FIR 01012011

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Key Points

Simple Math Shows AmericaCannot Avoid In ation Ahead

Death Spiral Risk Is Rising

PLUS:

Interview: Chris Whalen on

Bankings Future Crisis Lord Rees-Mogg: Spain Is the

Real Problem in Europe

Axel Merk: The Money Myth

Hans Parisis: Politics OverEconomics for Eurozone

James Dale Davidson onOur Dangerous Times

New Positions and Update

January 2011 Vol. 9, No. 1

Exclusive to CurrentSubscribers

Robert Wiedemers New Warning:Is U.S. Debt Still Triple-A? TheEvidence You Must Not Ignore For Your Portfolios Sake

Editors Note: Financial Intelligence Report has asked best-sellingauthor of Aftershock and sought-after consultant Robert Wiedemer, an

adviser to top corporations and private investors, to tackle the thornyissue of Americas debt and the risk it represents to investors worldwide.Markets have staged a remarkable recovery since the lows we saw in

March 2009. The uptick in our stock markets, however, masks a deepand well-entrenched threat.

Wiedemer warns now that the next few years could decimate yourwealth and that of most Americans if you dont safeguard yourself.

Starting in this issue, Bob periodically will share his invaluableexpertise as we navigate the turbulent economy and markets to come.

Important: FIR subscribers can renew their annual subscription andget a free copy of Bobs book, Aftershock: Protect Yourself and Pro t inthe Next Global Financial Meltdown a $28 value (shipping includedfree). To take advantage of this valuable offer, call 800-485-4350 ext.2139 or learn more online at www.newsmax.com/robert

By Robert WiedemerA few years ago, everyone thought triple-A mortgage bonds were

triple-A risks. Many investors, especially overseas investors, looked athighly rated mortgage bonds as being as good as Treasury bonds butpaying a higher rate. What could be better?

Of course, we know how that turned out. The entire mortgage-bondmarket melted down when home prices collapsed. The fundamentals ofmortgage bonds were bad before 2008 it was increasingly obviousthat declining housing values meant that the value of the collateralbacking those loans was worth much less.

From subprime loans to so-called liar loans based on littlemore than the borrowers unveri ed claim of a high income to primeloans, the nancial fundamentals of mortgage bonds were bad andgetting worse from the time housing prices stopped going up in late2005 until the mortgage market cratered in late 2008.

Psychology alone seems to have supported bonds up from 2005 to2008. People simply wanted the housing bubble and its related bubbles

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Page 2 Financial Intelligence Report January 2011

to keep going. Plus, many people just didnt think itwas possible that so many triple-A bonds could gobad, partly because the consequences of such a crisiswould be monumental. History, too, helped hold updemand for mortgage bonds. Home prices never hadturned sharply downward for any lengthy period inany large part of the United States during the entire20th century.

Momentum also held up bonds. It takes timefor reality to sink in. So, it took until late 2008 forpeople to see that so many triple-A bonds reallywerent triple-A.

Do we face the same situation with Treasurybonds today? Are the fundamentals so bad that onlypsychology, momentum, and history hold them up?

Lets look at the fundamentals. Unlike mortgagebonds, there is no collateral backing up Treasurybonds. They are essentially unsecured loans, like

credit cards, whose value depends solely on theborrowers ability to pay them off. There is nothingto foreclose on if the loan isnt paid.

So this is a fundamentally riskier type of loan.And many government loans have gone bad in thepast just not U.S. government loans. But justbeing unsecured isnt a big problem, as long as theborrower has the income to pay it off.

Loans to some governments are based on oilrevenues or other non-tax revenue streams, but withthe U.S. government, the only signi cant revenue

stream is its ability to tax its people.Simple Math Shows We AreIn Deep Water

Could our debt be paid off with tax revenuesin a reasonable period of time? Lets do the math.Assume that a reasonable period of time topay off a debt is 30 years. Thats actually a prettylong time for unsecured debt. Mortgage loans aretypically for 30 years, but they are backed by aphysical house that could be sold if necessary.

Lets also assume that our debt has risen to $15trillion when we start paying it

off (its nearing $14 trillion right now). That meanswe would need to pay $500 billion per year for 30years to pay it off.

However, before we can pay down the debt, wehave to stop adding to it. Right now, were addingabout $1.3 trillion to the debt every year. So wewould need to come up with $1.8 trillion ($500billion plus $1.3 trillion) to start paying off the debtover a 30-year period.

How does that compare with our income?This year, our income will be about $2.1 trillion.That means it would take almost 100 percentof our income to pay down the debt over a verylong period of time. Dont forget, we have otherexpenses, such as Social Security, Medicare, and themilitary. Those expenses run about $3.5 trillion peryear.

How many businesses would get a loan that

requires almost all of its revenues not pro ts to service? Under those terms, there wouldnt beany money to pay employees or vendors. In fact, nobusiness could get that loan from a sanely run bank.

That scenario presumes a xed rate. In reality,much of our debt is effectively at an adjustable ratesince it is short term. This means that the amountneeded to pay that loan could go up dramatically ifour incredibly low interest rates go up.

At 10 percent, our interest costs would more thandouble and, since our debt is so monumental, thatwould mean paying off the debt in 30 years wouldconsume more than all of our tax income. Again,thats not including the fact that we have otherexpenses besides paying off the debt.

Such a payoff, if possible, would be devastatingto our economy both the massive spending cutsand tax increases needed would bring the economyto its knees. It certainly would pop the remainderof our bubbles in stocks, private debt, consumerspending, and real estate.

By any standard, the fundamental situation ofour debt is that it is a toxic asset. It is so huge nowrelative to our income that we cant possibly payit off or even make much of a dent in it. Its not

Robert Wiedemer is president and CEO of the Foresight Group, a macroeconomic and risk assessment rm that helps investors and businesses make be er decisions through well-informed and objec t ve eco-nomic forecasts and analysis. He regularly speaks to groups of investors and economists. His latest book is

A f ershock: Protect Yourself and Pro t in the Next Global Financial Meltdown . FIR subscribers can renewtheir annual subscrip t on and get a free copy of Wiedemers book a $28 value (shipping included free),by calling 800-485-4350 ext. 2139 or online at www.newsmax.com/robert

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January 2011 Financial Intelligence Report Page 3

triple-A debt. Its like the mortgage debt, but worse.At least with mortgages, there is an asset of somevalue behind the loan.

Nevertheless, U.S. Treasury debt still is ratedtriple-A. Why? Because we can roll it over. We canpay off our old debt and then issue new debt toreplace it, adding massive amounts of new debt. Butthat ability to roll it over and add to it inde nitelyis largely due to psychology, not our fundamental

nancial situation just like the mortgage bondmarket before it melted down.Take all those issues I mentioned earlier that

held up the mortgage bond market after 2005,psychology, history, and momentum, and multiply itseveral times. The Treasury market has all three inspades. Psychology will be much more powerful inhelping the U.S. debt market stay alive than it wasfor the mortgage market.

We Can Roll Over Massive Debt,

But for How Long?Were already running into problems. In thespring of 2009, in response to the nancial crisis,the Federal Reserve had to begin buying our owndebt with printed money to make sure everyonewas con dent that U.S. debt was triple-A and thatinterest rates on that debt would stay low.

The Fed has just started printing money again,partly to keep interest rates low and partly to pumpup our stock market and real estate bubbles. They

call this round of money quantitativeeasing, part two (QE2).

So far, QE2 has been effective atboth of its goals. It has been moreeffective with the stock market,which has risen more than 10 percentsince Fed Chief Ben Bernanke rstannounced in late August that hewould be printing more money. But italso helps keep the real estate marketfrom falling more dramatically, giventhe downward pressures it faces fromforeclosures and lack of buyer interestin homes, thanks to the continuingdecline in prices.

But printing such massive amounts the latest round of printing meanswe will have increased our moneysupply almost 300 percent is alsothe beginning of the end. Yes, it helps

short term, but eventually it will create in ation,and that in ation will increase interest rates.

Even small changes in interest rates of a fewpercentage points kick off the rst part of thescenario for mortgage-bond style problems in theTreasury market. Thats because small increases canmake a big difference when interest rates are so low.

Higher interest rates increase our de cit, makingit harder to pay off our debt. Most importantly,

though, high rates burn investors who bought bondswhile they were at low interest rates.The values of ve-year, 10-year, and especially

20- or 30-year bonds drop dramatically as interestrates increase. That makes those bondholders veryunhappy and makes it much more dif cult for thegovernment to get repeat customers for its bonds.

The Fed can overcome this problem by simplybuying the bonds that other people dont buy. Butthat kicks off the second part of the scenario thebeginning of a vicious spiral of Fed bond purchases

to soak up more and more bonds people are lesswilling to buy because they were burned before byin ation.

Entering a Death Spiral of DebtOf course, since the Fed is using printed money

to buy those bonds, it will only cause more in ationand hence more concern among bond buyers.

The rst and second parts of this scenario are theinevitable result of interest rates that are too low and

Federal Government Debt: Total Public Debt

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12

10

8

6

4

2

01965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Federal debt issuance has risen steadily since the 1980s but accelerated dramaticallyduring the Great Recession. It has shown no sign of reversing, despite the risk to U.S.creditworthiness. Gray areas indicate recessions. SOURCE: St. Louis Fed

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the Treasury overloading the market with too manybonds to nance massive de cits and to re nanceour rapidly growing debt. Again, even small increasesin interest rates pop the low-interest bond bubble,which is developing thanks to the massive number oflow-yielding bonds being sold.

Low interest rates are viable only if there is littleperceived risk in those bonds. In ation destroysthat fantasy and greatly increases perceived risk. Inaddition, massive money printing also lowers thevalue of the dollar, further scaring the foreign buyerswho have been critical in funding our massive debt.

The third and nal part of the scenario is anincreasingly dif cult situation for the Fed tomaintain. Its essentially a death spiral of printingmoney to buy bonds that other people wont buy,which only creates more in ation.

The Fed could try to postpone in ation by paying

banks interest to hold on to their excess reservesrather than lend them out. (When the banks lendout money, it speeds up the onset of in ation, whateconomists call the multiplier effect.)

Of course, the interest being paid to banks comesfrom printing more money, so it ultimately sparksin ation. The higher the interest rate that the Fedhas to pay banks to hold on to their reserves, themore money the Fed has to print, further fuelingin ation. By now, the Fed is ghting re withgasoline.

Ultimately, though, as this spiral of printingmore money continues, government debt serviceand rollover of past government debt will becomeentirely the Feds job. Its just like the mortgagemarket, which the federal government took overafter it collapsed.

Of course, such a situation will produceunbelievably high in ation. That has the advantageof in ating away much of the debt, making it mucheasier for the government to stop interest andprincipal payments, and hence, any rollover of thedebt. Since it has lost its ability to borrow, default atthat point becomes a less costly way to deal with thedebt than continued high in ation.

Its very much like a consumer who nally lesbankruptcy, even though it will hurt his creditrating, because his credit rating is already too low toallow borrowing and the cost of trying to maintainthe payments on his various debts has become sohigh that it no longer is worth it. The United Stateswill have lost all nancial credibility at that point. Itwont be able to borrow a dime.

Of course, this is not a cost-free exit for theeconomy. Such high in ation will have devastatingeffects on pensions, savings, life insurance, stocks,and real estate. We de nitely can in ate our wayout of our debt problem, but not without seriousconsequences.

The problem the government faces is that,increasingly, it is boxing itself into such a scenario.In ation is the easiest route to take now.

The other option is to pop all the bubbles nowand throw the economy into a much more massiverecession and, possibly, a depression.

Neither the politicians nor the voters are likelyto make such a decision. Instead, they probably willtry whatever avenue is open to them to keep thebubbles alive. In fact, the only avenue that is opento them now that would maintain the bubbles is theone just described: printing money.

This scenario I describe makes it sound easy forthe U.S. government simply to let our debt collapse,but it really isnt. Lets be clear: We are no bananarepublic. It takes a very unusual set of circumstancesfor something like this to happen.

Those circumstances include:

A massive debt (seven times our annual taxincome)

A massive de cit (almost half of the governmentsannual spending is borrowed)

Very low interest rates on our current debt A very slow-growth or no-growth economy Massive asset bubbles in the stock market and

real estate Massive borrowing from foreign investors to

fund government debt

Weve never faced a situation like this before.Accordingly, the United States never has defaultedon its debt. It has never even come close. This time,however, the circumstances really are different.

These circumstances box us in.For example, if we print money to keep interest

rates low and offset our massive sales of newbonds for rolling over old debt, that will createin ation.

We cant do what we did in the 1980s to reduceour in ation (reduce the money supply) because itwill cause a huge spike in interest rates, as it did inthe 80s, which will pop our stock and real estatebubbles. It also means we wont have the money to

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buy all those bonds.We will have in ation. The problem with

in ation, though, is that it ultimately will pop allof the asset bubbles and the government debt anddollar bubbles in an even more spectacular fashionthan if we let it happen now by not printing money.

Plus, with slow economic growth, there is littlenew revenue coming in, which means we arerunning a very high de cit. That makes the problemeven more dif cult to solve. Its like packing a housefull of explosives.

We Are Now General MotorsImagine a business that has too high of a cost

structure, falling revenues, and too much debt much like the old General Motors. It was once thegreatest company on earth but ultimately founditself reduced to total bankruptcy.

General Motors could have changed earlierto avoid bankruptcy, but not by starting down

that road just three or four years before it wentbankrupt. The changes would have to have beenmade over the past couple of decades. The same istrue for the United States itself.

Like GM, we have boxed ourselves in, and it isdif cult to see an easy out. It is very easy to see howwe can prolong the problem, just as GM did, and Ithink I have laid out a valid scenario for how thatwill happen in this article.

But printing money doesnt solve the problem;it is simply the nal chapter in a long sequence ofhighly unusual events in U.S. history that led us tothe situation we face now.

Fortunately, there is an exit for investors. Thereare plenty of ways to protect yourself and evenpro t, if you see it coming. The key is to recognizethe problem now and then act before the realproblems begin.

I look forward to more conversations on this andother issues we face over the coming year.

By Christopher RuddyLike you, I usually give credence to experts who

have been right about things before.One such expert is David Skarica.I met David at the memorial service for my

friend, the late Sir John Templeton. The service tookplace in Sir Johns adopted home of Nassau, in theBahamas.

It was not a sad occasion, as Sir John was a manof God. Jack, Sir Johns very able son and a greatman in his own right, was there, as were many ofthe legendary investors family.

I also met a young man in his 30s who hadmoved to the Bahamas from Canada to follow inthe Great Contrarians footsteps. It was David.

Based on our conversations, it was clear early onthat David offered brilliant insights into the market.

Skarica follows Sir Johns footsteps, employingsimilarly unconventional, yet highly prescient,analysis.

For instance, the market hit its most recentintraday low of 6,469 in early March 2009. Manywarned that the Dow had room to fall. Yet Skaricahad a much clearer vision of what was ahead.

In fact, only a month before, writing in theFebruary 2009 edition of FIR (Market RallyAhead, Bear Will Remain), Skarica told investorsto expect a 50 to 100 percent market bounce upfrom that bottom, retracing a good portion of itsprevious high above 14,000.

Stocks just did that, putting back on more than62 percent before peaking again in the past fewweeks.

FIR investors who ignored all the gloom-and-doom folks and followed Skarica made signi cantpro ts as stocks roared off the bottom.

With such a track record, it was no wonder that,when I recommended David to a famed New Yorkbook publisher, John Wiley & Sons, it snatched himup with a contract to produce his rst major book.

Important: FIR subscribers who would liketo renew their annual subscription can get a freecopy of Davids The Great Super Cycle: Pro tfrom the Coming In ation Tidal Wave and Dollar

Devaluation a $28 value (shipping included free).Please call the Newsmax customer service line at800-485-4350 or learn more about the offer onlineat www.newsmax.com/david

FIR Readers: Dont Miss This Important Book!

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As major Wall Street banks imploded and hugecar companies went belly up in the crash a few yearsback, the solutions came fast and furious from theTreasury and the Federal Reserve.

Money was pumped into bank balance sheets,and losses were absorbed in exchange for cheapstock. While painful and costly, the x seemed towork. We avoided or at least postponed a

nancial Armageddon.Or did we? The TARP bank bailout cost has

been minimized dramatically, but the car companiesstagger along. Now the housing mess has resurfacedin the form of millions of questionable foreclosures.

The FBI is investigating. Congress is calling for

answers. If banks cannot prove they ownmany of the homes they sold in the formof securitized bonds, were back to squareone in the credit crisis. One or more majorU.S. lenders could go up in smoke.

Into this wild blame game iesChristopher Whalen, a co-founder ofbank ratings adviser and consultancyInstitutional Risk Analytics. Whalen alsois the author of several books, includinghis most recent, In ated: How Money and DebtBuilt the American Dream , published by Wiley andavailable now.

Whalen says were nowhere near done with thebanking mess precisely because we havent reallydealt with the mortgage asco underlying it all.Essentially, bank bondholders are in the cross hairs,he says.

The problem is that the bondholders in questionare pension funds and other middle-of-the-roadsavers basically, the American people.

Digging our way out is not going to happen viamarket forces or simply over time, Whalen says. Thegovernment has to get back into re ghting mode.Here is the interview with Christopher Whalen:

In the book, you provide us with a fascinating

history of how we have gone through repeated cyclesof boom and bust, thanks to excessive credit. If thepast is any indication, what is your take on wherethe U.S. economy is headed next?

I think we are headed into restructuring. Wevebought some time since 2008 when we had the big

crisis in the nancial markets, but the U.S. economyis restructuring despite the efforts by politicians inboth parties to pretend that were not.

You are going to see the banks under a lot ofpressure for the next couple of years and I think alsohome prices, commercial real estate the whole 10yards is going to continue to de ate simply becausetheres not enough income, real income, in thiseconomy to justify the valuations. Laurie Goodmanat Amherst Securities I quoted her recently sayingthat 1 in 5 residential properties in this country maygo into foreclosure.

So were talking about a crisis thats still verymuch ahead of us. Were not done yet, and thats

really the key message I want your readersto take away. Weve got a lot of work todo.

U.S. debt seems to be the new bubble.Is there any chance of rates staying lowfor years as we dig out?

I dont think so, and the reason is thatthe Fed has been doing this for two years.They are going to have to let interest rates

go up eventually, or everything in this economy pension funds, insurance companies, banks in termsof their investments are going to have zero yield.

The trouble with having low interest rates to helpleverage entities like banks and hedge funds andthe rest of them is that it kills savers. Youre takingincome, trillions of dollars a year in income, awayfrom savers retired Americans on anythingthat earns interest.

So your more conservative investors, the publicsector pension funds, are being punished by thisFed interest rate policy, and thats why I think weregoing to have to let rates go up within the next yearor so. If we dont, were Japan. We will replay Japanlarger.

Do you see a GOP win as helping or hurtingstocks in the economy?

Historically, it has not helped. I think if theRepublicans, though, start to address the publicshunger for honesty and their hunger for people whoare actually competent in nance and can discussthese issues with speci city, then I think it could

Christopher Whalen: The Crisis Is Still Ahead of Us

Lowrates takes

trillionsaway from

savers.

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be good for stocks. We actually may reverse thehistorical trend.

I sit on the advisory committee of my little villageof Croton-on-Hudson, N.Y., and let me tell youthat the issues they are dealing with are exactly thesame as the issues that are coming at every singlemunicipality and state in this country, which is theattack on the property tax base which underlieseverything.

Every community in this country is supported

by property taxes. So if the housing market keepsgoing down, if we continue to see no leadershipfrom the Obama administration on restructuringthe government housing complex, then I think weregoing to have a very dif cult time in all markets. Itwont matter, stocks or bonds.

Why havent companies put more of their cash back into the economy by now?

For two reasons: One is low Fed interest rates. Ifyou are a treasurer and you are making zero yieldon your cash, what do you do? You keep more cash.Youre not really getting an economic return.

The other thing is that big corporations, even thelargest corporations like General Electric, were shutout of the money markets in 2008. They rememberthat. So your typical corporation is now keepingtwice as much cash on hand as they used to and thereason for this, very simply, is that big companieshave to be able to nance their customers.

If they sell you something, they are usually goingto give you terms, at least 30 days. So they have to

be able to nance that sale and rightnow, its very hard for them to get themarkets to help them with that. Theycant sell that piece of paper thatevidences your amount owed to aninvestor right now, the way they usedto in the commercial paper market.

So your big companies are nowself- nancing, and its kind of unfair,I think. Its typical politics for thegovernment to say, Oh look at all ofthis corporate cash. Weve got to getthem to invest.

Theyll invest when they seedemand, and right now they are notseeing a whole lot of demand fromcustomers. So there are really three orfour factors behind that issue.

You monitor the banks. Do you see Europes banking system stabilizing soon or a collapse?

Theyre not going to collapse all at once, but theyare de nitely going to restructure. We wrote a notefor our clients a couple of weeks ago about AngloIrish, a bank that goes back to the colonial periodthats being wound down by the Irish government.

We suspect that the Irish government is goingto try and subsidize the bondholders, who haveescaped the pain so far, as you know. But I suspect

that in that case EU government is going to say tothe Irish, No, you cant subsidize the bondholders.They have to take some pain.

So I think the next phase of the crisis not justin Europe, but also in the U.S. is going to haveto be governments talking to the bondholders, theother stakeholders in these enterprises, and askingthem to contribute to the restructuring because thelosses in that bank are going to wipe out the equityseveral times.

So you have to start having a conversation. Is thegovernment going to pay for this? Or are the bondholders going to take some of the pain? Becausereally, since the failure of Washington Mutual andLehman Brothers, you have not had bondholdersof large organizations take a hit. Its only been thelittle banks, the community banks in the U.S., thatare subject to market discipline and, meanwhile, wesubsidized the big guys.

I think thats the issue ahead of us: Are we goingto keep subsidizing the bondholders at publicexpense, or are they going to take a hit, too?

Checkable Deposits and Currency Held by Corporations

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402000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

How much cash do companies hold? Most economists track a collection of liquidassets. Here, though, we see just cash held by U.S. nonfinancial corporations, whichhas zoomed higher. Gray areas indicate recessions. SOURCE: St. Louis Fed

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Especially in Europe.

So what do you think is the risk of a bankingcollapse here in the United States?

I dont characterize it as a collapse; I characterizeit as shrinkage. Were using the old Gilded Ageterm from the 19th century. Simply, were goingto watch their balance sheet contract. Im helpingclients right now invest in community banks, andits a tough process because to mark them to marketright now youre talking about pennies on the dollar.

So for shareholders of banks, this is not a goodtime. I think that, you know, honestly, the bigfour Bank of America rst off, followed byWells Fargo they need to be restructured withgovernment help. They have too much of what Icharacterize as an avalanche of foreclosures stillcoming at them.

Some of my dearest friends are Sylvain Raynesand Ann Rutledge, both of whom are structured

nance professionals. They both worked atMoodys. I asked them, How far are we throughthe problem? And they said Less than 25 percent.

So, in other words, the biggest part of theforeclosure problem in residential and commercialproperties is still ahead of us. Do the math: The U.S.banking system has $1 trillion in tangible equity.Were talking about trillions of dollars in losses.Clearly the government is going to be involved.

You have argued that banks have no incentiveto re nance mortgages to lower interest rates, asthe government wants. What is the solution here,considering the millions of foreclosures ahead?

A couple of things: We have to re nanceeverybody out there who has got a oating-ratemortgage and are current. In other words, thegovernment has just got to tell the banks: Re nancethem at current rates.

See, people dont understand mortgage pricing. In

the boom, when you were getting a mortgage, yourlender was maybe working for half a point. Today,that same lender, when they offer you a mortgage,is working for 4 to 5 points. Thats how muchadditional fees, credit enhancement, and everythingelse they put on top of the loan to protect themselvesand to increase the pro tability of the mortgagebanking.

Weve got to cut to the chase and tell the banksthat they can re nance everybody for a point not

ve points and that they ought to be moving thisprocess along because, even though it will hurt theirpro tability in the next quarter or two, if we savemom and dad from defaulting on their loan nextyear, thats going to be much better for the bank.

In fact, the bank is better off. Lets say they havea loan to you and you have a second mortgage,too. The bank is better off writing off the secondmortgage if the house is under water. It cant be soldto pay off the primary mortgage.

Write it off and restructure the primary mortgageand, if the obligor performs, its a home run. Thebank is going to be close to getting their moneyback in nominal terms and thats what we ought tobe targeting now, because if we continue to see aprogression of homeowners going into default andforeclosure, the U.S. government is going to end upas the biggest landowner in the country.

They already are, but they are going to go backto where they were a century ago, and the banksare going to be illiquid, too, because they are goingto own real property that they cant sell. They aregoing to become landlords.Were going to turn all of thebanks into REITs [real estateinvestment trusts].

These are the issues,frankly, that we need to betalking about in Washingtonright now, and wereparalyzed at the moment because the narrative, thelanguage we use to talk about these issues, is still 10years behind.

You know, we ought to think about the U.S. asthough it was 1920 and that we were facing secularde ation. Then I think the policy choices would beobvious. But, yeah, I do think that rates have to goup. Thats how were going to tell consumers thatthe dollar has value.

You have said that the Fed is feeding de ation bykeeping rates low. Can you elaborate on that?

Lets go back to the effect on savers. If youretalking individual savers, low interest rates by theFed are taking something like half a trillion dollarsa year in income out. So thats money that grandmadoesnt have to spend on the grandchildren, shedoesnt have to spend on groceries, whatever it is.She is going to reduce consumption.

Then you look at corporate savers, people whoinvest in government bonds, agency securities,

www.newsmax.com/whalenSee video at

Watchthe entireinterview

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basically your school district or your state. A verysafe, risk-averse investor.

Theyre losing $300 billion to $400 billion ayear in income that should be going into corporatetreasuries, public sector savers, your school district,or whatever it is. These people all need income offof their investments. Theyre not getting it.

So I think the Fed, unfortunately, even thoughthey are trying to help the banking system and theyare subsidizing the banking system to the tune oftrillions of dollars a year, they are killing the realeconomy in the process.

I just think that there has to be balance. Thatswhy I think that rates have to go up. The Fed shouldstop letting the banks park $1 trillion in excesscash at the Fed in New York and force them to buyprivate-sector assets and maybe we can get thisthing moving again.

But everything I see right now is feedingde ation, which is lower revenue, lower GDP, andlower home prices. Those things are going to kill usif we dont change them.

Former Fed Chief Paul Volcker recently warnedFed Chairman Ben Bernanke to watch out forin ation. Do you agree?

Well, I agree in the medium term, but rightnow the problem is de ation. Remember, (formerFed Chairman) Alan Greenspan didnt cause thisproblem. You have to go all of the way back toRichard Nixon and really ponder the increase indebt, the increase in government spending in the

U.S., and the attempts by the Fed tomake all of this work.

The Fed has been the facilitatorof a drug addict, and the drug addictis addicted to debt. If the Fed werereally run honestly, they would besaying no to Congress every day.They would be lecturing them on

scal issues, and they would pushrates higher in anticipation of thein ation you asked about.

Thats what we need in our centralbank. We need somebody who hasa spinal cord because the last twochairmen have been just pathetic.They are not serving the publicinterest. They need to go back andstudy Chairman Volcker and his

predecessors.Im especially thinking of Marriner Eccles and

his successor, Chairman (Thomas) McCabe in 1950who told Truman to take a walk even as the Chinesewere attacking us in Korea. That took courage.

Ben Bernanke has no courage. The whole FederalReserve Board ought to resign, in my view.

Could U.S. capitalism work with, say, a Europeanapproach to housing, with 50 percent down andvery limited mortgage access?

We had zero percent down, as you know, and20 percent equity has been the target. I think if theU.S. just went back to a more honest pricing and 20percent down, that would be such a radical changethat we would have to stop there and see whatimpact it had on the economy.

Fifty percent down would almost be Danish interms of mortgage underwriting. But what you haveto understand is that, during the boom, your typicalmortgage, the price of the mortgage was 92, 93cents on the dollar, and then they would pad the rest

of it with fees, insurance, all kinds of other stuff toessentially help an inferior borrower get credit.So what youre really saying with your question is

that were going to take that opportunity away fromthose 5, 6, maybe 10 million American householdsthat got credit in the last 10 years but certainlywouldnt apply under that regime.

Those would be tenants, and thats a big change,socially. Youve just changed the de nition of theAmerican dream, in political terms, by doing that.

St. Louis Fed Adjusted Monetary Base

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fed Chief Ben Bernanke has argued that the huge addition to money supply is not inplay yet and that the Fed can reverse oversupply in 15 minutes if necessary.

2,200

2,000

1,800

1,600

1,400

1,200

1,000

800

600

SOURCE: St. Louis Fed

( B i l l i o n s o

f D o l

l a r s

)

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The deterioration in the global monetarysituation has continued. The latest crisis is onceagain and perhaps fortunately in Ireland,one of the worlds smaller economies.

In Ireland, as in the comparable case ofIceland, the debts of a small country have spreadout into the broader, global banking system. Asmall country cannot afford banks that behavelike casinos.

In the case of Ireland, the debts threatenthe stability and perhaps even the survival ofthe euro. Only a couple of years ago, after10 years of the euro, the euro countries werecongratulating themselves on the success of theircurrency, comparing it with the greater problems

of the United States and theUnited Kingdom.

The euro had risen inexchange markets against thedollar and the pound. Germany,which is the industrial motorthat pulls the eurozone, hadrecord exports of manufacture,comparable in scale to theexports of successful Asiancountries and higher in quality.The whole of the eurozonehad the bene ts of relatively

stable prices and low interest rates. The currencyseemed to have been a success.

Now, in a strange turnaround, Ireland, one ofthe smallest of the euro countries, tried in anIrish way to avoid being rescued by its ownpartners. The other euro countries were more orless convinced that Ireland would need a bailoutif the Irish are to remain in the Euro system.

One can give a list of the most vulnerable euroeconomies. Greece is the weakest and just had toadmit that its debt gures are even worse thanoriginally stated. Ireland at the moment is thenext weakest, though not facing an immediatecash crisis.

Portugal is probably next, followed by Spain.Spain is a cause of particular worry because itseconomy is much larger than those of the otherthree weak countries. Germany wants to defusethe danger that the small countries will be unableto stay in the euro, because that would set aprecedent for withdrawing.

Bailing out Spain would be a quite differentmatter. Germany found that the bailout of East

Germany took 10 years to complete and costGermany most of the growth that might havebeen expected in the 1990s.

Spain not only has a problem of sovereigndebt but also has Banco Santander, a major assetbut a comparable liability. It is one of the biggestbanks of Europe, one that expanded very rapidlyin the last decade.

Like Citibank in the United States, it ispresumed to be too big to fail. The three largestEuropean economies are Germany, Britain, andFrance, with the U.K. and France about equalsize. Because of traditional connections betweenBritain and Ireland (for centuries they used thesame currency), Britain, which does not belong tothe eurozone, decided to contribute a signi cantportion of the Irish bailout.

Deep Debts, Deeper TiesThe United States has no responsibility to

bail out Ireland, and indeed has enough todo bailing out the nances of U.S. banks. Yetthe United States does have an interest in thestability of the euro, one of the worlds majorreserve currencies.

The big global currencies are the dollar, theeuro, the yen, and the Chinese yuan. There is acrisis in the Euro, a con ict between the dollarand the yuan, and a long-term problem of low

Japanese growth, which affects the yen.These problems are unlikely to be resolved

without risk of in ation. The world of currenciesis still sick.

Theworld ofcurrenciesis stillsick.

Sovereign Value by Lord William Rees-Mogg

An Ireland Deal Is Done,

But Spains Debts Loom

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Federal Reserve Chairman Ben Bernankesuggested during an interview on the CBSprogram 60 Minutes that it is a myth thatquantitative easing implies printing money. Withall due respect, Mr. Bernanke, if it looks like aduck and quacks like a duck, it is a duck!

Bernanke argues that his policies do notamount to printing money, as neither currencyin circulation nor money supply has increased.

This analogy is a bit like giving a loaded gun to akid, then telling your friends that its not a deadlyweapon because the shots that have been redhavent killed anyone.

Granted, we are exaggerating here because,after all, its only money we are talking about.

Yet, printing money maydestroy ones purchasing powerand thus ones lifes savings.

Indeed, the Fed doesntprint just money but supermoney. The money the Fedprints is more powerful thancurrency in circulation. Itsmoney made available to thebanking system. When the Fedbuys government bonds, or anyother security, from a bank, theFed credits the banks account

at the Federal Reserve, with the amount due.That money, however, is merely an entry on

the computer system at the Fed its literallycreated out of thin air. Its printed not physicallybut electronically. A bank with cash in itshands can create new loans; those loans maybe deposited elsewhere by the person taking theloan.

Thus the money the Fed creates out of thin aircan have a hundredfold multiplier effect by thetime it makes its way through the economy. Theloaded guns are not water pistols for kids butautomatic weapons!

The kids, of course, are the banks. So far,

their latest scolding (the 2008 nancial crisis)remains fresh in bank managers minds, so theyare rightly reluctant to release the safety on thosearms. But make no mistake about it: The banksare being handed potent weapons.

Indeed, the Fed would love to see the bankspull the trigger by handing out more loans. But itturns out that the banks are not nding enoughcreditworthy borrowers.

Truth be told, the money does nd its waysomewhere, and the Fed cannot control wherethe money ows. (Have you ever tried to controla little kid?) Instead of owing to where the Fedwould like to see all that freshly printed moneygo, it ends up in assets with the greatest monetarysensitivity: precious metals and commodities, aswell as outside of the U.S. dollar. Courtesy ofthe Feds mythical printing, gasoline is now ashigh as $3.50 a gallon at some gas stations inCalifornia.

The money doesnt stick where the Fedwould like it to because the Fed is ghtingmarket forces. Consumers would love to get theirhouse in order, quite literally. Without massiveintervention, both scal (cash for clunkers) andmonetary (credit easing, monetary easing), over-extended consumers would downsize further.

A Weak Magic WandYet the real problem is that policymakers

massive and ongoing intervention led us tobelieve that there is a magic wand, including theFeds printing press, can x our sorrows.

This leads us to the future: In our assessment,the Feds worst nightmare may well be thatthis mythical money makes its way through theeconomy. Bernanke says he could raise interestrates in 15 minutes should the economy needto be tamed.

To us, it appears highly unlikely that the Fedwill apply any such 15-minute policy to the U.S.economy.

Forex Insight by Axel Merk

The Fedwould loveto see the

banks pullthe trigger.

Debunking Bernankes

Money Myth

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The U.S. consumer has spent years rushingto the shopping mall to buy things no one needswithout heeding the price.

Such behavior has been a mainstay of theglobal economy. Now, European Central Bank(ECB) President Jean-Claude Trichet also hasrevealed himself to be a U.S. consumer at heart.

Recently, the ECB rushed to the EU centralbankers equivalent of a huge shopping mall

the EU government bond market and boughtthings no one needs without heeding price.The ECBs attempts to rig the EU bond

markets arent, of course, a bailout.Trichet said the extension of both the

nonstandard monetary measures to providenancial markets with

liquidity and the ECBprogram to purchasegovernment bonds weredriven by acute tensions in

nancial markets.He stated that an

overwhelming majority ofthe governing council backedthe ongoing purchaseof EU government bonds(no doubt German CentralBank President Axel Weber

disagreed!), that the purchases would continueto be sterilized, and that it remains a temporaryprogram.

Its not quantitative easing; werewithdrawing all the liquidity, Trichet said.

During Trichets news conference, it wascon rmed that the ECB was on the bid forIrish and Portuguese bonds.

Investors should keep in mind that the ECBhas to purchase EU bonds of the eurozonebecause it cant bail out eurozone governmentsdirectly.

This, of course, will cure the symptoms ofthe wider bond spreads, at least for now, but it

doesnt cure the underlying cause, which is thatthe euro doesnt work.

We can say Trichet has succeeded in buyingtime for now at least. If the macroeconomicdata continue to suggest that the eurozones morestretched economies can grow enough to nancetheir debts, that time will be really helpful.

But if the economies in the stretchedperipheral nations disappoint, the market

probably will ask for more soon enough.Nevertheless, the debt crisis once again hasdouble-crossed the ECB exit strategy.

It is possible that, in the midst of a futurecrisis, European policymakers might makeuncoordinated and even contradictorystatements, potentially causing market distortionsand jeopardizing funding access of individualsovereigns. To me, it is hard to see how evenItaly and Spain can attract market funding atreasonable rates under new rules designed topromote stability.

New Lows AheadThere is no doubt in my mind that the

resolution of Europes crisis inevitably willinvolve a dif cult political debate overapportioning the cost of a nal and sustainableresolution. I dont think its an exaggeration tosay this crisis will re-emerge until it is de nitivelyresolved.

Before coming to that, the crisis will manifestitself more and more in the political domain ofthe different sovereign eurozone countries.

For investors, it could and probably willbecome very dif cult to understand what will begoing on in the eurozone because it will be allabout politics, not economics.

I certainly can see the possibility that the eurowill make new lows relative to the October 2008low of $1.23 and the June 2010 low of $1.1875.It would be rash, at least for now, to call it muchfurther than these levels.

We can sayfor now, atleast, thatTrichet hassucceededin buyingtime.

Global Investor by Hans Parisis

Its More About Politics Than

Economics for Euro

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Life is what happens to you while yourebusy making other plans. John Lennon

Every so often, there are pivot points ineconomies, moments when their future prospectsare determined. Often, these pivot points areunannounced, and historians identify them onlyin retrospect. This is especially true, I feel, of thefar-reaching, global changes in climate being set

in motion by the mysterious dynamics of solarphysics.For example, the fall of the Roman Empire

was not driven just by scal exhaustion,punishing taxation, and runaway in ation, asEdward Gibbon detailed in The Decline and

Fall of the Roman Empire . Italso coincided with a dramaticcooling of temperatures becauseof a cyclical decline in the sunsenergy output.

Incomes plunged becausecrop production fell away inan agricultural economy. Thecenturies known as the DarkAges were not incidentally aperiod of traumatic cold, a timewhen the Mediterranean was sochilly that the Nile froze.

Another hidden pivot of history was thedestabilizing impact on the global economyof the end of the Medieval Warming periodwith the arrival of the Little Ice Age, beginningaround 1300. Suddenly colder weather shortenedgrowing seasons in Europe. Among other things,this led to recurring crop failures, widespreadmalnutrition, and population collapse asweakened people succumbed to the Black Death.

More prosaically, the abandonment of grapecultivation in England (wine grapes once weregrown as far north as Yorkshire) and elsewherein Northern Europe dictated a dramatic shiftaway from wine drinking to beer consumption,

especially among the European poor.It happened elsewhere, too. The social and

political instability informed by colder weathercaused crop failures that destabilized the MongolEmpire, with particularly acute famines from1333 to 1337. These calamities gave strongimpetus to change in trade routes and the growthof Western empires in the Age of Discovery.

Because the Mongol Empire had been

exceptional in welcoming foreigners, whenMongol rule collapsed rst at the periphery inPersia, and then in China itself, in 1368 thisresulted in closure of the northern overland traderoute to China, (think of Marco Polo), resultingin much higher prices for oriental goods,including spices in Europe.

Higher prices for spices, particularly pepper,which was important for preserving food (ordisguising rotting meat) before refrigeration,provided an impetus that led to Vasco da Gamasvoyage around Africa to India. The Portugueseopened a new route to import Asian spices toEurope, disintermediating the northern Italiantraders who had controlled the spice trade inEurope for centuries.

The economies of the Venetian Republic andGenoa slumped, never to recover after da Gamareturned to Lisbon in 1499 with a ship loadedwith pepper. Portugal became Europes principalintermediary in the trade with the East.

Recalling these past pivot points is pertinentbecause they underscore the central role thatclimate change and shifts in trade regimes haveplayed in determining who prospers and who doesnot. In this respect, the current global power grabassociated with global warming is unusual inthat it does not entail actual economic damageimposed by shifts in solar radiation but ratherprojected or imaginary harms that are anticipatedto follow from use of carbon-based fuels.

In my estimation, the whole fuss over globalwarming was never very plausible, given the

Ahead of the Curve by James Dale Davidson

Fedeasing goes

hand-in-hand withraisingtaxes.

Living in Dangerous Times

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huge mismatch between human energy usage andthe solar constant, which is the amount of incomingsolar electromagnetic radiation per unit area or,simply, the known energy input from the sun.

Global energy consumption in 2009 wascalculated to be about 15 terawatts or 15 trillionwatts, while the surface area of the earth is about510 million square kilometers. This means that theaverage heating from all human energy sourcesis about 30 milliwatts per square kilometer, thatis, 30 one-thousandths of a watt. Try roasting amarshmallow on that.

By comparison, the solar constant as measured bysatellite is roughly 1,366 watts per square meter. Inshort, human warming of the planet from all energysources is trivial in relation to solar heating.

Of course, solar energy reaching the earthuctuates from month to month and from year to

year. Thats why climate change is not a noveltybut a constant feature of life on earth.In a better world, you would not have to worry

about how these issues could be misperceived. Buttoday you do.

Notwithstanding sweeping Republican gainsin the midterm elections in November, decisionsalready may have been made that will condemnyou and your children to a future of falling livingstandards.

Risk No. 1 involves the climate changeconference in Cancn, Mexico, from Nov. 29, toDec. 10. A year ago, I thought the risk from futureclimate conferences had been mitigated by therevelations published Nov. 20, 2009, showing thatscientists were pressured to fabricate evidence ofglobal warming. As Alan Caruba recently wrote:

Nov. 20, 2009, is an important date becauseit was the day that global warming ended . . . theday that a total fabrication, a hoax, was revealedto be the work of the IPCC [The IntergovernmentalPanel on Climate Change, established by the UnitedNations and the World Meteorological Association],aided and abetted by a vast network . . . who soldtheir souls for grants and other funding.

Thats what I thought. But I was wrong. Theglobal warm-mongers have another ace uptheir sleeves. It now seems likely that the globalwarming hysteria will provide a convenient pretextfor the imposition of Smoot-Hawley-style tariffson U.S. goods by countries seeking to venture intoprotectionism.

Lord Stern of Brentford said in an interview

with The Times of London that the United Stateswould have to start worrying about being shutout of markets because their production is dirty.Lord Stern advises several G20 leaders and is oneof the key players seeking an international deal onemissions, the newspaper reported.

In other words, the reluctance of Congress toslash living standards in obeisance to the progressivequirk of slashing CO2 emissions to halt supposedglobal warming could lead to internationallysanctioned protectionism against U.S. products.

Risk No. 2 involves the extension of the Bush taxcuts and the danger that rate cuts for the highestearners will not be made permanent. Not worried,because you are not one of them? Think again.

As Fed Chairman Ben Bernanke has proclaimed,In ation is our goal. Usually, when the head ofa central bank wants to create in ation, he has thecapacity to do so. This could prove to be anotherdisaster for upper middle-income households,equivalent to the alternative minimum tax (AMT).

Your Taxes Are Going UpIn case youve forgotten the dirty little secret

of the AMT, it was introduced in 1969 on thepretext that it would target just 155 high-incomehouseholds that had been eligible for so many taxbene ts that they owed little or no income tax underthe tax code of the time.

What began as a tax aimed at just 155 wealthyfamilies has grown through the magic of in ation totarget 20 percent of American households.

According to a Congressional Budget Of cereport: In 2010, if nothing is changed, one in vetaxpayers will have AMT liability and nearly everymarried taxpayer with income between $100,000and $500,000 will owe the alternative tax.

Rather than affecting only high-income taxpayerswho otherwise would pay no tax, the AMT hasextended its reach to many upper-middle-income

households.The Obama-Bernanke program of quantitative

easing to create in ation goes hand-in-hand withPresident Barack Obamas plan to raise taxes on155 wealthy households. When theyre nishedtrashing the dollar, every cleaning lady will be in thetop bracket. And so will you.

Dont sleep lightly. We face an in exion point onthe way to higher taxes and lower living standardsin the United States.

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Stocks are about 20 percent higher since hittingtheir lows in July. Since our last review, the S&P500, a broad and representative index of the stock

market, gained 1.77 percent on a total return basis,which includes dividends.In comparison, the diversi ed FIR portfolio rose

by 0.50 percent since our last review. One cannoteat relative returns, of course, so its worth notingagain that, for 2010, stocks in general have returned12.49 percent, compared with 29.66 percent for theFIR portfolio.

Over ve years, the markets have brought mostinvestors 3.52 percent, roughly the rate of of cialin ation, effectively a zero return. Meanwhile, the

FIR portfolio has averaged 14.42 percent in thattime frame.The Federal

Reserves decisionto proceed witha new round ofquantitative easing,popularly knownas QE2, has beenthe most notableeconomic trend inthe domestic news.

In the UnitedStates, marketparticipants clearlyunderstand the details of QE2. Under this initiative,the Fed announced that it will buy $600 billion inlong-term Treasurys through the rst six monthsof 2011. The Fed also said it will reinvest another$250 billion to $300 billion in Treasurys that arescheduled to mature during that time frame.

Contrary to the view of the Feds economists,we arent so sure that QE1 really did push downinterest rates. At the end of December 2008, theinterest rate on the 10-year Treasury note stoodat 2.24 percent. Fed data shows that rates rosesigni cantly as the Fed bought securities in the openmarket, reaching 3.83 percent in March 2010.

One thing is very clear, though: Asset pricesdid go up as QE1 unfolded. The S&P 500 rose bymore than 30 percent. Gold rose about 35 percent,silver by more than 50 percent, and copper morethan doubled. The copper increase is especially

troublesome, given that some economists feel thatcopper, a far more industrial metal than gold orsilver, is one of the best indicators of future in ation.

Moreover, prices rose on almost everythingduring QE1. Only the dollar fell, declining by morethan 3 percent.

Using rough calculations, then, each dollar theFed created boosted economic activity by about 25cents. Most of the other 75 cents probably went tooverseas investors who pro ted from the dollarsdecline and were able to sell some of their Treasuryholdings to the Fed.

This has been a well-known rule of economicssummed up many years ago by the late Nobel

laureate economist Milton Friedman, who notedthat in ation is always and everywhere a monetaryphenomenon.QE2 is likely toprove the genius ofFriedmans insightsonce again.

The FIRportfolio is tiltedstrongly towardpositions thatwill do well inan in ationaryenvironment,one in which the

dollar declines in value. We do not know whenin ation will pick up, but the destructive power itcan unleash on your portfolio means its better to beearly than to wait until the damage is under way.

New PositionsWe continue to believe that in ation will be

a problem in the long term. Countries such asAustralia and Canada, rich in natural resources,should fare well in an in ationary future. Byapplying our stock selection discipline to thesecountries, we are adding several safe, large-capcompanies to the portfolio. They are readilyavailable to U.S. investors as American DepositaryReceipts.

In Australia, mining giant BHP Billiton (BHP) has $12 billion in cash available and is shopping forgrowth. Long-term prospects are excellent for the

FIR Picks More Than Doubled Stocks in 2010!

Year-to-date 1-year

3-years

5-years

Since Inception

FIR S&P 500

30%

25%

20%

15%

10%

5%

0%

-5%

Our Stellar Record: FIR Portfolio Returns vs. S&P 500

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industry and this well-managed company. FostersGroup (FBRWY) , an Australian brewer, makesthe eponymous beer popular in the United Statesand around the world. The stock trades at half thevaluation of industry leader Anheuser-Busch, basedon next years earnings estimate.

Canadian nancial stocks avoided the worst ofthe global crisis because they did not participate inthe subprime debt fad. Toronto-Dominion Bank(TD) has proved that it can grow through smartacquisitions. The bank is shopping for banks thatthe FDIC has shut down and has agreed to buyauto lender Chrysler Financial for $6.3 billion.Like us, the managers of TD seek value in theirinvestments and are patient. This stock is likely to

be in our portfolio for the long term.

Closed PositionsWe sold PowerShares High Yield Dividend ETF

(PEY) simply because we are con dent that we cando a better job nding safe, dividend-paying stocks.

The ETF uses an index approach to select stocksand seems to catching more losers than winnerswith this strategy.

Becton, Dickinson and Company (BDX) also wasold. With changes to the healthcare system comingin the United States and Europe, we want to limitexposure to this sector. BDX is a good company, butit is better to build a portfolio of great companiesfor the long term.

January 2011 Portfolio

Ticker

Recommendation Date EntryPriceCurrent

Price Total ReturnLatest

Recommendation

PPH Pharmaceutical Holdrs 15-Sep-03 76.74 65.47 12.30% Hold/ Stop 60

PFE Pfizer 1-Aug-05 26.46 17.08 -19.13% Hold

RDY Dr. Reddys Laboratories (ADR) 15-May-06 33.55 39.82 19.54% Buy

GSK GlaxoSmithKline (ADR) 15-Mar-07 54.21 39.80 -15.12% Hold

NVS Novartis AG (ADR) 15-Jun-07 55.96 58.99 17.63% Hold/Stop 42.79

DBU WisdomTree International Utilities Fund 15-Oct-07 33.38 19.98 -31.74% Buy

BRK.B Berkshire Hathaway 12-Oct-08 52.40 79.55 51.81% Hold/Stop 75

MO Altria Group 19-Dec-08 15.28 24.75 86.37% Hold/Stop 23

KMB Kimberly-Clark 19-Dec-08 51.11 61.99 29.85% Hold/Stop 59

JNJ Johnson & Johnson 12-Jan-09 57.8 62.57 11.69% Hold

SNY Sanofi-Aventis 12-Jan-09 31.5 32.79 4.10% Hold/Stop 24.65

GLD SPDR Gold Shares 2-Feb-09 92.63 134.70 45.42% Buy

GDX Market Vectors Gold Miners (ETF) 27-Feb-09 33.36 60.99 82.82% Buy

DJP Dow iPath AIG Commodity Index Tot. Ret. 26-May-09 36.23 46.63 28.71% Hold

NSRGY.PK Nestl 30-Jun-09 37.95 57.15 50.59% Hold/Stop 52

GLD SPDR Gold Shares 1-Oct-09 97.89 134.70 37.60% Buy

TBT UltraShort 20+ Year Treasury ProShares 28-Jan-10 47.92 40.12 -16.28% Hold

PFIUX Pimco Unconstrained Bond Fund 28-Jan-10 10.88 11.06 1.37% Buy FPNIX FPA New Income Fund 28-Jan-10 10.98 10.83 -1.37% Buy

BMO Bank of Montreal 20-May-10 54.88 61.92 12.83% Buy

COW iPath DJ-UBS Livestock TR Sub-Idx ETN 29-Jul-10 29.63 29.22 -1.38% Buy

EMF Templeton Emerging Markets Fund 16-Sep-10 20.4 22.23 8.97% Buy

FCX Freeport-McMoRan Copper & Gold 16-Sep-10 81.73 112.05 37.60% Buy

BHP BHP Billiton 15-Dec-10 89.13 89.13 0.00% Buy

FBRWY.PK Fosters Group 15-Dec-10 5.43 5.43 0.00% Buy

TD Toronto-Dominion Bank 15-Dec-10 72.27 72.27 0.00% Buy

As of close Dec. 15 total return adjusted for splits, dividends, and distributions

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Financial Briefs Jim Rogers: Let Bankrupt EuropeRestructure

Commodities guru Jim Rogers, chairman ofRogers Holdings, says some European countriesare already bankrupt and should be allowed torestructure their debt.

You need to let Ireland go bankrupt, Rogerstells CNBC. Why should . . . anybody pay formistakes made by Irish politicians and Irish banks?

That is unbelievably bad morality, and itsbad economics as well. Let the bank bondholderslose money, let Ireland reorganize and start over.Propping people up and carrying zombie banks and

zombie companies is not going to work.Greece, Spain, Portugal, Belgium, and Italy are allteetering on insolvency, and the United Kingdom istotally insolvent, Rogers says.

This is a serious problem we have in the West.Somebodys got to deal with it, he says.

Europes problems notwithstanding, Rogers sayshe owns and remains long on the euro. Even thoughthe British pound is doing well, he doesnt own it.

When asked about the United States, Rogers saidthe central banks money printing isnt good for the

world but at least the government isnt raisingtaxes.I think it is dumbfounding, stupefying, that we

have a central bank in the United States that thinksall it has to do is print money, he says. That hasnever worked.

Moreover, the price of everything is going up food, entertainment, education, healthcare . . . thatscalled in ation.

The Wall Street Journal reports that FederalReserve Chairman Ben Bernanke has said theU.S. central bank will remain focused on keepingin ation risks low, while suggesting that quantitativeeasing could be increased to stimulate the economicrecovery. (Moneynews.com)

Survey: Most Favor Social SecurityTaxes Based on Total Income

Most Americans feel Social Security taxes shouldbe paid on all or most of the income workers earnannually, according to Rasmussen Reports.

The survey found that 60 percent agreed onpaying Social Security taxes in such a manner, 21percent disagreed, and 19 percent were not sure.

Americans now pay Social Security taxes only onthe rst $106,800 they earn each year.

These ndings differ little from a similar surveyin August 2008, when Barack Obama, then apresidential hopeful, rst proposed higher SocialSecurity taxation on the campaign trail.

Full Social Security bene ts kick in at age 66,although some in Washington want to raise that ageto 70 for future retirees.

Social Security costs will exceed tax revenuebeginning in 2015, according to Bloomberg News.

Republicans, including incoming House Speaker John Boehner, want to raise the retirement ageand either limit or halt bene ts for higher-incomeretirees, which some Democrats oppose.

Yet one Democratic-led policy group,Washington-based Third Way, wants to raise theretirement age, trim or cut Social Security bene tsfor wealthier retirees, limit cost-of-living increases,and help young workers create private retirementaccounts.

Other Democrats argue that any debt-reduction

proposal must achieve the goals of reducing thede cit, promoting economic growth, and preservingSocial Security, outgoing House Speaker NancyPelosis spokesman Brendan Daly tells BloombergNews. (Moneynews.com)

Volcker: Fed Eventually Will NeedTo Head Off Inflation

Former Federal Reserve Chairman Paul Volcker,who is head of President Barack Obamas EconomicRecovery Advisory Board, said the Fed eventuallywill need to act to avert in ation after providingrecord monetary stimulus.

The Federal Reserve will have to act in a timelyway to head off in ationary consequences, Volckersaid during a panel discussion in Washington. Ithink they understand the problem.

Fed Chairman Ben Bernanke, who said he prefersin ation of 2 percent or a bit below, is leadingthe central bank in a program to purchase $600billion in longer-term Treasury securities to boost

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growth and prevent too-low in ation. Republicanlawmakers say the policy may fuel a surge in prices.

The Feds preferred gauge of in ation, thepersonal consumption expenditures index excludingfood and energy, rose 0.9 percent in October from ayear earlier. Including all items, the index increased1.3 percent.

Although in ationary pressures are not aproblem right now, Volcker said hes concernedabout the commitment of central banks to 2 percentin ation.

The popular rule for central banks nowis somehow price stability, but price stabilityinterpreted as 2 percent in ation, said Volcker, 83.Over the course of a generation, this rate of in ationcuts purchasing power in half, he said.

It is not exactly my de nition of stability, butthat is the rule that has become central to centralbanks around the world, he said.

While Fed chairman from 1979 to 1987, Volckerraised interest rates as high as 20 percent to tame anannual in ation rate approaching 15 percent.

Asked about the legislative overhaul of U.S.nancial regulation, Volcker said, There is some

danger if the Federal Reserve kind of becomes allpowerful.

The legislation creates a consumer bureau housedat the Fed, places the Fed chairman on a councilof regulators to monitor rms for systemic risk

to the economy, and gives the Fed responsibilityfor overseeing systemically important rms.(Bloomberg News)

End of Build America BondsThreatens Municipal Market

The looming end of the federally subsidized BuildAmerica Bonds (BABs) program may push up yieldsin the $2.8 trillion municipal securities market andput more nancial pressure on cash-strapped statesand cities, investors said.

Senate Democrats backing the subsidy, whichhas helped nance bridges, roads, and other publicworks, fell short in a bid to get the program addedto a bill extending the 2001 and 2003 income-taxcuts. That failure was the latest in efforts to keep theBuild America program alive beyond its scheduledend on Dec. 31.

The securities, which carry taxable interest ratessimilar to corporate debt, have allowed state andlocal governments to access investors abroad and

others who dont buy traditional tax-exempt bonds.That has eased the supply of tax-exempt bonds andbuoyed prices, which move inversely to yields, atrend that may reverse if the program is killed.

It could get pretty ugly, said Rob Novembre,managing director at Arbor Research & Trading Inc.in New York, who runs the companys municipal-trading operation. Whoever owns munis couldpotentially experience some pain.

Build Americas were created under PresidentBarack Obamas stimulus legislation as a meansof driving down borrowing costs for localitiesand funneling money to job-stoking constructionprojects. More than $179 billion of the securitieshave been sold since April 2009, funding clean-water projects in Ohio, highways in Kansas,dormitories at Rutgers University in New Jersey, anda new bridge spanning the San Francisco Bay.

The BABs program has been a great successstory, California Treasurer Bill Lockyer said. IfCongress lets it expire, it will damage our economicrecovery and in ict a multibillion-dollar injury ontaxpayers, not just in California but in every state inthe nation.

California and local issuers in the state have soldabout $36 billion of the taxable debt, he said. Inan interview on Bloomberg Televisions InBusinessWith Margaret Brennan , Lockyer said the BuildAmerica program has helped create tens of

thousands of jobs.Although Obama and other Democrats havesupported prolonging the program, they haverun into opposition from Republicans critical ofthe stimulus package. Extensions have passed theDemocratic-controlled House twice only to stallin the Senate, where the Republican minority hassuf cient power to block legislation. The U.S.government pays 35 of the interest costs on BuildAmerica bonds. (Thomson/Reuters)

TrimTabs: Bond Market Cracked,About to CrumbleHedge funds and other speculators are lining

up against the Fed on new debt, a signal that thegovernment debt market is hugely overbought andset to stumble badly, according to new data fromTrimTabs Investment Research.

TrimTabs told its clients that investors have beenmoving into bond mutual funds and exchange-traded funds (ETFs) while leaving stock funds.

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Investors put a combined $708.8 billion into bondvehicles since the beginning of 2009 while takingnearly $100 billion out of stock funds and ETFs.

Thats too many people on the same side of theboat, experts warn.

We now spot what we think might be tellingcracks in the bond markets foundation, wroteTrimTabs analyst Vincent Deluard, reported Forbes.

Mutual-fund investors were selling their long-term Treasurys to buy Treasury In ation-ProtectedSecurities, Deluard wrote.

Meanwhile, speculators are building positions inexpectation of a ight from U.S. debt.

Bearish 10-year Treasury sentiment soared inour November survey of hedge-fund managers, andspec traders have large short positions on Treasuryfutures on both wings of the curve, wrote Deluard.

While Federal Reserve Chairman Ben Bernankeis going on television to promise even morequantitative easing if necessary, many smallinvestors are jumping ship now to get into stocks asthe recovery at last gains traction.

The tax-cut deal now working through Congressmay have been the nal trigger.

Ordinary investors big move out of bondshas been a while coming, but ultimately it was apredictable trend, experts say.

Investors who got out of stocks and went intobonds for safety and security thought they had it

made in the shade, Marilyn Cohen, president ofEnvision Capital Management, told the Los AngelesTimes . Well, they did for two years, but its over. Alot of retail investors who look at their bond fundshave got to be freaked out, said Cohen, whoseWest Los Angeles rm specializes in bonds for smallinvestors. (Moneynews.com)

Roubini: Bond Vigilantes MayHave U.S. in Crosshairs

President Barack Obamas deal to extend theBush-era tax cuts could have bond vigilantes traders who demand higher yields on fears of de cit-related risks targeting U.S. debt markets, saysNew York University Nouriel Roubini.

Obama-GOP tax deal costs $900 billion overtwo years. U.S. kicking the can further down theroad. Are bond vigilantes starting to wake up?Roubini says on his Twitter account.

The White House and Republican leaders agreedto extend tax cuts to all Americans, including the

wealthy as well as extend unemployment bene ts.The bill passed and became law in December.

Both sides say the deal will spur economicrecovery and lower unemployment rates, althoughsome say the agreement threatens to widen analready gaping U.S. spending de cit.

Some say that the move wont hurt the U.S.economy at least not in the short term whilecreditor nations such as China continue to lend theU.S. money cheaply.

Economic problems in Europe are focusing theworlds attention on that side of the Atlantic, whichgives the United States a little time out of the hotseat and keeps the dollar safe, says one ChineseCentral Bank authority.

For now, market attention is still on Europeand for the coming six to 12 months it will notshift to the United States, Li Daokui, an academicmember of Chinas central banks monetary policycommittee, tells Reuters.

But we should be clear in our minds that thescal situation in the United States is much worse

than in Europe. In one or two years, when theEuropean debt situation stabilizes, attention of

nancial markets will de nitely shift to the UnitedStates. At that time, U.S. Treasury bonds andthe dollar will experience considerable declines.(Moneynews.com)

UCLA Indicator: A Rise, but HintsOf Continued WeaknessThe Ceridian-UCLA Pulse of Commerce Index

(PCI), a real-time measure of the ow of goods toU.S. factories, retailers, and consumers, rose 0.4percent in November following three consecutivemonths of decline.

The growth, while positive, isnt enough to offsetthe 0.6 percent decline that the PCI saw the previousmonth, nor the 2.1 percent decline experienced inthe PCI since July.

Although the PCI is up on a year-over-year basis,the three-month moving average has been decliningfor four months, suggesting relative weakness withinthe goods-producing segments of the economy.

The PCI is based on an analysis of real-timediesel-fuel consumption data from over-the-roadtrucking tracked by Ceridian.

By analyzing payment-card data for the locationand volume of diesel fuel truck operators buy, thePCI provides a detailed picture of the movement of

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goods and materials across theUnited States.

While the PCIs most recentdata show growth, it is notsubstantial enough to offset theloss from the third quarter, saidEd Leamer, chief PCI economistand director of the UCLAAnderson Forecast.

In short, Novembersup is relative to a low bar,so the growth is only mildlyencouraging. The atness wereseeing with the latest PCI datare ects inventories in motionwhich seem to be signaling a weakfourth quarter. (Moneynews.com)

Forex Guru: U.S.Headed for NewRecession

The U.S. economy is headed fora new recession, said John Taylor,chairman and chief investmentof cer of FX Concepts, whichlikely should bene t the dollarand weigh on commodity prices.

Its a new recession. Werealready growing, but the numbersshow that the U.S. governmentis still the primary creator of thisgrowth, Taylor said at the recentReuters Investment OutlookSummit.

Taylor runs the worlds largestcurrency hedge fund with assetsunder management totaling about$8.5 billion.

I would argue that, by the

middle of next year, we will be ina recession and our scal handswill be tied, he said.

Taylor has maintained in

previous interviews that theFederal Reserves quantitativeeasing program, designed as a wayto help jump-start the economy,wont necessarily prevent arecession.

Banks in a recession tend todemand the repayment of loans,and if the debts are denominatedin the U.S. currency and inmost cases, they are theninvestors are squeezed as theyscramble to nd dollars to repaythe debt. That should be dollar-positive, Taylor said.

This was what happened in late2008 when panic in the markets precipitated by the collapseof U.S. investment bank LehmanBrothers drove the safe-havendollar higher against most majorcurrencies.

Its kind of perverse. Whenthe U.S. economy is doing badly,the dollar goes up and when theeconomy is doing well, the dollargoes down.

Taylors remarks dovetailedwith Fed Chairman Ben Bernankescomments on the CBS program 60Minutes in December.

Bernanke said the Fed couldend up buying more than the$600 billion in U.S. bonds it hascommitted if the economy fails torespond or unemployment stayshigh.

The U.S. economy grew at amodest 2.5 percent annual rate inthe third quarter. Stronger growth

is needed to create large numbersof new jobs and make a dentin unemployment. (Thomson/ Reuters)

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