George Soros: Major bloodletting ahead

Billionaire George Soros believes a “bloodletting” may be in the offing for leveraged buyout firms (LBOs) and commercial real estate investors amid the worst economy in seven decades.

“In commercial real estate and leveraged buyouts, the bloodletting is yet to come,” Soros said in a speech in Europe, reported by Bloomberg News.

“These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy.”

Bankers across the globe have accounted for $1.66 trillion of write downs and write-offs on bad loans since the start of the credit crisis in 2007.

Crisis averted? UAE offers Dubai bailout

As a potential financial crisis, traders have already forgotten about Dubai.

The key factor is that the UAE is backstopping banks, which, as we know from experience here, is the signal to go back to business as usual.

A Run on the Dollar Starts Soon

It's one of those numbers that's so unbelievable you have to actually think about it for a while...

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss."

What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt, it's called a "default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money-management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. It has 8,133.5 metric tonnes of gold (it is the world's largest holder). At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

All of this is going to lead to a severe devaluation of the U.S. dollar... Which I expect to happen within 18 months. I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory, which was published last week. Coincidentally, America's paper of record – the New York Times – repeated our warnings (nearly word for word) last weekend. Word is getting out.

If you haven't taken steps to protect yourself from the coming devaluation – like owning gold and silver bullion, foreign real estate, and farmland – make sure you do it soon. The dollar rout is coming.

Good investing,

WHY YOU SHOULD INVEST IN AUSTRALIA

Today's chart shows that once again, the ABCs are the place to be these days.

Years ago, Wall Street began using the acronym "BRICs" when discussing investments in the developing countries of Brazil, Russia, India, and China. We say, "Go ahead and watch the BRICs... but also watch the ABCs."

The ABCs are Australia, Brazil, and Canada. These are the three best countries for long-term investment in commodities like oil, uranium, copper, iron ore, and sugar. Each country has managed its finances better than the U.S. Each is loaded with the raw materials growing giants like India and China need.

Take Australia. The Land of Oz is a major producer of iron ore, coal, wheat, gold, uranium, and natural gas. It has excellent rail and port infrastructure. It sits on the doorstep of Japan and China. And while the U.S. dollar has spent its time crashing, the Aussie dollar has spent its time soaring. It's as close to a gold and commodity-backed paper currency as it gets.

Worldwide escape from the dollar continues

India - whose central bank recently bought half of the 400 tonnes of gold the International Monetary Fund had offered for sale - has indicated it may now buy the remaining 200 tonnes. It is open to making additional purchases in the future.

We don't know where gold is going tomorrow, next week, or next month - but the trend of large gold purchases by foreign countries has clearly begun, and it should help put a long-term floor under its price.

Another huge country dumping the dollar

Russia's central bank gold stocks rose by 0.5 million ounces (15.6 tonnes) or by 2.6 percent in October to 19.5 billion ounces (606.5 tonnes), data on the bank's web site showed.

Russia's central bank has said it aims to increase gold's share in its reserves this year to keep its investments diverse. The metal is also seen as a safe-haven at times of financial market turbulence and economic crisis -- a status which has helped send the price of gold to record highs this year.

GOLD IS DUE FOR A BREAK

Today, we check in with an asset that needs a break soon: gold.

Below today's price chart, you'll find an indicator called the "RSI." The RSI measures overbought or oversold conditions on a given asset. When folks go wild for an asset, the RSI can reach "race car in the red" readings above 80.

Gold staged an upside breakout in early October. Since then, it has enjoyed a monster $150-per-ounce rally. This rally has left gold badly "stretched" to the upside. The RSI's "overbought" reading is at its highest point in 12 months. When a market is this stretched, all it takes is a lack of buying to cause a sharp correction. (I've marked previous examples with red arrows.)

Long term, gold has a bright future. The U.S. government's crazed "spend and tax and inflate our way to prosperity" program is murderous on our currency... which will drive people into real money (gold) for years. But in the short term, gold is like a runner that has sprinted flat out for a mile. It will take a deserved rest soon.

The bankruptcy of the United States is now certain

It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt - whether subprime borrowers, GM, Fannie, or GE - the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months - an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

Top forecasters agree: Dollar slide to continue

The top performing forecasters in Bloomberg’s survey of 46 firms predict the dollar will continue falling next year.

The sluggish economic recovery and exploding government debt will weigh on the currency, they say. Already the dollar has hit 14-month lows this year.

THIS IS MAJOR JUICE

This week's chart is picture of what traders like to call "juice."

You can use all kinds of different financial vehicles to take a position on any given idea in the market. Some vehicles are conservative and slow moving, for folks who avoid risk and volatility. Some are faster moving, for folks who know how to manage risk and want to shoot for quicker profits. These latter vehicles give you leverage... or "juice."

Juice in the copper market can be found in Freeport-McMoRan (FCX), the world's largest publicly traded copper producer. Regular DailyWealth readers know "Dr. Copper" is enjoying a big rally right now. The red metal is up 94% in the past 12 months.

Expensive copper means higher profit margins for FCX. Shares have more than quadrupled in price during the same time... and sports one of the biggest uptrends in the market right now. Major juice!

Jeff Clark: There are 2 kinds of bulls right now

The bullish money managers seem to be divided into two camps...

1. Those who believe the market will stay propped up through the end of the year, thereby cementing big bonuses for big returns, and

2. Those who are ready to hit the sell key at the first sign of sustainable weakness in order to lock in big returns on the year and guarantee a big bonus.

I think the second camp is much larger.

China gold BLOWOUT: Demand for the metal surging

Chinese consumer demand for gold continues to grow. It reached record levels in the third quarter of the year, as demand for jewelry and other items celebrating the 60th anniversary of the founding of the communist state added to already high investment demand.

In all, Chinese consumers bought up an astonishing 120 tons of gold, up over 12% compared to last year, even as total world demand fell.

The Chinese continue to buy up the world's gold as much of the western world sits idle. You'd be wise to consider buying gold now, before the rest of world wakes up and joins China.

South African gold industry on "deathwatch"

Despite claims of massive below ground reserves, researchers say that South Africa's gold industry is on deathwatch, with its goldfields nearly 95 percent exhausted and production rates set to fall permanently below 100 tons a year within the next decade.

South Africa is the fourth-ranked gold producer in the world.

Gold production from the Witwatersrand, the biggest known gold field in the world, peaked at around 1,000 tons...

THIS IS SILVER'S YEAR

When they close the books on 2009, they'll chalk up a big win for silver vs. gold.

One of the big questions facing the precious-metals buyer is "Should I buy gold or silver?" As we profiled in September, since the bull market in precious metals began in 2001, the answer is, "There isn't much difference in the returns... but silver is much more volatile."

Since the 2001 "kickoff," gold and silver are both up a little over 300%. But as you can see from today's comparison chart, when a solid metals rally gets going, the returns in silver can get extraordinary. Our chart plots the percentage gains in gold (black line) versus silver (blue line). Silver is up nearly 65% this year, while gold is up 30%. The blue line, however, has much bigger peaks and valleys.

Moral of the story: You can make a heck of a lot of money in silver... just be willing to stomach a lot of volatility on the road to riches.

The Simplest Reason Gold Will Soar

When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.

Why does gold go up when interest rates are low? It's simple...

The knock against owning gold has always been that, unlike cash, it pays no interest... Compound interest is almost irresistible. If you can earn 7% a year on a $10,000 deposit, in 10 years time, it will be worth $20,000. Gold will just sit there like a bump on a log.
But every so often, like right now, paper money pays you no interest... and the scales tip in favor of gold.

That's the simple version. Let's add one little tiny wrinkle to it, so you can see why gold has become irresistible now...

The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.

My longtime friend Porter Stansberry asked me to do a study of what happens when real interest rates are less than zero. The results were astonishing...

In short, when real rates are negative, gold soars and stocks stink. And when real rates are positive, gold stinks and stocks soar.

Here are the actual results. (Note: These are COMPOUND ANNUAL GAINS.)

1973 through 1980
The median real interest rate was -1.15%.
Gold returned +32% per year.
The real return on the S&P 500 was -7% per year (not including dividends).

1981 through 2001
The median real interest rate was +2.7%.
Gold returned -3.5% per year.
The real return on the S&P 500 was +7% per year (not including dividends).

2002 to today
The median real interest rate was -0.4%.
Gold returned +18.5% per year.
The real return on the S&P 500 was -3% per year (not including dividends).

Well, there it is, plain as day. And you can see, these trends persist.

In 2010, real rates will be negative. (Bernanke will keep nominal rates near zero... so subtracting inflation will give you a negative real interest rate.) There is essentially no chance for a POSITIVE real interest rate in 2010. Said another way, you WILL lose money in the bank in 2010. Whatever interest you earn won't keep up with inflation.

History shows, under that environment, stocks don't do well... and gold soars. There's nothing in sight to end that trend. Trade accordingly.

WHERE THE BULL MARKETS ARE

Breakouts. Everywhere we look in the commodity markets, we see breakouts.

Breakouts are one of the great "common sense" charting tools available to traders. It's simply when the price of a stock or commodity reaches a new high for a given period of time. No trend can start without one.

Here's this week's list of major commodity stock breakouts, aka, "where the bull markets are": BHP Billiton (world's largest mining company), Silver Wheaton (largest silver royalty company), Peabody Energy (largest public coal company), the Market Vectors Agribusiness Fund (food and fertilizer producers), Petrobras (Big Oil). And don't forget a fresh high in the Venture Index as well.

How about the commodities themselves? Try copper, gold, silver, and platinum. Crude oil, lead, aluminum, zinc, cotton, and sugar are within spitting distance of breakouts as well.

In addition to a bullish supply/demand picture, legendary investor Jim Rogers likes commodities because of the potential inflationary explosion the Federal Reserve is creating. As you can see from the chart below, he has the trend on his side.

A PICTURE OF THE ECONOMIC REBOUND

Score a victory for folks bullish on the global economy...

For a picture of this victory, we go to the past two years of action in the Baltic Dry Index. As we mentioned last month, the "BDI" is one of our favorite real world barometers of what's going on. It's the most widely followed gauge of the price it costs to ship raw materials like grain, coal, and iron ore.

The BDI fell 94% in just six months last year as credit – the oil of commerce – was drained from the global economic engine. It's the worst crash we've ever seen an index suffer. But like all economic indicators, the BDI is in rally mode right now...

After striking a bottom below 1,000 last December, the BDI rallied to 4,000 by June. It then corrected to almost 2,000 in September. But as you can see from today's chart, the BDI is set to reach a new 12-month high this week. As long as this index remains healthy, we have to say, "The economy ain't so bad..."

HOW THE RICH SEE THE RALLY

Our chart of the week shows why the rich, seasoned investor looks at the recent stock rally and shrugs his shoulders.

You see, the rich investor measures his gains not in the arbitrary value of government paper (dollars), but in real, honest money: gold.

This week's chart displays the 2009 return of the S&P 500 in terms of gold. Nominally, stocks are up big since May. But the U.S. dollar has plummeted in value... and the price of "real stuff" like crude oil, copper, and gold has soared. Measured in gold, stocks have drifted sideways for seven months... and are nearing a new short-term low.

We stand by what we said last month: Sure, dollars are flowing into stocks right now... but the yahoos running the controls in Washington D.C. are making those dollars worth less and less every day.

China shakes the gold industry: Rumored to be interested in major U.S. gold miner...

Newmont Mining (NEM), one of the world's biggest gold producers, has been on a tear lately. Its stock is up almost 20% in just the last week. Most are pinning the move on the company's great earnings at the end of October - third-quarter profits more than doubled as gold has risen above $1,000 an ounce... But there's also an interesting rumor behind the move.

Some on Wall Street are speculating China is looking to buy the U.S.-based company outright. It's no secret China has been on a buying spree for gold and other real assets, but this would mark its first attempt to buy a major gold company.

The rumor is unconfirmed at this point, and it's likely the U.S. government would get involved prior to a sale. But this type of news is certain to become more common as the world attempts to flee the dollar.

The 25 richest members of Congress

Did you know there are 238 millionaires in Congress?

That's according to a new study by the Center for Responsive Politics, which shows that more than 44% of Senators and Representatives are in the seven-figure club, compared to about one percent of all Americans.

Just as startling: 50 members of Congress boast estimated wealth of at least $10 million, according to 2008 data. And 7 are worth more than $100 million!

Overall, congressional median wealth...

HEALTH CARE: THIS WEEK'S UNLIKELY NEW HIGH

The star of this week's "unlikely new highs" department: the U.S. Healthcare Providers investment fund, symbol IHF.

IHF is a one-click way to invest in a broad swath of the U.S. heath care industry. Major holdings include Cigna (insurance), UnitedHealth (insurance), Quest Diagnostics (testing), DaVita (dialysis services), and Express Scripts (pharmacy management). The fund is up 35% in the past seven months and just registered a new 52-week high.

The conventional thinking is at odds with this price action. After all, won't the government's reform efforts drive down profits for anyone who gives a flu shot, performs a lab test, or asks you to fill out an insurance form? We asked medical stock expert Rob Fannon (editor of the Phase 1 Investor) for his take on the situation...

Rob says sure, reform may pressure profit margins. But remember how the ancient law of supply and demand works. The government could make health care "free" to tens of millions of people. When you make a product or service free, you create unlimited demand for it. That's why Rob recommends getting on board this trend. Profits may go down a bit, but if Washington's "free houses, cars, and health care" panderers get their way, a lot of new demand and revenue is headed toward IHF and its holdings.

Is It a Gold Bull Market or a Dollar Bear Market?

Which is it? A gold bull market? Or a dollar bear market?

Yes, you can have one without the other...

For example, gold soared 50% from early 2002 to early 2005 – but that was a dollar bear market, not a gold bull market. Let me explain...

Gold went from $280 to $420 an ounce in those three years. But in terms of euros, gold was exactly flat, at around 320 euros per ounce. So that was a bear market in dollars, NOT a bull market in gold.

So which is it today?

My simple definition of a bull market in gold is this: When gold is rising in terms of all four of the most widely traded currencies, you're in a gold bull market.

Today, we're in a gold bull market.

In each of the last three months (and in six of the last 11 months), gold has risen month-over-month versus all four major currencies: the dollar, the euro, the yen, and the British pound.

The numbers are astounding...

Since 1971, gold has risen against all four currencies month-over-month 31% of the time. If you simply hold gold during the month after that happens, the compound annual gain in gold is an astonishing 34%.

For the other 69% of the time (when gold didn't rise against all four currencies in the previous month), gold lost money over the next month. Extraordinary!

Last week, I showed you a simple gold indicator with some incredible results... I said, "Simple is elegant. A few minutes a year turned $10,000 into $1.28 million over 41 years, without any number gymnastics."

With that simple gold indicator, gold rises at a compound rate of 17% a year in "buy" mode.

With today's simple gold indicator, gold rises at a 34% compound annual rate after it's moved up against four currencies.

When you combine the two simple indicators, gold rises at a compound annual rate of 44%. Wow!

Granted, both indicators are rarely in "buy" mode at the same time – it's happened 26% of the time since 1971. But importantly, we're in "buy" mode in both indicators right now...

It's no surprise gold is soaring right now.

But to answer the question at the beginning... Is it a bull market in gold? Or a bear market in the dollar?

The truth is, unlike 2002-2005, it's both... It's a bull market in gold, AND a bear market in the dollar. The U.S. dollar has dropped nearly 15% since March against an index of the euro, pound, and yen.

Both of our simple gold indicators are in "buy" mode... and both have incredible track records. There's no hurry to sell your gold yet.

World gold supply is running out

Aaron Regent, president of Barrick Gold - the world's largest gold producer - said the world may be running out of gold.

He said there's a strong chance we've already reached "peak gold." World production peaked in 2000 and has been falling by a million ounces per year ever since, and ore grades - how much gold is actually in the ore - have fallen from 12 grams per ton in 1950 to near 3 grams per ton today.

Gold reached an all-time high of $1,118 today, and declining production should only act to add a floor under prices in the future.

How to understand the "Greater Depression" in one paragraph

Mises is always sound, but his prose usually ranges from dull to turgid.

But Mises on economics is highly topical, as the Greater Depression unfolds:

"The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about."

-Ludwig von Mises, Human Action, 1949

If you've got any question about how bad this thing is going to get, and what its social and political consequences are likely to be, read it again.

COPPER'S NEXT BIG MOVE

Today, we consider one of the great investment questions of our time... and ask for a little help from Dr. Copper

Longtime DailyWealth readers know we keep close tabs on copper. The red metal is a vital ingredient in everything around you... like power lines, homes, plumbing, cars, and refrigerators. This "in everything" quality makes the copper price an instant read on the global economy.

The great question we consider is, Are we going to slip into a slog of lower economic demand and lower prices? Or is the government going to set off an inflationary explosion with its giant "funny money" program?

We have our guess (the latter), but we always mind what the market says... which brings us to today's chart. It displays the incredible 85% rebound in copper prices in 2009. This rebound halted in August, and copper has drifted around $3 per pound since. Its next big move is key...

If the market breaks below summer lows of $2.20 per pound, it would be a loud warning we're entering a period of lower demand, lower incomes, and lower asset prices. A rise above $3.25 would be a loud warning – a shotgun fired next to your ear – that funny-money inflation is becoming a problem. Keep a close eye on the doctor...

This is a must-read piece on gold

The disconnect amazes me – the U.S. holds virtually all of its foreign reserves in gold. We are the world's largest gold holder, with more than double the amount as #2 Germany, but as a nation Americans are gold skeptics. Just this week, I was interviewed twice on television by two old-timers who are still clearly anti-gold. It appears they would prefer to live in a state of denial.

But in emerging Asia, the citizens get it. They say it's a good move because they are buying gold, too - they believe in it.

And with this purchase from the IMF, India has gone from being a price taker as a jewelry consumer to being a price maker as an investor. This is the sort of change in government policy…

DOLLAR DESTRUCTION: U.S. currency hits 15-month low

The latest on the biggest story in the world right now: The U.S. dollar just broke through downside resistance to reach a fresh 15-month low. Gold rose to a fresh high as a result.

As usual, the lower dollar means higher stock prices this morning. The FT reports:

"As the greenback dropped below the 75-point level on a trade-weighted basis, US equity futures spiked, suggesting the S&P 500 would begin trading above its previous closing high for 2009 of 1,097.91."

Why gold has a long, long way to run higher

"Who in this room has enough gold bullion to live off of for one year," Porter asked the roughly 250 Alliance Conference attendees. Only about 10 people raised their hands. Porter then asked who held at least 15% of their investable assets in gold bullion... Around one-third of the room raised their hands – an improvement, but still not the number you would expect considering the current gold mania.

And these aren't the average people you'll find on the street... These are our Alliance members – our very best clients. They receive everything we publish and will publish (except Phase 1) in the future – for life. Every day, we pound them over the head with information explaining gold's benefits and why they should buy it... And we've been recommending gold in one form or another for at least five years. In other words, this isn't a fair control group. But the majority of these folks still don't own sizable gold positions.

As Brian Hunt, Stansberry & Associates editor in chief, said while moderating Monday's panel discussion, "If you asked 100 people on a street corner if they owned gold, I'll bet nobody would say yes."

So if you worry gold is too popular, don't worry at all. The yellow metal has a long, long way to run.

Shocking new poll shows most of the world loves socialism

A new BBC poll finds that only 11 percent of people questioned around the world — and 29,000 people were asked their opinions — think that free-market capitalism is a good thing. The rest believe in more government regulation. Only a small percentage of the world's population believes that capitalism works well and that more regulation will reduce efficiency.

One quarter of those asked said that capitalism is "fatally flawed." In France, 43% believe this. In Mexico, it is 38%. A majority believes that government should rob the rich to give money to poor countries. In only one country, Turkey, did a majority say that less government is better.

It gets even worse. While most Europeans and Americans think it was a good thing for the Soviet Union to disintegrate, people in India, Indonesia, Ukraine, Pakistan, Russia, and Egypt mostly think it was a bad thing. Yes, you read that right: millions freed from socialist slavery — bad thing.

Why the only direction for Thailand is up

…I’m spending the next few days hiding out in Pattaya, a great little Thai beach town that ranks among the cheapest civilized places in the world.

Aside from a few marquee western brands, it’s practically impossible to spend more than $100/night in accommodations here, and everything from drinks to taxi rides to motorcycle rentals is so cheap the prices are almost cute.

There are a lot of westerners here, mostly older men who troll around the city looking to pick up younger Thai women. You see it everywhere– the proverbial ‘age mismatch’ between a pasty white gentleman in his 60s with a beautiful young thing in her 20s. The Thais don’t seem to mind, and neither do their male companions.

As such, the place is fabulous for hedonists and retirees… you can live on the cheap and have a great deal of fun in Pattaya, regardless of what you are into– outdoor sports, firearms, aquatics, food...

Iraq oil minister: We're going to pump 6 million barrels per day

Iraq is getting serious about pumping oil. The country's oil minister recently told interviewers he expects Iraq to produce 6 million barrels of oil per day once oil companies complete development work.

Iraq pumps just 2.45 million barrels per day now, and it's slowly awarding development contracts to giant oil firms like Chinas National Petroleum Corp, Italys Eni, and U.S.-based ExxonMobil. Iraq has never been fully explored with modern technology, but once it is, the country could contain more oil than Saudi Arabia.

IMF: Dollar carry trade is risking global collapse

First it was NYU economist Nouriel Roubini, now the International Monetary Fund (IMF).

Like many others, the IMF is growing concerned that a global dollar carry is trade pushing up assets worldwide — and risking a collapse if U.S. interest rates begin to rise.

The “trade” in question consists of borrowing dollars to take advantage of miniscule U.S. interest rates and then putting those dollars into assets around the world, including U.S. stocks and junk bonds...

What could be the biggest entertainment release of all time coming soon

Activision Blizzard (ATVI) is about to release its Call of Duty: Modern Warfare II: video game. Sales are expected to be half a billion dollars in the first week. That would make it the biggest entertainment product release of all time, topping even the most successful blockbuster movies.

According to the LA Times, "Activision is working with retailers to plan more than 10,000 midnight openings in the United States, including most of the 4,300 GameStop stores around the country."

Another major gold breakout: Now over $1,100

Gold powered to another record high on Monday on safe-haven buying as the U.S. dollar slipped and after a weaker-than-expected U.S. unemployment rate revived worries about the health of the global economy.

Gold has gained more than 25% in 2009, driven by persistent weakness in the U.S. currency that has lost more than 6% versus the euro so far this year...

Astonishing chart of Fannie and Freddie's mortgage defaults

Government-controlled mortgage lender Fannie Mae announced an $18.9 billion third-quarter loss – bringing total losses in the past eight quarters to $101.6 billion. Luckily, the Treasury Department stands ready with $200 billion of taxpayer money to bail this miserable company out. Fannie is asking for an additional $15 billion in emergency funds – its fourth "withdrawal" this year – upping its total bailout cost to $60 billion... so far.

But Fannie will never earn its way out of this mess... If the company actually turned a profit, the $6.1 billion in annual dividends it owes the government would eat it all... And Fannie has only earned more than $6.1 billion twice in the past 20 years ('03 and '05). So of course, Fannie is "dependent on the continued support of the Treasury to continue operating," according to its latest statement.

And the cash hemorrhage is only getting worse. Fannie's nonperforming loans rose to $198.3 billion this quarter, up from $171 billion on June 30, 2009, and $119.2 billion on December 31, 2008. In other words, bad loans have almost doubled in less than a year. And foreclosed property on Fannie's books stands at $7.3 billion compared to $6.2 billion on June 30, 2009. Take a look at this chart (borrowed from Whitney Tilson's housing presentation) showing the acceleration in Fannie and Freddie mortgage defaults:

With unemployment hitting a 26-year high of 10.2% (the economy shed 190,000 jobs), the chance of these nonperforming loans becoming active again is slim.

YOU CAN MAKE A LOT OF MONEY IN BONDS!

Question for DailyWealth: Was Porter Stansberry right with his wild claim in May? Can I really make as much in bonds as I can in stocks?

Answer: As always, let's consult the judge, jury, and executioner of all ideas: the market.

Below, you'll find another comparison chart. This one compares the gains in the high-yield corporate bond fund (black line) to the gains made in the S&P 500 (blue line). As you can see, Porter was right: Bonds gained a bit more than stocks. The nitty-gritty total return numbers are 17.4% for bonds versus 15.6% for stocks.

How can boring bonds register such big returns in such a short time? Bonds are just like any asset... When folks get scared to death, they'll sell a dollar's worth of bonds for 60 cents. The story here is the same as any great contrarian trade: When most folks can't stand the thought of owning something, that's when you buy with both hands.

Superbear Robert Prechter: Dollar ready for big surge

As we said yesterday, all the cool, bearish folks are dollar bulls now. Elliot Wave analyst Robert Prechter, who yesterday described the crash of 2008 as a "warm up," was on Tech Ticker explaining his belief that the dollar will surge.

TechTicker: Ever the contrarian, Prechter cited the heavy bearish sentiment on the dollar when he made similar predictions here in August.

The gold rally is different this time

I argued the bull case for gold in my posts over the past few months. With the gold price scaling fresh peaks and closing in on $1,100, it would certainly seem as if renewed interest in the yellow metal is being stirred up, especially subsequent to the purchase by India’s central bank of 200 metric tons of gold from the International Monetary Fund.

... The gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies...

A SLOW, STEADY BULL MARKET IN PRECIOUS METALS

Platinum isn't "super cheap" like we pointed out in February, but it's in a bull market.

Platinum is an odd bird in the commodities complex. It has precious-metal attributes like gold, which means people use it as a store of wealth and for jewelry. It also has industrial-metal attributes like copper. Industry uses it to make catalytic converters for autos. Naturally, industry insiders expect Chinese platinum consumption to soar in the next decade as the country grows wealthier.

Platinum suffered a brutal decline from $2,200 an ounce to $800 late last year. But as you can see from today's chart, it's enjoying textbook bull market action of "higher highs and higher lows" off its bottom.

Keep platinum on your trading list... If we experience an inflationary boom, platinum will benefit from a flight to precious metals... and it will benefit from increased industrial activity. These two factors spell higher prices for platinum.

Indian finance minister: Economies of Europe and U.S. have "collapsed"

Indian finance minister Pranab Mukherjee just punctuated his country's enormous purchase of gold by saying the economies of Europe and the U.S. have "collapsed." The comment and the purchase reflect the changing fortunes of Asia versus the West… which is bullish for gold.

The FT reports:

The purchase by New Delhi’s Reserve Bank from the International Monetary Fund pushed gold prices to a record $1,090.90 per troy ounce, up 2.6 per cent on the day, as traders bet that other central banks would also become buyers.

More on India's huge gold purchase...

The IMF announcement yesterday that it had sold virtually half of its planned 403.3 tonnes of gold, destined to increase its resources for lending to low-income countries, to India came as something of a surprise to the market. Not perhaps that a Central Bank had made the purchase, but the hard money had been on China to do so, not India.

Indeed, the market seemed, in retrospect, little affected by the news of the sale, which apparently involved daily sales that were phased over a two week period during October 19-30, with each daily sale conducted…

Al Gore is a boil on the butt of American society

If his global warming fakery and political pandering isn't enough to make you think Al Gore should be shipped to the moon, make sure to read this recent article on the former VP.

Gore is making a fortune with numerous green energy investments that he tirelessly lobbies for in Washington D.C. The businesses Gore backs would most likely be losers if it weren't for taxpayer subsides.

I guess we can't be too hard on Gore… as we've seen many times in the past 18 months, looting the Treasury is now the surest and best way to acquire wealth and power in America.

India joins China in mad rush out of the dollar

The dollar is still losing its luster as the foreign reserve currency of choice.

India has just bought 200 tons of gold from the IMF at $1,045 an ounce which is close to a recent record high of $1,070. The entire transaction is worth almost $7 billion. The move is seen as a way for India’s central bank to move some of its capital away from investments in the dollar.

The IMF may sell another 200 tons of gold...

THIS PAIRS TRADE WAS A BIG WINNER

Today, we check out a "pairs trade" that worked out beautifully.

A pairs trade is a two-sided position often used by professional traders. On one side, they purchase a stock, betting it will rise. On the other side, they sell as stock short, betting the price will fall. Pros use pairs trades to profit from the diverging fortunes of particular businesses. Take the Blockbuster/Netflix trade...

For many years, Blockbuster was just about the only game in town for movie rentals. But about 10 years ago, mail-order company Netflix began offering folks a way to rent movies without due dates, late fees, and trips to the strip mall. "On demand" cable offered a similar hassle-free service. As you can see from today's chart, the market likes the hassle-free method a lot better.

Netflix went public in 2002. Shares are up nearly 600% since then. Blockbuster shares are down about 94% in the same time. The chart below shows the two share prices plotted against each other since 2002. The wild divergence in share performance produced a steady, upward sloping "ratio" line. Tomorrow, we'll show you one pairs trade working right now... that will keep working for years.

Bond King Gross: No rally for the dollar

Bond manager superstar Bill Gross says the dollar will keep falling.

That’s because it protects U.S. trade by pushing down our export prices and pushing up our import prices.

"I think the dollar is an over-owned currency,” he told CNBC. “The Chinese, the Asians have basically owned too many dollars for too long."

The U.S. government favors the dollar’s decline, Gross says. "Let's face it, a lower dollar is basically a protectionist barrier."

Microsoft CEO: Business may never recover

In a statement that must send chills up the spines of other tech CEOs, Microsoft’s (MSFT) Steve Ballmer said that the vicious recession may have reset IT spending to a level which will never recover to where it was in the period just before the downturn.

“While we will see growth, we will not see recovery,” Ballmer said.

Ballmer is speaking directly to Microsoft’s own future, although he did not frame his comments that way. There has been growing concern that the world’s largest software company will...

THE BIG MONEY HAS RETURNED... TO SELL

With this week's chart, we check in with the "big money" again... and it's not pretty.

This summer, we noted several times how a stock rally requires a large and continuous flow of cash from "big money" investors that control hedge funds, mutual funds, and insurance funds. Only with their "yes" votes can a market remain healthy and strong.

At the bottom of this week's chart, you'll notice a panel with lots of black and red bars. These bars represent trading volume on the large S&P 500 fund (SPY). This is the most widely traded ETF in the country. Black bars represent trading volume on advancing days, red bars represent trading volume on declining days. The taller the bar, the greater the buying or selling "power" on that day.

As you can see, buying power slowly dried up during the summer. This was partly due to an expected seasonal lull. But in the last two weeks, the market has declined on some of the highest volume in half a year. The big money is back... and it's selling. Traders: mind your trailing stops!