The precious yellow metal is sizzling on the price charts, as traders shift capital from the higher-risk equities to the safe-haven sanctuary of gold.

The U.S. is battling crippling debt levels and deficits. Some cities across the nation are shutting down to save money. The once powerful U.S. economic engine continues to show breaks and is stalling at this most critical time for the country.

Over in Europe, we have the PIGS (Portugal, Ireland, Greece, and Spain) sucking money from the European Union and International Monetary Fund and taking away the ability to focus on growth.

We are also seeing some economic fragility in the BRICS grouping (Brazil, Russia, India, China, and South Africa). Brazil, India, and China are seeing some stalling in their economies and stock markets.

In China, you have inflation surging to 6.4% in June, the highest level in about three years. The Chinese central bank has increased the bank reserve ratios in an effort to stall lending. Slowing inChinahas an impact on the domestic and global economies that deal with China.

Domestically, you have a national debt of $14.5 trillion and this will grow to over $16.0 trillion with the debt ceiling increasing.

Given all of this risk, you should have some capital working for you in gold.

Gold is considered a safe-haven play versus that of silver. Investing in gold is a safe haven play when the overall market risk rises, as what we are currently witnessing.

On the demand side, China is a significant buyer of gold and this is expected to continue as the country hoards physical gold in its reserves. India is also a major buyer.

The reality is that gold is a limited resource that needs to be found and mined. There is a certain amount of global reserves in the ground, but, after that, there needs to be more exploration.

Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness.

On the chart, the October Gold traded at a record high of $1,683.50 on August 4 before retrenching. The current chart looks bullish on strong Relative Strength. There is a “golden cross” on the chart, with the 50-day moving average (MA) of $1,558 well above the 200-day MA of $1,451.

Some pundits have come out and suggested a $2,000 target on gold over the next few years. I even saw a staggering $5,000 price target on gold. Now the latter may be an extreme, but I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

In the current climate, gold represents the best bet, while silver continues to be a trading commodity based on the economic recovery and demand for electronics and industrial applications.

My advice to you is to buy a mixture of exploration-stage gold miners along with small to large gold producers. In this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.

We have the PIGS (Portugal, Ireland, Greece, and Spain) battling with debt issues in Europe. Spain is not fully there yet, but may inevitably need to find money. These countries are referred to as the PIGS because of their need for financial help.

Stock markets are battling negative sentiment here. The situation was helped by the crisis in Europe, but my economic analysis is that you cannot blame the Europeans, as there is a financial mess of our own here.

The key stock indices are languishing below their respective 50-day moving average (MA) and 200-day MA. The near-term technical picture is bearish and is dangerous at this time without any base or support.

A debt resolution was approved by the Senate and White House. The deal calls for a $2.1-trillion increase in the debt ceiling to around $16.4 trillion, which will allow the country to pay its debt obligations and spend. First of all, this is just adding to a massive debt load. In return, there will be spending cuts of about $2.4 trillion; but over a 10-year period!

The debt increase is not what we needed, but was essential. The government will need to focus on the cost side and implement its own austerity programs with discipline in order to cut the deficit and begin to work to bring down the massive $14.6-trillion national debt. It’s scary looking at the debt load and watching the mounting interest payments.

And in a “what if” scenario, can you imagine the impact of higher interest rates? It would make interest payments much higher and make it that much more difficult to reduce the debt load.

The problem, as I have been saying, is that the U.S. economy is not faring well and is below President Obama’s hopeful expectations after spending nearly a trillion dollars in infrastructure spending along with QE2.

The sky is not falling yet, but may be pretty close to it.

Just take a look at the second-quarter GDP that came in at a meager 1.3%, well below the 1.7% estimate. In contrast, China is slowing, but is still growing at around nine percent!

And making matters worse was a downward revision in the previous first-quarter estimate to a dismal 0.4% from 1.9%.

JP Morgan downgraded its estimate for the Q3 GDP to 1.5% from 2.5%.

I doubt we will see another recession, but you cannot brush this off. The probability for another recession is below 50% in my view, but it is still a possibility.

Manufacturing numbers continue to show a stagnant economy. The ISM Index was flat at 50.9 in July, its lowest reading in years and well below the revised 54.0 in June. An ISM reading above 50.0 represents expansion, so the reading is a concern.

The ISM Services index was also weak and grew at its lowest rate in 17 months.

Factory orders also declined in June.

So the red flags are evident. It’s becoming clearer that the U.S. economy is at risk for another decline and possible recession if stalling continues and the jobs market fails to ignite.

With the higher debt ceiling, we may yet see QE3.

— reporting from Rome, Italy

Does America want members of the 17 eurozone countries to go bankrupt one by one? If only a few went under, the American currency would win the currency wars and reaffirm itself as the reserve currency of the world.

If you were someone living outside the U.S., wouldn’t this sound like a “secret” strategy that could work? After all, are not all the major credit reporting agencies (that grant credit ratings to European countries) subsidiaries of major American corporations?

These are the suspicions I’m hearing from people here in Rome.

Let’s give the theory some further attention and you’ll be surprised at what we find…

When we look at the rising national debt of America, by the end of this decade, the debt-to-GDP ratio of the United States will surpass that of a number of European countries. Why, despite a never-ending rise in our total debt, are U.S. bonds not referred to as “junk” when so many other European countries, with better debt-to-GDP ratios than America, have their bonds considered junk?

On July 25, 2011, Moody’s Investors Services downgraded Greece’s sovereign credit rating by three notches to what is referred to as “Ca,” very risky.

In an ideal situation, here is what happens…

The American dollar is devalued over the next three to five years, so the U.S. is paying back its trillions of debt owed to foreigners with cheaper money.

The euro totally collapses over the next three to five years. With no euro, the greenback, although devalued, survives, as Europeans want American dollars, not Japanese yen or Chinese yuan.

Great idea, if you can pull off.

Under the scenario above, the snowball job of convincing two-thirds of world central banks that the U.S. dollar should be the reserve currency of those central banks continues.

But two problems arise…

Firstly, about 21% of the revenue generated by S&P 500 companies comes from Europe (according to Bloomberg). If the euro currency is devastated, the earnings of the major American companies will be as well, pushing stock prices lower.

Secondly, the rise in the price of gold bullion from $300.00 an ounce in 2002 to approximately $1,600 today is telling us a different story. There could be a new currency in town. Or, at the very least, there could be a new currency permanently tied to the price of gold.

Euro or no euro, American dollars partially backed by gold again…I easily see this in the cards. That’s the best advice on investing in gold or gold advice I can give.

What He Said:

“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.

As I read the financial newspapers and the popular Internet sites this morning, I realize that if there is one thing I hope I achieve in my own daily writings, it is to make my readers wary, almost suspicious of what the media is telling them.

Here’s what got me thinking like this…

Yesterday, the U.S. dollar hit a fresh, new three-year low against a basket of six other major world currencies. The media was quick to point to the bickering amongst the Democrats and the Republicans (over raising the U.S.debt ceiling) as the reason the dollar was falling to a new record low. Wherever I looked this morning, the news sites were basically saying, “Washington can’t agree on increasing the debt ceiling, the deadline is closing in, and the dollar is falling because of all this concern.”

But that’s where reporters have it very wrong, as far as I’m concerned.

Let’s take the debt ceiling issue off the table for a moment and let’s assume Washington passed a new debt ceiling limit of $16.0 trillion or $17.0 trillion. Would the greenback still be falling off the cliff in value? Of course it would.

We are passing a law that says the government can borrow even more money. The greater the debt of a nation, the weaker its currency. We are actually better off if the government doesn’t pass a new debt ceiling and it starts spending within its means.

I don’t want my readers to buy the propaganda the media spits out. At the very least, I want my readers to be aware of the fact that most people reporting the financial news today know very little about finances or economic analysis.

The following are my five core beliefs. I hope my PROFIT CONFIDENTIAL family of readers will benefit from them.

The devaluation of the U.S. dollar that started in late 2008, early 2009, will continue as: (1) the U.S.economy deteriorates further; (2) the national debt level continues to rise; and (3) the Fed prints more money.

Inflation will become a real problem in America thanks to years of monetary policy that promoted artificially low short-term interest rates and the hyper-printing of U.S. dollars.

Gold prices will rise on the back of a weak greenback and too many dollars in the system and as inflation comes back.

The euro is as done as the dollar. Either Germanywill eventually kick the weaker countries out of the euro or it will adopt its own currency.

The stock market will eventually test its March 9, 2009, lows, as Phase III of the bear market sets in.

Where the Market Stands; Where it’s Headed:

The next couple of days will bring the close of July 2011. And with another month behind us, the bear market rally in stocks that started in March of 2009 will have lasted 29 months. A tremendous feat? Not really. As I have written before, the 1934 to 1937 bear market rally lasted 35 months.

I remain steadfast in my opinion. We are in phase II of a bear market. During this phase, the bear brings stocks higher in an effort to lure investors back into them. The easy money in this bear market rally has been made. But there still is upside potential for stocks, albeit it’s limited.

While the media is obsessed with theU.S.debt ceiling limit, the Dow Jones could easily continue to ride the “wall of worry” higher.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.

When consumers are cautious, they tend to hold back on any major purchases such as homes, vehicles, furniture, appliances, and travel, to list a few. This will impact spending and gross domestic product (GDP) growth and the ability of companies to expand their businesses and hire. This is my concern and I feel that continued nervousness among consumers will impact GDP.

Consumer Confidence in July was another disappointment, with a reading of 59.5. The reading was above the estimate of 56 and the revised 57.6 in June, but it was below the 60.8 reading in May. The reading is the lowest since October 2010.

To tell you how bad the readings are, economists feel that a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession level of 90. In my economic analysis, the situation is not good.

Moreover, add in the fact that theU.S.housing market is in a double-dip recession after prices declined to below the lows of 2006 and you’ll understand my concerns going forward.

To drive the economy, consumers need to spend. We have historically low interest rates and quantitative easing. It is working, but not as fast as I would like to see.

The government can use fiscal policies, but with $14.2 trillion in national debt and at its ceiling, looking for an increase in the debt level, we are just adding more debt to American taxpayers’ load. Plus, spending more doesn’t mean consumers will join in.

The Durable Goods Orders reading for June will be reported on July 27, with estimates calling for a 0.5% increase in the ex-transportation reading, below the revised 0.7% in May. Some economists are also expecting a possible negative reading in durable goods. These are not necessarily readings you can get excited about.

A strong housing market is also critical, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening; home prices continue to decline, dragged down by continued high foreclosures and short sales, in which homes are dumped below the mortgage value. New home sales for June came in at 312,000, below the estimate of 320,000 and the revised 315,000 in May.

Also consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers the confidence to assume a mortgage and not worry about losing jobs and missing payments. The non-farm payrolls are due out next Friday and I’m not confident.

At the end of the day, we need to see confidence and the willingness to spend and not worry about money. Only under this scenario will there be sustained spending and economic growth. Unfortunately, there is little reason for us to get excited about at this juncture.

Please follow my story this morning.

Far away from North America, in Madrid, Spain, thousands of protestors are marching to protest high unemployment and poor government. They have marched for weeks.

The unemployment rate in Spain is 21%. According to The Associated Press, unemployment among those aged 16 to 29 in Spain stands at 35%. The thousands in the march are very well organized, accompanied by physiotherapists and masseurs (The Globe and Mail, 7/24/11).

Back to America…

On Thursday of this week, the U.S. may have its largest municipal bankruptcy ever in Jefferson County, Alabama. The county, with a population of 660,000, has struggled for three years under $3.0 billion of sewer bonds that have matured and that the municipality cannot repay. Creditors, led by JP Morgan Chase & Co., want their money. About 500 county employees are on unpaid leave.

The road from Madrid, Spain, to Birmingham, Alabama, is a long one. The problems in Greece, Portugal, Spain and Italy are mature and are only getting worse. How do citizens survive with 21% unemployment? 

In America, I believe our problems are only starting. Remember, the government and the Federal Reserve have done everything in their power to keep the economy going. We are starting to see stress on municipalities and states that cannot balance their books or repay their debt. 

Imagine the havoc that higher unemployment, a rapidly devaluing greenback, higher interest rates and higher inflation will play with municipalities and states? I really wouldn’t be surprised to see large, organized citizen protests become the new phenomenon in America in 2012.

Michael’s Personal Notes:

Wrong, wrong, wrong. They’ve called it all wrong.

The financial news sites this morning are reporting that gold is hitting a new record high on fears about the debt ceiling for the U.S.government not being raised. “Gold surges to record as U.S.debt impasse threatens default, AAA Rating,” is a headline that Bloomberg ran this morning (7/25/11).

In my humble opinion, gold is not rising in price because Congress will not raise the U.S.debt ceiling. It’s actually the opposite—gold is rising because the debt ceiling will be raised. And when it’s raised, the official U.S. debt will run up from its current $14.3 trillion to maybe $16.0, $17.0 or even $18.0 trillion.

That’s what gold is really worried about…spiraling national debt, which brings about a devaluation of the U.S. dollar and possibly inflation.

It’s a forgone conclusion that the U.S.debt ceiling will be raised. Politicians—both sides of the house—would not dare to have the U.S.default on its obligations.

Where the Market Stands; Where it’s Headed:

It’s more of the same for the market as far as I’m concerned. The assault toward Dow Jones 13,000 is on. The bear market’s last gasp will be bringing the Dow Jones into 13,000 territory, as it attempts to lure more investors back into stocks.

As the Dow Jones plows through 13,000, inexperienced reporters and analysts will tell us that the agreement between Obama and Congress to raise the debt ceiling is causing stocks to rise. Rubbish.

The higher the national debt, the greater the risk  for higher interest rates. We are near the end of a Phase II bear market.

The Dow Jones Industrial Average opens this last full week of the month up 9.5% for 2011.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S.economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Throw bad news at this stock market…it doesn’t matter…the assault on Dow Jones 13,000 continues its move ahead.

Yesterday was another big upside day for stocks despite a series of what I believe were negative economic news reports.

Bloomberg ran a story saying that a deficit-reduction plan gaining acceptance amongst members of the U.S. Senate would result in the end of preferred tax treatment of capital gains and dividends. This type of news would usually rattle stocks.

The Conference Board reported that its U.S. leading indicators rose in June at a pace of 60% below May. The Labor Department said that initial jobless claims rose by 10,000 in its latest reading. All negative economic news—that’s becoming the usual backdrop to rising stock prices.

Finally, the Atlantis ended the U.S. space shuttle’s 30-year history Wednesday. Where will the 9,000 people who worked for NASA get jobs now? House prices in Titusville, the closest town to Kennedy Space Centre, have already fallen 47% in five years (Source: Federal Housing Finance Agency).

In spite of how poor the economic news was yesterday, the stock market had only one mandate and that was to move higher. And this is exactly how bear market rallies work: bring stock prices higher, lure investors back into the stock market, and give them the false hope that all is well with the economy.

My prediction is that, by the time this bear market is over, a great number of investors will have been lured back into the stock market. As quickly as the bear brought stock prices up, it will bring them back down.

Sure, it’s very enjoyable to see the Dow Jones jumping 100 or 200 points in a day to the upside. But when we see drops of 100 to 200 on the downside, it gets very painful, as most investors play the upside of stocks, not the downside (short selling).

As I have been saying, enjoy the rally while it lasts, as this bear market rally’s life span is limited.

Where the Market Stands; Where it’s Headed:

There’s not much I can say that I haven’t said above. We are in a bear market rally in stocks that started in March of 2009. The rally, although long and tired now, will likely take stocks past Dow Jones 13,000.

In the immediate term, the dual forces of a government willing to go further in debt to spur the economy and a Federal Reserve ready to expand the money supply are overwhelming strong forces for the stock market. 

The ramifications of a devaluation of the U.S. dollar, spiraling U.S.national debt, rising long-term interest rates, rapid inflation—the bear market will have us dealing with them on a date soon to be announced.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

Consumer confidence amongst Americans is nose-diving.

An important report just released by Thomson Reuters/University of Michiganknown as a preliminary index of consumer sentiment decreased in July to the lowest level since March 2009. The report is startling for several reasons, but this should not be news for my PROFIT CONFIDENTIAL readers.

If we go back to March of 2009, we remember it as the month the stock market hit a 12-year low. The Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009—a decline of 55%. People were running scared. It was the bottom of the credit freeze.

But why are consumers, who make up 70% of American GDP, so worried again? Several factors are coming into play.

Job growth isn’t happening. This is the sixth year that house prices will fall in the U.S.  People don’t understand theWashingtonshenanigans concerning the national debt ceiling crisis. Is it any wonder that the Commerce Department reported that Friday sales at U.S.retailers stagnated in June?

If American consumers are going back into hibernation now, what will they do when inflation really spikes, interest rates rise to offset rapid inflation, and housing prices fall further as rates for mortgages rise?

Rightfully so, the American consumer is starting to realize that the future really doesn’t look that bright for the economy.

Michael’s Personal Notes:

I’ve been warning about inflation picking up steam in 2011. Government statistics are starting to provide evidence of the heated inflation.

According to a Labor Department report from Friday, consumer prices in the U.S., excluding the volatile food and energy items, climbed 0.3% in June after rising 0.3% in May—the biggest back-to-back gain in three years.

Overall prices rose 3.6% for the 12-month period ended June 30, 2011.

Inflation running at 3.6% and the Fed not raising short-term interest rates? Think about this for a moment. If you buy a 10-year U.S. Treasury, you make three percent on your money. But with inflation at 3.6%, you are actually losing the purchasing value of your money, while paying income tax on your three-percent return.

Something’s not right in the marketplace. But, as always, a regression to the mean will adjust the imbalance. Long-term interest rates will rise.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 7.8% for 2011. The more time goes by in 2011, the more bearish I turn on the economy. There has been no real effort by politicians to slash spending, the Fed stands ready to unleash QE3 if the economy falters…the long-term effects of both are inflation and insurmountable sovereign debt problems.

But, in the meantime, in the immediate term, stocks can—and I believe they will—continue to move higher.

What He Said:

“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S.housing market, which is now affecting lenders, will have significant negative effects on the U.S.economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007, Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

With the price of gold bullion hitting a new record high this morning, as Moody’s Investor Services says it’s placing the U.S. credit rating under review for downgrade, my mind wandered to my core beliefs about gold.

What I realized is that my opinion on gold and the reasons I believe the metal will continue to rise in price have not changed.

What has changed: the financial events of the past 10 months have created an even stronger argument for investors to have exposure to gold-related investments.

Below, please find a repeat of one of the most read articles I published in 2010. It’s from PROFIT CONFIDENTIAL on September 8, 2010:

“‘I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.’ (Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002.)

The format of this e-newsletter really hasn’t changed much over the past eight years, and neither has the message: Continued record U.S. deficits, rising American national debt as a percentage of GDP, and too much liquidity in the financial system—will all contribute to a weaker U.S. dollar. Given the fragile state of the euro, gold becomes the ‘currency’ of choice.

In these pages, I have repeatedly expressed the benefits of individual investors acquiring gold-related investments. I ‘pushed’ gold at $300.00 U.S. an ounce, $400.00, $500.00, and each time gold hit a new milestone price (basically each time the metal rose another $100.00 an ounce).

As recent as this summer [2010], I was writing in these pages about the benefits of owning gold-related investments. Basically, I have been pushing gold to my readers until I have turned blue in the face.

Yesterday, gold bullion reached a new milestone. Gold for December delivery closed at a new record high of $1,259.30 per ounce. In the days ahead, I expect gold to close above its record intra-day high.

Here are my three beliefs on what lies ahead for gold-related investments:

With the White House predicting that the official U.S. debt will hit $20.0 trillion by the end of this decade, the pressure to somehow devalue the U.S. dollar will push gold prices much higher.

On these pages, I have been predicting a gold bullion price between $2,000 and $3,000 an ounce. It could go even higher.

The great majority of investors have no exposure to gold-related investments. Our company has severed hundreds of thousands of investors, providing them with investment information and guidance.

I can tell you that only a very small portion of investors (maybe five percent) have actually bought any gold investments. Eventually, when the herd finally joins the gold bull market, prices will be pushed higher.

Finally, there’s not an investment that moves higher or lower in a straight line. Gold bullion prices are no exception.

Yes, gold has recently moved to a new record high, but, historically (at least over the past eight years), gold price run-ups are followed by small contractions, which give investors the opportunity to buy more gold-related investments before the next run-up.”

One of the next most-read stories of 2010 had to do with gold and, of all things, coffee. Here’s how the lead article from October 28, 2010, started…

“Do You Have My Wallet?

It’s 5:00 A.M. and I’m at work writing this morning’s PROFIT CONFIDENTIAL. The Starbucks down the street opens at 6:00 A.M. and, all of a sudden, I realize I don’t have my wallet.

My mind starts to wander. What happens if I went into Starbucks this morning and tried to pay for my chocolate banana ‘Vivanno’ with gold coins? I don’t think it would work.

Starbucks is a modern, hip place offering the ultimate “it’s all about me” customer statement. It’s obviously more fashionable to have a Starbucks cup in your hand than a Dunkin’ Donuts cup.

And, at Starbucks, it’s pretty much consistent. You know what you are going to get. And the concept works—millions of customers go through Starbucks’ 16,000 locations every single day. At most stores, you’ll find line-ups at peak hours.

But would a modern place like Starbucks take payment in gold coins? After all, it was only a couple of hundred years ago when they were readily accepted by merchants.

Of course, Starbucks would not take gold coins. Hence, I’ll have to wait until someone comes into work so I can bum $5.00 off them for my drink.

What’s my real message here?

The price of a beverage at Starbucks will rise over time, because we will need more dollars to pay for it. Think $5.00 is a lot to pay for my morning drink? I can see a day in the future when the same drink will be selling for $10.00, because the value of our fiat currency will diminish as inflation takes hold.

Even in Rome, when the empire was all but finished, it was lire that merchants were accepting, not gold coins. In 1927, it took 19 lire to buy one U.S. dollar. By 1970, it took 625 lire to buy one U.S. dollar—the after-effect of too much currency in circulation backed by a bankrupt country. Much like the direction we are headed in here in America.

Why does inflation grip currencies? Usually because there is too much of the currency in the financial system…again, very similar to what’s happening now. More dollars printed, more debt issued. One needs to wonder how far the greenback will erode in value. But, as investors, we know the greater the devaluation of the U.S. dollar, the more debt America takes on, the higher gold prices will rise.”

Coming back to today, July 14, 2011, not much has changed since September and October of 2010, except that our dollar has fallen further against other word currencies and the U.S. government has hit its debt ceiling. How can gold not continue its march higher?

I’ll try my best not to be sarcastic this morning…

But what happened to all theU.S.jobs we were promised were headed our way? The Labor Department reported this morning that only 18,000 new jobs were created in June 2011, the lowest monthly job growth in nine months. The median Bloomberg estimate called for 105,000 new jobs for June.

The unemployment rate; it’s going the wrong way, up this morning to 9.2%—the highest level in six months.

All those trillions spent to stimulate the economy, all those “too big to fail companies” that were bailed out. Did all that money really make a difference? Sure it did. It ballooned our national debt to $14.3 trillion. Now the Obama administration has new ammunition. It can go to Congress and say, “See, jobs are not being created; the economy is so fragile, we need to spend more money to stimulate it. Increase thatU.S.debt ceiling.”

It is just me, or is all this starting to sound more and more likeJapan1991-2000?

According to Canada’s Globe & Mail (7/8/11), theU.S. economy needs to add 125,000 to 150,000 jobs a month just to keep up with people entering the labor force for the first time. We are nowhere near that type of job growth.

What happens next? My thinking leans towards the Fed continuing to increase the money supply, keeping short-term interest rates artificially low, and coming up with a new version of QE2 (all which are inflationary measures). No wonder gold prices are jumping higher again this morning.

Why did I start today’s issue by saying, “I’ll try my best not to be sarcastic this morning?” Many economists believe that the way to solve our economic issues, the way to stimulate the economy, is to have the government throw taxpayers’ money at the problem.

From the early days of the credit crisis, I have been in that other group of economists; the minority that believe that economic contractions should follow their natural path, as economic expansions do—unabated by government intervention that eventually leaves its citizens with an overabundance of debt.

Let’s look at it this way. During the real estate and mortgage boom years of 2003 to 2006, did the government do anything to slow the boom down? No. It actually spurred the boom on by reducing interest rates to historical lows. Now that the economy has gone bust, we are throwing money (we don’t have) at the problem. It’s an ironic situation.

 Michael’s Personal Notes:

Talking about jobs…

Our neighbor to the north,Canada, a country with a population less than one-tenth of that of the U.S., reported this morning that it had created more jobs in June than the U.S.!

Canada created 28,400 new jobs in June (twice what analysts were expecting), pushing Canada’s unemployment rate down to 7.4%—the lowest jobless rate inCanada since 2009.

The Canadian dollar remains my favorite currency. I believe that, as the U.S. dollar continues to devaluate, the Canadian dollar will be a winner.

Where the Market Stands: Where it’s Headed:

We got to within 280 points of Dow Jones 13,000, and bang—the patheticU.S.job numbers report comes out, knocking stocks back down again.

In reality, the stock market could have taken it a lot worse today. Yes, it was a very poor June payroll growth number. Add that to continued woes inEuropethis morning with more pressure on the stock prices of Italian banks—and the market is taking the negative news in stride.

If this bear market was over, today’s bad economic news could have easily pushed the Dow Jones down 300 or 400 points. Hence my belief this is a stock market that very much wants to keep rising.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S.will continue to rise, the real estate market will get weaker, and the U.S.economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi, Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

Not only are we dealing with the uncertainty in Greece and the rest of Europe, but also the economic conditions in the United States appear to be worsening. From housing to jobs, to manufacturing and consumer spending, the signs are everywhere that the U.S. economy is stalling.

There was more bad news in jobs after the weekly initial jobs reading jumped to 429,000, above the previous week and the estimate. This is not good news and, if it continues, could force the Fed to think about additional stimulus to drive the stalling economic renewal.

But the Federal Reserve appears to be holding back. At the FOMC meeting on Wednesday, the Fed expressed caution and suggested that economic hardships may extend into 2012. The Fed also cut its growth forecasts for 2011 and 2012, which is a red flag, but not a surprise.

I was disappointed that nothing was mentioned about any stimulus after the end of QE2 on June 30. The Fed appears to be satisfied with the reduced interest rates as the key driver of economic renewal. Yet, with the continued soft housing market where foreclosures and short sales are driving prices across the country lower, along with the high unemployment at 9.1%, more must be done. The problem is the country’s massive deficit of over a trillion dollars and national debt in excess of $14.0 trillion, which makes it difficult for additional fiscal spending.

My concern is that the economy may falter or we could continue to see a flat-line renewal. There is also the potential of stagflation, where there are higher prices and slower growth.

It’s true that the housing market is improved from a year ago, but there continue to be problems. The S&P/Case-Shiller Home Price Index of 20 major metropolitan areas in the United States continues to show declines and my economic analysis tell us that this is not good.

I remain bearish on the housing market in 2011 and into 2012.

Fed Chairman Ben Bernanke acknowledged the weak housing market as a major hurdle to overcome. And overcoming it may take years.

Where I continue to see cause for concern is the jobs market. After generating an average of over 200,000 jobs from February to April, May produced only 54,000 jobs.

Thinks about it—there are currently about 13.9 million unemployed Americans, but only less than three million available jobs. This equation will not work. The number of long-term unemployed (those unemployed for 27 weeks and longer) is an astounding 6.2 million, according to the Labor Department. The problem is that, without jobs, spending will stall.

Ben Bernanke has a lot of work ahead of him and the situation is a lot worse than he probably thought. Over two years into President Obama’s term and there continue to be major issues.

The Fed has warned us. The stock markets will likely stall in the summer months with little catalyst for fresh buying. We can only hope that things will improve in the fourth quarter and into 2012; otherwise, making money will become that much more difficult.

Greece needs more money to pay for its previous loan. Ireland is in financial chaos. Portugal and neighbor Spain are not on stable grounds and could need help. And then there are Italy and Belgium. The European Union is in trouble. Germany and France are helping to pay for the misfortunes in these other countries. Europe is facing significant growth and debt issues.

Then you have the rising inflation in China, where interest rates are edging higher. In China, inflation surged to 5.5% in May, the highest level in about three years. The Chinese central bank has increased the bank reserve ratios in an effort to stall lending. I also expect another interest rate increase to come, the fifth since October 2010. Slowing in China will have an impact on economic growth and other global economies that deal with China, including Europe, India, and the U.S.

Domestically, you have a national debt of over $14.0 trillion and a trillion-dollar deficit. There is an effort to lift the debt ceiling in order to spend more. But many states are struggling to make ends meet and are looking at severe cuts in their state budgets.

Given all of this risk, you should be investing in gold.

Gold is considered a safe-haven play versus that of silver. Investing in gold is a prudent move when the overall market risk rises, like what we are currently witnessing.

On the demand side, China is a significant buyer of gold. This is expected to continue, as the country hoards physical gold in its reserves. India is also a major buyer.

Gold is a limited resource that needs to be found and mined. There is a certain amount of global reserves in the ground, but, after that, there needs to be more exploration.

Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness.

On the chart, the August Gold traded at a record high of $1,577.70 on May 2. The current chart looks bullish on above-average Relative Strength. There is a “golden cross” on the chart, with the 50-day moving average (MA) of $1,517 well above the 200-day MA of $1,411.70.

Some pundits have suggested a $2,000 target on gold over the next few years. I even saw a staggering $5,000 price target on gold. Now, the latter may be the extreme, but I feel that gold prices will continue to edge higher, especially if Europe falters.

In the current climate, gold is the best bet, while silver continues to be a trading commodity.

Buy a mixture of exploration-stage gold players and small to large producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.

In my daily writings, my goal is not to continuously be the bearer of bad news. When it comes to the economy, my goal is to educate my readers as to the severe structural economic problems the U.S. faces in the hope that more awareness of the issues will help my readers prepare their portfolios for the inevitable hardships that lie ahead.

Most Americans go along their merry way, oblivious to the mounting economic challenges facing America. I assume that, since you and hundreds of thousands of others read this column daily, you do not want to be in the “merry oblivious group.” You want to know what’s really going on with different aspects of the economy and how they will ultimately play out for or against you.

The following are seven major problems facing the U.S.:

1. Foreign Ownership of America

Ten years ago, foreigners owned 20% of U.S. Treasuries. Today, they own between 40% and 50%. If we go back through history, when we see past countries exposed to such dependence on foreign investment, the debtor nation (in this case the U.S.) has eventually faced sovereign debt problems and high inflation.

2. Price Action of Gold

The price of gold has risen 413% in less than 10 years and, during that 10-year period, it has failed to face a major correction in its price advance. The spectacular but steady rise in the price of gold bullion is a leading indicator of either a collapse in the value of the U.S. dollar or rapid inflation or both.

3. The Fed

As blunt as I can be, and in a nutshell, here’s my opinion: The Federal Reserve’s printing press has been supporting the economy since March of 2009. At the end of this month, the Fed says it will stop its QE2 program—basically a fancy name for printing money, taking that money and buying U.S. Treasuries. I have read various reports issued by analysts and economists. Depending on which report I choose to believe, the Fed has been buying about 50% of the Treasuries issued by the government under QE2. Who will buy these Treasuries if the Fed stops buying them? Scary thought.

4. Debt

The U.S.’s budget deficit this year will be in the $1.5-trillion to $1.6-trillion range. Our debt ceiling (the amount the U.S. can legally borrow) is here and it’s $14.3 trillion. Only nine years ago, the national debt was $6.0 trillion. In less than a decade, our national debt has gone up 140%. But the official national debt numbers we hear do not include entitlements to U.S. citizens and unfunded liabilities. Include these and our total debt is in the $70.0-trillion to $100-trillion range, again depending on which analyst report you believe. The official national debt is expected to increase another $6.0 trillion by the end of this decade.

5. Government Gone Too Big

Under the Obama Administration, the government has only gotten bigger. Between 40% and 45% of households in the U.S. receive some form of government support. Over 30 million Americans use food stamps. And, of course, the government is the biggest employer in the country. Social Security and Medicare—those expenses are huge for the government. But conveniently, they are not included in the government’s total debt, as they are both unfunded expenses. The government took over Freddie Mac and Fannie Mae during the credit crisis. Since these two entities owned or guaranteed half the residential mortgages in the U.S., does this mean the U.S. government now owns or guarantees half of all residential mortgages in the U.S.?

6. U.S. Dollar

Since June of 2010, less than 12 months ago, the U.S. dollar has declined 16% against a basket of six major world currencies. The devaluation has been steady and slow. Frankly, considering all the debt the U.S. has piled on, I’m surprised that the U.S. dollar hasn’t simply collapsed. Maybe it’s being supported. I don’t know; I’m just a writer. But I have studied history. And I can tell you that no superpower has thrived as its currency has devalued. In the case of the U.S., the situation is dire—the U.S. dollar is the reserve currency for 70% of world central banks. If they all dump the dollar, the repercussions to the U.S. economy will be insurmountable.

7. House Prices

The average price of a home in the U.S. has declined 33% in 20 major cities from their 2006 price peak, according to the S&P/Case-Shiller Index. It will be years before the housing market recovers…a major impediment to the U.S. economic recovery.

Yesterday, at a conference in New York hosted by Standard & Poor’s, Robert Shiller, co-founder of the S&P/Case-Shiller House Price Index, was quoted as saying that he would not be surprised to see U.S. house prices decline another 10% to 25% over the next five years. Shiller noted that, in Japan, housing prices fell for 15 years after Japan’s property bubble burst in 1990.

For eight consecutive weeks now, the bellwether U.S. 30-year fixed mortgage has dropped, and consumers are still not interested in buying houses.

A 30-year fixed U.S. mortgage today costs 4.49%. Last year at this time, it was 4.72%. The record low was 4.17% in November of 2010 (Source: Freddie Mac).

If the 30-year mortgage rate in the U.S. fell to three percent, would buyers surface? I doubt it. Consumers have no faith in the housing market and the inventory overhang is unprecedented. Just when you think the housing market can’t get any worse, it will get worse.

Based on the above, I’m sure you can see why I’m so concerned about America’s future and my kids’ future. American is no longer the industrialized leader it was following World War II. We face severe economic problems in the years ahead; hence you see why I’m long-term bearish on the stock market.

Next week, I’ll tighten the time frame and give you my more immediate reasons as to why I believe the U.S. economy will soon fall back into recession. Today’s U.S. economy…it’s looking very similar to me to the Japan economy of the 1990s.

Where the Market Stands; Where it’s Headed:

Stocks broke through their longest losing streak since 2009 yesterday. Although I was disappointed the market didn’t end on its high for the day, the market is putting in a base here.

I’d be worried if the Dow Jones Industrial Average fell decisively below the 12,000 level (12,124 was the opening this morning), but until then, the “tired” and “long-in-the-tooth” bear market rally presides.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe that only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

It all started back in April, when Standard & Poor’s warned that its AAA credit rating for the U.S. would be at risk unless the U.S. government came up with a plan to reduce the national debt and the annual budget deficit.

Last week, Moody’s Investors Service announced that it would place the U.S.’s “Triple A” credit rating under review unless the government made progress in increasing its debt limit by mid-July.

And, yesterday, Fitch Ratings said that it would downgrade U.S. Treasuries to “junk” if the U.S. government misses debt payments due August 15, 2011.

All this news about possible downgrades in the value of U.S. government bonds, and investors continue to flock to them?

Sure, there is a lot of politics going on behind the scenes. The Republicans who control the house want to flex their muscles and not agree to increase the government’s $14.3-trillion borrowing limit unless Obama’s Democrats give in to significant spending cuts. On the other side, I assume Obama’s Administration feels that the economy is too fragile to cut spending.

But here’s what’s really puzzling me and why I believe the herd chasing U.S. Treasuries will eventually get hurt.

In 2000, when the government was closest to running a budget surplus and when the national debt was actually going down, U.S. Treasuries yielded more than they yield today.

Think about this, because it is very important:

Today, the government is awash in debt. It spends $1.5 trillion to $1.6 trillion a year more than it takes in. The “official” national debt is $14.3 trillion, going to more than $20.0 trillion by the end of this decade. Just the interest on the debt is running at about $1.0 billion a day.

Yet, despite a government drowning in debt, U.S. Treasuries yield less today than they did 11 years ago, before the terrorist attacks, when this country’s finances were in much better shape than today—the Clinton Administration even claimed it had a budget surplus in the year 2000!

What’s wrong with this picture? It’s simple: fools are rushing in to buy U.S. Treasuries. And where the fools rush in, a slaughter usually follows.

Michael’s Personal Notes:

This is what he’ll do today…

At the end of their meeting today, Jean-Claude Trichet, the head of the European Central Bank (ECB), will announce that the 17-country ECB will keep interest rates unchanged at 1.25%. He’ll also set the stage…give the signal…interest rates will go up at the ECB’s next meeting in July.

Yes, the central bank in the European Economic Union is making the hard choice. It sees pathetic job growth in Europe, it sees the softening European economy…but it’s taking the high road and raising interest rates, because it recognizes inflation as the biggest threat to its future.

It’s unfortunate that North American central bankers do not see and act upon the same risk here.

Where the Market Stands; Where it’s Headed:

Poor stock market investors…they just can’t get a break. It’s now six down days for the market—the S&P’s longest losing streak since 2009. Patience, my dear reader, patience.

Investors are displaying fear in this market, stock advisors are turning bearish, economic news is poor…there’s been a washout in this market. And that’s when stock prices start to rise again and the market starts to climb the wall of worry again—when all is negative.

I’m sticking with my guns and predicting that we have not seen the end of the bear market rally… it still has life left in it. This mini-crash, as some would call it, is simply a correction in a bear market rally that has seen the Dow Jones Industrial Average rise 87% from its March 9, 2009, bear market low.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008, long before anyone else.

The key to growing the economy is creating jobs and spending. So far, the economic renewal has been decent given that it has largely been a jobless recovery. But things appear to be changing on the positive side, as the critical non-farm payrolls reading for April saw the creation of 244,000 new jobs. This was well above the estimate of 185,000 and the revised 221,000 in March. It was also the third straight month in which over 200,000 jobs were created. Moreover, it was also the highest pool of monthly jobs created in about five years. A negative was the jump in the unemployment rate to nine percent from 8.8%.

And, while the jobs creation is positive, we need to see the number increase steadily and go significantly higher in the months ahead. While the 200,000 level is clearly a vast improvement over what we have been seeing since the recession began, some economists argue that the country will need to add 500,000 jobs monthly to make a dent in the unemployment rate and to get it moving towards full employment at around six percent. The unemployment rate in April edged higher to nine percent.

Here’s the deal. There are currently about 15.1 million Americans unemployed and looking for jobs while struggling to make ends meet. We are seeing record numbers at food banks across the nation. The government is positive that jobs are being generated, but tell that to those barely holding on. The problem is that there are only about 2.9 million available jobs. That is five unemployed workers competing for one job. You don’t have to have complex economic analysis done to figure out that this is a problem and needs to improve.

Jobs need to be continue to accelerate, especially given that the government has high hopes after spending hundreds of billions on infrastructure and incentives and, in the process, building a massive deficit and adding to the over $14.0 trillion in national debt.

Jobs drive confidence and this gives consumers a reason to spend, especially on non-essential goods and services.

Consumers appear to be spending on non-essential big-ticket items, and this is bullish. The Durable Goods Orders reading for March was encouraging, with a better than expected 2.5% increase versus the 1.8% estimate, and up from a revised 0.7% in February. Excluding the transportation element, the reading of 1.3% was also better than expected.

When consumers spend, there is a domino effect down the line. In economics, this is known as the “multiplier effect,” wherein a dollar spent results in more spending. For instance, say you spend a dollar at the store. That dollar is used to pay workers who in turn spend. This cycle continues and is a major driver of total spending in the economy.

This is why jobs are so important for increasing consumer spending and driving the economy. And this is why the jobs readings, while very encouraging, still need to ratchet higher.

Terrible day for the markets yesterday…

It all started with June crude oil futures down about $9.00 a barrel, the U.S. dollar up sharply and the precious metals down. June gold futures were down about $34.00 an ounce, bringing the metal back below the $1,500 level. There was more pressure on silver prices, too (I explained why yesterday in my editorial, Why Silver Prices Are Falling So Quickly).

So, what are we to make of this and what action should investors take?

In times of volatile markets, I go back to the basics: No investment or commodity rises straight up during a bull market or falls straight down during a bear market.

Aside from its dip during the Great Recession of 2008/2009, crude oil has been in bull market since September of 2001. Common sense dictates: in the U.S., there are approximately 80 cars for every 100 people. In the world’s fastest growing economy, China, there are only 13 cars for every 100 people.

Oil is limited in supply. Electric and solar cars have not been successful. Oil is not only used for powering our vehicles and heating our homes, but also can be found as an ingredient in many of the items we use daily, including plastics, paint, synthetic fibers, make-up, and even medicine.

The law of economics says that when you have limited supply (as we do with oil) and increasing demand (from evolving countries like China and India), prices will rise in the long term. About 60% of the U.S.’s oil needs are satisfied by foreign countries, the top four being Canada, Mexico, Saudi Arabia, and Venezuela. Only 10 years ago, the U.S. was the main oil customer of these countries. Today, the U.S. competes with China for oil from these four countries.

Bottom line: demand for oil is rising, not declining. However, supply is limited.

Moving to gold bullion…

The greatest financial story of the past decade has been the quiet bull market in gold bullion. The metal has moved from $300.00 an ounce to $1,500 an ounce in about 10 years’ time. If we look at a 10-year chart of the U.S. dollar against other world currencies and a 10-year chart of the price of gold bullion, there is an almost perfect inverse relationship. The U.S. dollar falls in value, gold rises in price.

If you believe that the Fed will stop printing money, if you believe that the U.S. government will get its budget under control, if you believe that inflation will not be an after-effect of too many dollars in the system, and if you believe that the national debt will not hit $20.0 trillion by 2020, then you shouldn’t be in gold bullion.

For me, I’m staying the course. I realize every time the price of crude oil or gold falls that investors are taking some profits off the table…and that’s exactly what they are doing. There has been a tremendous amount of money made trading oil and gold in their bull markets. It is normal for investors and traders to put some of those profits in their bank account. Remember, no bull market goes up in a straight line. Corrections are not only normal; they are healthy, especially for the bull market in gold.

When I look at the price charts right now, I see that gold could easily correct to $1,400 per ounce. With each correction in the price of gold, I’m adding to my holdings, not selling them. I’m staying the course.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average has shed 229 points in the last two trading days. Big deal, I say. We are dealing with a bear market rally that has brought the Dow Jones Industrials up nine percent alone this year and up 95% since March of 2009. A couple of down days does not put an end to the “tiring” bear market.

My opinion: the bear market rally is still alive. Upside is limited, but there is more upside potential in this market.

What He Said:

“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. (Since 2005, I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.

Surprise, surprise, surprise…

The Commerce Department reported yesterday that the U.S. economy grew (i.e. GDP) at only 1.8% in the first quarter of 2011—below analyst expectations. On Wednesday, the Federal Reserve said that it expects GDP to be 3.1% this year.

Separately, the U.S. Labor Department reported an unexpected weekly jump in jobless claims to a three-month high. Jobless claims in the U.S. rose by 25,000 to 429,000 for the week ended April 23, 2011.

Dear reader, this is what you need to know:

The real estate crash that started in 2006 took down the mortgage market and created the credit crisis, which delivered to us the worst recession since the Great Depression. (I remind my readers that, back in 2006/2007, then Fed Chairman Greenspan said that the softness in the housing market would be isolated.)

Under the direction of current Fed Chairman Ben Bernanke (who I believe to be the best Fed chief we’ve had in decades), the Fed pulled out all the stops to save the economy from another depression. The government also chipped-in, basically saving Wall Street.

With so much monetary and fiscal stimulus in the economy, it was a given that we would bounce back from the depths of the recession. But the actions of corporations, in either their bankruptcy or their quest to be profitable again, created severe unemployment issues that will not go away anytime soon.

The government’s actions of saving banks, insurance companies, car companies and more caused our national debt to boom…another consequence of the Great Recession that will not go away.

Then we have the Federal Reserve keeping short-term interest rates near zero and flooding the system with dollars—the effects of which will be a devaluing dollar and inflation.

The cracks in the U.S. economy are starting to slowly show. We can’t have a government/Fed-induced recovery, as it will not be long-term, but only temporary in nature. The economy cannot repair itself without the housing market and without jobs from the manufacturing sector—both of which will not recover for years to come.

Everything is limited in time and money. So just ask yourself this question: How long can the government/Fed duo continue to create debt and issue dollars before the tools used to fend the recession become a liability in themselves?

Michael’s Personal Notes:

What the Fed really said…

I’m sure by now you’ve heard about Fed Chairman Ben Bernanke’s first press conference following a Fed policy meeting this past Wednesday.

Bernanke said that the end of the Fed’s $600-billion bond-buying program will be in June, the termination of which should not have a “significant” effect on the financial markets. I read this as saying that the Fed expects some impact from the end of QE3, but no real market damage.

As I expected, the Fed said that it will continue to roll-over all the securities it bought during and after the credit crisis. All those U.S. Treasuries and mortgage-backed securities the Fed bought…they’ll just remain on the Fed’s books for now. Hence, a chunk of government debt has been taken off the table.

Now that the Fed has promised to end QE2 on time, it will be difficult for the Fed to start QE3 as the economy worsens when the credibility of the Federal Reserve will come into question with investors. I just think the Fed will find another way, or another name, for buying U.S. debt.

Where I strongly disagree with Bernanke is on inflation. Bernanke says that the jump in fuel and food costs will have only a “passing” inflation impact. I beg to differ. The record amount of money pumped into the system during the credit crisis, the unprecedented measures of the Fed in buying so many securities, are all very inflationary. At least that’s what the rise in gold prices has been telling us.

Where the Market Stands; Where it’s Headed:

Wow! What a great first four months of 2011 it has been for stocks!

But the bear market, having finished its 26th month of moving stock prices higher and sucking investors back into the market, is getting very tired. The market will be very hard-pressed to repeat its January to April 2011 performance.

I still see us in a bear market rally. However, the life of that rally is limited now.

What He Said:

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007 Michael was preparing his readers for worse times ahead.

In my lifetime, I believe I will wake up one morning to the news headline, “Gold up $100 Today as U.S. Dollar Crashes.”

The popular media is slowly starting to pick up the gold bull market story. Investors are getting interested in it, and the smart money is buying in, but gold is still only in the second phase of its bull market. Once the third and most speculative stage sets in, we will see big single-day price rallies in the metal. That’s why I believe it’s still not too late for my readers to get into gold.

So far in the gold bull market, the majority of the rise in the price of gold can be related to the decline in the price of the greenback compared to a basket of the world’s other most popular currencies: the euro; yen; pound; Canadian dollar; Swedish krona; and Swiss franc. If you’ve looked at a chart of the U.S. dollar lately (against the currencies listed above), it reads like a straight line down.

I’m often asked, “Michael, why did you see gold as a buy in 2002?” Back then, two of our analysts wrote a report on how then Fed Chairman Greenspan had a secret plan to reduce interest rates to bring the value of the U.S. dollar down to help our exporters.

My realization was that, as the U.S. dollar fell in value, the 70% of the countries around the world that used it as their reserve currency would get squeezed and would look to abandon the U.S. dollar as a reserve currency. Their only alternative: gold.

By pushing interest rates so low in the summer of 2004, Greenspan not only succeeded in starting the devaluation of the U.S. dollar, but he also unwittingly set the stage for the greatest real estate bubble in American history—a bubble that eventually burst, causing the worst recession since the Great Recession.

To fight the recession, the U.S. government increased debt to record levels, putting more strain on the U.S. dollar. Gold has many “thirsts” that fuel its rise. One being a falling U.S. dollar. The second being increasing U.S. national debt, because a currency backed by a lot of debt is a currency in trouble. Both thirsts are being fed to gold right now.

(The above “classic” Michael gold article appeared in PROFIT CONFIDENTIAL on October 6, 2010. Gold bullion traded at $1,346.50 an ounce on October 6, 2010. Today, it trades in the $1,500-an-ounce area, a gain of 11% in six months. The reason we reprinted the article: there’s been no change in Michael’s feeling about gold bullion continuing to rise in price. In fact, what Michael wrote about six months ago is still fueling gold’s price rise today. And, yes, he’s still expecting to wake one morning to, “gold up $100 today as U.S. dollar crashes.”)

Michael’s Personal Notes:

The inflation rate in Canada surged in March to its highest level since September 2008—to an annualized rate of 3.3%. The Canadian dollar has been surging vs. the U.S. dollar for months now. Years ago, it took $1.50 Canadian to buy $1.00 U.S. Today, it takes $1.03 American to buy $1.00 Canadian! A total about-face.

I’ve been screaming for at least five years now: Americans, buy your stocks denominated in Canadian dollars on the main Canadian stock exchange, so you can get the additional whammy of a currency gain! I continue with that opinion today.

The worst-kept secret: the Bank of Canada is not far from raising its benchmark interest rates again.

Where the Market Stands; Where it’s Headed:

As we enter the final trading week of April, a bear market rally still presides. The risks for the economy are increasing each passing day, but this bear has not finished its job yet of convincing investors to get back into stocks.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying, “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”

Here’s a proposed new rule…

If someone wants to be a politician, they must first run their own business for five years, risking their own money every day.

Of course, this rule wouldn’t fly, because 99% of the politicians in Washington would need to quit, as they’ve never run a small business before.

In your own business, or in your personal life, you do not cut checks from a bank account that has no money in it or that a bank line of credit is not attached to.

If you do have a bank loan or credit line when you are running your business, the bank wants to see financial statements each year showing that you are making money; otherwise, they call the loan…a loan that is always limited in size by what the bank believes your business or income can afford to carry without risk to the bank.

The government, if it were a business, would have been bankrupt years ago. Why? It spends money it doesn’t have. It borrows money from a bank (the Fed) that simply prints it and hands it over to a client (the government) that is insolvent.

Democrats and Republicans are fighting it out in Washington these days over $60.0 billion in budget spending cuts this year. The $60.0 billion is not our problem. Our problem is in trillions of dollars, because that’s how the debt the government has accumulated is now measured.

Our current national debt sits at about $14.29 trillion. That’s the official number. By the end of this decade, the number is predicted to be $20.0 trillion. But the numbers are bogus. A real company would need to add future obligations, like retirement benefits, on its balance sheet, while the government doesn’t do that.

As Bill Gross of Pimco so eloquently pointed out in his April 2011 Investment Outlook, when you include unfunded social security, unfunded Medicare, Medicaid, and government agency and student loan liabilities, the true government debt is $75.0 trillion, about 500% of GDP.

How could it have gotten so out of control?

Here’s how the charade is played: The government takes in our tax money and spends it. It needs more to cover its expenses (because it spends more than it takes in), so it sells U.S. Treasury Bills. The Federal Reserve buys those bills with money it literally prints off a printing press. Foreign investors buy about 50% of those T-bills, because they need to for a variety of their own reasons.

President Obama was quoted the other day as saying it would be “inexcusable” for Congress not to pass the 2011-2012 budget, because it threatens to shut down some federal agencies for the first time in 15 years.

Treasury Secretary Timothy Geithner warns of “severe hardship” if the Congress doesn’t increase the government’s maximum borrowing limit past $14.29 trillion by May 16, 2011, the day government is expected to reach that limit.

To me, it’s inexcusable that our politicians have let our debt get so out of control. They don’t understand they are playing with fire. As inflation rises and interest rates rise, our debt will balloon in size. The credibility of the U.S. dollar will come into question. It will be a catastrophe for all Americans.

Let the government shut down. Run it like a business. If you don’t have the money, don’t spend it. But we all know the politicians won’t let that happen. They don’t have the guts or intelligence to see what the right thing to do is.

For investors like me and you who see the debt crisis in this country coming, there is a huge opportunity to make money from the rise in the price of precious metals, the decline in the value of the U.S. dollar, the decline in the price of U.S. bonds, and the rise in interest rates. I’ve never seen so much opportunity staring investors right in the eyes like we have today.

Unfortunately, and unpatriotically, we are making money as the country we love so dearly crumbles from the economic power it once was to mediocrity and insolvency.

It would have been nice if the politicians enabled us to make money as the country rebuilt itself. But, at a certain point, you are left with not much else choice but to fend for your own economic survival and progress, because those in power certainly won’t help you. All they know how to do is spend a lot more than they take in…what will eventually become America’s debt crisis and downfall.

Michael’s Personal Notes:

First Greece, then Ireland, now Portugal.

The financial world awakes this morning to hear Portugal has formally asked the European Union for a bailout. Portugal’s 10-year government bonds surged to 8.8% yesterday. The official unemployment rate in the country is 11.1%.

Who’s next? My bet is Spain, then Italy. And then it’s goodbye euro.

How long will Germany continue to prop up and bail out the European Union member countries? Time will tell. The real question is whether the mark will become the new currency of the region or if each country will go back to its own currency.

I can’t see the citizens of France or Germany being happy with using their money (indirectly) to bail out Greece, Ireland or Portugal. Frankly, I’m surprised we have not seen civil unrest over this.

One thing is for sure: whoever thought the euro could take over from the U.S. dollar as being the reserve currency of the world (yes, this was in the media only five years ago) was very wrong.

Gold, baby, nice, shining gold bullion, that’s the reserve currency of the future (and the past). Too bad the geniuses running the majority of world central banks decided to unload most of their gold over the past two decades.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 7.3% for 2011. The bear market rally that started in March of 2009 remains intact.

Expect more immediate-term gains from stocks; however, the upside potential is limited. The easy money in this bear market has already been made. The upside profit potential of 10% outweighs the risk.

What He Said:

“What group of stocks is next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.

There are currently about 15.1 million Americans unemployed and looking for jobs while struggling to make ends meet. We are seeing record numbers at food banks across the nation. The government is positive that jobs are being generated, but tell that to those who are barely holding on. The problem is that there are only about 2.9 million available jobs. That is five unemployed workers competing for one job. You don’t have to do any complex economic analysis to figure out that there is something wrong and, unless it improves, times will be hard.

The ADP Employment Change for March saw the creation of 201,000 jobs, just below the consensus estimate of 210,000 and the downwardly revised 208,000 in February. The reading is not that bad; it does point to jobs being created.

The Challenger Jobs Cuts for March were encouraging, with a 38.6% decline in planned jobs cuts, an improvement over the 20% increase in February.

The weekly initial claims have been improving, below the key 400,000 level. We saw 382,000 for the week to March 19 and estimates call for 383,000 for the week to March 26. The readings are clearly on the right path to recovery. Economists believe that the weekly claims would need to fall below 375,000 to drive down the unemployment rate.

All eyes will be on the non-farm payrolls on Friday, with estimates calling for the creation of 185,000 jobs in March, below the 192,000 jobs generated in February. Again, while the jobs creation is positive, we need to see the number increase significantly more. Some economists argue that the country needs to add 500,000 jobs to make a dent in the unemployment rate and get it to move towards full employment. The current unemployment of 8.9% is high. I do not expect a decline until more jobs are created.

Quite simply, jobs are not being created as fast as the government had hoped, despite spending hundreds of billions on infrastructure and incentives and, in the process, building a massive deficit and adding to the over $14.0 trillion in national debt.

You’ve got to worry about this.

The problem is that jobs drive confidence and this gives consumers a reason to spend, especially on non-essential goods and services.

The Durable Goods Orders for February fell a disappointing 0.9%, short of the 1.1% growth expected and much lower than the 3.6% reading in January. The reading excluding transportation fell 0.6%, also well below the 1.8% estimate, but better than the negative three percent in January. The readings suggest that consumers are not yet comfortable spending on non-essential goods and services.

And when consumers do not spend, there is a domino effect down the line. In economics, this is known as the “multiplier effect,” where a dollar spent results in more spending. For instance, you spend a dollar at the store. That dollar is used to pay workers who in turn spend. This cycle continues and is a major driver of total spending in the economy.

This is why jobs are so important for increasing consumer spending and driving the economy. And this is why the jobs readings, while encouraging, have a ways to go.