Invisible Tax

Invisible Tax
by Puru Saxena
The Daily Reckoning
Tuesday, May 23, 2006

---------------------

• What goes up must come down...waiting to find out what's next...
  
  
• Markets are voting machines...more cautions - at no extra cost...
  
  
• Take the contrarian stance...the foray to the belly of the beast...the purple-haired lady speaks...and more!

--------------------------

--- Advertisement ---

CEO Bets 22% of His Modest Salary That His Company’s  Stock Will Rise At Least 74% in the Next 11 Months His CFO agreed, and invested 31% of her salary…a scant 2 hours later.  Fact is—this $300 million company has just seen the largest insider-buying surge in its 48-year history.  If the CEO and the CFO, among other top execs, have this kind of confidence—shouldn’t you get a cut of the coming profits too?  Click here to learn more:

---------------------

World markets have begun to wobble.

Over the last ten days, emerging markets have had the longest stretch of selling since 1998. India's Sensex Index collapsed 10% in a single day...officials had to close the market.

The story was the same throughout the world, with only a few exceptions - notably China.

What goes up must come down. And leading the way down were commodity producers. Commodities - especially copper - have soared this year; a correction was inevitable. Silver has given back nearly 20% of its value. Even gold is headed down, though stuck for now around $655, a loss of about 10%.

In the developed world, stock markets are shuddering too. The Dow took a big hit last week and so far has not managed a bounce. But neither has it fallen further. Here in London, the FTSE shed another 2% yesterday, bringing the total damage over the last two weeks to nearly 10%.

What next? We're waiting to find out.

While we wait we note that markets go down as well as up. Usually a lot faster. And usually as much down as they went up...if you strip away the inflation.

Gold goes down too...even when it is in an uptrend. During the 1970s, for example, gold rose from $35 to $200. Then, just when newspaper headlines and ordinary investors were beginning to take notice, a correction began. The metal corrected over a 19-mo. period, losing 50% of its value. That shook the gold coins out of the grasp of weak and wobbly holders. It also set the stage for the next phase of the bull market, in which the metal shot up to $850 an ounce in January of 1980.

We suspected gold was ready for a major correction when we noticed Britain's major newspapers urging readers to buy it. The mainstream press is almost always wrong about gold. It only catches on when the bull market is nearing correction or completion. It comes to the conclusion that nothing can stop the metal's rise...just about the very moment the rise has come to an end. Then, when the bear market is finally over, it boldly announces that gold is a 'relic of the past...worthless from an investment point of view.' This is precisely what the British press - and the American press too - was saying in the late '90s, as gold hit its lowest point in half a century. The Financial Times wrote a famous editorial entitled, "The Death of Gold," in December of 1997.

Britain has the added distinction of having a central bank led by wits as dim as those in its financial press. As gold bottomed out, the Bank of England sold. If it had gone back 100 years it could not have found a worse time to do so. And if it had gone back 1,000 years, it couldn't find a worse reason. The BOE wanted to replace gold - a tried and true financial reserve for thousands of year - with paper money! Had no one at the central bank bothered to review even the sorry history of its own paper currency since the gold backing was removed? Did they not notice that the pound has lost nearly 99% of its value?

What set off the worldwide market frisson is anyone's guess. It appears that the same central bankers who missed the run-up in gold were becoming alarmed by it, after they finally read about it in the newspapers. They decided that it was the bud of inflation needed nipping. So, they talked up the dollar...raised rates...and tightened liquidity. Newspaper headlines tell us now that speculative money is headed into cash...particularly the dollar...as a refuge. We don't see much evidence of it. The greenback has barely risen against the euro...and gold remains above $650.

We don't know what happens next. But we wouldn't mind a stronger correction in gold - so we can buy more at a better price.

Still, we feel we should repeat our caution: in the short run, markets are voting machines. They can deliver any fool result the voters want. It is only in the long run that fundamentals matter...and that vox dei is heard.

And we deliver another caution at no extra price: we're not at all convinced that the inflation theory is correct. That is, the central bankers might be wrong about the cause of rising commodity prices, just as they are wrong about so many other things. Deflation may still be the greater danger. And clipping liquidity now might be just the thing to bring it on. American debtors might not sink in a sea of too much cheap currency, in other words. Instead, they might not have enough of it to stay afloat. More on this as we figure it out.... In the meantime, buy gold on dips...sell stocks on rallies. And watch the headlines. Whatever they urge readers to do; do the opposite.

More news, from our team at The Rude Awakening...

--------------

Doug Casey, reporting from Vermont:

"Are we really in the precious metals bull market of a lifetime?" and..."With gold blasting over $700, have things moved too far, too fast?"

For the rest of this story, and for more market insights, see today's issue of The Rude Awakening:

Gold Over $700 - Too Much Too Fast?

--------------

Bill Bonner, with more thoughts...

*** Investors have been uncommonly sure of themselves. The VIX is called the 'fear index,' because it measures investors' attempts to protect themselves. They protect themselves by buying put options. When the market goes down, the puts pay off. When they don't expect the market to go down, they don't bother to buy the options. So, you can tell how fearful they are just by looking at the VIX.

Well, the fear index has been in a decline for the last three years - since April of 2003. More and more, investors think they have less and less to worry about. Until last week. All of a sudden, the VIX seemed to come alive, popping up to a 2-year high.

One of the things investors might be worried about is the fact that so few of them bother to worry at all. The market in derivatives has grown to nearly $300 trillion, says Asia Business Times. In theory, some investors are long and others are short. And in practice, there must be someone on both sides of every trade. But when shudders turn into terror...then and only then will we see what all those derivative contracts are really worth.

Dan Denning recently told his Strategic Investment subscribers, "Volatility is the one thing sure to go up when everything else goes down in a stock market crash or correction. That may sound like a truism. And gold may be an exception. But I said the one thing 'sure' to go up. And when the outside world precipitates a stock market panic, you can be sure volatility will go up.

[Ed. Note: Dan's readers have been privy to the major gains that could be made from the VIX for quite a while now - and in his new special report, Dan reveals form of portfolio "wealth insurance" that yields up to 390% on the dollar. Click here for the full story:

Portfolio Protection

*** "Las Vegas developers folding high-end condo plans," says a headline on CNBC. By some estimates, the housing boom is responsible for half of all new jobs in the U.S. since 2001. The other half is in government. When the boom finally ends, we wonder, how long will the halves hold up?

This is the "new road to serfdom," says Michael Hudson. In the odd logic of the housing bubble, he points out, "debt has come to equal wealth." But this, he argues, is a mistake because "debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bounded to Spanish plantations or the sharecropping children of slaves in the postbellum South."

Ah, but won't the coming inflation wipe off the debts of America's middle classes? Isn't that what the house speculators are praying for? Isn't that what the central bankers are aiming for? Isn't that what we are all betting on?

We don't know. "As ye sow, so shall ye reap," it says in the Bible. Neither the modern economists, nor the central bankers, nor the lumpen homeowners believe it. They think there are knobs they can turn...levers they can pull to get whatever crop they want. How about another rate cut? How about easing up on lending requirements? Yes, they have sown debt. But why can't they reap financial liberation. Why can't they get what they want, rather than what they deserve? Anything is possible, we admit. But we just don't think the world works that way. And if it does work that way, we don't want anything to do with it.

"The bubble will burst," continues Hudson's prophecy, "and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom."

*** "Well it's easy to see how film projects go over budget and off deadline easily," Addison reports after yesterday's foray into the belly of the beast, Washington, DC.

His report:

"Our trip was like an episode straight out of the TV show 'The Apprentice.' At one point, Bruce, Mark and I were stuck on a train to DC behind another train that had caught fire. We patched in to Kate (Short Fuse) by cell phone.

"She'd gone down earlier with the film crew. But they couldn't find the billboards in the metro. And the PR firm couldn't find the agent who had them placed. What's worse, they'd just had their personal information taken by Capitol Police who said they weren't allowed to film any closer than a four-block radius of the Capitol Building.

"Greg and Joel, who are on an excursion across the country in a 26-foot moving truck (with a car) were supposed to meet us in DC to help distribute our Squanderville stickers. Really. What were we thinking trying to park a U-Haul downtown in a post-9/11 DC?

"Having no place to park, and getting tired of being harassed by the same Capitol Police, they left. By the time our train arrived, they were in Northern Virginia somewhere...headed for a ghost town in Pennsylvania.

"All was not entirely lost. We did manage to find the metro billboards and one of the bus ads. And we landed some usable interviews with DC tourists. One lady, in particular, has earned the title 'the purple-haired lady'. She's was not at all happy about the state of profligacy in the nation's capital...nor did she think our officials were capable of dealing with it."

More to come...
 
[Ed note: We're not going to let Greg and Joel off that easy. Here we've created an interactive map to follow their trek across the empire. If you so desire, you can ride shotgun with the fearsome twosome by following this link:

Ride Shotgun Across Them Empire...

--- Advertisement ---

---------------------

The Daily Reckoning PRESENTS: Officially, the Federal Reserve's purpose is to fight inflation and manage the economy - which is about as probable as turning stone into gold! Below, Puru Saxena presents the real agenda of the Federal Reserve. Read on...

THE INVISIBLE TAX
by Puru Saxena

Every human being must understand that the Federal Reserve IS inflation. The Federal Reserve was established in 1913 to create inflation and its secondary role is to manage the public's inflation FEARS. Over the past 25 years, the Federal Reserve has done a fantastic job at both - inflation (money supply growth) has gone out of control and the public's inflation fears have been well contained.

Let's review the consumer price level over the past 200 years. It is interesting to note that consumer prices didn't rise at all during the entire 19th century. However, under the "guidance" and "supervision" of the Federal Reserve, consumer prices have risen dramatically. In fact, prices in the economy have increased the most since the early 1970's when gold was removed from the monetary system.

"But why is that so?" you may wonder. The truth is, prices in an economy respond to changes in the supply of money. When we witness inflation (money supply growth), prices rise as the value of money declines due to an increase in its supply. On the other hand, during deflation (money supply contraction), prices fall, as the value of money increases due to a decrease in its supply. The reason why prices did not rise at all during the 19th century is because there was no inflation (money supply growth). In those days, money was backed by gold and the money supply was limited. Therefore, prices remained relatively stable; money held its purchasing power, and savings didn't get destroyed due to inflation.

Once the Federal Reserve came to power, things changed. Firstly, the gold standard was eliminated and then gold was completely removed from the monetary system in the early 1970's. Once this was accomplished, the Federal Reserve along with other central banks decided to embark on an inflationary rampage. As the supply of money accelerated, consumer prices in the economy surged and savings got totally destroyed due to inflation (money supply growth). This phenomenon shows that after remaining relatively stable for 170 years (1800-1970), prices have soared 600% over the past 35 years!

Inflation is an increase in the quantity of money and it is created deliberately by the central banks. As Nobel Prize winner, Dr. Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply." Inflation is NOT a mysterious by-product, which simply emerges out of the blue in an economy. But why would central banks create inflation? To answer this question, you have to ask yourself who benefits from the monetization of the economy? Who makes money from issuing more and more debt?

In order for the present monetary system to be accepted by the public, inflation must remain concealed. If the public discovered the truth, there would be tremendous uproar. Accordingly, central banks keep up the propaganda by claiming that inflation is tame and under control. I'm sorry to disappoint you, but what's under control in not inflation but inflation FEARS. By artificially suppressing the Consumer Price Index through complicated adjustments, central banks continue to please the public. Still not convinced?

Consider the following:

The money supply has grown from $302 billion in 1959 to over $10 trillion today - an astonishing explosion of over 3,000%! If this isn't inflation, then I don't know what is! During the same period, the US dollar's purchasing power has collapsed by 85%. In other words, due to money supply growth, the dollar saved in 1950 is worth only 15 cents today. So, you can see that "money" isn't an ideal store of value!

It's only normal to expect that the standard of living in any civilization should get better with industrialization and advancements in technology. After all, in today's "modern" world of abundance, food is plentiful and modes of transportation and communication are extremely efficient due to the progress made over the past 50 years. All these factors should've translated into a much more relaxed and comfortable life for everyone.

Unfortunately, if you look around today, you'll realize that despite all these advancements, human life for the average person has never been tougher! 50 years ago, families could survive on one income and debt levels were very low. These days, the average household needs two incomes, people are working longer, and everybody is up to their eyeballs in debt! So, what's gone so horribly wrong? Basically, inflation (money supply growth) has turned people into slaves. No matter how much you save, it's never enough because things always seem to get more expensive. I'll let you in on a secret: as long as the current monetary system continues, life isn't going to get any easier. However, we all have to live within the system, so it is vital to understand the situation and invest in the appropriate assets that will benefit the most from the ongoing monetary inflation.

Regards,

Puru Saxena
for The Daily Reckoning

Editor's Note: Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at www.purusaxena.com

An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3, and writes for several newspapers and financial journals.

The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise "Email Updates," which are sent out when an important development in the capital markets warrants immediate attention. Click here to subscribe:

Money Matters

--- Advertisement ---

America’s Top-Ranked Financial Newsletter Says:
The Petroleum-Free Car of the Future WON’T Run on Hydrogen or Ethanol

Whatever you do, don’t follow the Wall Street crowd into the hydrogen fuel cell myth. Forget ethanol, too. Getting rich from the end of cheap oil means investing in the REAL solution to America’s oil addiction. Buy in now -- before investors realize the mistake they’re making and come flooding in. Readers who followed similar advice had a chance to rake in average gains of 64% last year… and 62% the year before that. But even bigger profits could lie ahead.

http://www.isecureonline.com/Reports/OST/EOSTG582

The Daily Reckoning is FREE!
Click below...

The Daily Reckoning is FREE! Click below...