The difference between genius and stupidity is that genius has its limits
08.09.04

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

As I have mentioned several times before in this column, Saudi Arabia is on the brink of a civil war. The last thing the United States needs right now is another conflict in the Mid East to deal with, but in the event that either the Saudi Royals lose control of the country, or al-Qaeda attacks any of the 250,000 miles of vulnerable oil pipeline that supplies a goodly portion of the world's oil supply, Americans will find their military occupying the Persian Gulf States overnight. With 25% of the world's oil at stake there is no other option.

Due to the inescapable fact that the source for terrorism funding and manpower comes mostly from Saudi Arabia and that Saudi is the major global supplier for oil, the region has become the primary focus of the administration's "War on Terror".

We have not yet seen the worst of this unfolding drama. Iraq is about to fall into the waiting hands of the militant Iranian government. Iran is becoming, or may already be, a nuclear power. The West simply cannot rule Islam. Neither the Crusaders, Attila The Hun, nor any other would be world conqueror, has ever successfully invaded the Middle East.

I believe that America's involvement in the region will eventually lead to our undoing. Militant Islam senses the futility of the Administration's quest. Hegemonic governance breeds the madness that often stretches resources to the breaking point and, as a result, drives nations to their destruction.

Financial Markets

The Silver Bear Cafe is intent in bringing you financial news and commentaries that can provide you with the information you need to make educated decisions about your financial survival.

Record-high oil prices signal new danger to the economy, as rising costs ripple into everything from floral deliveries to the production of plastic toys and orange juice.

Crude-oil costs of $50 per barrel suddenly don't seem far-fetched, not in a week that has seen costs top $44 for the first time in 21 years of government reporting.

The markets are, IMO, on the verge of a serious deflation. As I have been saying, week after week, the collapse of the market is inevitable. In spite of the Fed's reckless attempts to keep the economy inflated, the balloon is beginning to leak in more places than they can patch. Like the poor little Dutch boy who ran out of fingers to preserve the dyke, the Fed is about to lose control. The floodgates are cracking.

I see one more feeble rally this week and then the stinky stuff will come in contact with the mixmaster. Simply stated, the time is now! If you haven't gotten out yet, you are going to become another casualty of the "misinformation campaign". The truth is that your equity returns, on average, have been losers for the last year when you consider the rages of inflation, coupled with capital gains taxes and the ongoing devaluation of the dollar.

Precious Metals

Gold rose last week after the U.S. raised the terrorism alert for financial institutions in Washington, New York and New Jersey. The evidence that al-Qaeda terrorist network plans to carry out ``large- scale attacks'', have investors edgy and seeking "safe havens".

I believe Gold may continue to rise week. The pitiful jobs numbers and resulting plunge in the dollar, combined with concerns terrorists may target the Olympic Games that begin Friday in Athens, also have investors edgy. The continuing fall of the dollar makes gold cheaper for buyers using euros and yen.

Gold will react to an actual terrorist attack, the inevitability of which seems to be a given.

Gold for December delivery rose $8.40, or 2.1 percent, last week to $402.10 an ounce on the Comex division of the New York Mercantile Exchange. Prices were up 14 percent from a year earlier.

If "Bubbles" Greenspan decides to raise rates in spite of the blaring evidence of a weak economy, the dollar will probably experience a brief rally which will not help gold. I do not think that a dollar rally could be sustainable in which case the raising of rates will accomplish nothing but the further weakening of both the housing and bond markets.

Gold may add to its gains this week because a government report is expected to show a widening U.S. trade deficit, which would suggest more U.S. dollars are needed to buy the same amount of goods, reducing the value of the U.S. currency.

I still think silver is the investment opportunity of a lifetime. Due to the incredibly volatile nature of our economy and the geopolitical situation, I look for the manipulators to pull out all the stops in the days between now and the elections. Even if silver is tarnished by the onslaught of the "naked shorts", I look for a high above $8.50 to be achieved before St. Valentine's Day.

Energy

Saudi Arabia’s giant oil fields have already have peaked and will start into rapid decline in as few as three years. There’s no way — absolutely no way — to avoid a world energy cataclysm.

What does this mean for you? On the consumer side, higher prices. I see oil at $50 per barrel in the next six months. That translates into $3.00 a gallon gasoline. But gasoline is not the only thing that is affected by rising oil prices. Electricity prices will soar. Water delivery to your home will go up. Unfortunately the greatest impact will be on food prices.

The effect of Peak Oil on transportation, electricity, economic growth and contraction, political power, civilization and – perhaps most importantly – food production is one of the most disconcerting issues I have researched.

As an investor, the energy sector is one of the safer places to be. Oil companies with proven reserves will make more money. They will, in turn, pay higher dividends. The energy transportation sector is also hot. Pipeline companies will do well.

It's a good time to be in the oil refinery business. Demand for gasoline is high and profits are pouring in at a record clip. With that combination, you'd think oil companies would be falling over each other to build new refineries. Not so. There hasn't been a new refinery built in the United States in 28 years and more than 200 smaller facilities have closed.

In 1981 the country had 324 operating refineries; today there are 149. They have been running at an average of 96 percent capacity but are unable to keep up with demand. Only gasoline imports have prevented shortages and gas lines.

Perhaps the hottest emerging sector involving energy is the liquefication and transport of natural gas. Liquefied natural gas, (LNG), will become huge in the not so distant future.

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 will 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

The commodification of water has become an issue I find most disturbing. Is it possible that you could someday be charged for collecting rainwater off your roof? You would be surprised at how many trans-national companies already have stakes in water delivery in this country.

Globally, we have already entered water scarcity. The Middle East will run out of fresh water within the next ten years. Sub-Saharan Africa will run out in the next 5 years. China is considering moving the capital to another location because there is no more water in Beijing.

Closer to home, the mighty Colorado river no longer makes it to the Sea of Cortez. It trickles out somewhere in the Mexican desert south of the Arizona border. The Rio Grand, which use to flow into the Gulf of Mexico now stops some 20 miles short of Brownsville, Texas. Aquafers all over the country are being depleted far more rapidly than they can recharge themselves. We are on the verge of a national water crisis right here in America.

In the next two decades, the struggle for water will tear apart communities, exacerbate differences between social classes, and challenge governments and private organizations to change how they perceive their roles.

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.

In a world of $100/barrel water, the world's population will contract by 75%. If you go to your grocery store today, you can find $2.00 per gallon water. Thats about the same as $100 per barrel. And they said "It couldn't happen here".

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.