"All of the conditions and prerequisites are in place for a 'crash of historic proportion' to happen at any time. Be on the lookout for a magnitude 9.2 shaker on The Street."

Moreover, all of our longer-term bearish indicators remain in place. Please review our illustrated gallery in the January 1st report for details.

To be clear, our crash warning indicator is not a specific timing device, it is a measurement of risk in the system. To repeat our ongoing footnote:

The purpose of our Crash Warning is not to frighten or intimidate. We feel obligated to bring to the table this potentially very serious situation that you'll never hear discussed on CNBC. We want everyone to be aware of the extreme risk at this juncture so you may take whatever steps you may feel necessary.

CAUTION: As we have demonstrated in the past, it's pretty damned difficult to pick market turning points and events in real-time, and we may indeed be wrong again. Invest carefully, at your own risk. Please read the disclaimer.

We think it unlikely, but a burst above the March high of 10,925 would argue for much higher prices.

Stay tuned!

http://bonds.yahoo.com/rates.html

Inversion seems imminent, as Sir Alan of Greenspan and His Merry Monetarists seem intent on raising short-term rates at least two more times in the coming months.

As our friends at Elliott Wave International and others have pointed out, every recession in the last 40 years has been preceded by an inverted yield curve.

So what's the big deal about inversion? It's economic upside-down cake. Banks usually "borrow short and lend long." That's how banks make their profit, but it's a losing proposition with an inverted yield curve. There's no incentive to create new debt. Liquidity in the system dries up. The wheels of commerce grind to a halt. And if the inversion persists, the dreaded deflationary cycle kicks in.

Long-time readers of this report know we've been anticipating exactly such a devastating deflationary depression. So how bad might it be? Doug Casey, publisher of the International Speculator newsletter, expects to see the "...Collapse of Western Civilization." No sense in mincing words, Doug.

Economic "Growth"
Despite the historical message of an inverted yield curve, mainstream economists are still wildly bullishness about the economy. One anal-yst recently proclaimed "the economy is rolling along like a freight train." Huh? They're all jazzed about reported growth of 3.4% on an annualized basis.

We don't buy it and we haven't bought it for years. If you've followed Grizzly's Growlings over the years, you know we've been a grinch on the state of the economy. We've harped on the fact that government economic statistics cannot be relied upon to be an absolute, accurate reflection of the state of the economy. This is not out of some dark and dangerous conspiracy, but out of the outdated, obsolete and ineffective methodologies used by the government to measure, calculate and analyze all the data.

We continue to proclaim that the emperor has no clothes. There is no economic growth.

To see how we come to this conclusion, unfortunately we need to dive head-first into the dismal world of government economic statistics.

The crux of the problem is that virtually all government economic statistics, including economic growth in particular, are adjusted for inflation. The politicians and bureaucrats mean well, really, they do. But their nobility has led them down the slippery slope of statistical manipulation. For at least the last ten years or so, they've fiddled with the figures for the purpose of under-reporting the rate of inflation.

Why would they want to do such a thing? For political gain, of course. They're politicians, aren't they? What they try to do is make things look better than they really are (and then take credit for it all). They want to be able to promise their constituents as many benefits as possible, for as little cost as possible.

OK, so what does this have to do with economic growth? Well, it's basic third grade math.

To calculate economic growth, government economists start with the overall growth in the economy, then they subtract out a rate of inflation. The result is the inflation-adjusted growth rate. Let's look at some numbers:

Now, lets "fudge" the inflation rate down to 2 percent.

Voila, the adjusted growth rate has magically increased to 5%!

So, for every 1% that reported inflation is reduced, adjusted growth increases by 1%. Fudge with the rate of inflation, and you directly affect the bottom line.

But don't take our word for any of this higher math, learn about it for yourself from two masters on the subject, Jim Puplava and John Williams. Jim Puplava is editor and publisher of Financial Sense Online, a "Five Paws" don't miss web site for everything economic and financial. John Williams is an economist and editor of Shadow Government Statistics,

Williams has done all the detailed research and gathered all the evidence. He skillfully charges that the Consumer Price Index has been willfully and deliberately understated for political and economic advantage. Click here to access Jim and John's fact-filled and revealing interview. (Scroll down to July 23.)

Savings and Spending
Zero. Zip. Zilch. Nada. The personal savings rate of Americans hit Absolute Zero in June. Yet personal spending surged 0.8%. Even most mainstream economists agree that this cannot be sustained. The cash tank is empty. The septic debt tank is already overflowing. The real estate re-fi cash machine has already been punched up for the max. There is no more juice to be squeezed from the financial stimulus stone.

Did You Know?
Here are some additional factoids and tidbits reflecting the unprecedented bearish potential for the economy, gathered from various sources:

• The current account deficit will approach $800 billion in 2005. Ten years ago, the deficit was "only" $109 billion.
   
• Total U.S. debt now exceeds $37 trillion.
   
• An estimated 80 million American consumers are "behind on payments or over the limit" on their credit card accounts.
   
• Total household debt now exceeds 90% of GDP, unprecedented in U.S. history.
   
• The average American household is in debt by $19,000; that's in addition to their home mortgage.
   
• 92% of household income goes to service their debt (including mortgage).
   
• In 2004, over $30 billion in fast-food purchases were put on a credit card. (Talk about "consumption!")
   
• One-half of all consumer debt is adjustable rate.
   
• Foreigners own 45% of all U.S. government debt. That's nearly doubled in the last four years.
   
• 40% of all new job creation over the past two years has been in the housing sector.
   
• Job layoffs are surging, with over 110,000 reported in June and at least 90,000 more in July.
   

And then there's real estate. . .

The warning signs continue to flash like a six-track railroad crossing. Here's a sampling of the latest data covering the first half of 2005, gathered from various media reports:

• 42% of first-time buyers put nothing down. Moreover, the median down payment on residential real estate purchases dropped to just 3%.
   
• 50% of all new mortgages are adjustable rate loans.
   
• 27% of all new mortgages are interest-only, compared to only 1.6% of mortgages just four years ago.
   
• Overall, nationwide, about two-thirds of all new mortgages are interest only or adjustable rate (or both!).
   
• An estimated 60-70% of "jumbo" loans (those more than $359,650) are Interest only.
   
• The median price of homes sold in June was $214,800, flat from the prior year.
   
• The price of lumber has fallen about 30% in recent months.
   
• Fannie May and Freddy Mac now hold over $3.5 trillion in mortgage-backed securities, more than all banks and savings and loans combined!!
   
• An estimated 56% of U.S. commercial bank assets are mortgages or mortgage-backed securities, a record high.
   

In a recent report on CNN, the infamous IMF found that real estate busts cause far more damage to the economy than do stock market busts. We think this time it will be one for the record books.

  . . . at this juncture, gold looks and feels as if it is ready to at least take a breather in the $430-$450 area, if not undergo a sizable pull back.

Indeed, gold has bounced around and consolidated this year, mostly in the $420-$440 range.

What mostly likely lies ahead is a five-wave decline to around the $360-375 area to complete wave C. The 8-year cycle would still have plenty of downward influence to go (see chart in January annual report), so the wave C low may only be the first leg of the correction. A trade-able bounce may ensue, followed by another drop, to the low $300s.

We think it unlikely, but a burst above the December 2004 high at $453 would argue for much higher prices.

Another reason we're still cautious (short-term) on gold is the persistence of bullish sentiment. For example, there have been recent full page ads in our local newspaper for a national coin dealer, pumping U.S. Gold Eagles. The sub-headline of the ad reads: "Gold sets blistering pace towards predicted $1,500 per ounce." Huh? Blistering pace? It's been more like a snail's pace. $1,500? Let's get through $500 first.

Our summary from the January annual report still holds:

Despite our current caution on metals prices, we know that holding the metals is about much more than making a profit on them. They're a security blanket, a sleep-well-at-night comforter, a nugget of piece of mind. If you're going to stick to your "buy and hold" approach, considering hedging with some puts. Long-term gold holders, if nothing else, just condition yourself to gold potentially dipping back to at least the mid $300s as the US dollar stages a rebound from its deep, four-year plunge.

The rhetoric intensified a few weeks ago when a top Chinese general actually threatened to use nuclear bombs not again Taiwan, but against the US! From a July 14 CNN Report: China sends nuke warning to U.S. over Taiwan

BEIJING, China (Reuters) -- A senior Chinese general has warned that China was ready to use nuclear weapons against the United States if Washington attacked his country over Taiwan, the Financial Times newspaper reported on Friday.

"We Chinese will prepare ourselves for the destruction of all of the cities east of Xian. Of course the Americans will have to be prepared that hundreds ... of cities will be destroyed by the Chinese," he added.

A very scary, but very real, scenario. Will the US stand by its treaties with Taiwan? Could the Chinese military be bluffing? We sure don't know, and it'll take titanium testicles to call their bluff. America and indeed all of the so-called civilized world, will be "all-in."

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The August 2 RED ALERT is the first of its kind I've ever made in the 11 years of studying seismic event indicators. It is so huge that I almost can't believe my eyes. The importance and severity of this has impressed me more significantly than when I predicted and warned about the coming December 26, 2004 Indonesian events beginning December 22.

Needless to say, an earthquake of epic proportion would be an unmitigated catastrophe, rippling through hundreds of Main Streets across the country, and at least one Wall Street.

"Be Prepared."
-- Boy Scout motto

"Expect the unexpected."
-- Heraclitus  500 BC

Thanks for listening!  -- Grizzly

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