Marius Kloppers had his numbers wrong. He said there were 74 resource projects in Australia at an advanced stage worth $80 billion. Yesterday, the Australian Bureau of Agricultural and Resource Economics (ABARE) said it was 74 projects for $112 billion. That's a 67% increase from this time last year. Is it inflation? Or just Gorgon?

These were projects already in the pipeline before the commodity price correction of 2008. The Gorgon gas project off the Northwest Shelf alone is a $43 billion project (nearly 40% of the total). Energy projects make up 38 of the 74 projects and 72% of total capital spending - which is why in both Australian Small Cap Investigator and Diggers and Drillers, Kris and Alex are recommending both conventional and unconventional energy shares.

But usually the companies doling out billions in new cap ex are larger companies with deeper pockets. That doesn't mean they aren't shares you want to own, or that their share prices aren't correlated with rising commodity prices. But we reckon you're going to find bigger cap ex related gains from the companies getting some of the contracts related to projects like Gorgon. These are the "pick and shovel" companies of the cap ex spending boom.

Or you can look at the other end of Resource City, to the explorers and developers. ABARE reports that last year set another record in resource exploration spending in Australia. Some of it was brownfield exploration (old sites or mines being redeveloped) and some was greenfield (brand new sites or mines). All up, there was $6 billion in exploration spending in Australia last year.

More than half of that was a frenzy of small companies drilling for new oil. $3.8 billion was spent on petroleum exploration. That tells you what the industry thinks about oil prices: they are going higher. Coal exploration spending was up 27%, with iron ore exploration up 30%.

The big shocker was that uranium exploration and gold exploration spending were both down by double digits in the last year. The uranium exploration spend was down 20% and gold down 26%. Yet the price forecasts for both commodities look, at least according to Alex's research, pretty damn bullish. So why aren't the explorers out kicking rocks and taking names?

It turns out they are, just not in Australia. The ABARE numbers measure exploration spending within Australia. But many Australian-listed firms are looking for gold and uranium in other places, especially in Africa. They're doing so because production costs are lower there, even if political risk is higher (although in some places, it's more than acceptable for the projects on offer).

They're also doing so because if you find a country with an acceptable level of political risk, you can also find greenfields mines to develop and build. Granted, that takes a lot of capital. But some of the developers never plan on running the mine anyway. What they're looking for is an economic deposit (high ore grades that can be produced easily) leveraged to higher commodity prices. They can then sell that off to a producer without ever turning a shovel in anger.

Just this morning, Aussie-listed Impact Resources said it believes it's found a large new uranium province Botswana. In a possible case of "nearology," Impact said the new province has similar characteristics to A-Cap Resources 98 million pound inferred resource in the same neighbourhood.

We have no idea what the facts are for either company. What we do know is that Alex told us two things (in his November letter) that you should look for with Aussie uranium companies: they need to have a resource big enough to produce a given amount of uranium each year and they need to be in production by 2012-2013. Impact's resource, according to Alex's research, was not big enough to qualify on the first measure.

As to the second measure, that's when Alex believes a shortage could hit the uranium market, thanks to interrupted mine supply at BHP's Olympic Dam and Cigar Lake in Canada. That, plus the removal of Russian-supplied recycled nuclear warheads. And that's just on the supply side. On the demand side, well, you've probably heard that story so we won't go into it.

Of course all this fuss about oil, gas, gold, and uranium presumes there will be a functioning world economy needing and/or wanting these things next year. Maybe not so, says a report from Societe Generale!

The French bank published a note to clients warning them to be ready for a possible "global economic collapse." In its report, "Worst case debt scenario," the bank said what we've been saying for the last month: the transfer of private sector debts to government balance sheets threatens a sovereign debt crisis (which is really a kind of debt-induced fatal heart attack for the fiscal welfare state).

The bank shows that overall debt-to-GDP ratio in the U.S. (when you include government, business, and households) is 350%. Bank analyst Daniel Fermon says in his report that even without more fiscal stimulus, government debt-to-GDP ratios will, within two years, be at 105% of GDP in the UK, 125% in the U.S. and Eurozone, and 270% in Japan.

This massive global debt burden is more than the underlying assets can bear. That is, the assets (collateral and the tax base) will not generate sufficient income to service the debt. It's global Ponzi Finance. What's in store, then, is another great forced deleveraging where debts are liquidated and asset values are forcibly written down.

That's not anyone's idea of a good time. "Under the French bank's 'Bear Case' scenario," writes Ambrose Evans-Pritchard in the Telegraph, "the dollar would slide further and global equities would retest March lows. Property prices would tumble again. Oil would fall back to $50 in 2010."

Hmm. Doomer porn? Or prudent preparation? You decide!

Rock-star bank analyst Meredith Whitney has already made up her mind. She told CNBC in an interview, "I haven't been this bearish in a year...There's nowhere to hide at this point...The Fed and the Treasury have to get the banks to pay back TARP. That means the banks are going to raise capital again."

She was asked if the banks are adequately capitalised? "No way," she answered evasively. "All this said...I don't know what's going on in the market right now 'cause it makes no sense to me. There's no root in fundamentals."

That's the trouble with a market trading on liquidity alone. Valuations don't make sense. But that's doesn't keep people from making them, or having an opinion anyway. Take gold (or pay $1,143.20/oz. for it).

Another report from Societe Generale - this one from analyst Dylan Grice - says that if the U.S. dollar were fully backed by gold, as it was in during the peak of the 1970s gold bull - it would trade for $6,300 per ounce. That makes gold, er, cheap at these prices.

Is this a case of gold entering its mania phase? Are analysts now starting to outdo each other with gold predictions? Maybe.

But Grice makes a sensible case. He writes that, "The U.S. owns nearly 263 million troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap - at current prices, the USD is only 15 percent gold-backed."

If gold goes to $6,300, a lot of things will have gone wrong. Uber-bear Nouriel Roubini fears things are about to go from worse to much worse. He writes in an op-ed that the American unemployment picture is harbinger of bad times ahead.

"This is very bad news but we must face facts," Roubini writes. "Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries."

"As a result of these terribly weak labour markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures."

It's pretty gloomy. But at least now, at the end of the week, the status quo seems to have clarified itself. We think we know what the opposing forces are in the market and just what's at stake.

In the red corner is the spectre of another massive forced deleveraging (debt deflation). Banks are undercapitalised. Assets are overvalued (shares, property, commodities, and most definitely most government bonds). This fighter will pummel stock markets and asset prices much lower as the world comes to grips with too much debt that produced too few productive assets and real income.

And in the blue corner is Helicopter Ben Bernanke. His mission, should he choose to accept it, is to devalue the U.S. dollar (and all those currencies currently pegged to it) and create more new money faster than deleveraging can wipe out debt. In theory, Bernanke is just the man for the job. Why?

He's an avowed deflation fighter. And, again in theory, there is no limit to how much money the Fed can create. Through monetary policy and other methods, the Fed can continue to shovel liquidity into the banking sector to keep it fictitiously capitalised and nominally solvent. In this fight, the Fed expands its balance sheet two to three times its current size (at least).

Of course if the Fed does begin growing its balance sheet at that rate one thing will happen and another thing might happen. First, gold will get closer to $6,300 as global dollar holders realise the Fed's intentions toward the dollar (not honourable). But there is another possibility.

The other possibility is that the U.S. Congress, not understanding anything, but seeing the fiscal deficit explode and the dollar plunge, begins to call for Bernanke's head on a pike. Or, to be more precise, bill's stripping the Fed of its independence and calling for a formal audit might began garnering support in the Congress.

There might even be some elected representatives of the American people who try and prevent a further currency calamity for Americans (who are rapidly realising that a weaker dollar means a lower standard of living and rising prices for imports). Don't hold your breath, though.

Congress get tough with the Fed? Granted, it's a stretch. My colleague Dan Amoss back in the States suggests Bernanke's political strategy could be to let a little deflation creep back into asset markets. A drop of 10-15% on the Dow would get Congress good and worried again, and mid-term elections are not far off are they? With another spell of deleveraging, Congress might just back off and let Chairman Bernanke continue his long-slow, back-door re-capitalisation of the zombie American banking sector.

You have to wonder, though, if the markets will be so compliant with the Fed's plans (assuming the Fed's plans are anything like we've described). You have to wonder if normal people are beginning to lose confidence that the so-called authorities have our best interests at heart, of even know what they're doing.

Above all, you have to keep really tight trailing stops to lock in your equity gains, increase your allocation to cash, and keep an eye on element number 79 in the periodic table. It's telling you exactly what to expect.

A final possibility is that the United States is ripe for a populist demagogue who either rails against the unfairness of China's currency policy and/or tells Americans it's time to close the borders, repudiate the debt, and get the fiscal house in order...with a big broom...and some pitchforks.

Dan Denning
for The Daily Reckoning Australia

• Uranium: A Carbon-friendly Substitute for Coal
• Energy Debate in Australia Needs to Get Serious
• Uranium Shares To Show Gains in Face of $120 Oil
• Red Bear Rising: Russia’s Resource Based Geopolitical Strategy
• BHP Billiton: The Oil Company That is Not an Oil Company

Lately, the stock market has been grabbing most of the headlines for its surprisingly strong performance since last March. But commodity prices have been surging as well. Favorable macro-economic trends are powering both markets.

The S&P 500 Index is up more than 50% from its March lows. Meanwhile, the CRB Index of commodity prices recently broke above the 280 level making new yearly highs - about a 40% advance from the lows of last year.

Therefore, no matter what America's grim economic data may be saying, the stock market and the commodity markets both agree that some sort of recovery is underway.

I how no opinion about where stock prices are headed next, but I feel fairly confident that commodity prices will continue trending higher over the coming years. That said, many commodity markets have already posted such large gains during the last few months that some investors may be skittish about climbing aboard.

I understand this fear, but investors must remember that commodities are not homogenous. Even though many of them have soared this year, some commodities have advanced very little. Corn is one of the notable laggards...and I think it has some catching up to do.

My recent research travels took me to the West Coast to revisit acquaintances made during the July National Chicken Marketing convention. (Yeah, that's what I do for fun!)

My big takeaway from this chicken confab was that most of the presenters and professionals in attendance believed that $3.00 corn was way too cheap and that corn prices would begin moving higher. I trust these guys. After all, it's their business to know the cost inputs from the egg to the bird on your plate. But their bullish outlook for corn was a minority opinion at the time.

Back in mid-summer, when this convention took place, the corn crop looked likely to make it through the summer months in great shape, with no threats in sight to disrupt high yields. Consequently, corn prices were languishing near multi-year lows.

But as it turns out, the "chicken crowd" was right to believe that corn prices were too cheap. And the corn price charts from last summer confirmed the strong potential for even higher prices. Though my view on trading weighs heavily on technical analysis, I learned long ago not to ignore important fundamental information. At the lowly price of $3.00 a bushel, the upside potential for corn seemed much greater than the downside risk.

That's why I urged the subscribers of my Resource Trader Alert (RTA) to enter a bullish trade on corn. Over at RTA we use options to directly play commodities themselves - options help limit our risks, while still providing ample opportunity to profit.

I recommended a six-month-long option play on corn, designed to benefit from any strong up-move in corn prices. The specific trade I recommended cost just a little more than $1,100 to initiate. I was looking for corn to move to $4.00 a bushel by then end of this year. But as it turned out, we hit that target in late October, which caused the value of the corn trade I recommended to more than double.

That's just how quickly the commodity options can move - a 25% rally in corn prices caused the recommended corn options to double. By using options we were able to maximize our profit potential and substantially limit our risk.

The reality of fundamental trading on things like weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. Often, price charts reflect this "insider knowledge."

In other words, a price chart can provide an early indication that a market is about move into a bullish mode, even before any broadly disseminated public information would confirm the rising prices. Therefore, when you combine technical analysis with the informed insights of industry insiders, you can shift the odds of success greatly in your favor.

After a brief correction, corn is on the rise again and trading just above $4.00 a bushel. I'm staying with this friendly trend for now.

Regards,

Alan Knuckman
for The Daily Reckoning Australia

• Corn Prices on the Rebound
• Wheat Prices Look Set for a Move Up
• The Aussie Dollar as a Measure of Global Risk Appetite
• Nervous Investors ‘Short’ the Market By Buying Commodities
• Macmahon Holdings Limited (ASX:MAH) Near a 52 Week High

Australian baby boomers have never experienced a "rainy day" - so they've never planned for one.

But then why would you?

Over the last 20 years, virtually everything has gone up... and up...

A generational bull market has lifted the stock market, property values and commodity prices to dizzying heights. Most of us have felt the benefit of this in some way or other.

It's certainly made us feel a lot wealthier than we are. And when you feel wealthy, you tend to act wealthy.

And that's just what we've been doing - in some style... We've bought bigger houses, newer cars, nicer TV sets - and in the process, we've racked up more personal debt than the Americans were in just before the U.S. sub-prime crisis hit.

How deep in debt are we?

According to the Bank of International Settlements (BIS), during the 1980s, the ratio of household debt to disposable income for Australian households was around 45%. For every dollar an Aussie earned he owed 45 cents. Not ideal - but manageable.

Since 1990, the BIS reports that this ratio has risen rapidly, reaching an incredible 157% in December 2007. That means for every dollar the average Aussie earns, he owes $1.57.

In an October 2008 article, The Australian reported:

"By 2008, Australian households carried 35 per cent more debt relative to their income than Americans. The great Australian middle class has become more addicted to credit and more spendthrift than the US, the home of consumer capitalism."

We all know what happened in America after their debt bubble exploded...

But despite that warning, and despite debt far in excess of their incomes, Aussies are STILL spending money like it's going out of fashion.

In June 2009 the government handed out $900-a-piece to low and middle-income earners as part of a $23 billion stimulus package. By August, Australian National University economist Professor Andrew Leigh found that 40 per cent of those who'd received that cash had spent the lot. That's some stimulus for the economy!

"This is approximately twice as high as the share of United States residents who reported that they spent the tax rebates handed out in 2001 and 2008," noted Professor Leigh.

We all love spending free cash - who doesn't? - But every dollar you fritter away now is a dollar your future self will have to find when there's no regular money coming in.

The fact is, despite the overwhelming warnings, many of us spend more than we earn without any thought to the consequences... we believe that house prices will always rise... that high asset values equate to "true" wealth... and that we don't have to save any of our income because our super will provide us with a comfortable retirement.

But hang on a second - How often do you audit your super?

How regularly do you check to see whether your nest egg is still growing... or, at the very least, well protected against the economic downturn? Every month? Once a year? Never?

Have you checked it recently? Maybe you should...

Many Aussies opt for their company approved super fund and then forget about it, expecting to be handed a huge cheque at the end of their working life.

Granted, it's convenient: no research, no hassle, no worries. There's usually a big name behind the fund, and the glossy brochure your HR Manager hands you makes you feel cosseted and reassured.

It's the easy choice so you take it. And you stick with it - because you never physically see the money... it's just another deduction on your pay slip. It's not as if you're actually handing over piles of notes to someone to safeguard and nurture for you.

According to a recent report by superannuation research firm Chant West, the majority of retail super funds (i.e. yours) are classed as "growth" funds; defined as containing between 61 and 80 per cent of their allocation in assets such as shares. Even if you're invested primarily in a "balanced" fund, 40-61 per cent of your retirement cash will still be held in "growth" assets, says Chant West.

Growth assets are great when the market is going UP... but you want to limit your exposure to these assets when the market goes DOWN. And that's the problem: in the same report Chant West states that the average 'growth' super fund fell by 13% in 2008/09.

This is the worst return since the introduction of compulsory superannuation in 1992.

The worst return in the history of super.

That's a real kick in the teeth.

And the thing is, unless you've been paying attention, you may not have even noticed it. Rest assured, it'll smart pretty badly when you're still doing that early morning commute five... or even ten years after you'd planned to retire.

Please understand: sticking with the 'default option' of your company super allows someone you don't know to make all the crucial decisions that affect your financial future.

In terms of committing crimes against your future self, this is just about the worst thing you can do. Believe me - you may as well jump forward in time to the day you retire and punch yourself square in the face.

Kris Sayce
for The Daily Reckoning Australia

• Your Average Australian Super Fund
• World of Super Collides With World of Credit Crunch
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
• European Governments of the Eurozone are Separately Responsible for Their Euro-debt
• Your Actively Managed Superannuation Fund Cannot Beat the Market

A report on U.S. payrolls showed that the American economy shed around 491,000 jobs last month. This was less than expected by forecasters and the least amount of jobs lost in the U.S. since October of last year. So in a manner of speaking, losing half a million jobs in a month is an improvement.

Financial markets were encouraged by this news. In fact everything seems to be encouraged. The Dow was up. The S&P was up. Gold was up. Oil was up. Up, up and away!

Not even the news that Bank of America may require US$34 billion in new capital could bring the mood on the Street down. The results of the 'stress tests' have been duly leaked so the market can digest the rumour (and sell the news). The good news is that Morgan Stanley, JP Morgan, Goldman Sachs, and American Express all seem to have 'passed' the test and do not require additional capital (at least according to government accounting). Of the 19 backs quizzed, it looks like 10 will need more capital and 9 will not.

Whether the 'stress tests' really tell the truth about the banks or not doesn't seem to matter at the moment. There has been a huge cloud of uncertainty hanging over the banks (and thus the market) regarding their solvency. Just the idea that the cloud may be dissipated (and that the economy is free to recover) is sending stocks higher.

Don't take our word for it. Look at the Aussie dollar. Look at commodity prices. As we said yesterday, risk is back. If we get a resumption of the carry trade (borrowing in USD and Yen to buy higher yielding assets) it can only be good news for Aussie stocks. We just don't know how long the party will last.

Of course no one really knows how much capital the banks will need over the coming years to offset losses. It could be a lot more. U.S. real estate site Zillow.com says that 22% of Americans owe more on their homes than their homes are worth. That's what we call "negative equity." If it were true, it would mean more than 20 million homes are underwater.

Do you think the stress test included the possibility that 20 million Americans would default on their mortgages? Probably not. It's an almost apocalyptic number. But it IS a credit depression. And it WAS a pretty big bubble in housing.

Here in Australia, everyone's going berserk spending government money. Retail sales hit $19.3 billion in March. That was a 2.2% gain over February. Nothing like a little national retail therapy to deal with a structural problem in the economy, is there?

That structural problem-similar to America-is an economy built on consumption and housing and the financial industry. That said, this looks like a rally you don't want to get in the way of.

Even Rupert Murdoch thinks "the worst is over." "There are emerging signs in some of our businesses that the days of precipitous decline are done and that revenues are beginning to look healthier," he said, after saying that he expects the full year operating profit to be 30% lower than last year's figure.

He also said he believed advertising dollars are fleeing print newspapers for good, to the web. And it's worth noting that one of Murdoch's properties-the Wall Street Journal-is one of the few newspapers that charges for online content. It's not a coincidence that the Journal is one of the few profitable papers in the U.S. Its circulation is rising.

Hmm. Charging for on-line content. It's a thought.

Until tomorrow...

Dan Denning
for The Daily Reckoning Australia

• Bank Stress Test Not Stressful Enough
• Were the Government’s Stress Tests a Bogus Exercise in Deception?
• Australia to Borrow as Much as $300 billion
• House Prices Down and Aussie Market Enters Second Wave of Rebound Rally
• Fannie and Freddie Say Goodbye to Veto

Before we begin our journey, a quick note about those of you who aren't reading this. Bigpond is apparently still blocking the DR from reaching some readers. There's not much we can do about this. We're rattling cages and shaking trees. If you want to contact Bigpond directly, instructions on how to do so are here. Agitate!

Here in Australia, all the talk is whether or not Rio Tinto's London directors are selling its Australian assets at the bottom of the commodity cycle. This would contradict the axiomatic investment advice of "buy low, sell high."

It was instructive to read Chinalco's Xiao Yaqing comment in this weekend's Financial Review about how the deal would be a way for Rio's board to create further value for shareholders. Here's a man who must be pretty sure he holds a winning hand. But he can't overplay it yet.

As we said last week, Rio's board did not begin last July with the project of ruining shareholder value by taking on massive debt at the top of the resource cycle. But now, the company has to sell assets to a strategic partner in order to pay down that debt.

It's not a done deal yet, of course. The Treasurer must approve any deal. And Rio shareholder's are bucking for a fight. However, aside from what happens to current Rio shareholders, the bigger question is whether the whole affair is a marker for the bottom of the commodities bear. So is it?

Leighton's Wall King says it's not as bad as it looks. He told the ABC's Inside Business that, "I think the comments about declining in mining are over-exaggerated...One blowfly doesn't make a summer and one mine closure in central Queensland or cutbacks doesn't signal the end of the mining industry."

He's right, of course. Mining-with its cycles of capital spending and fluctuating commodity prices based on demand and supply-is about as cyclical as you can get. But assuming there's not a lot more downside in commodity prices, how fast commodity shares recover depends on access to finance and a pick-up in demand.

But with the clowns who believe they're running the global economy, a recovery in demand is getting further away, not closer. The G-7 finance ministers met this weekend and the result was not encouraging. They issued a statement that read, "We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector. The stabilization of the global economy and financial markets remains our highest priority."

Right boys. You get right on that. Nearly twenty months since the first two Bear Stearns funds went belly up and policy makers are still tripping over the neckties trying to figure out which 'tool' is the best for the problem. The problem is not with the toolbox. The problem is with the tools.

In the meantime, all this rumbling and stumbling and bumbling weakens confidence in the stock market and strengthens the case for gold. Swarm Trader Gabriel Andre writes in this morning to say, "We had a look this morning at the DOW/GOLD ratio. It is nothing revolutionary. But it's useful. It shows you the how many ounces of gold it takes to buy a "share" of the Dow." You can see the chart he was looking at below.

"During the last twenty years," Gabriel continues, "roughly between 1980 and 2000, the ratio rose. It means that the Dow Jones was rising faster than gold prices. Since 2001, the DOW/GOLD ratio began falling within a clear bear market trend."

"The bear was obviously in the Dow and not gold. Gold prices have performed a lot better than the US equity index. Today the ratio has accelerated its decline, and may break on the downside a support level. That is, the Dow is getting weaker in terms of gold, or gold is getting stronger in terms of stocks. Whichever you prefer.

"Looking at a chart, technically speaking, there is a possibility that the ratio goes even lower more quickly. In layman's terms, it means that either the Dow Jones will collapse or either Gold price will soar. A ratio of 5 might be a technical objective: therefore a Dow Jones at 8,000 points would imply an ounce of gold at 8,000/5 =$ 1,600 =>$ 1,600 USD!! Or maybe if gold price remains around 900 USD, it would imply a Dow Jones at 900*5= 4500 points!

"The link with the markets here down under? Well if the main US equity index crashes or even remains at the same level, the perspectives for the ASX 200 are also bearish." But not for everything, the Swarm Trader points out. The gold and precious metals shares may be the place to be for the remainder of the quarter.

Over at the Wall Street Journal's European edition (paid subscribers only), Frenchman Jacques Attali reckons we are all on the road to Weimar now. That is, he believes the entire planet may be headed for a depression and massive inflation. We are slouching towards Weimar Germany, where inflation was rampant.

"The major powers think that the crisis is only fleeting, and that we'll soon return to the old order," he writes. "No one really wants to undertake the profound changes necessary to resolve it. Although the world's public debt should be cut, now it is only being increased."

" Everywhere [ed. including here in Australia], out of fear of a recession, the survival of the system is being financed by all those who still have resources: the banks, when they choose; the governments, when no one else can. Since there is no talk anywhere of increasing taxes, the governments themselves are getting into debt, borrowing from national or foreign investors and, as a last recourse, from the central banks.

"The numbers show it. When the American debt ought to have been reduced, it increased in 2008. The Geithner bailout, just like the Paulson plan, will increase America's public debt even further. The European debt is also increasing sharply. Many more borrowers will default on their loans: derivatives, credit cards, mortgages. And no one is there anymore to buy them back."

What is so hard to understand about this? Everywhere politicians dishonestly and immorally believe the way to correct years of too much debt at the household and corporate level is to take on more debt at the government level. Perhaps, while they're doing this, they can explain to future generations how much we owed it to ourselves to paper over problems of our own creation by borrowing from them. But don't expect that!

"This growth of public debt, on top of private debt," Attali writes, "can only lead to catastrophe: the bankruptcy of households, banks, even countries. What has happened to Iceland can happen to larger countries as well, if panic seizes creditors. Anything is now possible, including the collapse of the global banking system, whose losses would have grown beyond reach of rescue."

"This panic could be set off by the realization of the insolvency of the system. It could also be set off by political or terrorist movements: A number of determined groups, with even limited means, could organize speculative attacks on banks, leading to their collapse.

"Then we could arrive at a global depression. It could even be followed by hyperinflation, provoked by the immensity of the monetary means created since the start of the crisis; the depression would allow the debt to be reduced to nothing, to the benefit of the borrowers. The world would then be experiencing a depression ready for inflation, a global Weimar."

Attali does hold out one hope. He reckons a new global leader could emerge if one country or economy makes a great leap forward in new sources of energy. More on that as a "production possibility frontier" tomorrow.

Dan Denning
for The Daily Reckoning Australia

• Debt to GDP Ratio Will Return to Normal
• Bear Market to Last at Least Five Years
• 40 Years of Inflation, 80 Years of Dow/Gold
• Commodity Inflation Causes Consumers to Cut Back on Spending
• Daily Reckoning Plan to Save the World

The elephant in the room blasted out a mighty honk this weekend in a report by Access Economics, as reported in today's Australian. "Batten the hatches," Access says. "This is not just a recession. This is the sharpest deceleration Australia's economy has ever seen." Access adds that the federal budget is "buggered."

"Leading economic forecaster Access Economics warns in its quarterly Business Outlook, released today, that the nation's economic boom will 'unwind scarily fast', halving corporate profits, costing more than 300,000 people their jobs and blowing out the current account deficit to more than $100 billion."

Dire stuff indeed. But the question from last week remains, is this massive dose of negative news already priced into Australian stocks? Or is it a further hammer blow that will drive them to new lows?

So far this morning, the market seems to be taking the prospect of a prolonged earnings recession fairly well. Or maybe it's just in denial. The Access report correctly points out that the fall in commodity prices will dry up government royalties and corporate taxes. This will lead to higher budget deficits, more unemployment, and a contraction in the mining industry after four years of break-neck expansion.

Australia's government is now in the same pickle that Gordon Brown and Barrack Obama find themselves in: how do you distribute enough borrowed loot to keep your economy from shrinking without igniting inflation and a weakening of your currency? And if you accept that the government really can step in and spend money while households and businesses are not, where does it spend it? Roads? Bridges? Booze? Pokies?

Those are mostly political questions. Economically, it's hard to see how corporate earnings will recover this year. Demand is falling. Miners are winding up projects. All this being the case, don't look for earnings to lead to a big bear-market rally.

In fact, as we mentioned last week, we think it's likely that you'll see a large exodus of institutional money out of common stocks and into corporate bonds. Corporate bond yields are now much higher than what you'll find in U.S. government bonds. And it is the habitual thing to do, changing asset classes rather than liquidating altogether.

The big sleeper so far this year is oil. Oil prices have fallen 25% since rallying to just over $50 last week. The leverage is out of the oil market. And with a global recession, the IEA now predicts oil demand will fall for the second year in a row. It's the first time that's happened since 1983.

But the real story is how the falling oil price is hammering oil producers. Multinational oil companies are cutting back exploration programs. They're not looking for oil. And you can't produce what you can't find.

As for the national oil companies in Mexico, Venezuela, and Russia, well they too are being hit hard by the falling oil price. During the big run up to $150, national oil companies were cash cows. But it now appears that little of the oil bounty was reinvested in new production or even maintenance of existing production.

So what do we have now? We have a situation here. A situation where the falling oil price is leading a big reduction in oil production. This will match, for a while reduced demand for oil. But we also think it's baiting the trap for a huge blowback in oil prices. And the spark for that could be geopolitical. More on that tomorrow.

It didn't seem possible, but things are getting worse for Americas largest commercial banks, Citibank and the Bank of Amerika. "The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phase of its rescue attempt, with plans to purge bad assets that are paralyzing the financial system," reports the Wall Street Journal.

Aha! Remember that phrase from last week, "incorporating the public debt?" This was the alchemical process by which a huge slab of outstanding debt was transferred to a new entity and converted into, ahem, "capital" in 17th century Britain. It now looks like you'll see a new large national financial institution in America this year. It may even resemble a giant vacuum, or a garbage dump.

No matter what it looks like, it will be the receptacle for the metastasizing debt that is killing the financial sector. The Journal says that the discussions for the new "Bad Bank" between the Fed, the Treasury, and the FDIC, "show how the rapid deterioration of bank assets is outpacing the government's rescue efforts. Banks are now struggling not only with the real-estate investments that sparked the crisis, but also with the car loans, credit-card debt and other consumer debt that have taken a hit with the faltering economy."

We may as well get on with full nationalisation of the financial system. Thus far, it's been incremental. But the end game is increasingly obvious now. Governments will either begin guaranteeing all mortgage lending and corporate debt (as plans in the UK suggest) and/or assume responsibility for the toxic assets impairing financial balance sheets (in exchange for equity).

What this means for stocks, paper currencies and gold bears more discussion. More on that tomorrow.

Dan Denning,
for The Daily Reckoning Australia

• Equity Premium Will Be Replaced With a Tangible Asset Premium
• Corporate Debt is Just One Aspect of the National Debt Problem
• The Cash Flows Are Coming
• Oil Prices Under $70
• Big Australian Resource Stocks Up 24% in 2008

My outlook for this period is very bullish. Having spent both the peace and productivity dividends of the last few decades, the current direction of government policy - increasingly interventionist - threatens to set in motion the forces of capital flight... into gold. The effect of this on the dollar will be historic. There is no more honest a measurement for this forecast.

However, it is a three-five year outlook. It may start to unwind tomorrow, or perhaps not for two or three years.

Technically, the long-term chart contains no great knowledge. I don't put much stock in the charts of any price trend spanning more than 10 years. My calls would lag major turning points by about five years. But as far as the long-term chart goes, the gold price is still in a long-term bull market.

The last highest low in the eight-year bull trend lies at around $540, which is just above the final resistance point of the previous bear - the break out point after which the gold price accelerated in 2005...the year that Bernanke was chosen to head up the Fed. Go figure - turns out gold was right about him.

However, the more normal "primary" trend support lies at around $700.

The "primary" trend is the sequence that shows up most prominently in the five-10 year (weekly or monthly) chart.

In the case of gold, it is the trend that began back seven or eight years ago.

In a normal trend, the correction lows stop at previous highs, or resistance levels, which are at the $700 mark here. Note that the bulls bumped up against that level a few times during 2006 and 2007, before ultimately breaking out. That just makes support that much more significant at this level.

However, during a correction to the primary sequence, the normal support points might fail, and it becomes difficult to figure out whether it is still a bull market at all. In other words, it is possible to see gold prices fall to $600, or even $540, even if the general bull market is still on.

Percentagewise, a correction of just such magnitude occurred in 1975. Gold prices fell from around $200 per ounce at the 1974 peak to just above $100 a year later, before soaring to new highs, and to over $600 by 1980. So the long-term technicals tell us almost nothing, except that there is room on the downside whether or not the bull market is still on.

There are two facts, however, that argue against a correction of the same magnitude today.

One is technical, sort of, and the other is fundamental.

From a technical standpoint, it should be noted that the advance in gold prices leading up to 1975 was larger (percentagewise) than the advance from the $260 low in 2001, and occurred over a shorter time frame. I don't know how much that may be worth, but it's something to consider.

Fundamentally speaking, moreover, simply comparing the Federal Reserve's policies today with those of 1973-74, when it was similarly trying to rescue the world economy from a crisis that saw a 40% decline in the Dow, it cannot be denied that the current policy is far more inflationary... more bold... more off the charts, if you will. If the Fed underestimated its contribution to the inflationary events of the '70s, as Bernanke argued in a speech about inflation last year, what is the 2008 Fed doing?

The Medium-term Outlook, One-Two Years

My outlook for this period is also quite bullish for gold, as the positive short-term effects of the government's current policies begin to wear off and the negative effects start to set in sometime in this time frame. I know this is counterintuitive to anyone who believes what the government is doing today is beneficial, but that is really the only way it can work. In this period, you will see asset prices recover, along with commodity prices, and maybe even a fleeting boom (bubble) somewhere, like in biotech, or public works - wherever. However, the rising tide won't come in fast or high enough to keep all the boats rising like in other bull markets, or even in significant bear market advances.

Let me distinguish here between a recovery in the economy and reflation.

I expect significant deterioration in the economic fundamentals in the medium term. However, much of it is priced in, and the effects of monetary debasement will underpin the dollar value of the soundest assets. Indeed, only the soundest equity or real estate assets will provide real protection against the confiscatory policies of governments over this period. These include gold-related assets, and some of the other important commodities, though it isn't certain whether gold will outperform in this time frame.

It could take a full year for inflation expectations to recover from their current trough.

Moreover, although the Fed has been a leader in the reinflation program in 2008, it had not inflated nearly as much as the other central banks between 2003-2007. This fact created the illusion of a global boom that would sustain even as the U.S. economy recessed. Now it is being liquidated.

That is one of the reasons the commodity liquidation was so excessive, and also why the dollar rallied this summer. I don't know exactly what to expect from the dollar in the next year or two, but at best, trade should continue to be choppy.

Currency markets won't offer much opportunity for most people until the dollar's bear market resumes - sometime after 2009, in my judgment. However, this should not hinder gold's performance. Moreover, my feeling is that the Fed will pursue a low interest rate policy for longer than other central banks, which will eventually be the catalyst that undermines the dollar and sets it up for the final chapter in its bear market - the one that leads to a brush with hyperinflation.

Technically, the intermediate trend (i.e., the nine-month trend) is still down. The bulls have bounced off normal primary support at $700 nicely, and October tends to herald correction lows, seasonally speaking. Most of my leading indicators, including gold shares, moreover, suggest the low is in.

The technical objective of the seven-month top formed January-July 2008 was also already achieved at $695, plus or minus, suggesting the bear leg is complete. However, until the last lowest high ($940) in the downtrend is cleared, we have to tame our enthusiasm. What's more, the current rally has stalled at the downtrend line, which intersects the current time horizon at about $890.

If the bulls can't make it back up to at least the $940 high of September/October before the market falls back through $830, then I would worry the market MIGHT either retest its $690 low, or go lower.

The Short-term Outlook, One-Three Months

My outlook for this period is neutral to bullish, with the possibility of one more test of support in the mid-high $700s if bullish sentiment returns to Wall Street prematurely. Although the policies governments are pursuing are fundamentally and relatively bullish for gold, it is more than possible that they engender a recovery confidence in the short term that may hinder the performance of gold.

Technically, the objective of the October-November ascending triangle (bottom) in the chart below has completed at $875-880.

The last highest low in the short-term sequence is around $830. If the market falls through this level before extending the current rally to the $940 area, as mentioned above, there is the slight risk that there is something wrong with my bullish medium-term (or intermediate) outlook above.

But this risk is not that great considering all the bullish permutations that could still take shape on the chart. Still, the most likely scenario in my mind is for a pullback to somewhere between $750-800, whether or not the current two-month sequence extends to $940 in the next few weeks.

If the pullback starts now before a higher high, I'd put it at the low end of the shaded area in the chart ($740); if it starts higher, say from $940, it could stop a little higher, like $775-800.

But until we get over $900, the $830 handle should be watched, as a break through it before a higher high could trigger the liquidation of the two-month advance and start a correction to at least $775.

Ed Bugos
for The Daily Reckoning Australia

• An Oil Price Correction is on the Horizon, When and Where
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• Today’s Current Gold Price
• Profiting From the Copper Indecision
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But here at The Daily Reckoning headquarters, we keep our eyes open, even on national holidays.

What we saw at the end of last week was the kind of day that suits us. The Dow dropped 120 points on Friday. The dollar fell. Gold rose. And oil... as mentioned above... hit a new record.

*** And throughout much of the United States, farmers say 'rain, rain go away.'

Often too much rain can be just as harmful to a crop as not enough. And in this case, heavy rain across the country has caused the corn crop to run behind by a few weeks. Some farmers have no choice but to plant later, causing their crop yields to go down... and push grain prices up.

An option farmers have when corn planting is delayed is to switch some of their acreage over to soybeans, but even this is becoming increasingly difficult.

Kevin Kerr explains:

"One Resource Trader Alert subscriber told me that he 'spoke to a family friend who farms a few thousand acres in Northeast Iowa yesterday, and he's not expecting to rotate any corn to beans unless wet weather continues through this week. Even then, it's pretty hard to get the right bean seed not to mention they've already fertilized for corn.'

"I heard this over and over again when I went on my spring farm tour. Farmers are locked in now, couldn't switch if they wanted to. Input costs are so high they are even planting sections that aren't underwater in order to just get something in the ground. At this point yields are certainly going to be impacted and there is no turning back or switching to shorter yield corn like a 90 day, or certainly not trying to switch to beans.

"In fact, I hear in some smaller rural areas seed and fertilizer dealers have been cut out and not even gotten what they were promised from their distributors, leaving many farmers without anything. This could be one of the worst years for farming in recent memory and at one of the worst times possible."

Commodity prices across the board have been rising in the past couple of months. We don't know how long this trend will last - that is, the trend towards higher commodity prices and lower asset prices - but we give it a while.

Bill Bonner
The Daily Reckoning Australia

• Aquaculture: Soybeans and Corn Under Water
• Farmers Feel Consumers Blame Them for High Food Costs
• Most Commodities Are in a Bull Market Today
• Corn Prices on the Rebound
• Farming Cattle is Out; Farming Soybeans is In

"Sam's Clubs, Costco limit bulk rice purchases," said an AP story last week.

Today, the New York Times talks of a "recession diet," in which shoppers try to switch to cheaper foods. And there is talk of a drought this year, further reducing the supply of available grains.

"We've reached the peak for grain production," says Resource Trader Alert 's Kevin Kerr.

"World farmland planted with grain has declined since 1980, mostly due to environmental factors such as soil erosion, waterlogging and salting of irrigated land, air pollution and water shortages."

"We are also running out of crop varieties and have ridden fertilizer as far as it will take us. Thus, world grain output has been holding flat at around 1.6 billion tons and may begin to fall."

The LA Times mentions consumers "coping with soaring prices." And the Boston Globe reports that drivers are trading in their gas-guzzling SUVs in favor of smaller cars. Maybe that is why Toyota is now the world's leading automaker – selling more vehicles than General Motors.

Gasoline is at about $3.60 a gallon. Milk is even higher, at more than $4 a gallon. Consumers have no choice – they have to cut back. That, too, is one of the essential verities of today's economy. Ours is a consumer economy in which consumers have less money to spend.

"In short, we're facing a crunch in just about every natural resource you can name," Kevin tells us. "But for investors, the indicators for real asset investments are flashing green. My expectation is that we are at the beginning of a major bull market in commodities. That will mean an unending trend of higher prices for the things that keep the world running.

"So the cycle of ups and downs will continue. But now there is a floor – a level commodity prices simply cannot fall below. And the emerging economies – and the booming population – push that floor a little higher each day. It will just take awhile before the market is ready to admit it.

"Until that happens, we can play those ups and downs for tremendous opportunities. And while we're not the only ones who've noticed, we do have one advantage over most investors..."

Bill Bonner
The Daily Reckoning Australia

• An Abundance of Paper Money is Causing Food Prices to Soar
• Americans are Paying Record Prices for Energy and Food
• The Iowa Floods Send America Into a Season of Hoarding
• Peak Oil, Peak Food and Peak Everything Else
• Are Farm Prices Destined to Rise as More People Compete for Food?