Just a quick post to review the predictions I made and how well they turned out.

• Name: iPad (Ding!)
• Size: 9.7″ (Ding! I said 10″)
• Form Factor: Basically a large iPod Touch (Ding!)
• Home Button? (Ding!)
• Aluminum back? (Ding!)
• Buttons and holes: headphone (Ding), microphone (Ding), volume (Ding), mute (Ding), sleep (Ding)
• USB port? (Bzzzt!) Only has Apple dock. But that serves to connect to your computer. And it does have adapters for cameras.
• Orientation: (Ding! Both portrait and landscape)
• WiFi (Ding)
• Internet connectivity: (Ding? 3G is optional. Nice surprise that it is easy to get 250MB/mo for $14.95)
• Won’t have a phone (Ding!)
• Software: (“It will be like an iPhone with some iWork apps available for download” DING! DING!) It actually runs iPhone apps like I expected.
• Books: (“They will probably start selling books through iTunes.” DING! DING!)
• GPS and big maps (DING!)
• Cameras: (BZZZZZT!) Not three, not two, not even one camera. Maybe version 2?
• Cost? I said $899 dropping to $699. I assumed it would have a 3G card installed. Their price for 3G? $629 to $829. Plus you want to buy the keyboard, case, and adapters. So I give myself a DING! for the price as well.

So I think I got most everything right. Big misses on cameras and USB port. Bottom line is that the iPad is pretty much exactly what I pictured it to be in my mind. I will own one (or more).

Take your pick of names but we are all awaiting the next holy product to be announced from Apple. After “The Jesus Phone” which had people literally weeping in their seats upon its unveiling, the Apple Table is set to be the next  revolutionary gadget that we didn’t realize we couldn’t live without.

I have a small window of time before the official announcement is made before which I can make my own predictions, wish lists, and observations about the new miracle device. Apple is expected to announce it on January 27th at a media event. I guess there is not enough time for them to get all my wish list items incorporated into the thing, but at least they will have my wish list for their 2nd generation of it by 2011.

First, my preferred name for the thing is the Apple iPad. I like the way it rhymes with iPod and it is alliterative with iPhone as well. iSlate is my 2nd choice just because it sounds cool. iBook would be my 3rd choice as it would fit into the MacBook line nicely, but iBook places too much emphasis on this thing being just an eReader and not enough on the other things I want it to do. Read on. iTablet? Sounds like something Dell would call it.

Form factor. The iPad will have the 10” screen everyone is expecting and will basically be a “Honey I Blew Up the iPhone” looking thing. A home button at the bottom and that’s all you see physically. Aluminum back, buttons and holes along the edges. Nice places to put your fingers as you hold it in portrait or landscape orientation.

Buttons and holes will include those found on the iPhone: Headphone/microphone jack, volume buttons, mute switch, sleep button. But it will also include USB. The BIG question is will it include a power hole or a iPod dock hole? You see, it makes a difference in deciding if the iPad will SYNC with a computer or will BE a computer. Will your iTunes library still be on your MacBook and you have to sync it with the iPad, or will the iPad have enough storage to hold all your music by itself? My guess: it will BE a computer and can run iTunes on its own. It could still share music with your MacBook with that family sharing  route and it could share photos and files and so forth. So my money is on it having a nice magnetic power adapter with all kinds of neat accessories we can buy like a car charger and external battery. PLEASE let me use the same magnetic adapter as my MacBook. My guess: they won’t! (They make TONS of money on those things!) And make some kind of adapter that lets me plug it into all my various iPod connectors in the car and external speakers.

The USB adapter will allow commonly needed connections like cameras, flips, and, wait for it… iPhones! And yes, i want to be able to charge my iPhone from the battery of my iPad. You won’t need USB for the external keyboard and mouse because those will connect via BlueTooth. And while you are typing and mousing on your iPad, you will need it to somehow stand up, won’t you? So I’m wondering if this thing will have some sort of picture-frame-like stand on its back that lets you sit it on a desk or table either in portrait or landscape orientation.

I keep harping on orientation. For me this is key to the iPad: being able to read books and long pdfs on it in portrait mode. Already it is more useful than a MacBook for that reason alone. I find reading books in landscape to be too small a window into the text. I don’t know how many others are like me, but the first thing I do on a new computer is move all of those dock or taskbar things from the bottom of the screen over to the left side. That gives me a little more reading room on my MacBook. And I try to trim menu bars and status bars away as well. With the iPad in portrait mode I will be in reading heaven even on a smaller 10” screen.

How will this thing get on the Internet is a key question. Of course it will have Wi-Fi. But will it be on the 3G and EDGE networks as well? Will I have to buy more service from ATT Wireless? Will it tether through my iPhone? Will the iPad BE a phone? My hopes are that it will BE a phone that uses the same phone number as my iPhone, that I can talk on either one, that I can switch between one and the other during a call, that I can surf the net on the iPad while talking on the iPhone, that it can let me make and receive calls with my BlueTooth headset, and that it can act perfectly well as a desktop speakerphone. Not too much to ask, right? If iPhone was the “Jesus Phone” then what would this iPad be, the “GOD” phone?

But my guess of what will actually happen is more limited. I think for this first release it will have Wi-Fi and 3G and EDGE DATA networking only. You will have to add some sort of appendage to your ATT Wireless iPhone plan to get remote internet on the thing. No calls, talking is for iPhones and that is the way we say it will be, says Apple. Maybe in a later release they can figure out if it makes sense to add a phone or not. Perhaps too many people will end up using the data plan to make Skype calls and they will come around.

What about software? Is the iPad a small MacBook or a big iPhone? Wow, this is a tougher one to call. I can make a good case for both. You want to be able to run iWork on the thing, right? But yet Apple wants you to buy 10 billion apps for the thing too. So like a flash it hits me: it runs MacOS but with an iPhone mode so you can do BOTH. But the iPhone OS is all about limiting what you can do. Will Apple want to limit what you can do in the iPad? If so, it will be more like an iPhone with some iWork apps available for download. Actually in that case they will probably throw in some iWork apps for free but you gotta buy all the other cool stuff.

How will you use this thing if you already have a MacBook and an iPhone like I do? You will have your iPhone in your pocket, your MacBook on your desk, and your iPad in your hands. On the couch, in a seat, or in bed. This is the “media comes to me” device. Read a book? Sure, the iPhone already has the Kindle app from Amazon so you can buy thousands of books for $9.99 and start reading. Knowing Apple, they will probably start selling books through the iTunes store. Don’t wanna miss a market, right? But I better be able to get pdfs onto this thing easily and freely or it goes in the trash.

You will also of course watch movies, listen to music, surf the net, and make blog postings. Standard fare. It is the book reading thing that makes the iPad so special. And of course it will be the first successful touch screen computer from Apple. The iPhone set the stage, but now we will have pinch and zoom super-sized. We’ll be using our arms more to see those details from the satellite view. Ah yes, GPS. Big maps finally. Would this thing be appropriate on the dashboard? Not unless it has a camera that can show what is in FRONT of the car! And speaking of cameras, it needs at least two: One on back like normal on the iPhone for taking vids of others and one on front for taking vid of you. Maybe one on the side just to be sly. And I’d really love it if the one on the front is actually UNDER the center of the screen, invisible to us but fully able to see us nonetheless. That way on video calls people will be looking AT YOU instead of somewhere off into space.

Finally, the dreaded question: How much will they want for this thing? Remember when the Jesus Phone first came out how much they charged? Same deal here, waayy more than what we want to pay. They will really put it to those early-adopter guys, hahaha! I expect that early price to be $899. Gasp! With netbooks retailing for $399! Yep, but it will drop after a few months to $699 and everybody will be like, “Whew, now I can afford one at last.”

So prepare for the iPad invasion. Prepare for the weeping, shaking bodies to behold not the iTablet being brought down from the mountain but the iPad being unveiled on Steve’s stage. I can’t wait.

The Austrian economists anticipated the present crisis. Should we listen to them when it comes to their predictions about what comes next? In one voice they are saying we will experience inflation unlike we’ve seen in the USA in over 100 years. Inflation is defined as the increase in the supply of money and credit. We are certainly experiencing an increase in the supply of money at present. But the draw-down of credit is counter-acting the monetary inflation and we are hovering in inflationary stasis at present.

Fed Chairman Ben Bernanke said the same thing on February 18th:

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation. The Fed’s lending activities have indeed resulted in a large increase in the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time.

He acknowledged that they are inflating. But he threw a red herring into the mix by talking about weak economic activity and low commodity prices (Heh, except gold, right Ben?) trying to infer that they are somehow the cause of inflation. No, they are the result of inflation. Next, he went into how they will correct their inflation:

However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink. … However, the principal factor determining the timing and pace of that process will be the Federal Reserve’s assessment of the condition of credit markets and the prospects for the economy.

Bernanke recognized that the plane is in a nosedive and at the last minute he plans to push on the stick and go airborne again. I hope it is not a cloudy day when he has to judge how far the plane is from the ground. He wrapped up his thoughts on inflation and how to avoid it:

As we consider new programs or the expansion of old ones, the Federal Reserve will carefully weigh the implications for the exit strategy. And we will take all necessary actions to ensure that the unwinding of our programs is accomplished smoothly and in a timely way, consistent with meeting our obligation to foster maximum employment and price stability.

What do *you* think the chances are that the Fed will get all of the necessary actions right? Have they gotten the necessary actions right up to this point? Let us examine a scenario where they are not able to get it right and we do indeed experience undesirable inflation, which I will define to be anything above 5% annually.

How might the various asset classes be affected in times of inflation? To answer this question, I utilized Simba ’s spreadsheet for back-testing portfolios (which I imported into Google Spreadsheets) to do a correlation between CPI (Consumer Price Index, the government’s official inflation number) and various stock fund, bond fund, and gold returns. The data in the spreadsheet uses annual returns of Vanguard index funds along with the yearly closing price of gold from the years 1971 – 2008.  The spreadsheet already calculated the cross-correlation between each of the mutual funds and it lists the annual CPI index. So it was very easy to drop the CPI into one of the mutual fund slots and instantly see the correlation between every asset class and inflation. Here are the results, sorted by correlation:

The table shows those asset classes that were most closely correlated with the CPI at the top. Note in the third column that a value of 1 would mean the asset is perfectly correlated, -1 would mean perfectly correlated inversely (it went down exactly as CPI went up), and 0 means there was no correlation: it was random.

So we see that those assets that were most highly correlated with CPI were T-bills, gold, long-term government bonds (inversely), short-term Treasuries, and commodities.  Everything else was below 0.25 correlation. Interestingly, micro cap stocks were totally uncorrelated with inflation.

So how did a portfolio of those assets perform during the years 1973-1981 in which CPI was 8.7, 12.3, 6.9, 4.9, 6.7, 9, 13.3, 12.5, and 8.9%?

I constructed a portfolio along the lines of the Harry Browne Permanent Portfolio (HBPP invests 25% each into total US stock market, long-term bonds, money market, and gold) but I added some small cap value, micro cap, and eliminated the long-term bond fund. I then back-tested that portfolio during those inflation years. Here is the portfolio what I came up with:

The Inflation Portfolio:

VISVX (Small Cap Value) 15%
BRSIX (Micro Cap) 15%
PCRIX (Commodities) 10%
VMPXX (Money Market) 45%
Gold 15%

The "Inflation Portfolio" had a CAGR (Compound Annual Growth Rate) of 15.5% and a risk (as measured by standard deviation) of 10.5%. Plotting that on a chart, here’s what it looks like compared with some other portfolios and the assets themselves:

The chart shows plots for various portfolios during those inflation years. The plot point directly above HBPP simply substituted BRSIX for VTSMX in the HBPP. The major components of the Inflation Portfolio are also plotted separately showing how volatile gold and BRSIX were themselves. When tempered together with VMPXX, the risk came down considerably while retaining significant returns. You can see all of the rest of the details in the Google spreadsheet that I created for this scenario and you can test out other hypotheses yourself.

The Inflation Portfolio worked from 1973 through 1981. If we see inflation return, would it work again? Some folks are discussing these findings at the Bogleheads forum if you want to chime in.

Please note this is not a recommendation to invest your net worth in the Inflation Portfolio!

This is a follow-up to my posting from last May called “Technical Analysis and Trend Following” where I compared the S&P 500’s decline from 2001-2003 to the movement from April 2006 to May 2008.  It was a thinly-veiled jab at those who were predicting a resumption of the bull market based upon a recent uptick in the market. I showed that there was an uptick in April 2001:

and anyone who bought at that time lost big as the index went from about 1300 in April 2001 down to 850 in 2003:

Then I showed a chart that looked similar to the first chart, but this time one that was of the recent market from April 2006 to May 2008:

This was a time when stock market pundits like Cramer and most of the talking heads on CNBC were saying the market was set to go much higher. Others who didn’t get mass media attention like Nouriel Roubini, Peter Schiff, Gary North, and Ron Paul were saying we were in big trouble.

Amazing how it worked out. Chart #2 above took two years to drop from 1300 to 850. This next chart took only five months, from May 2008 to October 2008, to drop the same amount. And yes, there was an intra-day low of 839.8 on October 10th.

If I were to show a chart from February 2003 to October 2007, it will look like the north slope of Mt. Everest. Oh heck, why don’t I go ahead and show it…

Is that what the S&P 500 will look like from October 2007 to 2011? Or will it be condensed into a space of five months like the recent deline was? Or will it be different this time?

I do not know where the market will bottom out. My sense of it is that the market will trade violently around the current level for the next few months, bouncing along this bottom. As earnings report come in lower, the P/E ratio of the market will adjust accordingly. I think there is more widespread bearishness today compared to May. But I think there are still a lot of bulls trying to buy the bottom. There is an epic battle between the bulls and bears which will continue until we see the light at the end of the economic crisis tunnel.

Meanwhile, I’m taking a look at dividend focused funds and will report on show 133.

Peter Schiff of Euro Pacific Capital does a weekly show (on shortwave radio or something, but anyway). The one he did on Wednesday the 24th is a must listen. He tells it like it is. For example, “It’s not the tax payers who are on the hook for any bailout: nobody is talking about raising taxes. It is the dollar holders who will suffer through higher inflation…. The dollar is going to collapse.”

I cannot find a way to subscribe to his show through iTunes. So what I do is download the .mp3 file, import it into the music section of iTunes, then add it to a Playlist that gets it onto my iPhone. Of course you could always just listen on your computer.

Like a weathervane, Cramer points toward where the winds are blowing.

Like a chameleon, Cramer adapts to the current environment.

Like a stock picker, Cramer follows today’s trend and picks what worked.

Like a cheetah, you should turn and run from his advice as fast as possible.

Here’s why…

I’ve witnessed this flip-flopping so many times, I’m just tired and weary of it. Please just take the Risk Capacity Survey, select an appropriate portfolio of Index Funds, buy and hold them, and then invest and relax.

(via The Kirk Report via Crossing Wall Street via Felix via Don Harrold – can you believe that chain?)

I made ten (really eleven) predictions on show MMM-092: Predicting the Future for 2008. Prediction #8 was:

8. A one-stop-shop ETF portfolio fund will appear that gives complete exposure to risk, reward, and diversification all for a low fee. It will include all of the SMILER components as well as some bonds, commodities, and even private equity and possibly even some selected shorts (A short of a bear fund, perhaps??)

That prediction came true today as I learned from IndexUniverse.com that PowerShares announced three “ETFs of ETFs“, their so-called “Autonomic” portfolios. All of the SMILER components (Small, Micro, International, Large, Emerging Market, and REIT) are in these plus some bonds and commodities. Even currencies, gold and oil funds are in these. These are the laziest possible portfolios; buy one ETF and you’re done! (Hmmm, maybe I’m not really recommending that. We’ll see…)

The funds are named “PowerShares Autonomic [style] NFA Global Asset Portfolio” where [style] is either Balanced (PCA), Balanced Growth (PAO) or Growth (PTO).

The total expense ratios for each of these funds include the expenses of each of the component ETFs plus another layer of management fees and are 0.82% for PAO, 0.75% for PCA, and 0.86% for PTO. Yeah, you might be able to do it cheaper if you bought each of the ETFs yourself. Then again, maybe not with all the trading costs.

The table below shows the percentage of each of the ETFs that are included in each of the new ETFs.

I intend to track these funds to see how well they compare against our Lazy Portfolios. I may even try to backtest a portfolio of the individual ETFs to see how well it would have done in the past, including the average annualized returns and Sharpe Ratio. The problem will be that some of the ETFs themselves aren’t that old.

I’ll be talking about this on show 112 and letting you know more as I know more. This is fun. By my count, that is 4 down, 6 to go. (Predictions #3, 4, 5, and 8.) I still stand by the rest. And we’ll see if Apple announces a tablet PC on June 9th for prediction #2.

And since I’m here, have you noticed that Jim Cramer has been talking more about “portfolios” recently? His “Kevlar” and “Stability” portfolios come to mind. This makes prediction #1 even more likely. #7 is a slam dunk. And hey, for #9 there are more international stars in MLS this season too. Go Beckham!

I have a question for you trend followers. You chart watchers. You technical traders. Have a look at this chart and tell me if it is time to buy or time to sell.

Looks like the momentum is up on this baby right? Time to buy? Here’s how it worked out for you…

The first chart was from roughly May 1998 thru April 2001. The second chart was from about April 2001 thru March 2003. The trend definitely wasn’t your friend if you thought we had bottomed in April 2001 and were headed for nothing but up.

Now take a look at this chart:

Anything familiar-looking about this chart? Is it the same chart as the top one?

Nope. This chart is from April 2006 to present. For everyone who says we’ve seen the bottom. Revisit chart #2.

I wish I’d never seen a stock chart and I wish I didn’t have easy access to charts like I do now because I get sucked in to thinking that there must be patterns in prices like there are patterns in nature. I am always wrong when I think that. Studies have shown that there actually is *some* momentum, but I really don’t think anyone can consistently profit from it. Here’s a better chart if you must look at charts.

Twenty years of Index Portfolio 100 from IFA.com.

I’m just sayin’. Set it and forget it. For twenty years!

Here now for a self-fulfilling prediction: I said you’d be seeing more of Jim Rogers in 2008 as commodities and China take the headlines. Here now is Jim on CNBC the other day in an interesting (sometimes funny!) interview in which he says the Fed is doing a poor job, throwing gas on a raging fire. The other central banks around the world are doing much better. At least they *acknowledge* there is inflation.

If you want to take his advice and buy agriculture and currencies, you may want to do some homework on DBA, FXY, FXF, and FXA. Possibly DBC as well. Oh, and SKF!

Gold reached $1000/oz today, as I predicted.

A tag cloud is a visual depiction that identifies the frequently-used words of an information collection. A tag cloud for 2008 might include: Sub-prime. Meltdown. Credit-crisis. Foreclosure. Term-auction. Dollar-collapse. Asset-devaluation. Inflation. Deflation. Stagflation. Recession. Depression. It would be strikingly different from that of just one year ago. Back then we were talking earnings, iPhones, and efficient frontiers. Back then we were rationalizing a 130% exposure to equities. Back then we were calculating our 4% safe withdrawal rates. Back then it was sunny skies ahead. Today our tag cloud is dark indeed. Where do we run when the dark clouds come?

Meltdown CreditCrisis Foreclosure TermAuction DollarCollapse AssetDevaluation Inflation Deflation Stagflation Recession Depression SubPrime

I asked at the end of last year whether it might be time to dynamically adjust our risk capacity. We had been properly focused on the long term. We understood that over any span of 20 years an investment in stocks had not just performed well but had performed pretty darn well. We understood that taking risks meant expecting returns. We understood that proper investing meant first understanding our capacity for risk and then carefully matching that risk with a portfolio of equity and fixed income index funds.

Should We Run?

But late last year we saw cumulonimbus on the radar. A monster of a stormcloud threatening to bring down home prices, their mortgage lenders, their insurers, their investors, and just about anything else in its path. Storm warnings advised those holding stocks and bonds to be prepared for tough times ahead. We did not know if the big red blob was headed our way or if it was going to veer off to the north or to the south. It was time to reassess our capacity for risk. Could we truly accept devastation in the short term? Nope. Stand here and take a pounding? Nope. It was time to turn tail and run. That meant shifting our asset allocation. But what to buy? And what to sell?

Ah selling. Mark Hebner of Index Funds Advisors has a saying that there are only two reasons to sell. The first is when you need the money and the second is when you lose faith in capitalism. Is it now time to sell? Do we need the money? We might argue that yeah, we need our money. Rather than losing the value of our stored wealth to someone else, wouldn’t we rather have it? So the answer to the first question then is, yes, we need our money.

But that is distorting words and bending them to suit our desires isn’t it? We don’t need our money in the sense that we need it to buy food. We need our money in the sense that we need it to avoiding losing it. Maybe we need a better definition of the word need. Rather than getting all Clintonian about word meanings, let’s scrap question one and instead let’s have a look at the second question; Have we lost our faith in capitalism?

Now we’re not asking whether we have lost our faith in God or our faith in family or our faith in the goodwill of all the great people that make up this wonderful nation in which we live. No, we are asking whether we have lost faith, even temporarily, in the privately operated market economy we call capitalism. Most importantly, we want to know if we can still make capital with our capital. In order to figure this out, we need to understand the nature of money. For some reason, they don’t teach us about money in government schools. Perhaps it is because the dumber we are about money, the more easily it can be slipped from our possession by those who might have taught us about it.

The Meaning of Money

I am frustrated that I didn’t know the true meaning of money until recently. Even though I took a tour of the Bureau of Engraving and Printing last year and they showed how they print Federal Reserve Notes, they didn’t explain what money is. Only by joining the r3VOLution did I get my first glimpse into the true nature of money. Why didn’t somebody long ago grab me by the collar and shake me and tell me what money is? If I would have known a year ago what I know now about money I might have listened to Jim Rogers more closely and bought some commodities. I might have listened to Peter Schiff and bought some gold at $300. I might have listened to Warren Buffet and bought more foreign investments. Brazilian reals. Swiss francs. Even dollars – Australian dollars that is. Folks have been trying to explain money to me for years. I did not have ears to listen. I do now.

I just finished reading a book published in 2006 called Empire of Debt: The Rise of an Epic Financial Crisis by Bill Bonner and Addison Wiggin, they of the DailyReckoning.com web site. When their book was released, we were in the midst of a most glorious stock prosperity. I remember coming across the book but thinking, "Why waste my time with some doom-and-gloomsters when I can be shoveling cash into the coal fire of hot stock gains?" Now that I have ears to hear, I am open to the message of this book. And the message is this: The US economy is built upon a house of cards that doesn’t stop with a deck of just 52 but is expanding geometrically, piling layer upon layer, reaching far and wide, and that someday – the authors don’t know the date – we are going to be playing a game of 52 Pickup, but with a much larger mess on the floor.

The US economy, nay the economy of most of the globe, is now built upon an exponentially expanding supply of fiat currency. Talk about a Mad Money Machine! A growing supply that is shrinking its own demand. We are aware that generally when one has more of something, that thing becomes worth less. That is indeed the nature, they tell us, of fiat currencies. And not only do they continually become worth less, but indeed they become worthless. Yes, the expected value of a fiat currency is zero. Backed by the full faith and credit. Got faith?

I admit I am coming to my limited understanding about all of this a bit late. When asset prices were rising day after day, who needed an understanding? Buy high and sell higher was the rule. A monkey could make money in stocks.

We now know that the puffy white cloud we saw miles away became a roaring thunderhead once it got on top of us. We know we gotta get to shelter. But where do we go? Over here we have the quicksand of the falling dollar. Over there we have the credit crisis. Cash is not safe; it is losing its value to inflation. Similarly, US bonds are not safe with the risk of rising interest rates. Foreign stocks are not safe; they’re coupled to the US. And now that the smart folks have figured out where to be, namely, commodities, can they be considered safe after their enormous gains recently?

Armed with an understanding of the impact of the glut of dollars, I cringe when I hear people talking about rising oil prices or the rising cost of commodities and how that might create inflationary pressures. Create inflationary pressures? These high prices ARE inflation. And they are not caused by growing demand. They are caused by growing supply… of dollars!

Taxing Inflation

And another thing… How good of the government to tax us on their own inflation! We swap out of dollars into something that holds its value, like say an American Eagle gold coin. The dollar falls and falls. Later, we swap back into dollars so that we can swap again for a car or something. But guess what? The government wants us to give them something like 30% to 40% of the difference between up there where the dollar started and down there where it ended. Don’t look at it as buying gold at $850 and then selling it at $950. Instead, consider it as swapping out of dollars at 1/850 oz. gold and swapping back in at 1/950 oz. gold. Oh yeah, and when swapping dollars for a car, they take taxes again! If we could swap directly gold for a car, perhaps we would get taxed only once?

Where to Run? 

But I’m looking for a place to stay dry while the storm passes, remember. Peter Schiff in Crash Proof: How to Profit From the Coming Economic Collapse says buy gold, foreign assets, and keep some cash to buy the crash. James Turk in The Coming Collapse of the Dollar and How to Profit from It says to buy gold metal and miners, short the financials, and buy some selective exporters. Maybe it’s not a bad idea to listen to these ideas and incorporate some of them into our portfolios.

So how will America get out of this debt? You think there isn’t an answer don’t you? You think that we will just sink until we’re all once again living in caves. You’d be wrong. There is a way American can pay off these debts! In fact, there are three ways. Quoting now from Empire of Debt:

When people cannot pay their debts, they do not pay them. But the debts do not cease to exist. They are merely "paid" by someone else–the creditor. In the case of America’s debts to foreign nations, this can be achieved in three ways: the currency in which the debt is denominated can be devalued against other currencies; the currency can be made less valuable through inflation; or the debt can be repudiated. One of these things–or all of them–is likely to happen.

So there is a way to reduce if not eliminate America’s debt. Reduce the value of $9 Trillion to about $9 Million and hand over a check for the $9 Trillion. More precisely, just print $9 Trillion and pay off the debt to the foreigners with that. Never mind that by adding 9 trillion in dollars makes all of the already existing dollars worth far less.

A Loaf of Bread for a Quarter

We used to be able to buy a loaf of bread for a quarter. Yes, 25 cents. A quarter dollar. But if hyperinflation were to happen, it could take $50 or $500 or $5000 or worse to buy a loaf of bread. But it would still take only one silver quarter. You see, a true silver quarter contains about $3.5 worth of silver at today’s prices. Even after hyperinflation where the value of the dollar drops terrifically, the silver quarter relative to the loaf of bread will stay basically the same.

It is hard to recommend buying silver or gold after the recent parabolic run up. Just like it was hard to buy Google at $450 the first time through that price point. I don’t know which way it will go. But this seems certain: the US dollar will get weaker. Maybe not today, maybe not next month or even the rest of 2008. But with government spending the way it is and people not saving the way they don’t, the US economy is on track for some serious mean reversion compared to the rest of the planet. Folks, we need to get really serious about preparing for some hard times. Dark clouds are here. But hey, if we’re wrong and we only get peace and prosperity, if it turns out to be only a passing shower before the azure blue skies, then what have we lost? A little upside?

Here’s hoping that all your umbrellas are beach umbrellas and that our tag cloud for the future is full of cheery words.

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