There is a risk in holding cash in an environment of asset price inflation - a condition that usually occurs when governments create large fiscal deficits and inflate the money supply. The practice is endemic to banana republics and declining empires...and it is happening in the US at this very moment.

The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure 'multipliers' are greater than one - so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin... But the evidence is quite strong that these policy responses usually trigger inflation.

I suppose that even someone without any common sense might understand that a "strong currency" over longer periods of time reflects a high degree of prosperity and economic success, whereas a chronically weak currency is symptomatic of economic imbalances, such as a lack of competitiveness or overconsumption, arising usually from excessive supply of money and credit.

I would also suppose that even if someone never travels overseas, he would understand that if the US dollar loses 50% of its value against all the other world currencies (everything else being equal), it means the US is 50% poorer relative to the rest of the world. (Now, this is not entirely correct, since the US has overseas assets that would appreciate in value in USD terms).

Moreover, stock price movements become extremely volatile and erratic in countries with a depreciating currency. In the long run, the depreciation of the currency will usually more than eliminate the gains in local currency terms. So, whereas in 2007 both the Dow Jones and the S&P 500 exceeded their previous highs reached in 2000 in US dollar terms, these indices failed to make new highs in Euro terms. In addition, whereas the US economy expanded in US dollar terms between 2001 and 2007, in Euro terms it actually contracted!

Even with the S&P 500 having shot up since the beginning of the year by over 25%, it has merely kept pace with the price of gold. And during the last 10 years, the S&P has lagged behind the official US inflation rate...while lagging VERY far behind both the euro and gold. Since the end of 1999, the S&P 500 has delivered a total return after inflation of about MINUS 25%.

Unfortunately, the US is not the only country that is busily debasing its currency. "Everyone" is doing it. Because of the current collective debasement of all paper currencies by central bankers, I believe that precious metals and mining companies will maintain their purchasing power.

In the 1980s the US dollar was a very strong paper currency compared to the Mexican Peso. Today, there is no paper currency that is as strong relative to the US dollar as the US dollar was relative to the Peso in the 1980s! The only "currencies" that have a chance of becoming as strong against the US dollar as the US dollar was against the Peso between 1979 and 1988 are precious metals such as gold, silver, platinum, and palladium.

Also, I should add that precious metals could appreciate even if the US dollar miraculously recovered strongly against foreign currencies for an extended period of time. Such dollar strength would probably be a symptom of some horrible economic or political problems around the world, which could be friendly to precious metals.

Central bankers and pundits seem to believe that they have averted the second Great Depression, while ignoring the fact that more and more debt produces less and less GDP and fewer and fewer jobs.

For now, though, the low ten-year bond yield is the lifeline from which all support flows. Much of the investment universe holds together because money can still be had for cheap - not by the volition of a cooperative private sector, rather induced by a US government that simply distributes money for free. Such an ill-conceived idea could only have been born in the test tube of a central banker.

Private lenders comprehend the difficulty of making profits when being forced to lend for nothing, so the government increasingly finds itself to be the interest-free lender of last resort.

Ultimately, if central bankers continue this process for long enough, it is the dollar, and any currency or economy still pegged to it, that could eventually crash. Therefore, we investors find ourselves in the precarious position of having to maintain sufficient liquidity, but not too much in case the real value of these liquid reserves is wiped out by politicians and central bankers gone mad.

Regards,

Dr. Marc Faber
for The Daily Reckoning Australia

• US Dollar As Reserve Currency Not Working Very Well
• 4 Ways to Protect Against a Falling Dollar
• Is Gold Money?
• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?
• Transfer of Wealth

The front page of today's Australian Financial Review has a time-lapsed picture of cars travelling on what apparently is a "Superhighway Paved with Gold." Ah! No wonder gold is going up. It would take a lot of gold to pave a superhighway.

The caption underneath the picture reads, "There's big money to be made from the new tech boom by investing in internet stocks and telecommunications players." And this story just so happens to be published hours after Apple told the market it sold more iPods and Macintosh computers in the fourth quarter than ever before. The crowd went wild.

Apple shares finished up about 5%, just under US$200. Since they bottomed at $78.20 in January, shares in the company have soared by 154%. That's certainly a big enough rise to get your attention. But as with the A-REITS we mentioned yesterday, if you were going to buy into the bogus recovery, the time to do it was eight months ago - not yesterday.

Mind you Apple is an interesting business that might have the ability to deliver great earnings growth through the teeth of a global depression. We doubt it. But iPods have become pretty indispensable in modern culture. You never know.

But today's Daily Reckoning has a simple point to make: watch out! The only thing really going down right now is the U.S. dollar. And that gives us the heeby jeebies. Last time there was such a consensus about the dollar's short-term direction, everything reversed, and quite suddenly.

The last time the dollar index broke out from its lows was in June of last year. Once it busted out, it set off a chain reaction in financial markets. Investors got out of risk assets and back into short-term U.S. Treasuries. Stocks went down, and Aussie stocks were no exception.

In fact, as you can see below from the chart (courtesy of Slipstream Trader Murray Dawes), there is a pretty clear relationship between the week greenback and the All Ords. Murray inverted the dollar index scale to show the correlation more clearly. The bottom line is that if the dollar index strengthens (the blue line goes down), the All Ords will weaken (the black line will go down too).

Click to enlarge

A dollar rally and an equity selloff are even more likely now for two other reasons. First, any time you get a carry trade - in which investors borrow a cheap currency to buy assets - there is always the risk of a short squeeze. Investors who are short the dollar cover that short by buying back the currency.

Right now, as you can see from two more charts below, investors are about as bearish as they've been on the dollar (or least bullish, if you prefer). The Powershares DB US Dollar Index Bullish and Bearish Funds measure the greenback versus a basket of six other currencies, the Euro, the British Pound, the Canadian dollar, the Japanese Yen, the Swedish Krona, and the Swiss Franc. One shows dollar bullishness nearing a new low. The other shows dollar bearishness reaching a new high.

Click to enlarge

Click to enlarge

The second reason to expect a reversal in the dollar and a sell-off in stocks is that stocks are pretty overvalued at the moment. John Hussman at Hussman Funds writes, that, "On the valuation front, stocks are presently overvalued, but to levels that we've observed at least several times in history. The anomaly relates to market action, where we can no longer find a single historical instance where stocks were more overbought on the combination of short - and intermediate - term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980.

Hussman then adds that, "One of the notable features of extreme overbought conditions is that investors rarely have much opportunity to get out, just like the fast and furious advances that clear oversold conditions tend to occur too quickly to capture unless one has already established a position. As for the present, we have rarely seen 90% of stocks suspended above their 50 - and 200 - day moving averages for as sustained a period as we have now observed."

Of course Hussman is writing about U.S. stocks. What about Aussie stocks? We asked Murray to see if the Aussie market looks overbought on a technical basis as well. He sent us the chart below, and the brief answer is "Yes!"

Click to enlarge

"A quick look from 10,000 feet really shows us how overbought the market is at the moment," Murray comments in his note. "The weekly MACD (which shows us the relationship between a long term and short term moving average) has not been this high very often in the past 30 years. A quick look at all of the times it has been this high shows some interesting facts.

"The final blow off rally before the 1987 crash took the weekly MACD to a level below where it is now (the thin blue line). In 2006 when it reached the same level as in 1987 we did have a correction in the market, although it didn't last too long and we eventually headed higher for another year.

"The final rally before the credit crunch in 2007 took us to a level which is about where we are now. Do you think it was a good idea buying stocks in early 2007?? Not really. The market has now retraced to within a whisker of the 50% Fibonacci level. And the long term moving averages are saying that we are still in downtrend.

"The risk of entering the markets at this time is very high. Any longs should have tight stops, but any shorts need to wait until short term momentum indicators have shifted into negative territory which they haven't as I have stated in the past. It could be a good idea to take a bit of money off the table if you are sitting on good profits from the past few months. When the music stops you will only get a chance to sell with everyone else and it will be at much lower levels in the blink of an eye."

Have we switched religions on you? Not all. We're still a confirmed U.S. dollar bear. But a sudden collapse in the dollar is not in the interest of any trader or investors who have large dollar-denominated assets. And traders are amoral anyway. You trade the trends and the trends never move in a uniform direction.

So consider yourself warned. Though we are confirmed U.S. dollar bears, the dollar is looking oversold. Stocks are looking overbought. And frankly the reflation of all asset markets (bonds, stocks, commodities, and real estate) is looking over cooked.

Dear Dan,

Merv

We'll have a think on it Merv. "Dan Denning, hanging out with the meth heads and prostitutes in St. Kilda" doesn't seem very family friendly. But truth be told, the company you find in St. Kilda is still better than hanging out on Collins Street.

Dan Denning
for The Daily Reckoning Australia

• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy
• Looking at WPL and Oil Side by Side
• S&P/ASX 200 Clears Resistance Line
• Aussie Dollar is Crushing Long-time Rivals Like the Pound and the U.S. Dollar
• Investors Think Things Will Return to the Way They Were in the Bubble Epoque

But let's not forget about oil. It too is priced in dollars. In fact, the big gold move started because Robert Fisk claimed the Gulf States and China et al. are tired of paying for oil in an unstable currency. You could say that gold moved closer to being money again because of how important oil already is to the real economy.

We'll get back to oil in a moment. But there was a story in today's Age that gave us the willies. "The Aussie dollar is poised to storm past parity with the US dollar, propelled by local interest rate rises and Australia's close ties to the booming Chinese economy, according to currency analysts," reports Chris Zappone.

It doesn't sound too creepy. But there IS a creeping hint of euphoria to the Aussie story at the moment. The dollar...the economy...the fact that summer is just over the horizon...you can feel the animal spirits getting friskier. It was like this in the summer of 2008 as well, right before the bottom fell out.

But enough of the weird sense of déjà vu. How does the big picture affect your investments? That is always the tricky part. It's one reason why we are stuffing our new offices with all kinds of traders and analysts and writers whose ideas would probably get them thrown out of a respectable job. These are just the people we want thinking about the investment future.

Dan Denning
for The Daily Reckoning Australia

• Gold, the Aussie Dollar, the Greenback and You
• Aussie Dollar is Crushing Long-time Rivals Like the Pound and the U.S. Dollar
• Dollar’s Demise Has Started a Chain Reaction in Currency and Commodity Markets
• Rally in Stocks and Rise in Aussie Dollar is a Result of the Carry Trade
• The Aussie Dollar as a Measure of Global Risk Appetite

The importance is dependent on your perspective. Those people who are not borrowing money to spend are thus suffering the pangs of a lowering of their lifestyle, which depended on borrowing money to spend; and then they come around, whining about stupid things like, "Daddy, things have gone up so much in price that I need more money, which you would give me if you loved me. Don't you love me? I love you! Won't you please love me, daddy?"

And so I ask, "Can't you love me if I don't give you any money?" and they say, "No. You could borrow the money, and then we would love you", and I reply, "I have been borrowing money and now I can't pay them back" and so the kids say, "Then borrow some more!"

And, in a terrifying revelation, I realized that it is not only my children, but all the rest of the economy that is totally dependent on everybody else borrowing money to spend, too.

So now you see how Chaos Theory was right, and that all things are connected to all things? If not, then pay attention to how they will now commence to all drag each other down into the Nightmarish Hell Of Inflationary Insolvency (NHOII).

And it doesn't take a real genius to see why, but the point is not that the American people were stupid enough to think they could get a perpetual free lunch by borrowing money to pay for it, or even that a smaller subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those who also think that they can call me on the phone and either 1.) Ask to borrow some money from me, or 2.) Ask me to pay them back the money I borrowed from them.

My response is the same, in that I give neither one of them any money because I don't have any money; so to one I laugh in scorn, and to the other I say that I have just put a check in the mail to them, and that they will get their money soon, and if it hasn't arrived in a few months, call me back and I'll write you a new check and get it right into the mail.

The point is that a much larger subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those people who think that they can elect government representatives who legislate all problems out of existence, that will tax me and then give the money to them, or the Federal Reserve will create more money to loan to investors with which to buy government debt so that the government can spend, spend, spend us into blessed Utopia. Either way, it's Bad, Bad News (BBN).

And, alas, one way or the other, they are right. Unfortunately. And that is one reason that I weep, alone, in the Mogambo Bunker Of Bunkers (MBOB), doors locked, radio blaring, machine guns cocked and loaded, mostly drunk or nearly so, soon to be blissfully comatose.

Another reason that I cry so piteously and drink so abusively is that all this new government borrowing will create so much new money that it will destroy the dollar's buying power, taking my own country down with it.

The only reason that I stop bawling like a little crybaby is the knowledge that the people who own gold, silver and oil will get rich, rich, rich, and since I own gold, then people will want me to loan them a few bucks out of my huge stacks of money because they are starving, and their children are starving, and I will say, "No!" and it will be thin gruel indeed for them to hear my mocking voice again echoing in their heads, "Buy gold, silver and oil, you morons, because your stupid government is letting a private bank (that misleadingly calls itself the Federal Reserve when it is, in fact, neither) to create so damned much fiat money that it will produce catastrophic inflation in consumer prices that will destroy the country, just like it has done to every other stupid country in the last 4,000 years that let its stupid government increase a fiat money supply at its whim! Hahahaha! Now you see why I always said you were freaking doomed! Hahaha!"

But I feel terrible, as this constant infliction of inflationary pain by heedless expansion of the money supply is so unnecessary, and that is why I was pleasantly surprised to read in The Wall Street Journal the headline "Central Banks Consider Gold" in its Commodities Reports column.

The reason is easy to see if you read the article backwards, in that there was a question about central bank buying "last week, when gold saw a record single-day gain", especially Chinese central bank buying of gold, which is already the ninth-largest holder of gold in the world but which holds only 1% of its foreign-exchange reserves in gold, although it actually said it would like to hold more. And Mark O'Byrne at Gold & Silver Investments says that he would "be surprised if the Chinese hadn't been nibbling at the gold market," which leads to the news that Asian banks "are seen as keen buyers" of gold, which leads to the news that "other central banks are now far more likely to be holders of gold", which leads us back to the second paragraph that "Turbulence in the financial markets and recent US dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework", which leads to the opening paragraph of "Central banks may be starting to turn one of the few assets in which they can invest; gold."

In short, those crafty Chinese, a fifth of the world's population, may be getting ready to issue a gold-standard money, which will instantly make their currency the strongest in the world, which is just what a country needs if it wants to import a lot of things cheaply so as to respond to demand for internal economic growth without stoking inflation in prices!

And, fortunately for those of us who both love to have large profits handed to us and who also own gold, a Chinese gold-standard may soon make a dream come true as gold would skyrocket when priced in suddenly depreciated dollars.

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Borrowing Money is no Longer in Fashion
• Does This Mean You Should Sell Your Gold?
• Why Do Men and Women Want Money and Power?
• Millions of Zimbabweans Face Starvation due to Nationalisation caused by Hyperinflation
• The Return of the Cattle Market

..where earnest men and women toil long hours in glass towers. What are they doing?

'Look at this chart,' they tell clients. 'It shows how much you can expect to make at different risk levels. And see this curve? It is what we call the 'efficient frontier,' where the risk/reward relationship is optimized by proper asset allocation.'

'Wow,' you say. 'You must have some pretty smart cookies working for you.'

'Well, we do our best,' says the young man, modestly.

In a normal economy, 'finance' performs a useful function - helping to match up people who have capital with people who need it. But even when it is on the level, the profession is full of bombast and flimflam.

Those numbers, presented so confidently to customers, were 9/10ths smoke and 1/10th mirror. The new book by Rogoff and Reinhart confirms a point made by our friend Nassim Taleb: both the theory and practice of modern portfolio analysis were flawed. The theory was flawed because people are not reliable. They don't always react in the way their models predict. What they did in the past may or may not be what they do in the future. And the practice was flawed because the past that the number crunchers looked at was limited to the last 25 years; it was the period since 1980, for which they had the figures! In other words, their models were based on numbers only from the boom years.

The US dollar is getting trashed, Strategic Short Report's Dan Amoss tells us.

The greenback "is increasingly being viewed as a 'funding' currency in the carry trade," Dan continues.

"In other words, leveraged speculators are borrowing US dollars in the short-term money markets at near-zero rates to buy bonds in higher- yielding currencies like the Australian dollar or the euro. If this trend remains in place, it will continue to drive down the exchange rate of the US dollar, and drive demand for gold up.

"This trashing of the dollar is not bullish for America as a whole. It's dangerous for the viability of the middle class. It's good for exporters of agricultural products, specialized manufactured products, and energy producers, but bad for everyone who pays for lots of imported products, or imports that are incorporated into the supply chains of businesses that sell to US consumers.

"I think this claim that 'a weak dollar is good for exports' is narrow- minded and misleading. It ignores the fact that a weak dollar would drive capital out of the US, into economies that are paying a real return on their currencies."

Bill Bonner
for The Daily Reckoning Australia

• A Dollar Crash Will Have Disastrous Implications for Global Financial Markets
• The U.S. Dollar vs Inflation, Americans Vote for the Dollar
• U.S. Dollar Strength or Oil Weakness?
• Gold, the Dollar and Inflation
• U.S. Dollar Bulls Rallying Behind Fed Statement

We began having doubts about the 'feds inflate...gold soars' hypothesis last year. It was too easy...too obvious. And if it were that easy to inflate a nation's currency, how come the Japanese couldn't get the hang of it in the '90s?

So, we moved towards a contrarian position - inflation, yes...but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.

To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that's all we ask of it, we are always satisfied. Even if it is down in the short run - and it went through an 18-year downcycle from 1980 to 1998 - it will come back in the long run.

Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in dollars nor in euros; he should count it in ounces.

Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now...everyone's a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the gold price...followed by a new, big bull market after inflation has found its footing.

And so what does gold do? It goes up!

Yesterday, gold rose $11 - still comfortably above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we'd see it in the bond market. But instead of selling off - which is what Treasuries should do if there were any hint of inflation - bonds are going up.

Is gold going up because people are afraid of the dollar going down? Well, maybe. But that is like saying that the dollar is going down because people are afraid the price of gold is going up. Where's the chicken? Where's the egg? Which is the cause? Which is the effect?

The dollar is still going down...as gold rises. Yesterday, it closed just below $1.48 per euro. It is so low now that Americans' cost of living is among the lowest in the world. The average house sells for just $160,000. That's just over 100,000 euros. Even out in the country...you would have to do some serious searching for a nice house anywhere in Europe that you could buy for $100,000 euros.

And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse - by delaying it, disguising it or diverting it in another direction (such as converting deflation into hyperinflation).

Yesterday, the Dow rose again - up 51 points. As far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.

House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January, an estimated 350,000 houses have been bought thanks to the program.

Household net worth also is going up for the first time in two years - at least, that's what the papers say. Of course, what do you expect? The feds are pushing up asset prices - giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends...so does the temporary wealth effect...

Is this still a contrarian view? Seems to us that it's becoming more contrarian every day. The longer the rally goes on the more people think it is the real McCoy.

Stay tuned...

Bill Bonner
for The Daily Reckoning Australia

• Themes from Day 1 at the Agora Financial Investment Symposium
• When People Fear Inflation or a Falling Dollar They Find Refuge in Gold
• When Gold Ruled the Earth, Part I
• China is a Key Driving Force in the Gold Market
• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?

"We may now be entering the Asian century, dominated by a rising China and its currency. This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable."

Yes, it could take more than a decade. But investors could take a big loss any day. All it would take would be a sudden move by China...or a shocking inflation figure in the United States...or a Treasury bond auction that doesn't go as planned. Everyone is watching the United States...carefully. And foreigners hold trillions' worth of dollar- based assets outside the United States. These are dollars that people hold, not to pay their bills or buy gasoline, but as a speculation. They're speculating the greenback will hold its value as well or better than the other things they might do with their money.

Europeans hedge their bets against the euro - with dollars. Asians hedge their bets against falling stock prices. Russians hedge their bets against the ruble. Latin Americans hedge their bets against their own pesos, bolivars, and cordobas. Everybody likes dollars because they are the most trusted money in the world. For the last 50 years, nothing could compete with the dollar. (Even though the dollar lost value against a number of other currencies over long periods of time.)

These foreign holders are already nervous. They've seen the mess the United States has gotten itself into. They read the headlines. They watch the news. They know that the United States is running a budget deficit this year equal to four times the biggest budget deficit ever - a record set just last year. It is as if a runner broke the record in the 100-yard dash...and then ran the course four times faster a year later. This is not progress. This is spooky.

The Chinese already let the United States know they are worried.

"We trust you to protect the value of our assets," they in essence said to the US Treasury Secretary.

And in the middle of May 2009, from the Financial Times comes news that Brazil and China are working toward using their own currencies in trade transactions rather than the US dollar.

This comes on the heels of the news that China's central bank governor Zhou Xiaochuan proposed to create a reserve currency "that is disconnected from individual nations."

What Mr. Zhou would like is to replace the US dollar as the world's leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

Then in June, Russian President Dmitry Medvedev questioned the US dollar's future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. Russia may consider ruble-yuan swaps.

The dollar "is not in a spectacular position, let's be frank, and its prospects cause various questions as do the prospects for the global currency system, " Medvedev said in an interview published by the Moscow-based Kommersant newspaper. Regarding the global financial system, "therefore our task is to make it more mobile and at the same time more balanced."

But for now, as long as these countries trust the United States to keep its promises and protect its money, they continue to hold US dollar investments - notably, US Treasury bonds. But just wait until the United States loses their trust. In a matter of minutes, China could dump enough US dollars to set off alarms all over the world. All of a sudden, dollar holders would rush for the exits - each one trying to get out before the others. In minutes, the dollar market could collapse...taking down US Treasury bonds with it.

Regards,

Bill Bonner and Addison Wiggin
for The Daily Reckoning Australia

• The Greenback Dollar Decline
• US Dollar As Reserve Currency Not Working Very Well
• US Dollar a Sort of Monetary Brand
• 4 Ways to Protect Against a Falling Dollar
• Special Drawing Rights Used as the World’s Reserve Currency?

"Reason #1: Inflation is falling, which generally means no forecast for a rise in rates. No rising rates means no attraction for investors. Inflation has been falling since October '08: 5.2%, 4.5%, 4.1%, 3.1%, 3.0%, 3.2%, 2.9%, 2.3%, 2.2%, 1.8%.

"Reason #2: U.K. exports have hit the skids for the period going back to November. Check out these numbers year-over-year: November: $36,260 billion; December: $35,190 billion; January: $34,412 billion; February: $33,046 billion, March: $32,765 billion; April: $32,264 billion; May: $32,239 billion; June: $31,888 billion; July: $32,208 billion. In spite of the flattening out over the last couple reporting periods, there is no recovery here.

"Reason #3: Industrial production in the United Kingdom has maintained double-digit losses since January: -12.1%; February: -12.7%; March: - 12.6%; April: -12.4%; May: -11.9%; June: -11.1%. Without production, nothing sells. No sales.. no income. No income... no jobs.

"Reason #4: Thus the unemployment rate has been rising every month since January: 6.3%, 6.5%, 6.7%, 7.1%, 7.2%, 7.6% and 7.8%. Unemployment is still on the rise. Nearly one in five households are living on government benefits, with nearly 2 million children living in homes where no adult is working.

"Finally, in the oddity column...

"Reason #5: Business confidence and consumer confidence have been on the rise (although I am not sure why). I have mentioned to you before that sentiment figures are not really fundamental indicators. However, you can view them in a contrarian light when the real numbers are falling and the sentiment numbers are rising. Everybody wants things to be better but, as St. Paul writes, 'He that deceiveth himself is not wise.' And when we do ignore the 'facts,' they always come back to bite us!

"This is the foundation of a sucker's rally. People are drawn out of the woods and back into the mainstream, only to be blindsided by another whack from the recession paddle."

"Forget properties or shares," writes a dear reader. Here's how to make real money:

From the Bristol Evening Post:

"Outside Bristol Zoo is the car park, with spaces for 150 cars and 8 coaches. It has been manned 6 days a week for 23 years by the same charming and very polite car park attendant with the ticket machine. The charges are £1. per car and £5. per coach.

"On Monday 1 June, he did not turn up for work. Bristol Zoo management phoned Bristol City Council to ask them to send a replacement parking attendant.

"The Council said, 'That car park is your responsibility.' The Zoo said, 'The attendant was employed by the City Council...wasn't he?' The Council said, 'What attendant?'

"Gone missing from his home is a man who has been taking daily the car park fees amounting to about £400. per day for the last 23 years...!

"Total sum just short £2.9 million."

Bill Bonner
for The Daily Reckoning Australia

• Understanding What is Behind the Price Movements
• Consumer Confidence is at its Lowest Point Since 1980
• Profiting From the Copper Indecision
• Trouble In Tokyo
• Housing and Unemployment Are Weaknesses in the U.S. Economy

So how much more bounce is there left in this market? That's the question we grapple with today. If you're into rhetorical fallacies, you might say we're begging the question. You only assume it's a bounce if you reckon the rally is not based on an improved long-term earnings out-look.

There are plenty of analysts and investors - many of whom are now filling up our inbox with snarky notes - that contend the worst of everything is over. It's a recovery. And even if America is stuffed, Australia has its cosy China relationship to power commodities and the currency higher.

Maybe so, put probably not. We reckon it is a bounce in the image of the post 1929 stock market crash. You don't liquidate a decade's worth of speculation and leverage in 18 months. It takes years. They started the process in Japan in 1989...and it's still going on.

But the stock market is not a television show or a graphic novel. It does not have a tidy beginning, an enthralling middle, and a miraculous end. Attention spans are short these days. People expect instant resolution. But the unwinding of a credit boom doesn't work that way, especially when you have central banks and governments fighting it every step of the way with measures to prevent the needed liquidation.

Consider this our warning then: this rally is on borrowed time. We don't know when. We don't know why. But we do know what. And the what is that stocks are going to price in much lower earnings and investors are going to pay less for those earnings. Expect a lot of spring volatility.

Unlike late 2008, though, this is a great opportunity for traders, mainly because you can short financial stocks. The S&P ASX 200 Financial index is actually up 63.5% since the March six lows. We've been working with Swarm Trader Gabriel Andre to add short recommendations to his service. It's ready to roll now, and Gabriel says the financials make inviting targets.

Energy investors ought to take heed as well. Lately there's been a nice correlation between the oil price and stocks. The better the economy, the better it is for oil and earnings. Both have gone up.

We're still bullish on energy for a lot of reasons. But if the party ends sometime in September/October/November, you can expect lower oil and energy prices. That means if you have gains in energy stocks, you'd want to think about trailing stops and profit taking. In fact look for profit taking on the share market as a precursor to a new move lower.

It certainly does make for a tricky investment strategy. Energy stocks are some of the few stock we'd really want to own for the next ten years. But stocks are stocks. And in a bear market, most stocks go down. So what do you do?

A more active management strategy is probably what's called for. But this violates one of those old axioms of institutional investors: do not try and time the markets. The buy-and-hold strategy works when you're in secular bull market. It also works to the extent that most investors take control of their investments in moments of extreme uncertainty. People end up selling at the bottom and buying at the top as a result.

So why become active when being passive is so much easier? Because your money - and perhaps your retirement - is what's at stake. You can go along with the media and pretend the last two years haven't happened, or that they did but everything is better. But remember, these are the people who didn't see the whole thing coming in the first place. Does trusting them sound like a good game plan?

Of course most of the time, trusting the conventional wisdom/do nothing approach works. Most of the time the world's financial system doesn't totter on the brink of a cliff. Most of the time you wouldn't have to bother reading about outliers, black swans, and worst-case scenarios - the subjects it is our full-time job to explore here in the Daily Reckoning.

But we reckon now IS one of those times. In fact, it's been that way since the Fed took interest rates to zero in 2003 and kicked off a global liquidity boom in all asset markets. You live and invest in an era of global fiat money. How that era ends is a dead certainty. But when is another question altogether. More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

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"Try what?"

"Inflation indexed bonds mate!"

Last night was trivia night in Elwood. Your editor sat across from Australian Wealth Gameplan editor Kris Sayce. Between questions about how many venomous snakes there are in Australia and whether New South Wales is larger than South Australia (it's not), we found the time to query him about whether buying inflation indexed bonds from the Australian government was a good investment strategy.

"The problem with them," he said, "is that you're relying on someone else to tell you what the rate of inflation is. That someone else is the government. And they are probably lying about it. It doesn't really offer you a hedge against inflation of they are under-reporting the real inflation rate."

"Right. Liars. Elitists. Oligarchs. Maybe we'll be lucky and the current lot will be like the French aristocracy in the revolution and go mad with self-destruction."

"Uhhh....Wouldn't you rather be in gold? I think you'd also rather be in common stocks that pay a dividend. At least there you have the chance for some capital appreciation too, greater than the real rate of inflation even. At least that's the plan."

It is the plan. And it's a good plan. It's not without critics. But everyone is a critic. The problem is the same for all of us: what assets are going to beat inflation in the coming ten years?

Of course, that presupposes that inflation will be a bigger problem than deflation. And as Dr. Steve Keen mentioned at our Debt Summit, there is a whole lot of bad debt to write off still. Debt deflation, he reckons, is going to last a whole lot longer. Years, not months or weeks.

But in the financial markets, everything appears to be going up. The Aussie dollar is up against the greenback. The Dow is up. The All Ordinaries are up. And oil keeps on charging up as well. It is a bull market in complacency.

We're on the Diggers and Drillers beat today, working on the weekly update. So we'll have to cut today's notes short. But the mail box is full of readers who think your editor is an idiot. There are some other insightful comments as well.

--Dear Dan,

Tim Bullen

On two legs. We don't trade at all. We leave that to the Swarm Trader. And we don't recall advising people to short the banks. We simply said don't buy them because it will be hard for them to grow earnings in a Credit Depression. But each to his own.

--"You must be kidding. Banks are the only business that pays virtually nothing for the inventory it resells, then charges people for the privilege of withdrawing it. We'd be better off with self-storage vaults for our $$. Banks deserve low margins. Except today where the central banks are larding them with $$. Banks add no economic value to the product they handle. Period"

--Dan,

Charles

Good point. Gold is not anyone else's liability. That's why it's been so useful as a medium of exchange for so long. You can't counterfeit it either.

--Dear Dan,

Jack.

Well said. We did leave that out in our focus on valuing individual shares. But you're quite correct that the decline and collapse of the U.S. dollar is a massive factor behind rising commodity prices. That and the industrialisation of China and India.

Dan Denning
for The Daily Reckoning Australia

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