As the editor of the Silver Bear Cafe, I spend most of my time researching current events. I explore the markets, the economic war that is being waged on the middle class, precious metals, the Federal Reserve and energy. In this weekly column I will attempt to condense the week's events and examine how the news might affect your pocketbook. JSB

Financial Markets

I was asked by a friend this week, how I thought the markets would perform this year. Well as Yogi Berra put it: "It's hard to make predictions, especially about the future". I'm going to go out on a limb and suggest that 2013 will be the year that the sheeple finally begin to lose confidence in the financial system and view the Central Banksters of the world for what they are; Bozos that are the cause and not the effect. This realization will be predicated by higher bond yields and a noticeable increase in the rate of inflation. Meanwhile the VIX (Volatility Index, a popular measure of the implied volatility of S&P 500 index) has fallen to new lows, trading at the lowest levels in the last five years. This expresses lackadaisical sentiment of the part of investors, which is a very strong contrarian indicator. Get ready 'cause here it comes.

From Bengt Saelensminde:

There's a whole other concept to inflation. A school of thought that says inflation isn't some sort of scientific concept, or even anything that lends itself to measurement. Inflation is in the eye of the beholder and comes down to faith. Specifically the public's faith in paper currency.

I believe there'll come a point when the public simply loses faith in the currency. Some say that will be when we head into hyperinflation – and it's right to draw a distinction between the normal type of inflation (which can be corrected) and the 'lost-faith' type.

However you like to define it, it's happened many times throughout ancient and modern history. It's just that, in the West, we haven't seen it for a while. Why? Because the broad public has faith in our currencies.

But the public won't remain asleep forever. There will be a wake-up call. And we need to be ready for it...

The four warning signs

It's hard to measure faith in currency – that's why the central banks don't bother. But there are some warning signs – I've got four of them:

First, we need to keep an eye on what I call the 'inflation indicators'. Watch out as energy and precious metals prices start to move to new highs. The rich and powerful will lose faith first and they'll be tucking away real assets (if they haven't already started!).

If you see gold move swiftly over $2,500, or Brent crude oil heading towards $150, then start to look out for the next signs...

The second thing to keep an eye on is volatility in the markets. Now, I've already suggested that this will be met head on by the central planners. And the way they deal with markets going the wrong way is to print more money and prop them up. So we're looking out for volatility followed by an escalation in quantitative easing (QE) to pay for it all.

As I said, in the West, most investors are unfamiliar with 'lost-faith' currency inflation. Some may have read about it – but there's precious little first-hand experience. What we need is a reminder. So the third thing to look out for is a rupture in a Western currency. Iceland and Hungary have come pretty close over the last few years – local residents will tell you all about the benefits of holding gold!

So far, these breakdowns haven't been big enough for most investors to notice. What we need is a biggie – Japan perhaps?

On the Economic War Front

If there is anyone out there that still believes the tripe that is spewed by the mainstream media, concerning the robust recovery we are all supposably experiencing, please take off your blinders and pull your head out of the sand. To suggest that the economic demise of America is being intentionally orchestrated by a bunch of megalomaniacal morons my seem a bit conspiratorial. But that is simply because it is.

From Jim Quinn:

The fog of uncertainty is engulfing the nation, making consumers hesitant to spend and businesses reluctant to hire or invest. It was like being in a commercial real estate horror film, with SPACE AVAILABLE, NOW LEASING, and STORE CLOSING signs startling me everywhere I turned. The trip took a spooky turn as I passed branches of those zombie banks – Bank of America and Citigroup. They don't even know they're already dead. I finally arrived at the Mall passing thousands of empty parking spaces with a few cars huddled close to the zombie starring in Night of the Retailing Dead – Sears. In the miasma, the few visitors appeared to be automaton like consumers programmed to shuffle through the mall and buy things they don't need with money they don't have. To say the road ahead for this country in 2013 is foggy would be an epic understatement. Let's hope it doesn't have a Nightmare on Elm Street like ending.

Virtually all of the mainstream media, Wall Street banks and paid shill economists are in agreement that 2013 will see improvement in employment, housing, retail spending and, of course the only thing that matters to the ruling class, the stock market. Even among the alternative media, there seems to be a consensus that we will continue to muddle through and the day of reckoning is still a few years off. Those who are predicting improvements are either ignorant of history or are being paid to predict improvement, despite the overwhelming evidence of a worsening economic climate. The mainstream media pundits, fulfilling their assigned task of purveying feel good propaganda, use the 10% stock market gain in 2012 as proof of economic recovery.

Precious Metals

If you ever contemplate if and when the gold market will go ballistic, please consider how many people remain completely unaware of the reality of the situation. In the following contribution from JS Kim, one realizes, without a doubt, that if investors were ever made aware of the following statistics, that they would exit the S&P 500 and pour into gold and gold stocks and thereby initiate the beginning of a new bubble in the precious metals sector. It could then last for several years. The gold rush is still in its infancy and far, far from over.

From JS Kim:

Viewing the chart to the right, a six-year old child could tell you that investing in physical gold and gold mining stocks (as indicated by the AMEX HUI gold bugs index) yielded returns from 2001 to 2012 far superior to the returns of the US S&P 500 Index over the same time period. In fact, the truth of this statement is so self-evident, that if this same child was asked what asset classes he should have been invested in over the past decade by viewing the above chart, the simplicity of that question might lead him to think that one is asking a trick question.

So why is it that all the leading Wall Street investment firms stated during the visible onset of the global financial crisis in 2008 (versus the real onset of the global financial crisis quite a few years earlier) that gold was one of the riskiest assets in which one could possible invest? The simple answer, of course, is that if they were the ones involved in the scam to take gold and silver prices down back then, then certainly they would not tell you that the steep, rapid (but short-lived) drop in gold/silver prices was a massive buying opportunity.

However, if a six-year old can see what is so obvious, then why should a man of Warren Buffet's prominence continue to slander gold and why does his right-hand man, Charlie Munger, make idiotic statements like "gold is a great thing to sew in your garments if you're a Jewish family in 1939" but not to own, instead of just stating the truth that "physical gold (and physical silver) was one of the best assets to build wealth since 2001"? And if a six-year old can look at the above chart and immediately know that he or she should have been invested in gold and gold assets, why, according to the World Gold Council, is still only 1%, or $146 billion of the $146 trillion investable global assets, invested in gold, and 9.1% invested in money markets, 48.7% in fixed income, 37.2% in equities and 4.0% in alternative investments? (though these most recent statistics are from the end of 2010, it is doubtful that these statistics have changed much in the past two years.)

Energy

There is nothing that the current administration is doing that will relieve the economic pressures that are about to become apparent in the global energy fiasco which is becoming more distressed by the minute. Israel is still planning to attack Iran, India is on the verge of going to (nuclear) war with Pakistan and North Korea has just threatened South Korea over UN sanctions that aim at deterring atomic weapons testing. This, coupled with the propaganda being spewed from the MSM that the U.S is on the verge of energy independence, ensures that the general population will remain "in the dark" when concerned with the level of volatility that currently exists.

From Adam Taggart:

For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil's apex, suddenly we find that "growth" is a lot harder to come by.

Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand. 

For certain, shale gas will be a boon for the U.S. and some other countries. But very little is transported these days by gas, and there are no mega-sized infrastructure projects underway to change that anytime soon. Extraction of new tight oil plays is increasing production, but not by enough to offset other field declines elsewhere in the world, and not at the prices we were used to over the past century. The era of cheap oil is over, and these higher permanent prices act as a boot on the throat of economic growth. Hence the mired global economy we have been experiencing in recent years.

Rather than fooling ourselves with fanciful "energy independence" pablum, we should be looking hard at what kind of future we want to have now that oil is no longer cheap. And we should be asking ourselves in regards to the remaining fossil fuels we're extracting: How can we put these non-renewable BTUs to their best use, before they become expensive, too?

The Fed

Those of us who understand the immense value proffered by precious metals (and coal and oil and potash and fresh water...) as a hedge against the massive deflation which must eventually occur as the natural result of the massive inflation that has been going on for the last eleven years, are in financial survival mode as we stack gold and silver. The clueless felonious putzs (the Federal Reserve) who, through their infernal machinations have managed to steal most of everything, only at a cost that will prove to be unbearable, have presided over the creation of a a dysfunctional system that has no options other than to self destruct. The following assessment is provided by a former Central Banker.

From John Exter:

John Exter (1910-2006) The Central Banker who made a fortune in Gold

I lived through the great depression. I remember it vividly. I know what it did to people. I remember the 25% unemployment. So I’m very unhappy when I have to say this depression is going to be worse.

A time will come when housing prices will weaken so much that many people who bought houses recently will lose all their equity. Once they lose their equity, they may say: “Why should I go on paying the bank? Why don’t I just let them have it?” So I think you’re going to have defaults on mortgage loans and foreclosures…

More foreclosures, of course, put more pressure on home values. Then more defaults-and when people start to default on their debts, troubles multiply. This is one reason why I think we cannot avoid a banking collapse.

I think people have rather been seeing—in their heart of hearts—that a depression is coming, or at least some sort of hard times…When your income shrinks and you have a debt burden, the debt burden becomes more and more onerous-and you get desperate to borrow…I expect the government to respond to the deflation by trying desperately to re-inflate. I expect huge budget deficits. So I expect the dollar ultimately to become worthless.

The Federal Reserve has already defaulted-gone bust. When I was a young man, the Fed had to redeem its liabilities in gold at $20.67 per ounce. As a matter of practice, any of us could go to any bank in the US and write a $100 check and take out five $20 gold pieces. To maintain that obligation, the Fed had to avoid borrowing short term and lending long term. But it didn’t. As a result it had its own liquidity squeeze and defaulted on its IOUs-the paper dollars circulating-are not promises to pay anything. They’re IOU nothings.

Paper is worthless as a store of value. The only thing that can give the US dollar any value is its promise to pay something that is a good store of value-primarily gold-to the holder. The government now has welched on that promise, so these paper IOUs are not really worth anymore than the paper they are printed on.

Sooner or later the public will catch on and the dollar will become worthless…As the crisis intensifies; as the results of the liquidity squeeze become apparent and illiquid debtors start to default; as the depression and deflation set in; gold will once again emerge as the supreme store of value.

…This is hard for me to say, for I am a banker: On the subject of income, I’d definitely stay away from banks. Bank deposits are paper IOUs. A bank owes you Federal Reserve notes. Even Federal Reserve notes are not good. A bank is even worse because you have the added risk that it will default on its promise to pay such notes. Remember: gold never defaults.

Financial Survival

How can the Fed keep buying treasury paper, which allows the Government to keep on borrowing? While I realize that keeping the bond market inflated is the primary aim of the Central Bankers, (the Fed), to what lengths will they go to do so? What new legislation will they dream up for their puppet politicians to pass? If it never occurred to you that the Federal Reserve, (a private corporation), owns the U.S. Government, please read the following statement made by Fed Governor Ben Bernanke.

"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."

What in blazes is positive inflation? And why would anyone, representing the people, want the price of goods and services to rise? Who, but a banker could benefit from inflation? Inflation equals rising prices. Rising prices equal more loans. More loans equal more interest. The natural evolution of man would have provided for a continuing improvement in the standard of life for all persons, if it wasn't for the heinous contrivance called inflation. Technology has provided new and improved ways to produce and deliver almost everything. Without inflation almost everything would be cheaper, or at least remain the same price. Let me restate that last part. If it wasn't for the Federal Reserve, everything would become cheaper, instead of more expensive. Most people believe that inflation is a natural economic occurrence. This is simply untrue.

From Robert M. Williams:

Back in 1980 the US experienced high inflation, close to 20% and with interest rates in excess of 18%, before the Fed finally got things under control. Companies had to raise prices and sales suffered as a result. In today’s world we are experiencing inflation, but it’s a lot harder to see. The government has changed the weighting of its inflationary indexes so the true effects aren’t reported. We also have more subtle ways of hiding inflation. Companies have learned not to raise prices since everyone can see that. Instead they’ve learned to quietly cut back on content while maintaining prices at previous levels.

I do my own shopping and I’ve noticed that the cereal boxes carry less content, in terms of weight, although the box size often remain the same. Then there are companies like Starbucks! In Latin America they carried a certain brand of mineral water that costs them +/- US $1.10/bottle, and then they sold to the public for US $2.50/bottle. I should add that it is a quality product. Four months ago they switched to a much cheaper brand, costing US $0.60/bottle, and yet they sell it at the same price. Then we have beer, a popular drink in Latin America selling for around US $2.70/bottle. Over the last two years the bottle size has been reduced from 640 ml to 600 ml, and now there’s a plan to reduce it to 580 ml. I suppose I don’t have to tell you that the price has remained constant.

I could go on but I think you get the idea. Companies find it difficult to raise prices, especially with Asian countries producing at excess capacity. So they quietly go about reducing content. The next time you go to the supermarket take a good look at the content you get for the price you pay. Pay attention to it over time and you’ll be surprised to see it shrink. They’ll be no notices or fan fair, just less content for the same price. That’s inflation, and it will never show up in the statistics.

We currently live in a world where the US, Japan, China and Europe are all printing currency at excessive rates and that is inflationary. On the other hand the Asians are flooded with excess capacity and are willing to export at cheaper and cheaper prices, even if it means a loss, in order to keep people employed. The standard of living has gone up considerably in Asia over the last decade and their leaders are afraid that rising unemployment will lead to civil unrest. Better to export at a cheaper price than lay people off! This of course is deflationary and that’s where we find ourselves today, trapped between two huge conflicting forces.

You must first realize that there are, present in our lives, enemies. You must then know who those enemies are and act accordingly.

Eliminate as much debt as possible, especially “variable rate” debt, such as credit cards and lines of credit. Interest rates will be rising, so the elimination of debt offers a “real return” of escaping rising rates by creditors.

Get some control over some fresh water.

If you are depending on Social Security, stop.

Follow the course opposite to custom and you will almost always do well...

Its not what you don't know that will screw you up, it's what you know that is wrong. The spin you hear from the mainstream media is intended to mislead you. Open your eyes and face the future. If you leave your head in the sand and ignore it, you are only leaving your butt exposed for the world to kick. This all may sound like gloom and doom, but when you get a handle on what is going to happen, you will have a future filled with opportunity. Fortune favors the Informed.

More next week...

May the Great Spirit be with you always,

Johnny Silver Bear
Chief cook and bottle washer, The Silver Bear Cafe

Disclaimer

All statements and expressions are the sole opinions of the editor and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The staff of Silver Bear Cafe are not registered investment advisors and do not purport to offer personalized investment related advice. The publisher, editor, staff, or anyone associated with, or associated to the Silver Bear Cafe may own securities mentioned in this newsletter and may buy or sell securities without notice.