08/17/11 Poitou, France – Permanent zero. That’s what Edward Harrison calls the Fed’s new policy of guaranteeing ultra-low interest rates for the next 2 years.

But first, let’s look at what happened yesterday. Gold soared $21…again, setting a record.

The Dow fell 76 points. Not much of a follow up to the bullish day on Monday. Maybe investors are catching on. Maybe they realize that we are in a ‘zero stage” economy.

Zero is a funny number. It is not a number at all. When you say there are ‘zero’ donuts on the table, how many are there? None at all. There are no donuts on the table. So how many is zero?

And what happens when you add zeros together? Nothing. But when you multiply by zero something extraordinary happens…something becomes nothing. No kidding. Zero times 6 = 0. Zero times the entire federal deficit equals zero. Want to make something disappear? Multiply it by zero.

And what happens when you multiply a Great Correction economy by zero rates of interest? Hey, that’s what we’re finding out.

If a person is zero years old…how old are they? They have no age. They do not exist. Zero is empty…non-existent…it is nothing. It is a void. It is where the person who does not exist sits to drink his coffee.

But what is a void? It is like describing the universe. You may say that the universe began with the ‘big bang,’ but what was there before? Zero? No… There had to be something to blow up.

If you say the universe was a ‘giant void,’ it only raises our curiosity. How can a void be giant? And what exactly is in a void?

Let’s try to imagine something that is so small it has no dimensions. None. Take a measurement. Cut it in half. Do that again…and again…and no matter how many times you do it, you still have something. You can’t make the damned thing disappear! You can’t get to nothing, no matter how hard you try.

Therefore, zero – by definition – does not exist! And if it does not exist, there is no point in talking about it.

We only bring it up because zero is becoming a larger and larger part – if you can imagine it – of the US economy. Zero interest rates. Zero growth. Zero stock market appreciation. Zero housing gains. Zero new jobs.

Yes, dear reader…the economy is a Big, Fat Zero…

The whole thing is breathtakingly bizarre. The feds’ latest measure puts consumer inflation at more than zero – about 3%. John Williams’ Shadow Stats puts it at 11%. And yet, the Fed lends member banks money at zero interest.

It is not only giving money away, it has pledged to do so until the middle of 2013.

“Get it here! Free Money! Get your Free Money here! For the next 24 months!”

Readers may think this is a good thing. Now, the banks know that all they have to do is to borrow the Fed’s money for nothing…and then lend it back to the federal government for 10 years at a higher rate. Maybe 2% higher. Two percent is not a lot. But the feds will borrow $3 trillion or so during that 2-year period. Let’s see, 2% of $3 trillion is $60 billion. Not bad. Especially for doing zero work.

In other words, for zero effort and at zero risk the banks will make beaucoup money from the Fed’s permanent zero interest rate policy. It is supposed to encourage them to borrow and lend…and thereby stimulate the economy to grow.

But we’ll make a prediction. No, several of them.

Bankers, being who they are, will still find a way to lose money. They are public utilities now, run largely for the benefit of their employees. Bank managers will suck out the profits, leaving banks severely undercapitalized. Then, when US Treasurys collapse, the banks will collapse too.

Another one: permanent zero is not just a policy measure…it’s a prediction and a curse. It is what you get when you take the road to Japan – permanently zero interest rates…and zero growth too.

And another one: when they multiply a permanent zero interest rate policy with an economy in a Great Correction they will get…zero.

 

Bill Bonner

for The Daily Reckoning

About Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day andEmpire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning

Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the new book from Bill Bonner, is now available for purchase. It is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. Whether your new to these Daily Reckonings, or one of Bill’s “long suffering” readers, this is one you surely won’t want to miss. 

Special Report: Shattered Bank Vaults, Empty ATMs, and No Milk in the Store– Do you know just how drastically your life could be set to change if the U.S. gov’t can’t borrow another dollar? Services you take for granted today could disappear overnight. Don’t risk your future – watch this urgent briefing right now. There’s no time to lose… Don’t wait, watch now.

Three companies that were either past Grandich clients, Tracking List picks, or both, appear worthy now of a stink bid.

“It’s the most dangerous time in World Financial History” and “Gold shares are probably as cheap as they will ever be in anybody’s life time” – Bob Moriarty

s.

Michael Campbell: Bob, what do you make of the action in gold over the last couple of weeks?

Bob Moriarty: Well, not just the action of Gold but the action of the markets. I started in that scene in March of 1970; I’ve been watching the markets for 41 years. I’ve never seen anything like last month. Now, let me take you through what happened last week. One of the things that you can expect is a stock market correction upwards from here.  The 420 point climb on Tuesday, 500 point decline on Wednesday and the 400 point climb on Thursday sure makes gold rising a fraction in the days look thin.

Michael: What are the things you think are driving this huge volatility in the market?

Bob: Well, there’s two issues. the schizoid nature of the market that doesn’t know whether it wants to go up or go down has a simple explanation for part of it, certainly in shares. High frequency trading which is programmed trading by the big funds and the big banks that should be illegal. It’s stealing, okay? You want to go buy a stock and stocks got 500 shares at 87, and it has got 500 shares at 88, 500 shares at 89 and 10,000 shares at 90 and you want to buy 15, 000 shares. So you put in an order in for 15,000 shares at 90, you would expect to pick up the shares at 87, 88 89 but the Bank of America or JP Morgan jumps in front of you with high frequency tradings. They snap the shares up a quarter of a second ahead of you and sell them back to you at 90. It should be illegal, it’s stealing and what it does is it magnifies the markets and that’s very, very dangerous.

Michael: I looked at the market at 11:45 last monday and it was down 200 to 300 points and in that last hour of trading it just absolutely fell out of bed. That’s happened consistently; that last hour of trading seems to bring a lot of action in the market. Is that what you attribute to as some computer selling program?

Bob: Actually not, the computer selling magnifies everything but if you are going to sell in a mutual fund they put their order in at 3 o’clock. So 3 o’clock to 4 o’clock is the most active period of the day when people are trying to move mutual funds. it also tends to show what the market going to do the next day. But the program trading, high frequency trading which is stealing, magnifies everything in the market. Now, we had two days last week with gold moving $60 from a high to a low in one week, that’s unbelievable.

Michael: Think about the non professional investor, the person who’s got other things to do than stare at the market. My goodness it’s a tough environment.

Bob: How do you cope with 600 points down on one day and 500 points up the next day? How do you cope with gold moving up $60 one day and moving down $60 the next? It doesn’t make any difference whether you are a bear or bull, you get creamed.

Michael: Let’s come back to the Gold market for a moment here, I have been recommending a core position in gold since 2001, 2002 that was 30% of people’s portfolio and then you could have a trading position beyond that. I know you talk a lot about trading and investing, and I think that the 200 points that gold gold tacked on in such a short period of time.was a great example of why you never want to be out of  a core position in a massive bull market.

Bob: That’s a good point, you are defining it slightly differently than I do, I define gold as having two functions. The first and the most important function is it’s an insurance policy. It’s an insurance policy against Central Banks like Zimbabwe where they print hundred trillion dollar notes. The most valuable currency that you could have in Zimbabwe then and now is gold because it keeps its value. I would encourage people even at $1800 gold to have a gold insurance policy.

Michael: My bet on gold has been simply a really strong feeling about the incompetence of government to be able to handle the financial circumstances that were coming. Do you see anything out there that would discourage that view?

Bob: We got started in July in 2001 because I saw Gold and silver being at the bottom and I said so; gold at $252 was like stealing. It costs $400 dollars an ounce to produce. If you could buy it at 252 you were doing extremely well. Silver gets to $4 in November 2001. $4 an ounce for silver, are you kidding? But when you talk about $1800 gold and $50 silver, you’re no longer investing, you’re now speculating, you’re betting on the future of the dollar. You’re not buying it because it’s cheap, which is when you should buy it. You are buying it when it’s expensive hoping that somebody else is going to buy it from you at a higher price. Now, I am coming to the conclusion deflation may be the risk.

Michael: Generally gold share prices have not kept up to the metal. What do you make of that?

Bob: It’s interesting that you picked up on that. For years I used to use the XAU over gold as a measure and I had a very good record of predicting both tops and bottoms. It was a very predictable range when it got to a certain point, you were at the top and when it dropped to a certain point you were at the bottom and it was as regular as clock work. The XAU over gold measures psychology, when everybody is very bullish they want the shares, when they are very bearish they want the gold. So, regardless of the level of gold that gave you a very good measure of psychology; that broke down in August of 2008. Everybody should go look at the chart of the XAU over gold now and look at what it was prior to August of 2008. In real terms, gold shares are cheaper today than they were in 2001. Now, in 2001 Michael you were not mainstream, I was not mainstream; we were goof balls saying, the economic system is going to fall apart, GM is going to go bankrupt, Ford is going to go bankrupt, the banks are going to go bankrupt and the system is going to come to a screeching halt. Well, everybody understands that now but shares are cheaper today at $1,700 gold than they were $252 in relative terms, that creates opportunity. Now, I encourage people to invest when things are cheap. Gold is not cheap, silver is not cheap, the stock market is not cheap, housing is approaching being cheap but it’s not yet. But gold shares are incredibly cheap. The market will respond so you buy them now and you are set for life for the market to expand. I think you will see gains of 100%, 200, 500% in lots and lots of companies including some of the ones that are totally corrupt run by idiots.

Michael: We were talking to Don Vialoux who does seasonality analysis, he was also saying it’s a very good time to be looking at gold companies right now in this time period. How would you approach the senior gold companies, the mid tiers and the juniors?

Bob: Well, if you want a savings account you should invest in the majors. As the price of gold goes up, they are getting enormous benefits from it and some of them will pay a dividend. If you want to make money, you want to invest in the mid tiers and the juniors. When I invest in those stocks I look for a ten fold return. You don’t see it very often but you see it often enough.

Michael: I am sort of a conservative in my approach, I like to keep my money. So when I’m investing in a growth story I’ve preferred things that are already in production because then I do get a direct bang from the rise in the gold price since the costs generally don’t go up with the rise. What’s your take on that.

Bob: Here is the beauty, investing in majors is the savings account, investing in mid tiers companies is the convertible that is paying a percentage return and investing in juniors is crack cocaine. Now, because I visit 30 or 40 juniors a year I get to see these companies six months before anybody else does. Investing in juniors it’s very difficult, it’s very dangerous. Strangely enough I would tell people to ignore the facts because that defies everything, It’s really simple, everything that goes up goes up because of psychology and everything that goes down goes down because of psychology. The old adage of sell in May and go away works because everybody goes on vacation for the summer so everything dies in May and it revives in September. If you want to make money in the junior market buy when nobody wants to buy and sell when everybody wants to buy. If a stock’s sitting there and it’s trading 2000 shares a day, put it in a stink bid five cents under whatever it is and wait for it to come to you; because the fact that nobody wants to buy means that these things go down a lot more than they should and you can pick them up cheap. Now, when everybody wants to get into the market its a very liquid market and that’s when you should sell.

Michael: When you are investing in gold shares the direction of the broad market plays an important part. Where do you see the broad market indexes going?

Bob: It’s my belief that we face a very real risk of deflation now. I think the broad markets will be down between now and October, I think it easily could be worse in 2008 and they will have tendency to drag down the gold shares. That said, from a timing point of view gold shares are probably as cheap as they will ever be in anybody’s life time. They are exceptionally cheap and I think they are going up and they are going to up a lot more. So you can sit on them and they go down, so what?

Michael: Let’s come back to the inflation, deflation tug of war going on. People have an intuitive sense that when inflation comes gold goes up, what about in a deflationary environment?

Bob: The value of gold buying power goes up. Now we have $600 trillion in derivatives, I am not even going to try to explain it, I am just going to say ten times the size of the world economy and they are at our backs. Now, in real simple terms, the problem of the United States , the problem of Greece, the problem of Italy, the problem of Spain, the problem of the UK, the problem of Ireland the problem of Iceland is too much debt. We have hundreds of trillion of dollars in debt that will never be paid off and no government has the guts to come up and say you know we’re going to match what we spend to what we take in. Well, I am sorry, folks it’s that simple, your income has to match your out go. If it doesn’t you’re broke and since governments don’t want to do that they keep printing money and they keep wanting to put debt on the backs of the tax payers. We can’t afford it, okay? Those debts are going to be written off and when they do that’s going to be very inflationary. So, we could see $500 gold that would buy ten times as much as it would now. There a two ways a financial system can die, inflation or deflation,  the end result is exactly the same but there is a very real risk of deflation.

Michael: We’ve been in an inflationary world for so many years, over generations. It’s difficult for people to grasp the deflation concept when we all have a fair amount of faith in the government to debase their currency so much that you get Zimbabwe 100 Trillion Dollar Bills that are worth nothing.

Bob: .Yes but there is a as flaw to that thinking too Michael. I spent two years in Vietnam. I was a fighter pilot and I was an intelligence officer, how much faith do you think that I have in the power of government?

Michael: I hope not much.

Bob: No, that’s the most powerful military in the world, we had unlimited money to spend and we lost. I know how impotent governments are, and what’s going on in Europe now is a perfect example. We see the debt debate in the United States. You’re going to tell me those guys are in control? You’re going to tell me they know what’s going on? They are hopeless, they are idiots. It is spinning totally out of control and there is nothing anybody can do about it. They are trying to save the banks in Greece. What do you think the depositors are doing? They are walking in saying give me my money, when everybody in it says give me my money the banks goes under.\

It is really simple, it’s not a Democrat issue, it isn’t a Republican issue, it’s a simple fact of life. You cannot spend money you don’t have and governments have been doing this since 1694 when the Bank of England started and I’m sorry but that model no longer works and we need a new model. We are drowning in debt, everybody knows we are drowning in debt and everybody is saying well, we’ll put on a little more debt and give them a bottle of Jack Daniels to drink.

Michael: I couldn’t agree more. What are you telling investors, people to do these days?

Bob: It’s the most dangerous time financially in world history, do not take risk, do not have debt, do not have leverage positions, have an insurance policy in the form of gold or silver and do what makes sense rather than listening to everyone around you. Don’t trust anything the government says.

Michael: Bob its so nice to have the chance to talk with you and we certainly appreciate you talking longer than we asked for,  but it’s been so insightful. Thank you.

Bob: Thank you Michael it’s been a great pleasure.

Michael Campbell: Bob Moriarty is President of 321Gold.com, one of the most viewed Gold Sites and he has been on top of the gold wagon for so many years.

 

 

Jim Rogers, co-founder of the Quantum Fund recently told Investment U that agriculture prices on a historic basis are still depressed and that is where he sees the next opportunity.

Yes, Jim Rogers is betting on agriculture. But read this too: dating back from 1970, there have at least been four price jumps to the tune of 100% which was followed by thorough declines in the S&P agri-commodity index!

Not everybody is a Jim Rogers! So, investors are betting big on farmlands these days, a safer-than-agricommodities-bet.

The farmlands provide a respite from cyclical price swings of the commodities market. Average value of an acre of farm land tracked by USDA featured mostly a steady climb from $737 in 1980 to $2,350 in 2011, says Bloomberg.

According to Jeremy Bentham, farmland and forestry would outperform all global assets long-term.

“Farmland is the lowest-risk part of the value chain, but it’s also a key part of production,” says Jose Minaya, TIAA- CREF’s head of natural resources and infrastructure investments to Bloomberg.

In fact, hedge-fund manager Stephen Diggle calls farming the ultimate safe haven.‘After all, you cannot eat gold’, he says.

Leasing farm lands

Of course, the farmland frenzy is fuelling so-called land-grabs in Africa and other parts of the world.

“Foreign governments have dipped their toes into African and South American land markets in the hope of securing long-term food supplies…” says an ABN Amro World Agronomy Report.

In several cases the lands were leased:

In eight African countries recently studied, lease terms varied from 20 to 50 years, with renewals often possible up to 99 years. The FAO report on the matter noted: “Most leases involved payment of an annual rental of from less than $2/ha in Ethiopia to $5/ha in Liberia through to $13.8/ha in Cameroon.”

Many business houses, especially from India and China are occupying land at cheap prices in many parts of the world, especially in impoverished African countries.

Water scarcity and farm land buying

There are arguments that water scarcity is propelling certain investors towards land with water surplus.

“It is a particular issue for countries such as China and the Gulf states where water resources are particularly limited. As with land deals in general, little evidence exists which document the rights gained by investors over water. But the evidence which exists indicates that small-scale farmers may suffer greatly. For instance Bues (2011) demonstrated how in Ethiopia, the distribution of water rights within an irrigation scheme changed in favour of the land acquirer and against local farmers, due to the greater bargaining power and resources of the former.” The FAO report notes.

The report predicts:

“Contentious water issues will not disappear and are likely to intensify due to changes in climate. This will further propel and increase the need for investment. As a result, awareness of water issues is paramount and because acquiring water rights is such a key issue in investment projects, they will invariably impact on water management for many inhabitants both up and downstream. This is certainly illustrated in one major land and water deal in Mozambique…”

Hence negotiation of water rights is a question of vital importance in farm land contract negotiations, the agency notes.

 

More Great Articles at http://www.commodityonline.com/

Crazy can’t even come close to describing what happened last week.

 

The Dow had four 400-point swings in a row for the first time in its 115-year history. Trading was a complete sideshow all week. The yield on the 10-year Treasury note hit a record low. Gold hit $1,800 per ounce. And nearly every one of the 500 stocks in the S&P index ended down midweek.

 

You want a better breakdown?

 

The Dow dropped 634 points Monday, rose 429 points Tuesday, plunged 519 points Wednesday, then surged 423 points on Thursday. Despite the fear, we ended Friday in the green. Believe it or not, it was the first time since early July that the Dow and S&P index rose for two consecutive days.

 

Bear Market Territory?

 

Since the market highs of April 29, the Dow is down 12 percent. The S&P 500 is down 13.5 percent. No shallow bear market yet. But there’s still a lot of pessimism in the market with everything that’s going on around the world.

 

If you read last week (see The Dangerous Unknown), I said the bottom for the market’s recent sell off was forming and to buy on the dips.

 

If you would’ve bought on the dips, I think you’re going to be happy (if you’re not already). As a matter of fact, because many of my investments (and probably yours) are Canadian-listed stocks on the TSX, you would’ve more than likely made some money.

 

The S&P/TSX index had posted its best week in more than a year, up 6.26 per cent while its little brother, the S&P/TSX Venture, was up 4.85%. Buying on the dips could’ve netted you more than that.

 

But as I said before, I can’t predict political events. I still don’t know what Europe has in store for us or what Bernanke’s breakfast will be next week. I am still looking for a catalyst on August 26 when Ben speaks at Jackson Hole (see The Dangerous Unknown), but I don’t know what he’ll say.

 

That’s why it’s always better to focus on what we do know, instead of what we don’t know.

 

What We Know and What We Don’t

We don’t know if this is the bottom, but what we do know is that if you look at stocks and treasuries the evening of August 10, the S&P 500 closed cheaper relative to treasuries – cheaper than any time in the last 36 years, since 1975. That means for the first time in the last three decades, the yield on the S&P exceeded the yield on the 10-year US Treasury.

 

We know that once the yield on equities relative to Treasuries exceeds 4%, equity markets tend to do very well in subsequent months. So while there is a lot of risk out there, there is also a lot of risk factored into the prices of bonds and stocks.

 

We know confidence in our markets is very low. But again, we know for a fact that when confidence hits a trough over a 12-month time period, we typically get double digit returns on stocks. So while I don’t know if this is the bottom, I do think stocks are cheap.

 

We know insiders are buying at a pace not seen since the market bottom of March 2009, when the rally began. They are buying big time. According to Vickers Weekly Insider Report, the long term average of the ratio of insider sells to buys falls in the 2:1 and 2.5:1 range. In other words, the norm is that insiders sell more than they buy. Recently the ratio was 1.68:1, which is bullish. After last week’s 513-point plunge, the ratio was 0.33:1, extremely bullish. Just weeks ago, the Vickers report had the sell-to-buy ratio at 6.43 to 1. This is higher than 95% of other weeks’ readings over the last decade. The insiders sold, forced the market downward and are now buying back millions upon millions worth of stock at much cheaper prices (see Far From Over).

 

We know that when you see stocks that have been badly battered more on fear and panic than fundamentals, you tend to see a strong rebound over the following few months. The way the markets tanked was a clear indication to me of panic selling over the last 7 trading days.

 

We know this isn’t 2008. A week before that (see The Real Deadline) I said:

 

“The phones of my brokers haven’t stopped ringing – but they’re not phone calls from retail clients – those are dead. They’re phone calls from deal makers and institutions. That means deals are being done and some hot issues are being worked on in anticipation of the next rally.”

 

Trading ideas and projects are still being pitched to money managers. In 2008, no one would even try to pitch anything because everyone had gone into hiding. Not so today. Pitches are still being thrown around, and in Canada at least it’s clear that many are acting on them. This is not 2008.

 

The Bottom Line

 

With all that being said, I remain cautiously bullish – especially towards the gold miners and the juniors.

If I see a bigger dip, I am looking to buy. There’s a reason I haven’t sold any of my mining shares lately.

 

My current portfolio is clearly focused on emerging production stories and strong exploration plays. Almost all of my stocks or stocks I plan on buying have a resource in hand or have drilled into something special. These are the projects I think will really flourish way when the rally begins.

 

I am expecting a very strong rally in the gold sector so if you see something that’s good value with good management, I’d be picking away at it. Don’t stay out of the market because the media says it could go lower. Why? Because aside from the history-making volatility last week, there was one signal that mattered more to my portfolio than any others.

The Big Signal No One Talked About

 

When the indices plunged mid-week, gold hit a record high of $1800. That’s hardly a surprise for me and if you have been reading the Equedia Letter for a long time, you would know this. I think gold will continue to go much higher.

 

But that’s not what caught my attention.

 

When the indices plunged mid-week and gold hit a record high of $1800, guess what companies soared? That’s right, all of the gold majors.

 

For the first time in a long time, I saw gold stocks rally with the price of gold. Every gold major surged when gold hit $1800: Barrick, Goldcorp, Kinross, Freeport McMoran,Yamana…you name it.

 

Just take a look at the Market Vectors Gold Miners ETF (GDX) which surged 4 out of 5 days, ending up nearly 6%. Even the Market Vectors Junior Gold Miners ETF (GDXJ)soared, ending up just over 7%.

This is a big signal – one I am shocked that media outlets and other prominent newsletter writers failed to mention. All they saw was the volatility.

 

The gold mania is beginning and gold stocks are going to be a lot higher soon as gold looks to crack the $2000 threshold. The gold producers climbed significantly when gold rallied to $1800 last week. Imagine what they will do when gold hits $2000. Imagine where gold will go once QE3 is announced. Imagine where gold will go once Europe spends its way out of trouble.

 

Just imagine.

 

Once the majors get rolling, the juniors will follow as buyouts and takeover rumours begin. The majors will take advantage of beat up juniors and this will fuel speculation into that market segment. Then the triple digit returns will begin.

 

Lock ‘n load.

Until next time,

Ivan Lo

Equedia Weekly