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February 26, 2007

The Zaniest U.S. Election Campaign of Modern Times
by Martin Weiss

2/26/2007 8:00:00 AM

Almost every non-dollar asset in the world is surging: Gold has just gone through the roof. Other natural resources are following. And foreign stock markets are beating the S&P by up to 11-to-one.

Meanwhile, the dollar is falling, and nearly every dollar-based asset is underperforming or sinking.

Yet few American investors are doing much about it. With rare exceptions, they have ...

• All their real estate in the United States ...
• All their cash in U.S. banks or money markets, and ...
• Nearly their entire stock portfolio in U.S. stocks.

Few have stopped to realize how severe -- or how serious -- the dollar decline has become.

And fewer still are connecting the dots to a new force that could drive the dollar down at an even faster clip:

The Rapid Transformation of
The American Political Scene

The time has come for all investors to ask two urgent questions:

Question #1. What will happen to the U.S. dollar as the newly elected Democratic Congress butts heads with the Administration, causes acute paralysis in Washington, and sends the message to international investors that the American ship of state is floundering?

Question #2. What will happen to the U.S. dollar as the presidential election campaign heats up ... massive, broadside attacks on the Administration reach a crescendo ... and international investors begin to see the entire country as torn by political infighting?

Yes, it may be too early in the presidential campaign to speculate about who might win. But it's not too early to analyze the financial consequences, regardless of who wins.

Yes, it would be naive to say that our election system is a structural weakness. But it would be equally naive not to recognize a series of new and unprecedented facts that threaten the dollar in ways that no one is now anticipating:

Fact #1. Even before political uncertainty bursts onto the scene, the dollar is already falling.

Fact #2. The U.S. is already running the largest trade deficit of all time.

Fact #3. The U.S. financial markets are already heavily dependent on foreign money. In 2006, for example, the U.S. government borrowed more money from foreign investors than from Americans. The U.S. bond market, real estate market, and stock market are all greatly sustained by the inflow of foreign capital.

Fact #4. Even with these big inflows, last year, the U.S. stock market was the 56th worst performing market in the world.

So imagine what can happen next as the United States is swept up in a blistering, mud-slinging, and potentially unsettling political era!

The key point to remember:

When overseas investors -- in Europe, Asia, or the Middle East -- decide which country to invest in, politics is often more important than economics.

They will seek to put their money in the countries that display less political uncertainty. They will look for a well-defined fiscal policy, a positive trade policy, and an inviting regulatory policy.

If they see -- or imagine -- anything different, they're likely to hold back their money. Or worse, they'll pull it out and send it elsewhere.

Will they find calmer seas abroad? Probably not. But political troubles abroad are already factored into their investment allocations. Political troubles in the U.S. are just beginning to become a factor.

The Earliest, Hottest, and ZANIEST
Presidential Campaign in Modern History!

I personally remember every presidential election campaign since Dwight D. Eisenhower defeated Adlai Stevenson for a second time in 1956. But never in my lifetime have I seen anything like this!

For the first time ever, we have a unique convergence of confusion-breeding circumstances:

• No incumbents in the race and none who will ever join. That, in itself, leaves the field wide open to the widest range of political scenarios you could think of -- or could not think of.
• No major candidates participating in public campaign financing. Never since the passage of the Federal Election Campaign Act (FECA) in 1971 have we seen all of the front-runners disavow campaign financing! And never before in history has a presidential election been so likely to be driven by so much money -- another wildcard that adds to the uncertainty of the outcome.
• No sign of unity in either major party. The Republicans are splintered by wavering loyalty to the president; the Democrats scattered by conflicting proposals for ending the war in Iraq.
• No time to plan and strategize. The presidential election is still nearly two years away and already the campaigns are off their launch pads, prematurely charting an uncertain course.

This means that it's going to be increasingly difficult for any candidate -- whether in the center, on the left, or on the right -- to make meaningful mid-course corrections. It may also mean that, with any unforeseen changes -- in the economy, the Middle East, or the public mood -- soaring campaigns could crash and burn. Even the most popular early entrants to the race could get bounced out of the game.

• No candidate with a viable solution to the one problem that's foremost in the minds of virtually all voters: The war in Iraq.

Consequently, every candidate is ultimately vulnerable to the single question that could drive him or her to the wall: "Regardless of why we went to war, regardless of whether you voted for it, against it, or not at all ... what in the heck are you going to DO about it?"

The end result:

The earliest, hottest and zaniest presidential campaign you've ever seen ... or you're ever likely to see.

It's going to be dirty, messy and unsettling. It's going to drive American voters crazy and foreign investors crazier. And it's going to be almost impossible to forecast. But one thing seems certain:

The Republicans Are at a
Major Strategic Disadvantage

The Democrats can't get their act together. That's bad.

But the Republicans don't have an act to follow. That's worse.

The big issue that's tearing the Republican party apart: Loyalty to the president of the United States of America.

If you're a Republican, how do you tell a voter that you support the president but don't support his policies?

• Could you say you're disloyal to the president? Of course not. The only thing that might be more damaging to your base would be to declare your disloyalty to the nation.
• Could you say you're fully behind the president's policies? Sure. But with the president's approval rating at 33%, that's not exactly going to earn you a big crowd of enthusiastic voters.

So you're stuck. And until you can find your way out of this dilemma, you're likely to twist in the wind.

Meanwhile, the Democratic front-runners are forging ahead. They're raising their visibility. And they're raising big MONEY. They have not yet proposed a viable method for getting us out of Iraq without disastrous consequences. But for now at least, most of their supporters seem content to just find someone -- anyone -- that can echo their personal frustration with the war.

That's the not-so-little nuance which is putting the Republicans at a significant strategic disadvantage at this juncture.

So, with this backdrop, it's not too early for you to ask:

What Might Happen to Your Investments
If the Democratic Congress Grabs
The Reigns of Its New-Found Powers?

What Might Happen if It Becomes Almost
A Certainty That the Democrats
Will Win the Presidency?

Before you answer, consider these realities:

1. Historically, nearly all presidential candidates pander to their political bases in the early stages of the campaign. Once nominated, they try to convince the rest of the voters that they are not as extreme as they appear. Then, when in office, they often flip-flop again, leaning back toward their political base.

2. Right now, none among the current crop of leading Democratic contenders is running as a "new Democrat" moderate in the mold of Bill Clinton. Quite to the contrary, they sound more like old Democrats, in the mold of a Lyndon Johnson or Jimmy Carter in office.

They want to raise taxes, boost government spending, and strengthen government regulation. Before they follow in the footsteps of a Bill Clinton, they want to reverse the course taken by George Bush.

That means you can expect a Democratic Administration more like the Carter years than like the Clinton years -- even if Bill Clinton himself winds up back in the White House as the nation's First Husband.

You may think I'm just speculating. But the fact is I'm basing my analysis on the ratings of the four most widely respected business, taxpayer and shareholder organizations in the country ...

Citizens Against Government Waste (CAGW)

Profile: An outgrowth of the Grace Commission. Founded in 1984 by the late industrialist J. Peter Grace and syndicated columnist Jack Anderson. Describes itself as a "private, non-partisan, non-profit organization representing more than one million members and supporters nationwide,.

Stated mission: To eliminate waste, mismanagement, and inefficiency in the federal government.

Ratings: Since 1989, CAGW has examined Congressional roll-call votes to determine which members of Congress are voting in the interest of taxpayers. Although it tends to give higher ratings to Republicans than Democrats, some Republicans also score poorly. Example: Sen. Susan Collins of Maine who earned just a 38% rating.

Current ratings of leading Democratic candidates: Terrible. Senator Hillary Rodham Clinton of New York gets a lowly 17%. So do Senators Joe Biden of Delaware and Christopher Dodd of Connecticut. Meanwhile, Senator Barak Obama of Illinois and former Senator John Edwards of North Carolina rank even lower, with just 13%.

The U.S. Chamber of Commerce

Profile: The world's largest business federation representing more than 3 million businesses of all sizes, sectors, and regions. Founded in 1912, it includes hundreds of associations, thousands of local chambers, and more than 100 American Chambers of Commerce in 91 countries.

Stated mission: "To advance human progress through an economic, political and social system based on individual freedom, incentive, initiative, opportunity, and responsibility."

Ratings: The Chamber ranks members of Congress for key business votes set out in its annual publication, How They Voted. And it often gives high grades to Democrats that are pro-business. For example, David Scott of Georgia got a 74% rating and Sen. Ken Salazar of Colorado earned a 72% rating.

Current ratings of leading Democratic candidates: More generous than the CAGW, but still well under par: Clinton -- 35%, Obama -- 39%, Biden -- 44%, Dodd -- 39%, and Edwards -- 15%.

The National Taxpayers Union (NTU)

Profile: An advocacy organization established in 1969 by author James Dale Davidson to educate taxpayers, the media, and elected officials, on a non-partisan basis, regarding the merits of limited government and low taxes.

Ratings: Every year, it rates U.S. Representatives and Senators on every vote that it believes affects taxes, spending, and debt. Its own statement: "Unlike most organizations that publish ratings, we refuse to play the 'rating game' of focusing on only a handful of congressional votes on selected issues. The NTU voting study is the fairest and most accurate guide available on congressional spending. It is a completely unbiased accounting of votes."

And indeed, it does not hesitate to slam Republicans. Sen. Olympia Snowe of Maine, for example, gets a very low 35% rating.

Current ratings of leading Democratic candidates: Even lower than the already-low CAGW ratings: Biden and Dodd, 10% and 11% respectively ... Clinton 9% ... Obama 6% ... and Edwards a flat ZERO percent.

The American Shareholders Association

Profile: An advocacy group formed to protect the interests of American shareholders whose ranks have soared to more than 50% of the total population.

Ratings: Issued to members of Congress on the basis of how their votes impact the rights and interests of shareholders. It has given high ratings to some Democrats (such as 86% to Rep. Bud Cramer of Alabama) but tends to give higher ratings to Republicans.

Current ratings of leading Democratic candidates: With the exception of Biden's (30%), the American Shareholder Association's ratings are virtually in lock step with the NTU's very low ratings: 10% for Clinton and Dodd. Zero percent for Edwards. (No data for Obama.)

Bottom line: Even if some of these organizations have a partisan tilt, you cannot overlook their data and analysis. Nor can you ignore the likely consequences of a Democrat-controlled government:

Likely Consequence #1
Higher Taxes!

During the Carter Administration, the top federal income tax rate was 70%. During the Bill Clinton Administration, the top rate went from 31% to 39% -- where it has remained ever since.

So you can see the direction the country could go if we start down the Carter path!

Likely Consequence #2
More Regulation!

According to a report by the Small Business Administration, the burden that government regulation puts on the economy already reached $1.1 trillion in 2004 -- or $10,172 per American household. In a democrat-controlled government, expect even more.

Result: Businesses are leaving the country for friendlier, less Big Brother-like shores -- or not coming here in the first place.

For example, more large international companies are choosing to list their shares on the London or Hong Kong stock exchanges due to the regulatory burden imposed by the 2002 Sarbanes-Oxley Act. In 2005, only one out of the top 25 global IPOs took place in the U.S. Five years earlier, 9 out of 10 major IPOs were listed in New York.

Another reason to allocate a growing portion of your money to overseas investing!

Likely Consequence #3
More Government Spending!

On February 6, President Bush submitted his new $2.9 trillion budget to Congress, and Democrat leaders immediately denounced it for spending too much on Iraq and not enough on key social programs.

A week earlier, House leaders approved a $463 billion spending plan for the remainder of the fiscal year that froze some federal agencies at 2006 levels. But they included increased spending for veterans' health, education, scientific research, HIV programs and public parks, among other things.

The new temporary spending bill includes $3.6 billion more for veterans' health ... $1.4 billion more for housing subsidies ... $216 million more for the FBI ... $615 million more for Pell grants for low-income college students ... and more.

The FBI will get $6 billion, an increase of $216.6 million to fully fund 31,359 positions, including those of 12,213 agents and 2,577 intelligence analysts.

What would we see under a new Democrat president allied with a Democrat-controlled Congress? More of the same. Much more!

Already, Democrat leaders in the House have criticized Bush's new budget for cutting $95 billion over five years off of the government's major health programs, Medicare and Medicaid. They also didn't like cuts in low-income heating subsidies, Head Start for preschool children, rural health programs and the Corporation for Public Broadcasting.

Moreover, the creation of a new medical entitlement program will almost certainly be a priority of a new Democrat Administration in 2008. Everyone wants to see a healthier America. But a national health care system could be a monster waiting to be born.

Likely Consequence #4
Even Bigger Deficits!

Deficits are hardly unique to Democrats. Ronald Reagan racked up $1.3 trillion in on-budget deficits in eight years. George H.W. Bush saw $1.1 trillion in deficits in just four years. His son has so far managed to spend $2.3 trillion more than the government has taken in -- and he isn't even done yet!

What has changed, however, is that the structural deficits created by government entitlement programs -- Social Security, Medicare and Medicaid -- will create massive new deficits in the future, regardless of which party is in control.

Meanwhile, many Democrats have pledged not only to ensure no cuts or means-testing are introduced in these programs, but also to expand them and create new entitlements, such as Universal Health Care.

That's why spending on entitlement programs is increasing rapidly -- from 40% of total government expenditures today to an expected 80% by 2030.

And that's why Federal Reserve Chairman Ben Bernanke told Congress last month that "long-term fiscal imbalances" due to rising spending on entitlement programs such as Medicare and Social Security imperil the economy and future generations.

Result: Unless massive cuts are made in regular government spending or entitlement programs, or both, most economists expect government deficits to soar over the next decade.

Foreign investors will anticipate this trend long before it sets in. And more money will leave the United States for greener pastures abroad.

Likely Consequence #5
Higher U.S. Inflation!

Over the past 50 years, which political party controls the White House has generally made little difference in the ups and downs of inflation.

The big, outstanding exception: The Carter years!

That's when the inflation rate hit a postwar high of 13.5%. And that's when the U.S. dollar was in the gravest long-term danger.

I'm hoping and praying we don't go down that mine-infested path again. But even a modest slant in that direction can only hasten the decline in the dollar ... drive more investors to pull out of the U.S. ... and give foreign stock markets an even greater advantage over ours.

My Recommendations

1. It's still OK to keep a reserve of cash in U.S. Treasury bills. But,

2. You should continue to beef up your holdings in investments designed to rise with the dollar's decline -- based on gold, natural resources and the best-performing foreign stock markets.

3. For specific instructions on how to go for large profits overseas, make sure you don't miss the just-released transcript of our Weiss teleconference.

It was one of the biggest of its kind in history: Precisely 5,071 investors registered to call in. And the incoming call volume was so intense, it even overwhelmed one of the most robust teleconference providers in America.

So if you were not able to get in, giving you the transcript is my way of conveying my sincere apologies. And if you were able to get in, the transcript gives you a new opportunity to learn from the experience in a convenient, readable format.

I sent it to you Saturday morning at 8 a.m. Eastern Time.

The subject line was "Gala Edition: Immediate Global Opportunities."

If you missed it, be sure to check your inbox again right now.

Good luck and God bless!

Martin

Martin Weiss, Ph.D.
Editor, Safe Money Report
support@martinweiss.com

For more information and archived issues, visit http://www.moneyandmarkets.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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