Weekend Edition

This is it. This is your last wake-up call...

 

At a recent breakfast, John Paulson, the most successful speculator of the last 20 years, explained exactly how the great inflation will come to pass. Says Paulson: The banks will resume regular lending – thereby releasing all of the excess money supply into the system – within six to 24 months. Two or three years after that, we will see 12% annual inflation.

 

Paulson is recommending investing in gold. He's already placed more than $4 billion of his firm's assets in the metal. Why is Paulson building his position so early if he doesn't expect inflation to kick in for four years? Scarcity.

 

Paulson notes, of the $200 trillion of investable assets in the world, only $800 billion is gold. You won't be able to get much of that $200 trillion into gold at any reasonable price. But that won't stop people from trying.

 

 Here's the part that sent a chill down my spine. At this breakfast, Paulson also gave a rare insight into what he's doing with his personal money. Apparently, his fund offers a special option whereby you can invest using gold. According to someone at the breakfast table, you convert your cash into gold and buy into the fund using bullion. When you cash out, you are paid in gold at the value it is worth that day. Paulson is 100% invested in this style.

 

When the world's most successful speculator would rather be invested in his own fund via bullion instead of dollars... you gotta wonder why you're still carrying greenbacks in your wallet.

 

 "Most people wouldn't consider it a raise," according to Julie Gibson, a GM spokeswoman. Really? If you made $1.26 million last year and were going to receive $5.45 million next year, what would you call it?

 

GM is raising CEO Fritz Henderson's pay by that much as ordered by the U.S. government under guidelines for recipients of U.S. bailout money. Does this make any sense? Of course not...

 

When it comes to salaries, we prefer to mind our own business. We pay some of our employees sums that outsiders would probably consider outrageous. On the other hand, we know our compensation strategy is one of our core competitive advantages. (If you pay peanuts, you're going to end up with a bunch of monkeys.)

 

But we've never asked Uncle Sam for a penny. And we wouldn't accept a penny from that dirty old man under any circumstances. So for now at least, we can pay our employees whatever we want. I wonder how much longer this will be the case...

 

 Still, on Wall Street, the government-led charade on cutting executive pay continues... The Head Nudge, Feinberg, has capped executive salaries at $500,000. But everyone knows salaries on Wall Street mean nothing. Lloyd Blankfein, Goldman Sachs' CEO, only made around $600,000 in salary last year. Meanwhile, his total take home was closer to $50 million.

 

Those salaries aren't buying the Ferraris and vacation homes on Nantucket. And those salaries aren't funding tens of millions that Wall Street pours into political "donations."

 

The truth of the matter is plain to see: Washington and Wall Street aren't sitting on opposite sides of the table. They're sitting on the same side. Washington needs Wall Street to go along with its money printing and its deficit spending. (You don't see any major banker talking about gold.) And Wall Street needs Washington to socialize the risks of investing with inflation and bailouts... otherwise all of them would go bust once a generation.

 

So they're sitting together at the table. And what's for dinner? You and me, my friends, you and me.

 

 Insider selling last week nearly tripled from the previous week to $846 million ($330 million of which was media mogul Sumner Redstone dumping his stake in CBS)... Meanwhile, insider buying was a paltry $14.7 million, down from $32 million the previous week.

 

The message coming from corporate executives is clear: They believe their companies' shares are overvalued after the recent rally, and they're cashing out before the next leg down.

 

On a similar topic, an investment banker friend of mine said his firm is almost exclusively doing equity offerings now... All of the publicly traded firms are calling him, trying to tap the equity markets while share prices are bloated and investors' risk tolerance is on the rise.

 

When corporate insiders – who know more about their companies than anyone else – are selling and Wall Street is buying, watch out.

 

Regards,

 

S&A Research

 

 

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