Only the very brave would think of trying to trade against the trend. Even if your natural inclination is to be bearish on the Australian stock market you should suspend these thoughts for now.

I will explain now, why the technical indicators are pointing towards a higher move for the market.

And why this higher move could see the Australian index add another 6.4%.

The S&P/ASX 200 cleared an important technical level last week. This level was the resistance line set around 4,530 points.

Let me take you through what happened...

The first breakout occurred last Thursday when the index closed at 4,570.80 points. After another positive session last Friday the index corrected on Monday before moving sharply higher yesterday.

This is a typical sequence after a breakout. Let me explain in details. Typically, when a resistance line has been cleared, it immediately becomes the new support line for the price action.

A breakout is a clear positive signal.

This is especially valid when the resistance was in place for a long time. It means the breakout is a significant trading event and that the strength of the bullish signal triggered is high.

The second observation is that the previous resistance is generally tested just after the breakout. If validated (therefore if the price action finds support on the previous resistance), it gives confirmation to the market players that the bullish signal is solid. In this scenario, the set-up is ready for a further upside move.

This is what happened here.

The pull-back last Monday was a move that tested the previous resistance identified now as the new support. That's why the index closed at 4,531.10 points and 4,540 points on Tuesday. Lower points were posted during intraday sessions at 4,518 (Monday) and 4,526 points (Tuesday).

However, most traders usually pay most attention to the closing prices rather than intra-day price points.

As the new support has been validated, this gave a confirmation to the bulls that some further momentum is ahead. As a result, the index soared yesterday and closed at 4,650 points. This morning it is currently trading around 4,695 points.

And as the title of this analysis suggests, it looks set to head higher.

In fact, the road to 5,000 points is now open.

Click to enlarge

Why 5,000 points? Well, first and foremost, it's obviously a clear round psychological level that is an easily identifiable target.
Second, it corresponds to the 50% Fibonacci retracement ratio of the decline occurred between points A and B.

If you are not totally familiar with this powerful technical indicator, it detects and identifies support and resistance levels when a price action retraces a previous trend.

In other words, after a significant move (either up or down), prices will often rebound and retrace a significant portion (if not all) of the original move. As the price retraces, support and resistance levels will often occur at or near the Fibonacci Retracement levels.

The target of 5,000 points corresponds to the 50% retracement ratio of the downtrend started in November 2007 (point A) and March 2009 (point B). Therefore the 50% ratio corresponds to half the distance between those two points.

This represents a potential strong resistance level for the rising price action.

The 50-day Momentum indicator is heading north, whereas the Relative Strength Index (14-day RSI) does not yet detect any obvious overbought configuration. Consequently, the medium-term objective is clearly the level of 5,000 points. On the downside, the immediate support around 4,530 points remains of course valid.

At the moment, the bulls are winning the battle. It may not last, but the safer bet is to run with the bulls rather than against them...

For now!

Gabriel Andre
Slipstream Trader

for The Daily Reckoning Australia

PS. My new trading alert service, Slipstream Trader, has just gone live. To find out how you can make "slipstream" gains from mainstream stocks - and to take a risk-free 60-day trial of my new service, click here

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We weren't surprised to see the Money Morning mailbag bursting at the seams here at the Old Hat Factory yesterday.

Within minutes of yesterday's email going out the replies started flooding in.

Perhaps the most remarkable response was from the property bulls.

Look, let's be fair about it. When we asked on Friday if readers had authentic research to back up the 'housing shortage' claim, it was probably the busiest day of the week for property bulls.

After all, there's all those 'open for inspections' to prepare for over the weekend.

So it's not surprising that we received less than a handful of emails from property bulls, offering opinion - which is fine - rather than the real evidence for a housing shortage.

We've no problem with people expressing opinions - we've done that once or twice ourselves.

But roll forward to yesterday and 'BANG!' The property bulls have woken from slumber. The responses were enough to split the Money Morning mailbag.

Unfortunately, there was a distinct lack of hard evidence in the responses. In fact it was the usual stuff - not enough houses being built, too many immigrants, not enough 'quality' housing.

So, rather than getting into a "yes there is, no there isn't" argument, we should probably follow the lead of Money Morning reader Jason:

"The resilience, stupidity and arrogance of the 'property' crowd is incredible. I no longer even entertain them with a discussion any more. When I hear them say 'Property prices always double every 7 yrs' or 'Housing shortage', I reply with. ' I completely agree now is the perfect time to buy a house, I'd get in while it's still cheap'."

We couldn't have put it better ourselves. Hats off to Jason.

But despite Jason's example, we will stick with property for today. But we'll take a slightly different tack.

Regularly we receive emails into the Money Morning mailbag asking us for advice on whether the reader should buy a home now, or sell their home now.

Our response is always the same - no response. That's because unfortunately our licence prohibits us from offering personal financial advice. All we can do is keep things nice and general in these emails.

But the reader emails do have a striking similarity. Almost always - when asking if they should buy - the phrasing is the same: "I can borrow $500,000" or "I can borrow $700,000."

We don't recall ever seeing an email that states, "We've seen a nice house in X suburb, with three bedrooms. It's a nice area and the price is $450,000. Do you think we should buy it?"

Obviously, our non-answer would still be the same.

For all the talk about property being excellent value and a great long term investment, we'll make a bold claim - that property buyers actually don't have any interest in the property they're buying.

In fact, I'd go so far as to say that property buyers are not buying property at all.

Rather, they are 'buying' a loan and using the house as security.

Why would we make such a claim? And what point are we trying to make?

Well, it just seems that the actual house is a secondary consideration. Sure, we see plenty of comments about a lack of 'quality' properties, but as soon as the property loses its 'quality' it seems to become a 'renovator's delight' or a 'demolition job.'

Then even though it's only land value, the price of the land suddenly becomes the value of adjacent properties less the cost of building a new house. That may be obvious, but is it logical?

But back to the buying 'psyche' for a moment. The fact that property buyers see property as an investment rather than a dwelling is precisely the reason why there will be a property price crash.

It's no different to the stock market. If investors were always rational and approached the buying of shares as though they were buying the whole company, then share prices would be unlikely to rise to such extreme levels.

But that's just how a market works. Speculators add liquidity to the stockmarket through buying and selling. They don't buy because they believe the company has strong cash flows or because they like the net profit after tax forecasts. They buy because they believe the price will rise - nothing more, nothing less.

Property investing is the same. Many people buy a house because they want to live in it, and because they prefer ownership to renting.

However, more and more, property buyers and home owners have been brainwashed by the 'location, location, location' mantra. They are buying not because they want a place to live, but because they believe the price/value will rise. They buy not because it is close to the train station for their own benefit but because they are told it will 'add value' when they sell.

They don't buy because it is close to the shops, but because it will 'add value' when they sell. Even though the buyers are just as likely to drive a car to the station or the shops. But that doesn't matter, it's all part of the 'location.'

Take a look at this brief news story from News Ltd: "The average price of a Sydney home could rise by $100,000 in the next two years, according to an [property] investment group."

The article states, you guessed it, "A shortage of homes and a growth in population will cause the property boom."

See what we mean? Not a single mention of an actual property or a type of property, or the benefits of owning rather than renting, purely that the price will go up because there isn't enough supply and too many immigrants.

As I mentioned above, property buyers are not buying homes or houses any more. They are taking out the biggest possible loan to buy the most expensive property they can, because, well, the more you leverage the bigger your returns.

Why buy a $200,000 loan against a house that will only be worth $400,000 in ten years after it doubles, when you can buy a $400,000 loan against a house that will be worth $800,000 when it doubles in ten years?

As for the other issue I mentioned above about land value, look, your editor is aware there are economic studies and theories that could fill entire libraries on the subject of land and rent. So we'll state here up front that we have no intention of competing against such learned thought.

We'll just write what's on our mind, whether it's right or wrong.

So what we say is this. Why, for example, should the land value in Richmond be X times greater than the land value in Dandenong?

What extra value does the land in Richmond have that the land in Dandenong does not?

The cost of building a home on the land should be the same.

Of course, the simple answers could be that land in Richmond is more desirable than land in Dandenong. That inner city types typically have more disposable income than outer suburban types and therefore they can bid the price up higher.

But is the land any more useful or productive in Richmond than the land in Dandenong?

Here's our point. A house in Richmond is no more productive to the economy than a house in Dandenong. Yet it is X times more expensive, and most probably requires a debt that much larger.

So, the only things that can have driven the price is supply, demand and price. Which brings us to the final point. How reliable is price as an indicator of supply and demand?

This is perhaps the real reason the property market and property prices have taken off.

One of the comments we regularly receive is that: "There must be a shortage of houses because house prices have gone up. If there was a surplus of housing then prices would fall. Simple as that."

Well, it's not quite that simple. Let's use an analogy to make our point and round things off for today...

Imagine that someone announced, "There is a shortage of apples, buy apples now."

And then assume many people started saying it, almost every day. It would most likely have an impact on the price of apples.

You could quickly go to the local orchard and buy apples from the apple grower and he may charge you 50 cents, because that's the current market price.

The apple grower is happy because business has been slow so he'll sell them for 50 cents each. But then he notices an increase in business. More people are going to buy apples from him.

Within days queues are forming at the orchard door. The apple grower realizes he can charge extra because of the demand. So he raises the price to $1. But there is still demand because people believe there is an apple shortage.

So the apple grower raises the price further to $2. There is still demand... but not quite as much. But the apple grower doesn't notice the queues are getting shorter, or if he does he doesn't care because he's making four-times as much money as he used to for the same apples.

So he cranks up apple growing production.

Eventually, the apple grower takes a look at the millions of apples that he has in the barn and works out if he can charge just an extra 20 cents he will be a multi-millionaire, so he raises the price to $2.20.

Unfortunately for him, when he opens the barn door, all the buyers are able to look inside and see there is not an apple shortage at all. There is an apple surplus. Buyers no longer feel have the same urgency to pay $2 per apple.

They figure the apple grower will need to lower his price to get rid of all the stock. The buyers are happy to come back tomorrow to see if they're cheaper.

The price of apples plummets.

You see, supply, demand and price do not necessarily mean that all three are at the correct level. Levels or supply, demand and price change all the time. Therefore, just because prices are high it does not necessarily mean there is a shortage of supply.

Sometimes it is just the belief that there is a shortage which creates the high prices. And can you blame the majority of people for thinking there is a housing shortage?

Of course you can't. Not when you read day after day in the mainstream press news items telling you there is a housing shortage, and telling you there are too many immigrants who are buying up all the property they can eat.

In summary, there is no difference between the application of supply, demand and price in the housing market to its application in any other market.

Strip away the distortions and the untruths about a shortage of property and the whole thing crashes around your ankles...

Of course, we could be wrong, and house prices could continue rising forever!

Kris Sayce
for The Daily Reckoning Australia

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Here are six lawn mowers from the real economy - the parts that don't revolve around Wall Street of Washington, DC - that could easily mow down the green shoots:

1. Stabilizing numbers for continuing unemployment claims are painting a misleading picture. In reality, hundreds of thousands are rolling off of the traditional six months of benefits into extended unemployment benefits rolls. The recent payroll data was temporarily inflated by a rebound in auto production from depression levels, and the government's hiring of census workers. Also, the unemployment rate fell because the number of people actively looking for work keeps falling. There are absolutely no signs that those who were laid off will find a new job anytime soon.

2. The federal government's income tax receipts are still collapsing. Paycheck withholding tax receipts are still falling sharply. As data services like TrimTabs have demonstrated, income tax receipts are far more accurate gauges of trends in personal income than the highly massaged employment figures from the government. Falling tax receipts translate into a higher threat of confiscatory marginal tax rates in the future, deficit monetization and more inflation.

3. Last Friday's aggregation of July same store sales in the retail business confirms that end demand for many products remains bleak (aside from auto sales in the "cash for clunker" program, compliments of the ballooning national debt). For perspective, gasoline prices in July 2009 were about 35% lower than the $4-plus per gallon level of July 2008. One would think that this would be a major tailwind for retail, but it's not.

4. The federal government is spending other people's money like a drunken sailor, yet a good portion of the sugar high "stimulative" effect of this spending on GDP will be offset by lasting cuts in state and local government budgets.

5. The bond market will continue balking at absorbing trillions in new Treasury bond supply to fund the deficit. Rising mortgage rates, which are tied to Treasury Note yields, will limit the positive impact of refinancing those few homeowners that have any equity left in their homes.

6. Has the market noticed that the FDIC is stalling on its duty to shut down and eat heavy losses at several zombie regional banks - Corus, Guaranty, and Colonial to name a few? When it when it does so, it will have to draw down tens of billions of dollars from its emergency line of credit with the Treasury.

These factors all indicate that the economy is most certainly not returning to pre-credit bubble conditions. Yet the stock market is pricing in a return to such conditions - especially in the rallies in junk stocks that we've seen since the market lifted off on July 13.

I'll add a seventh lawn mower: the growing risks posed by debt bubbles in China and other emerging markets...

The Chinese government realizes that its stimulus spending and pressure on banks to expand lending is inflating a massive bubble in the Chinese stock and property markets. The problem with unsustainable economy activity is, of course, that it must eventually end. Michael Cembalest, the Chief Investment Officer of J.P. Morgan Global Wealth Management, describes the Chinese lending bubble in his Aug. 6 "Eye on the Market":

And in China, while there are positive recovery signals, I've never seen a country expand its loan base by 34% in one year without massive inefficiencies and asset speculation in its wake. Only 5% of this year's loans went to private enterprises (which employ 75% of the urban workforce), as 95% went to state-owned enterprises or provincial entities. While there have been substantial productive improvements in rail and other infrastructure, our contacts in Asia also indicate that funds designated for stimulus are ending up pushing up land price auctions to 4 times the original bids.

This is mal-investment on a monumental scale. But for now, the Chinese have much more room to borrow and inflate than the US (which has spent the last few decades doing so). Eventually, the market will cut them off. The end will not be pretty, and at some point in the future, shorting Chinese stocks may be one of the best short selling opportunities in history.

But in the meantime, it makes no sense to bet against China. The Communist government has proven very efficient at stealing the resources of its people (via inflation and taxation) and channeling them into whatever infrastructure project they deem necessary.

This process could end next week, or next year. That's the annoying part about bubbles: they tend to expand until the last patsy has bought in, and there's no telling how many patsies there are. There are already signs emerging that the furious pace of loan growth is slowing down. Today, Bloomberg reports:

"China Construction Bank Corp. will reduce new lending by about 70 percent in the second half after a surge in loans in the first six months increased credit risk, President Zhang Jianguo said in an interview.

"CCB, the world's second-largest bank by market value, plans to extend about 200 billion yuan ($29 billion) of loans, down from 708.5 billion yuan in the first half, said Zhang, 54. The company's new lending through June 30 was 42 percent more than for all of 2008."

Lots of debt loans are being made, but as long as loan growth is running hit, they will be hidden. Once loan growth stalls, bad loans will come to light, and the Chinese government may implement its own version of TARP to recapitalize its banks.

But the situation in the US is different...

Society has too much unaffordable debt at nearly every level. To top it off, we have a Federal Reserve run by central planners who not only misdiagnose their own complicity in the credit bubble, but also remain smugly confident that they can withdraw excess reserves before fears of inflation pick back up. This is turning out to be the financial market's largest ever game of chicken: the Treasury and Fed acting in a brazen manner to depreciate all forms of US paper (government debt and dollars), and, with each passing year, foreign creditors with fewer and fewer reasons to hold the liabilities of a bankrupt government that's accelerating its move deeper into bankruptcy.

The ingredients add up to the potentially explosive move up in gold-related assets. The more developments I see regarding economic fundamentals, and fiscal and monetary policy around the world, the more I want to own gold, and sell most stocks.

Regards,

Dan Amoss
for The Daily Reckoning Australia

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What gives? As far as we can tell, the rally that began in March continues.

While it might peter out any day, we continue to believe that this market intends bloody mayhem...and that it won't stop until it has killed both the bulls and the bears.

The bulls will be killed in the classic way. A strong rally on Wall Street...or a series of minor ones... will lead them to believe that "the worst is over." They'll get back into stocks after a 20% or 30% advance - hoping to recover what they lost last year.

Then, the stock market will make a new dramatic move to the downside. This will probably happen several times...each time leaving bullish investors with more losses. Finally, the bulls will give up. They will sell stocks...driving prices down and dividend yields up. By the time the bottom is reached, former investors will neither know nor care. P/Es will be scarcely more than 5. Dividend yields will rise above 5%. The Dow will sink to 3,000 - 5,000.

Then, it will be the bears' turn. When stock prices go down, they'll sit smugly with their cash, Treasuries and gold. But gold will not resist the deflationary whirlpool. It could get sucked down violently...or might just float down gently, remaining low for a long time. Either way, the gold bulls will give up. Only the gold bugs will hold on. Cash and Treasuries, meanwhile, will look smart - for a while. Then, suddenly, they will look like the stupidest investment on the planet. In a matter of days...maybe weeks...the dollar could lose half or more of its value. Savers will suffer staggering losses.

No, dear reader, the months ahead will be a challenge. The world economy is telling a story no one has ever read before. Every day we turn the page just to see what happens. We have no idea how the story might develop. It's all guesswork.

Still, when the final chapter is read out...the moral of the story will probably be familiar to us. It always is.

China has increased their gold holdings 75% in the last six years. They recently announced that the gold holdings have been transferred from the State Administration of Foreign Exchange (SAFE) books to the People's Bank of China. PBOC. Our intrepid correspondent, Byron King explains what this really means:

"China is monetizing its gold!

"This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But in keeping with a nation where youngsters get their Sun Tzu with their mother's milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not "monetary," then it was just another nonmonetary investment commodity like iron ore or copper or petroleum.

"But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves.

"This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset. Gold has not been a factor in global trade and currency exchange since the late 1960s. But there's a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It's because the U.S. dollar has been so badly mismanaged over the decades. No, you won't read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It's happening.

"So now the Chinese are primed to begin using gold as a monetary asset. What's the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBOC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. In the future, only central bank suckers and losers will be net sellers of gold. (Take note, IMF.)

"And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly. Need I say more?"

The plane coming back from Buenos Aires wasn't full. Air traffic is down 11% from a year earlier.

And this was before people began worrying about swine flu.

Today, commentators are fretting about how a serious epidemic would affect the "recovery." They needn't worry. First, because there is no genuine recovery to worry about. Second, because if a serious epidemic were to hit the world, economic growth would be the least of our problems.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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"I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there's no sense of urgency. And there's a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.

"And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect."

Richard Russell is 84. He's been writing his investment newsletter, Dow Theory Letters, for 50 years. This weekend a group of his admirers, including your editor, came together to say thanks.

There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them. But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell. He's been studying "the language of the markets" for more than half a century. Though no one ever fully masters the language of the market, Richard can at least carry on a conversation with it.

"The primary trend is down," says he. In the end, he continues, no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it "has fully expressed itself."

What does that mean? We don't know...and no one else does either. But if this market has something to say, it's probably something it's wanted to get off its mind for a long time. And our guess is it's not a message that people are going to want to hear.

Richard is probably right. After so many years of watching markets, he's developed an instinct for what is really going on. This is going to be worse than people expect, he says. Because despite all the whining and bellyaching in the press, most people still do not expect the worst. Over the last quarter century, they've learned to look for bottoms...and buy. Every time it looked like real trouble was coming, the Fed cut rates...and soon, it was off to the races again. Now, they're afraid of missing this opportunity for another boom.

But Richard is old enough to be able to look back much further than a quarter of a century. He's seen the Great Depression...WWII...the bear market and stagflation of the '70s. He knows that sometimes it pays to be extra cautious. "Cash and gold," says Richard, are the only investments you should be holding now; we're a long way from the bottom.

One of the reasons we think that is because so many people are looking for the bottom. "Individual Investors Pile Into Citi," says a headline from last week.

"The old Wall Street adage about the dangers of catching a falling knife doesn't seem to be scaring individual investors away from Citigroup Inc.

"Some discount-brokerage firms report a surge of individual, or retail, investors buying shares of Citigroup during the past five months, amid the New York bank's stock-price slide."

These investors think they see an opportunity. What we see is a trap.

The Dow rose again on Friday. Apparently, this is the rally we've expected since November. It could take the Dow back to 10,000 or so - before collapsing on the heads of naïve investors.

Remember, this is a depression, not a recession. And thanks to determined government action, it is on its way to becoming a Great Depression. In a depression, you can't revive the old economy. It needs structural change - eliminating the mistakes of the previous bubble period - and building new businesses with new ways of doing things. "Creative Destruction" Schumpeter called it. Things that don't work need to be destroyed...so that things that do work can make use of the capital more efficiently.

"What would you do if you were suddenly in a position of power in the United States?" asked one of crowd at Saturday night's dinner.

"Nothing," replied Richard. "I'd do nothing. I'd let it happen. I'd let the bear market do its work."

Amen, brother.

More news from Addison and Ian in Baltimore:

"Another industry built on credit-fueled consumption, and thus, likely to get leveled during the great deleveraging, is looking a little gluttonous right about now," writes Addison in today's issue of The 5 Min. Forecast.

"U.S. restaurant expansion over the past 20 years has vastly outpaced population growth."

"Since 1990, the number of bars and restaurants in the U.S. has grown 49%, to over 537,000. The American population has grown only 23% in that period," Addison continues.

"Growth in the restaurant industry has even outpaced the U.S.'s appetite for squandering money. According to the National Restaurant Association, in 1985 Americans spent around 40 cents of every "food dollar" in restaurants. Today, we're closer to 48 cents on the dollar, a 20% bump.

"Back in the 1950's, the average Joe spent just 25 cents of his 'food dollar' in restaurants. If we're to return to anything even resembling a post-Depression, post-War, way of life... tens of thousands of restaurants will go under."

Each weekday, Ian and Addison bring readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

And back to Bill with more thoughts:

Many old friends were at Saturday's dinner. Analysts, writers, opinion mongers, subscribers. One fellow said he had been reading Richard Russell for the last 30 years.

"I figured I probably paid Richard more than $60,000 in subscription fees over that period," he explained. "But it was the best investment I ever made. He helped me turn a few bucks into $30 million."

"Well, what do YOU think?" asked a local reporter, interviewing your editor at the Richard Russell dinner.

"I agree with Richard," we explained. "Let the free market do its work."

"But aren't you afraid that the banking system will collapse and that millions of people will be out of work?" came the follow-up question. "Are you saying that the government shouldn't even try to make sure that doesn't happen?"

"Maybe the government should make sure there are enough parking places. It should probably make sure the grass is cut at Arlington Cemetery. But there's no way it can do a better job of getting people what they want than they will do themselves. Even in a depression.

"Here's our new motto at The Daily Reckoning. You're going to be the first to report it in the press. And when historians finally get around to discovering our oeuvre, they're going to credit your paper as the first to publish it. Are you ready?
Here it is:

"The free market rarely takes you where you wanted to go...but it always takes you where you ought to be.

"There...we think that pretty much says it all, no?"

Rick Rule was there too. Rick provides finance capital to the mining sector - among other things. We asked him what he thought of the recent run-up in stock prices.

"I'm a lender, mostly. And as a lender, I'm primarily interested in the credit quality of the people I lend to. Am I lending now? No."

Rick explains that stock prices in the mining sector are, generally, too high. Investors are betting that they go higher. That's a bet a speculator may want to make, but not a lender. And it's that kind of speculation that got people in trouble in the first place. Homeowners bet that their houses would go up in price. So did their lenders...and their lender's lenders. They were so sure they were going to make speculative gains they forgot to pay attention to the quality of their credits.

But a rally is underway...and our guess it will destroy both the bulls and the bears.

The bulls will buy stocks believing that we have another bull market on our hands. After having lost 50% of their money since 2007, they'll lose another 20%-30% when this rally collapses.

The bears, meanwhile, are convinced that there is worse to come. They think the stimulus spending programs will cause inflation. So they're buying gold and commodity stocks - sure that when inflation comes, it will cause mining and oil stocks to soar. Maybe it will - eventually. But the first big move will probably be down. They, too, will lose big.

That could be the big surprise of this depression. It will kill the stock market bulls when the bear market rally collapses...then it will kill the stock market bears when the mining and commodity stocks collapse...and finally, it will wipe out the middle-class savers when inflation increases and the dollar collapses.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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