More news:

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From our very own Jim Amrhein:

"Even the least political among us realize that, overwhelmingly, pressure to regulate firearms in America comes from the left side of the aisle. And naturally, the Democrat sweep of Congress in 2006 has given many firearms enthusiasts, hunters, sport shooters, militia members, gun collectors, constitutionalists, weapons dealers and responsible gun owners who live in transitional neighborhoods (they're often the driving force behind positive transitions) a moment of unease."

For the rest of the story, see this issue of:

Whiskey and Gunpowder

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Short Fuse, back in The Land of Pleasant Living...

*** China’s trade surplus almost doubled in the first quarter, widening to $46.4 billion - up from $23.3 billion in 2006.

"Obviously, the U.S. consumer isn’t finished buying flat screen TV’s from Wal-Mart!" EverBank’s Chuck Butler, told us. "Not as long as the credit card companies keep sending out credit cards to every Tom, Dick and Harry that may or may not have the wherewithal to pay back what he borrows, without even a hint of a credit check!"

This is not helping matters, as the United States took their complaints to the World Trade Organization yesterday - and China’s commerce ministry said that the case will "severely damage" trade relations between the two countries.

Uh-oh...looks like trouble in paradise.

*** Now for a commodities update from everyone’s favorite Maniac Trader, Kevin Kerr:

You can blame it on wet weather...cold weather...snow...and the ethanol craze - but the volatility in U.S. crop prices is certainly here to stay for a while.

In addition to problems with the weather, "farmers are facing higher and higher costs associated with corn, such as expensive seed and fertilizer," said Kevin, in a recent MarketWatch column. "And now in southern states, opting to plant corn means irrigation costs come into play."

"Mother Nature is not being cooperative and that could be foreshadowing for what could be a very rough weather season. Ironically, the biggest fear is that due to wet conditions, crops will go in late, and then this summer drought and high heat will kick in.

"That could be a double whammy of terrible conditions for farmers. The drought predictions are backed up by the La Nina effect, the same weather conditions that could create violent hurricanes in the Gulf again."

One thing is for certain: The grain markets and ethanol demand are not going away anytime soon - and for investors there is a lot of money to be made in this sector right now. While everyone is rushing to the obvious ethanol investment, you could be checking out two alternative energy investments that are positioned to make those in the know a pretty penny:

Better Than Ethanol!

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The Daily Reckoning PRESENTS: With all that’s going on in the U.S. markets right now, it’s easy to overlook an area like Zimbabwe - at least in a financial sense. But, as John Paul Koning explains, failing to notice this market could be a colossal mistake. Read on...

ZIMBABWE: BEST PERFORMING STOCK MARKET IN 2007?

by John Paul Koning

CNBC and other stock market tabloids are notorious for making simplistic linkages between the stock market and gross domestic product (GDP). They tell us that any event that stimulates GDP growth inevitably drives stock prices up, and any event that hurts GDP growth pushes stocks down.

Since the largest share of GDP is consumption, consumer demand becomes the all-important figure driving growth. When the consumer gets too excited, the Fed must step in to cool them down with interest-rate hikes. When the consumer isn’t spending, Fed interest-rate cuts stimulate demand.

The tragedy currently occurring in Zimbabwe completely contradicts this sort of logic. Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half of what it was in 2000. Ever since President Mugabe’s disastrous land-reform campaign (an entire article in itself), the country’s farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.

Yet something odd is happening.

The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, with the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices.

While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.

CNBC logic fails to explain the coincidence of a rising ZSE and collapsing GDP because it entirely ignores the monetary side of the economy. At this point Austrian economics makes its contribution to our story. According to Austrian Business Cycle Theory (ABCT), the peak-trough-peak pattern that economies demonstrate is not their natural state, but one created by excess growth in money supply and credit. New money is not simply parachuted to everyone equally and at the same time - it is sluiced into the economy at certain initial "entry points." From these entry points, a number of initial goods are bought by recipients of new money causing a rise in price for these initial goods relative to other goods.

Because entrepreneurs react to this observed but unjustified change in the structure of prices by investing their capital, misallocation occurs. As money-supply growth continues and prices become more contorted, more and more ventures are undertaken that would not be undertaken in a regime without money-supply growth. When, for whatever the reason, money supply finally contracts, the artificial strength in prices that encouraged unprofitable ventures is removed, prices collapse, and large numbers of ventures go bankrupt. Thus we have the recession part of the business cycle, the simultaneous failure of many firms at the same time.

If, as the Austrian theory states, money enters the economy at certain points, it is likely that a nation’s stock market will become a prime beneficiary of any monetary expansion. Fresh money enters the economy first through banks and other financial entities who may invest it in shares, or lend it to others who buy shares. Thus stock prices rise relative to prices of things like food and clothes and will outperform as long as this monetary process is allowed to continue.

This is what we are seeing in Zimbabwe. With the country suffering from Mugabe’s catastrophic policies, increasingly the only means for the government to fund itself has been money-supply growth. This has only exacerbated the economy’s problems. The flood of new money that authorities have created has caused the existing value of money in circulation to plummet, i.e., the prices of all sorts of goods to explode, some rising more than others.

As prices become more misaligned, basic decision-making abilities of normal Zimbabweans are impaired and the day-to-day functioning of the economy deteriorates. Perversely, all of this has forced the government to issue even more currency to make up for budget shortfalls and to buy support. At last measure, the country’s consumer price index was rising (i.e., the purchasing power of currency declining), at a rate of 1,729% a year.

The ZSE is growing some three times faster than consumer prices. This relative outperformance versus general prices is a result of stocks being a chief entry point for the flood of newly created money. Keep Zimbabwean dollars in your pocket, and they’ve already lost a chunk of their value by the next day. Putting money in the bank, where rates are pithy, is not much better. Investing in government bonds is the equivalent of financial suicide. Converting wealth into foreign currency is difficult; hard currency is scarce, and strict rules limit exchangeability.

As for capital improvements, there is little incentive on the part of companies to invest in their already-losing enterprises since economic prospects look so bleak. Very few havens exist for people to hide their wealth from the evils created by Mugabe’s policies. Like compressed air looking for an exit, money is pouring into shares of ZSE-listed firms like banker Old Mutual, hotel group Meikles Africa, and mobile phone firm Econet Wireless. It is the only place to go. Thus the 12,000% year over year increase in the Zimbabwe Industrials.

Our Zimbabwe example, though extreme, demonstrates how changes in stock prices can be driven by monetary conditions, and not changes in GDP. New money gets spent or invested. In Zimbabwe’s case, because there are no alternatives, it is stocks that are benefiting.

This sort of thinking can be applied to the stock markets in the Western world too. Though western central banks have not been printing nearly as fast as their Zimbabwe counterpart, they do have a long history of increasing the money supply. It forces one to ask how much of the growth in Western stock markets over the preceding twenty-five years has been created by a vastly increasing money supply, and how much is due to actual wealth creation. Perhaps stock prices have increased faster than goods prices for the last twenty-five years because, as in Zimbabwe, Western stock markets have become one of the principal entry points for newly printed currency.

Regards,

John Paul Koning

for The Daily Reckoning

Editor’s Note: John Paul Koning is a stock market researcher at Pollitt & Co, a brokerage based in Toronto, Canada.