The economic tides are shifting east and America is fading further and further away from the shores of GDP growth. Igniting the economy and raising GDP is the key and only chance, excluding hyperinflation, the US has at paying off its debt. Although the US appears to be sliding back into a recession, we believe continued monetary stimulus and higher inflation will drive commodity based investments over the short-term. If recent political history has taught us anything, it's that a recession will mean more monetary stimulus and more debt.


Special Note: Our team is keeping a close eye on America's money supply as we believe the Fed will continue to flood the markets with USD to devalue the currency. Inflation will drive the markets and more specifically commodities, higher.


US debt has rocketed above $14.6 trillion and continues to rapidly rise. It is believed to be increasing by as much as $80 billion per week. The last thing you want to be holding when this house of cards collapses, is US Dollars. Keep in mind, there are record levels of cash sitting on the sidelines that need to be used. If we have a few weeks of stronger economic data, which will stabilize markets, we believe the sidelined cash will head back into equities. A robust September and October across all major exchanges is still likely.


Stimulus?

If the Fed and US government fail to stimulate the economy, and fail to raise GDP growth, interest rates will eventually rise as one country after another lower their participation in treasury auctions. This will force the United States into a default scenario, which would be a 'game over' situation for many other countries as well. We still believe the US can avert this disaster, it will however require a herculean effort. The Fed and US government will become more and more desperate. Let's hope they make wise decisions and that Corporate America begins to take calculated risks, in order to grow small businesses once again.


Standing Alone At the Top

Gold hit an all-time record high Friday, as it has repeatedly done in the past couple weeks, climbing above $1880 an ounce. Gold is on a tear, just completing its longest run, 7 consecutive weeks, since 2007. Dennis Gartman, from the Gartman Letter, wrote on August 19th that "Gold is the currency of the world at the moment, with the world convinced that the monetary and fiscal authorities are likely to do nothing right and everything wrong when it comes to resolving the world's current fiscal problems."

It's hard to disagree with this statement. Gold is quickly becoming the only trusted, un-manipulated form of currency in the world.

Gold is the best performing asset in the world and has been for the past 10 years. It is becoming harder and harder for anyone to ignore this fact. Gold is still tremendously underinvested in when compared to other asset classes. This is going to change.


The China Angle

We're sure you remember China and Russia raking the US through the coals following the debt downgrade. We have an interesting theory with respect to China and its long-term tactics in dealing with the United States to reach its ultimate goal. Remember, at roughly $1.2 trillion in US Treasuries, China is the US' largest foreign creditor and is second only to the Federal Reserve.

Obama recently sent Joe Biden to give reassurances to the Chinese regarding the safety of US Treasuries.

A day after S&P cut U.S. debt to AA+ from AAA, China's official Xinhua News Agency said the U.S. government must realize it can no longer "borrow its way out of messes of its own making."

China and its various news outlets have repeatedly called for an examination and reconstruction of the world currency.


Two weeks ago, following the downgrade, China's leading newspaper, People's Daily reported, it was time for Beijing to consider using its "financial weapon" against the United States. This is just one of many harsh comments that China and its government-run news agencies have been dishing out. The official Xinhua News Agency, recently called for "International supervision over Washington's printing of dollars" and went on to suggest the consideration of a new international reserve currency to replace the greenback "to avert a catastrophe caused by any single country."


China cannot make this happen on its own - it doesn't have enough high-powered allies. If however, it continues to lend to the United States, it is in a way fuelling America's out of control addiction to debt. Is China doing the US a favour by lending it money or is this a self-serving act in order to secure China as the new World Leader?


We believe China's plan is not to defeat the US by military force, but from a financial standpoint, by literally lending the US into bankruptcy.


If the US goes 'bankrupt' China will have the largest and most powerful economy on earth. This will give China the chance to determine the new world reserve currency. Though many are hesitant to believe that this might occur, it is a very possible outcome.


Flash forward 3 or 4 years from now. The US is in the midst of default. Sovereign debt has expanded to roughly $20 trillion. Interest rates have been on the rise for 6 months to a year. The faltering economy has yet to rebound. The US would no longer be able to make interest payments and would be forced into default. Who better suited to take the responsibility of the world reserve currency than America's greatest creditor and the owner of the largest economy on earth?


Do you think China would sacrifice 2 or 3 trillion dollars (of its reserves) to become the most powerful economy on earth and control the world's currency?


We do.


Imagine how easy it would be for China, in a period of crisis because the US is defaulting, to sway other countries into following its lead. A refusal to follow its lead could mean no trading with the largest economy on earth.


Obviously, this is a completely hypothetical scenario we hope does not happen, but it can't be ignored. There is also one critical component holding it back from happening. At the moment, China's workforce depends on American and European consumers. Consumer demand from the western world has been the primary factor of China's growth over the past decade. This is slowly changing. If China's middle-class continues to inch out of poverty and can create true domestic, consumer demand, the story could change and history along with it. China would no longer need the US consumer and that would truly be a scary thought.

What led us to assume China might actually be smiling behind closed doors, as it loses money week after week buying US Treasuries, were recent comments from Premier Wen. During Vice President Biden's visit to China, Wen stated, "In spite of the difficulties facing the U.S. economy at present" he believes the U.S. can weather the economic downturn and "get its economy back on the track of healthy growth."

Obviously he has to remain publicly positive, but does he really believe this? Has America given him any reason to believe this? In the past decade its debt has ballooned $12.7 trillion.

Our team is remaining positive as September and October are historically excellent months for the stock market. With an election looming we know the talking heads in Washington are going to do anything and everything to see the unemployment rate fall. Obama is planning a big speech in early September to introduce his new plan to create jobs - something we had predicted. In these volatile markets, don't forget how fast the sentiment and momentum can change.

All the best with your investments,,