If we don't change course, we may end up where we are heading
07.19.04

As the editor of the Silver Bear Cafe, I spend most of my time researching current events. I explore the markets, the war, precious metals, the Federal Reserve and energy. In this weekly column I will attempt to condense the week's events and examine how the news might affect your pocketbook. JSB

On the war front

In the last tewnty-five years over 398,00 people have been killed in earthquakes.

And what about hurricanes? Just the ten deadliest hurricanes of the last century killed more than 14,000 people in our country.

Then we have plagues and epidemics. Black Death, Smallpox, Measles, Influenza and AIDS have claimed hundreds of millions of lives.

So, the events of 9/11, while tragic and spectacular, were no more than a bee sting when compared to other natural disasters. I call 9/11 a natural disaster because it was a predictable result of the forces at play in our world's political weather. There were preliminary tremors (previous Trade Tower bombing, USS Kohl, embassy bombings, etc) and there will be aftershocks. This is what happens when the tectonic plates of religion and culture and economics strain against one another.

The thing about natural disasters is that you can predict that they will happen but you can't quite predict when or where. You can have Hurricane Osama on your radar screen but you can't tell until the last moment whether he will make landfall in Miami or Hilton Head or if he will dance up the coast to Boston. But you don't make the people in Kansas and Colorado board up their windows in anticipation.

The dust hadn't settled from the collapse of the Trade Towers before the neo-cons in Washington were planning how to seize upon the event to advance their agenda. Now, two imperial wars and a head blow to our civil rights later, (The Patriot Act) we see how efficiently the current junta has been at capitalizing on the disaster.

The "War on Terror' makes about as much sense as declaring a war on earthquakes, plagues, and hurricanes. I'm sure those would be popular and honorable wars. But to relinquish our rights and freedoms, our money and the lives of our young people because we fear disaster is a pitiful way to live. And to allow commercial rapists to sodomize the world economy under the banner of fighting terrorism is an attitude worthy of sheep.

In the last half century more people have been killed by tornadoes than were killed on 9/11 and the aftermaths look much the same--rubble and bodies and dust. Perhaps we should declare War on the Weather. Tornadoes hit swiftly and without warning, like terrorists. They take innocent lives. You never know when and where they will strike. But any savvy midwesterner knows that you don't let your life be ruled by the possibility of tornadoes. You don't stop breathing when there is a cloud in the sky.

If an earthquake had tumbled the Trade Towers, we would have mourned the victims but probably wouldn't have called them heroes. We don't call the millions of AIDS victims heroes, or those eaten by tornadoes. We certainly don't use hurricanes as an excuse to go to war.

Financial Markets

Being diversified in terms of the "investment universe" also means holding assets in different jurisdictions. It only makes sense that an investor would want to hold accounts outside the U.S. I am well aware that this has become increasingly difficult, and, under pressure from the U.S. authorities, some Swiss banks are extremely reluctant to accept such accounts. (If they do accept such accounts, they must not give U.S. residents advice by telephone, fax or e-mail; therefore, almost full discretion or periodic visits may be advisable.)

Singapore is, however, a viable and safe alternative to Switzerland. Still, the fact that the U.S. authorities have made the opening of overseas accounts so difficult should serve as a warning signal of things to come.

Our economic freedoms are being systematically pilfered. if you snooze, you lose.

The NASDAQ and Dow Jones have broken down through their 50 day moving averages (not shown, but take our word for it) as well as the 200 day moving averages.  The S&P 500 also broke through its 50 day moving average and is holding just above the 200 day moving average at about 1103.  These moving average breakdowns are the next warning signs of weakness, with the breaking of the 50 day MA being the first warning signal, and the 200 day MA being even more significant.

Precious Metals

Gold. This is perhaps the most difficult market to analyze due to the fact that gold represents different things to different people. In the Eastern world gold is money while Westerners tend to view it as a "barbarous relic". I use to look at gold as a commodity but now see it as money. Unlike our own money, it cannot be devalued or belittled in any real lasting way. It has been around for five thousand years and it will be around for another five thousand years. It has survived everything, including wars, famine, inflation and deflation. Everyone can quote chapter and verse of gold's great meteoric rise in price during the 1979 - 1980 inflation but most people would be hard pressed to tell you what would transpire during a deflationary period. These are quite rare so I had to go back to the Great Depression of 1929 in order to have an idea as to what we could expect. In short. Gold did rise 65% but I'm not sure it's a fair comparison since prices were fixed by the Roosevelt Administration.

Silver Is Rarer Than Gold. That's right, Silver is indeed rarer than Gold.  As hard as it is to believe, there are roughly 300 million ounces of Silver available in the world, and over 4 billion ounces of Gold.  Yet, Gold is about 62 times more expensive than Silver today.

The key to the silver price is monetary demand. Other categories of demand alter only slowly over time due to technological or economic changes. Supply-demand imbalances in commodities can persist for a surprisingly long time without moving the price sharply. In the past decade, the price of silver has been practically flat, with a few spikes, because monetary demand has been absent. Strong, sustained silver moves occur when many people decide suddenly they want silver because it is money. Today, when stocks, currencies, bonds, and other paper assets have begun to disappoint investors, investor attitudes are shifting. What begins as a trickle ends as a tidal wave when the panic peaks. When public revulsion at the US dollar begins, the tidal wave will become a tsunami. Silver, far more volatile than gold, will benefit most.

One item of paramount importance to nearly everyone is war. According to data in the early 1980's, the U.S. military used more than 5,000 items containing silver, ranging from a naval torpedo using 4,161 ounces of silver to the smallest relays using less than 23 grams. The Defense Department has acknowledged that there are over 150 different kinds of bearings containing silver. The Defense Department also states that over 100 different kinds of batteries containing anywhere from a few grams to over 1000 ounces of silver are used in military applications. A good amount of silver is used in jets, ships, submarines, and rockets. Silver is used to provide bonding of titanium and stainless steel. In most military applications it is necessary that all equipment work accurately and reliably. Only silver enables this military hardware to meet these requirements.

I don't know how high silver must go to satisfy the mandate from the law of supply and demand. Nor do I know how silver prices will behave, once the journey begins in earnest. I am a firm believer that it won't be a normal price journey. By that I mean, it won't be two steps forward and one step back. Not only is silver going much higher, it will do so in volcanic fashion. In my opinion, Silver is currently the best investment opportunity in the history of mankind.

Energy

In 1949, the then unknown geophysicist Dr. Hubbert made the startling prediction that the "oil age" would be short-lived. He was ridiculed in 1956 when he predicted that US oil production would peak in 1970 and decline thereafter.
No one is laughing now. His predication was dead-on. Today his "Hubbert Curve" shows the peak in world production occurred between 1999 and 2002.

The peak in production is the point at which any resource becomes more valuable and expensive. Demand remains but supply falls off. Prices go through the roof. Those of you who were driving in the US in 1972-73 will vouch for the rapid changes that occurred across the board due to the decline of US oil output.

The only oil left to find is underwater. In fact, the planet's proven untapped deepwater oil reserves could more than triple in the next 20 years. The downside to this potential bonanza id that the cost of extraction will increase by a factor of five. Access to these remaining reserves are already being contested. (see; Bear Tracks; It is later than you think.

The global oil supply struggles against the forces of inevitable depletion. What's more, the global balance between supply could become quickly imbalanced if terrorist attacks disrupt supplies.

I believe that news about oil and gas will forever be entwined with news about the wars. The ever dwindling resources will be harder to find, more highly contested and higher in price. Check out the Silver Bear for news on renewable energy sources.

The Fed

For the last couple of years the Fed has quietly gone about the business of reflating the economy. They have printed more than $475 billion during the first six months of 2004 and $31.7 billion for the week ending June 28th. There's only one problem with this; it's not enough. Greenspan needs to print more. A lot more! I think he'll have to print $1 trillion dollars over the next six months just to keep the wheels on. Also, he'll have to stop raising interest rates and may even have to lower them. If he doesn't, we'll have deflation, and there's no cure for that. The last deflation we experienced came in with the 1929 Depression and we survived that, in part, because we were the world's largest creditor nation. We aren't so lucky this time around. Currently the United States is the world's largest debtor nation and a deflation would be the worst of all possible worlds as it would make debt unserviceable. Deflation destroys paper wealth (you can read this as housing) and will cause our "debt bubble" to implode. I'm sure that many of you feel that Mr. Greenspan can work some of his magic and make it all better, but I disagree. Why? It has to do with the fact that we import deflation, largely from Asia as well as from Europe to a lesser degree. It also has to do with the Internet. It's now possible to find the absolute lowest price for just about any item you want to buy and that takes away the pricing power for producers.So the Fed finds itself in a tight spot. It raised rates at the end of June, but now it must adhere to market anticipations with further hikes or run the risk of appearing impotent. That could prove to be deadly for the leveraged speculators who have been encouraged by Fed actions — and inactions — since 1996.

And higher rates may also burst the housing bubble, and unleash numerous problems for government-sponsored mortgage lenders, as well as for young, low-income and minority families who became homeowners in recent years via low down-payments and low mortgage rates.

Delinquency rates have been rising in recent years and the concern is that, since most of these low-income families have negative net-worths outside their homes, continuing layoffs will squeeze them out of the housing market. And as that lack of demand ripples up the move-up market, housing prices from top to bottom will fall in what could be a self-feeding and serious decline leading to the first nationwide drop in housing prices in the post-World War II era.

Financial Survival

Health-care costs are rising 300% faster than wages. Explaining away the impact upon the “Real Economy’s” participants is quickly becoming far less palatable to America’s Working Class. I use that term very loosely to include all Americans not feeding at the top tier of first abuser privilege granted to those with immediate access to Chairman Greenspan’s “Liquidity Trough.”

Last month import prices soared at an annual rate of 19.2%. Consumer prices had their biggest jump in 14 years this year with the latest rise at 7.2% annualized. This included a 55% surge in energy prices and a nearly 11% gain in food prices (both annualized). Excluding these, the popular core rate was obviously less but since we all eat and drive, the core rate is actually meaningless

Houses in most locations are not presently a good buy. If you can't buy a house, rent it out, and cover your costs, then it is over priced. As you already know, today, there aren't many houses out there that pass this test. In other words, it's far cheaper to rent a home than it is to buy one.

We are entering a period of civilization where the keyword is sustainability, not growth.

In a world of $100/barrel oil, the weak die and the strong survive.

Very soon, as early as next year, a lot of people here will be glad they held gold and silver

Its not what you don't know that will screw you up, it's what you know that is wrong. The spin you hear from the mainstream media is intended to mislead you. Open your eyes and face the future. If you leave your head in the sand and ignore it, you are only leaving your butt exposed for the world to kick. This all may sound like gloom and doom, but when you get a handle on what is going to happen, you will have a future filled with opportunity. Fortune favors the Informed.