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Weekend Edition

The Best of The S&A Digest
Saturday, June 27, 2009

Have you ever heard of the Liberty Dollar? It's essentially a warehouse receipt you can use to barter for goods. Each Liberty Dollar is a receipt for so much gold, silver, and copper.
 
Assuming the guys running the system are honest, it's a much sounder currency than the government's paper dollar. The problem is, it's expensive to set up such a system and difficult to get people to accept your warehouse tokens at face value.
 
I wouldn't have personally used Liberty Dollars. I prefer to own my gold directly. I can wire money to my bullion dealer anytime I'm holding too much paper money. On the other hand, I certainly applaud the fact that a few Americans at least have gotten fed up enough with the government's funny money and done something about it. Everyone, it seems to me, has the right to use whatever kind of money he likes – or at least they should...
 
But it turns out you don't have that right... The feds recently arrested all of the backers of the Liberty Dollar. Says U.S. Attorney Ed Ryan: "When groups seek to undermine the U.S. currency system, the government is compelled to act. These coins are not government-produced coinage, yet purchasers were led to believe by those who made and sold them that they should be spent like U.S. Federal Reserve Notes."
 
Mmmnnn... Since Congress abrogated its legal responsibility to "mint coins" back in 1913, when it created the privately owned Federal Reserve, who has done more to "undermine" the value of the U.S. dollar? If the government wanted to protect the value of the dollar, you'd expect it to be consulting with the Liberty Dollar guys, not arresting them.
 
Besides the irony of the government (which relies on paper currency) arresting the backers of a sound currency on a counterfeiting charge, I wanted to bring this matter to your attention because it represents the first step in what I believe will be increasing government efforts to restrict your ability to escape the dollar. The government doesn't want you to be able to use commodities like money. It doesn't want you to be able to escape the huge inflation that's coming.
 
For its scheme to work, you have to keep the value of your assets in their worthless currency. The government's biggest fear is a run on the dollar. And it'll do everything it can to prevent it – including seizing your gold. Think it won't happen? It did in 1933. And it will again.
 
Some of the world's biggest investors are making big bets on inflation... "The deflation scare has pretty much been taken out of the market," said Kenneth Volpert of Vanguard Group. "The inflation scare has not been priced in yet, and we think that's still to come."
 
On June 18, the Labor Department said the consumer price index fell 1.3% in the year ended in May – the most since 1950. One day later, BlackRock, the world's largest money manager, issued a special report telling investors why they should buy Treasury Inflation Protected Securities (TIPS). And Bond King Bill Gross of PIMCO thinks U.S. Treasuries are a bad bet because the U.S. could lose its triple-A credit rating. PIMCO is still buying TIPS after recommending them in January.
 
It could be a couple years before inflation creeps up, but why risk waiting? We'll side with Bill Gross and Vanguard and buy inflation protectors while they're still cheap.
 
Days after repaying its $10 billion federal TARP loan, Goldman Sachs announced it will likely pay the biggest annual bonuses in its 140-year history. Goldman is reaping windfall profits due to decreased competition (no more Bear Stearns or Lehman Brothers) and increased debt issuance by companies and the government. The bank estimates the government will issue $3.25 trillion of debt before September, as a prime broker of U.S. government bonds, "Government Sachs" will make hundreds of millions of dollars.
 
After blockbuster first-quarter earnings of $1.66 billion, Goldman said it would set aside half of its earnings to reward employees.
 
This is exactly why you should never invest in a Wall Street bank. They exist for the sole purpose of enriching the employees... not the shareholders. How can you possibly treat the shareholder well when 50% of your gross profit is paid out as compensation? These massive bonuses based on short-term financial goals encourage employees to take outrageous risks – often with massive leverage. We've seen what happens when these bets go awry.
 
"It's the most bearish we've seen insiders, on a whole, in two years," said InsiderScore research director Ben Silverman. Executives at U.S. companies are taking advantage of the huge market rally to unload stock... Insiders at S&P 500 companies are dumping their shares at the fastest pace since June 2007 (two months before the credit markets froze) and have been net sellers for 14 straight weeks. So far this month, insiders at S&P 500 companies have sold $2.6 billion in stock... more than 22 times the number of purchases.
 
The message these executives are sending is clear... They do not believe their companies' fundamentals merit the current, inflated share prices. Be wary going forward...
 
Regards,
 
S&A Research
 
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