bursting of the bubble.

If the 1.5 billion Arabs decide to abandon the dollar and only accept gold as payment the market will double overnight.

Many really brilliant investors and analysts, like Richard Russell and Warren Buffet all agree. Whether it is Samuelson for Newsweek or Sean David Morton on late night radio ... Something big is going happen.

TAKE ACTION IMMEDIATELY

Please reader, take a portion of your money and put it into a product that has a stable value -- like United States gold and silver coins -- which offer PROTECTION (from inflation or deflation) PRIVACY (from the prying eyes of all) and PROFIT POTENTIAL (Some gold and silver coins are up 70-80% in the last three years). Call today, 1-800-289-2646.

Top 5 inflation fighters -Linda Stern, Reuters
May 12, 2004

WASHINGTON, May 12 (Reuters) - The Fed is getting ready to take away the punchbowl, before the recovery party gets too hot. But a cynic might say we're due for an inflation hangover anyway, because of rising federal deficits and the impending retirement of many baby boomers.

This argument holds that the only way to make good on those long-term Social-Security promises and reduce the deficit is to pay it all off with cheaper money -- and that means inflation.

Inflation can kill the best-laid savings plans. Bonds and stocks both can get walloped during periods of rapidly rising prices. Maybe that's not happening this week or next -- some economists argue that the economy is still too weak to get inflationary and that heightened global competition will keep prices under control.

But, remember the 1970s? Low growth. Newly opened international markets. Drifting and falling stock prices. ... And, inflation through the roof.

The moral: It's a good idea to keep an inflation kicker in a well-balanced portfolio. You may have missed the best bottom-priced buying opportunities, but the point of inflation protection is that you put it in your portfolio and then forget about it. Sooner or later, the time will come when you're happy you did.

Here are some investments that should do the trick, though each has its disadvantages and advantages.

FULL STORY

WHAT I EXPECT TO SEE -Jim Puplava, Financial Sense
May 14, 2004

For the average investor, the true realization of inflation will have to be experienced first hand through deflating bubbles in the stock and bond markets and in real estate.

What I expect to happen is that the Fed will try to raise interest rates, but I don't believe they will get very far before the stock market and economy begin to roll over as the stock market is now doing. Then the real panic will begin to set in and we will see the central banks reverse course and begin to reinflate.

More importantly, like Federal Reserve policy during the 70's under then Fed chairman Arthur Burns, the Fed is targeting interest rates rather than the money supply. The markets will simply adapt, if they don't blow up first. A 2% Federal Funds Rate does nothing to stop inflation. Curbing money and credit -- by raising bank reserves and raising interest rates high enough where it becomes no longer profitable to borrow money to speculate -- would curb financial credit and asset bubbles.

The only problem with this kind of policy response is that the economy and the financial markets are far more geared than when Paul Volcker applied the breaks to credit and money in the late 70s and early 80s. The financial markets could not handle the stress on account of its leverage.

That is why history shows inflating one's way out of a credit bubble has been the preferred policy of choice from Roman emperors to Prime Ministers and American Presidents.

With debt levels this high, the only policy option is to inflate or die. The other alternative is a debt-cleansing depression. Instead of a benign macro environment as the financial press would suggest, I see a malignant tumor. All of its symptoms are listed below taken from my March 1st Market WrapUp "Collision Course."

Seven Headwinds of Inflation

1. Lax monetary policy
2. Expanding government budgets
3. Rapidly rising government deficits, 5% of GDP and growing
4. A falling currency
5. War and an expanding military budget
6. Soaring oil and commodity prices (This time it's structural.)
7. Protectionism

To the seven headwinds of inflation, I would add the structural fundamentals for gold and silver.

Gold and Silver's Bright Fundamentals

1. Producer hedge book reductions and decline in central bank gold sales
2. Reflation
3. A declining U.S. dollar
4. Increased investment demand and decreasing supply
5. Low negative Interest rates
6. Volatile geopolitical storms
7. Resource scarcity

Ask Yourself...

As to the constant mantra echoed so often in the financial press that "gold is dead" or that "the macro environment is healthy" and that "central banks have inflation in check," I would ask the reader to take some time and think about it. What have you read or heard versus what you are experiencing firsthand? Do you find that you spend more money today for food and gas or utilities than you did a year ago? If you bought a home recently, has its price risen double-digits over the last few years? Are you paying more in social security, property taxes, and sales taxes this year? Are your healthcare premiums going up or down or by only 4.5% as the government now reports? Have your dentist, family physician, chiropractor, or psychiatrist raised the cost of an office visit? Did your investments keep pace with inflation in 2000, 2001, 2002, 2003, and 2004?

If you are experiencing inflation firsthand in the form of rising gas and utility bills, rising food bills, rising service costs, then why don't you own gold, silver, oil or natural gas, foreign currencies or commodity-related investments? Taking this a step further, if you have owned them, do you still own them? If you sold, why did you sell? Was it because of price? Do you believe what you hear and read in the financial and mainstream media that inflation is low or benign?

FULL STORY: IT'S TIME TO CROSS OVER

Why A Dose Of Inflation Is Good For You -NIEL KADLEC, TIME
Monday, May. 24, 2004

Something's wrong with this picture. Corporate profits are up; companies are spending again. More than a million jobs have been created since August, and economic growth should exceed 4% the rest of the year. The recovery bodes well for wages and job creation, even, at long last, for conservative savers who have been unable to find money-market yields much above 1% for several years. This is the good news we have all been waiting for. Yet Wall Street has been acting as if something were terribly wrong. Long-term interest rates are notching higher, a clear sign that some perceive the investment climate as riskier. The 10-year Treasury-bond yield hit 4.8% last Friday, up from 3.7% two months ago. Mortgage rates are jumping too. The Dow sank to its lowest level of the year last week, briefly dipping below 10,000.

The market is missing the point. Sure, the invigorated business world is producing the first whiffs of inflation since the Internet bubble, a turn that all but guarantees that the Federal Reserve will raise short-term interest rates this summer. In so doing, the Fed will bring down the curtain on a long easy-money period that has been marked by 0% car loans and giveaway mortgage rates. But for that to be bad news, rates would have to jump dramatically � and fast. A sharp spike in rates could kill the housing market, shut down business spending and slow the economy before the job recovery really takes hold. That's not likely to happen.

To be sure, once the Fed starts raising rates, you never know how far it will go. Stephen Roach, global chief economist at Morgan Stanley, says the Fed has been "irresponsible" in not boosting rates already. He is worried that a series of stiff hikes may be needed to make up for lost time. Uncertainty surrounding how far and how fast rates will rise is what has investors running for cover. But few believe the coming rate boosts will stop the recovery. Economists generally expect orderly rate increases that by the end of 2005 will have pushed the benchmark short-term Fed funds rate to about 3% from today's 1%. Such movement would "reflect healthy economic conditions and be welcome," says Hugh Johnson, chief economist at First Albany Capital. Provided that rates climb slowly, a growing economy can absorb the incremental costs because profits, income and jobs are also on the rise.

In fact, rising rates should be met with cheers, not jeers. They confirm the recovery. Companies can start raising prices, allowing them to start hiring again too. Business is so good at Pine Hall Brick Co. in Winston-Salem, N.C., that the company raised prices 3% in January -- its first increase since 2001 for face brick used in housing -- and plans a similar price increase next year. The company is doubling output at its Fairmont, Ga., plant and boosting head count 8%, to 320 workers. "We designed the plant to double capacity over three years," says president Fletcher Steele. "We're way ahead of any schedule that I would have expected."

http://www.time.com

THE PERFECT STORM -Tom Dyson and Addison Wiggin, DR
May 15, 2004

The markets are confused, the Fed is confused, we are confused. Good news is bad news - for stocks; inflation is bad news for gold and good news for the dollar; the Fed couldn't print money any faster if it was giving it away, yet there's talk of a liquidity crisis; credit has grown to levels people couldn't have conceived of 20 years ago, yet some fear a credit crunch; befuddling.

Of course, there are explanations for all these phenomena - though mostly far too complex and overly thought-out for our wine-addled brains. Sometimes you just have to go back to basics.

The Fed has been inflating its way out of a recession. In fact, the Fed has been inflating since the dollar was released from its golden anchor in 1971, at which point - for the first time since 700B.C. - no currency on the planet had any connection to gold.

We are now steaming 'full ahead' into the "perfect-storm" - as Steven Roach put it. The potential confluence of three economic weather- systems - an energy crisis, a China collapse and a Federal boob-job on the interest rate - all bearing down on the unseaworthy U.S. balance sheet, loaded with debts, derivatives and deficits, could, theoretically speaking, sink the ship.

Nobody can possibly predict how this story might end, let alone assign the correct probabilities to all the different factors. We are sailing across uncharted waters. What is clear, though, is that the U.S. dollar is in a bear market. And although we may see some prolonged rallies, and sharp, upward spikes - call them death-throes - the long-term conclusion doesn't make for pleasant reading, unless, of course, you own gold.

Gold closed the week at $377, down a couple of dollars on the week. Next week, it may go down more. Or it may go up. We don't know. The huge dollar-short position may uncoil, or it may not. The debt bubble could explode, or is it implode? We couldn't say.

The important point is that - no matter how the tragedy plays out - gold will benefit eventually.

Elsewhere, on Friday, crude oil hit another intraday all-time-high at $41.50 per barrel, as did gasoline on Thursday, touching $1.4015 a gallon.

Meanwhile, at the stock market, the Nasdaq made a new low for the year, reaching 1,878 on Wednesday. It closed at 1,904 at the end of Friday' session. It had been as low as 1,896 in mid-March, which is still well clear of the bear-market-low at 1,108, set in October 2002. The Dow closed the week at 10,013, 107 points lower than this time last Friday.

30-year 'risk-free' Treasury rates fell from 5.56% to 5.50% on Friday, but gained 4 basis points over the week. Considering that both the PPI, on Thursday, and the core CPI, on Friday, jumped unexpectedly higher, the reaction was muted, which perfectly suited the character of this baffling market.

Maybe next week, no news will be bad news.

http://www.dailyreckoning.com

Feb. 17 - The words "Social Security" showed up once in President Bush's January State of the Union address. In two clipped sentences towards the end of his speech, Bush expressed his hope that younger workers would "have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account" and that the Social Security system would transform into a "source of ownership for the American people." Republicans in the House chamber applauded. Some Democrats sat on their hands. And then the president moved on to paragraph length proposals on immigration and prescription drugs.

Across the aisle, Social Security has kept a similarly low profile. Democratic candidates deliver policy speeches on everything from agriculture to John Ashcroft but most stay mum about Social Security on the stump. Of course, frontrunner John Kerry pays lip service to protecting senior's benefits. But one could travel for days on his campaign bus before learning that the system needed any fixing at all.

This is surprising since experts in both parties are convinced that Social Security needs a dramatic overhaul, soon. Current estimates have taxpayers paying more into the system than they will receive in retirement pay by the year 2018 and the entire system rendered insolvent in the next thirty years. Even the most optimistic of politicians will admit under pressure that the large number of retiring baby boomers expecting a return on their payroll taxes could very well wreak fiscal havoc on the land. The days are dwindling before the Social Security crunch becomes a crisis but in this election year, the presidential candidates of both major parties seem reluctant to mention the problem at all.

While the candidates' reticence may not seem prudent considering the gravity of the issue, it could make a good deal of political sense. In the past decade, the politics of Social Security have undergone a tremendous transformation, leaving both parties uncertain exactly how to make it a winning issue at the polls. Republicans, who generally favor at least partial privatization of the system, are uneasy about pushing any program that seems to dramatically alter the 20th century’s most popular government program. Democrats, riddled with internal dissent on the proper course for fixing the system, have trouble distinguishing themselves as anything but defenders of the status quo. So while the Republicans and Democrats will no doubt get more specific on the entitlement program before 2004 is through, leaders in both parties are thinking very carefully about how much they say, when.

FULL STORY

Read SOCIAL INSECURITY: The Problem and Proposed Solutions

David M. Bradshaw is Editor of Real Money Perspectives, publisher of Rediscovering Gold in the 21st Century: The Complete Guide to the Next Gold Rush (7/01) and has been an economic commentator since 1987, when he produced the World Economic Perspectives radio show. In 1997, he produced a one-hour TV documentary, "Preparing Wisely for the Next Millennium," which was distributed free of charge at Blockbuster Video nationally. In 1999, he produced a one-hour radio special, "The Big Picture: The Shape of Things to Come" discussing geopolitical, economic and spiritual trends in the 21st Century. MORE...