FSO Editorial "Best Quotes of April 2006" by John Rubino 05/08/2006

Christopher Laird, PrudentSquirrel
Gold bullion is not going to be a feasible alternative to the U.S. dollar because there is not enough of it to make a market. It will all just become "not for sale."

Ted Butler, Investment Rarities
Most of you know that the lessons you have learned in life the hard way, through adversity, are those that are most obeyed. The [silver] dealers, likewise, have suffered heavy losses as a result of the 8 month silver rally and are, in fact, covering at substantial loss for the very first time in decades. I think they are more concerned with closing out their shorts and eliminating continued exposure to the upside, than they are with the losses they have booked. I think they will be reluctant to put their heads back into the lion’s mouth by going short again.

Richard Daughty, the Mogambo Guru
But the Treasury is still selling bonds like money is going out of style, which it actually is! Hahaha! Well, perhaps this is not the most clever Mogambo bon mot (CMBM) in history, but it is nonetheless apropos because the entire REST of history has shown that currencies that are depreciating from over-issue are seldom "in style", and sometimes (after a government/central bank creates waayyy too much money and credit, like now) they go so far OUT of style that they are never heard from again! I bring this up partly because this is, sadly, the ultimate fate of the US dollar, as this is always the fate of the currency of any country, world or planetary system that is so ignorant, or so stupid, or so impossibly corrupt that it would try, and try, and try, to buy national prosperity by creating a wildly-inflating fiat money and credit to buy it with! Hahaha!

So I am laughing in loud Mogambo scorn (LMS) at not only bond market bozos who are still buying bonds even as the prices fall and keep falling, but also the complete clods who are buying stocks at the same time, even as central banks are tightening, even as the Congress is spending outrageous amounts of borrowed money, even as the dollar is falling, but also (and I have to rub my eyes in disbelief) even when crude oil is nearing $70 a barrel! What kind of complete idiots are these jerks? I'll tell you who; idiot Americans who keep plowing their money into mutual funds and retirement plans loaded with non-gold equities and bonds, thinking that portfolio managers are some kind of magical wizards who will produce gains when nobody else can.

Marc Faber, GloomBoomDoom.com
So, we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms, but it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others. This means that some asset classes while rising in value could deflate against other asset classes, such as happened with the Dow against gold since year 2000.

Bill Fleckenstein, Fleckenstein Capital
It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won't get hurt). The lenders will bear the brunt of the pain, because in many cases, they loaned the entire purchase prices of many homes. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.

John Hathaway, Tocqueville Gold Fund
Not the least among the resources propping up the dollar is the residue of trust enjoyed by this brand of paper currency that has been earned over centuries of history. Its demise has been managed with great skill and subterfuge. Therefore the pace has been slower and at times imperceptible compared to the more notable flameouts. Still, the end result, however long it takes to materialize, will be the same. It will be replaced, redesigned and redefined. Do not doubt that the game of liar's poker will continue with replacement dollars. It is unlikely that politicians will ever appreciate or understand the difference between cash and money. For the political class, cash in the form of state issued IOU's will always be the preferred form of legal tender. How else would they ever be able to play liar's poker? Imagine trying to do that with real money that has kept is value for more than two millennia.

Clive Maund, CliveMaund.com
Alright, so how, as speculators, do we handle this extraordinary situation? We know we are looking at a market which is already very overbought, but which has a fair chance of generating a superspike, in defiance of normal overbought parameters, resulting in huge gains. The correct speculative vehicle for maximizing profit potential from this situation, and minimizing damage in the event that the silver does not continue higher over the short to medium-term is call options in selected silver stocks. Options have the supreme advantage in the current situation in that they provide massive leverage on capital employed, while strictly limiting losses to the "stake money".

Doug Noland, PrudentBear
But the financial world is changing rapidly and radically. The dollar is methodically losing its status as a stable and reliable reserve currency. At the same time, currencies generally are losing favor to real assets as stores of value. Understandably, market participants are questioning the will and capacity for central bankers and policymakers to stabilize the Unwieldy Global Credit system. It would at this point require a determined and concerted effort to instigate some serious financial and economic restraint, especially among American, Chinese and Japanese authorities. No one would dare hold their breath waiting for such an outcome.

Texas Congressman Ron Paul
Could America exist without an income tax? The idea seems radical, yet in truth America did just fine without a federal income tax for the first 126 years of her history. Prior to 1913, the government operated with revenues raised through tariffs, excise taxes, and property taxes, without ever touching a worker's paycheck. Even today, individual income taxes account for only approximately one-third of federal revenue. Eliminating one-third of the proposed 2007 budget would still leave federal spending at roughly $1.8 trillion-- a sum greater than the budget just 6 years ago in 2000! Does anyone seriously believe we could not find ways to cut spending back to 2000 levels? Perhaps the idea of an America without an income tax is not so radical after all.

Stephen Roach, Morgan Stanley
It may be that we’re guilty of making too much out of the great bond market conundrum. Given the extraordinary accommodation of major central banks in recent years, long rates simply may have been pinned down by the mother of all liquidity cycles. Those days are now over. Monetary authorities are leaning the other way in attempting to normalize their policies. So far, the impacts of these efforts have largely been confined to the short end of yield curves. But now, for the first time in 15 years, the world’s major central banks are all on the same side of the policy equation. That may be “all” it takes to push normalization out to the long end of the yield curve. What worries me most about such a scenario is the possibility of discontinuous adjustments -- with simmering pressures at the long end suddenly vented by a sharp upward movement in real long-term rates.

Julian D. W. Phillips, Gold Forecaster
But where are do you run to from the $? All the world's other currencies are dependent on the global monetary system of which the $ is the foundation on which other currencies rely, especially the Euro (despite its design as a reserve currency). Each currency has its place in the currency world and has an enormous dependency on the $. We even suspect that those controlling the Euro do so in tandem with the $, so as to keep the relationship between the two largest global currencies completely stable (as can be seen in the last year's performance of the $:Euro). So diversifying out into another currency would hardly solve the problem, would it? In the face of a fall from power of the $, all currencies would follow, like Pilot fish stick to sharks, down to the depths.

Essentially we are left with hard assets, such as gold and silver. These are too small for governments to turn to, certainly at these present low $ prices. And with individuals able to access this market, the 'depth' of the market (ability to buy in volume without disturbing the price) just isn't there. So gold, unless at prices around 10 plus (?) times the present price, is just is not eligible as stand-alone money in this world, yet!

Jim Puplava, Financial Sense Newshour
When the real estate market rolls over it’s not like the stock market where they can send the Plunge Protection Committee into the futures pit, and try to prop up the market. Once a person’s home is foreclosed on there’s nothing the Fed can do to alleviate that. So, I think once beyond 5%, they’re going to have to start cranking up the bilge pumps and bring in the US air force, we’re going to need more than helicopter money.

Beyond 5%, I think we’ll go into freefall especially along the coasts. More likely, I think we’re already in a recession. If you look at the economic numbers we get we know that GDP for example is overstated because we understate the inflation rate. So we could already be in a recession right now. I think we’ve gone into one. We also know unemployment is understated because we use these bogus birth-death figures to account for these jobs. They accounted for almost 70-80% of the jobs created in the last employment report. So who knows what those job numbers are? And this is the period of time normally between February and May when the birth-death model creates more hypothetical jobs. We also know inflation is grossly understated. So if inflation is grossly understated that means GDP is grossly overstated. The bottom line: beyond 5% we’re going into a recession, and it’s unavoidable.

Steve Saville, Speculative Investor
At the end of last August, in the immediate aftermath of Hurricane Katrina, gold was as cheap relative to oil as it has been at any time over the past 35 years, and although it has out-performed since that time it is still very cheap relative to oil. Over the past 35 years there have, prior to last year, been 4 times (1976, 1982, 1990 and 2000) when the gold/oil ratio dropped into single digits. In each case the ratio rebounded to above 15 within the ensuing 2 years.

The bottom line is that the gold price could rise to a multiple of its current level without making a significant difference to the economy (except to the extent that it affected inflation expectations), but the oil price could not do the same.

Puru Saxena, Money Matters
Below, I present the money supply growth rates around the world -

Australia +8.1%
Britain +12.2%
Canada +6.4%
Denmark +24%
US +8%
Euro area +8%

Looking at the above figures, you can see that over the past year, a significant amount of money has been introduced into the system. The thesis is that the surging money supply will cause the value of money to drop and make it easier to repay the mountains of debt. "But what about my savings?" you may ask. Frankly, the establishment does not care about your savings. In order to remain popular, the officials almost always cater to the needs of the majority. Today, the majority of the population is heavily in debt and with its back against the proverbial wall! Therefore, you can bet your bottom dollar that the rate of inflation will continue to surge and hyperinflation may not be far away.

Peter Schiff, EuroPacific Capital
For now, the precious metals bull market climbs a classic "wall of worry." Once fear gives way to greed, there is no doubt in my mind that this major precious metals bull market will ultimately produce a speculative bubble. However, such a development is years from unfolding. To help identify when a precious metals bubble might actually be about to pop, I have composed my list of the top ten signs to watch out for.

Top ten signs that a precious metals bubble is actually forming

10. Commodities trading jackets are the best selling items at Abercrombie & Fitch
9. George Foreman is the pitchman for an infomercial featuring a "Home Panning Kit"
8. The most popular major at Chico State is Geology
7. Due to high prices, Olympic metals are replaced by ribbons
6. Monster Park in San Francisco is re-named Glamis Field
5. Analysts upgrade shares of McDonald's based on mineral rights to its real estate holdings, bringing new meaning to its "golden arches."
4. Snoop Dogg introduces the "Bling Mutual Fund."
3. Hustle and Flow wins another Oscar for their single "It's Hard out Here for a Miner"
2. The WB has a new hit show about teenage prospectors called "Dawson's Claim"
1. Tom Cruise and Katie Holmes name their newborn son Newmont.

Mike Shedlock, Mish's Global Economic Trend Analysis
Long term prices of houses simply can not rise above people's means to pay for them. That is a simple economic fact. Here is another simple economic fact: Family incomes are falling. The negative savings rate and rising foreclosures are more proof of stress in the system.

J. Taylor, J. Taylor's Gold and Technology Stocks
We have been led to believe by way of the popular press that the Fed really does have control of economic policy to the extent that they can and have smoothed out the business cycles. But is it possible that a mass exodus from the dollar by our foreign creditors, who have been sending us something like $3 billion per day to keep the American economy afloat, would cause M-3 to implode (decrease) rather than explode (expand) and that may in fact be the reason the Fed has chosen to stop reporting M-3?

One money manager told me at the New York Gold Show last year that the inflation/deflation question is not only an important investment question but that it is the only important question she is concerned about. I agree that it is a most important question, because which way this monster economy tips will have everything to do with the way we allocate the resources of our Model Portfolio. So long as our Inflation/Deflation Watch continues to point toward inflation, then we want to own base metal and energy stocks. On the other hand, if the system tips toward a deflationary implosion for what ever reason--whether the Fed loses control or whether it is by design--the only asset categories we will want to own then will be gold, gold shares, and cash, perhaps under the mattress.

Rich Toscano, Voice of San Diego
During both 2004 and 2005, 80 percent of San Diego homebuyers used adjustable rate mortgages (ARMs). There is nothing inherently shocking about this statistic -- until you consider the fact that those two years saw fixed mortgage rates lower than they'd been in two generations. Why would any buyer -- let alone the vast majority of buyers -- blow the opportunity to lock in lifetime-low mortgage rates for good? Why would they instead subject themselves to the payment increases resulting from the nigh-inevitable rise in adjustable mortgage rates?

The answer is simple. Many buyers didn't see the need to lock in low rates because they didn't think they'd be in the mortgage for very long. Some assumed that they would sell their homes at huge profit and move to the next coach up on the housing gravy train. Others figured that they would soon refinance their mortgages to pull out all that equity they'd gained. In either case, a fixed-rate mortgage would be pointless. So why not stretch to get a little more house by employing an ARM.

It doesn't make a difference whether or not these buyers intended to occupy the purchased home. They took on the risk of eventual payment hikes in order to increase their "bets" -- the prices of the homes being purchased -- in the hopes that price appreciation would cover the increased mortgage bills and lead to even bigger payouts. For better or for worse, they were very much engaged in speculation.

James Turk, GoldMoney
There have been an increasing number of predictions in recent weeks that the uptrends in gold and silver cannot be sustained, but these forecasts are missing the main point. Watch what IS happening rather than what COULD happen.

Focus on the trend. Trends often last longer and go much further than we expect. So rather than worrying about when the inevitable correction may occur, we should instead be enjoying the moment. Enjoy riding this wave that has taken gold and silver to ever higher prices. Be guided by Mae West's words of wisdom: "Too much of a good thing can be wonderful."

Doug Wakefield, Best Minds
Last week, a friend sent me a link to a Saturday Night Live (SNL) skit, wherein they present a "new consumer credit program." It's called, Don't Buy Stuff You Cannot Afford.” What follows is a conversation between one of SNL's "credit counselors," as he happens upon a couple trying to balance their checkbook.

Wife: (sighs) I just can't get these numbers to add up.

Husband: Like, we're never going to get out of this hole.

Wife: Credit card debt, does it ever end?

Credit Counselor (CC): [walks in] Maybe I can help.

Husband: We sure could use it.

Wife: We've tried debt consolidation companies.

Husband: We've even taken out loans to help make payments.

CC: Well, you're not the only ones. Did you know that millions of Americans live with debt they cannot control? That's why I developed this unique new program for managing your debt. It's called, [presents book] Don't Buy Stuff You Cannot Afford.

Wife: Let me see that... [Grabs book, reads] "If you don't have any money, you should not buy anything." Hmm, sounds interesting.

Husband: Sounds confusing.

Wife: I don't know honey; this makes a lot of sense. There's a whole section here on how to buy expensive things using money you save.

Husband: Give me that... [Grabs book, looks at it] And where would you get this saved money?

CC: I tell you where and how in Chapter 3.

Wife: Ok, so what if I want something, but I don't have any money?

CC: You don't buy it.

Husband: Well, let's say I don't have enough money to buy something. Should I buy it anyway?

CC: No-o-o-o.

Husband: Now I'm really confused!

CC: It's a little confusing at first. It's in the book. It's only one page long. The advice is priceless, and the book is free.

Wife: Well, I like the sound of that.

Husband: Yeah, we can put it on our credit card.

CC: [shakes head]

Announcer: So get out of debt now. Write for your free copy of Don't Buy Stuff You Cannot Afford. If you buy now, you'll also receive Seriously, If You Don't Have the Money, Don't Buy It, along with a 12-month subscription to "Stop Buying Stuff Magazine." So order today!

Roland Watson, New Era Investor
One would assume that rising energy costs are good for gold but not for gold producers.

Many investors may be looking at the price of gold and the potential profits this may generate for [mining] companies. I say "potential" profits, because in the peak oil era, they will have to increasingly consider the price of energy as well.

Higher energy prices keep lower-grade gold underground and higher metal prices keep lower-grade oil underground. Something has to give and as the investment landscape changes in a world of increasingly expensive production, investors will have to change their physical and equity allocation accordingly.

John Rubino is the author of The Coming Collapse of the Dollar (co-written with James Turk), How to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall Street financial analyst and columnist with theStreet.com, he currently writes for Fidelity Magazine, CFA Magazine, Kiplinger's Personal Finance, and Merrill Lynch Advisor. He lives in Moscow, Idaho. Contact by Email.