Tony Lepage

After 16 consecutive rate hikes, the Fed Funds rate sits at 5%. Before this rate increase cycle began, the Fed Funds rate was below 2% for 4 years and for most of that period it sat at 1%. Now that the rate is at 5% watchers are calling for the rate increases to stop.

Throughout history this has been part of the business cycle. Easy money is provided to stimulate the economy and then the money supply is tightened to prevent things from getting out of control. Tightening money prevents bubbles from forming within sectors of the economy. Bubbles grossly misallocate investment and cause severe, harmful corrections.

Nope, no housing bubble here. Dumbass.


Those calling for the rate hikes to stop are doing so because they feel that if the rates are increasing, the cost to borrow goes up and this will slow the economy. This is an incorrect belief and I’ll explain why.

The Fed Funds rate is still lower than inflation and this means it makes sense to continue to borrow money if you are going to invest it to for an average return. If the interest rate is lower than the inflation rate, you simply have to invest into something that returns at a rate greater than (or even equal to) the inflation rate.

This means the current Fed Funds rate is NEGATIVE.

How could this happen? What does this mean? I don’t want to be a dumbass, teach me.

Okay, so when I read that the CPI is 2.1% in news media this means the ‘consumer-price-index’ correct? Wrong! The consumer price index is meant to reflect the change in costs that consumers are paying for items they require everyday. CPI now stands for ‘core-price-index’ and there are not very many people who noticed the switch. Why was this done?

You may have heard me blast arguments about the U.S. government deficits being lower during the Clinton administration. Here is why: the Clinton administration simply took all payments to social services and used them to pay for other government services. In effect, this increased the funds the government had to work with, balanced their books and made it appear the government was running a surplus. The only losers are the baby boomers who will need every cent of social services because they have been brought up to trust these implied benefits will be available for them too. They wont be, and for a long period of time, us 20-somethings will have to pay a large sum to fund this notion until it all completely faulters.

Anyways, the Clinton administration did some magic in that they wanted to decrease the inflation rate by 1.1% so that they could reduce the amount of payments being given out as cost of living supplements to their current social services users. This is an example of CPI manipulation

Since this time, the Bush administration has taken the inflation numbers and added their own twist. They have decided that the cost of transportation, energy and food does not reflect the costs of the average consumer. They think that gas prices are high because of the war and this doesn’t equate higher prices to you and I. This is no joke. If you were to calculate the inflation rate the way it was calculated during the Clinton years ago you would come up with an inflation rate of about 6.5%. The last I read, they were telling us that inflation was 2.1%. However, if you calculated inflation based upon the real cost to consumers, I am sure you would discover inflation is running at about 8%. If you’ve made it this far, I hope you can understand my concern—if the inflation rate is 8% my wages should be rising at this rate too, otherwise I’m getting poorer year over year.

While the Federal Reserve may have most people tricked into thinking that they have been harnessing inflation, they have not fooled me. I’ve created a spreadsheet that I will be using to record the prices of things I purchase most often. I am going to do this monthly and across competitors. Then I will start to publish this data as my own index of inflation.

My message to you: Inflation is higher than you think. Just take a look at all the things that cost you more each day. You shouldn’t be able to notice a 2% annual rise in prices but we’re able to see that things are getting costlier. Just how much costlier remains to be seen. My biggest concern is that if inflation is running at 6-8% (and it more than likely is) no one seems to care. When will we start to care? All of my peers go to school, take on debt, and will eventually (or have already) graduate to work 40 hours a week for a paycheck that they need to live. If they only understood how the money system is currently working against them, then they could perhaps get some real value for those dollars.

Note: I hope that YOU find value in the new type of posts I will be making to this blog. I don’t see any value in creating simple, mindless, and vain attempts to document my day-to-day life highlighted with small snippets of humor (even if I remain “nameless”). Although I could go on and on about my work, party or personal life, I have no intent on publishing that kind of crap on the web. If you really need this kind of stuff wait 10 years and buy my memoirs. If you don’t like this, obviously this isn’t the place for you. It’s actually quite amazing how much heat I’m taking for my $708 post from 2 weeks ago. This will only inspire me to write more. I understand that it is hard to adapt to change.

If you don’t like what I’m saying: don’t read this blog!

The window is here, but for how long and what price range will it present us? Let’s make things fun. I’m going to stick my neck out here, and make some real predictions.

Motivation: One of today’s headlines reads: Gold sinks more than $36 to end at a one-month low.

A word of caution: while specific targets are shown in the charts below, one should only watch for long term trends and not exact numbers. If gold goes to $1500 an ounce, does it really matter if you bought at $600 or $700 an ounce?

Examining this first chart you can appreciate how most of those involved in the gold markets up to May 2002 became disheartened by the turn in price action. For a short while, it appeared that the bull market had become a bear market. Six months later a new high is hit and gold begins the next up swing.

Continuing up that swing gold reaches a new high only to have it taken away. This time gold hits a new high of around $386 and dives south of 330; a 15% drop. Sentiment is worse—just when things were starting to look good the “gold bull” bucks some more riders.

Notice the classic flag formation. While price action is between the flag boundaries (no new lows or highs), a break north or south of it can indicate the direction of a major pending move.

This brings us to the point when mainstream media begins to talk about gold. However, gold is still moving in relation to the US dollar: when the USD$ goes down, gold goes up. This relation is soon left behind during November of 2005 when gold finally breaks free of this tie and makes some serious moves upward.

In fact, these moves are so seriously quick and fast a lot more people are paying attention. This is why the current correction on gold has to be fierce. It has to last a (relatively) long time and it has to force the average investor to say “Gold is over.”

What would make anyone say such awful things? Perhaps the commodities bull market will begin to end and prices for other metals will stabilize. A lot of investors can’t see the difference between gold and other metals. Gold is a currency and this will cause the gold price to continue to rise, regardless of what other metals do. Maybe the USD will start to stablize, form a base and slowly move higher. Remember, November 2005 marked the end of that relation. The USD is doomed, it is the end goal of the Federal Reserve: devalue the USD and inflate the money supply. The problem lies in creating so much money and not causing stagflation (0% economic growth relative to true, hidden inflation). Nearly impossible.

For the short term, this bull has to buck some riders. This may be the last chance for you to join in on the action or maybe this cycle of two-steps-forward-one-step-back isn’t over and will continue a few more times. For now, here are my predictions till year end:

Also, the longer gold is slammed and prevented from making new highs, the better it will be for anyone involved in the next up-leg. If gold doesn’t hit a new high until the New Year, expect the upswing to be fierce… think $900-$1000.

I’ve been doing a lot of research about our economy and that of our southern neighbor, the good old u. s. of a. In fact, I’ve learnt a lot more since the last time we spoke. I’ve researched both sides of my arguments and I’ve taken a few steps backwards to evaluate my positions. I’ve done it a lot of times.

You may notice that I got rid of that slogan that used to be listed above under my name… you know, the one about “Silently posted vs. publicly ranted.” I have decided that the economic theories that I like to share with friends are not rants. I have decided that I am not eccentric about these investment philosophies. They are warnings and it would be wise to take heed. Don’t take my word alone, do some fact checking of your own and see what is really going on.

It may be fun to laugh when I start talking about Gold or Silver. It may be fun to pretend like I rant about this all the time. But where does this reaction come from? Is it a resistance to think that everything isn’t as peachy as you’d like to believe? Perhaps you’re in denial, or perhaps you think someone will come and save you if anything bad happens. Oh sure, it could never happen. You’re right in a way, it can be stopped from happening, but only if you (and everyone you’re conforming with) wake up and realize that it has to be a group effort and it needs to happen fast.

Right before us, right now and over the next few months, there is a window of opportunity. We must, as a civilization, not just you and me; we must fix what is wrong before it blows up in our faces. What will blow up? Aren’t you being a little dramatic? Perhaps, but before you judge, don’t you think you need to read up on the matter yourself? Oh, that’s right… you haven’t.

We must be far sighted. We must take preventative action. There is no action with inaction. If everyone believed what I am saying (or for that matter, if they cared) then we would take (and thus, the market would take) preventative measures and a severe crisis would be averted. I will save the details for another post (in the very near future)—but for now, I need to articulate my frustration. Perhaps I will delete this post in a couple days, or maybe I won’t.

Although I said I won’t go into specifics, the details are many and are not exclusively limited to swelling government deficits, lack of real job creation, ballooning markets teetering on popping, growing international conflicts, and our ALWAYS increasing reliance on oil.

Iran is the #2 producer of oil within the OPEC nations and they are telling the world that within the next ten years, they will become an IMPORTER of energy. This is why they want to enrich uranium—yeah they really do want nuclear reactors for energy. What does this say for the price of oil? What does this say for an oil economy? An economy that has a rate of consumption that continues to increase dramatically in the face of $70 oil?

Over the next few years the following may occur. Generally, this is what I’m planning for. As the Federal Reserve breaks the American economy by increasing the interest rate too much, expect them to react by pumping the economy with money. This will prevent a complete collapse of their economy but it will significantly decrease the value of paper currency.

Hopefully, you have reformed your denial and are able to see this happening. Sure, when I spell it out like this it can’t be hard, but remember, if the dollar is decreasing, then everything else will be increasing… salaries, the stock market, home prices, etc. This will make it hard to see the real information, the real facts. TV is a powerful tool of mass persuasion. Remember to take a step back and look in all directions, not just the shortsighted direction in which all the lemmings are running.

On a final note: think of all the times that I “ranted” and think of all the different people I have ranted to. If any of them had listened to me, they’d have enjoyed an increase of over 200% in 1 year. Gold closed today at $708.00 an ounce, or $780.00 Canadian. The USD tanked a lot today. Expect a drop in gold and silver, stop consuming and save some cash. Then when an entry point opens up for you, jump in. Remember, it is still cash. And most importantly, if you buy into gold or silver, make sure I’m not selling to you—that would mean you’re still a lemming.