The MoneyMan Report

Whatever you might think of Secretary of the Treasury Paulson and Fed Chairman Bernanke, you can see they aren’t dumb, especially when you see them alongside the Senators charged with overseeing their proposal. When you see the whole bunch of them on TV conducting a hearing, you tend to forget just how big a deal it is when one of these Senators comes to your Rotary Club meeting. Think of how slick and sophisticated they look and sound.

In the old days, the guy getting all the attention would have been Greenspan, but Bernanke hasn’t achieved that kind of stature. Paulson, The Treasury is taking up all the oxygen in the room, making the Chairman of the Fed and the head of the SEC look like dwarfs. He must be an awfully smart and impressive guy.

I also love his strategy, which didn’t occur to me when I was listening to him defend his plan but only later when I got out of the room into the air. The $700 billion to buy the bonds is only the beginning, and Paulson knows it. But he’s only going to take the heat for that part of the plan, because he knows the Democrats will automatically do the rest for him, and he’d just as soon let it be their idea. If he proposed it, they’d grill him over it, so why not let them force it on him and make it look like a bipartisan concession by the Administration.

The bonds value is based on the interest and principle received from the repayment of the mortgages. No repayment, no value. Which means the bonds go up in value every time somebody pays back his mortgage, and they go down in value everytime somebody defaults. When the homeowner defaults, the value depends on how much the home can be sold for. So the value will never be zero, and the plan will never cost all the money used to buy the bonds.

But the more help and support the homeowners receive, the more they continue making the payments, and the higher the value of the bond goes. Note this has nothing to do with market values of the bonds, it’s only about income received. Talking about these bonds as though they are stocks is silly. They aren’t trading vehicles. The fluctuations in value are supposed to be beside the point. They are supposed to be about income and return of principle. The uncertainty of repayment is causing the problem for the values. Every time you make the payments last longer and the return of principle more likely, the bonds rise in value. So the second part of the plan has to be the support of the homeowners. Of course, fewer defaults will stop putting more discounted homes on the market, raising the current selling price of all homes, making homeowners less upside-down, and more likely to continue payments, making the bonds more valuable again.

Now the gambit. The Democrats will fight bloody murder to tie mortgage payment support to the bill. The Administration will reluctantly agree to this bipartisan approach, and the bonds ill automatically become more valuable, reducing the loss on the bonds. If Paulson buys the bonds at a price higher than the current fire sale, but less than the eventual value of the interest and principle, the whole exercise may cost nothing.

If we don’t get the plan approved, it will be because of sheer ignorance and fear, and as a free society, we will deserve what we get. An educated and informed populace wouldn’t have the problem. A kingdom would have done the deal last week. Paulson’s gambit will probably work. The Democrats will get to take credit for forcing the mortgage support for the regular people. The improved performance of the mortgages will make the bonds worth more money. Hurray for trickle-up economics. I personally bought more Goldman Sachs stock yesterday. I heard this morning that Warren Buffet bought a little of it, too. So how scared are you?

Here’s the inside story from one of the most successful trading and investing operations in the country and how it works. It’s a ‘tough-love’ guide for savvy businessmen and women who are finally determined to get as good at investing their money a they were at making it in the first place.

Now, first of all, in order to seize this opportunity, you’re going to have to pry yourself away from the comfortable illusions that have been keeping you down all these years. You’re going to have to take a brutally honest look at yourself and your tendencies– something almost none of the competition is willing to do - then ignore your emotions and steer with your mind and your skill.

This mental process is much easier to accomplish than you expect. Just stop trying to feel good while making the right move. Understand that you’re always going to be human. You’re always going to be driven by the same emotions as the people around you. You’re just going to be one of the few, the proud and the rich, who are smart, brave and determined enough to resist your lemming-like human tendencies and act on what you think rather than what you feel.

This is really easy to understand when you consider that a boxer must learn to keep his eyes open while in punching exchanges or he’ll be knocked out the first time he encounters anyone with even mediocre skills. A quarterback must be able to concentrate on completing his throwing motion even when he knows he’s about to be hit hard by a two hundred eighty pound linebacker. His receiver must learn to reach up for the ball and focus totally on catching it, exposing his ribs to the cornerback who is just waiting for the ball to arrive so he can do his best to break those ribs. A rifleman must learn to fire without flinching, even when he knows the explosion is coming as he squeezes the trigger. The slightest flinch or natural reaction by any of these guys results in failure, and most people don’t know, don’t bother, and don’t train themselves. They also don’t win these games, and they never reap the rewards of greatness.

The truth is, once you understand all this there are few complications, it doesn’t take years of education or practice, and almost anyone can learn to perform these seemingly inhuman feats, just as anyone can learn to invest with his mind instead of his emotions. Every U.S. Marine learned to shoot without flinching. Every kid in my Lower East Side projects knew how to follow through with a pool cue. You may not have learned these things because you come from classier stock than I, but if all of us could learn these things, they must not require much special talent. That’s the good news.

The bad news is, you’ll never get used to doing the unnatural act of following your mind instead of your emotions in business, in the stock market, in sports or anywhere else. You’re built to act on your feelings, and though it won’t require much brainpower or effort, the compulsion to act like a lemming or sheep will never go away. You’ll have to deal with it everyday, and it will take cujones or courage every day. Fortunately, if you live this way you’ll probably be doing it from your beach home, enjoying a panoramic view and the best of everything, as do the great athletes and the great investors. I guess it’s all a matter of taste, but personally, I prefer to live the conscious life of a warrior-hero, not a sheep, knowing full well that it would be much tougher if everybody did it.

So, do I have mixed feelings about sharing these secrets with millions of people in books, live boot-camps, and everyday on radio and TV? To be perfectly honest, sometimes I do, but the truth is, at age 63 I now know that most people just won’t bother. Most are simply not ready to win. Their minds will play tricks on them, their self talk will defeat them, and there will always be lots of room at the top.

Need an example of a fabulous company? Here's one, Apple. Why? Because they understand the market.

As a new Apple owner, let me tell you why I purchased it! Within our company, we've got about 80 or 90 PCs. If you question why anyone would by a Mac in such an environment... Well, there are just certain things that Apple does eloquently and beautifully. Reliability is one of them. When our PC system is down at the office, you can always get your work done on a Mac. And, in my opinion, anyone claiming to be a tech-junkie needs one, because that's what they're built for. And, PC's... not so much!

Not only did I just buy another mac, I will keep buying them. I can chat easily with my kids, they are constantly innovating and raising the bar. In the office, video-conferencing between 3 locations costs us about $50,000 and with Apple, you buy a $1,000 computer and it comes for free! Yet, not quite business-friendly presently, Macs are starting to get there. With programs like Leapord, which allows users to put Windows on a Mac, and with the new business-based iPhone coming out soon, it's likely businesses will start the process of conversion.

And, speaking of the value of innovative companies...

Take Time Warner, who recently split up the cable company from the parent entity. The result? A combination of cash dividends and spin-offs were given to stock-holders, but why? Can Time Warner not find a better use of their money? Was distribution the only option? Why make people pay taxes on dividends when it could be spent to increase to new levels of profitability?

And, which company is the counter-example to Time Warner? Google is a good one. They know what they are doing and I am confident that they would never pay a dividend. Google, unlike Time Warner, knows they can do something better with the money than the shareholders can.

The real questions are... What have you done with the money that you've collected in dividends over the last year or two? Secondly, what makes you think you can utilize this cash most effectively?

How big of a player is China? In terms of the sheer size of the economy, the U.S. is by far more significant. Even by doubling in capacity, China’s economy would still not compare to ours. Yet, the United States, primarily driven by baby boomers, has another issue. An aging population, the baby boomers, who have already paid their dues, are ready or almost ready to slow down.

As a whole, the United States is no longer a force in the realm of industrial production. So, as baby boomers continue to age, second homes, boats and their consumption altogether will decrease. The result? Our economy wont be as vital as in the recent past.

In contrast, others around the world are motivated… In terms of numbers, currently there are 1 to 2 billion people (that’s 3 to 7 times the size of our entire population), who are ready to work harder and cheaper than most Americans. How do we compete with that? Truthfully, we can’t. But, how stupid and fearful are we, to say we don’t like this situation. We helped them get to this point and there is nothing we can do to stop it.

Doomsday isn’t coming, because despite our lack of competition in industrial production, the United States, Canada and Western Europe have been saving money for the last 50 to 100 years, while other potions of the global population have been growing rice and similar tasks. So what? Well, our savings translates into extra capital. And, in order for China to compete with us, they need what we have, and that is capital. With the U.S. being the only true holder of capital, it seems reasonable that we morph into the world’s banker.

Gaining high returns by making it available to the global population, we can support those who want to work hard and run businesses. Fear has never gotten anyone anywhere! Why waste your time and energy resenting, fearing and punishing (by tariffs and nontariff barriers) those outside of our country for their motivation for a better life? Why not accept the fate of a changing world and discover the ways that it can work for us?

Yes, at this time, some may fear the loss of their jobs. But, this is so much more than a short term issue. In 5 to 10 years, what happens? The next generation is half the size of ours’ and their level of education is increasing on a systemic level. So, who’s going to mow the lawns and clean the gutters? Who’s going to be the entry-level bank tellers? Who’s going to answer the phone, do the telemarketing, and fetch the golf balls on the golf course? Will it be your child or grandchild? We simply won’t have enough people to do all these things.

Aggressive young people are growing up, driven by the idea of success and comfort. Pretty soon we will be begging them to join our work force. The question is weather or not it is reasonable to hinder their progress now… Shouldn’t we help them do it and get rich in the process?

On local television last week, the station asked me to tell people how to save money.

My response? Sure...You can do little things, like washing your own car and making your own lattes. But, that can only get you so far!

The truth is the rest of the world is working harder than we are. The problem is not the government. Rather, it's about working harder, competing efficiently and find ways to make yourself more valuable. Is simple you see, if your pay goes up then you’ll be able to handle increasing costs. It's an issue of the perception of entitlement, really. Low oil prices are not an inalienable right nor are low food prices. So, instead if assuming relief will come, sitting idle as the costs of living increase or demanding corporate reform and government intervention, isn't it more efficient to make more money by making yourself more valuable? Whats the worst that can happen, in the unlikely event that these prices go down, you are still making more income!

Not really surprising, the audience was furious with my ideas. Yet, I stand behind them. Unfortunately, as long as people are looking for somebody to handle their money problems for them, we’re going to be looking at a very dangerous American stock market. So, investors, such as myself, must look to healthier markets abroad where more opportunity exists.

But, at the end of the day, it could get much worse... So, individually we must be committed to constantly improving ourselves, which will lead to increases in our own personal profit potential. You need to make more money to cover increasing costs and, in turn, you can make your money work for you...

Getting ahead, is not about complaining or believing the politicians when they promise you everything under the sun. What's remarakable about freedom is that we have the choice to succeed or to fail. And, given current economic conditions, you are being called to perform at capacity or to suffer for from factors beyond your control.

At this point, people can’t even think about fixing this problem by saving and finally living by a budget. Globally, foreign companies are competing aggressively and relentlessly for materials, customers and access to profitable markets. What can we do? Foreign innovation in strategies to sell more goods and services coupled with methods to understand and deliver what people want, present a clear competitive advantage over American companies in the global market place. That's not to say that American companies are worthless by any means, but if you want to change things then become the innovator in your company or start your own! The end result will earn you more personal cash flow, your business and the economy will be better off.

Do you really want to do anything to make a difference? Not to be condescending, but it appears that most would rather blame others. To illustrate, CNN just took a poll, and 73% of the people they talked to blame either the U.S. Government or OPEC for oil prices.

But, I ask you, is blame a useful strategy? As a capitalist, there is one way to effectively change things. And, yes, it is based on monetary-based rationale! Innovate from within, bring new thoughts and profitability to energy by investing in venture capitalist if you see fit or developing new strategies.

Blame is not only a non-issue, as there’s really not much that can be done at this moment, it's also a waste of time. The path of ACTION, benefits everyone.

I love to analyze how everybody including myself behaves. There's a reason why we do a lot of it. Much of it has great survival value for a cave man because that's what we are physically built to be and instinctively, that's who we are evolved to be.

What I find interesting today is how we value the path we are on so much more than we value any other path.

The fact that I already have made a choice, makes me want to deceive myself, lose money or do anything, but look objectively at a different path.

The value, of course, is that we aren't all over the place. Our culture would never have developed cures for cancer or AIDS, weapons, space ships, if we didn't have a tendency to stick to things, so our species is bound and determine to stay put.

The problem is, cavemen don't get rich. They don't have the flexibility to make decisions and adaptations to a constantly changing environment. 500,000 years ago, the world changed at a pace of over 2000 years, not over 30 minutes. You're not evolved to naturally do it, or to like it.

You're evolved to spend the money and power that you get. Your instant gratification is the cushy life you get for doing it right. So take your choice. Feel comfortable or do well, most people can't do both in this environment.

Good luck.

Think about how we're doing business now in America, and compare it to how things were ten years ago, under Bill Clinton, better yet, under Ronald Reagan.

Like the frog in the pot, the changes are happening so slowly, like an hour hand on a clock and you don't feel it and you don't notice it—if you don't pay attention to your surroundings very carefully, you're bound to get burned.

So take a look around you... for the first time in your life, capital is flowing out of the U.S. This is no small thing. You have to remember the whole idea of the stock market is supply and demand. More buyers mean things become more valuable, less demand means prices go down. The owner is poorer.

So again I remind you, for the first time in your life, capital is flowing out of the U.S. and into other places and this is happening for another very simple principle reason: Capital can go wherever it wants, so it goes where it is treated the best—and capital feels best in a free market.

Now don't be confused. The capital doesn't care if the people are free; it cares if the capital is free to operate unfettered.

Right now, capital feels more unfettered in other places and that is affecting your wealth, but it happened too quickly. So you see, you still feel free, because this really is a wonderful free country. Nobody could subjugate us here because we will fight for our personal freedom.

How about financial freedom? We still don't entirely understand the magnitude and power of us having financial freedom. It's wrong, it's dumb, and it's costing the most talented of us, a lot of money.

It's flattening out the results like a pancake. This kind of environment makes the most creative people go where they can do the best, leaving the weak, no choice, but to stay here.

Arthur is doing as much investing as he can abroad. I'm looking almost exclusively at investments either centered somewhere else or are in the business of producing growth somewhere else.

It's ok with me. I'm sure I don't want to live anywhere else, and I do bring my money home, but I could be enticed to stop doing that too.

It's not smart business.

Let me give you an example.

If the price of food goes down, let's take for instance, wheat—well, we have to subsidize the wheat farmer. If the price of houses goes down, we have to subsidize the builder and the homeowner.

The last time we got so involved in interrupting the business cycle was under Jimmy Carter, who left in disgrace, after he ran up 20% inflation, 20% interest rates, and 800 dollar gold.

So here we are again. Eight years into a sideways stock market and 1,000 dollar gold and we're figuring out how to charge the most productive people more money to live here.

On top of that, we're making sure that when things don't work right, we subsidize them.

So you subsidize the losers, and you fine the winners. Hmmmm . . . makes you wonder . . .

Again the winners go somewhere else where they can operate in peace, the losers stay here.

This is just starting, but the more we do it, the more I'm going to be investing accordingly. No matter which price goes down, somebody gets hurt. Car prices go down, and the car workers are hurt.

--Well wait a minute. If we are at a bottom and the price can only go up, how can we not get inflation?

So we don't want inflation, but we don't want prices to go down.

I'm sorry – this sounds like my ex-wife . . . Ok, frogs in the pot, we just talked about how our plan seems to be—make prices go up and set things up so capital leaves your country—lower investment in growth and relentlessly rising prices.

You see how these things happen?

By the way, just to digress for a minute into politics . . . I won't be long—please indulge me. You set policies now, you tell people how much to charge for things, you regulate what prices people are going to be able to buy things at. You regulate who they are going to be allowed to hire, and you tax or punish them if they hire the low cost producer. You make it difficult for them to move their assets offshore if that is better for them.

Is this starting to sound like some alternate form of government and economy we used to compete with and beat the pants off? Are they adopting our winning strategy and we, in turn, adopting their losing strategy?

Do you understand how every single place that has more favorable rules attracts capital from the places that are less attractive? Look at California, where they've raised the taxes, made all those rules about everything, tell people how to live—and so what happens? They are in decline, their real estate values declining.

We, here in Texas, are much better for business. We've chosen to go without income taxes, therefore capital flows here. Our house prices are holding up great and money is flowing out of California and into other parts of the U.S.—so the richer, more productive people are moving out. This is the first year California had a declining population, while it is one of the record years for population increase in Texas. This is happening all over the world, not just in the U.S., but it doesn't give you a great lab to understand the mechanics.

I'm perplexed how any logical person wouldn't be able to understand this. You can look at this as a policy issue and go change the world, like my partner, Art Laffer. You can also look at it as an opportunity to invest smart and take advantage of every situation . . . but the point is to look and act.

So how do you hedge high prices?

You don't have to bet against your country, you just make sure you are a citizen of the world financially. The best thing I can do to make my country financially strong, is to make myself financially strong. I do that by making sure I have assets that benefit from us having higher prices and from growth around the world.

I like steel. I like general electric. I like titanium and I like agribusiness. I like Mexico, and I'm going to love Korea. I love Australia, but it may be too late for me to love them. They are so strong in Australia—it's quite unbelievable, in fact.

Let me be the first one to tell you about Australia. Remember Houston and Dallas in 1973? Sheet rock installers running around with diamond ear rings, it was so hot and nobody wanted to do the work, so the pay got higher and higher.

In Australia right now, they have so much money, the governments running huge surpluses, the people buying every kind of new big screen anything—any every kind of cool electronic device. It's shocking how much money they are raking in—selling iron, minerals and materials to china. So our job is to help Arabs learn how to live like Americans, and their job is to supply the Chinese with minerals. I'm not sure how smart that sounds to me.

I don't know, but you can see how my capital is looking for a home cause. I'm a member of the union of people who use our brains to get a better deal.

Suddenly all you hear are black swans. I met the author of The Black Swan, Nassim Nicholas Taleb, by the way, at FreedomFest in Las Vegas. I was only a speaker at the event, not the proprietor—it is in no way associated with BizRadio, but if you have the money and you are wanting an advantage in life that comes from using your brain to get a better deal, this is the kind of thing you should be going to. Back to my point, this book is about the randomness and uncertainty in our existence told through stories and vignettes.

So here's what a "black swan event" is...

Somewhere in Australia, they have only white swans. The people believed there was no such thing as an Australian black swan. All swans were white.

No matter how many white swans they saw—no matter how many times they confirmed their belief that swans are white, how many black swans do you think they had to see to make them completely abandon that theory?

That's right—one.

What about risk management at Citigroup and Bear Stearns?

Because they've been around for so long—was it 200 years—Bear Stearns has been in business. That's why you trust them. That's why you had the 3 million dollars your family spent two generations earning and saving up. They've had 2/3 of it in their bond hedge fund – that's the safe one.

It had high quality, high rated bonds in it and you liked investment banks especially the safe ones that specialize in bonds...

So how many events like the one you've watched unfold this month to know that your entire risk management and dependency on experts and belief in things because they've worked for you—all of that—how many of these events did it take the guy who just lost 3/4 of his family fortune that took 2 generations to create?

How many times do they have to lose most of their wealth to find out that overconfident hubris is wrong?

That's right—one. Probably? Hopefully?

So now that you've heard of the black swan, do you have to get eaten by one? Or will you wake up and start thinking everyday about what you are doing?

Do you start now with the idea that your money belongs in your pocket? Are you more mindful of yourself about the absolute necessity to think through exactly what you are doing?

Negligently sitting back and operating of the idea that "they have worked for me very well for so long" is overconfident, foolish hubris and that the people who are doing that are just acting like lemmings...

Yes, my role is to say, "Wake up!"

Maybe this is going to make your mutual fund salesman mad, and maybe your insurance agent, and maybe your stock broker, and maybe my mutual fund advertiser, but I'm telling you – your money belongs in your pocket. You have to have a real reason for every penny you allocate right now.

And just because a theory sounds right to you, doesn't mean it's not going to turn around and swallow you up. Take this guy Schiff, for instance. He had all these theories about how bad America is and how bad our government is—he is a libertarian, which I'm very sympathetic with. This isn't about politics, but he continues to think that everything we, Americans do is wrong. So he develops this story and he writes books about it and goes on everybody's radio and tv show—and guess what, finally after all this time, there is a cyclical problem with mortgages. So my goodness, all of a sudden he's everywhere. He's on Neil's show; he's on Mike Norman's show. All of a sudden, Mike and Schiff are in love.

But you know what?

His whole idea, which I heard him say on my show, and on Neil's show and on Dagen's show is that he staying away from all the American stuff and he's investing overseas, China and Europe.

Guess what? That stuff is down 3 times what American assets are down right now.

He had a good story, but never considered the black swan event?

He has an interesting story, and even if it turns out to be right, doesn't mean you check your brain at the door and start investing mindlessly like a lemming. He had the story right; yet he still lost lost the money.

Too bad.

If these amateur financial stories were actually helping somebody, wouldn't there be people getting rich from it?

Here is the headline in Bloomberg:

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March 26 (Bloomberg) – Even as the Bush administration insists it won't risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and treasury efforts to quell a financial crisis.

History suggests the Fed may not recover some of the almost $30 billion investment in liquid mortgage securities it received from Bear Stearns Cos., said Joe Mason, a Drexel University professor who has written on banking crises. Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at the time when foreclosures and defaults are surging. Senators are promising to investigate.

Not one of these guys understands anything meaningful about these bonds. A month ago, not even Ben Bernanke understood them—but now he does, apparently—because he's doing the right thing. So what's the message here? Start buying mortgage bonds, only the Triple-A type.

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I am not a broker, so I may be the only one who will share with you what the big guys like Goldman Sachs understand and you don't.

First of all, the bond market is so simple that it's complicated. It's a win-win situation vs. the stock market. Any promise with guarantees and a payoff date is a bond, so any combination of interest and principle is a bond.

Here's a funny story:

The pricing service says it's worth 950 so I wanted to go out and buy some—heck if I can get a 9% interest rate on a bond and pay only 900 a bond, it's going to be paying near 10%. On top of that, if the bond is foreclosed on, guess what I will get back? I'd get a full thousand, because as long as Fannie Mae is in business, the bond is 1000 bond, and I only paid 900.

Here's the rub. Guess how many of these bonds I could have bought with millions of dollars? They started out at 100 each. How much do you think you can buy them for now, especially with this debacle going on?

Now that they are priced at 950, you can't get them for any less than 1000 each. You can't buy them for 950. Do you know why? Nobody is willing to sell them for 950.

So why did Bear Stearns fall apart, and why do I keep receiving the 9, 10 or in some cases 16%?

This whole story is an alarmist lie. It isn't happening. The government isn't taking a thirty billion dollar risk—it's actually taking NO RISK at all. They hold 800 billion dollars worth of gold. Gold's gone down 10% and the treasury has lost 80 billion dollars on the gold that it's holding—who's writing about that?

Nobody. Why? Because these writers have absolutely no idea what they are writing about and they're only trying to scare you.

Complete drying up of selling pressure, total rush of demand or buying power--that's what new bull markets have always been about. We probably aren't done with the bear market, and we are not yet in a new bull market.

Then again, we have this theme that keeps recurring, keeps making fools of us creatures of habit.

Those darn foreigners again! They surprised us all in September 2006. All of a sudden, they piled in to U.S. stocks. Jack Bouroudjian told me – I remember it like yesterday, he said, "I see this European money piling up on the sidelines, this is going to be big!"

It caught everybody by surprise. Why? Because we are all used to seeing things our way.

Now you understand what I've been saying for a while. There is no U.S. stock market. There is no U.S. economy, and really for all intents and purposes, there is no U.S. currency.

Anybody can denominate anything in any currency they want. I can do a futures contract. I can transfer any money into any other money anytime, I can hedge, or I can speculate.

Just because people like Giselle Budchen and Bette Midler want to be paid in Euros does not mean that the dollar will keep going down. That's just a small minded perspective. More or less, it means the whole trade is obsolete.

Think about this, if it's all one economy, then it wouldn't matter. It's all about trade, deficits, budget deficits, and capital flow. So does Massachusetts buy more from Rhode Island or visa versa? What about New Jersey and New York? Do you ever worry about the trade deficit between Texas and New Mexico?

Why do those sound so silly? Because it doesn't matter. Texans can buy more from Okies forever and it makes no difference to anyone. You only worry about the trade deficit because people who sound smart say it matters. It doesn't matter between New York and New Jersey, just as it doesn't matter between England and the U.S.

Now you have all this money sitting on the sidelines, coming out of commodities, coming out of bonds, wanting to come in and buy these depleted yet wonderfully priced assets here in the U.S. With a 20% decline in price, and a 20% decline in relative currency strength, for today at least, you can buy a 6 million dollar big beautiful beach house in the most luscious spot on earth – Laguna Beach or La Jolla, CA and it would costs the same as a flat in London.

I've spent a lot of time in both, and let me promise you, they are not equal in any way. Those people have wanted to take advantage of the great deals here for a while, and the only thing stopping them was that the dollar was still plummeting. The second it stops, they rush in with their cash.

Trust me, Arabs are smart, they get it. Europeans are smart, they get it. Only U.S. congressmen, along with some announcers on television finance programming don't get it. They don't understand it. If they were spending their own money, they'd get it quickly.

Now you understand the dynamic. I'm not smart enough to tell you if this is what's happening right now, but it has always been the wild card.

My historical figures on how the bear market should end are based on the history of what Americans do. They have nothing to do with Arab sovereign fund owners or sheiks who are living on sand and can't grow tomatoes. When those guys get involved, everything changes—all the metrics we're used to stop. They just end and most people aren't ready to deal with it.

You may ask, where's the proof in all of this?

What about our bonds? What about our concerns about inflation, with the price of gold at 1000, oil at 100, copper at 4 bucks, natural gas at 10--so what's cheap? Is it medical care, cars or college tuition?

So why are bonds, which are supposed to be keeping investors safe from inflation, only yielding 3.5%? It is because of foreigners who have changed all the metrics.

When the foreigners get involved, the principles are the same, but the numbers, the indicators, the turning points--they are all looking different.

People are looking at the wrong things and seeing the wrong signals. You have to wake up. Ask yourself, why is Citigroup going down and why would the Prince of Abudabi want some of it?

Now that the dollar may be holding, money will start to shift into U.S. assets. If this keeps up, it will make a lot of problems go away all at once. There are still people who say that there isn't enough capitulation. There wasn't enough capitulation in Sept 06 either--that's why it caught so many by surprise. The rally lasted for more than a year.

So the moral of the story is: Abandon your beliefs and superstitions about the stock market. Don't believe anybody (present company excluded)! I'm not saying this is the bottom. I don't have to know this information in order to make money on this rally or at least give you an opportunity to lighten up.

In a day, maybe two, who knows when--I'll tell you whether selling pressure is disappearing, and you'll know whether demand will keep growing.

The most stylish thing to worry about, after you get done worrying about impending bankruptcy of everybody in sight, is inflation.

Everybody has a theory. I recommend you ignore them all. Is the Fed creating inflation by lowering interest rates? Not so far!

Stimulating or slowing the economy isn't the point. The real problem is that we are pushing business to our competition overseas by making poor political and financial decisions. First we teach everybody else in the world how to do business, and then we ourselves forget how to do it.

Others have learned from watching us. We've forgotten more about entrepreneurship and risk taking and marketing than they've ever known, but we're forgetting what made us great. It is having faith in a system in which each individual and each group, through enlightened self interest, spent his time and capital on helping people get what they want, knowing that the better and more forward thinking we are at it, the more we get rewarded by society. We may be on the way to forgetting how to do this, and as a country, losing faith in our system of free markets for several reasons.

For one, we've shared our free market ideas with foreigners and they have adopted them. Now they've used our free market ideas to catch up with us. Starting from the rice fields, their growth rate is bound to be higher.

Secondly, our 24 hour-a-day news media is full of stories about the "youthquake" or the "unionquake." All these quakes basically tell one story-- young people are tired of our system and want change; unions are tired of our system and want change. People who have no understanding of the history of our western civilization are tired of our merit based, experience based system and want change. These stories about the youthquake and the unionquake are all about how these people are tired of the people who risked time, resources and money on becoming good at what they do. They're tired of the unfair advantage caused by excellence, experience, and courage. They prefer a system in which they get rewarded because they deserve it, because they are a member of a certain racial or demographic group or any reason that doesn't involve risk and excellence.

Finally, these same groups are also tired of any chance of sacrifice to keep our country free--of the idea that foreign policy decisions should be made based on some understanding of history and our place in it and finding meaning in the long term goals of various cultures – that kind of boring stuff. The reason all this is coming to a head now is because today we have the first generation in history that is empowered by the web, intends to participate in our electoral system, and has virtually no formal education of training in history, geopolitics, sociology or political science. Personally, I don't know how to deal with this, but it's a unique problem and left to its own, it is likely to produce a new government that defines fairness as everybody ending up equal, regardless of quality or performance, one that refuses to protect our homeland because they believe everybody else is always right and we are always wrong--a government that would like to force Americans to buy things they don't want in order to protect their personal favorite anachronism.

This whole idea that because the price of oil is going up, the dollar is falling, we have inflation, and our economy is slowing is proof that we have something wrong with our system. It is dumb, foolish, and just plain wrong.

Nobody is perfect. We're not perfect. I can do a year of shows on all the stuff we do that isn't perfect. For example, spending billions to bail out investors who made wrong decisions because they have a lot of votes is an example of what happens in a free economy in election year. This is a problem to me; however, the idea that the above symptoms prove that our system has fundamental flaws is just wrong.

The world is full of countries that loathe us. Some of these countries are good friends of ours and at the same time, can hate everything we stand for. The Arabs think we are a surrogate for their enemy of 6000 years, Israel, and they feel that we are an affront to Allah and anything decent. Our friends, the Saudis, basically agree with this, and so do the leaders of Iran, Syria, and Palestine. They just love to inflict any kind of damage they can on us to prove we are not Allah's choice. Fortunately, there are some of them, who are decent enough to not resort to terrorism and murder. Regardless of who they are, if they are rich in natural resources, we have use for them. We love oil. We need oil—we are addicted to it.

Economic gamesmanship is their legitimate right, as it is ours.

They can use their resources to gain geopolitical power, as demonstrated by Vladimir Putin and that idiot in Venezuela, Hugo Chavez. There are some legitimate economic reasons and some manipulative political reasons for all these guys to diversify away from the dollar to the Euro. Diversification makes sense anyway, plus this puts them in a better position to attack our economy, help create instability and inflation, which to them is a big plus.

The problem for them is a simple one: They need us more than we need them. We are all of their best markets. They are doing great for the time being. We've accumulated resources from doing great for hundreds of years. And we have more and more varied resources than most of them have, including the most important resource of all. We have been attracting the strongest, bravest, smartest most visionary members of every other country and culture for three hundred years. We are an amalgam of winners, creators, risk takers, strategists, and heroes. Don't lose confidence, because that hasn't changed at all.

If this concerted financial attack works, which it well might, we will have some inflation and probably some dislocation. Do we feel discomfort when we trade with a culture with whom we are at war? Of course, we do. What is the cost of war? Will we endure a mild inflation, maybe 1% new unemployment? Contrast that with the plight of the people in Darfur or the holocaust victims in Poland and Germany--that's what most people talk about when they discuss the pain of war.

Some of our poorest people might experience discomfort that is well within our ability to alleviate. (By the way, bear in mind that our poorest will still be among the most fortunate humans who have ever lived on this planet.)

The more important impact of manipulative or defensive dollar selling will go like this. We experience some marginal economic dislocation. We slow down buying their products and services. They experience problems on a scale we don't even dream of. Do you remember the pain among non-royal Saudis when they jerked our chain and lived for a decade on ten dollar oil? Other global currencies plummet. They come back, forget they don't like us. Buy U.S. bonds in a new flight to quality.

A forecaster, who sounded the alarm last year about coming economic weakness, now says the elements are already in place for a strong U.S. recovery.

U.S economy is ready to resume its healthy growth and regain its rightful place as the cornerstone of the greatest global growth story ever and upside surprises could begin as early as June 2008.

So the question must arise, why are so many analysts now calling for a death spiral?

First, here's some supporting evidence for the optimistic call:
While daily news stories can temporarily move markets, the stock market is not really interested in today. The stock market anticipates and discounts conditions three to six months out. Throughout the decade, we've been correctly basing our three to six month economic forecasts on the supply of money available from refinance, from excess bank reserves, and from savings. These have served as indicators to anticipate crowd psychology. We've observed that like a bunch of teenagers, the more money we have in our pockets, the better and more optimistic we feel. It follows that these positive feelings and expectations lead to stronger spending and investment—thus a stronger economy with stronger reported data one quarter out.
So why are so many smart people so sure our country and our economy are circling the drain?

There are people who just see the negative in everything. They are accounting types, whose left brain lobe manufactures their view of the world, completely oblivious to the fact that very little of what the United States has accomplished over the last couple of hundred years looked possible on paper.

Today, that kind of negative personality adds up all the factors he knows about, and sees a death spiral in the making. Bottom-up thinking based on the past doesn't help anyone see how we Americans could ever prevail.

We of the integrated whole brain, start with the fact that no one on this planet has ever invented a worse success plan than betting against the U.S. economy, our military, or our system. I, for one, have made a living taking the other side of this bet whenever I've had the opportunity. Now the merged free world economies have taken that vitality and energy to a whole new level – sort of the U.S. economy squared.

Instead of measuring from the bottom up, I recommend these accounting types put away your green eye shade and wake up. The Internet and other communication and technological advances have brought the whole world together. We—the merged world economy--are in the process of bringing billions of new people throughout Asia, Latin America and soon Africa into the middle class and better.

With some short interruptions, we're creating a global boom of proportions no one has ever dreamed before. There is no GDP. The only thing that matters is the Gross Global Product. There is no U.S. money supply, the only thing that matters is the global money supply.

The dollar doesn't matter. What matters is the dollar plus the pound, plus the Euro plus the Yuan, plus the Rupee. What's the difference? We all buy and sell from each other or to each other. We easily change money back and forth. Giselle Bunchen didn't have to insist on Euros. She could freely change her paycheck into Euros or hedge her future pay in the futures market. None of that matters at all.

Because of a dynamic global economy, these green eye shade types can't even fathom our money supply is now growing 5 times faster than normal. With bank reserves growing as fast as they are, you'll see an additional ten trillion dollars of bank financing power over the next year.

One night a year ago, after speaking at an event in Las Vegas, I told my wife we'd know when we were near the bottom of the economic slowdown when we started seeing Peter Schiff on TV everyday.

I wouldn't race to be the first to call the stock market bottom, because the decline could continue for a couple of more months, and new unanticipated challenges could still arise, but I like what I see much better now than what I saw three months ago.

For those who like green eye shade detail...

Here I quote work by Tony Crescenzi of Miller Tabak.

As savings deposits rise, lending capacity grows. The rule is that for each dollar received, banks can lend 90 cents on the dollar because each dollar is subject to a 10% reserve requirement (small banks could pay rates as low as 3%).

This is why it is rational to believe by the end of this year, the recapitalization of the banking system will be well on. Already, bank credit is expanding rapidly, growing at a 13% pace since the end of July, or $660 billion, to $9.369 trillion.

A year from now, it would not be surprising to see financial assets grow by about $1 trillion, which, in theory, would give the financial system the capacity to handle roughly $10 trillion of new credit, more than plenty to handle current problems

Two years ago, in my book, Escape from the Herd, I said the next great opportunity to invest in the building blocks of global growth would be when people became so worried about a temporary slowdown in the U.S. economy that they would totally forget the gigantic global growth story that characterizes this generation.

If I'm telling you to use the current mild rally to lighten up on your exposure to the markets, how will you know when to get back in?

Here are some ideas on what a bottom will look like...

A classic bottom out will be signified by a huge drop over days, which will feel like nuclear winter, with a big drop finally – lots of 90% down days close together, a midday turnaround, followed closely by one or two 90% up days. Selling pressure will disappear and demand will get progressively stronger. The number of issues rising will start to increase, as the number of decliners falls precipitously, new highs will expand and new lows contract. Technicians will start to see more and more company stock charts with bases, probably 10% or less of the stocks will be above their 10 day average price...

I specifically omit a signal that many use as their only signal, and that is lots of panic around. I have found over ½ century of studying these markets that people panicking in a bear market are not crazy, they're right, and acting like they're always wrong can get you buried.

Panic is a great buy signal in a bull market correction. Excessive jubilation is a terrific sell signal in a bear or downtrending market, while the opposite is not true in my experience.

More than 50 years ago, my grandfather told me there was one thing I needed to know: Making money is the opposite of human nature.

The way you cash in on this richest of all wisdom is to finally get it through to your brain. Riches are created by buying fear and selling happiness.

Humans are cool, smart individuals, and they are also robots--mindlessly, compulsively following the most powerful human compulsion - the pull of the herd. That always means joining the money-losing majority, who without fail, sell in panic at major bottoms and can't get enough as prices peak in once-in-a-decade runs.

I don't agree with Jim Cramer on much, but I do agree that the guys running our economy right now are completely clueless and imprecise, and subject to the same panic as almost everybody else.

One game-changing move would simplify the whole situation. It would definitely speed up the recovery and turn our economy around. What is the simple trade? Our treasury needs to sell gold and Euros. 10% of the gold in U.S. storage is equal to ½ the total open gold futures contracts. Even a fraction of that, done suddenly on Friday afternoon is all it will take. A tiny move completely would change everything.

I remember like yesterday, a similar situation in June 1998. The yen was caught in a death spiral. Traders all around the world were selling it short, making the dollar too high, shifting the whole world economy out of balance, much like the dollar in freefall is roiling all markets today. Rubins discussed the situation freely and implied that he wouldn't intervene, though he cagily said nothing is off the table. The traders took that as a green light and accelerated selling the yen.

June 11, Mr. Rubin appeared to suggest that the United States would not intervene to bolster the yen, but later clarified his remarks to make clear intervention was always an option. During questions by members of the Senate panel, Mr. Rubin said that intervention on currency markets generally had only a temporary effect.

On Friday afternoon, June 12, Rubins and the U.S. Treasury suddenly came to market and started buying yen. The short squeeze was one of the most profound I can remember in a half century on Wall Street. That was the bottom and the yen never looked back. The whole problem went away in one smart chess move.

Suddenly entering the market on Friday to sell gold and sell Euros for dollars would do the same. The short squeeze would completely end our dollar slide. We have to understand: Global investors are holding back from buying cheap U.S. assets and avoiding providing capital because the falling dollar makes all investing in U.S. assets prohibitively expensive. Money will immediately pour in. Europeans, Chinese – everybody will immediately start buying American assets. It's all going to happen anyway, in slow motion, after much pain. You want to end all the pain today, and start on the road back to the top? That's how to do it. Too bad we don't have anyone on the first team who understands the markets well enough to do it!

One of the smartest traders in recent history was the Treasury Secretary tuned Citibanker, Robert Rubins. Not only does America miss his gift, so does Goldman Sachs.

I love how all of us "Free Marketeers" love Socialism when we are on the receiving end.

On Monday, 90% of stocks went up, as we all celebrated the Fed entering the business of market maker and speculator mortgage derivatives. By the way, some of the smartest and most experienced bond dealers have lost fortunes on these because they didn't understand them.

As chief investment strategist for a bond portfolio in excess of 100 million dollars, I have to say that selecting these kinds of bonds requires about thirty years of practice.

Who is doing well in the mortgage bond business right now? It's those who didn't rely on margin leverage (borrowing capital) to make money. Many pros got this wrong obviously, even with all that experience.

The government is entering the bond trading business, and though everybody feels that Carlysle Capital deserves to die because they were arrogant enough to use 30 to 1 leverage, you should keep in mind that the Fed used 100% borrowed money (treasury bonds) to trade for those mortgage bonds.

As far as I can see, the only thing that qualifies the government to be a buyer of these falling knives on 100% margin is the fact that unlike Carlysle Capital, they have an unlimited amount of our money to lose. If celebrating this dopey policy creates even a short stock market rally, I'll take it--not that it's a smart idea, by any means, and it is certainly not a triumph of capitalism.

I shared a great conversation with my friend, Art Laffer on my show the other day. We talked about how people are still fooled by the illusion of a bad economy. There are so many people involved in our economy who are trying to force industry through protectionism laws and restrictions, through fights and strikes, all the while, there are people who are simply making things that consumers want and need and learning that by being the low cost provider, they can get richer, wherever they may be in the world.

Art says: The world is not for the worker, the world is for the consumer. That's how it's always been. You want the most goods at the lowest price for the most people—that's what economics is about. When you start putting restrictions on trade, restrictions on work, union dues, high tax rates, big social infrastructures, you lose all that. There are so many people making noise about Walmart, but they all go to their local Walmart to buy high quality products at low costs. We love Walmart--even if they do buy from China—buying from china is not bad for America and it's not bad for those people who consume those products.

On another note, everyone is very excited about the primaries in Texas and Super Tuesday—many people continue to peg what goes on in the primaries to what is happening in the stock market. Art's done a lot of research in this area, so I asked him to share his thoughts about this situation and when these new changes in legislation would actually affect the economy?

Art explains that if "HillBama" wins in November, they will take office on January 20 and a new Congress will be in place, both in the House and the Senate. It will then take them a while to get legislation moving through committee hearings...it won't be until August or so for major pieces of legislation to pass and even by then, new agendas and operations will only start implementing - only start - by January 1, 2010. There will be a lot of build up before you see anything...if they do what they say they're going to do and raise taxes like they say they are next year, ask yourself, "what do you do this year?"

You should accelerate all the income you can forward and 2009 will look like a pretty good year. So even though we are in anticipation of a collapse in 2010--the stock market, based on the numbers I've always seen—the stock market doesn't feed us very much in advance . . . maybe 3, 4, 5 months in advance. For instance, the Reagan trough in the market occurred in August of 1982, when it hit 777. . . For Kennedy, with his great policy, it wasn't until July of 62 that it troughed. It was in August of 22 that it troughed when Harding and Coolidge had their great boom. The market really doesn't usually feed very early in advance, that's why I think we are going to see another year of a run once the Fed gets their act in shape, then we can have a run.

So what he's saying is that any bad market right now is not being caused by the anticipation of Hillbama, and secondly, if they are to be elected, it's going to cause people to speed up and do more and the markets will go up and the economy will look better because people are trying to get ready for them.

Art adds: if you could do anything right now to accelerate income, wouldn't you do it? If they extend the payroll tax out to all income earners and let the tax cuts roll back 39.6% and say you live in California, where your highest margin is 10.3% and you don't get the alternative minimum tax-and you don't get that deduction, you could be at a 64% marginal tax rate in California, from what is now a 42-43% rate—if you knew they were going to do that, wouldn't you want to accelerate your capital gains right now?

That's why I think so many people are moving to states like Texas and Tennessee, where there's no income tax and it's so wonderful for our state economy. There are still people who are trying to get in and change our policies to make it more like theirs—

Art agrees with me and notes that, people are always trying to pull down others who are seem to be doing better than they are. You can't let the jealous, the angry, and the bitter pull down the people who are trying to make it work for their kids and their families, and their futures—we can't let this negativism run the world, just can't let them do it. Hate cannot run the world. The people who hate the rich are the ones you have to keep at bay because the dream is to make everyone rich, not to make the rich poor!