Seriously, the governments of the developed world are pumping up the balloon of debt bigger and bigger while postponing the inevitable pop for less and less time. European politicians, without asking their citizens, have now promised nearly $1 trillion for backstopping their member nations. They will accomplish this by buying up distressed sovereign debt - like Greece’s - and by doing so drive down the borrowing cost of issuing new debt. They state also that they will sterilize this by withdrawing liquidity from the system at the same time. So the net effect would be to drive down the cost of borrowing for countries like Greece while incrementally tightening credit conditions for everyone else. Should the loans fail, i.e. should Greece default and leave the ECB stuck holding a bad loan, then the EU governments, including those who are in debt trouble, are guaranteeing the loans.

A couple of points warrant mentioning. First, the people of those countries like Greece are still expected to endure severe belt tightening. As we have seen from the pictures of the activity in Athens this isn’t going down well. Expect that they will turf out the current government and replace it with one that refuses to continue with the plan and threatens to leave the EU.

Second, the German populace did not want to support Greece with aid in the first place and Merkel just lost the North -Rhine-Westphalia elections so she has lost control of the upper house. There will need to be votes taken in parliament on this and it is not clear they will pass. There also may be constitutional challenges. So beyond the initial pop it is unclear that this plan can actually be executed without the ECB being forced to simply print money to cover the bill. This is obviously inflationary.

While stock markets rallied strongly today the currencies, after an initial short covering spike did not move all that much. Bonds corrected but that was expected technically anyway. Gold was down but not a lot. So the flight to safety trade did not react to an extreme degree the way equities did. The equity rally in fact seemed very reminiscent of the bear market one-day-wonder rallies of 2008 - largely short covering.

The world has not seen a situation before with our current conditions. In the past, say Wiemar Germany, Germany and to a lesser extent Austria and some of their eastern neighbors suffered hyper inflation. But their main trading partners did not. Further, hyper inflation due to currency debasement was the primary problem. Debt was not, unemployment was low, the banks were solvent. What we have now is a global case of sick banks, high sovereign and personal debt, high unemployment in many developed nations, and a debasement of multiple, major currencies. Further the same nations debasing their currencies have aging populations. It is difficult to see then how we get a roaring stock market and booming economy out of this like Wiemar Germany had*. It seems more likely to us that we get high inflation without the benefits as an aging population seeks to preserve its money in gold and other tangibles and eschews paper assets.

Time will tell. For now we are exposed only to gold either directly or through ETFs. We own no stocks nor do we intend to for some time. Our view is that the equity markets are headed down and the EU’s actions will only further serve to drive people into something that they perceive as free form manipulation by politicians.

*See: “The Economics of Inflation - A study of Currency Depreciation in Post-War Germany” by Constantino Bresciani-Turroni, available on Amazon.

Energy stocks are getting killed as investors sell everything that is energy related in response to the gather catastrophe in the Gulf of Mexico. Make no mistake, until that well is caped - at least a month from now, the ramifications of this spill cannot be over emphasized. As it gains size it will increasingly surround more and more operating rigs and installations forcing them to shut down. An oil or gas rig is a dangerous place at any time but surrounded by oil makes it even more dangerous. Two rigs were shut down this weekend - there will be others. If any pumping facilities are impacted then oil from rigs unaffected by the spill could lose their ability to get oil to market. If the shipping approaches to major harbors are closed we will see transportation disruptions. The fishing industry is obviously in serious trouble. All-in-all - do not underestimate the impact.

Once the dust settles a little the market should start targeting companies a little more selectively. We should see higher oil and at gas prices from this and the domestic, on-shore US producers should out perform the off-shore Gulf of Mexico lot. Companies involved in supporting the clean-up should do well. BP has unlimited liability and it comes directly from their pockets. There is no insurance company.

As for the broader market it is looking very weak at the moment. Our bet is lower prices before we rally again. Use this as an opportunity.

Following are the annotated charts for: USD, Gold, SILVER, HUI, WTIC, XLE, NYSE

USD 04/30/2010

Gold 04/30/2010

Silver 04/30/2010

HUI 04/30/2010

WTIC 04/30/2010

XLE 04/30/2010

NYSE 04/30/2010

Gold rocketed higher today though the gold mining stocks and silver really didn’t follow suit. Nonetheless, with the rise in the US dollar, gold rose in all major currencies and clearly broke out of the recent consolidation. The next stop is the previous high. This move could take us to new highs if the contagion does in fact spread.

So what about Greece and Portugal? We are frankly somewhat surprised that the Europeans and the IMF have taken so long to get specifics on the table and clearly show the market that Greece has the cash. The longer they fiddle around the worse it gets. In addition there is increasing talk - generally from hedge fund managers who we suspect are short Greek debt, that the IMF will insist on a restructuring of the debt and bond holders will lose out. It seems inconceivable to us that the Europeans would allow that to happen but you never know.

As a result we see a few scenarios as likely. In all cases we expect markets to remain lower into tomorrow and likely through the Fed announcement in the afternoon.

If the Europeans quickly announce the details of a rescue with cash forthcoming and no restructuring of debt required then we could see a rally globally. There are significant short positions out on Europe and they will provide the fuel for a rally.

If on the other hand no package is forthcoming quickly or if a restructuring emerges then this sell-off could have further to go. If Portugal, Spain, or Italy then appear to have issues, this sell-off could turn into a rout.

Consequently, we are holding pat in out positions for the moment. If we see more weakness leading into tomorrow afternoon, then we will begin pruning positions in energy as necessary. We anticipate no changes in our precious metals positions (nearly 33% of the portfolio now).

As we write this Asia is down 2-3%, oil is down and the dollar is up again. Oddly, S&P futures are just about flat to positive.

We are long energy to the tune of about 40% of our portfolio, and precious metals to the tune of nearly 30%. While we still have 20%+ in cash we are rapidly putting this to use. We especially note that many energy stocks have significant short positions against them which can result in rapid moves higher. FTK moved over 20% Friday alone and is not done. This was a $50+ stock before the crisis, after a 20% move it trades at $2.11. Others with large short positions are GDP, ATPG, SD, BPZ, WNR to name a few.

So our thesis going forward is long oil&gas producers, services, and drillers, and long precious metals and their miners including both gold and silver. We expect this trend should continue for some months - at least into this fall.

Now, PPI numbers were unexpectedly high in the US. We anticipated this but as usual the market shrugged it off as the core PPI, the PPI excluding everything going up in price, was tame. Well folks, we can’t have it both ways. If the broad PPI is rising and the core is not then companies are getting margins squeezed and this rally will fail as earnings begin to disappoint. Or, as we expect, the core PPI and CPI will start reflecting the costs being passed on to the end user and we will see inflation taking off. As we have noted a number of times, the rest of the world, and significantly many Asian countries, are experiencing rising inflation now. We think it is looming here. As we write this tonight there is an article on Bloomberg entitled: “Bond Traders Declare Inflation Dead.” Hubris if ever we have seen it.

As for the other market issues out there they will continue to cause ructions for some time. Goldman is not very important - except in their own minds. They will eventually fire Blankfein who has to be one of the worse front men anyone can have when dealing with political and populist issues and hire someone who has more sophistication. They will pay some fines and have certain businesses stripped from them. They will cry and complain that this is the death of America - it’s not. A self-serving financial system is not in America’s interest. A rock solid financial system that supports the broad American economy and is not a systemic risk to it is in America’s best interests.

As for Greece - it is surprising to us that despite the fact that the European Union and the IMF are going to actually bail Greece out the markets are still not cutting them any slack. That seems to speak to a deeper concern about the other nations and sovereign debt issues in general. This eventually benefits gold.

Here are the annotated charts for: USD, WTIC, XLE, Gold, HUI, Silver. Please study them carefully.

USD 04/23/2010

WTIC 04/23/2010

XLE 04/23/2010

Gold 04/23/2010

HUI 04/23/2010

Silver 04/23/2010