I wanted to share with you a segment of my Mining Speculator hotline I wrote on January 18th to address some of the recent changes in the stock market. In that Hotline I said the following:

I have been concerned for several months now that we could be approaching a point where the second shoe is about to drop on the liquidity crisis. For me the mid-August sell-off last summer was just a warning sign of what is coming.

The Fed most certainly is having some emergency meetings to see if anything can be done. Let's hope this is the case. The first shockwave of 2008 however may be upon us. Unfortunately, we are at one of those critical moments where stocks of all kinds may start to sell-off as we see a rush for the exits in order to raise cash.

The junior mining share markets look like they are going to take a nasty drop as well. Don't panic and sell. I sense this one is going to be worse than the mid-August meltdown so be patient and just hang in there.

Just three days after saying the above, our stock market did indeed take a "nasty drop"; much to the chagrin of investors worldwide.

To understand what is happening with our investment prices and why, we need to delve into a serious discussion on economics, politics, and what governments are doing. The reason for this I have stated before but it needs to be reinforced, particularly during moments like we are currently experiencing.

The prices of our stocks are mostly determined by economic conditions, and economic conditions are created by politics. So in order to know what our investments will do, we must understand what governments are doing and will do.

It would be nice if we could be successful with the junior mining stocks based just on the fundamentals of that market, (i.e. evaluating the companies on their merits, supply/demand scenarios, visiting the properties, talking with the management teams, etc.). But this is not the case, as we have just witnessed this past week with good companies, and great stories selling off in droves. One conference attendee at Vancouver I talked to aptly described the unfolding scenario at the time as "trying to catch falling knives."

So let's dive into the economic and political issues that are running the show at the moment and try to gain some clarity on what we need to do about it.

Bailing Out the US and World Economy... and What About the Stock Market?

Is there any doubt in your mind at this point as to what extent the Fed, or any Central Bank around the world for that matter will go to in order to keep the existing economic order from collapsing? From what we have just witnessed in the past several weeks you should have no doubt whatsoever concerning this point. The system has to be highly manipulated in order to keep things going. From the false economic data that is published routinely by governments to keep you in the dark, to their willingness to flood the earth with money for the sake of bailing out their banking friends who have major problems, you should clearly understand what a tenuous situation we are facing.

In the past week or so the US Treasury and White House in collusion with the Federal Reserve made dramatic moves to salvage the stock market and economy from collapse, indicating even more just how bad the situation has become.

The Fed made an emergency interest rate cut of ¾'s of a point. This is on the heels of two back to back aggressive ½ point cuts within the last few months. The last time the Fed made such a dramatic ¾ point cut was back in August of 1982. And it looks like another rate cut of at least ½ point is on the way. This would take interest rates in the U.S. to 3% while Europe is raising rates. Anybody see a problem here for the U.S. dollar?

Both Bush and Bernanke touted economic stimulus packages to ease stock market fears and avoid talk of a recession but neither worked as stocks worldwide sold off anyway and the reality of the "R" word hit home. And right on cue to bail out the plunging stock market, we now have the official naming of what many have referred to over the years as the PPT (Plunge Protection Team). I had a good laugh this past week when the Washington Post wrote a piece naming the organization that uses government money to intervene in private markets as "The Working Group on Financial Markets".

In that article the Post said this group is composed of the secretary of the treasury and the Chairman of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. In addition to the permanent members who attend these meetings, the head of the President's Economic Council, the chairman of his Council of Economic Advisors, the comptroller of the currency and the president of the New York Federal Reserve Bank often attend as well.

The Stock Market Lessons To Be Learned from all this...

The general stock market in the U.S. has to be primed again and again artificially to keep the whole thing going. What we saw last week on the part of this "working group" was nothing short of outright massive buying as the selling panic threatened to cause the biggest single day drop in the Dow history. As the Dow opened last Tuesday morning to a 400 point drop, it looked like we were headed to a 1000 point loss similar to those witnessed the previous two days in Europe and Asia. But miraculously, the tide was suddenly turned as the "working group" did its thing.

How much longer they can continue to keep all the financial balls juggling in the air is the big question, but it looks like they will pull it off yet again at least for the moment. Should we be thankful for this reprieve or should we be upset that free markets are not allowed to take their due course? Just as a forest needs a burn every so often to remain healthy, trying to avoid or postpone the inevitable consequences is just making things worse.

In my opinion, the pain and consequences are coming regardless of government intervention.

The fundamental economic problem that has engulfed the U.S. and world economy is the mountains of bad debts and insolvency with banks and large financial institutions. This debt must be dealt with. It must be cleaned up. Providing liquidity is only a temporary fix or stop-gap measure. It will not solve the problem of insolvency. These consequences are yet to be felt. We are only in the beginning stages of what looks to be a long and protracted period of great difficulty due to the unwinding of these debts.

The bailouts that we have seen thus far are only the beginning of what I see on the horizon. The amount of money that will need to be created out of thin air will continue to accelerate as the crisis worsens in stages. Each successive stage will be worse than the last one until all this bad debt is removed from the system. There is no way of knowing just how big the final number may be since the public is only privy to a small portion of these losses. Joel Skousen in his "World Affairs Brief" (www.worldaffairsbrief.com) had this to say about the potential problems that still exist in the system:

How the bozo banking regulators in Washington and New York allowed such stupidity and risk taking in the financial markets is beyond belief, yet here we are.

Major Changes for the Stock Market

The quickly changing landscape within the stock market and the Wall Street financial world is going to look a lot different in the near future. Instead of getting wild bonuses by selling corrupt derivatives deals, Wall Streets brokers are more likely to get a pink slip. Layoffs within the big financial houses are already underway along with many restructuring deals to absorb weaker financial institutions that already are stamped "TOAST." The recent takeover of Countrywide Mortgage by Bank of America is a case in point. In addition, fourth quarter numbers are starting to come in and analysts are expecting a US$15 billion write-off for Merrill Lynch and an $18 billion write-off for Citigroup. Again, this is just the tip of the iceberg and greater fodder for even more bailout behavior.This leads me to some conclusions:

We now know with almost absolute certainty what governments and politicians will be doing. They will manipulate and hype-inflate like there is no tomorrow to avoid and postpone economic consequences. Unlimited spending and total fiscal irresponsibility on the part of the U.S. government is what lies ahead. Bank on it.

How much longer they can keep this going is anybody's guess, but the powers that be who are running this farce clearly understand they can't do it indefinitely.

Stock Market Liquidity Issues:

Further waves of liquidity selling are on their way. The problem with liquidity issues is that you can never really know what is going to sell-off and when. This is because it is nearly impossible to do research on those who are in trouble and what they hold in their portfolios that most likely will need to be sold at some point. This is why there is no rhyme or reason at times as to why some company stocks get hit worse than others. When the need to sell comes for these troubled players, they offload anything in their portfolios that is liquid regardless of quality.

World Politics, War, and Oil

The war in Iraq appears to be a war without end. It is at the center of the growing problem regarding our dependence on Middle East oil to fuel our economies.

The growth of China and their rapidly increasing thirst for oil now has them as the number two consumer on the planet behind the U.S. Shortages of fuel in China have recently caused riots as stranded drivers went on a rampage when gas stations ran dry.

You don't see this widely reported on TV or the international press, but China has had major problems keeping up with their demand for oil.

In the city of Hubei recently, the entire fleet of public buses ground to a halt because of lack of fuel. As a result, more than 100,000 angry commuters were forced to the streets on most days.

From one end of China to the other, drivers are waiting in line for hours to get to the pumps. And when they finally get there, they're likely to be rationed five gallons per customer. Dozens of cities are now deploying riot police to maintain order at the pumps.

Officials in China are pulling out all the stops in a desperate attempt to increase oil imports.

Around the world, key oil producing countries are faced with depleting oil fields, combined with soaring domestic consumption that is cutting into supplies that would normally be available for export. Any significant decline in exports is going to ignite a wild worldwide scramble to secure oil interests and send prices to much higher levels.

This could be the trigger that finally sends oil prices above US$100 a barrel to stay.

And this is without a crisis in the Middle East. Can you imagine where oil prices will go if a major geopolitical scenario unfolds that destabilizes the region? How likely or unlikely that is I can only guess at this point, but if it did occur, oil prices would be on their way to $200 a barrel.

Competing governments around the world trying to secure their own oil interests will only add to the problem and possibly lead to further and greater wars.

The conclusion I come to on these topics is that the world is becoming an increasingly more volatile place geopolitically and another major factor for us to watch in regards to how we invest our monies.

The Coming Election in the US

I can't even watch the political debates anymore between the various candidates running for the office of President of the United States. It is just too depressing and gets me to the point where I am screaming mad and want to do something about it.

Lee Iacocca recently went public with his personal disgust with the situation in his book "Where Have All the Leaders Gone?" Check out some quotes from the book below:

"Am I the only guy in this country who's fed up with what's happening? Where's the outrage?"

"So here's where we stand. We're immersed in a bloody war with no plan for winning and no plan for leaving. We're running the biggest deficit in the history of the country. We're losing the manufacturing edge to Asia, while our once-great companies are getting slaughtered by health care costs. Gas prices are skyrocketing, and nobody in power has a coherent energy policy. Our schools are in trouble. Our borders are like sieves. The middle class is being squeezed every which way. These are times that cry out for leadership.".

"But when you look around, you've got to ask: Where have all the leaders gone? Where are the curious creative communicators? Where are the people of character, courage, conviction, omnipotence, and common sense?... Name me a leader who has a better idea for homeland security than making us take off our shoes in airports and throw away our shampoo? We've spent billions of dollars building a huge new bureaucracy, and all we know how to do is react to things that have already happened. We should be screaming bloody murder. We've got a gang of clueless bozos steering our ship of state right over a cliff, we've got corporate gangsters stealing us blind, and we can't even clean up after a hurricane much less build a hybrid car."

"But instead of getting mad, everyone sits around and nods their heads when the politicians say, "Stay the course, stay the course. You've got to be kidding. This is America, not the damned Titanic. I'll give you a sound bite: Throw all the bums out!"

"You can't call yourself a patriot if you're not outraged. This is a fight I'm ready and willing to have"

Amen brother!

The only choice for me out of all those who are running for office is Ron Paul, a true leader and American patriot. But Ron Paul is the arch enemy of the establishment and is basically not electable. Such is the current situation in America. It's deplorable.

I have little hope that we will see anything significantly change for the better politically in the United States regardless of which bozo gets elected in the coming election.

What to do About All This... An Investor's Perspective on the Markets

The superficial economy continues to grind it out as the massive liquidity injections flow through the system giving us a false sense of security that all is well. For now it looks like we will get another reprieve and the economy will continue along for the time being.

Don't become overwhelmed by short-term events. Take a deep breath and focus on the BIG PICTURE. The only way to keep your head about you in such times is to understand what is happening and plan accordingly.

The bottom-line to all of what was said above is that the dollar is doomed, and gold, silver and their respective mining shares will be going much higher. Owning the physical precious metals and the quality mining shares represents the best way to play the economic circumstances we are dealt by politicians and governments. Click here to learn more about my Mining Speculator service.

You've heard me preach from the pulpit so to speak about owning the precious metals over and over. I don't believe I know another newsletter writer on junior mining stocks that is more outspoken about owning the physical metals than I am. Those who have listened have doubled and even tripled their money in most cases with the prospects that it will go a great deal higher.

The present decline in commodities and mining stocks is nothing more than a temporary situation which presents us with a buying opportunity. What looked good at $1.00 is even better at $0.70 cents. The volatility I keep talking about is certainly with us and perhaps will get even worse. But remember volatility goes both ways and this is why I don't recommend cashing out of all your stock positions. I expect the moves upward to be very big and swift when they happen. If you cash out completely thinking you will buy back in later, I believe you could miss a good part of the action. The best way to play this market is to cash up some when the market is running in our favor.

These junior mining shares, especially the better companies with precious metals exposure will rebound nicely and run to even greater new highs than we have seen in the past. Relax, enjoy the ride. If we don't go into the mania phase, which I expect is still in the more distant future, then we will probably see another pullback with yet more liquidity selling which gives us further opportunities to buy low and sell high.

Personally, I am being extremely selective as to what I am buying at the moment. If you are doing any purchasing now, pick away with smaller purchases as you see the companies you like retreat in price. How low can we go this time around who knows? The trickier part is selling within 20% of the top when things are running. That is where my service comes in. In Mining Speculator , I take the guesswork out of buying and selling at the right time. I send simple alerts to inform you when to buy and when to sell. And as you get more experience with trading these markets, you will learn to better trade with the volatility that presents itself.

Also, taxes are right around the corner; April 15th for US investors and April 30th for Canadians. If we do see some strength in the next few weeks, I recommend trying to cash up earlier than trying to sell in April in order to raise monies for taxes. I would look to our more profitable positions to take some money off the table to pay taxes.

You may also look through your portfolio to see if there are companies you no longer like as much as you once did and sell those positions first to raise the needed cash. I will be looking to do so myself in the next few weeks on any strength.

Click here to sign-up to Mining Speculator service and get my report on a $3 Chinese gold stock that should perform quite well during this next leg up absolutely FREE!

Regards,

Greg McCoach
Editor, www.GoldWorld.com and Mining Speculator