There is a whiff of Soviet-style economics in the air today in America. The U.S. government's CPI data is cooked. CNBC and Larry Kudlow's "buy stocks" propaganda machine makes Pravda look amateur. Alan Greenspan has excelled in his role as Big Brother such that whatever perpetually bullish nonsense he spews is treated as gospel. The widespread faith in a "Greenspan put" by the world's financial market participants has never been stronger. And now we have politicians interested in taking your social security tax money and injecting it into the stock market with the hope of keeping the party going (at least for a while). In fact, some skeptics out there believe that the government has been propping up the equity markets for years through its so-called "plunge protection team". While we doubt any outright market manipulation, we are aware of the fact that a strong stock market is a national security issue because consumers who feel wealthy will continue to spend money and keep this economy going. Perhaps, even before this gigantic real estate bubble is pricked the idea of private accounts to invest in not only stocks and bonds, but also real estate will surface. That could be the solution to the giant Medicare problem no one is talking about! Well, maybe not. We suspect that the investing public will find many ways over the next several years to lose money in overpriced stocks, bonds, and everyone's supposed risk-less asset, real estate.
The problem of course is that a potential lift in the stock market from private accounts would only be a temporary boon. Just look at the lack of success of the Asian governments in the 1990s propping up their stock markets. Instead of letting the market correct itself, Japanese, Thai and other Pacific Rim politicians kept giving its citizen-investors another drink in the hopes of delaying the inevitable hangover. Former Federal Reserve Chairman, William McChesney Martin, described the role of the Fed "as taking away the punch bowl when the party was really getting going." We believe that Sir Alan Greenspan, instead of removing the punch bowl, has in fact spiked the bowl with cheap and easy credit as far as the eye can see.
Capitalism only works when the speculative excesses are reigned in through market forces. No one, despite their size, not even the U.S. government, can directly or indirectly subvert market forces forever. Sooner or later the hangover hits. Unfortunately, what the Japanese and others never realized was that by pushing back the day of reckoning they only made it worse. Excesses in Japan and the U.S. in 90s through today have been allowed to climb to stupendously silly heights that make the depths of the soon to follow fall even more spectacular.
So with all of these dollars being printed to support the stock market, the value of the greenback itself would come into question. So for all of you bears who are frustrated because you think the market may become (or already is) rigged, your salvation lies in shorting the dollar. But how do you do this? You could certainly buy Euros or Swiss Francs. But chances are the governments in those countries would be doing the same thing (debasing their currency) as our government is doing here. Just take a look at the pension liabilities in France & Germany and you will agree.
The best way to go short the dollar is to use the two currencies that have been around since biblical times - gold & silver. When the true problems of the U.S. financial system are brought out into the light of day, we think the precious metals will shine. And every story about falsified docs at Fannie Mae, derivative shenanigans at AIG, or mind numbing losses at GM reminds us that never has such a powerful and overpriced society been so levered and in the need of massive foreign financing to maintain output. Investment demand for gold and silver should return in a big way as more prudent allocations to poorly run fiat currencies lead to chunky purchases of the yellow and gray dogs.