10-Oct-08 
EWR Bulletin    Bulletin Index

Special Emergency Bulletin, #3

By Richard J. Maybury
Copyright © 2008 by Henry Madison Research, Inc.
www.richardmaybury.com
1-800-509-5400, Fax 602-943-2363

10 Oct 08

Dear Reader,

Here is what I think is happening.

The fiat US dollar is the world's reserve currency, as gold was for thousands of years until the dollar took over in the 1970s. Unlike gold, fiat dollars can be created without limit, and every informed investor around the world knows it.

For more than three decades these investors have lived in constant fear that one day US officials would go crazy and start creating dollars in mountainous quantities. They have known that if some sort of deflationary crisis was bad enough, US officials would panic and open the floodgates.

That serious deflationary crisis has arrived, and US officials are opening the floodgates, creating dollars at an astounding rate. See the Monetary Base chart at http://research.stlouisfed.org/fred2/series/BASE. The Monetary Base is the most high velocity money, the high-powered stuff that feeds through to the other measures of money supply and, eventually, causes prices to rise in the economy.

US officials know that if they inflate enough to stop the deflation, they will trigger a global run on the dollar, as in 1979, and the dollar could become worthless.

There is some threshold they are afraid to cross, but they don't know where it is. If they boost the money supply so much that it crosses the threshold, the run on the dollar will begin.

So, instead of dumping a Mount Everest of dollars into the economy in one fell swoop, they've been pouring the dollars out incrementally in foothill amounts, hoping to spot the threshold before they cross it.

These smaller injections of dollars each has an effect, but not much.

Few Americans have solid backgrounds in economics, so they see each of these smaller injections as a failure.

Each "failure" makes them more fearful, and more afraid to spend or invest money. Velocity falls, and nullifies the injections.

But those new dollars are out there, and the rest of the world knows it. Every day people around the world grow more afraid of the dollar, and they wonder what the domino effect will be. They now fear every currency.

What's coming? Impossible to say. Economics is not an exact science. Under a fiat dollar, competent investment recommendations always boil down to what they have been for 94 years: you tell me what the Fed will do, then I will tell you what to invest in.

My best guess is that at some point US officials will give up trying to protect the dollar and they will dump that Mount Everest of greenbacks into the world economy.

If I'm right about that, then this deflationary episode we have been experiencing for weeks will someday be regarded as the greatest buying opportunity of all time. Snap up any non-currency asset that is of high quality, be it real estate, gold, mining stocks, oil, art, antiques, silver, platinum, classic cars, commodities, you name it. Stuff, not paper or promises.

Where's the bottom? Again, impossible to say. The only way to know for sure what to do with your money, and when, is to know what Fed officials will do, and no one can, because even Fed officials don't know. I'm sure they change their minds hourly.

That's what happens when humans try to play God. They always do it badly.

The only long term solution is to go back to the Constitution and gold standard, or something similar to the gold standard, perhaps a basket of commodities.

Until we see those two conditions, expect continued turmoil, and continued huge profits from the recurring bargain hunting opportunities.

As for the Permanent Portfolio, it is made entirely of high quality assets. In a panic, when millions of companies and individuals are forced to sell in order to raise the money to pay their debts, they sell their high quality items first, because the junk doesn't bring much. Their panic selling of their best instruments has been driving the Permanent Portfolio down.

In the 38 years for which we have data about the PP strategy, I don't think it has ever dropped as much as it has recently. That's a good measure of how extreme this crisis is.

The PP is geared more for inflation than deflation, so I'm confident it will come back nicely as soon as we transition to the boom side of the boom-and-bust cycle. I have not sold any of mine, and have no plans to do so.

Incidentally, some people are not aware of our web site and may not be reading these emergency bulletins. I would appreciate it if you would ask around and mention the bulletins to others. Thank you.

You might also want to check Jim Powell's comments at http://www.growthstockalert.com/. Jim and I work closely together, and in most cases you can assume that if he said it, I agree with it.

I will continue my bulletins for as long as it seems necessary, so that you aren't left hanging all alone, wondering if you should do something.

--Richard Maybury

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