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Archive for June, 2008

HYPERINFLATION SPECIAL REPORT

Banking Solvency Crisis Has Opened First Phase of Monetary Inflation

Hyperinflationary Depression Remains Likely As Early As 2010

__________

  

Overview

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.

What lies ahead will be extremely difficult and unhappy times for many. Ralph T. Foster, in his “Fiat Paper Money” (see recommended further reading at the end of this issue), closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor at Harvard and University of California Berkeley, who experienced the Weimar Republic hyperinflation:

“It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.”

This Special Report updates and expands upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, exploring: (1) the causes and background of the evolving hyperinflation and great depression; (2) why circumstances will differ from the deflationary Great Depression of the 1930s; (3) implications for politics and the financial markets; (4) considerations for individuals and businesses.

The broad outlook has not changed during the last year. More generally, though, developments in the economy and the financial markets have been in line with projections and have tended to confirm the unfolding disaster. Specifically, the current inflationary recession has gained much broader recognition, while the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding. While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar. That event is important to the shorter-term timing of the pending hyperinflation.

Regular readers may recognize text from last year’s Series, as well as material from various SGS newsletters, but such is the nature of revisions to prior material. Points that may be repeated from earlier newsletters are done so in sequence to help build the arguments explaining the unfolding crisis. Great thanks are extended to the numerous subscribers who offered ideas, questions and materials that have been incorporated in this report. 

 

Defining the Components of a Hyperinflationary Great Depression

Deflation, Inflation and Hyperinflation. Inflation generally is defined in terms of a rise in general prices due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.

In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II and in the dismembered Yugoslavia of the early 1990s.

The historical culprit generally has been the use of fiat currencies — currencies with no asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its system, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.

Foster (see recommended further reading at the end of this issue) details the history of fiat paper currencies from 11th century Szechwan, China, to date, and their consistent collapses, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.

Here are the definitions:

Deflation. A decrease in the prices of goods and services, usually tied to a contraction of money in circulation.

Inflation. An increase in the prices of goods and services, usually tied to an increase of money in circulation.

Hyperinflation: Extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency.

As discussed in the section Historical U.S. Inflation: Why Hyperinflation Instead of Deflation, the domestic economy has been through periods of both major inflation and deflation, usually tied to wars and their aftermaths. Such, however, preceded the U.S. going off the gold standard in 1933. The era of the modern fiat dollar generally has been one of persistent and slowly debilitating inflation.

Recession, Depression and Great Depression. A couple of decades back, I tried to tie down the definitional differences between a recession, depression and a great depression with the Bureau of Economic Analysis (BEA), the National Bureau of Economic Research (NBER) and a number of private economists. I found that there was no consensus on the matter, so I set some definitions that the various parties (neither formally nor officially) thought were within reason.

If you look at the plot of the level of economic activity during a downturn, you will see something that looks like a bowl, with activity recessing on the downside and recovering on the upside. The term used to describe this bowl-shaped circumstance before World War II was “depression,” while the downside portion of the cycle was called “recession.” Before World War II, all downturns simply were referred to as depressions. In the wake of the Great Depression of the 1930s, however, a euphemism was sought for future economic contractions so as to avoid evoking memories of that earlier, financially painful time.

Accordingly, a post-World War II downturn was called “recession.” Officially, the worst post-World War II recession was from November 1973 through March 1975, with a peak-to-trough contraction of 5%. Such followed the Vietnam War, Nixon’s floating of the U.S. dollar and the Oil Embargo. The double-dip recession in the early-1980s may have seen a combined contraction of roughly 6%. I contend that the current double-dip recession that began in late-2000 already is rivaling the 1980s double-dip as to depth. (See the Reporting/Market Focus of the October 2006 SGS for further detail.) Please note that the definition for “great depression” below has been revised to a contraction in excess of 25% (from 20% stated in the March 16, 2008 newsletter), in order to be consistent with the usage in last year’s Series.

Here are the definitions:

Recession:Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor such as a truckers’ strike. The NBER, which is the official arbiter of when the United States economy is in recession, attempts to refine its timing calls, on a monthly basis, through the use of economic series such as payroll employment and industrial production, and it no longer relies on the two quarters of contracting GDP rule.

Depression:A recession, where the peak-to-trough contraction in real growth exceeds 10%.

Great Depression:A depression, where the peak-to-trough contraction in real growth exceeds 25%.

On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II — as officially reported — have been recessions. Using the somewhat broader “great depression” definition of a contraction in excess of 20% (instead of 25%), the depression of 1837 to 1843 would be considered “great,” as technically would be the war-time production shut-down in 1945.

The current economic contraction is about halfway towards being classified as a “depression,” based on my definitions and GDP accounting. As the Great War became World War I with the advent of World War II, so too may the Great Depression become Great Depression I, as the current crisis reaches its full, terrible potential. As with the two world wars, what may become known as Great Depression II had its roots in Great Depression I.

 

Current Environment

Before examining how the current circumstance can evolve from an inflationary recession to a hyperinflationary depression and then great depression, it is worth defining the nature of the current economic and inflation conditions in the United States, and likely near-term developments.

Based on the regular material discussed in the SGS Newsletter, the U.S. economy is in an inflationary recession as will be reported in official statistics. Real (inflation-adjusted) fourth-quarter 2007 GDP, in July’s benchmark revision, and/or first-quarter 2008 GDP should be in contraction, with most underlying economic series showing distressed levels of activity consistent with a recession. Annual CPI inflation is at 4.0% and headed higher. Oil prices remain over $100 per barrel, weakness in the dollar is just beginning to impact the CPI, and the inflationary effects of soaring broad money growth should start to surface around mid-year. Official CPI could be running in double-digits by year-end 2008.

Net of gimmicked methodologies that have reduced CPI inflation reporting and inflated GDP reporting, the U.S. economy has been in a recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first downleg was the recession of 2001 that really began back in late-1999. Annual CPI inflation currently is running around 11.6%, again, facing further upside pressures.  

The current outlook does not exclude further bounces and dips in economic activity. As was seen during the Great Depression, in severe contractions the economy can hit bottom and then bounce briefly until it falls again, finding a new bottom. As discussed in the Depression/Great Depression section, the current economic downturn reflects a structural shift, which increasingly has constrained consumer activity during the last several decades, and which cannot be turned quickly. The current downturn, by my numbers, already is halfway to qualifying as a depression. The evolving depression quickly will move to great depression status, when the hyperinflation hits, as such will be extremely disruptive to the conduct of normal commerce.

The efforts by the federal government and the Federal Reserve to prevent a systemic collapse as a result of the banking solvency crisis has started to spike broad money growth, as measured by the SGS-Ongoing M3 measure, which currently shows a record annual growth rate of 17.3%. While the Fed has not been formally creating new money — yet — by adding to reserves, it has had the effect of creating new money by re-liquefying otherwise illiquid banks, by lending liquid assets versus illiquid assets. As a result, a number of banks have been able to resume more normal functioning, lending money and creating new money supply. As the systemic bailout proceeds, formal money creation will follow and already may be starting to show up in official accounting.

In response to the rapidly deteriorating fundamentals underlying the value of the U.S. dollar, selling of the greenback has been intense, but contained, with brief periods of stability as seen at the moment. In the near future, dollar selling should build towards an extreme, with heavy foreign investment in the dollar fleeing the U.S. currency for safety elsewhere. With the domestic financial markets and U.S. Treasuries so heavily dependent on foreign capital for liquidity, the Federal Reserve — now touted as the formal financial market stabilizer — will be forced increasingly to monetize federal debt. That process will build over time, given the federal government’s effective bankruptcy, as discussed in the section U.S. Government Cannot Cover Existing Obligations. Therein lies the ultimate basis for the pending hyperinflation.

Again, the current circumstance will evolve into a hyperinflationary depression, then great depression. Although such is not likely much before 2010, or after 2018, that financial end game for the current markets will tend to come sooner rather than later and will break with surprising speed when it hits. As discussed later, this likely will not be a deflationary environment as seen during the Great Depression.

What lies ahead for the current year will be severe enough and financially painful enough to affect the outcome of the 2008 presidential election. Historically, the concerns of the electorate have been dominated by pocketbook issues. Prior to gimmicked methodologies making the reporting of disposable personal income largely meaningless, that measure was an excellent predictor of presidential elections.

In every presidential race since 1908, in which consistent, real (inflation-adjusted) annual disposable income growth was above 3.3%, the incumbent party holding the White House won every time. When income growth was below 3.3%, the incumbent party lost every time. Again, with redefinitions to the national income accounts in the last two decades, a consistent measure of disposable income as reported by the government has disappeared. Yet, even with official reporting, the current annual growth in real disposable income is at 2.2%, well below the traditional 3.3% limit.

Accordingly, odds are quite high that the numbers for 2008 will favor an incumbent party loss, i.e. a victory for the Democrats. Where I always endeavor to keep my political persuasions separate from my analyses, for purposes of full disclosure, my background is as a conservative Republican with a libertarian bent.

What follows or coincides politically with a hyperinflationary depression offers a wide variety of possibilities, but the political status quo likely would not continue. Times would be financially painful enough to encourage the development of a third party that could move the Republicans or Democrats to third-party status in the 2010 mid-term or 2012 presidential elections.

 

Historical U.S. Inflation: Why Hyperinflation Instead of Deflation

Fire and Ice

Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

– Robert Frost

As to the fate of the developing U.S. great depression, it will encompass the fire of a hyperinflation, instead of the ice of deflation seen in the major U.S. depressions prior to World War II. What promises hyperinflation this time is the lack monetary discipline formerly imposed on the system by the gold standard, and a Federal Reserve dedicated to preventing a collapse in the money supply and the implosion of the still, extremely over-leveraged domestic financial system.

The accompanying two graphs measure the level of consumer prices since 1665 in the American Colonies and later the United States. The first graph shows what appears to be a fairly stable level of prices up to the founding of the Federal Reserve in 1913 (began activity in 1914) and Franklin Roosevelt’s abandoning of the gold standard in 1933. Then, inflation takes off in a manner not seen in the prior 250 years, and at an exponential rate when viewed using the SGS-Alternate Measure of Consumer Prices in the last several decades. The price levels shown prior to 1913 were constructed by Robert Sahr of Oregon State University. Price levels since 1913 either are Bureau of Labor Statistics (BLS) or SGS based, as indicated.

The magnitude of the increase in price levels in the last 50 years or so, however, visually masks in the first graph the inflation volatility of the earlier years. That volatility becomes evident in the second graph, with inflation history shown only through 1960.

What is shown in the second graph is that up through the Great Depression, regular periods of inflation — usually seen around wars — have been offset by periods of deflation. Particular inflation spikes can be seen at the time of the American Revolution, the War of 1812, the Civil War, World War I and World War II.

 

The inflation peaks and the ensuing post-war depressions and deflationary periods tied to the War of 1812, the Civil War and World War I show close to 60-year cycles, which is part of the reason some economists and analysts have been expecting a deflationary depression in the current period. There is some reason behind 30- and 60-year financial and business cycles, as the average difference in generations in the U.S. is 30 years, going back to the 1600s. Accordingly, it seems to take two generations to forget and repeat the mistakes of one’s grandparents. Similar reasoning accounts for other cycles that tend to run in multiples of 30 years.

Aside from minor average annual price level declines in 1944 and 1955, the United States has not seen a deflationary period in consumer prices since before World War II. The reason for this is the same as to why there has not been a formal depression since before World War II: the abandonment of the gold standard and recognition by the Federal Reserve of the impact of monetary policy — free of gold-standard system restraints — on the economy.

The gold standard was a system that automatically imposed and maintained monetary discipline. Excesses in one period would be followed by a flight of gold from the system and a resulting contraction in the money supply, economic activity and prices.

Faced with the Great Depression, and unable to stimulate the economy, partially due to the monetary discipline imposed by the gold standard, Franklin Roosevelt used those issues as an excuse to abandon gold and to adopt close to a fully fiat currency under the auspices of what I call the debt standard, where the government effectively could print and spend whatever money it wanted to.

 

Roosevelt’s actions were against the backdrop of the banking system being in a state of collapse. The Fed stood by twiddling its thumbs as banks failed and the money supply imploded. A depression collapsed into the Great Depression, with intensified price deflation. Importantly, a sharp decline in broad money supply is a prerequisite to goods and services price deflation. Messrs Greenspan and Bernanke are students of the Great Depression period. As did Mr. Greenspan before him, “Helicopter Ben” has vowed not to allow a repeat of the 1930s money supply collapse.

Federal Reserve Chairman Ben Bernanke picked up his various helicopter nicknames and references as the result of 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.” The phrase that the now-Fed Chairman Bernanke likely wishes he had not used was a reference to “Milton Friedman’s famous ‘helicopter drop’ of money.”

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 …” As a quick point of clarification, Mr. Bernanke’s actions to address the current banking system’s solvency issues are still in the preventative phase. The money supply is not in collapse, and the Fed has not started dropping cash from helicopters, yet, but the choppers are in the air and remain at the ready.

As expounded upon by Mr. Bernanke, “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 full text of then-Fed Governor Bernanke’s remarks can be found at: http://federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm.

Where Franklin Roosevelt abandoned the gold standard and its financial discipline for the debt standard, eleven successive administrations have pushed the debt standard to the limits of its viability, as seen now in the ongoing threat of possible systemic collapse. The effect of these policies has been a slow-motion destruction of the U.S. dollar’s purchasing power, as seen in the accompanying table, since the gold standard was abandoned in 1933.

Loss of U.S. Dollar Purchasing Power through March 2008
                                   ----Since January of ----
            Versus:                1914      1933      1970
             Swiss franc           -80.4%    -80.4%    -76.5%
             CPI-U                 -95.1%    -94.0%    -82.3%
             Gold                  -97.9%    -97.9%    -93.4%
             SGS-Alternate CPI     -98.2%    -97.8%    -93.6%
            Note: Gold and Swiss franc values were held constant
            by the gold standard versus coins in 1914 and 1933.
            Sources: Shadow Government Statistics, Federal Reserve,

As discussed in the next section, the limits to the unlimited abuse of the debt standard are particularly evident in the GAAP-based financial statements of the U.S. government, which show the actual federal deficit at $4.0-plus trillion for 2007, alone, with total federal obligations standing at $62.6 trillion. With no ability to honor these obligations, the government effectively is bankrupt.

At such debt levels, the markets soon will recoil from lending Uncle Sam whatever he needs. Major buyers of U.S. Treasuries from outside the United States, including a number of central banks, already are balking. These investors have funded nearly all net U.S. Treasury debt issuance of the last five years, putting to use the excess dollars flushed into the global markets by the United States’ excessive and ever-expanding trade deficit. This practice, however, generated liquidity for the U.S. markets that has helped to depress long-term Treasury yields as well as to boost equity prices, in general.

Although the U.S, government faces ultimate insolvency, it has the same way out taken by most countries faced with bankruptcy. It can print whatever money it needs to create, in order to meet its obligations. The effect of such action is a runaway inflation — a hyperinflation — with a resulting, effective full debasement of the U.S. dollar, the world’s reserve currency. The magnitude of the loss of the U.S. dollar’s purchasing power in the last 75 years now has the potential of being replicated within a few days or weeks. 

In the present environment, the chances for the collapse in money supply needed to generate a consumer price deflation are nil. First, the discipline of the gold standard that helped trigger historical deflations is gone. Second, both from the standpoint of the government’s fiscal irresponsibility and from the Fed’s standpoint of providing the financial system with whatever liquidity is needed to keep it afloat, the U.S. central bank already is pushing broad money growth to new extremes, not containing it.

Shown in the next four graphs are powerful fundamentals that either drive U.S. inflation or reflect market expectations of the longer-term domestic inflation outlook. Oil prices are near historic highs, the dollar is near historic lows, and money growth is at an all-time. The near-term outlook for all three series is for new record levels and for extremely strong upside pressure on U.S. inflation. Accordingly, gold prices should continue moving higher, setting new historic highs.  

 

 

  

U.S. Government Cannot Cover Existing Obligations

The U.S. Treasury publishes annual financial statements of the United States Government, prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by Treasury Secretary Paulson.

The statements show that the federal government’s annual fiscal deficit, far from being officially in the low hundreds of billions of dollar — although 2008 numbers rapidly are moving towards the $500 billion mark — is careening wildly out of control, averaging $4.6 trillion dollars per year for the six years through 2007. The difference is in accounting for the net present value, and year-to-year changes in same, for unfunded Social Security and Medicare liabilities.

The government’s finances not only are out of control, but the actual deficit is not containable. Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than for Social Security and Medicare obligations, the government still would be showing an annual deficit.

The results summarized in the following table show the various deficit/debt/obligation measures. The official GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare is estimated at more than $4.0 trillion in 2007 versus $4.6 trillion in 2006. The 2007 estimate is based on a consistent year-to-year accounting basis.

Further, contrary to the suggestion of Treasury Secretary Paulson — aside from a weakening economic outlook discussed in the next section — if the annual deficit is beyond containment through standard fiscal actions, then the United States has no way to grow out of this shortfall.

 

U.S. Government - Alternate Fiscal Deficit and Debt
                    Reported by U.S. Treasury
       Dollars are either billions or trillions, as indicated.
        Sources: U.S. Treasury, Shadow Government Statistics.
                                                               Total
        Formal      GAAP      GAAP       GAAP                 Federal
        Cash-      Ex-SS    With SS     Federal     Gross     Obilga-
Fiscal  Based       Etc.      Etc.     Negative    Federal    tions(2)
Year   Deficit    Deficit   Deficit    Net Worth     Debt      (GAAP)
(1)    ($Bil)     ($Bil)    ($Tril)    ($Tril)     ($Tril)    ($Tril)
-----  ------     ------     ------     ------      ------     ------
2007   $162.8     $275.5      $4.0(3)   $57.1       $9.0       $62.6
2006    248.2      449.5       4.6       53.1        8.5        58.2
2005    318.5      760.2       3.5       48.5        7.9        53.3
2004    412.3      615.6      11.0(4)    45.0        7.4        49.5
2003    374.8      667.6       3.0       34.0        6.8        39.1
2002    157.8      364.5       1.5       31.0        6.2        35.4
(1) Fiscal year ended September 30th. (2) Revised to include gross
federal debt, not just "public" debt. (3) On a consistent reporting
basis, net of one-time changes in actuarial assumptions and
accounting, SGS estimates that the GAAP-based deficit for 2007
topped $4 trillion, instead of the gimmicked $1.2 trillion.
(4) SGS estimates $3.4 trillion, excluding one-time unfunded setup
costs of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (enacted December 2003). Link to the 2007
statements: http://fms.treas.gov/fr/07frusg/07frusg.pdf

The GAAP-accounting is what a U.S. corporation would have to show. The Administration’s rationale as to why Social Security and Medicare should remain off balance sheet runs along the lines that the government always has the option of changing the Social Security and Medicare programs. That said, there clearly is no one in political Washington willing to go public with the concept of eliminating or substantially cutting those programs. Such includes the prospective presidential candidates.  

Consider that given the current financial condition of the government, various politicians are pushing ever further for expensive cradle-to-grave programs for the electorate, ranging from national health insurance to bailouts of mortgaged homeowners at risk of foreclosure. With no full funding available for any new programs, the government again is showing its willingness to spend whatever money it has to create. The intent going forward is inflation — hyperinflation. This circumstance has evolved with the full knowledge of political Washington and the Federal Reserve.

 

As shown in the above graph, U.S. federal obligations are so huge versus the national GDP that the country’s finances look more like those of a banana republic than the world’s premiere financial power and home to the world’s primary reserve currency, the U.S. dollar.

If not for the special position the United States holds in the world, its debt — U.S. Treasuries — likely would be rated as below investment grade, instead of triple-A. Moody’s has even hinted at a longer-term downgrade on Treasury securities. While a three-month Treasury bill should be safe, I would not want to bet on receiving full value on a 10-year Treasury note or 30-year Treasury bond.

Yet, as shown in the following two graphs, most U.S. Treasury issuance has been purchased by investors outside the United States. Not only have these investors been taking a hit in terms of the value of the U.S. dollar, but also they face meaningful default/devaluation risk in the future. It is only a matter of time before this accommodation of foreign investors shifts to flight to safety outside the greenback, and therein will develop the early pressures for the Fed to start becoming the lender of last resort to the federal government.

 

 

 

Depression/Great Depression

The U.S. economy is in a deepening structural change that has resulted from U.S. trade policies that have driven the U.S. manufacturing base offshore. As a result, a large number of related, high paying jobs have been lost to U.S. workers.

As shown in the accompanying graphs, as the U.S. trade deficit has risen to the highest level for any country in history, U.S. average weekly earnings, adjusted for inflation, have fallen. Even using official CPI for deflation, current real earnings are below their peak back in the 1970s. Adjusted for the SGS-Alternate CPI measure, real earnings have been falling since the early 1980s. Also shown are real median incomes for U.S. males versus females, showing declines in recent years, per official government data.

The effect of this structural change has been that most consumers have been unable to sustain adequate income growth beyond the rate of inflation, unable to maintain their standard of living. The only way that personal consumption — the dominant component of GDP — can grow in such a circumstance is for the consumer to take on new debt or to liquidate savings. Both those factors are short-lived and have reached untenable extremes. Debt expansion and savings liquidation both were encouraged by the investment bubbles created by Alan Greenspan; he knew that economic growth could not be had otherwise. Part of what is happening today is payback for those policies. 

This circumstance places both the federal government and the Federal Reserve in untenable positions, where they cannot easily or rapidly address the underlying problems, even if standard economic stimuli were available. From the standpoint of the federal government, traditional fiscal stimulus in the form of tax cuts or increased federal spending have reached their practical limits, with the actual annual budget deficit running out of control at $4.0-plus trillion per year.

From the Fed’s standpoint, it can neither stimulate the economy nor contain inflation. Lowering rates has done little to stimulate the structurally-impaired economy, and raising rates may become necessary in defense of the dollar. Similarly, raising rates will do little to contain a non-demand driven inflation, such as seen in the current circumstance that is so heavily affected by high oil prices.

By the time hyperinflation kicks in, the economy already should be in depression, and the hyperinflation quickly should pull the economy into a great depression. Uncontained inflation is likely to bring normal commercial activity to a halt. Such is consistent with the final graph in this group, which shows household income dispersion at historic highs.

The greater the variance in income, the more negative are the longer term economic implications. A person earning $100,000,000 per year is not going to buy that many more automobiles that someone earning $100,000 per year. The stronger the middle class is, generally the stronger the economy will be. Extremes in income variance usually are followed by financial panics and economic depressions. U.S. Income variance today is higher than it was coming into 1929, and it is nearly double that of any other “advanced” economy. 

 

Hyperinflationary Great Depression

In the United States, the printing presses have not been revved up heavily, yet, but the commitments are in place, as seen in the annual GAAP-based deficit running on average more $4.0 trillion per year. That amount is far beyond the ability of the government to tax or the political willingness of the government to cut entitlement spending. While the inevitable inflationary collapse, based solely on these funding needs, could be pushed well into the next decade, actions already taken likely have set the stage for a much earlier crisis.

The current systemic bailout being worked at all costs by the Federal Reserve and the U.S. government, as well as earlier efforts by the Fed to buy time, have made the circumstance worse. Pushing recent Treasury funding needs on foreign investors — stuck with excess dollars from the ever-expanding U.S. trade deficit — has created a huge dollar overhang in the markets that already has started to crumble. The more the crisis has been pushed into the future, the greater the potential for pending calamity has become.

Milton Friedman and Anna Jacobson Schwartz noted in their classic A Monetary History of the United States that the early stages of the Weimar Republic hyperinflation were accompanied by a huge influx of foreign capital, much as had happened during the U.S. Civil War. The speculative influx of capital into the U.S. at the time of the Civil War inflation helped to stabilize the system, as the recent foreign capital influx to the United States has helped stabilize the equity and credit markets of recent years. Following the Civil War, however, the underlying economy had significant untapped potential and was able to generate strong, real economic activity that covered the spending excesses of the war.

Post-World War I Germany was a different matter, where the country was financially and economically depleted as a penalty for losing the war. Here, after initial benefit, the influx of foreign capital helped to destabilize the system. “As the mark depreciated, foreigners at first were persuaded that it would subsequently appreciate and so bought a large volume of mark assets …” Such boosted the foreign exchange value of the German mark and the value of German assets. “As the German inflation went on, expectations were reversed, the inflow of capital was replaced by an outflow, and the mark depreciated more rapidly … (Friedman p. 76).”

The Weimar circumstance is closer to the current U.S. circumstance, although, in certain aspects, the current situation is worse. Unlike the untapped economic potential of the United States 140 years ago, today’s U.S. economy is languishing in the structural problems of the loss of its manufacturing base and a shift of domestic wealth offshore.

In the early 1920s, foreign investors were not propping up the world’s reserve currency in an effort to prevent a global financial collapse, knowing in advance that they were doomed to take a large hit on their investments in Germany. In today’s environment, both central bank and major private investors know that the dollar is going to be a losing proposition. They either expect and/or hope that they can get out of the dollar in time to lock in their profits, or, primarily in the case of the central banks, that they can forestall the ultimate global economic crisis.

It is this environment that leaves the U.S. dollar open to potentially such a rapid and massive decline, and dumping of U.S. Treasuries, that the Federal Reserve would be forced to monetize significant sums of Treasury debt, triggering the early phases of a monetary inflation. In this environment annual multi-trillion dollar deficits rapidly would feed into a vicious, self-feeding cycle of currency debasement and hyperinflation.

Lack of Physical Cash. The United States in a hyperinflation would experience the quick disappearance of cash as we know it. Shy of the rapid introduction of a new currency and/or the highly problematic adaptation of the current electronic commerce system to new pricing realities, a barter system is the most likely circumstance to evolve for regular commerce. Such would make much of the current electronic commerce system useless and add to what would become an ongoing economic implosion.

Some years back, I happened to be in San Francisco, having dinner with a former regional Federal Reserve Bank president and the chief economist for a large Midwestern bank. Market rumors that day had been that there was a run on a major bank in the City by the Bay. So I queried the regional Fed president as to what would be happening if the rumors were true.

He had had some personal experience with a run on banks in his region and explained how the Fed had a special team designed to handle such a crisis. The biggest problem he had had was getting adequate cash to the troubled banks to cover depositors, having to fly cash in by helicopters to meet the local cash flow needs.

The troubled bank in San Francisco, however, was much larger than the example cited, and the former Fed bank president speculated that there was not enough cash in the vaults of the regional Federal Reserve Bank, let alone the entire Federal Reserve System, to cover a true run on deposits at the major bank.

Therein lies an early problem for a system headed into hyperinflation: adequate currency. Where the Fed may hold roughly $210 billion in currency (sharply increased in the last year) outside of $50 billion in commercial bank vault cash, the bulk of roughly $780 billion in currency outside the banks is not in the United States. Back in 2000, the Fed estimated that 50% to 70% of U.S. dollar cash was outside the system. That number probably is higher today, with perhaps as little as $200 billion in physical cash in circulation in the United States, or roughly 1.5% of M3.

The rest of the dollars are used elsewhere in the world as a store of wealth, or as an alternate currency free of the woes of unstable domestic financial conditions. In Zimbabwe, for example, where something akin to hyperinflation is underway, U.S. dollars are used to maintain some semblance of economic activity, where wages and salaries seriously lag inflation, and goods often are available only on the black market.

Given the extremely rapid debasement of the larger denomination notes, with limited physical cash in the system, existing currency would disappear quickly as a hyperinflation broke.

For the system to continuing functioning in anything close to a normal manner, the government would have to produce rapidly an extraordinary amount of new cash, and electronic commerce would have to be able to adjust to rapidly changing prices.

In terms of cash, new bills of much higher denominations would be needed, but production lead time is a problem. Conspiracy theories of recent years have suggested the U.S. Government already has printed a new currency of red-colored bills, intended for some dual internal and external U.S. dollar system. If such indeed were the case, then there might be a store of “new dollars” that could be released at a 1-to-1,000,000 ratio, or whatever ratio was needed to make the new currency meaningful, but such would not resolve any long-term problems, unless it were part of an overall restructuring of the domestic and global financial and currency systems.

From a practical standpoint, however, currency would disappear, at least for a period of time in the early period of a hyperinflation.

Where the vast bulk of today’s money is not physical, but electronic, however, chances of the system adapting here are virtually nil. Think of the time, work and effort that went into preparing computer systems for Y2K, or even problems with the recent early shift to daylight savings time. Systems would have to be adjusted for variable, rather than fixed pricing, credit card lines would need to be expanded daily, the number of digits used in tallying dollar-denominated transactions would need to be expanded sharply.

While I have been advised that a number of businesses have accounting software that can handle any number of digits, I also noted on a recent cross-country trip that a large number of gas stations have older pumps that cannot register more than two digits’ worth of dollars in their totals or more than $9.99 per gallon of gas.

From a practical standpoint, the electronic quasi-cashless society of today also would shut down early in a hyperinflation. Unfortunately, this circumstance rapidly would exacerbate an ongoing economic collapse.  

Barter System. With standard currency and electronic payment systems non-functional, commerce quickly would devolve into black markets for goods and services and a barter system.

Unlike Zimbabwe, the United States does not have widely available, for circulation, a back-up reserve currency for use in place of a highly-inflated domestic currency. The alternative here is in the traditional monetary precious metals. Gold and silver both are likely to retain real value and would be exchangeable for goods and services. Silver would help provide smaller change for less costly transactions.

Other items that would be highly barterable would include bottles of a good scotch or wine, or canned goods, for example. Similar items that have a long shelf life can be stocked in advance of the problem, and otherwise would be consumable if the terrible inflation never came. Separately, individuals, such as doctors and carpenters, who provide broadly useable services, would have a service to barter.

A note of caution was raised once by one of my old economics professors, who had spent part of his childhood living in a barter economy. He told a story of how his father had traded a shirt for a can of sardines. The father decided to open the can and eat the sardines, but he found the sardines had gone bad. Nonetheless, the canned sardines had taken on a monetary value.

Reserves of the Necessities of Life. Howard J. Ruff, who has been writing about these problems and issues since Nixon closed the Gold window, rightly argues that it will take some time for a barter system to be established, and suggests that individuals should build up a six-month store of goods to cover themselves and their families in the difficult times. Mr. Ruff covers this and many other excellent fundamentals in his new book How to Prosper During the Coming Bad Years in the 21st Century (see recommended further reading at the end of this report).

Financial Hedges. During these times, safety and liquidity remain key concerns for investments, as investors look to preserve their assets and wealth through what are going to be close to the most difficult of times.

In such a circumstance, gold and silver would be primary hedging tools that would retain real value and also be portable in the event of possible civil turmoil. Also, at some point, the failure of the world’s primary reserve currency will lead to the structuring of a new global currency system. I would not be surprised to find gold as part of the new system, structured in there in an effort to sell the system to the public.

Real estate also would provide a basic hedge, but it lacks the portability and liquidity of gold. Having some funds invested offshore — outside of the U.S. dollar — would be a plus in circumstances where the government might impose currency or capital controls.

While equities do provide something of an inflation hedge — revenues and profits get expressed in current dollars — they also reflect underlying economic and political fundamentals. I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period. Where all stocks are tied to a certain extent to the broad market — to the way investors are valuing equities — such a large hit on the broad market will tend to have a dampening effect on nearly all equity prices, irrespective of the quality of a given company or a given industry.  

Other Issues. A hyperinflationary depression would be extremely disruptive to the lives, businesses and economic welfare of most individuals. Such severe economic pain could lead to extreme political change and/or civil unrest. What has been discussed here still has not been a comprehensive overview of all possible issues, but rather at least has raised some questions and touched upon some likely consequences. No one can figure out better than you the peculiarities of this circumstance and how you and/or your business might be affected. Using common sense is about the best advice I can give.

God Bless;

 

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No surprise from the Fed yesterday. Their feeble statements about inflation just prove what I’ve said all along: When considering deflation or inflation, the Federal Reserve will always opt for the lesser of the two evils, inflation!

Nevertheless, many of the so-called experts on Wall Street seem to think that oil and gas prices can’t go any higher … that China’s raising its domestic energy prices will kill demand … that the bull market in natural resources and the jumps in inflation are over.

I believe they are wrong. Dead wrong.

Why? All of my experience … all of my indicators … all of my proprietary cyclical and technical models tell me oil and gas prices are headed much higher … natural resources are going to double … triple and even quadruple … and that inflation has just started to break out to the upside.

Today, I’ll provide you with an update on inflation.

But first, let me give you …

Five Reasons Oil and Gas Prices
Are Headed Even Higher

FIRST, the price of oil is holding firm near record highs despite seemingly bearish news that China raised its retail energy prices and Saudi Arabia would increase its oil production.

When a market fails to decline on bearish news, that’s extremely bullish. It’s anecdotal evidence of the power of the bull market in energy, and it’s also clearly visible on the charts.

Take a look …

Massive Uptrend

See that massive uptrend that started in late 2007 … and was reaffirmed in early 2008? That’s a short-term uptrend that is about as powerful as they come.

Moreover, the price of oil is now higher than it was when home prices peaked and the mortgage crisis started … higher than it was when Hurricane Katrina made landfall … higher than it was when Bush released some of the Strategic Petroleum Reserves, and more.

Plus, the price of oil — even if it dips — will probably find strong support at the $110 level!

That’s one of the most powerful bull markets I’ve ever seen on the charts, and in all my studies of various indicators.

That’s not to say there won’t be pullbacks. There will be. And some will be sharp. But this bull market has plenty of power left.

Indeed …

SECOND, nothing has changed to alter the exploding demand that underlies rising oil and gas prices.

It’s certainly true that here in the U.S. everyone is talking about high energy prices. And $4-plus gas at the pump is causing many people, myself included, to make some driving and behavioral changes to reduce energy consumption. But let’s take a look at the big picture …

Over the past two years, demand for oil has grown at TWICE the average annual pace of the last decade.

According to the International Energy Agency (IEA), demand continues to rise faster than in any year since 1976!

Moreover, the IEA says developing countries could push demand up more than 40% from 86 million to 121 million barrels a day by 2030.

India's launch of the world's cheapest car has caused auto sales to explode across the nation of 1.1 billion people. Car penetration in India is just nine percent as compared to 89% in the U.S.
India’s launch of the world’s cheapest car has caused auto sales to explode across the nation of 1.1 billion people. Car penetration in India is just nine percent as compared to 89% in the U.S.

India’s oil consumption is expected to rise by nearly 30% over the next five years.

In China, oil consumption is expected to double over the next 15 years to more than 10 million barrels a day.

Speaking of China; what about the government raising its domestic retail oil and gas prices by as much as 18%? Shouldn’t that be bearish and quell demand in China?

Heck no! Beijing has raised oil and gas prices SIXTEEN times since the beginning of 2005. Did any of those price hikes hurt demand? Not one bit.

Plus, Chinese citizens are quickly learning that prices can and will rise, even in a state-run and subsidized economy. That will induce inflationary behavior, and become self-fulfilling — as consumers in China begin to buy in anticipation of even higher prices.

Are any of the above bearish for oil and gas prices? Hardly.

Bullish? You bet they are!

THIRD, there simply isn’t enough oil on the planet to meet demand. The facts …

  • 90% of all known reserves in the world are now already in production.

  • Among these reserves, 80% are in their depletion phase.

  • 10% of all oil production comes from just four large oil fields while 80% comes from older fields discovered BEFORE 1970.

Bullish? You better believe it!

FOURTH, underinvestment in refineries has not changed one iota even in the last few years.

In fact, not one new refinery has been built since 1976. Moreover, in the last quarter-century the number of refineries has plummeted by more than 50%!

I fault the oil companies for that. The bureaucrats who take so long to approve the necessary permits are also to blame.

These four factors alone provide all of the ingredients needed for an ongoing, massive, long-term boom in energy prices. But on top of these, we also have what I call …

The Fifth Dimension — possible supply disruptions caused by …

  • War in the Persian Gulf, the largest source of oil reserves on the planet …

  • Terrorist attacks, which may very well target mission-critical oil facilities …

  • Hurricanes …

  • Other man-made and natural disasters that no one can possibly predict …

Investors should never bet on the Fifth Dimension. No person in their right mind would ever plan an investment strategy based on such events — let alone get into the irrational position of actually hoping for such an event.

But that doesn’t mean these events can’t happen. As such, they are a very real possibility and need to be considered.

All this shows you just how bullish the fundamentals are for oil and gas prices … why I remain bullish … and why I believe every portfolio should have an allocation to energy investments.

Now, let me give you a rather shocking update on inflation …

I estimate that the true rate of consumer inflation
in the U.S. is running between 8% and 10% right now!

Years ago when I predicted double-digit inflation would return to the U.S. no one listened to me. Most told me I was nuts. And still today, almost everyone tells me I’m crazy when I say inflation will go much higher.

Soaring inflation across America and around the world is emptying consumers' wallets.
Soaring inflation across America and around the world is emptying consumers’ wallets.

But what they don’t understand is this: When there is no gold standard backing the monetary system, central bankers are free to print money at will … and stir up inflation by DEFLATING the value of your money. It’s all in the name of covering up bad fiscal spending, reckless corporate behaviors, bad credit decisions by lenders and borrowers … bad debts, you name it.

Understand this one fact of today’s monetary system — and you will be several giant steps ahead of the majority of investors, protecting your money and profiting from the actions of those in charge of the monetary system.

My forecast: Real inflation, not to be confused with the government’s loony CPI figures, will likely climb to at least 20% before central bankers get serious about it.

And that’s just a conservative, broad-based inflation figure. The price hikes you will see in individual items will be much more dramatic, though they will roll from one commodity to another, playing hop-scotch with each other.

For instance, right now my models show the following commodities are about to take off like a rocket, while others go into a sideways trading mode …

  • Sugar, about to explode higher, and already up some 34% in the past two weeks, through June 20.

  • Cocoa, exploding higher NOW, hitting a 28-year high two weeks ago.

  • Coffee prices are about to take off and could reach new record highs in the next six months.

  • Cattle and hog prices: Forming a base now, will likely double in the next 12 months.

  • Cotton: About to make another new run to the upside, and new record highs above the $1.21 per pound level.

So, will inflation abate if the Fed continues to talk tough, or even raises interest rates? Don’t bet on it.

Best wishes,

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I hear that along with Peak Oil, the world is now hitting Peak Fertilizer. Well, there’s enough BS being spread about the oil crisis that it could solve our fertilizer problem in a jiffy.

Much of it is — no surprise — coming from Washington. Another load of bull is coming from our so-called “friends” in the Middle East. Even corporate America, where you might expect common sense to hold some sway, is busy shoveling misinformation. As a result, many investors are left neck-deep, choking, and grasping for a lifeline.

The good news is that I do have solutions for you. More on that in a little bit.

First, I want to start with some Peak Oil truths, half-truths, outright lies, and the dire consequences that are coming due if we don’t get on the stick soon.

Truth: America consumes 25% of the
world’s oil (20.5 million barrels per day),
but has 3% of the world’s oil resources.

Right now, we pump 7% of the world’s production (in other words, we are depleting our resources faster than other parts of the world). But we don’t have enough oil to meet our own needs — we cannot drill our way out of this.

But here’s some good news: Although the U.S. is the biggest consumer of oil, the U.S. represents only 4.8% of the world’s population. That means we have plenty of room to save oil by pushing conservation.

Truth: The Saudis aren’t our friends.

Despite their recent assurance to raise oil production to record levels within weeks, Saudi Arabia has effectively used propaganda methods for decades to convince governments, corporations and individuals to believe their statements.
Despite their recent assurance to raise oil production to record levels within weeks, Saudi Arabia has effectively used propaganda methods for decades to convince governments, corporations and individuals to believe their statements.

The market is grateful because the Saudis are talking about boosting production by 200,000 barrels per day on top of a 300,000 barrel per day hike in May. But this is just bringing Saudi production back to the level it was at in 2006. Why did the Saudis cut production in the first place? Because they want higher oil prices!

OPEC production cuts, rebel attacks in Nigeria, mismanagement in Venezuela and the crashing of production in Mexico have all removed about a million barrels a day from the global market. The Saudi hike barely makes up for half that. With friends like that, who needs enemies?

And while the Saudis say they are raising production …

Truth: OPEC exports will probably FALL in July.

According to Britain-based tanker tracker Oil Movements, OPEC crude oil shipments are projected to fall by 230,000 barrels a day to a total 24.59 million barrels a day in the four-week period to July 5.

The biggest drop is in the Middle East. Shipments from key Middle Eastern OPEC producers are projected to decrease by 350,000 barrels a day to 17.63 million barrels a day.

Oil Movements forecasts OPEC exports based on spot and term chartering of crude oil from OPEC member countries.

So how does this jibe with Saudi Arabia’s promise of more production? Answer: It doesn’t! But then, a promise made isn’t always a promise kept.

Truth: America isn’t in the driver’s seat
when it comes to global oil prices.

Global energy consumption increased by 2.4% in 2007 on top of a 2.7% increase in 2006. U.S. energy consumption was flat, while Chinese consumption rose by 7.7%. This year, emerging markets combined (China, India, Russia and their other “life in the fast lane” buddies) will pass the U.S. in oil use. Going forward, global oil consumption is expected to keep climbing even as U.S. consumption eases. After all …

  • Americans each use 25 barrels of oil per year.

  • The Chinese each use 2 barrels of oil per year.

  • And the folks in India each use just 1 barrel of oil per year.

Where do you think the growth is going to come from? The rest of the world wants to live and drive like Americans!

Annual World Oil Consumption

So with China in the driver’s seat and India close behind, the U.S. can’t do much to influence prices unless it cuts consumption sharply.

Truth: Refineries are the biggest bottleneck.

The kind of oil U.S. refineries like to turn into gasoline is called light, sweet crude. Light sweet crude is in short supply, especially with the Nigerian oil fields under siege by rebels. But Saudi Arabia and other Middle East countries actually have excess “heavy, sour” crude that is not easily turned into gasoline by most refineries. Iran’s state-owned National Iranian Oil Co has been unable to sell about 25 million barrels of crude stored in 14 oil tankers anchored in the Arabian Gulf, even though the price on that heavy oil is discounted by up to $13 a barrel!

Refineries in the U.S. are running at less than 90% of capacity. The culprits: Poor maintenance, reduced productivity of workers, no new technology, and more. And oil companies aren’t exactly eager to spend $7 billion to $10 billion and 5 years building new refineries that could handle heavy, sour crude if we’re on a collision course with peak oil.

Truth: There aren’t enough drilling
rigs or ships to exploit the deep-water
fields in the Gulf of Mexico.

The world’s existing drill-ships are booked solid for the next five years.

And that shortage should continue. Transocean, the world’s largest drilling company, is building nine new deepwater rigs, and eight of them are already under contracts that run from four to seven years — even before they leave the shipyards!

Those drill ships are designed to plumb the depths of deepwater oil fields, those below more than 1,000 feet of water that represent one of the final frontiers of oil prospecting. In fact, some of the best prospects are in so-called ultra-deepwater fields beyond 5,000-foot depths. Thanks to the shortage, drilling costs for some of the newest deepwater rigs in the Gulf of Mexico have hit $600,000 a day, compared with $150,000 a day in 2002. So while we might eventually find more oil there, it won’t be cheap oil.

Half-truth: Billions of barrels of oil are
locked away, out of reach, on federal lands.

Well, sort of. There may be up to 75 billion barrels of oil on land that is currently off limits. But there’s probably a lot more than that on 68 million acres of land that oil companies can currently drill, but aren’t.

According to the Mineral Management Service two-thirds of the 36 billion barrels of oil believed to lie on federal land, mainly in the Rocky Mountain West and Alaska, are accessible to drilling. Another 89 billion barrels of recoverable oil is believed to lie offshore, and fourth-fifths of that is open to industry. And it’s not just oil — in the Gulf of Mexico, four times more natural gas is probably contained in the areas already open to drilling than in those protected by the ban.

In the last four years, 10,000 more permits have been issued to oil and gas drillers than have been used. That means the companies are actually stockpiling extra permits.

As for the offshore areas in the Gulf of Mexico, there are 7,740 active leases and only 1,655 in production. Only 10.5 million of the 44 million offshore leased acres are currently producing oil or gas.

So why do oil companies want to open up new lands for drilling? Maybe it’s that if they lease that new land — and stockpile more permits — they can add to their “potential” oil reserves without putting one drill in the ground, and potentially boost their share prices in the short term.

Lie: Drill here, drill now, and pay less.

The talking point in some parts of Washington is that if only we would open up the Alaska National Wildlife Reserve (ANWR) and restricted parts of the Gulf of Mexico to drilling, gasoline prices would fall pretty quickly.

Nothing could be further from the truth. Now let me be clear — I believe we SHOULD open up ANWR and the offshore Florida coast to drilling — eventually we’ll want all the oil we can get from those spots, so we might as well start the process now. But it won’t affect prices at the pump for years to come. Even if we dropped the ban right now, production probably wouldn’t start before 2017.

A 2004 study by the government’s Energy Information Administration (EIA) found that drilling in ANWR would trim the price of gas by 3.5 cents a gallon by 2027. If oil prices continue to soar, the savings would be more, but not much. Opening up areas off the Florida Coast may also cut gasoline by a few pennies a gallon when that oil eventually comes to market.

Reason: While offshore territories and public lands like ANWR may contain up to 75 billion barrels of oil, and that may sound like a lot, it won’t make a significant difference in a world that uses about 86 million barrels of oil a day and will use even more by the time those fields start pumping.

However, that said, the Democrats are on the wrong side of this issue. Sure it will take years to find new fields and get them producing. But we’ll still need oil in 2017, 2027 and beyond, and it will be more valuable — and more useful — than it is now.

So while I’m in favor of drilling off the coast of Florida, people should be aware that it won’t lower gas prices anytime soon … and they should want to do it for the right reasons, AFTER we already have a massive conservation program underway.

The bottom line is that the best thing we can do to lower the price of oil very quickly is to conserve. After all, the cheapest oil is oil you DON’T use.

Lie: Opening up Florida’s coast to offshore
drilling will be an environmental disaster.

Actually, drilling industry technology and safety standards in North America are getting better. Drillers have a very good track record in recent years. And remember how Hurricanes Katrina and Rita ripped up rigs all through “Energy Alley”? That didn’t cause massive spills.

There IS a “dead zone” the size of New Jersey in the Gulf of Mexico, but it’s caused by fertilizer and chemical run-off from Midwestern farms that flush out through the Mississippi. The recent floods in the Midwest and the resulting washout of chemicals into the Gulf are probably causing more of an ecological disaster than new drilling ever could.

Lie: The oil market needs more regulation.

The topic of energy speculation is taking center stage on Capitol Hill this week, where nine bills attempt to limit the role of traders. A House panel examination is set for Thursday.
The topic of energy speculation is taking center stage on Capitol Hill this week, where nine bills attempt to limit the role of traders. A House panel examination is set for Thursday.

Oh, please! A U.S. Commodities Futures Trading Commission (CFTC) investigation showed NO evidence of price fixing in the commodities markets. Global investors (perhaps including a fund that’s in your 401k) are hedging their bets in the stock market by betting on rising commodity prices. Oil is a commodity that looks like an especially good bet. Therefore, there’s speculation in oil futures.

This isn’t a plot by the Forces of Evil. It’s the way free markets work. And while big funds may buy oil futures contracts, they don’t take delivery — in other words, they aren’t adding to global demand.

As for regulating the oil companies themselves — while I don’t think they need tax breaks, I don’t think they need Big Brother riding them either. If they want to drill, let’s cut the red tape and get out of their way.

Lie: The government is working to solve the crisis.

This is the most depressing lie of all. I already told you about the Democrats being on the wrong side of offshore drilling. And just last week, GOP members of the Senate put the kibosh on a bill that would have extended tax credits for wind power, solar, and renewable energy sources like biomass, geothermal, landfill gas and trash combustion. There is no good excuse for the GOP action — none — except that it makes their contributors at the oil companies happy (less alternative energy means more demand for oil). And leadership from the White House on this issue has been laughable.

The flood of lies and the inability to see the truth has consequences …

If America Doesn’t Get Its Act Together,
The Consequences Will Be Dire

Here are just three things that could go wrong …

1) We could lose the natural resource wars. Countries like China and India have a plan. What resources they don’t have enough of, including oil, they go out and get by making deals. The U.S., on the other hand, makes enemies.

The U.S. plan was (apparently) to seize the oil from Iraq. That didn’t work out so well, though Iraqi oil production is finally climbing. Now, the same people in Washington who wanted to invade Iraq are pushing for war with Iran. If it comes to that … if the Iranian oil fields go up in flames and they start lobbing missiles around the Middle East … forget $200 per barrel oil. Heck, oil prices will probably go to $300 or even $400 per barrel.

What the Bible Says About the Future of the Middle East and the End of Western Civilization has sold over 1 million copies.
Apocalyptic literature sales are booming in America as oil prices explode. Author John Walvoord’s deep and probing book entitled Armageddon Oil and the Middle East Crisis: What the Bible Says About the Future of the Middle East and the End of Western Civilization has sold over 1 million copies.

2) We could slide into a steep recession. High energy prices are already killing the airlines and hammering American companies both big and small. In contrast, the World Bank just raised China’s economic growth forecast to 9.8% from 9.4%.

An expanding Chinese economy is very bullish for oil/diesel/gasoline prices, even though China is cutting fuel subsidies for its citizens. Last week, China announced it was raising the cost of diesel and gasoline by about 42 cents a gallon. But folks in Beijing still get fuel at a discount, and they’ll probably have more of it BECAUSE prices went up — before the price hike, fuel stations across China sometimes ran out of gasoline because Chinese companies don’t like to sell at a loss.

China’s biggest area of growth is internal demand. If it keeps growing while the U.S. economy falters, that could spark more trouble …

3) The U.S. dollar could tumble even lower. The U.S. dollar is 86% negatively correlated to the price of oil. That means when one goes up, the other usually goes down.

This makes our Arab oil “friends” grind their teeth, because they’re selling oil in dollars. If rising oil prices weaken the U.S. economy, pushing the U.S. dollar lower, that’s one more reason for OPEC to move to pricing oil in a basket of currencies.

The U.S. dollar is propped up by its role as the world’s reserve currency for oil transactions. If that is undermined, that could send the greenback crashing on its next big leg down.

How to Protect Yourself — And Profit

Big American oil stocks, like those represented in ETFs like the Energy Select SPDR (XLE), should do well. ETFs and ETNs that track the price of oil itself, like the Goldman Sachs Crude Oil Total Return ETN (OIL), should do even better.

But I think you can do better still.

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Santa Barbara is hardly the picture of poverty. Oprah’s mansion is there, and the city’s median house is worth a cool million. Heck, — we ate some tremendous sushi on State Street and relished in the city’s upscale vibe.

So imagine my surprise when I learned that 12 of Santa Barbara’s parking lots have recently been converted into nightly homeless shelters!

A CNN story highlighted the case of a car dweller who sleeps in one of these parking lots every night. Were drugs a factor in her demise? Nope. How about mental illness? Not at all.

Rather, the 67-year-old woman is jammed into her Honda, along with her two dogs, primarily because of the housing bust and a slumping economy.

The former loan payroll processor was laid off earlier this year. Because her rent ate up 75% of her income, she was forced to move into her car. Even with a new $8-an-hour job and her Social Security checks, she cannot afford a place to live. And she’s not alone …

Here’s a quote from the coordinator of this new parking lot program:

“The way the economy is going, it’s just amazing the people that are becoming homeless. It’s hit the middle class.”

67 years old ... a Social Security recipient ... sleeping in her car every night.
Barbara Harvey: 67 years old … a Social Security recipient … sleeping in her car every night.

Think about that: Twelve parking lots full of middle-class homeless people in one of the nation’s most affluent areas.

It’s sad.

It speaks volumes about the state of the economy … the situation many soon-to-be-retirees are finding themselves in … and just how quickly things can go wrong.

It begs the question …

Why Isn’t the “Misery Index”
Reflecting This Economic Pain?

Back in the 1970s, the misery index was widely cited. The measure, which was created by economist Arthur Okun, combines the government’s unemployment and inflation rates to give a quick picture of the on-the-ground economy.

Right now, the U.S. misery index is hovering around 8.9 (inflation of 3.9 combined with unemployment of 5%).

That’s not great, but it’s hardly alarming by historical standards. In the 1970s, the index was running near 15%, and it hit a record of 20.6 in 1980.

So on one hand, we’ve got anecdotal evidence pointing to plenty of misery even in posh places like Santa Barbara. On the other, official measures make everything look hunky dory.

What gives?

I think the real reason that the current misery index looks so tame is because of the way the government measures inflation.

See, the misery index is based on the Consumer Price Index (CPI). And as I recently told my Dividend Superstars subscribers, that thing is fishier than a river full of salmon!

Here are four reasons why the CPI is a totally bunk measure of inflation …

#1. Hedonic regression — That’s the government’s fancy way of saying that technological improvements in a given product mean you’re getting more for your money.

Let me give you an example of how this supposedly works:

Say you bought a basic car in 1980. It probably wouldn’t have had airbags or a CD player. Today’s basic cars come with both.

So rather than just admit that the average price of a basic car has risen by the exact percentage, the people who calculate CPI might readjust the number to reflect the fact that CDs and airbags represent substantial improvements for today’s car buyers.

In other words, they might lower the real rate of price increases to reflect this fact.

Never mind that you might not want a CD player. The fact that manufacturers put them in the dash and force you to buy them means you’re coming out ahead!

Hedonic regression is used for clothes, computers, and more. And it lends some credence to the old saw that while figures don’t lie, liars can certainly figure.

#2. Product substitution This is like the evil twin of hedonic pricing. Under this scenario, if corn gets too expensive, the government just figures you’ll switch to carrots. So they stop tracking corn and start tracking carrots.

But that’s a rather huge assumption. And I’m still waiting to hear what the substitute for gasoline is!

#3. Most taxes are excludedCPI calculations don’t factor in federal, state, or local taxes, even though they are probably sucking away half of your income.

Nor does it matter that property taxes have increased substantially for many homeowners over the last few years. Nope, that’s not inflation for regular, old urban consumers!

#4. Bizarro real estate figures You’d think the housing bubble would have pushed the CPI through the stratosphere … after all, it makes up a quarter of the CPI-U.

But Washington doesn’t measure housing prices like normal people. Instead, it uses a measure called owner’s equivalent rent (OER). This is what homeowners think they could rent their houses for. And as you probably know it’s been a lot cheaper to rent than own throughout the housing bubble. It still is, especially in the nation’s hottest real estate areas. Take it from someone who’s currently being subsidized by his landlord!

Washington's figures belie what's happening on the ground.
Washington’s figures belie what’s happening on the ground.

So the CPI has totally missed much of the run-up in housing prices. And now, if a weak housing market forces more people to rent, the CPI may actually show increased inflation!

I should also note that there are plenty of reasons to find fault with the employment side of the misery index, too.

For example, if someone is unemployed but has not looked for work in the last month, they are excluded. Peculiar, isn’t it?

Oh, and what about Barbara Harvey, the aforementioned Santa Barbaran? What would the government say about her?

Well, even though she might be looking for a full-time job, she wouldn’t be considered unemployed because of her part-time job.

Technically, the government is right. But “technically” doesn’t always paint an accurate picture of what’s really going on.

Here’s the bottom line …

No Matter What the Statisticians Say,
Real People Are Suffering Real Hardship.
Consider Taking These Protective Steps …

Look, Washington can say inflation is tame till they’re blue in the face … they can tell us that the unemployment rate is totally under control … and they can say we’re not in a recession because GDP remains positive.

When it comes to investing, I use common sense and my own two eyes. And right now, I see lots of people suffering from sinking home values, job losses, and massive price increases for life’s basic necessities.

Even more worrisome is that I see plenty of people in retirement, or very close to it, who are having a tougher time scraping by.

I mean, the fact that a Social Security recipient is sleeping in a parking lot pretty much says it all, doesn’t it?

Sure, it’s an extreme example. But it really proves the point that, in the end, we’re on our own when it comes to shoring up our finances and securing enough income to live comfortably in our golden years.

So, with that said, here are three steps I suggest taking to make sure you won’t end up sleeping in your car:

Step #1: Save for a rainy day. It’s not easy to forego flat screen televisions or designer handbags, but the sense of security that comes with a big nest egg is well worth the restraint. No matter how much you make, or how much you’ve already accumulated, times like these are gentle reminders that a little cutback here or there is worth undertaking.

Step #2: Make sure you have a liquid emergency fund. I always advocate keeping a few months worth of your income stashed in a very liquid savings vehicle such as a Treasury-only money fund. You never know when you’ll need it to help yourself, a family member, or a friend. And having all your money locked into volatile investments might prevent you from quickly accessing your cash when you need to.

Step #3: Consider dividend-paying stocks to help your nest egg outpace inflation. I’m always singing the virtues of dividends. And right now, I think many beaten-down dividend payers represent tremendous value for longer-term investors.

Not only are many of my favorite companies currently paying out better annual yields than other traditional income investments … but those that steadily increase their payments can help your portfolio beat inflation, whether it’s running at 3.9% or 9%!

God Bless;

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In 1999, the global economy silently underwent a monumental shift…a shift that in the short years to come promises to give rise to an inflationary era — the likes of which America has never before seen…

This shift that was probably the single most significant to occur since America abandoned the gold standard in 1973–though nobody seemed to notice it at the time–even though it was an event that changed everything: An event that shook up global energy markets and realigned global economic powers.

Few people–even on Wall Street today–seem to be aware of this profound change–let alone understand the serious ramifications it is having on the global economy. Not to blow our own horns, but in my book

The Oil Factor, we alerted investors about this change. In fact, it’s how– despite the financial massacres that have occurred this decade–we have managed to help others profit through what has been for most investors a painful period in economic history. We knew something that it seemed no one in any major Wall Street investment house knew–or at least something that no one was willing to admit…

We knew that global oil prices were headed skyward.

In fact, for the next 6 years running we predicted higher oil prices each year. After the book, I became known as “the $100 oil guy.” And I was scoffed at by many of my peers. But I’m sure you well know what happened in the years that followed. Surprisingly no other major Wall Street firm in any of the last 6 years (except maybe Goldman Sachs) even predicted higher oil prices. And even Goldman’s said it would only be a short-term spike. Probably because they didn’t know (or understand) what we knew back then.

In 1999 a momentous transformation occurred in the dynamics of the global oil market. Oil prices became supply-driven. And the reason that happened was largely due to OPEC. For the first time in OPEC’s history, they were no longer just another player in the oil arena. Rather, they had become the controlling player.

From 1982–1998, the major oil producing countries outside OPEC, had the ability to increase oil production in order to accommodate for global growth. But in 1999, these oil-producing countries hit a point where they could no longer increase production by any significant amount. The only countries outside OPEC with the ability to increase production were a handful from the Former Soviet Union and Africa. But the increases we’ve seen from these regions this decade have been negligible.

To put it another way: By 1999 the world was using all the oil that non- OPEC countries were capable of producing. Prior to that, any shortfalls in OPEC’s oil supplies–due to wars, political instability, terrorist attacks or whatnot–could always be made up by other countries. But in 1999, Britain and all the other major non-OPEC oil producing countries hit a point where they could no longer do that. They were already pumping at full capacity. Supply was barely keeping up with demand.

The result is that now, we are fully reliant on OPEC–a politically unstable region–to make up for any shortfalls in our global energy supply. This has not only sent global oil prices soaring skyward, but it has precariously awarded OPEC with almost complete control over oil prices.

As you’ll learn in this report, this event, coupled with a rising China and India, by the decade’s end could drive oil prices up to $200 a barrel, and give birth to an inflationary era the likes of which America has never before seen…

Just like in the inflationary ’70s, P/ E ratios will plummet across the board. Great growth stocks–like Cisco, Dell and IBM–may watch their stock prices crash 50–90%–even as their fundamentals remain strong and growth powers forward. Traditional investment havens like CDs, bonds and money-market funds will be turned into financial death traps. Markets will grow increasingly irrational.

But even as the broader market gets blown to bits, there will still be one country…one commodity…one investment

destined to outshine all the rest. This country was the only major economy that made a determined effort to become energy independent after the last oil shocks of the ’70s.

I’ll tell you about this miracle growth economy in this report, and show you why it is poised to weather the coming inflationary storms better than any other country. Plus I’ll tell you about the #1 company destined to reap the greatest rewards from the coming global energy crisis. It’s the 8th biggest energy company in the world. It’s won countless awards and accolades–yet most Americans don’t know its name–yet! This company is the ultimate oil-shock proof, inflation proof investment to own today. Before I tell you its name, let me first tell you why it is truly one of the best bets you could make on the market today…

The Coming Oil Shocks: The One Unavoidable Economic Reality

 

Despite all the media spin and hype about oil today, few people have a true picture of the real state of our global energy situation. As Dr. Colin Campbell (one of the world’s leading oil geologists) said at a conference on peak oil in 2004: “If the real figures were to come out, there would be panic on the stock markets. In the end that would suit no one.”

And the truth is, the figures just don’t add up. It has become increasingly obvious to me and a number of top energy insiders, prestigious oil geologists, and oil moguls that we are careening toward an imminent energy crisis of unprecedented proportion. And unfortunately, thanks to the monumental mess we’ve got ourselves into, this time there’s no easy way out. No easy solution.

The math is simple. Limited supplies just can’t keep up with soaring global demand. For example, in just 150 years we have burned through oil reserves that took an eon to form. And no significant world-scale oil discoveries have been made since the North Sea and Alaska in the 1970s. In fact, in 2003 the top 10 oil companies spent $8 billion on exploration, but only found less than $4 billion worth of oil and gas. And in the last few years, the 70 largest energy companies returned well over $100 billion to their shareholders in dividends and share buybacks, rather than spend the money on exploration.

What’s more, for the first time ever, Saudi officials admitted to the world’s leading industrial powers that OPEC will not be able to meet Western oil demand in 10–15 years.

The world’s wells are running dry.

At Ghawar in Saudi Arabia, a field which produces over half of Saudi oil, Saudi engineers are injecting 7 million barrels of seawater a day into the field. This is a fatal sign that the world’s largest oil field is nearing a collapse of output. And Farouk Al Zanki, Chairman of Kuwait Oil, announced that production of the world’s second largest field (at Burgan) is “exhausted.” The Burgan oil field is the source of more than half of Kuwait’s output. Even worse, Iran, the world’s 2

 

 

nd largest oil exporter, has said that within a decade it will need to become an importer!

The world’s wells are already pumping at capacity, and global demand is rising. By 2015 the global economy will need an additional 18 million barrels per day.

Where will this extra oil come from?
 

That’s the problem. It won’t come.

 

But What About Alternatives?

While we believe there will be many technological revolutions in the production of hydrogen fuel cells, solar energy, biofuels, wind power, thermal depolymerization, hydroelectricity, it’s too little too late. We should’ve started decades ago. The problem is, we are talking about the need to retrofit the current $45 trillion global energy infrastructure in order to produce, transport and distribute these new forms of energy. No matter how great a scientific energy revolution, it will still take years–if not decades– to retrofit the planet. The crisis is still upon on us.

Even when we struck oil 150 years ago, it still took generations for that energy source to become widespread. Oil slowly transformed economies over time. It didn’t happen overnight. The industry took lifetimes to develop the infrastructure to get oil to where it is today. To discover the wells, erect the refineries and build the pipelines that are needed to extract, transport, refine, process and distribute the 83.5 million barrels of oil the global economic engine needs each day to keep running. To supplant this existing structure with a new one would require a monumental effort.

The cost alone would be in the tens of trillions of dollars. And because of the complexity and magnitude of the project it would take decades. The problem is we should’ve started decades ago. But we never did. We never planned for the day of energy reckoning. And now it is upon us.

The pumps are running at full capacity. Populations are exploding. China and India, and many other emerging economies are undergoing sweeping industrial transformations. Our energy needs, according to the U.S. Energy Information Administration, will soar a staggering 54% by 2025. Thanks to a lack of planning on the part of successive administrations, civilization in the coming years may face one of its most violent disruptions ever…

The Costs of Your Tomatoes, Corn, Cotton, Beans and Peanuts are Headed for the Clouds.

You rely on oil in more ways than you probably think about. It’s not just when you drive your car, or turn up the thermostat in your home. Virtually everything you own or consume has been touched by oil in some way–whether it was used in the transport of the goods, or the fertilizer on your foods, or the plastics in your products. Everything from combs to cameras… detergents to dresses…shampoo to shoe polish…tires to toilet seats has been touched by oil.

When oil prices remain low, it doesn’t just keep the price of our gas and our heating down, it also keeps the price of almost everything else down too. That’s the inflationary or deflationary power that this black gold holds.

The frightening thing is–and it’s one the consumer has only begun to confront–is that when oil prices reach a tipping point– a certain threshold–then it begins to seep into every nook and cranny of the economy.

Prices for all types of goods and services, from gas to broccoli, start to rise with them.

We are at that tipping point today, and oil is about to spill over into every part of the economic universe– causing not just consumers to wheeze, but all types of industries from airlines to auto-manufacturers from chemical companies to paper mills, from plastic producers to textile suppliers, from the agricultural industry to silicon chip makers…

For example, though few are aware of it, oil accounts for a large chunk of agricultural costs, due to petroleum based fertilizers, herbicides, pesticides, irrigation and transportation.

In 1999, when oil was just $16.55 a barrel, it accounted for 22% of agriculture’s overhead. At $70 a barrel, it accounts for nearly 50%! At $100 oil, that percentage will climb to 70%. At $200 oil, it will be a devastating 83%.

While in the past six years, farmers and growers have absorbed some of these costs, more and more (as you’ve probably noticed) they’re having to pass them onto you–the consumer. This means that the costs of your tomatoes, corn, cotton, beans and peanuts will be headed for the clouds.

And this is just one of the industries that will begin to pass the soaring costs of oil onto you–the consumer.

 

 

At least not fast enough–and not in the quantities we need. We are careening toward an era where supply side shocks will become the norm–resulting in regular superspikes that will cause global industry, and the corporate world to wheeze. Any interruption in the supply chain will have dire effects.

 

 

 

Soaring Investments in an Oil-Strapped Future

As the oil price continues to climb, as demand soars and supplies crash, its impact on our lives, and on the global economy will become more pronounced. Sky-rocketing oil prices will rock global markets, and send the investment arena spinning. It will be the fuel that will fire this new inflationary era. Your investments will become volatile. Many will crash and burn.even worse than the Great Depression. We experienced 5 bear markets. Investors became irrational. They punished even the era’s greatest growth stocks. The P/E ratio of the S&P crashed from 16 to less than 8. Retail stores, cosmetics, beverages, food stocks all plummeted, with cosmetics leading the way, losing 45.6%. Pepsi, Avon, Gillette, Kellogg’s, Hershey, Wal-Mart, Ford, GM, Dow Chemical, DuPont all watched their stock prices crash 10–90%.

into hidden asset classes of the hyper rich.

While Wall Street is slow to catch up on the massive mega-trends that are unfolding today, and how they will impact investors, we’ve been putting them to work for years.

For example, one group of alternative income plays, and one that is hardwired to benefit from the global energy crisis, can be found in international energy and resource stocks–yet many of these picks are off the Wall Street radar, and are trading with single digit P/Es.

For example, while the big U.S. oil giants, stand to benefit from the coming global energy crisis, and promise to be a safe harbor in the volatile years to come, there’s an even better way to play this. There is a select number of foreign based global energy companies, with decades of reserves and experienced management teams, who also enjoy one powerful advantage over many U.S. energy companies:

 

And if you think your dividend checks from your bluest of blue chips will save you, think again. The rules will have changed. And the markets will deliver millions of unsuspecting investors some nasty surprises. From 1967_82, U.S. stock markets went through their worst 15-year period ever_

During the inflationary ’70s, markets constantly zigged and zagged.

And if you think the oil-shocked, inflation afflicted _70s was bad. The coming era will be much worse. It will be the ’70s on steroids. And it is retirees on fixed incomes that will be hit the hardest. They will suffer the shock of negative real returns. The modest rates of interest they will get on their CDs, money-market funds and bonds will not be able to keep pace with inflation. Their monthly income checks will buy them less and less. Their dollars won’t fly them very far. The rising costs of everything will not only eat away at the value of their investments, but it will erode away the very quality of their lives. Their social security checks, their dividends, their yields will wither in the face of soaring costs of living.

That’s why I’m writing to you today. To tell you about the market’s small clutch of alternative investments that will be hardwired to benefit from the enormous challenges facing the global economy today–rather than be crushed by them.

In this report, you’ll learn about the global market’s most outstanding inflation-proof investment opportunities. Many of these opportunities may surprise you. Many you won’t find in the usual places. In some cases, we’ve had to look beyond Wall Street. We’ve had to dig a little deeper, and go a little farther. We’ve had to learn how to tap

 

 

They are perfectly poised to benefit from the unprecedented growth going on right now in many of the world’s major emerging mega-markets, including China, India, Brazil and Russia.

Plus these global energy plays have the additional benefit of enjoying revenues and profits denominated in currencies set to soar against the U.S. dollar in the years to come. This means every time one of these emerging market currencies edges up against the dying dollar, the income and capital gains you’ll get from these global energy behemoths will grow that much bigger! You’ll be able to buy a little bit more. And as the years roll by, and as the dollar continues to plummet, these growing new income sources will become ever more critical to your purchasing power, and your future.

And in our opinion there is one oil and energy income play destined to outperform all the rest…

 

 

The Brazilian Energy Miracle

The #1 Oil-Shock-Proof, Inflation-Proof Investment

 

While ExxonMobil, Conoco Phillips, Chevron and other oil super-mergers dominate the headlines, there’s another oil company–whose reserves are even bigger than many of these oil superstars, and whose prospects for growth far outshine them–yet most Americans aren’t familiar with its name. But this energy company harbors a number of unique advantages over practically every other energy company in the world today.catapulting its already huge pool of reserves to 9.6 billion barrels–that’s more than ConocoPhillips! It’s also already producing 1.8 million barrels of oil per day, compared to Conocco’s 1.6 million.

Firstly, it’s just found a giant new field with potential recoverable oil reserves between 700 million and one billion barrels–

Even at today’s prices it’s sitting on a pot of black gold worth around two thirds of a trillion dollars. But as global oil supplies evaporate, and oil prices escalate, this company’s pot of gold will only grow more valuable.

But if that wasn’t reason enough to invest, this company goes one giant leap further. Not only is it one of the world’s biggest oil producers, it is also one of its biggest alternative energy

producers.

And within as little as a decade it could be producing, consuming and exporting just as much alternative fuel, as it does oil. The alternative energy industry is one of the few sectors in the coming years that will enjoy such staggering growth that not even soaring inflation will be able to temper it.

And this company is an almost unrivalled global leader and pioneer in alternative energies. It is the biggest producer of what the U.S. Department of Energy calls: “

 

The fastest growing alternative fuel in the country.”

 

 

You’ve no doubt heard of it by now. It’s called

 

 

BioFuels.

And everyone from Willie Nelson to Richard Branson_from Bill Gates to the Google Billionaires are getting in on them. But this little-known energy giant has been a pioneer in BioFuels for decades.

And this is where the investment opportunity gets very interesting. For this company lies in the only major economy on the planet today that bothered to learn from the last energy crisis:

The one economy that set upon an ambitious path toward energy independence.

Today, it has achieved just that, and now enjoys a thoroughly snug and highly envied position among an oil-addicted world.

This country is Brazil. And as far back as the ’70s it began transforming its #1 crop–sugarcane–into the fuel of the future. Now as the rest of the world and global industry wheezes as oil-prices climb higher, Brazil is poised to not only weather the coming energy storms, but get rich off them.

Add to that the fact, that it is also one of the four biggest and fastest-growing emerging mega-markets on the planet, and you have an investment poised for growth…

 

The Brightest Star in the Energy Universe

 

 

The #1 company destined to reap the greatest rewards off the coming energy crisis is Brazil’s biggest energy company: PetroBras (Brasileiro Petroleo) enjoys a unique position shared by no other energy company in the world today.the world’s biggest BioFuel producer. It is perfectly positioned to ride what will most probably turn out to be two of the greatest bull markets in stock market history. It is decades ahead of practically very other company in the world in its production and distribution of renewable energies.and even to us here in the U.S. Plus it’s just penned a new deal with Japan, with many more countries showing keen interest. And now it’s building the world’s first major BioFuel pipeline. What’s more, it plans to spend $54 billion dollars on its BioFuel and oil production and distribution facilities by 2010.

Not only it is one of the world’s biggest oil producers, it is also

In fact, PetroBras already helps fuel 48% of Brazil’s cars with its BioFuels. It also imports its BioFuels to many other countries too, including India, Venezuela, Nigeria

 

 

The company is poised to become the brightest star in the energy universe. And it’s about to leap into the consciences of not just the American public, but the international public too!

On top of that, the company has won

 

 

countless awards, including best company in Central America, world’s best refiner, plus an award for transparency. Plus it has also just won the award that the New York Post refers to as: “the business world’s equivalent to the Oscar.”

This event covered 600 nominations for companies performing in all sectors in more than 30 countries. And it ranked #1!

All this, and the company’s trading with a P/E ratio in the single digits! But it won’t remain cheap for long. And on top of all that, this company can also offer you fat rising income checks. It pays a dividend, which thanks to its breath-taking growth and skyrocketing profits should continue to rise for literally

decades to come!

What’s more, this investment looks destined to be an outstanding currency play. Brazil is in the throes of a sweeping industrial, agricultural and technological transformation. It is fast becoming a leader in not just energy, but in outsourcing, infotech and telecommunications.

Annual Foreign Direct Investment is exploding. In the past decade FDI has gone from next to nothing to tens of billions of dollars a year. Its GDP is projected to soar a staggering 10-fold in the next 40 years. And already Brazil is exceeding these predictions by a wide margin.

The country is currently the fourth biggest emerging mega-market on the planet. And when the world starts to withdraw from its oil addiction, Brazil will power ahead. Its currency at the moment is one of the most undervalued in the world, and should rise to a stunning degree against the U.S. dollar in the years ahead. That means your capital gains and your dividend checks should grow fatter and fatter, as the dollar grows leaner and leaner.

It’s a perfect way to protect yourself from oil shocks, falling dollars and rising inflation.

 

God Bless!

 

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Political unrest in the oil-rich Middle East boils over into open conflict…

A line of cars stretched for blocks winding into a gas station. The price is US$7 a gallon…but the price is partially covered by another hand-painted sign that reads: “Authorized Vehicles Only.”

On the floor of a stock exchange frantic traders cry: Sell…Sell…SELL! But there are very few buyers…

Anxious families gather around the television as a politician addresses the nation…a state of emergency is declared…but then the screen is filled with static. A moment later, lights in the neighborhood flicker and go dark…in fact whole cities go dark…with nothing left to power the generators…

The Road Warrior Image

These could be scenes from America’s last energy crisis in the 1970’s – but in fact they are scenes conjured up by Hollywood… specifically in the 1981 film The Road Warrior.

Inspired by true events of the ‘70’s, the film paints a dark picture of a world in the very near future. In the film, the world has been thrown into chaos by an apocalyptic energy crisis. Perhaps these images are just a glimpse of things to come…

Now Showing: Global Energy Crisis Part II…

The world is now enduring its second major energy crisis, with crude oil setting a new record high of US$135 a barrel a week and a half ago.

Other fossil fuels that Americans count on to be cheap and plentiful are sky-rocketing too.

Coal prices in the U.S. doubled between January 2007 and this past February – in just one year. Coal soared 143% in Asia during the same period. In fact, over the past five years, the price has gone from about US$20/ton to more than US$120/ton – an increase of 600%.

Coal fired power plants produce 40% of the world’s electricity needs today, and rising demand has propelled this once cheap fuel into the stratosphere. Like oil, it looks as if coal prices have shifted to a permanently higher plateau.

The One Lagging Fossil Fuel Is About to Take Off

Energy Gap Chart

Natural gas prices had been lagging the rise in crude oil, but not anymore. Like its other fossil-fuel cousins, natural gas prices are playing catch-up with a vengeance – soaring 45% so far this year alone!

Recently, the world’s top energy market watchdog, the International Energy Agency (IEA) forecast a major crude oil supply crunch. In other words, they’re predicting a potential energy Armageddon within the next 7 years! According to the Wall Street Journal, the revised forecast from the IEA “reflects deepening pessimism over whether oil companies can keep abreast of booming demand.” Can anybody say, “Peak Oil?”

Just a bit further along, the IEA projects world oil demand to jump by one-third in just over 20, reaching 116 million barrels a day in global consumption by 2030. The trouble is the IEA and other experts are just now realizing that aging fields mean big-oil producers will “struggle to surpass 100 million barrels a day over the next two decades.”

In fact, “the world could face a shortfall by 2015 of as much as 12.5 million barrels a day.”

Brazil Closes In On Energy Independence Thanks to Alternative Fuel

In the film, Mad Max and his band of road warriors must constantly fend off attacks by rival gangs. They’re fighting over a tanker truck full of gasoline – in a world where all the filling stations have run dry.

So will life inevitably imitate art in this instance? It doesn’t have to end this way. Greater commitment to, and investment in, other alternative fuel sources could save the world from an apocalyptic energy crisis. There’s little time to waste however, with fossil fuel prices on the rise already, and supplies now in doubt.

The Modern Cure to the Mad Max World

Brazil is one model to study a bit closer. In the last energy crisis during the 1970’s the Brazilian government embarked on an ambitious program to free the country from oil imports. Brazil mandated every gasoline station must carry ethanol and that all new cars must be flex-fuel capable. At the time, some said this was nothing more than misguided government meddling with private enterprise…a boondoggle.

Today there are 29,000 ethanol pumps all across Brazil. There’s practically one on every street corner. In the U.S., we only have 700 ethanol pumps in the entire country.

An impressive 85% of new cars sold in Brazil are flex-fuel capable today, compared to just 5% of cars on the road in the United States.

Brazil has successfully replaced 40% of its gasoline needs with ethanol, resulting in US$59 billion in oil import savings since 1975. Brazil’s booming ethanol industry is the leading global exporter today, and they’ve created one million new jobs along the way.

Today, gasoline prices in the U.S. are above US$4 a gallon and climbing – as consumers and businesses suffer. Meanwhile Brazil is expected to become a net crude oil exporter sometime in the next two years.

 

God Bless!

 

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