Said the Joker to the Thief

It was just too easy for us last year...

In lower Manhattan, we could throw a brick in any direction and be sure to hit a major swindler and at least two knuckleheads. And as for making money, everywhere we looked, we saw something to sell - art, oil, retailers, finance...you name it. The only things that went up last year were gold and U.S. government bonds. All we had to do was to stick to our Trade of the Decade...sell stocks on rebounds, buy gold on dips...and we made money.

A year like that doesn't come along very often. We can't remember when we had so much fun...

A real boom lasts longer than most marriages. This last one began in 1982 - during the first Reagan term. Now it is gone...over...fini...kaput. Just like that.

After so many happy years spent together, you'd think there would be some kind of ceremony...some suitable last rites and requiem mass to mark its passing. Instead, people turn their backs on the past like it was day-old bread. They clean out their cupboards on January 1st, and toss out the dead year to bluejays and starlings.

Here at The Daily Reckoning we are sentimental fuddy duddies. Hardly a day goes by that we don't recall the many good times we had during the madcap years of the boom. We still haven't even been able to take down our Christmas tree or hang up our 2009 calendar...and, below, we turn our heads back for one last, nostalgic look...

And now we face a grim task; for now we have to reckon with the year ahead. Stocks are no longer absurdly over-priced. Nor is oil. Nor is anything else - with one major exception - U.S. Treasury debt. Should you buy stocks...or sell them? Should you buy more gold now...or wait for the first signs of inflation? Is it time to buy the oil producers...or the gold miners? Will the world economy sink into a Japan-like slump...or will the feds cause a Zimbabwe-like catastrophe?

Every day, our head aches from trying to figure it out...

How do you make money, dear reader? You look for the fool who wants to give it to you. Who is the fool in the market in 2009? He is the fellow who buys U.S. bonds. But taking his money may not be as easy as it looks.

Let's first turn to the headlines...and we'll come back to the fool later.

Yesterday, the Dow sold off a further 27 points. The stock market looks to us as though it wants to go up. We're tempted to bet on...since a rebound is usually the safest bet you can make after such a major tumble. But there is no guarantee it will work that way.

But Mr. Market is full of tricks. Who knows what he'll get up to?

Oil is trading above $40 this morning. And gold rose $12 yesterday.

The news from the economy tells us that the financial losses are working their way into the business world.

Retailers had their worst December in 40 years, says the LA Times.

Loan delinquencies hit record highs last year, says the Washington Post.

"Job losses stack up as recession deepens," is one of today's headlines. Unemployment numbers have reached a high not seen since the beginning of the boom - 26 years ago.

Layoffs in China are beginning too. At least China has some savings it can use to fight the downturn. America can only borrow...and borrow...and finally, print up money.

That is our forecast, by the way.

First, we don't believe that a generation's worth of errors can be corrected in 6 months. Investors and consumers have had a shock. But they are still hopeful. After the worst crash in stock market history they are nevertheless holding onto their stocks. They see a recession...but they don't quite believe it. Just wait. First, there's the financial shock. Then, the economic shock. And then, another financial shock as investors realize how bad the situation really is. Shock after shock...knock after knock...investors, consumers and businessmen get the boom year reflexes beaten out of them.

*** Dividend yields are now higher than Treasury bond yields, but they are still not at sold-out, depression bottom levels. And the Dow, now down about 35%, is far above the depths you'd expect in a generational downturn. To get down to real bargain levels - such as those of 1932, 1949 and 1982 - the Dow will have to go well below 5,000...say, to around 3,000. And investors' attitudes will have to change. That's when they cease believing that prices bounce at all; instead, they come to think that they are leaden...and begin to believe that holding stocks is always a losing proposition.

Bounce or no bounce...stock prices are probably going a lot lower.

Second, the feds are hell-bent on preventing this kind of severe, natural correction. The Fed has already cut its key lending rate to zero. Yesterday, the Bank of England hacked its own key rate to the lowest level since the bank was set up in the late 17th century. Apparently, this is the most menacing situation faced by the British economy since the reign of William of Orange. Or to look at it with a bit of historical imagination, not since the beginning of the industrial revolution has the Anglo-American empire needed such emergency-level interest rates:.

The New York Times provides the latest details:

"Crisis Trumps Restraint

"As the ranking Democrat and then chairman of the House Budget Committee, Representative John M. Spratt Jr. of South Carolina accused President Bush for eight years of recklessly running up huge fiscal deficits.

"But by noon on Wednesday, after listening for two hours as economists explained why it was crucial to run a large deficit - one that would triple the previous record and vault far above $1 trillion - Mr. Spratt looked shell-shocked.

"Lingering in his chair as the cavernous hearing room emptied, he stared into the distance and gave vent to his concerns.

"The thing I wanted to ask," he said, "was if there was some limit which we should be wary of? Is there some limit in terms of how much borrowing and debt creation we should take on?"

"For the moment, the answer is no."

*** And here we spare a moment to return to one of our own old dicta:

People come to think what they must think when they have to think it.

The House Budget Committee listened to Martin Feldstein and Mark Zandi - both conservative economists - along with Robert Reich, Bill Clinton's Secretary of Labor.

All sang the same Keynesian tune. The refrain, as rehearsed by Martin Feldstein, goes like this:

"Reviving the economy requires major fiscal stimulus from tax cuts and increased government spending."

When America's economy was young and competitive it survived slumps and crashes without medical intervention. Now, every passing cold requires feeding tubes. And this latest bout of influenza has the doctors in a panic. They are casting aside warnings and giving the patient masses doses of the old quack treatments. They'll increase the dosage - until they run out of supplies - and then switch to those new, experimental medicines that have recently been used in field trials by Dr. Gono in Zimbabwe. Since they cannot leave well enough alone - the public won't stand for it - they will keep giving bigger and bigger doses, of more and more dangerous medicines, until the patient dies.

When? How? We wish we knew. But yesterday, we got word that the European Central Bank has found a way to do what the U.S. Fed is already doing - buying up government debt. As you may know, dear reader, when central banks buy government debt, the money supply increases directly.

Surely, Gideon Gono must feel his chest swelling with pride. He must be in line for a Nobel Prize...or a hanging. Against, we quote his approving words:

"Banks, including those in USA and Britain are not now just talking of, but actually implements flexible and pragmatic central bank programs where these are deemed necessary in their national interests.

"That is precisely the path that we began only 4 years ago in pursuit of our national interest and have not wavered from that critical path despite the untold misunderstandings, vilification and demonization we have endured from across the political divide."

*** One last note before we turn you over to today's essay. If you still haven't seen I.O.U.S.A., here's your chance to watch it from the comfort of your own home. The documentary, followed by a panel presentation, will air on CNN this Saturday 2PM and Sunday 3PM (10th & 11th). Be sure and tune in...

Bill Bonner
for The Daily Reckoning Australia

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