Dear Subscriber,

The truth may be unthinkable, but the reality is undeniable:

Much of our nation's financial structure is collapsing, and our government's only response is phony money, bogus bailouts and a litany of false promises.

Ben Bernanke, Henry Paulson, the FDIC and the U.S. Congress say they can do it all.

They say they can save bankrupt brokers like Bear Stearns ... take over recently failed banks like IndyMac Bank and First National of Nevada ... prop up insolvent mortgage giants like Fannie Mae and Freddie Mac ... refinance millions of defaulting mortgages ... dish out hundreds of billions in tax rebates ... and still have enough cash in the kitty to cover the next round of financial collapses.

They say their unbridled money printing won't devalue the U.S. dollar.

They say their unlimited pledge to guarantee junk mortgage bonds won't sabotage the credit of the U.S. Treasury.

They say their blank checks to private companies won't rip off U.S. taxpayers.

They'd have you believe they can outlaw the cycle of boom and bust ... repeal the law of supply and demand ... even freeze the march of time.

In the real world, of course, no government in history has ever been able to do anything of the kind, and they know it.

In the real world, their "solution" is part of the problem, and they know that too.

They know that wealth is generated from work — not from the paper money they're printing. They understand the hazards of indulging the most daring debtors and rescuing the most reckless risk-takers.

They know darn well the fatal flaws of the course they've chosen. But they proceed to pursue it anyhow.

Why? Because, behind the façade of their feel-good happy talk and beneath the thin veneer of their Pollyanna optimism, nearly every single one of our leaders — including Bernanke and Paulson, Democrats and Republicans — is really a gloom-and-doom pessimist in disguise.

They are pessimists inasmuch as they have little faith in America's ability to confront hard times. They greatly underestimate our ability to cope and adapt. They think we can't handle the truth.

I disagree. In the Great Depression, our parents and grandparents faced the unthinkable truth and created a stronger country as a result. They confronted the truth again during World War II and helped create a better world in its aftermath.

I believe we can do that too. We have the resources. We have the knowledge. And we have the added benefit of hindsight. But before we move forward, we must admit five irrefutable facts:

Irrefutable fact #1: Ours is a debt-addicted society,and weeding out the bad debts is the first step toward true recovery.

Irrefutable fact #2: By far the biggest pile-up of debts is in mortgages — $14.7 trillion, according to the Federal Reserve's latest Flow of Funds report (see PDF page 64, Table L.4, line 9).

Irrefutable fact #3: Among those mortgages, a quarter to a third could go bad: Their terms are high risk for both borrower and lender. Their collateral is shaky. Most should never have been created in the first place.

Irrefutable fact #4: When bad debts go into default, there is no free lunch. Somebody has to pay the price. The only question is: Who?

Irrefutable fact #5: The overwhelming bulk of the bad mortgages were created to help Americans move into homes that were priced far above their means. But the only way to correct this problem is to let natural market forces drive home prices back down to much lower levels.

Do most of our leaders have the wisdom and moral fiber to confess to these truths? Not yet. But in the not-too-distant future, they will have no other choice.

Reason: America's housing marketplace is bigger than any government; its power, greater than any law. It is the single largest asset class in the world. It packs the most powerful forces of supply and demand ever assembled in history.

And right now, it's tearing down some of our nation's largest banks. Two examples ...

Washington Mutual
In a Death Spiral?

Washington Mutual, America's largest savings and loan, is unfortunately, also one of the nation's largest subprime lenders.

A direct consequence: It appears to be in a death spiral, losing $3.3 billion in the second quarter ... admitting to losses of as much as $19 billion this year ... and probably on its way to losses of an estimated $26 billion.

That estimated loss is over four times its total market value as of Friday's close ... twelve times its yearly earnings in the best of times.

Can it get a new capital infusion to stave off failure?

Perhaps. But on April 8, Washington Mutual already got an injection of $7 billion from private equity firm TPG Capital. And now, less than five months later, an amount equivalent to TPG's entire investment has been more than wiped out with the plunge in Washington Mutual's shares — to a meager $3.82 on Friday.

What's worse, the TPG deal restricts Washington Mutual's ability to raise new, desperately needed capital going forward. And further impairing its ability to raise capital, Moody's announced that it is reviewing the thrift for a downgrade to junk status.

Here's the big problem: As of the latest reckoning, Washington Mutual has $214.6 billion in residential mortgages on its books. And among those, more than three-quarters are in non-traditional categories — option ARMs, subprime loans, home equity loans and multi-family mortgages. Less than one-quarter is of the traditional, single-family prime variety.

Just in option ARMs alone, Washington Mutual has $52.9 billion, one of the biggest such portfolios in the industry. Moreover, 62.5% of its option ARMs are in two of the hardest hit states — Florida and California.

Nonperforming assets are growing by an average of 36% each quarter. If they continue to grow at that rate, they could reach a whopping 6.7% of total assets by year-end.

Investors are pulling out. Rumors are swirling that creditors may be doing the same. Bankruptcy looms.

Wachovia Also
Suffering Huge Losses

Wachovia, the nation's fourth largest bank with nearly $800 billion in assets, is also in danger. Its staggering $8.9 billion loss reported last week may be just the tip of the iceberg.

Its big blunder: The acquisition of subprime lender Golden West Financial for $24 billion at the very peak of the real estate market in 2006.

The net result for the bank: It's now stuck with option ARMs valued at $122 billion concentrated in California, the state with one of the worst mortgage default rates.

Net result for shareholders: Over $55 billion of their wealth has been wiped out since the acquisition — more than double the total purchase price of Golden West.

The big problem going forward: Wachovia has $231 billion in residential real estate loans on the books. But only 22% of these are classified as "traditional mortgages." Most of the rest are higher risk.

My Recommendations

Recommendation #1. If you haven't done so already, check the safety of your bank.

Yes, your deposits are insured by the FDIC up to $100,000. But there are still risks and inconveniences of getting stuck in a failed bank or thrift.

For example, if your principal is $100,000, your accrued interest could be at risk. And if your account is a business checking account with large uncashed checks outstanding, even though your book balance may be under the $100,000 limit, your actual bank balance may be over the limit. So those funds may also be at risk.

Even with your insured deposits, after a messy failure, there could be a significant delay in regaining access to your money. You will get your $100,000. But don't expect it to happen overnight. To get a free safety rating on your institution, follow these steps:

Step 1. Go to TheStreet.com's Banks & Thrifts Screener.

Step 2. Look for the green box to enter your information. Under "Bank Name," type in only the first word of your institution's name.

Step 3. To the right of your bank or thrift's name, make note of its rating: A is excellent, B is good, C is fair, D is weak and E is very weak.

Step 4. Use these general guidelines:

• If your bank or thrift is rated B+ or better, we believe it's secure.
  
  
• If its rating is between B- and C-, check it a few times per year to make sure it hasn't fallen below C-.
  
  
• If it's D+ or lower, seriously consider switching to a safer institution, of which there are many to choose from.

Recommendation #2. Also consider moving most of your savings and checking to a Treasury-only money market fund. Treasury-only money funds are not insured by the FDIC. But I think that's a moot point because the investments they buy enjoy the direct guarantee of the United States Treasury, with no $100,000 limitation.

Examples:

• American Century Capital Preservation Fund
  
  
• Dreyfus 100% U.S. Treasury Money Market Fund
  
  
• Fidelity U.S. Treasury Money Market Fund, and
  
  
• Our affiliate's Weiss Treasury Only Money Market Fund.

Recommendation #3. If you haven't done so already, dump any bank shares that you may own, whether at a profit or a loss. The recent Fed- and SEC-inspired rally was a gift — a last chance to get out at somewhat better prices.

Recommendation #4. Your investments, your business or your income may still be vulnerable to collapsing mortgages and other debts. For protective hedges, check Our Comprehensive List of Inverse ETFs and consult with your advisor or money manager to select the ones that best match your needs.

Good luck and God bless!

Martin

Wednesday, November 26, 2008

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Gold's fundamentals and the potential for more financial chaos make the yellow metal your best bet for profits going forward.

Dear Subscriber,

The Fed, the Treasury and all major governments on the planet are throwing the kitchen sink at this debt crisis.

But their efforts are being overwhelmed by a monumental sea change — the shift from rising prices to falling prices, from booming asset values to crashing asset values, from wealth creation to wealth destruction, from inflation to deflation.

For my entire lifetime, and probably yours as well, we have been living with inflation — sometimes tame, sometimes rampant — but consistently eroding the purchasing power of our dollar.

Inflation pervaded every money decision we made or thought about making, every retirement plan or business model. Inflation was factored into our leases, our employment contracts, our budgets, our investment programs.

Now, all of that is changing; and it's doing so dramatically! Suddenly, the polar opposite of inflation is taking hold in America: Deflation!

Suddenly, prices are plummeting — not just for real estate, but also for automobiles, appliances, clothing and gasoline.

From peaks reached just a few months ago to the latest bottoms, the price of oil has plunged 73% ... copper has fallen 66% ... lead and nickel are down 73% ... platinum is down 66% ... and wheat is off 64%.

Even the government's slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, falling by the most since the government first introduced the index in 1946.

These are not numbers that denote less inflation. They are hard evidence of outright deflation!

This is crucial for you: If you continue investing as you did in inflationary times, you risk losing almost everything. However, if you acknowledge this historic shift and make the right moves now, you'll have the opportunity to build substantial wealth.

This inflation-deflation switch is turning the entire world of investments upside down and inside out.

It means you must consider the grave new dangers deflation brings your portfolio and, at the same time, the unique new opportunities deflation gives you to grow your wealth.

This past week, during our Deflation Survival Briefing, I covered both topics with Jack Crooks, the only currency expert I'm aware of who, unlike his peers, not only warned unambiguously about deflation but also has a unique way to profit from the deflation.

I assume you attended the event online from start to finish. At times, however, the sound may have been unclear, and I apologize. So here's an edited transcript for your convenience. It's a double-length gala issue especially for you, my way of underscoring the vital importance of this sea change.

Deflation Survival Briefing
with Martin D. Weiss and Jack Crooks
(Edited Transcript)

Martin Weiss: Jack, the division of labor I've mapped out is this: I will focus on the dangers and protective strategies; you can focus on the opportunities and profit strategies.

Jack Crooks: That makes sense, but I think it's pretty obvious what the dangers are.

Martin: Specifically, you're referring to ...

Jack: Losing money. Losing a lot of money. Deflation means most asset prices go down. When asset prices go down, anyone who owns those assets loses money. It's that simple.

Martin: What most people don't seem to grasp is how much money — the sheer magnitude of the losses. But the Fed just released the numbers, and I want to show them to you. I want you to see for yourself the amazing drama that literally bursts from these pages.

On the Web, just go to Flow of Funds, pdf page 113. From this table, I've pulled out the main numbers to walk you through this step by step, because it's probably the most important set of facts you've seen — or will see — for a long time:

First quarter 2007: Every single wealth sector is still growing, except one — real estate. This $53 billion loss in real estate is a time and place that will go down in history as the great turning point of our era.

Second quarter 2007: Another $190 billion in real estate wealth destroyed.

Third quarter 2007: Households suffer a whopping $496 billion in losses — nearly 10 times as much as in the first quarter.

Fourth quarter 2007: The wealth destruction spreads to nearly all other sectors. Households lose $708 billion in real estate, the most in history. Plus, they lose $377 billion in stocks, $145 billion in mutual funds, $265 billion in their life insurance and pension reserves.

First quarter 2008: The carnage deepens. Households lose $911 billion in stocks, $297 billion in mutual funds and $832 billion in insurance and pension fund reserves. Plus, the losses spread to the last major sector, equity in noncorporate businesses.

Second quarter 2008: The Bush economic stimulus package kicks in, and it slows down the pace a bit. But the hemorrhaging continues. Not one single sector recovers.

Third quarter 2008: Earth-shattering losses across the board, with households losing ...

Grand total: Nearly $2.9 trillion in losses — the worst in recorded history.

Grand total lost over the past year: $7.2 trillion.

Jack: And this is not just a bunch of numbers. It's a hard-nosed reality that almost everyone is up against.

Martin: Absolutely! At the peak of the housing boom, one of our associates had his home appraised at $1.4 million. Three weeks ago, he had it appraised again and it was down around $700,000. That's a 50% decline. And it's not just the high end of the market. In May 2005, another home in our area sold for $175,000; now it's listed at Realtor.com for only $64,000.

Jack: People think that since home values have already fallen so far, they must be near a bottom.

Martin: I don't agree with that view. Most of the price declines we've seen so far merely represent a recognition that the peak prices of the mid-2000s were a fantasy built upon "Frankenstein Financing" — wildly speculative credit terms such as option ARMs and liar loans. The hard-core declines in housing, driven by basic things like recession and unemployment, are just now getting under way.

Jack: How much further do you see home prices falling?

Martin: My personal opinion is that that over half of the declines are still ahead. That applies not only to housing, but also to commercial properties; not only to real estate, but also to stocks and other assets. Consumer prices just began to fall in October. Outright contractions in the economy are just now getting under way. Deflation is still in its early stages. The wealth destruction has a long way to go.

Jack: You call this wealth destruction and I don't deny the validity of that term. But another way to describe it is rampant deflation. Deflation in the value of real estate and other investments, deflation in energy, deflation at the car dealer and deflation at every mall. In each and every sector that you've described, the U.S. dollar buys more.

Martin: That's the positive side of the story. But whatever you call it, these numbers don't lie. You can see with your own eyes that it's massive and that it's spreading throughout the entire economy.

Jack: Martin, all this raises some urgent questions in my mind and probably in the minds of our readers as well. First, can the government offset this massive destruction of wealth with more bailouts, more Fed actions and gigantic economic stimulus packages?

Martin: They can buy some time or they can slow down the process temporarily, as they did in the second quarter of 2008, for example. But still, my answer is a flat NO! Not even Washington can print enough money fast enough to halt this deflationary spiral; it's just too huge. And all the printing press money in the world won't do much if it's not lent or spent.

Bottom line: No matter which companies Washington bails out, this is a house of cards. It's coming down. And you must get out if its way.

Jack: Still, a lot of people have big expectations for President-elect Obama's stimulus package starting next year.

Martin: The highest estimates for the Obama stimulus package are $1 trillion. But even if it's that big, it's still small in contrast to the wealth destruction we're already seeing. And it's going to take a couple of years before all of that money reaches Americans. By that time, trillions more in wealth could be lost.

Jack: Every economist I read likes to leave some wiggle room for future butt-covering, just in case they turn out to be wrong. But you're not pulling any punches, are you? Why is that?

Martin: It's not needed in this situation — because of the sheer enormity and speed of the wealth destruction: $7.2 trillion just through over the past year. In contrast, the Trouble Asset Relief Program (TARP) is $700 billion. So these losses are already ten times more than the entire bailout program.

Let's compare how much is being lost vs. what the government is doing to offset it. Here's the progression we just saw:

• $1.5 trillion lost in the fourth quarter of 2007
  
  
• $2.7 trillion lost in the first quarter of 2008
  
  
• $630 billion lost in the second quarter of 2008
  
  
• $2.9 trillion in the third quarter

Now, let me demonstrate why the government's efforts are unable to offset this wealth destruction. Congress has authorized $700 billion for TARP. But the Treasury Department reports that in the fourth quarter, only $330 billion has been committed so far.

Jack: Committed or actually disbursed?

Martin: Committed.

Jack: The ol' check-in-the-mail routine, eh?

Martin: Yes. But let's assume the $330 billion is already at the banks. And let's say that in the first quarter of 2009, they are able to disburse all of the rest. That's still minuscule in comparison to the wealth destruction.

Jack: Meanwhile, the wealth destruction continues.

Martin: Right. We don't know how much. But let's assume the wealth destruction does not decelerate or accelerate. Let's just assume it continues at the same pace.

Here's what it would look like. Moreover, most of the money being funneled to the banks is not reaching consumers and businesses. Instead, it's sitting idle at the banks, to rebuild their capital, to try to offset all the losses they've sustained.

Jack: How much of the TARP money are the banks actually lending out?

Martin: We don't know.

Jack: Isn't this why Congress is so ticked off, trying to find a way to force the banks to lend out the TARP money?

Martin: Yes. But it's a tough sell. The banks are going broke. They're being asked to lend it to borrowers, who they fear will also go broke. So the resistance is great. But even if you assume that Congress can force the Treasury Department to, in turn, force the banks to loan out some fraction of the TARP money, it would still be only a fraction of the total TARP funds.

Jack: A drop in the bucket.

Martin: Absolutely! The huge red areas in this chart represent the tremendous power of deflation. The small black areas represent the impotence of government to offset the deflation.

The power of deflation is hundreds of times larger than the government's ability to counteract it. This is why the U.S. government was not able to prevent deflation in the 1930s. And it's also why the Japanese government was unable to prevent its deflation in the 1990s.

Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.

Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments.

Jack: Good point. But let me go to the second major question I get from readers: What's causing this and when will it end?

Martin: What's perpetuating the deflation is excess debts. Look. Debts were usually bearable. As long as people had the income to make their payments — or as long as they could borrow from Peter to pay Paul — they could keep piling up more debt, and life went on. Deflation alone is also not so bad. It makes homes more affordable, college education more accessible, and basic necessities of life cheaper.

Jack: But when you put debts and deflation together ...

Martin: That's when things fall apart! That's when you get not only wealth destruction but DEBT destruction.

Jack: And we have evidence of that as well, I presume.

Martin: Yes, undeniable, smoking-gun evidence. For decades, we've almost always seen more debt piled up quarter after quarter, year after year. But then, beginning in the third quarter of 2007, all that changed. For the first time, we saw massive debt liquidation — debt destruction.

It started in the commercial paper market, where corporations issue short-term corporate IOUs to borrow in massive amounts: In the third quarter of 2007, instead of growing as it almost always has, commercial paper was being liquidated at a rapid pace. That was the canary in the coal mine.

Jack: And now?

Martin: Now the debt liquidation has spread: In addition to the liquidation of commercial paper, we're seeing massive debt liquidation in mortgages and corporate bonds.

Jack: How big?

Martin: The biggest ever in recorded history. Look at mortgages! The Fed reports how much in new mortgages are created each quarter at an annual rate. Ever since you and I were born, all we've even seen is net new growth in mortgages. That's how it was when we were growing up, that's how it was in recent years, and that's what we saw in the third quarter of 2007. See?

Jack: $1,005 billion.

Martin: Yes. Net net, after all mortgage paydowns, new mortgages were added at the rate of $1,005 billion per year. Almost the same in the fourth quarter of 2007.

But then look: First quarter 2008 — $539 billion. Second quarter 2008 — new mortgages begin to vanish from the market. Yet, up until this point, we're just talking about a credit crunch.

Jack: In other words, less new credit.

Martin: Yes, and that's already a powerful deflationary force: Most people can't get mortgages. So they can't buy. Since there are few buyers, prices fall. That's when people think: "This is terrible. It couldn't possibly get any worse."

Jack: But it does, doesn't it?

Martin: Dramatically worse: In third quarter of 2008, the volume of mortgages going bad is so big and the volume of new mortgages being created is so small, we have a net decline in mortgages outstanding. For the first time in recorded history, we have a net destruction of debts in this sector. This is far worse than a credit crunch. It is a DEBT COLLAPSE, an unprecedented, unstoppable deflationary force.

The same kind of debt collapse also hits corporate bonds. Third quarter of 2007 — no problem. New bonds are issued at the annual rate of nearly $1,481 billion per year.

Fourth quarter of 2007 — big decline, to $821 billion.

Jack: Credit crunch begins to hit.

Martin: Exactly. First and second quarters of 2008 — credit crunch hits even harder. Third quarter of 2008 — debt collapse strikes! It's the biggest net reduction of corporate bonds in recorded history, running at the annual rate of $755 billion (red bar in chart). Again, one of the most powerful deflationary forces of all time!

Jack: So what's the next stage?

Martin: A chain reaction of corporate bankruptcies.

Jack: But it looks like they're going to save companies like General Motors and Chrysler.

Martin: Even if they do, they cannot save hundreds of thousands of smaller and medium-sized companies that are going bankrupt all over the country ... tens of thousands of municipalities and states running out of money ... tens of millions of Americans who have gotten smacked with the trillions in losses I've just showed you in the household sector.

This wealth destruction and debt liquidation is classic; and despite all the government intervention, it is fundamentally very similar to the collapse we saw in 1929 and the early 1930s.

Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.

Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.

But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.

But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year.

All it did was prolong the agony — now 18 years and counting.

Jack: So precisely how much longer do you think the deflation will continue in the U.S.?

Martin: Nobody knows. But it's clear that this is not a short-term situation that will be resolved in the foreseeable future. It could take years to flush out the bad debts and restore confidence.

The key is the debt liquidation. That's the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall ... and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation.

This is what's happening all around the country right now — not only in housing, but also in every asset imaginable. These vicious cycles are like hurricanes striking every city and state in the country. Until they exhaust themselves, the deflation will continue.

Like you said at the outset, deflation is falling asset prices across the board. Not just falling home prices, but falling prices on land and commercial properties. Not just stocks and bonds, and commodities, but also collectibles — art, antiques, stamps and, soon, rare coins as well. There may be some exceptions. But overall, unless you have some very convincing evidence to the contrary, you must assume the value of your assets are going down and going down hard.

Jack: So what's a person to do?

Martin: If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment.

Jack: Even if it has already gone down a lot?

Martin: Don't look back at what the price was. Just look ahead to what the price will be after a massive deflation. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well.

Jack: Suppose market conditions are so severe, there are no buyers. Then what?

Martin: Then, you can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.

Jack: What about antiques and art?

Martin: For the first time in many years, you're seeing a contraction in major auctions sales. For example, annual sales of contemporary art at Sotheby's and Christie's auctions in New York and London are down 17% in 2008. In the two years before that, they doubled in sales. So that's not a huge decline yet. But it's a sign.

You won't get peak prices. However, if you act swiftly, you can still sell. If you wait, you'll get caught. Ditto for stamps and rare coins.

Jack: Gold is holding its value the best compared to the much larger percentages you cited earlier for other commodities. But I believe it's only a matter of time before gold succumbs to the deflation as well. What do you think?

Martin: This is hard for a lot of people to accept, but it's also hard to envision a situation in which gold defies gravity for much longer. It's still a good insurance policy against governments that could run amuck. But I suggest you reduce your holdings to a bare minimum.

No matter what, the key is to pile up as much cash as you possibly can. Then put that cash into the safest place you possibly can — short-term Treasury securities. You can buy them from the Treasury Department directly, through their Treasury Direct Program. Or for even better liquidity, I recommend a Treasury-only money market fund. Our favorites are Capital Preservation Fund and the Weiss Treasury Only Money Market Fund. There are many more to choose from and they all provide the same safety.

Jack: Last week, there were some Treasury bills auctioned off at zero yield. Doesn't that discourage you?

Martin: Not in the slightest. As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!

Jack: Martin, I'm going to assume that's my cue to jump in and take us beyond just safety and protection, so we can talk about turning this deflation into a profit opportunity.

Martin: Yes, please do.

Jack: There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down, the value of each dollar goes UP. That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.

Martin: Please explain that connection more specifically.

Jack: Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.

Martin: There was a lot of talk about other currencies replacing the dollar as a reserve currency.

Jack: Talk, yes; action, no. It never happened. And now, it's going the other way: Your dollars now buy more than two gallons of gas for every one gallon they bought just a few months ago. The dollar now buys three times more oil and copper than just a few months ago. Not just 20% more or 50% more, but three times more!

We're seeing the same thing happen against currencies. The dollar is in a massive, long-term uptrend against the euro, the British pound and virtually every currency in the world. Yes, we've witnessed a temporary dollar setback in recent days, but it does nothing to change the big trend.

Martin: It certainly does not change the deflation. But please give us specific reasons why the dollar is rising against currencies in particular.

Jack: There are three big reasons. The main one is that, as I said, the dollar is the global measure of virtually everything. So when there's global deflation, the dollar is the prime beneficiary.

Look. We've had decade after decade of inflation and global expansion. During most of that period, the worldwide supply of dollars and dollar-based credit expanded dramatically. And those dollars became the key funding source of bubbles in nearly every major asset class — real estate, stocks, commodities, energy and metals. As the supply of dollars expanded, the dollar lost value.

Now we have deflation and global contraction. So now everything is turning the other way. Despite the Fed's efforts to lower interest rates, credit — dollar credit — is drying up all over the world. The overall supply of dollars is contracting. So U.S. dollars are suddenly scarce and their value is going up.

Martin: Still many people in the U.S. don't see that. They think: "If the U.S. economy is in so much trouble, isn't that bad for the dollar?"

Jack: No, that's simply not how it works. A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy.

It's not the U.S. dollar vs. some other measure. It's the U.S. dollar versus the euro, the British pound, the Aussie dollar, etc. So the relevant question is never, "How well is the U.S. economy doing?"

The question is, "How is the U.S. economy doing compared to the European economy, the U.K. or Australia?" In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly ... which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.

Martin: Please elaborate.

Jack: Europe's banks have lent more than $2.7 trillion to the high-risk emerging markets, and those emerging markets are being crushed by deflation. Europe's banks have big exposure to Hungary, and Hungary is collapsing. They have big exposure to the Ukraine and to Russia, which are also collapsing.

Europe's economy is in much worse shape than ours. In Germany, export demand has vanished. So it's just now starting to accelerate downward.

Worst of all, the Eurozone's governing bodies are a mess. You've got each member nation making its own monetary policy and each going off on a different course with its economic stimulus plans. For example, the European Central Bank wants to retain some semblance of moderation in its monetary policy. But the leaders in countries like Italy, Greece, Spain, Portugal and Ireland are scared. So they're going to whatever it takes to try to prop up demand, no matter what the central banks says.

Martin: It's adding political chaos to financial chaos.

Jack: Precisely. These are the reasons the euro has been falling and, despite a sharp rally, will likely continue to fall — probably down to parity with the dollar, or lower.

Martin: That's a huge drop — over 30% from these levels. What about the U.K.?

Jack: Worse. Their housing bust is more extreme than ours. Their reliance on revenues from a sinking financial center — London — is far worse than ours. Their consumers have more debt than almost any other developed country.

Martin: And the Australian dollar?

Jack: Solid as long as commodities were going up ... but a disaster with commodities going down! In just the last five months, the Australian dollar has lost 31% of its peak value. Other currencies tied to commodities are also getting killed: The New Zealand dollar is down 39% from its peak; the Brazilian real, 35%; the Canadian dollar, 23%.

Martin: And going forward?

Jack: Deflation means more declines in commodities. And the more commodities fall, the more these commodity currencies plunge. It's that simple.

Martin: You said you had three reasons for the dollar's surge.

Jack: The third reason is the flight to the center. Think of the world currency market as a solar system. The dollar is the sun; the other currencies, the planets. As the system expands, investors migrate from the core currency, the U.S. dollar, to the inner planets — currencies like the euro, the Swiss franc or the pound.

And as the system expands even more, they migrate to the next tier of currencies, like the Australian dollar or the Canadian dollar ... and then, still further, to the system's periphery — outer planets like the Brazilian real, the Mexican peso or the South African rand. At each step of the way, they take more risk with less stable economies, use more leverage, go for bigger returns — all fueled by abundant dollar credit.

Martin: OK. What happens when the global economy contracts?

Jack: Precisely the reverse. As the global economy begins to come unglued, they rush back to the center, creating a massive flight back to the U.S. dollar. They have no love affair with the dollar. They just see the peripheral economies going down and they dump those currencies. These are the first risky investments they sell, almost invariably switching back to U.S. dollars.

The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.

Martin: Is this true across the board, regardless of the currency?

Jack: No. There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen.

But the main point is this: The single most consistent consequence of global deflation is a rising dollar.

Martin: So in the midst of all these bear markets, if you're looking for a big bull market ...

Jack: You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.

Martin: A year or two ago, you were betting against the dollar, and you were right. Now you're betting on a rising dollar. That's a big change.

Jack: You're darn right it is! It goes hand-in-hand with the big sea change you've so clearly illustrated today.

Martin: Can you explain to our readers how to go about betting on a rising dollar?

Jack: There are several ways. You can place your bets in favor of the dollar, using instruments that are tied to the dollar index. So as the dollar index rises against other currencies, you profit directly.

Or you can bet against foreign currencies. Remember, the flip side of a rising dollar is falling currencies. The more those currencies fall against the dollar, the more you make. I prefer betting against the currencies because that lets me choose the weakest of them all.

Martin: What instruments do you use?

Jack: I use a revolutionary investment vehicle called currency ETFs. They're simply exchange-traded funds, just like any other ETFs. The same ease of trading and flexibility, the same low commissions, the same availability through any stock broker. If you buy stocks or any other ETF, you can buy currency ETFs.

Martin: Before we get into this any further, can you give us full disclosure on the risks?

Jack: All investments have risk. If the currency goes the wrong way, you lose money. But the advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.

Martin: Please explain that.

Jack: Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies and, therefore, always a bull market in currency ETFs. I don't recommend currency ETFs for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.

Martin: A world that's far removed from those disasters.

Jack: Exactly. I also think that it's the ideal vehicle for average investors to profit from deflation and a rising dollar.

Martin: Specifically, which ETF do you use to profit from a rising dollar?

Jack: There's an ETF that's tied directly to a rising dollar index. The more the dollar rises, the more money you can make. And there's virtually no limit to how far it can go.

Martin: Before we end today, please name it for us. But of course, it's a two-way street. If the dollar falls, then this ETF would fall in value as well.

Jack: Of course. But there are also ETFs tied to specific falling currencies. When the dollar is rising, it means other currencies are falling. And with these ETFs, the more those currencies fall, the more money you can make. Plus, you can do it with two-for-one leverage.

Take the euro, for example. If the euro falls 10%, you stand to make 20%. If the euro falls 20%, you can make 40%. And if you want to be more aggressive and buy them with 50% margin, you can double that leverage. In other words, every 10% decline in the currency gives you a 40% profit opportunity.

Martin: Do you recommend margin?

Jack: I don't think you need it. The currency market offers plenty of profit opportunity without margin.

Martin: Can you give us some specific examples without using margin?

Jack: Sure. Let's say you bet against the British pound last August. In just three months' time, you could have grabbed the equivalent of a 52% annual return on your money.

The return on the euro would have been even better. If you could have bought the ETF that's designed to profit from a falling euro, you could have grabbed the equivalent of an 81% total annual return. On the Aussie, you could have made a 68% annual return.

Martin: With the way the stock market is performing and the way yields have fallen, I think most people would be happy with a lot less than that. Jack, if you can help folks make, say, 30% or even 20% per year, and you do so regularly, that would be a great service you provide.

Jack: Plus, we're not talking about speculating on some little-known stock or exoteric bond. When you buy currency ETFs, you're investing in the currency itself — CASH MONEY. You never own a single share of stock or any kind of bond.

You're also not affected by financial failures. Since you never buy stocks or bonds in a bank or corporation that could default, currency ETFs help insulate you from the debt crisis. In fact, the debt crisis overseas, which is far more frightening than the debt crisis here, is driving investors into the U.S. dollar, which can actually help investors make more money in their dollar ETFs.

Martin: Since the ETFs are not investing in stocks or bonds, please explain what they are investing in.

Jack: In most cases, interest-bearing money markets. So in those ETFs, on top of the appreciation in the currency we're aiming for, you also earn interest. And with many currency ETFs, the interest yield is higher than what you can make in any U.S. money market.

Martin: Let's say you're wrong about the dollar and the dollar turns down. Then what?

Jack: In 2007, when the dollar was falling, we did very nicely. I have a service dedicated exclusively to currency ETFs, called World Currency Alert. And in it, I can recommend currency ETFs that are available now on every major currency. There's an ETF for the euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the Canadian dollar and more.

Sometimes we'll focus on just a couple of special opportunities; sometimes, when we have a broad movement in the currencies, we'll recommend you diversify among many different ones.

Martin: Does that require a larger investment?

Jack: No. Remember, these are just ETFs, just shares traded on the exchange. So you could buy just one share of each if you wanted to. In other words, there's virtually no investment minimum. With just $1,000, you could buy a whole range of different ETFs across several different currencies.

Martin: What kind of fees are we talking about to buy and sell the currency ETFs?

Jack: You pay a broker commission. But if you use a discount or online broker, your commission costs can be slashed to the bone.

Martin: How does this compare to trading standard ETFs, like those that focus on particular stock sectors?

Jack: I think it's a lot easier and better.

Martin: Why is that?

Jack: Instead of thousands of stocks and stock sectors, you only have to track six major currencies — the euro, British pound, Swiss franc, Japanese yen, Australian dollar and Canadian dollar. Instead of choppy and crazy stock market surges and plunges, currencies tend to give you much bigger, sweeping trends.

Martin: Because ...

Jack: Because once you get these massive macro global trends — like the deflation we talked about — turning them around is like turning a big tanker at sea. They can last for many years. It's like sailing with the Gulf Stream. You just follow the currency current as far as it will take you.

Martin: How would you characterize this current you're riding right now — the deflation pushing the dollar higher?

Jack: I've seen big currency trends before, but nothing quite like this one, nothing as powerful and large. Your numbers bring that home very convincingly, I think.

Martin: Tell us why you think investors should buy your service, and don't be bashful. I think it's safe to say that our readers want to know how to make real money from this deflation, and if you have a unique way to do this, its information they're going to want to pay close attention to.

Jack: Actually, you don't need World Currency Alert to invest in currency ETFs. It's very easy to do, and like I said, they're readily available to anyone with a regular stock brokerage account. You buy and sell them just like a stock or any other ETF. You don't need any new accounts. They're extremely liquid. You just aim to buy them low and sell them high, like any other investment.

Martin: What would you buy when?

Jack: Whenever you see a setback in the dollar, I would buy the PowerShares Dollar Bull ETF.

Martin: OK. So why should someone buy your service?

Jack: You don't need my service to buy them. You need World Currency Alert to make money in them, to take your profits, and to do it with some degree of consistency.

If your goal is to take no risk whatsoever and keep all your money 100% safe, then buying currency ETFs would be a mistake, because there IS always risk of loss. But if you're concerned about this deflation — or a future return of inflation — then NOT taking this opportunity is the mistake you'd be making, in my view. There's nothing, absolutely nothing standing in your way.

Martin: Except the cost of the service.

Jack: No, I don't see that as an obstacle. The cost of World Currency Alert is just $295 per year. If you invested just a couple thousand in one of the trades I just mentioned, you could cover an entire year's cost very easily.

Martin: In terms of timing, when would be a good time for investors to start with your service?

Jack: There's no particular time that's better than any other. Right now, we've had a setback in the dollar. So I'm looking to jump in with a new batch of recos, perhaps around the first week of the new year. So you could wait until then.

The key timing issue is the price change we're going to put into place: Starting January 1, we're raising the price to $395. So don't wait until then. Because as long as you join before December 31, you save $100.

Plus, there are even bigger savings if you join for two years. In fact, I think the two-year membership makes the most sense.

Martin: Because ...

Jack: Because, like I said, it offers the biggest savings. And no matter what, if you're not happy, if it doesn't work for you or you just decide to change your mind, no problem — 100% money-back guarantee in the first 90 days; pro-rated refund at any time thereafter.

Martin: That's very fair. Please provide a web link for more info and to order your service.

Jack: It's http://images.moneyandmarkets.com/1195/88357.html
Or you can call 800-393-0189.

Martin: One way to look at this is like a home business to generate extra revenues.

Jack: I agree. All it takes is a couple of minutes each day, and for each minute of your time, you could be looking at a thousand or two in revenue per hour. Just remember, the price goes up January 1, 2009.

Martin: Thank you, Jack. And thank YOU, our readers, for joining us today. Let's talk again soon.

Good luck and God bless!

Martin