SMI Visitor's Weblog

Welcome to the SMI Visitor's Weblog. Below you'll find selected excerpts reprinted from our Member's Weblog, plus occasional posts created especially for our visitors.

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Will gold keep rising against major currencies?

The answer, of course, is "no one knows." But the prospects for gold seem good — or, put another way, the prospects for currencies appear to be not-so good.

Reporter Tom Sullivan offers details in Barron's.

The dollar is not as good as gold. Neither are 22 other currencies.

A recent study by GoldMoney.com, which enables online cross-border transactions using gold as a currency, found that from 2000 through 2009, gold rose an average 10.1% a year versus the Swiss franc...14.9% against the U.S. dollar... [and] 20.0% for the Sri Lankan rupee.

"Gold isn't going up, currencies are going down," says James Turk, GoldMoney.com's founder. "The purchasing power of gold remains basically unchanged against commodities. In contrast, the purchasing power of national currencies is being constantly eroded."...

That's because governments are debasing currencies, he says, destroying their citizens' purchasing power by spending beyond their means and using debt to stay afloat. The U.S., as one example, is trying to goose its economic recovery through massive deficit spending, but it may worsen the situation should the dollar tank, Turk asserts.

As always, there are those who see things a different way. The Barron's article quotes Ashraf Laidi, chief strategist at CMC Markets, who predicts gold will fall against the dollar.

Laidi could be right. But for any weaker gold/stronger dollar scenario to extend to the longer term would require the reversal of a pronounced nearly decade-long trend (see table).

A more extensive version of the table is here (PDF).

Kansas City Fed chief: Hyperinflation could happen here

I started working for Larry Burkett in 1990, about the time he was beginning work on a book called The Coming Economic Earthquake. Larry wasn't an economist. He was just an extraordinarily insightful, common-sense guy who had the uncanny ability to see around corners.

Although some criticized The Coming Economic Earthquake (I think unfairly) as alarmist and economically unsophisticated, Larry's point was simply this: a government that takes on obligations it can't pay for will eventually face a time of reckoning.

Today, who can deny that this is true? Just read the newspapers. Greece. Dubai. California.

I suppose what made The Coming Economic Earthquake controversial is that Larry argued that even the strongest nation with the largest economy — i.e., the United States of America — was not immune from the principle that too much debt and too many unfunded obligations will ultimately lead to financial upheaval.

If you remember the book, or recall hearing Larry talk about these issues on the radio, a speech delivered last week by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, will seem eerily familiar.

Congressional Budget Office (CBO) projections have the federal debt reaching an unsustainable level of two to five times our total national income within the next 50 years, which leads us to an inescapable conclusion — U.S. fiscal policy must focus on reducing this debt buildup and its consequences....

[I]t strikes me that we have only three options. First...: We can knock on the central bank’s door and request or demand that it "print" money to buy the swelling amounts of government debt. Second..: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level....

Throughout history, there are many examples of severe fiscal strains leading to major inflation. It seems inevitable that a government turns to [the first option; it calls on] its central bank to bridge budget shortfalls, with the result being too-rapid money creation and eventually, not immediately, high inflation....

German hyperinflation [in the 1920s] is one classic and often-cited example, and with good reason. When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a 500,000 Mark German note. He had been in Germany during its hyperinflation and told me that in 1921, the note would have bought a house. In 1923, it would not even buy a loaf of bread. He said, "I want you to have this note as a reminder. Your duty is to protect the value of the currency." That note is framed and hanging in my office....

Many say it could never happen here in the U.S.... [But] the unthinkable becomes possible when the economy is under severe stress....

[T]he fiscal projections for the United States are so stunning that, one way or another, reform will occur. Fiscal policy is on an unsustainable course. The U.S. government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis.

Back in early 1990s, some of our elected leaders read Larry's book and took heed. I know because I accompanied Larry on a trip to Washington (made at the invitation of a Congressman) where he spoke to many members of the U.S. House about the direction of the nation's finances. For a time, in the mid- to late-1990s, the situation improved. Spending increases were slowed and some of the national debt was retired.

Today, the government's economic picture is far worse than when Larry wrote the Earthquake book. Let's hope and pray that today's leaders will listen to Mr. Hoenig, and to the hundreds of thousands of citizens who are rising up to say, "Enough is enough."

The full text of Thomas Hoenig's address to the Peterson-Pew Commission on Budget Reform Policy Forum is here (PDF).

What next for gold?

It took some SMI readers by surprise when we started writing positively about gold in our May cover article, then came right out and suggested buying it in August's A Dollar in Danger Leads Many to Gold. Some believed it was too late to buy at that point, having seen gold rally from roughly $250 at the beginning of the decade all the way to nearly $900 at that time.

Now, with gold up another 20% in the six months since those articles were written, any such concerns of being too late to the party have only grown. Many are still wondering if it is too late to be buying gold.

A lot of this "is it too late" questioning reflects the split between the two approaches to gold that Austin discussed in the August cover article. The "short-term trader" mentality sees gold's recent run and thinks it may be due for a correction soon. The long-term accumulator sees the reasons for long-term appreciation in the years to come and recognizes those are still intact regardless of whether the price of gold corrects here.

What is the long-term case for gold? In a nutshell, it's a safe haven against poor stewardship of the world's fiat currencies. Most of us are focused on the dollar, given that we live here and conduct most of our business in dollars. But gold is also gaining popularity as an alternative to the British pound, the Euro, the Yen, and other currencies. The dollar isn't the only currency in trouble, it's just the biggest and most prominent.

One of the big dilemmas facing investors right now is the question of inflation vs. deflation. It's a tough call. On one hand, we see the dollar devaluation, the huge expansion of the money supply and easy money policies of the Fed, and signs of life from the economy. It's not a difficult task to connect the dots and construct a high inflation scenario.

On the other, there are all sorts of catalysts that could tip the world economy back into recession again, which would be distinctly deflationary (at least for the short-term). It's even easy to concoct a scenario where inflationary forces (like the rising price of oil) cause another deflationary recession. If you feel a little overwhelmed trying to sort through the possibilities, you're not alone.

The troubling part of all this as investors is that what works in an inflationary environment is typically the opposite of what works in a deflationary one. Bonds should do well with deflation and poorly with inflation. Stocks are the opposite.

Which brings me back around to gold. This Minyanville article quotes David Einhorn of Greenlight Capital with one of the better insights into gold that I've seen this year:

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

In other words, while another deflationary round of recession may temporarily bring gold prices down, providing better buying levels for traders and accumulators alike, in reality it's the decisions being made regarding the fiat currencies that are going to drive gold's future prospects.

In one major respect, this makes the gold question much easier. Rather than having to figure out whether we're headed for inflation or deflation next, you really only have to decide whether those calling the shots are going to make decisions that are in the long-term best interests of the dollar and other currencies, or whether they will likely continue to make short-sighted decisions that put the future value of these currencies at risk.

Given the "fix it now, and worry about the consequences later" mentality so prevalent in this generation, that seems to be a relatively easy call.

To recap then, it's entirely possible that gold pulls back from these levels, perhaps even significantly if we slip into a double-dip recession (or if it looks like we may). However, longer-term, we still think the prospects are quite strong for gold.

To read SMI's coverage of how best to invest in gold, as well as to get all of our latest investment recommendations, become an SMI Web Member. It only costs $8.95 per month, and you can cancel anytime — no long-term commitments. Try it today.

Gold vs. Bonds

Mark Hulbert points out that in recent months both gold and bonds have performed well. But, he asserts, that can't last — eventually they're going to have to part ways.

While he focuses on different reasons than we did, Hulbert's conclusion echoes our own from the October issue of SMI: "Don't be surprised if the bond market over the next several months is markedly weaker than gold."

Paper vs. physical gold

In our September cover story, A Road Map For Investing in Gold (web membership required, sign up here), Austin tackled the issue of buying paper gold (like an ETF based on the gold price) vs. owning real, physical gold. Basically, his view was that paper gold is fine to trade if all you're trying to do is make a profit on the increase in gold's price over the short-term. But for those who envision a long-term move in gold based on an accelerating devaluation of the dollar, being an accumulator of the physical metal itself seems like a better idea.

With that in mind, I found this warning from the World Gold Council (via the Uncommon Wisdom blog) to be very interesting:

There is approximately 78 times more "paper-gold" being held by investors than physical gold in existence on this planet that has ever been mined, according to the World Gold Council.

As this clearly implies that un-backed "paper-gold" accounts may be subject to the risk of default, investors should stay clear of buying paper-metal accounts from banks and make sure that any precious metal investment vehicle used does actually store the metals in a fully unencumbered, "un-leased" and physical form.

Not surprisingly then, the author comes to a similar conclusion as Austin at the end of this similar blog post on the dangers of paper silver:

My point is that while I prefer to hold physical gold and silver, I think there’s nothing wrong with using the SLV (or the GLD or DGP, for that matter) for a trade. It's much easier than shlepping down to a precious metals dealer and buying physical gold and silver with the intention of selling it later.

Physical gold and silver you buy and HOLD. Paper gold is fine for trading.

If you're thinking at all about investing in precious metals, it would be time well spent to read our recent two-part cover article: A Dollar in Danger Leads Many to Gold, and A Road Map for Investing in Gold. Web members will also find links to our specific primers on gold coins, gold bars, and gold funds at the bottom of that second article.

Meet James Turk

In my August cover article, "A Dollar in Danger Leads Many to Gold," I explained why higher inflation seems likely, why having some exposure to gold in one's portfolio is reasonable, and briefly looked at how much of one's assets might be allocated to gold.

In September, I followed with "A Road Map for Investing in Gold," where I discussed five ways to invest in gold should one wish — the first three involve owning gold bullion directly, the last two represent indirect avenues of ownership. I explain why I recommend direct ownership for those who want to start adding gold to their other investments.

One of the organizations I recommended was GoldMoney.com. It is a low-cost vehicle for those who wish to accumulate gold bullion via dollar-cost-averaging. James Turk is the founder of that organization.

In these four brief videos, James addresses the UK Silver Investment Summit on the topic "Factors That Will Drive Precious Metals' Bull Market."

The videos are from last year and so are slightly dated, but they do a good job of introducing you to James and his views on the gold and silver markets. In Part 4, he answers a question concerning ETFs and why he feels they are more suitable for traders than for long-term accumulators.

Bernanke - Take II

Earlier this week, President Obama made it official and reappointed Ben Bernanke for a second term as Federal Reserve Chairman. This wasn't a big surprise and was viewed by many as the safe choice. It would have been tough to switch to a new leader while we're still very much in the midst of volatile economic times.

That's not to say, however, that everyone loves the decision. Bernanke is getting mostly positive reviews from economists for his performance during the financial crisis. But he's also drawing his fair share of criticism. Here's a sampling.

Robert Samuelson thinks that while Bernanke made some significant mistakes, he got it mostly right:

Here is where Bernanke distinguished himself. A student of the Great Depression, and especially of the disastrous effects of bank failures, he went well beyond the standard response of lowering interest rates (the overnight Fed funds rate dropped effectively to zero by December). The Fed created a dizzying array of "liquidity facilities" that substituted more than $1 trillion of Fed credit for retreating private credit. The Fed supported markets for mortgages, money market funds, commercial paper, auto loans and student loans. The strategy was, as [In Fed We Trust author David] Wessel says, to do "whatever it takes" to avoid a complete loss of credit and confidence — a loss causing continuous drops in spending and asset prices (for stocks, bonds, homes) and culminating in depression.

Although there were other actors, the Fed's interventions were decisive in halting the panic. It is an open question whether any other Fed chairman — someone without Bernanke's detailed knowledge of the Depression — would have been so bold in supporting credit markets. Moreover, Bernanke's approach inspired similar moves abroad. After the 1997-98 Asian financial crisis, Time magazine ran a cover story called "The Committee to Save the World" featuring Summers, then-Fed Chairman Alan Greenspan and then-Treasury Secretary Robert Rubin. An updated version might have Bernanke on the cover under the headline: "The Man Who Saved the World."

The Wall Street Journal isn't quite as generous. In their estimation, Bernanke deserves credit for what was done after the crisis blew up. But he also deserves criticism for being largely responsible for creating the problem in the first place:

This commodity spike weakened the economy further in 2008 and contributed to the failures that struck after Labor Day. As economists Anna Schwartz and John Taylor have noted, Mr. Bernanke misdiagnosed as a liquidity crisis what was principally a bank solvency problem. This is one reason his easing did little to stem the panic throughout 2007 and 2008. A steadier monetary hand might well have avoided the autumn panic. But the Bernanke Fed was taken as much by surprise as Lehman Brothers.

All of this history is relevant because the Fed is now back where it was in 2003, albeit with a weaker recovery and more political complications. The test of Mr. Bernanke's second four years will be whether he has the wisdom and political courage to roll back his epic monetary easing before it creates the next set of problems or a new inflation. Everyone loves a central banker when he's flooding the economy with money, at least while the mania lasts. But Mr. Bernanke will sooner or later have to say no to the political class. This is something he has never done, and already there are signs in China and the edges of the dollar bloc of new asset bubbles.

But those criticisms pale when compared to the harsh words John Hussman has for Bernanke in his latest commentary:

Ben Bernanke (like Tim Geithner and his predecessor Hank Paulson), shows no hesitation in diverting the real resources of the American public to defend and compensate the bondholders of mismanaged financial companies who made reckless loans and who should have (and equally important, could have) been expected to write down principal or swap debt for equity as an alternative to receivership. This is not decisiveness. It is timidity and poor stewardship. Worse, the underlying problems are not healed — only band-aided temporarily by a flood of public money.

Unfortunately, the resources used in the recent bailout were not just free money tossed out of a helicopter. Only a partial-equilibrium economist thinks that way. No, this was an allocation of trillions of dollars of real resources that could be spent improving access of poor families to health care, finding cures for life-changing diseases, providing better education, and reversing the crowding-out of productive private investment. A public servant willing to act this carelessly with the resources entrusted to him, and so strongly in defense of fellow bankers, frankly does not deserve the job. Most likely, we will face the same credit issues a few quarters from now, given that the lull in the adjustable-rate reset schedule is near its end. We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership.

It's good to realize that judging the performance of Fed Chairmen is difficult to do accurately in the moment. Volcker was hated when he was breaking the back of inflation in the early 80s, as it involved brutally painful interest rate hikes. But today he is widely lauded as one of the best Fed chiefs we've ever had. On the opposite end of the spectrum, Greenspan was widely hailed as "The Maestro" — a supposed genius who left the job with great popularity. Yet just a few short years later, many hold him responsible as one of the prime culprits of the financial crisis.

Time will tell how Bernanke is remembered. How he deals in his second term with the inflation threat created during his first term will likely go a long way toward writing the rest of the story.

Presumably non-partisan federal budget commentary

You know blogging has gone mainstream when the director of the Congressional Budget Office (an independent nonpartisan agency) has his own blog. It's been around for more than a year... not sure why I never came across it before. Looks like he (or, possibly his staff, since he's presumably a pretty busy fellow) posts fairly regularly.

Here's the front page if you want to bookmark it for future reference. Tuesday he reported what went on at the White House when he met with President Obama, "his key budget and health advisers, and some outside experts."

There's an archive section devoted to budget projections. And from that archive, here's a July 16 post on The Long-Term Budget Outlook. Some excerpts:

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy....

CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt....

Not easy reading, but appears to be a good source of data directly from the horse's mouth rather than as filtered through the liberal or conservative media.

National Debt road trip

Austin forwarded this to me last week during our writing frenzy. I think some of you will find it eye-opening, as I did.

One of the problems with discussions of government spending and debt is that the numbers are so huge. Most of us have no reference point for numbers in the billions and trillions, so we react much the same way to a report of a $300 billion deficit as we do a $500 billion deficit — they're both incomprehensibly huge.

This short video (less than 3 mins) does a good job of translating the pace of federal spending to something we're more familiar with: miles-per-hour on a cross-country road trip. Take a few minutes to watch it. You may be surprised.

Inflation experiment

The Fed is “running a laboratory experiment” on what drives inflation: the money supply or the output gap, says Laurence Meyer, a former Fed governor and now vice chairman of St. Louis-based Macroeconomic Advisers.

That's the summary of an excellent Bloomberg article on inflation and the recent government actions. There are two competing heavyweight theories squaring off right now. Call it Keynes vs. Friedman II.

Nobel-prize winner Milton Friedman contended that “inflation is always and everywhere a monetary phenomenon.” In other words, when you create too many dollars, it will eventually show up as inflation as more dollars chase the same supply of goods.

SMI tends to agree with the Friedman economic view of the world, so you've been exposed to a regular diet of this sort of thinking. We believe the government's massive spending will ultimately be inflationary (which is why we'll be exploring the inflation topic in the cover article of next month's newsletter).

While Friedman is a big name and his followers are widespread, his view is by no means unchallenged. The primary competing viewpoint on inflation comes from Keynes, whose economic theories dominated for decades (some would say until they were disproven during the 1970s by rampant inflation coupled with stagnant growth; i.e., the infamous "stagflation").

The article explains how the current economic situation is viewed through Keynes' framework:

At the root of that concern is substantial and growing slack in the economy, which, according to White House chief economist Christina Romer, is operating 5 percent to 10 percent below potential. That means the economy will have to grow a percentage point above trend — reckoned by the administration to be about 2.5 percent annually — for five or more years before the slack is used up.

The Phillips curve — developed by economist A.W. Phillips using Keynesian concepts — posits that such excess will reduce inflation as firms stuck with idle capacity cut prices and workers facing layoffs accept smaller wage hikes.

In essence, it boils down to this: can the government get away with significant money creation (to help spur the economy out of its present trouble) without causing serious inflation at some point down the line? Friedman would likely say no, Keynes would likely say yes.

Even if inflation is the eventual result, there's the tricky issue of timing. As San Francisco Fed President Janet Yellen is quoted in the article as saying a few weeks ago, “For some time to come, disinflation, and even deflation, will represent greater risks than inflation."

Much more to come in the May issue of SMI.

Revisiting The Coming Economic Earthquake

In recent weeks, several SMI message board posts and blog comments have mentioned Larry Burkett's 1991 (and revised in 1994) book, The Coming Economic Earthquake.

When published, the book was widely criticized as being 1) unnecessary scare mongering and/or 2) too simplistic in its view of the U.S./world economy.

As one who helped research that book, I am convinced that much of the criticism came from people who didn't actually read it. Larry simply presented the idea, consistent with basic economics and documented by history, that debt - whether it be personal, business-related, or governmental - cannot continue to expand indefinitely. At some point, a time of reckoning must occur.

I heard echoes of Larry when reading a long interview in a recent Barron's with Ray Dalio, chief investment officer of Bridgewater Associates.

[I think we are experiencing] a "D-process," which is different than a recession - and the only reason that people really don't understand this process is because it happens rarely.... This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.

Basically what happens is that after a period of time, economies go through a long-term debt cycle - a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes.

At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt.

Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.... The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again....

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes - the cash flows that are being produced to service them - or we are going to have to raise incomes by printing a lot of money.

It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue....

A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation - and that will last for as far as I can see out, roughly about two years.

On this last point, I'm not sure Larry would agree. In his book, he expressed concern that trying to inflate the money supply by printing a large amount of new money would stoke inflation, even hyperinflation.

Dalio is arguing that, at least in the near-term, combining printing money with a devaluation of the currency can achieve the necessary balance. Maybe. But I am reminded of one of Larry's favorite sayings: "The man who tries to ride on the back of the tiger is likely to end up inside." (To be fair, Dalio's comment is specifically focused only on what he expects this year and next. He may well agree with Larry regarding the longer-term; we don't know from this interview.)

Focus on the Family recently re-aired a 1992 interview with Larry in which he talked about the Earthquake book. You can hear it here. (NOTE: The timetable Larry envisioned played out in 1997 in Asia. It was delayed here in the U.S. for several reasons, including technological innovation, a slowing in the rate of growth of government spending in the mid-1990s, and a long period of low interest rates that helped keep debt "affordable.")

Peering over the ledge

We interrupt our normally optimistic reporting to bring you this view of what could go wrong...

Crown's MoneyLife radio program yesterday was a really good discussion of a recent Wall Street Journal article titled The Doomsayers Who Got It Right (subscription required). While you can't read the actual article unless you're a WSJ subscriber, the first link above is a loose transcription of the radio program which discusses many of the details in the article.

The article catches up with the current thinking of three prominent economists/money managers who predicted much of the economic crisis. An extremely brief summary of their views follows.

Jeremy Grantham points out that the unintended consequences of the government's response to the financial crisis are unknowable. He thinks there's a long-term risk of a surge in inflation and sees a better than 50-50 chance 2009 will see the stock market decline further. He's setting aside cash in case stocks fall significantly lower, though the article doesn't say he's actually predicting that. In fact, somewhat surprisingly to me, Grantham mentions that he expects real (after inflation) returns of 9.5% from foreign stocks and 7.5% from U.S. stocks over the next seven years. Those are both pretty decent numbers.

Bob Rodriguez sees the economic slide continuing much longer than most. He says his concern isn't the next two years, "but period three through 10." He expects high inflation during that time and GDP growth of less than 2% per year, which would mean a very slow recovery.

Much of this prognosis is based on a change he sees in the U.S. consumer from spender to saver. The Crown program pointed out that the paradox here is that it's a great thing at the individual level for people to quit spending so much and start saving - exactly the right prescription for personal financial health. But 70% of our national economy is made up of consumer purchases, so if the savings rate does go from 1%, where it's been in recent years, to 7%-10%, where Bob Rodriguez sees it moving to by next year, that means the economy as a whole is going nowhere fast.

As an investing blog, it's also worth noting that Rodriguez was buying stocks in October and November for the first time in over a year, though mostly in the energy sector where prices for real assets (like oil) will likely rise as inflation catches hold.

Peter Schiff is probably the most bearish of the group, expecting massive inflation and sharply higher interest rates as foreign investors eventually refuse to buy U.S. debt. He sees the dollar dropping significantly in that scenario and foreign markets outperforming U.S. markets by a significant margin as a result. (Detractors would point out that while many of Schiff's dire predictions have panned out, his actual investment performance has been poor, as his investments have been mainly overseas stocks and commodity-based, both of which were hammered in the downturn last year.)

There's value in examining the "what if's" these bearish views present. The most important take-away from an article like this is probably not so much on the investing side (though there are elements there worth exploring, and we likely will in the months to come), but the personal finance side. If these men are right, the economy is not going to get better anytime soon. In these scenarios, it is paramount that readers do the hard thing in preparing themselves financially by spending less than they earn, paying down debt, and establishing an emergency savings reserve. Don't assume things will bounce back quickly.

I really appreciated the conclusion of MoneyLife host Chuck Bentley's take on all this, which you can find at the end of the program or transcript (linked to above). He explained that as Christians, we don't have to put a positive or optimistic "spin" on this sort of news, but we can and should have hope about the future, in spite of what may come economically because God can and will redeem even the tough things that happen to us. Read or listen to the ending of his program for his full take. It's good stuff.

As you know, SMI doesn't put a lot of faith in any expert's predictions. So we're not going to get all panicky about these predictions. But it is worth soberly considering these gloomier outlooks so as to prepare ourselves in case they are accurate. That starts with getting our personal finances in order, and then ripples into our investing decisions. Again, the investing implications of all this are a little beyond the scope of this post, but we'll likely delve a little deeper into some of this in the future.

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