Only some 7 months ago, just as the post Katrina recovery began to unfold, upon the announcement of "Helicopter Ben" to succeed Dr Greenspan as the next Fed Chairman, we anointed him right here in this report: "Bull Market Ben" and up until last week, he certainly lived up to his name. However, if he keeps up these maniacal interest rate hikes much longer, we may have to re-anoint him "Bear Market Ben".

Politicians, Presidents and Chief Executives and especially Federal Reserve Board Governors and Chairmen have to be especially careful about how they communicate financial aspects, such as US Dollar and Interest Rate policy and most importantly they have to maintain an arms length consistency or say as little as possible, lest it be misunderstood or misinterpreted. What went wrong last week was the market may have felt let down by Dr Ben, because he miscommunicated or indicated a possible pause in interest rate hiking policy back in mid-April that sent many stocks markets around the World soaring to new highs. And in doing that, he potentially set the market up as somewhat expectational that a pause might in fact be imminent or would signal so, in the accompanying May 10, Press Release, perhaps in the form of a lack of unanimity as was recently revealed as promising in earlier Fed minutes. Regrettably: The final paragraph containing this statement may have provided the additional catalyst that spooked the market into an immediate selloff from the opening bell Thursday:

Fed Funds raised to 5%. And, in a related action, the Board of Governors 'unanimously' approved a 25-basis-point increase in the discount rate to 6 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco.

The continuing perennial problem with the Federal Reserve, as outlined by L William Seidman above, is they almost always overshoot, in part, because right before the economy slows down, as a result of their multiple increases in rates, they routinely get spooked by runaway commodity prices or stockmarket blowoffs and the danger always is, that once they go too far, they rarely reverse policy overnight or quick enough and begin lowering rates as they should. So, it can take a very long time to turn things around, just as it did in post 2000 and 9/11.

Could it be different this time around? In a perfect World maybe, but there are too many epic differences today, from any other time ever...

Ben Bernanke's Destiny - To ultimately flood the US Economy with Dollars and Fuel the Inflationary Fire

Unfortunately, this time around, the Federal Reserve does not have the luxury of tax cuts to stimulate the economy, as we are already so totally knee deep in deficits, that increasing these same could be bordering on suicidal. So, all they have available is their ability to lower short term interest rates back down to 1%, something we predicted some time ago, might eventually happen, along with the other ace in the hole: 'Helicopter Ben' himself, who got that name from his studies of the Great Depression, believing that it and future depressions to be preventable, because as Fed Chairman, he would board a metaphoric or imaginary helicopter and totally flood the US Economy with liquidity to prevent same or worse and somehow, this may be the ultimate destiny of this Fed Chairman, whose time may truly be coming.

Actually we believe Dr Bernanke may soon end raising rates and with the next FOMC meet only 5 weeks away, a gigantic rally may ensue and even if he doesn't, raising rates even further could still be interpreted as the economy being too strong and stocks could still rally a lot.

Global Hyper-Inflation is coming - As we've warned here before - We're approaching an unsustainability of supply

Markets have an uncanny way of seeing the future way ahead of time and sensing things long before they actually happen. Over the past few years Oil prices have risen steadily and methodically and no-one really knew why they were moving relentlessly higher on both good and bad news, including against a backdrop of some of the largest inventory buildup in years, in Crude. What this curious anomaly caused many traders to do, was short more Crude, because after all, if inventories were rising to their highest levels since 1999, when the price was at multi-decade lows of $10, surely Oil prices would go back down. But, they didn't. They kept on rising and slowly but surely it began to dawn on investors that maybe the emerging giants of India, China, Latin America, Eastern Europe and Russia, in their relentless desire to be more American in their increasingly prosperous lifestyles, many now with middle-classes larger than the entire US population, were suddenly consuming energy at an astounding rate, to the point that demand now exceeds supplies at 85 Million Barrels per day. And, as the Energy markets kept rising, there were some unknown events out there in the future, that might cause some kind of dramatic blowoff...

Those events turned out to be Hurricanes Katrina and Rita that culminated in an interim peak of epic proportions in the Energy markets that have subsequently been exceeded in recent weeks, indicating that markets have since gone higher, without the pre-requisite of some kind of catastrophic event. This is very dangerous, because as was pointed out by ourselves some time back, in several special reports on energy the Chinese may not be telling us the full story as to the real numbers behind their consumption binge and Jim Cramer agrees. And the recent allegations or maybe revelations that the Saudis may too be running out of Oil, has placed the World in a precarious position, because it's already short approximately 2 Million Barrels per day and even the once mighty OPEC itself cannot even meet its own quotas.

Every Integral Component of the Global Economy is Soaring in Price - That's Hyper-Inflationary and Ultra-Bullish for Gold

The point we are getting at, is the Fed has a habit of throwing caution to the wind at the last minute and seem to never factor in, the ever present possibility, that some kind of exogenous event can come out of nowhere and really put the economy in jeopardy, especially when they have overshot rates on the upside. It is a demonstrable fact that every Oil shock price rise has ultimately resulted in a fairly significant economic slowdown or recession and while many may think it's different this time around, because we managed to make it this far with sky high gas prices, it's not. They're beginning to bite and will likely continue to do so for some time and they are acting like a double rate hike or tax hike on the economy at the same time, essentially compounding what the Fed is doing down at the Reserve and that is the risk that traders and investors began to factor in last week, as we also did, believing the Fed had already gone way too far. Meanwhile, the inflation genie is out of the bottle and the tremendously powerful rises in Gold, Silver, Platinum, Palladium, Copper, Zinc, Aluminum, Lead, Titanium, Chromium, Steel et al, are signaling major inflation ahead, because along with Oil, all of those items are integral parts of the economies of the entire World and if they are all soaring exponentially, this is something that has never ever happened before, in quite this way, along with a synchronized World economic expansion of unprecedented proportions, especially with countries such as China growing exponentially at 9% per annum compounded. That compounded growth multiplied around the World, is an enormously powerful warp factor that is being dramatically reflected by the behavior of Copper, Silver, Platinum, Titanium and other super critical metals that have woken up from a deep slumber of decades long inactivity, to a point where sudden and real scarcities abound. To put all this into proper perspective, with the Chinese economy growing at an epic compounding annual rate of 9% and the rest of the World at an unprecedented 5%, then, what this means is, that in spite of interest rate hikes and everything else, if the demand for goods like Copper was so much yesterday, it will be so much more today and will likely to continue to be more next week and next month. Epic demand is occurring and supply is not.

As we've been expounding for years - Gold is extremely undervalued - Even at today's extreme high price levels

What this is telegraphing is the strong probability that Gold and Silver in particular in just the same way that supplies are not keeping pace with increasingly strong demand are in all likelihood for now headed substantially higher. And they too have so much catching up to do just to reach ratio norms with Crude Oil of 15 : 1 of Gold versus the price per barrel that today alone suggests Gold should be trading at $1,085 per ounce and as James Turk has calculated, Gold adjusted for inflation should be trading at $2,200. These are very powerful numbers that we have watched building over the years, perplexed in earlier years, why it was taking so long for this compounded inflation to truly impact the price of Gold. But now, that it is happening so persistently, methodically and relentlessly, one can only assume that this move is of a much greater potential magnitude than many can imagine and only a few think tanks around the World such as the brainiacs of GATA who have been beating the Gold drum for 7 years and others that see the possibility of Gold even going to $38,000 per oz have been right on...

The fact is nobody knows how high Gold might go, but the realization that the World too, like Energy, may be running out of Gold, Silver and Copper is only just beginning to dawn on the more elite intellectuals of the investment masses, the majority of whom woke up last week and said: What happened? What happened is what that Gold market may be telegraphing from behind the scenes, that we are really facing an unprecedented era, wherein one day, Fed Chairman Ben Bernanke in a desperate bid to undo the misdeeds of his predecessor and himself, may be forced to get up in that "Money Helicopter" and shower the Nation and World with liquidity to rescue the US Economy from fate as yet unknown, but in so doing, could ultimately lay the groundwork for an inflationary nightmare and truly decimated US Dollar.

The Trillion Dollar Problem - An Unfolding Nightmare Scenario of Epic Proportions

The real problem lies in what has been outlined for some time now by forward thinkers like Jim Rogers who have often dubbed this: The Ultimate Nightmare Scenario, that has been building for years and that is, in addition to the twin deficits, the Trillion dollars that has flowed into the US Economy through the US Treasury Markets, created Greenspan's "Conundrum", wherein the Fed temporarily lost its power to influence rates and slow the economy down, because the Bond markets were keeping rates artificially low and stimulating US Economic and Global growth and at the same time, the US Dollar was rising due to these large inflows coming from Japan where interest rates are at record low levels, thereby creating a money machine, where low interest money could be deposited in high return US Bond growth havens and this attracted recycled Petrodollars from Middle Eastern, and other Oil rich and fast growing nations the World over, especially China.

The problem now is: The winning combination of a strengthening US Dollar and rising US Treasury Bond markets over the past few years, or double whammy gains, has been turned upside down into a double whammy losing scenario where Bond values are deteriorating and so too, is the value of the US Dollar, which has declined at what has been approaching near panic selloff levels as Gold has been soaring.

The Haunting Dilemma Confronting the US - A Programmed Devaluation of the US that could be terminal

The phrase: Be careful what you wish for may apply to the intense and almost embarrassing politicking in Washington to revalue the Yuan:

What is particularly concerning is the attempt to program a revaluation of the Chinese Yuan against the US which is akin to a programmed devaluation of the US Dollar. This is a very dangerous development. The decimation of the US Dollar over the past month, may be just a taste of things to come... Because like that giant sucking sound, investors are dumping US Treasury Bonds and exacerbating the situation even more along with the Fed is like throwing Gasoline on the inflationary and Dollar devaluation fire as they make futile attempts to defend the Dollar by raising rates. The most troubling aspect of this policy is that another country tried this before with devastating consequences.

Deja Vu for the Mexican Peso - Only this time - It's the US Dollar and maybe the Peso all over again too...

In 1994, the Mexican Stock market and economy were the darlings of the investment World. Telmex, Telefonos de Mexico was the most heavily traded stock in the World and Telmex was so loved by thousands of investment funds, the desire to own this issue was insatiable. And then, one day, someone pointed this out on CNBC and within hours, began one of the most brutal unravelings of a stockmarket boom ever, as Telmex was summarily decimated in a selling frenzy of devastating proportions and the entire country unraveled with it at lightning speed, as the Mexican Peso, which was now accelerating its programmed decline beyond its "controlled parameters", began to accelerate down and increasingly sliding slope towards a cliff edge and as World speculators began to pound the peso into a death spiral, money was flying out of the country in a mass exodus in spite of raising interest rates to as much as 100% to defend the currency. Ultimately with no-one willing to step in and stem the tide, the Peso eventually found its own level and fell from the equivalent of 2,800 pesos to 1 US Dollar, to about 14,500 or so before rebounding some to a mean of around 11,000 or 11 "New Pesos" with 3 zeros removed, where it is at today...

Every time we see that US Dollar chart versus the Yuan depicting the Dollar's programmed decline, we get those shivers down our spines, because just as happened with the peso, the peso chart steepened and accelerated towards that cliff edge and ultimate point of no return. And, that's not all: Remember Argentina? They could be Argentinizing China in the process and that in of itself, could have very bad tidings as it could plunge China into a recession or worse and that is the last thing anybody needs today is 1 Billion unhappy people out of work...

Jim Rogers Expects $1,000 an Ounce - Louise Yamada's $1,000 call gets good company as it's joined in increasing numbers

If the Precious and Base Metals moves of the past months are any indication, they could well be interpreted as a warning shot across the bows of greater things to come, of a real out of control inflationary skirmish or even an all out inflationary war... And as for the Dollar's Peso scenario... Never say never. It's happened before and the once almighty US Dollar has no divine right to remain so. We have arguably been committing the old same sins we were scolding our Latin counterparts for committing in the Eighties and Nineties, and now we're pretty much compounding those: As Winston S Churchill once proclaimed: "We shape our houses and they shape us"... In other words what we over-create can come back and destroy us. Or as he also said: "Those who fail to heed the lessons of history are doomed to repeat them".

The Trillion Dollar Killing™

Who will be the winners? Who will be the losers?

And who will be the Masters of the Golden Domain?

The losers will be more likely those who are left holding US Dollars, especially, if anything like what happened to the Mexican Peso were to happen to the US Dollar, the ramifications would be apocalyptic to say the least. Although houses held their values, people could not maintain their mortgage payments. Just as in Texas in the late 1980's Oil bust the people walked away from the houses they couldn't pay for and left the state. In Mexico the same thing happened and most of the banks that were in dire straits had to auction tens of thousands of foreclosed properties in cities like San Antonio. The real winners will be those who are exposed to Gold and Gold related investments such as Gold mining stocks, as Gold and especially Gold stocks could soar exponentially versus a death spiraling US Dollar, that in all likelihood would be compounded by a crazy mad Global scramble to dump US Treasuries and repatriate funds out of Dollars and into Gold.

On one side of this trade will be a Trillion Dollar Killing and maybe one of the greatest windfalls in history, the other side staggering losses.

In 1995, the US bailed Mexico out of its difficulties, in what might have been preventable if enacted sooner. But who will bail the US out? Since the US is the lender of last resort and largest economy, that will be hard. That will be resting on the shoulders of one Ben Bernanke.

Trade Well

From the Desk of Savant