We believe an inflationary depression began in February of 2009, and little has changed. Since then factory output has increased, as have
inventories and other outward signs, such as retail sales. We believe
that one-year spurt is ending, unless a new stimulus program is put in
place. This past week we saw a $78 billion addition to unemployment
benefits and Larry Summers has said they need an additional $200
billion. In order to keep the economy going sideways a total of another
$800 billion will be needed. The Fed may have cut back the creation of
money and credit to zero, but it is still dishing out trillions to
domestic and foreign banks, which can only affect the domestic economy
in a residual way. The key is real personal income. Including government
programs it has fallen $500 billion over the past 16 months. In
addition real unemployment remains at a high of 22-3/8%. That is U-6
less the birth/death ratio. This terrible dilemma is a first and is
surprising in as much as government addition to income has gone past 18%
for the first time ever. We expect that part of the reason for both
situations is the perpetual drag of free trade, globalization,
offshoring and outsourcing, which has continued unabated.

There is no question that the $800 billion stimulus has come to an end. During the past 16 months $200 billion of that $800 billion has shown up in
consumer spending. The rest has raced through the economy and the result
is a budget deficit in the vicinity of $1.8 trillion.

Over the past several months we have seen a decreasing number of new unemployed, but last month those official figures rose. That to us was the signal
that the growth in employment had ended as well as the mini-recovery. We
will know better the situation when May’s figures are released. The
small increase in non-farm payroll tells us our appraisal of offshoring
and outsourcing is correct. We predicted the effects of offshoring and
outsourcing in 1967, but, of course, no one was listening.

Small business’ contribution has been zero. Many of these businesses are failing and most cannot get loans. We expect that condition to persist
indefinitely, which means job stability is nowhere to be seen in the
immediate future. In spite of bogus government figures the economy is
not growing and won’t grow. Unless the system is totally purged in a
classic way there will never be any recovery.

Sooner or later the deflationary depression and purging will come. The economy is stagnant and that is with an $800 billion stimulus program and $2.3 trillion in
spending by the Fed, some of which had to have entered the economy. Just
think of where we would be without both additions. With stimulus, over
the past year, we have only seen an average of 2.38% growth. This is
certainly a very weak “recovery,” especially in view of the tremendous
amount of money and credit injected into the economy.

As a result excessive spending is over. Over 70% of Americans expect to be savers and to lower their credit card balances; that is those who are
still employed. We see consumers back at about 70% of GDP. Without
stimulus we see much lower figures; with stimulus only 68% at best can
be maintained.

Manufacturing is climbing yet employment in the sector is stagnant. That means people are working much harder to keep worker productivity at a very high abnormal level. This is all well and good,
but who will buy the products produced? Exports did well through March,
but we have to believe the much stronger dollar will make US exports at
least 15% more expensive and those of the euro zone 15% less expensive.
Exports make up 20% of GDP.

Even with auto and appliance incentives sales are still under the weather. We have also just seen an end to housing purchase incentives. All indications are we are headed
toward a flaccid economy without major stimulus. Business will find out
again how dangerous it is to listen to your government. The residential
housing inventory is again going to build this time to a real three-year
inventory overhang. We expect 20% lower prices over the next year.
These are not the things recovery is made of.

As we look forward we see money supply plunge to the same levels of the 1930s. This is the same thing the Fed did between 1929 and 1933. We have zero interest rates,
but they really only help the large borrowers and those with AAA
ratings. In the first quarter $300 billion was removed from the economy,
or a contraction of 9.6%. By the way that proves the upward move in
gold and silver have not been the result of anticipated inflation, but
by other factors, such as Europe’s problems. We cited the fall a year
ago of European M3 and M4 like figures, and as usual, no one was
listening. We, as you can see, have had the same result in the US. These
reductions obviously were well coordinated. In addition, the assets of
institutional money market funds have fallen at a 47% rate, the sharpest
drop ever. Part of this Fed move is for banks to raise capital asset
ratios as the Fed removes and overpays them for their toxic assets,
which the taxpayer gets to pay for. That in part is why banks won’t lend
to small and medium-sized companies, and this is why there cannot be a
recovery. The banks, Wall Street, and insurance companies are
selectively being bailed out, irrespective of the consequence to the US
and European economies. Unfortunately, we are following the path of the
“Great Depression.” That means gold and silver are being purchased in a
flight to quality. Yes, we believe inflation is on the way in bigger
numbers, but unless things change dramatically it won’t be long before
that inflation is overcome and deflationary depression takes hold.

As you have seen the titans of banking and Wall Street savaged the market on 5/6, and again are in the process of doing so, to convince Congress not
to audit the Fed and to give it tyrannical monopoly powers to run
America. Congress is being threatened. They are being shown the power of
the Fed and its owners, if they do not do what they are being paid to
do. It shows you the power of Goldman Sachs, which controls 72% of all
NYSE trades and can move the market at will by front running all orders
and by restricting all credit into the system. Isn’t this what
derivatives are all about? They totally control all markets and it has
to end. That is why you have to unseat almost all the incumbents in
Congress and the Senate and bring this monopoly to an end. The Working
Group on Financial markets” has to be disbanded and “Executive Orders”
have to be terminated. The “Imperial Presidency” has to end if we are to
continue to have a democracy. How can you have markets recovering every
time they fall, as if by magic? You cannot have manipulation of
markets, as we have experienced in gold and silver since 1988. We wrote
our first article on the subject in August 1988 in the “Bull &
Bear,” which David still publishes. How can we continue to have SEC
authorized rule breaking by allowing naked shorting?

How can we allow corporations to carry two sets of books and mark assets to model? What is wrong with American businessmen and our representatives? They
allow this to go on supposedly for the better good, as they stuff their
pockets with cash. Now they want to allow a Federal Reserve monopoly,
what is wrong with these people? What has happened to our country? The
Illuminists who run our country from behind the scenes do whatever they
please and it has to stop. Our country has become the laughing stock of
the world, as Europeans and Asians, as well as Latin Americans rush to
buy gold and silver. They cannot get rid of dollars and euros fast
enough. Obviously some people are waking up, but not more than 2% of
Americans. In Wall Street and banking if you do not roll with the
establishment you get destroyed. Look at what we have had to put up with
for 50 years. Look at what happened to Bear Stearns, Lehman Brothers
and countless others who you have never heard of. Most people on Wall
Street know what is going on, but they won’t talk about it. They do not
want to be ostracized or run out of business. We as well can assure you
Wall Street and banking owns the SEC, CFTC and most of the House and
Senate.

It was a year and one-half ago we told you that $800 billion in stimulus wasn’t enough. That is now proving to be the case. Get ready for another liquidity barrage, called quantitative easing. It
will also mean real interest rates will rise again. The backbone of most
all nations of the world is debt not gold, silver or a basket of
commodities. Greece is being blamed, but all told, 19 nations are on the
edge of bankruptcy. In fact, central banks in these countries are among
the biggest speculators. In the euro zone countries cannot print money
so they sell bonds in spite of the rules of the bailout. Many are having
a hard time selling bonds. Thus other nations are secretly doing so.

There is talk of another Northern European currency backed by gold. If that happens the dollar will fall because it won’t be able to compete. Those
in the southern tier will have to return to their own currencies and do
as Argentina did ten years ago. Those long dollars do not get too
comfortable. The corporatist fascist corrupt model will fail because it
is already bankrupt, as will many other countries.

Last week was another mixed week for most markets. The Dow fell .06%; S&P rose 0.2%; the Russell 2000 rose 1.9% and the Nasdaq 100 rose 1.6%. It was a
week of “Hail Mary” finishes. That is averages reversing in the last
hour of trading. Broker/dealers rose 0.2%; cyclicals 1.7%; transports
2.2%, as consumers fell 0.5% and utilities 0.1%. High tech rose 1.2%;
semis 1.9%; Internets 1.7% and biotechs 1.1%. Gold bullion rallied
$37.00, the HUI 5% and the USDX rose 1.7% to 86.78.

Two-year T-bills fell 1 bps to 0.75%; 10-year notes 5 bps to 3.30% and the 10-year German bund 2 bps to 2.68%.

Freddie Mac 30-year fixed rate mortgages fell 6 bps to 4.78%; the 15’s fell 3 bps to 4.21%; one-year ARMs fell 5 bps to 3.95% and the 30-year jumbo rose 5 bps to 5.64%.

Fed credit fell $15.3 billion to $2.324 trillion, up 11.6% ytd and 12% yoy. Fed foreign holdings of Treasuries and Agency debt jumped $9.6 billion.
Custody holdings for foreign central banks rose $111 billion ytd, or
9.3% or 12.6% yoy.

M2, narrow, money supply rose $43.9 billion to $8.573 billion.

Money Market fund assets rose $5.2 billion to $2.849 trillion. Year-to-date funds are off $444 billion, after a 1-year decline of $940 billion.

The House passed a bill on Friday that would end a tax break for executives of investment funds, leaving hedge funds, private equity firms and venture capitalists scrambling to ease the effects of
the bill before it is taken up by the Senate next month.

It seeks to change the tax treatment of “carried interest,” which is the portion of a fund’s investment gains taken by fund managers as compensation. Under current
rules, carried interest is taxed federally at a rate of 15 percent
because it is treated as a capital gain. That contrasts with the tax
rate on ordinary income, which can be as high as 35 percent.

So, it appears that wise-guy welfare might be repealed. However, wise guys made one of their best investments ever by bribing Congress with hundreds of millions of
dollars. In return, wise guys garnered tens, if not hundreds, of
billions of dollars in compensation.

Companies sold the least amount of bonds in a decade this month as concern Europe’s sovereign debt crisis will slow the global economy drove up relative borrowing costs by the most since the
aftermath of Lehman Brothers Holdings Inc.’s collapse. Borrowers issued
$66.1 billion of debt in currencies from dollars to yen, a third of
April’s tally and the least since December 2000.

Yields on junk bonds rose to the highest since December relative to Treasuries. Spreads widened 27 bps yesterday to 724 bps, the highest since Dec. 9. That’s up from a low
this year of 542 basis points on April 26. High-yield debt has lost
4.6% in May, on pace for the first drop in 15 months. ‘We’re seeing high
yield under a lot of pressure here,’ said Nicholas Pappas, the co-head
of flow credit trading in the Americas at Deutsche Bank. ‘There is a
flight to quality to solid investment-grade companies.’ The percentage
of corporate bonds considered in distress surged this week to the
highest since 2009 as investors dumped debt of the neediest borrowers.
Some 17% of junk bonds yield at least 10 percentage points more than
Treasuries, up from 9.2% last month. The jump is the biggest since the
distress ratio rose 11 percentage points in November 2008.

The U.S., Spain and Greece are among developed nations whose borrowings put them in a ‘ring of fire’ amid sovereign debt concerns, said Pacific
Investment Management Co.

The Netherlands has experience with controlling water: 2,000 miles of dykes preventing the sea from flooding the country's nether regions have taught the Dutch a thing or two about
hydroisolation and spillover control. Unfortunately, as the last 40 days
or so demonstrate so amply, neither the US nor the UK have the faintest
clue how to stop the GoM oil spill which is now entering into the realm
of the surreal. Which is why it may be time to learn from those who do
know something about the matter. Zero Hedge has received the following
proposal from Van Den Noort Innovations BV, which asserts it can get the
GoM oil spill under control within days, and it doesn't even involve
nuking the continental shelf.

The US ISM Manufacturing index fell to 59.7 in May from April's 60.4; remaining above market expectations of a decline to 59.0. The Prices Paid index fell to only
77.5 from last month's 78.0, an upside surprise on an expected fall to
72.0.

Construction spending in the U.S. rose in April by the most since 2000 as demand related to the end of a tax credit spurred builders to break ground on more houses. The 2.7 percent
increase brought spending to $869 billion, after a revised 0.4 percent
gain in March that was more than previously estimated, Commerce
Department figures showed today in Washington. Economists projected no
change for April, according to the median forecast in a Bloomberg News
survey.

Sales boosted by a government incentive of as much as $8,000 helped reduce the number of unsold new houses in April to the lowest level in more than three decades, spurring housing starts. While
government construction also increased for a second month, spending may
be limited by tighter state and local budgets.

“The turn in housing is encouraging,” Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. “We’ve
cleared away enough new homes inventories that at least we can add some
construction. Non- residential construction is still quite weak.”

The gain in April was the biggest since August 2000. Estimates of 53 economists surveyed by Bloomberg ranged from a drop of 1 percent to an increase of 2
percent, after a previously estimated gain of 0.2 percent in March.

Construction spending decreased 11 percent in the 12 months ended in April.

Private construction spending rose 2.9 percent, the most since July 2004. Homebuilding outlays jumped 4.4 percent, the biggest gain since October 2009. Private
non-residential projects increased 1.7 percent, the most since September
2008 and led by factories and power facilities.

The IMF has announced its gold reserves declined to 2,966.4 in April from 2,981.5 tons in March, a 15.1 ton decline. And while the IMF sold well over half a billion worth
of gold in April, Russia was once again taking advantage of what some
are calling fire sale prices, bulking up its gold holdings by 5 tons,
which increased from 663.7 to 668.7. Russia has now been adding gold
every month since February. As has long been known, in 2009 the IMF
announced it would sell 403.3 tons of gold, of which 212 was purchased
in prearranged deals by India, Mauritius and Sri Lanka. This means the
IMF, after accounting for all disclosed sales, has 152.1 tons of gold
left to sell from its original quota. Bloomberg discloses who has been
doing the most buying recently: "Central banks and governments added
425.4 tons last year to 30,116.9 tons, the most since 1964 and the first
expansion since 1988, data from the World Gold Council show. Official
reserves may expand by another 192 to 289 tons this year, according to
CPM Group, a research and asset-management company in New York." Keep
your eyes on Russia: "Russia’s central bank bought 142.9 tons of gold
last year, raising its holdings of the metal by 29%, RIA Novosti
reported last month, citing Bank Rossii’s annual report submitted to
parliament.

Tuesday spot gold rose $12.70 to $1,224.80, as July rose $12.40. Spot silver rose $0.13 to $18.54, as July rose $0.01. Gold traded as high as $1,229
in London. Physical gold dictated prices in spite of strong selling.
Gold open interest fell 10,394 contracts to 547,525. Silver OI rose 472
contracts to 120,952. The HUI traded higher earlier, but the outside
month for silver just couldn’t hold its gains. The HUI fell .69 to
454.39, whereas it should have been up about 8 to 10 points. The XAU
lost .91 to 173.02. Government was again unsuccessful in suppressing
gold. They brought the Dow back from minus 150 to plus 80 to off 112.
The S&P fared worse, off 168 and Nasdaq 208 Dow points. The euro hit
a low of $1.21, and Larry Summers stepped in and drove it back up to
$1.23. It closed off .0088 to $1.2236. There was plenty of bad news.
Israel, Turkey, Syria, Iran, China, North and South Korea, Greece and
most of Europe; then in California, Illinois, Pennsylvania and many
other states. Canada raised interest rates. Italy is even being
questioned regarding their financial situation. One European bank sold
3,645 ounces of gold last week worth 3 million euros. The IMF again sold
14.4 tons of gold in April. They said they would never sell into the
market. This shows you what their word is worth. Wholesale premiums on
British sovereigns have jumped from 3.5% to 7% in just one month.

The yen fell .0036 to .9106; the pound rose .0158 to $1.4646; the Swiss franc fell .0003 to $1.1564; the Canadian dollar fell .0024 to $.9485 and the USDX rose .20 to 86.79.
The 10-year T-note closed at 3.30%.

Oil fell $1.70 to $72.27, gas fell $0.04 to $1.98 and natural gas fell $0.11 to $4.24. Copper fell $0.06 to $3.05, platinum fell $0.90 to $1,548.50 and palladium fell $3.85 to $453.45. The CRB
Index fell 2.41 to 252.39.

Gold at $36,000 Not as Ridiculous as It Sounds?

CNBC.com | May 26, 2010 | 07:20 AM EDT

Gold has reached record highs in recent weeks, but it will continue to rise, Ben Davies, CEO of Hinde Capital told CNBC Wednesday.

Gold should be viewed not as a commodity, but as a cash supplement, Davies said.

“There’s been such proliferation of currency,” he said. “As a consequence, gold is very undervalued.”

“I could be really obtuse and say $36, 000,” he said. “But actually it’s not as ridiculous as it might sound.”

If all the reported Fort Knox gold was re-valued at $36,000 per ounce, it would pay off all the debt in the US, he said.

On Monday, Dennis Gartman reversed his call for gold investors to rush to the exits, saying the precious metal was no longer overbought, but
also warned that it was a technical call and he is "not a gold bug."

Davies argued that as the money supply increases, gold will see an increase in use as currency, boosting demand. Emerging markets will also buy gold to
increase reserves, he added.

Great dynasties in history have come out of crises with large amounts of gold to use in the markets to buy cheap assets, Davies said.