Everyone must be wondering where this “unprecedented global financial crisis”, (the World Bank’s words), is heading. What follows, for what they are worth, are my cogitations on this crisis. Words: 1641

So conveyed Alf Field in an article* written back in November 2008 which warrants being revisited for its deep understanding of the dire economic conditions of our time and his insightful assessment of what can be done to alleviate the problem.  

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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Field goes on to say:

There is no doubt that the world is dealing with a credit/debt deflation of historic proportions [so let's spend] a little time understanding how such events are precipitated.

• An economy…is financially sound when expenditures are less than incomes. The difference can be saved and invested to produce additional income and capital growth in the future.
• When debt is introduced into the system…[it] delivers a boost to the nation’s GDP… [which, initially] is quite large but as time goes by and the debt total climbs higher, the cost of servicing that debt reduces the economic benefit received from new increases in the debt mountain.
• A continuing supply of easily available and cheap debt leads to speculative bubbles in one or more of the following areas: real estate, financial assets, commodities and collectibles.
• Once a bubble gathers momentum, a positive reinforcing feedback loop develops. More debt pushes up asset prices and this higher collateral value permits more borrowing which in turn pushes up asset prices which provides collateral for further increases in borrowing, and so on.
• Eventually when debt becomes excessive, reaching extreme and unsustainable levels, an extraneous event occurs that shatters confidence and destroys the rationale that was underpinning the bubble.
• This results in assets being sold to repay debt and a downward reinforcing feedback loop develops.
• Asset sales reduce the prices of those assets, which diminishes their collateral value, which causes lenders to demand more security, which causes more asset sales, and so on.
• Weaker lenders go bankrupt and the economy starts to collapse into recession and possibly depression.

Debt Must be Repaid Some Time, Some How

Once debt becomes excessive, and there is little doubt that this status was achieved some time ago, debt cannot be repaid out of savings and must be repaid in one of the following ways:

1. Via bankruptcies, which causes lenders to wear the losses of debt failures, but eventually the broader community also suffers from the economic depression that follows;
2. Via a rapid debasement of the currency which allows debt to be repaid in currency with vastly reduced purchasing power. Lenders are repaid but suffer a reduction in the purchasing power of their capital. The broader community suffers from massive price inflation and the economic dislocations that flow from this.
3. Via a combination of the above two methods where there are initial bankruptcies followed later by a lesser degree of currency debasement than that contemplated in 2 above. This appears to be the course that the world leaders are headed towards by their actions to date.

Debt Deflation Then – and Now

There are 3 major differences between the present debt deflation and prior episodes. They are very important differences and will probably impact on whatever new decisions our political leaders take to ameliorate the crisis. These new factors are:

1. Modern economies are linked by an electronic global interconnectivity which assists modern commerce and trade to operate smoothly. This system relies on the ability of banks around the world to readily respond to transactions elsewhere. If you use your credit card to withdraw funds from a Moscow ATM, the Russian bank must have instant certainty that the funds will be delivered from your bank to settle the cost of the cash withdrawal. This global electronic system has been developed over the past 30 years and we now have electronic money. People are paid electronically and make payments out of their bank accounts electronically. Modern commerce and industry relies on this electronic system in order to function properly.
2. OTC derivatives did not exist 30 years ago but have become an important aspect of modern commerce, investment and banking. These instruments are now massive in quantity and have the potential to deliver staggering losses. They have already become a destabilising influence in the world banking and economic systems. A major problem is that these losses cannot be quantified and nobody knows where they will settle, leading to distrust between banks.
3. For the first time in history a world wide debt deflation is occurring in a situation where virtually all countries have the ability to create unlimited quantities of their own local currencies at will.

[Please note that a major section from the original article*has been deleted here for the sake of a fast and easy read and should be accessed for those wanting a more detailed understanding.] 

 

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Stimulus packages and bailouts are helpful but…Much will depend on how our politicians and central bankers handle the situation. There is still plenty of scope for the situation to get out of hand at either extreme, resulting in either a deflationary depression or a hyperinflation.

How in the World Did the World Get Into this Situation?

We have been bombarded by views that it was caused by Greenspan’s excessive liquidity and low interest rates, combined with weakness in regulation, rating agency mistakes and obfuscation from Wall Street. Even the OTC derivatives have been blamed for part of the problem. These issues are all valid but to use a medical analogy, they are secondary cancers. They could not have existed without a primary cancer being the underlying cause and stimulus. So what was the primary cancer, the one which made it possible for all the other problems to exist?

We need to go back to basics. This subject was dealt with in this article which explains how the fractional reserve banking system works.

Briefly, the fractional reserve system requires approximately 10% of new deposits to be lodged with the Federal Reserve or Central Bank. Thus if a new deposit of say $1.0m of fresh money arrives in the banking system, the bank receiving the deposit must put $100,000 with the central bank and can loan the balance of $900,00. When that loan arrives as a deposit with another bank, $90,000 must be placed with the central bank and $810,000 can be loaned out. That in turn will arrive as a deposit elsewhere and $81,000 must be placed with the central bank and $729,000 can be loaned out, and so on. Finally when all these iterations are complete, the central bank ends up with $1.0m as deposits from the banks that have made loans of about $9.0m.

At this point new loans can only be made from profits generated within the economy. This is important as the banking system will have reached a period of stability which will remain until a fresh deposit of newly created money appears in the system from somewhere. That new money will allow the banking system to generate loans of approximately 9 times the amount of new money.

What happens if there is a money tap open somewhere in the system and each day a large dollop of newly created money enters the system? Very soon the banks will be awash with deposits and desperately seeking new secure loans.

As lions kill instinctively in order to survive, bankers make loans instinctively in order to survive. Eventually in these circumstances of excess deposits, lending standards deteriorate and new loans are made to less credit worthy borrowers. In time, anyone with a good story gets a loan.

It is this desperate search for secure new loans by the banking systems of the world that is the primary cancer referred to earlier in the medical analogy. It allowed Wall Street to develop racy new products which were gobbled up by banks around the world in the belief that they were secure investments.

This is what actually happened in the real world. There was an open tap pouring large dollops of newly created money into the world banking systems over many years that created the insatiable appetite for new banking loans and investments. What was the money tap that was left running? It is a flaw in the international monetary system which allows the USA to pay for its trade deficit using newly created US Dollars. This has been going on for two decades but has mushroomed in recent years…

What is important to understand is that without this insatiable demand for secure loans and investment by banks, it would not have been possible for all the other irregularities to have taken place. Credit standards would have remained robust and the banks would have avoided the bulk of the toxic waste that they got involved with.

The simple fact is that the world’s banks were awash with deposits looking for anything that resembled a reasonable loan or investment. Wall Street created the products required to meet that demand, resulting in the huge debt bubble that recently came to an end. In addition, banks (prompted by the large availability of new deposits) made many unwise loans across national borders which are now creating problems in countries in Eastern Europe and South America…

*http://www.gold-eagle.com/editorials_08/field111208.html

Other Articles by Alf Field:

1. Alf Field is Back! The “Moses” Generation and the Future of Gold

I have come out of retirement for this one off, once only, speech to warn that the good ship “Life As We Know It” is sinking. You have the choice of getting into a life boat now or going down with the ship. The life boats consist of precious metals and other assets that will survive the coming currency destruction. [Let me explain.] Words: 1400

 2. Update of Alf Field’s Elliott Wave Theory Based Analysis of the Future Price of Gold

The Elliott Wave Theory (EW) gives superb results in predicting the gold price. [While] it is a complicated system with many difficult rules [which] I explain in simple terms in this article, [I have determined that] once this present correction in gold has been completed it should [undergo] the largest and strongest wave in the entire gold bull market. The target for this wave should be around $4,500 with only two 13% corrections on the way. [Let me explain how I came to that conclusion.] Words: 1924

Over the past two months stock markets have crashed around the world and gold prices have soared as global investors decided that the U.S. has lost its race against time. A new recession is upon us before we even half-closed the output gap left open from the last recession. It means even larger deficits and an even weaker dollar. The price of gold and Treasury bonds is telling us that a full-blown international bond and currency crisis is approaching.  There is no international policy mechanism available to stop the panic short of re-opening the gold window that the U.S. closed unilaterally and “temporarily” in 1971. [Let me explain.] Words: 3025

So says Eric Jansen (www.itulip.com)  in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. 

Jansen goes on to say, in part, and I quote:

The best opportunities for sustained recovery have been squandered. Now we’re in real trouble. Getting out of it will not be as simple as the print, spend, and wait policy formula of the past three years that has failed to spur growth, produce jobs, and get the economy going again.

The incipient recession that the stock, bond, and gold markets smell is not a so-called “double dip” recession. It is a mid-gap recession – a recession that occurs in the midst of an output gap – and it is a far more serious economic event than a recession that produces an output gap.

a) The Recession of 1983 Wiped Out Public Sector Debt

The U.S. has not experienced a recession inside of an output gap since 1938, except for the one produced on purpose by the Volcker Fed in 1983 [see chart below] to squeeze the last breath of life out of an inflation spiral that was showing signs of resurgence in 1982… The inflation of that period wiped out private sector debt — mortgage and credit card debt, auto and student loans, and corporate debt that had accumulated on household and business balance sheets over the previous decades. As a result, the Reagan administration started with a clean slate of low private sector debt levels, virtually no public sector debt, and a massive tail wind of falling interest rates that fueled the growth of the finance-based economy. By the end of Reagan’s first term in 1985, two years after the recession that ended in 1983, the number of unemployed had fallen from 12 million to 8 million as inflation fell from 15% to 3%. Reagan’s re-election bid was assured.

b) The Recession of 2009 Expanded Public Debt

Here’s is the same chart updated to August 2011. The so-called Great Recession, in contrast, was not manufactured to kill off an inflation spiral that wiped out a generation’s debts. It followed a seizure of the great credit machine that fueled the nation’s growth since the early 1980s and left it buried under a mountain of both private and public debt. The Fed cut rates to zero and via quantitative easing and other monetary tricks attempted to get the machine going again. Rather then exit the recession with private sector debt wiped out and public debt near zero as in 1983, in 2009 private debt levels were higher than ever, and deficit spending to stimulate the economy expanded public debt well beyond the already worrisome levels reached before the recession. The result is the outcome I warned about in 2009: high unemployment, high inflation, and high deficits. 

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Two years later more than 14 million Americans remain unemployed and consumer price inflation [see chart below] is officially over 3%, but is closer to 4% according to the MIT Billions of Prices Project price index [see article here on this method of determining inflation]. 

Yet for all of the printing and spending starting in 2009, and the Fed’s success at producing inflation as Bernanke promised, all evidence points to a recession by Q4 2011. In fact, the economy may have entered a recession in Q2. The evident downward trend in economic growth two years into recovery is highly unusual from a historical perspective. 

 Since the Fed is locked into a deflation-fighting stance, inflation will be maintained above 2% even as nominal growth declines to below zero. The result: negative 2% growth by Q4 2011.

We had two years to close a trillion dollar output gap, but we blew it. 

Yesterday’s cure is today’s disease

Money supply expansion via central bank operations, government spending, and direct cash injections into failing financial institutions stopped the financial crisis in its tracks. Fed chairman Ben Bernanke kept the promise that he made in his now famous 2002 speech titled Deflation: Making Sure “It” Doesn’t Happen Here to prevent a repeat of the deflation spiral and economic contraction that gripped the US economy from 1930 to 1933… In that speech [see below] he asserted that the misguided, ideological laissez-faire policy approach to the previous credit bubble crash in the 1930s would not be repeated on his watch and that, instead, an activist and radical reflation policy would be pursued. In addition, he made a reference to gold that he may regret today.

“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

“What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

At the time Bernanke gave this speech I doubt he had any idea how prophetic his statement about gold and fiat dollars was to be after he executed his inflation plan five years later to fight off a post-crisis deflation spiral. 

[Unfortunately,] the “production of as many U.S. dollars as it wishes” by the Fed has not come “at essentially no cost.” Trillions of dollars of credit and money expansion ran head long into a few thousand tons of gold that cannot, in fact, be expanded rapidly and at no cost. Anti-deflation policy – a pro-inflation policy by any other name – weakened the dollar and every currency on earth, as we shall see, and exploded the gold price more than five-fold from $300 at the time of his speech to over $1700 at this writing. 

A consequence of government spending and zero interest rates is a depreciating dollar. The policy succeeded at boosting exports over the following quarters and years, but the immediate aim of dollar depreciation policy was not to improve the prospects of US producers but to halt asset price deflation in the FIRE sector [finance, insurance, and real estate] with cost-push inflation from rising energy import prices. 

A similar strategy that was executed by FDR under similar circumstances using gold instead of oil as the price anchor. In 1933 FDR halted a runaway deflation spiral by calling in gold and devaluing the dollar against gold by 70%…Without an international gold standard the unspoken strategy this time around was to not wait three years for deflation to get out of control but to move immediately via aggressive interest rate and fiscal policy to depreciate the dollar against oil – and so it was. 

The immediate impact of these policies was positive. Credit contraction and deflation stopped in their tracks…No serious economic observer argues that the policies that Bernanke envisioned and later executed were not necessary to prevent the economy from collapsing once the inevitable crisis began. 

The pilots who flew us into this hurricane were Alan Greenspan and the Reagan, Clinton, and Bush administrations that he served under. Bernanke did not have the option of compounding the error by putting the plane on autopilot and hoping for the best. That does not mean that Bernanke will not be the scapegoat for inflationary policies in the future. The real culprits here, however, are in the White House and Congress, who failed to follow emergency reflation measures with viable long-term solutions. 

Two years later we have the worst of all worlds. The U.S. economy is not “catching” and growing steadily under its own power as it must in order for monetary and fiscal stimulus to be withdrawn. Yet if stimulus is continued, consumer price inflation, nacent but persistently growing, will get out of control. 

Running out of time and options

I said in 2010 we had until 2011 at the latest to get the economy ramped up to a sustained 4% quarterly real GDP growth rate [and] suggested a way to do this by investing public funds into energy and communications infrastructure projects to boost growth to a 4% level. Rather than adding to the nation’s debt burden [such] government outlays[would have] produced a return on investment on borrowed taxpayer money by reducing the energy intensity of the U.S. economy, the number of BTUs of energy needed to produce a dollar of GDP. Such a reduction [would have been] as stimulative as a tax cut and for the same reason: household income devoted to fuel and food [would have been] freed up for spending on other goods and services. 

[Unfortunately,] we didn’t do [what I had suggested]. Instead, we:

• wasted the two years and trillions of dollars, mostly borrowed, on a haphazard and misguided mix of projects, from “Cash for Clunkers” to make-work maintenance of existing transportation infrastructure. 
• then we wasted more time arguing about whether the nation has too much public debt, when in fact public debt as a portion of total private and public debt outstanding is only 6% of total debt, down from 13% in the 1960s. Financial corporate debt, on the other hand, has over the same period grown from 2% to 37% of total debt.  It is this excessive financial sector debt that is weighing down the economy and preventing the economy from recovering at a high enough rate to close the output gap. It is why this recovery is unlike any other, and why every recovery since 1980 has been weaker and weaker, generating fewer and fewer jobs, and requiring more and more new debt growth to get the economy going again.
• finally, to cap two years of fumbling, Congress passed a bill to reduce government spending, a decision that can only slow the economy even further and make existing debt even more difficult to finance. 

Implications of the Mid-gap Recession

To understand the meaning of the new recession that is upon us it is important to get your head around the last mid-gap recession that happened despite muddled efforts to avert it.

The Great Depression happened in two parts [as shown in the chart below]. Part I was a massive recession that saw GDP decline by 25%. Part II was an output gap, the gap of between the potential output of an economy under conditions of low inflation and full employment. New Deal spending closed the gap from 24% to 14% of GDP. 

The New Deal stimulus spending was cut in 1937 after months of partisan bickering about the risks to the nation’s credit that deficit spending posed. Sound familiar? The spending reductions caused a new recession that widened the output gap to 17% of GDP. By the end of 1941, WWII spending, acting as gigantic public works project, closed the output gap and created a positive gap with high inflation. 

The current depression, like The Great Depression, is also happening in two parts. The 2008 to 2009 recession left a more modest output gap of 4% of GDP, thanks to the Bernanke Fed’s radical reflation approach. To close this gap by 2013, the economy needed to grow at an average of 4% per quarter starting in Q2 2009. 

 A combination of monetary policy and stimulus spending helped close the output gap to 2% of GDP by the fourth quarter of 2010 but growth has averaged only 2.5% of GDP since the recovery began in the second quarter of 2009, not the 4% we need to close the gap. At that rate, the gap is never going close – ever!

That, believe it or not, is the good news. Today the BLS revised Q1 GDP growth down from 1.9% to 0.4% almost no growth, and the first pass at Q2 growth is 1.4%. The past record of revisions during our feeble crawling-out-of-the-output-gap suggests another cut to near zero or negative growth is likely.

Deficit reductions spelled out in the Budget Control Act of 2011 virtually guarantee that the economy, already teetering on the edge of recession in the first half of the year, will fall into recession and contract in the second half of the year. 

This political acceleration into a mid-gap recession is occurring a full two years before my previous projection of a next recession occurring in 2013 if the U.S. fails to pursue a program of energy and communications infrastructure targeted, ROI producing stimulus programs. Once again, try as I might, just as I failed in 2001 to imagine that our leaders were crazy enough to create a housing bubble to bail the economy out of the fallout from the tech stock bubble, I was unable to think darkly enough to foresee the economic nightmare our leaders were capable of creating with alacrity. 

With the onset of a new recession, the current output gap will open further, and for nearly identical reasons as in 1938: fiscal stimulus was cut before the output gap was closed.

An output gap is the difference between the output of a productive economy running at full capacity and an economy running below capacity. Potential output is the old trend growth rate of the economy. It represents the good old days of 2006, with only two unemployed vying for each job opening, the prosperous economy that both producers and consumers – and investors – still hoped until July was just around the corner. Now they know it isn’t.

 The output gap we are in today is the difference between the actual output of the economy after the 2007 to 2009 economic contraction versus the potential output of the economy at full employment without inflation if the financial crisis and economic contraction had never happened. 

The gap created by the global financial crisis and recession must be – must be – closed before the next recession arrives to widen the gap further… If that is not accomplished the U.S. will find itself in an economic predicament far more dire than the one posed by the fallout of the financial crisis. 

If we don’t make the Q2 2011 deadline to get the U.S. economy moving again at a 4% annual growth rate the U.S. will run out of foreign buyers for its government debt and sooner or later face a full-blown debt and currency crisis. As the U.S. is at the center of the global monetary system, and over 80% of the world’s international transactions are dollar-based, a dollar crisis is a global economic calamity without precedent that will drag all other currencies down with it, with no quick-fix solution like the multi-trillion dollar global fiscal stimulus and bailouts that pulled the world economy back from the brink in late 2008 and early 2009. This second recession will put US finances on an even more precarious footing. 

When in 2009 I forecast a next recession for 2013, I said: “The other antecedent to recovery to keep in mind is government spending. We’re not supposed to worry about this because we’re going to grow our way out of it, but try to imagine what might happen if the next recession occurs before tax receipts recover to previous levels while government outlays are cut. We think it might go something like this. Might deficit spending to stimulate the economy in a next recession produce a $4 trillion shortfall, or 21% of GDP?”

I supplied the following as a warning of the consequences of a failure to avoid a recession before the US exits its post-recession output gap. 

In 1980 if the Fed was determined to stop an inflation spiral from developing into full blown hyperinflation then:

• interest rates had only one way to go: down;
• inflation had one way to go: down;
• the dollar had one way to go: up.

Today, the opposite is the case.

• interest rates have one way to go: UP;
• inflation has one way to go: UP;
• the dollar has one way to go: Down.

Conclusion

Gold is starting to look like a can’t lose bet to more and more market participants, including governments that are US political allies.

*http://www.itulip.com/forums/showthread.php/20308-Illusion-of-Recovery-–-Part-I-Print-and-pray-has-officially-failed-Eric-Janszen?p=207877

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

The gold price has enjoyed an advance of [approx. $100 since the end of September so] we are probably facing some profit taking and correction, right? Not exactly. Words: 693

So says the Jason Hamlin (www.goldstockbull.com) in a recent article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Hamlin goes on to say:

1. [In answer to question number 1. above:]
a) While gold has just made a new record nominal high, the price is still nowhere near the inflation-adjusted high of $2,500 to $5,000, depending on whether you use true or manufactured (government) inflation statistics.
b) The $100 advance in the past month represents a gain of only 8%, versus the last major upleg which lasted 3 months and registered a gain of more than 26%.

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2. Stocks don’t go up (or down) in a straight line, right?
Not exactly.
While they don’t move up in a straight line forever, major uplegs of bull markets have no problem moving nearly straight up for months at a time before correcting or consolidating. If you have been riding the gold bull for a while, you will remember several periods over the past decade where the price seemed to defy gravity.

3. Can gold possibly continue higher and if so, how high can gold go during the current upleg?
[Quite likely.]
a) Despite claims that gold is overbought and needs to correct, the gold price is only at the midway mark of its trend channel… If we get a move similar to the high season last year (Sept – Dec), then the gold price has much higher to go… A repeat of last year’s 26% seasonal gain would put gold just shy of $1,500, which is also the top line of its trend channel and [if] you don’t think last year’s advance was an anomaly, [it wasn't as] the average gain of the ten major uplegs in the gold market over the past ten years has been around 25%.

b) The fundamental landscape has also improved for precious metals in the past year, with significant increases to the M2 money supply, deficit and overall debt. Yes, credit contraction is having some deflationary effects, but the printing presses are about to kick into high gear with QE 2.0. The Fed always has a bias away from deflation and overconfidence in their ability to control inflation so I believe we are most likely to see the latter or some type of stagflationary scenario. Money/stimulus will be pumped into the economy in greater and greater quantity just to keep the market afloat. While this avoids bank runs, panic and political protests, it will have the effect of slowly siphoning the wealth from the taxpayer via devaluing the dollar [which is good for the price of gold].

c) Gold demand soared by 36% during the second quarter [and] we are now heading into the Indian wedding season, Asian governments are quietly increasing reserves and physical buying is driving up the gold price across all currencies.

d) There are also rumors that JPMorgan, Goldman Sachs and other investment banks are closing their commodity prop trading desks, which would force a covering of massive paper short positions.

So, while some sideways trading and consolidation is possible in the short-term, the current upleg is likely to break through resistance, climb to $1,350 in the short term and push towards the top of the trend channel near $1,500 by the end of the year.

Conclusion
If you haven’t established a position in both physical metal and stocks in quality mining companies, what are you waiting for?

*http://www.goldstockbull.com/articles/how-high-can-gold-go/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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To protect your portfolio in this deflationary landscape, a pervasive focus on capital preservation and income orientation, whether that be in bonds, hybrids, or a focus on consistent dividend growth and dividend yield would seem to be in order. Words: 1380

In further edited excerpts from the original article* David Rosenberg (www.GluskinSheff.com) goes on to say:

CONSENSUS OPINION FOR 2010
After perusing several Wall Street research documents on what to expect for 2010 I found, however, that the overwhelming consensus view was as follows:

• Muted recovery but still GROWTH

• Equity markets will be UP

• Most popular forecast involves a large-cap multi-national/emerging market barbell for equity allocation

• Decided preference for emerging markets as that is where the growth is going to come from

• This adds up to expectation of 4% to 5% for global GDP growth; 2% to 3% for the U.S.A.

• Generally neutral on the U.S. dollar

• Positive on commodities

• Negative on long government bonds across the board because of concern over government balance sheets

• Overall constructive view on credit product, especially for shorter-term maturities

MY THOUGHTS ON THE OUTLOOK

The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010.

This recession is really a depression because the recessions of the post-WWII experience were merely small backward steps in an inventory cycle but in the context of expanding credit whereas now we are in a prolonged period of credit contraction, especially as it relates to households and small businesses.

In addition, we have characterized the rally in the economy and global equity markets appropriately as a bear market rally from the March 2009 lows, influenced by the heavy hand of government intervention and stimulus.

2010 may well be seen as the year in which we witness the inevitable drawn out decline that is typical of secular bear markets.

The defining characteristic of this asset deflation and credit contraction has been the implosion of the largest balance sheet in the world — the U.S. household sector. Household net worth has contracted nearly 20% over the past year-and-a-half, a degree of trauma we have never seen before.

Frugality is the new fashion and will likely stay that way for years as attitudes toward discretionary spending, home ownership and credit undergo a secular shift. As households begin to assess the shock and what it means for their retirement needs, the impact of this shocking loss of wealth on consumer spending patterns in the future is likely going to be very significant.

What has really impressed me is what the general public has been doing with their savings, which is to allocate more towards fixed-income strategies. Looking at the U.S. household balance sheet, what I see on the asset side is a 25% weighting towards equities, a 30% weighting towards real estate and there is obviously a lot in cash and deposits, life insurance reserves and consumer durables, but the weighting in fixed-income securities is less than 7%. So my contention is that this is the part of the asset mix that will expand the most in the next five to 10 years.

What also makes this cycle entirely different from all the other ones experienced in the post-WWII era is that this is the first consumer recession we have witnessed where the median age of the baby boom population is 52 going on 53. The last time we had a consumer recession in the early 1990s, the boomer population was in their early 30s and they were still expanding their balance sheets. The last time we had a bubble burst in 2001 they were in their early 40s. Now they are in their early 50s, the first of the boomers are in their early 60s, and we are talking about a critical mass of 78 million people who have driven everything in the economy and capital markets over the last five decades. This cohort realize that they may never fully recoup their lost net worth, and yet they will probably live another 20 or 30 years.

So, what is happening, which is at the same time fascinating and disturbing, is that the only part of the population actually seeing any job growth in this recession are people over the age of 55. Everyone else can’t get a job or are losing jobs — there is a youth unemployment crisis in the United States of epic proportions and a record number of Americans have been out of work for longer than six months in part because the “aging but not aged” crowd is not retiring as early as they used to.

Many retirees who took themselves out of the workforce because they believed that their net worth would provide for them sufficiently in their golden years are redoing their calculations and coming back to the workforce to make up for their lost wealth. They are seeking income in the labour market, not because they want to but because they have to in order to satisfy their retirement lifestyles.

We can understand that there are concerns over inflation, but the history of post-bubble credit collapses is that even with massive policy reflation, deflation pressures can dominate for years — this was certainly the case in the U.S.A. and Canada in the 1930s, and again in Japan from the 1990s until today. Income strategies in both cases worked well with minimal volatility.

Of course, all the talk right now is about reflation and all the efforts from the central banks to create inflation, but the facts on the ground show that the inflation rate for both consumers and producers has turned negative for the first time in six decades. Perhaps inflation is a consensus forecast but deflation is the present day reality and often lingers for years following a busted asset and credit bubble of the magnitude we have endured over the past two years.

So, to protect the portfolio in this deflationary landscape, a pervasive focus on capital preservation and income orientation, whether that be in bonds, hybrids, or a focus on consistent dividend growth and dividend yield would seem to be in order.

What has become crystal clear is that the U.S. government has taken over the beleaguered U.S. dollar, which can only be described as benign neglect.

2010 is a mid-term election year in the U.S. and the Administration will do everything it can to squeeze every last possible basis point out of GDP growth and to prevent the unemployment rate, the most emotionally-charged statistic of them all, from reaching new highs.

While I still believe that a sustainable return to inflation is a long ways away, there is little doubt that we will see continuous efforts at policy reflation, which means that the U.S. money supply is going to continue to expand rapidly, which in turn is positive for commodities, which are after all priced in U.S. dollars.

On top of all that, it does appear from a volume demand perspective, that the secular growth dynamics in Asia, China and India in particular, have reasserted themselves and this part of the world is the marginal buyer of commodities. This is the key reason why the Canadian stock market, given its resource exposure, has continued to do very well in comparison to the United States, especially when the positive trend in the Canadian dollar enters the equation, and I expect this outperformance to continue.

One conclusion I think we can agree on is the need to maintain defensive strategies and minimize volatility and downside risks as well as to focus on where the secular fundamentals are positive such as in fixed-income and in equity sectors that lever off the commodity sector, under the proviso that the “experts” are correct on this particular forecast — that China and India remain the global growth leaders.

*http://www.godlikeproductions.com/forum1/message940992/pg1

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