There was an article on Yahoo describing the unemployment situation and comparing some of the statistics between the different states.  Some of the states with the highest unemployment rates include Nevada, California, and Florida.  The state with the lowest unemployment rate is North Dakota.  Can you figure out why this is?

The obvious correlation that I see is that the states with the highest unemployment rates are the ones that experienced the biggest boom and bust with the housing market.  When housing prices were going up at huge rates about 5 to 10 years ago, it was states like California and Nevada that saw the biggest housing boom.  Now that the housing boom has gone bust, these states have the worst unemployment.

A state like North Dakota, with the lowest unemployment rate, did not see a big housing boom in the last decade.  While prices were going up 20%, 30%, or even more in some areas, the price of housing in North Dakota was going up very little.  There was a minimal boom which meant a minimal bust also.

With my study of Austrian economics, along with just plain common sense, it is easy to see that the Federal Reserve was the primary cause of the housing boom.  The Fed artificially lowered interest rates and kept a relatively loose monetary policy.  Monetary inflation then translates into price inflation, but it gets directed into certain hot spots.  Housing was a natural place for this newly created money to go.

Low interest rates made borrowing cheaper.  In addition, a house is a hard asset and is therefore usually a good purchase in an easy-money environment.  In addition, the housing market is subsidized by the government in so many other ways, particularly when it comes to mortgages.  There are also other little things like the mortgage interest deduction on taxes that encourages home buying instead of renting.

The states with high unemployment actually show a real life example of the Austrian business cycle.  The Fed created an unsustainable boom that eventually went bust.  These were misallocated resources.  These resources, which included human labor, must now readjust.  This is the correction process.  This can take time, particularly when the government is interfering and trying to prevent the market from correcting the situation.

In conclusion, the Fed causes a lot of problems.  Libertarians particularly like to look at inflation and how it makes us poorer by making things more expensive.  But high unemployment in states that had a big housing boom and bust also illustrates the horrible effects of central bank policies.  The previous malinvestment that was caused by the Fed (mostly under Greenspan) is the primary reason that the employment situation is so bad right now.  It will continue to be bad in the future if the government doesn’t step out of the way and allow the correction to take place.

The volatility continues.  The Dow closed down over 400 points today.  Gold was up above $1,820 and is up again in after market trading.  With gold going up, stocks going down, and unemployment remaining high, it is an indication that the government’s policies are failing, which of course is no surprise to libertarians.

Meanwhile, Obama is going to announce his plans for another stimulus.  There is probably only one good thing that may come out of it.  He may propose to extend the payroll tax cut that will expire at the end of the year.  This is a good thing.  The government is running massive deficits and is headed for default anyway, so we may as well keep what we can now.

If Obama really wanted to help unemployment, he would propose the same payroll tax cut for employers.  A payroll tax cut for employees helps those who are working.  It lets people keep a little extra.  But in order to help unemployment, you have to decrease the cost of labor.  By reducing the employer portion of the payroll tax, it would make it cheaper for companies to hire people.  This would actually do something to help unemployment.  Of course, the politicians, particularly the Democrats, could never just “give away” money to big corporations.

I expect the rest of Obama’s “stimulus” to be horrible.  It will contain mostly welfare and government programs that will only make things worse.

The economy needs more savings and investment.  The economy needs a liquidation of the bad debt and previous malinvestments.  The economy needs less regulation.  While Americans try to pay down debt and increase savings, the government is ruining this by spending money and running up more debt.  This is making it almost impossible for any kind of real recovery.

Expect more volatility.  Day traders should be happy.  The stock market will continue its roller coaster as the market is not sure if there will be recession, price inflation, or both.  The bond market and the gold market are telling us two different things.  My guess right now is that bonds are correct for the short term and gold is correct for the longer term.  In other words, we will see a continued recession and then we will see significant price inflation.

It seems that China is in a boom that may go bust.  I was talking to people about this years ago.  I remember 4 or 5 years ago hearing some people say that China may go into a recession after the 2008 Olympics.

China has a reported price inflation rate above 6% right now.  I would not be surprised if that number were understated significantly.  Of course, this is price inflation.  Monetary inflation in China has been much higher in the last several years.

I am hearing more people today talk about the possibility that China is “overheated”.  This is absolutely true, but I just want to be clear on something.  The only reason that China is “overheated” is because of the previous monetary inflation.  There is absolutely nothing wrong if an economy grows 8 or 10 percent per year, as long as it is not part of an artificial boom.  In a free market economy with stable money, a huge growth rate of 8 or 10 percent does not mean that things have to slow down or go bust.  If the growth is built on real savings and investment, then the growth is real.

Unfortunately for China, much of its growth has been artificial.  There is no doubt that the Chinese people are far better off now than they were 3 decades ago or even 1 decade ago.  Some of this growth is real due to the semi-liberalization of the economy by the communist rulers.  However, as I mentioned, China has had significant monetary inflation over the last several years.

The Austrian Business Cycle Theory applies to China just as it would apply anywhere else.  The easy money policies of the Chinese central bank have created an artificial boom that is misallocating resources. This is why we see these new cities being built that are practically empty.  If China keeps increasing its rate of monetary inflation, then eventually they will go to hyperinflation.  The more likely scenario is that the Chinese central bank will slow down monetary inflation and there will be a severe correction.

For anyone who studies and understands Austrian free market economics, there should be little doubt that there will be a bust in China.  It will be China’s first major recession, since this is the first time that China has had any kind of significant economy.

The interesting thing to learn from the Chinese boom is just how long it has been able to continue.  Again, there were people five years ago predicting a bust.  While Austrian economics can help us in predicting that a bust will occur, it is almost useless as to the timing.

Remember this lesson when the price of gold goes through the roof.  A bubble can last a lot longer than people think.  When the day comes that it does go bust, be prepared and step out of the way the best you can.

Gold finished up today, closing above $1,780 per ounce.  After its big run in the last few weeks, it pulled back a little and now seems to be resuming its up trend.

A couple of weeks ago, I wrote that I don’t think gold is in a bubble.  With the movement this week, not only is gold not in a bubble, but it doesn’t even look like it is going to have a significant pullback any time soon.

My analysis of the economy and investments usually comes from a libertarian/ Austrian point of view.  I like to look at the facts and make judgements based on the fundamentals.  For this reason, I have been bullish on gold.  The Fed has tripled the adjusted monetary base in the last three years and the federal government is running a yearly deficit of $1.5 trillion.  These are enough reasons alone to be bullish on gold.

I am not usually a chart guy.  I don’t like to look at breakout points or moving averages.  With that said, even if we look at gold from this perspective, you still can’t help but be bullish.  Gold made a significant move during the recent stock market turmoil.  After hitting new highs (several times), it had a slight pullback.  The price has been consolidating and looks ready for another possible move.

Compare gold in the last few weeks with silver this past spring.  A few months ago, silver went parabolic.  It went up about 50% in a very short time span.  It went all the way to near $50 and then the bottom fell out.  Silver managed to lose 30% in the matter of days.  It snapped back to below $35 in an incredibly short time frame.

When you look at gold in the last few weeks, it looks much stronger.  It looked like it could go parabolic, but then it stopped and made a slight retreat.  It is not going to the moon in the matter of days, as silver did a few months ago.

Perhaps foreign central banks are putting a floor under the gold price and buying on dips.  There are also a lot of scared investors out there looking at gold.  Most people do not own gold, except for small amounts in jewelry.  Most don’t even own much in the way of stocks.

I know a couple of people who are looking to sell some gold (mostly jewelry).  Again, if we were in a bubble, people wouldn’t be looking to sell now.  I expect gold to go parabolic at some point, but we are not even close to the final run yet.  I think at some point, gold stocks will get hot.  I am not making a prediction as to the timing, but I am making a prediction (which I usually don’t like to do) that gold stocks will catch fire as investors look for alternatives.

Warren Buffett, one of the world’s richest individuals, wrote an opinion piece in the New York Times in which he called for higher taxes on the mega-rich.  This has been a standard line of his for years.  Buffett is an Obama lover and he is a statist (or do I repeat myself).

The results are in for the Ames Straw Poll.  Michele Bachmann won, while Ron Paul took a close second.  The spread between the two was less than 200 votes.  Tim Pawlenty came in third, but it was a distant third.  I think this just about puts him out of contention.  Although Romney finished 7th, he was not competitively trying to win.  You can see the results here.

As I blogged on Thursday, I think the race for the Republican nomination comes down to four people.  Those four are Mitt Romney, Rick Perry (who just announced), Michele Bachmann, and Ron Paul.  I think my prediction has become stronger based on the straw poll results.

If Sarah Palin enters the race, I don’t think she will win the nomination.  If anything, she will probably just take votes away from Bachmann.  They are both women and they are favorites amongst Tea Party conservatives.  I don’t think her entering the race would be damaging to Ron Paul, as his supporters are more libertarian than conservative.

As for the debate, I watched most of it on Thursday and it was a bit more interesting than past ones.  Pawlenty and Bachmann went at it and I thought that Bachmann got the best of him.  I think this was his last chance to perform well and he basically failed.  He had a few funny one-liners, but this is not enough to be successful.

Newt Gingrich came across fairly well, although I still think he is a fake.  He does not stand a chance because most people sense (rightly) that he can’t win against Obama.  So even those who like him realize that others don’t.

Rick Santorum has never stood a chance and that will continue.  He claims to be a wonderful Christian, yet he wants to bomb the Middle East back to the stone age.

Herman Cain occasionally sounds good when he is speaking libertarian rhetoric.  The rest of the time he comes across as vague and, quite frankly, stupid.

Jon Huntsman just comes across as creepy and he is another establishment favorite, except he has little chance.

Ron Paul had an interesting night at the debate.  I thought he would shine more with economics.  We are in an economic crisis and he has predicted much of what has happened.  He did not shine as much as I thought (or hoped) he would.  He nailed it when they were talking about Romneycare and the 10th Amendment.  He said that while it may be bad policy, the federal government should not go in with their guns to overturn state law.  Bachmann got this completely wrong, which should show libertarians that she is not a libertarian.

I thought Ron Paul shined the most when it came to foreign policy.  Of course, people who disagree with him will see things differently.  This is where he really distinguishes himself from the field.  When Santorum challenged him on Iran, Paul really showed off his intelligence when he pointed out that the Iranian conflict goes back to at least 1953 when the U.S. government overthrew their leader.

When it comes to the economy and fiscal policy, I think Ron Paul needs to challenge the other candidates more.  It was actually Santorum who pointed out that a majority of the budget is made up of Medicare, Medicaid, Social Security, and the military.  This makes it almost impossible to balance the budget unless you make huge cuts to one or more of these things.  But Ron Paul actually could cut enough to balance the budget.  It would be difficult for Michele Bachmann to explain how she would balance the budget.  She emphasized that she voted against raising the debt ceiling, but it is unclear what she would specifically cut to balance the budget.

In conclusion, I think we are down to four: Romney, Perry, Bachmann, and Paul.  This is great news for libertarians as we have a spokesman in the national spotlight.  Even if he doesn’t win, the country will be better off as more people move towards true liberty.

Tonight is a Republican presidential primary debate.  It will air on Fox News.  On Saturday, the Ames Straw Poll takes place.  Do not mistake this as a regular poll with a random sample.  The Ames Straw Poll is a better indication of a campaign’s organization and the loyalty of its followers.  For this reason, Ron Paul will likely do well.

It is impossible to predict what will happen tonight, but I expect the economy will be the big topic.  I’m sure Fox News will find a way to ask Ron Paul some bizarre question, but he will get his points across as usual.

I see the whole race for the Republican nominee coming down to four people at this point.  I never expected John McCain to get the nomination in 2008, but I do believe we are in a different era now, just 4 years later.

I expect the 4 main contenders to be Mitt Romney, Michele Bachmann, Rick Perry, and Ron Paul.  I do expect Perry to enter the race and to be a contender.  Even if Sarah Palin enters the race, I think it is unlikely she will get the nomination, although it would certainly make things interesting.

Romney and Perry are the establishment candidates.  Romney is out of favor with the Tea Party.  He has to defend Romneycare in Massachusetts.  Romney passed Obamacare in his state before Obamacare actually existed.  If there is one thing that unites the Republicans, it is their hatred of Obama and Obamacare.  How could Romney possibly be the nominee given this fact?

Perry is trickier.  He sometimes talks a good game.  He sometimes sounds libertarian.  He said he was open to the suggestion of Texas seceding from the U.S.  He was pandering to his audience at that time.  If conservatives look closely at his record (most won’t), then they would see that he has been horrible on some issues.  He has an advantage being the governor of a large state that is not struggling as much economically.  His rhetoric will fool a lot of people.  Just remember that this is the man who wanted, essentially, a forced vaccination program for young girls.

Bachmann is not favored by the establishment, but she would still be acceptable.  She would continue the U.S. empire.  She says she favors ending the Department of Education.  It is hard to say if she is telling the truth.  Besides that, she doesn’t offer much in the way of specifics.  I would be a little more impressed with her if she did.  She says she wants lower taxes and less spending, but she doesn’t really say what she would cut.  I fear Bachmann in the way that Reagan was bad for libertarianism.  She will espouse all of these free market principles, but her policies will not reflect her rhetoric.  Then the hacks in the media will say that her free market principles have failed.

Then we are left with Ron Paul.  The establishment hates him and his ideas.  They fear him.  They fear he is correct in what he says.  They fear the following that he has accumulated.  It is really unbelievable that he is polling in the double digits in many national polls.  For anyone in the libertarian movement prior to 2007, this should be really impressive.  This is the first time in modern day America that libertarian views are being heard by millions and millions of people.

The Ames Straw Poll is rather important.  If any one of the big candidates, excluding Perry, finishes less than third, then I think their chances will be low of getting the nomination.  It is very important, for those campaigning and participating, to finish in the top three.  I expect Ron Paul will be in the top three.

The stock market has been on a roller coaster ride in the last week.  The drops have been more than the ups.  This is very bearish news for the stock market and the economy in general.  Of course, if you have been paying attention and you understand Austrian free market economics, then none of this comes as a shock to you.

Even less shocking, although notable, is the huge run in the price of gold.  It topped over $1,800 per ounce today.  People are buying gold due to economic uncertainty and fiat currency uncertainty.  The interesting thing is that the other metals have not been on this same run.  Even gold’s cousin, silver, has not done that well.  If silver is the poor man’s gold, then I guess rich people are buying right now.

The other notable thing is that, as of closing today, an ounce of gold is worth more than an ounce of platinum.  I discussed this in a blog post last month.  Platinum is typically more expensive than gold.

In today’s environment, it is easy to see why gold is doing so much better.  Gold has a history of being money.  Platinum is more of an industrial metal, often used for cars.  Gold is primarily used for jewelry and investment.

Another factor right now is the fact that many foreign central banks are buying gold.  They are certainly not buying platinum.  Bernanke says that central banks hold gold because of tradition.  But the reason it is tradition is because gold acted as money for thousands of years.  Central bank buying is probably helping in this gold explosion.

I am even more adamant now that platinum might be a good speculation at this point.  The gold to platinum ratio is now over 1 to 1.  While ratios don’t always mean anything, it can be useful for speculative purposes.

I think the last week has confirmed my overall strategy of investing in a permanent portfolio setup, as described in Fail Safe Investing.  I am also an advocate of holding far more gold than silver.  I am not against silver as a speculation, but gold should be a rock in your portfolio.  It is there for more stability and a hedge against inflation.  Silver is much more volatile.

So while I am still advocating that a majority of your portfolio be in the permanent portfolio and that most of your precious metal holdings remain in gold, I think there are opportunities for speculation.  If you want take a very small portion of your investments and buy platinum, I think now would be as good of a time as any.

After my last post on platinum, there was an anonymous comment listing ETFs and ETNs.  If you don’t want to buy and take possession of the actual metal, then PPLT looks like a good alternative that you can easily trade through a brokerage account.

After yesterday’s huge drop in the stock market, the Fed met today and released its statement regarding the economy and its policies going forward.  You can read the transcript here.  It is a short read.

The Fed announced that the current conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”  I have written about the federal funds rate before.  The Fed is not really controlling this rate right now, at least through the money supply.  The banks have piled up massive excess reserves and most of them don’t need overnight loans.  This has kept the rate near zero.

This statement didn’t mean all that much.  If anything, it should really be a bearish sign that the Fed expects to maintain this policy for at least 2 more years.

The transcript does say that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings.”  This is an indication that they plan to have a stable money policy.  As usual, they leave open the possibility of adjusting their strategy as things progress (or regress).

The market had a slightly negative reaction after this release, but then the stock market exploded in the last hour of trading.  The Dow went up about 600 points in the last hour, closing up more than 400 points for the day.  Of course, this still did not erase all of the losses from yesterday.

Interest rates went down.  It is ironic that rates on government bonds have gone down since being downgraded from AAA status from S&P.  If you want to refinance a mortgage and you procrastinated last year when rates were way down, you have another opportunity.  If you can get a 30 year loan for about 4%, why not take it?  If you stay in your house for a long time, your last payment in 30 years will be practically nothing.  Make inflation your friend, even though it is not.

It is impossible to predict where the market will go from here.  I expect a lot more volatility in the short term.  Ultimately, it is going to depend on government policies and, even more so, Fed policies.  It is important to keep an eye on the adjusted monetary base.  This is far more meaningful than the federal funds rate.  The Fed actually controls the monetary base right now.

The bottom fell out of the stock market today, with the Dow falling more than 600 points.  It was even more brutal for the Nasdaq and S&P 500, which were both down over 6 and a half percent.  This came after news from late last Friday that the S&P was lowering the U.S. government’s AAA rating.  Today, the S&P announced more downgrades, including some municipal debt.  The news keeps getting worse and worse.  Meanwhile, gold exploded today, hitting new highs above $1,700 per ounce.

For anyone who has followed my speculation strategy of going long in gold and silver and shorting the stock market, you have done very well these last few trading days.  If you have a lot riding on market shorts, you might consider taking a small amount off the table.  While I expect the stock market to continue down for now, you never know if the Fed comes out with an announcement of QE3 that could drive the market right back up.

Of course, if the Fed does announce another massive round of quantitative easing (money creation), then this will be even more bullish for gold.  The Dow to gold ratio is now less than 6.5 to 1.  In other words, you need a little less than 6.5 ounces of gold to buy one share of the Dow.  I have no magic ratio of what would make a good buy on the Dow or a sell on gold.  There will continue to be roller coasters, but I think a Dow to gold ratio of 4 to 1 or less might be a good indicator.  I would be very surprised to see it hit 1 to 1 any time soon, but we really are in unknown territory.

I think the S&P downgrade was largely symbolic.  The U.S. government should have been downgraded a long time ago.  The three major agencies (S&P, Moody’s, and Fitch) are basically granted a monopoly by the government.  They are part of the establishment.  I’m not sure what this tells us here.  Perhaps the government will use this downgrade as an excuse for more taxes or more so-called stimulus.  Or perhaps things are so bad that even the S&P could not ignore it.  Whether the government will ever officially default is unknown, but it defaults almost every day by devaluing our money.

Besides gold, the other investment that did well today was bonds.  The 10 year yield was down to about 2.34%.  There is a tug-of-war going on between gold and government bonds.  Investors are seeking both for safety, but for different reasons.  Investors in bonds fear a major recession.  Investors in gold fear major price inflation.  Both sides may be right.

The Keynesian policies of this administration and the one before have put us in this situation, along with Congress and the Fed.  The Fed has tripled the monetary base since 2008 and we have seen deficits of around $1.5 trillion.  All of this and the economy is already going back in the toilet.  This is what happens when the government does not allow the correction to take place.  With all of the spending, debt, and money creation, things are only going to get worse.

My biggest fear right now is that these politicians will take a page out of Paul Krugman’s playbook and say that the only reason the economy is not recovering is because the previous stimulus was not big enough. If the government spends even more and the Fed goes crazy with QE3, then we could get hit really hard with price inflation.  Ron Paul and Peter Schiff may be proven right sooner than we could have imagined as both have warned of severe consequences for the U.S. dollar.

Just remember that the name of the game right now is to keep what you have.  If you can make any extra profits while maintaining your purchasing power, then consider yourself lucky or really good.