The End Game
Research for Online Investors

by John Dalt

10/22/10

The finance ministers of the G 20 countries are meeting in S. Korea this weekend.  The main topic is how to keep countries from devaluing their currencies for competitive advantage in world trade.  The U.S. has proposed that developing countries set targets for stable trade balances with other countries.  China and Germany are not in favor of this as it seeks to limit exports on their economies.

Turbo Tim’s proposal is a childish act.  The kind of thing one would expect from an unruly child at a cocktail party.  “Mom, you aren’t paying attention to me…I’m not going to eat my peas.”  The Chinese are going to make us eat our peas, and their do-dads with lead paint on them too.

That is not really true, they are not going to make us, we are going to do it willingly.  To do otherwise would throw the U.S. economy into a depression.  Imagine going in a Walmart. Target or a hardware store and every price is doubled, if the item you want is even available.

We have been down this road before.  Richard Nixon tried price controls in the early ’70’s in an effort to slow inflation.  It didn’t work.  Shortages developed as products could not be sold profitably.  Higher raw material costs had to be passed on in the price of finished products.  Limiting imports from other countries restricts the supply of goods.  Who will supply do-dads if we can’t import them?

The last light bulb factory in the U.S. closed last month.  How many do-dad factories are there in the U.S.?  Who will vacuum form all the toys for Christmas?  Who will make the fireworks for our celebrations?

What will we do when the cheap electronic parts for cars are not available, or the tires?  These are just a few of the things whose delivery will grind to a halt, when the world goes to war over free trade.

China does not engage in free trade, they manipulate it and game it at every turn.  But, we don’t either.  We manipulate our currency because we have too.  The U.S. is spending money we don’t have, and must reduce the value of our currency by borrowing more and more, as we erode our balance sheet.

We are like the brother-in-law who lives beyond his means.  He hits us up for five bucks, and we help him out.  Two months later he needs a thousand so your sister won’t lose the house.

The Federal Reserve is ready to start buying Treasuries next month. Some say up to one hundred billion dollars per month. That is enough to float most of the government’s new borrowing. Does the Fed know something we don’t know? Are other countries pulling away, not willing to loan the U.S. money anymore?

Inflation from printing money scares us.  Cheaper dollars scare us.  Trade wars and currency wars scare us.  Loss of confidence in the U.S. dollar is the end game.  Let’s hope it is not here, yet.  Our lives could change for the worse quickly.

Today's chart illustrates the Dow adjusted for inflation since 1900. Notice that, adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. Also, the inflation-adjusted Dow is a little more than double where it was at its 1929 peak and trades 65% above its 1966 peak -- not that spectacular of a performance considering the time frames involved. More recently, the Dow has retraced 60% of the financial crisis bear market and is currently testing post-crisis highs. It is interesting to note that the 70% gain produced during the post-crisis rally is actually slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today.

Jim Rogers: “Bernanke has never been right about anything…the Fed is destroying the saving and investing class…that pay their bills.”  Click to watch the video.

Quote:
For the first time in history, there are 100,000 home foreclosures in the month of September. 100,000 people were told this fall they were going to lose their house. 100,001 if you count Nancy Pelosi.---Jay Leno

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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