That's fantastic! Just 18 more months before we can put all of this behind us. Why didn't they aim to overcome the crisis a year ago? Oh well. Better late than never.

Of course, it is possible the leaders of the APEC nations have no idea what to do, and certainly don't agree on how to manage their currencies. The Journal reports that everyone is badgering the Americans and the Chinese to quit their cozy currency arrangement. America has effectively devalued the dollar with low interest rates, and the Chinese have matched the devaluation because of the semi-formal currency peg.

The results is a global race to the bottom, otherwise known as competitive currency devaluation. Exporting nations must mimic the Fed and keep rates low (or sell their own currencies and buy dollars) to stay competitive. It suits China and America for different reasons.

America's weak dollar hasn't exactly helped exports like everyone expected. In fact, the trade deficit widened last month on a weaker dollar, mostly due to huge oil imports. But as long as U.S. interest rates are kept low, the housing market will not implode. The weak dollar suits the Fed.

And a weak Yuan suits the Chinese for now. They remain the world's low cost producers. And their goods get even cheaper when the Yuan declines with the dollar. More market share is good for Chinese producers. But it doesn't make any other exporters trying to compete in manufactured or consumer goods very happy. About the only people, or metal, made happy by the current state of affairs is gold.

The weekend edition of the Australian Financial Review has gold on the cover, incidentally. You can see a picture of it a few paragraphs down. Underneath the giant golden letters it reads, "Why you shouldn't laugh about gold hitting $US2000 an oz." But if anyone's laughing, it's a nervous laughter.

Why? Well, the fact that the gold made the cover of the AFR confirmed our view that it was an excellent month to research uranium stocks. That's just what Diggers and Drillers editor Alex Cowie did. He published his first report as the full-time editor of Diggers and Drillers on Friday. It was on uranium, including one specific recommendation.

We talked with Alex about whether to write about gold this month or uranium. Trouble is, he'd already written about gold in October. We've been getting a lot of questions here at the DR about gold. The gold price is making new highs in U.S. dollars ($1,123.40 in the futures market last week), but hasn't carried over into Aussie dollar.

The strong Aussie dollar has capped the Aussie gold price for now. You can read what Alex has to say about it here. The short version, though, is that Aussie investors looking for leverage to higher gold prices ought to look at producers who incur cash production costs in U.S. dollars. This keeps costs under control, but ought to benefit share prices (all things being equal) if gold continues to make new highs.

November 2009	Winter 2006
Source: The Australian Financial Review	Source: Diggers and Drillers

By the way, a report predicting $2,000 gold was the very first letter we mailed when we began our financial publishing business in 2006. The prediction seemed a bit crazy back then. And truth be told, the report bombed. That is, very few readers took us up on the offer to subscribe to Diggers and Drillers and see what else we had to say about gold stocks and the resource industry.

And to be fair, the prediction hasn't come true...yet. Most Aussie gold stocks have lagged the move in bullion prices. And some people still think that gold itself as a genuine asset class is a crazy idea.

The author of the AFR's piece, Robert Guy, is grudging in his recognition of gold's recent performance: "Often dismissed as cranks and conspiracy theorists, true believers may have found vindication in gold's record-breaking run, which has underscored the migration of the mainstream to the long-held world view of these fringe dwellers."

And then he can't help himself. "Gold bugs' dystopian vision of debased currencies, enfeebled banks, debt-burdened governments resorting to the printing press, coupled with the menacing spectre of inflation, presents a worrying analogue to reality," he adds.

An 'analogue to reality'? Last we checked, all those things Guy mentions weren't just prophetic visions. They ARE reality. The real vision - in the sense of a something that appears in fevered recesses of the mind but has no existence in the physical world - is that government-led efforts to revive the economy by taking on more debt have actually worked and that everything is getting better and better.

But then, the idea that investors who buy gold are crazed believers is a convenient way of dismissing monetary history. Close your eyes and pretend everything is all right!

To understand the investment benefits of gold, you don't have to "believe" in gold in the way that, say, you have to believe in the Virgin birth or the resurrection to call yourself a Christian. You just have to understand how gold has always been part of a sound money system and how it promotes responsible government and personal liberty. It is not an act of faith. It's a rational conclusion.

Further, gold's physical attributes - durability, divisibility, transportability, relatively scarcity, and its sameness in all places - make it such a useful medium of exchange. To the extent that those qualities make for really useful money, gold does have an inherent value. Gold is very good money, which is why it's being remonetised after years in the Keynesian wilderness.

But we've written so much about gold in the past you are probably sick to death of it. So we'll conclude with two points. A sovereign debt crisis is brewing because Western Welfare states refuse to live within their means and are increasing public sector debt. This makes their currencies dangerous to own and their bonds subject to default. At the very least, most paper currencies face major devaluations.

The second point is that gold bullion is not a panacea for the problem of fiat currencies. It's a good start. But if you think the monetary world will somehow muddle through, then gold stocks give you leverage to a higher gold price. As eye-catching as gold's recent gains have been, we reckon most investors haven't begun to stock up and gold.

While the easy money in gold has been made, the big money has yet to be made.

All that said, we think Alex's timing on uranium is good. Turning to your attention to those asset classes that no one wants to touch is hard to do. For one, you have to be conscious that what everyone is talking about is either fully priced or over-priced. Secondly, it takes some courage to step into a market that everyone hates, or finds so uninteresting that it's not worth the time.

Granted, uranium does not exactly constitute a hated asset. But it hasn't been in the limelight lately, has it? There was a small story in this weekend's Australian, though. Energy Resources Australia's CEO Rob Atkinson says the pieces are in place for a uranium shortage down the track.

He cited three factors. First, the GFC cut off the capital for new mine development. This happened with oil and gold, too, both of which were facing production peaks anyway. But in the uranium industry, you've had major interruptions of mine supply from two sources that were expected to be a lot more productive, BHP's Olympic Dam and Cameco's Cigar Lake mine.

On the demand side is the resurgence in the world's fleet of nuclear reactors, which use uranium as fuel. Of course nuclear power remains controversial in some places (like Australia) even as it figures prominently as part of the energy portfolio in other places (like China and India).

No matter how you "feel" about it, it's pretty likely that nuclear will emerge as the clear winner as an alternative to hydrocarbons. Who knows what kind of madness the world's leaders will agree to. The idea that the world can give up burning coal and still maintain a comfortable standard of living is belly-laughable.

But even if next month's climate change summit in Copenhagen fails to produce a breakthrough (and it already looks like that may be the case), uranium should come out of the summit...er...glowing. And don't get us started on that summit. We've heard the interviews and read the articles. It does indeed look like a massive power grab. But that is a subject for another day.

As an investment issue, uranium stocks present better value right now than some other commodity stocks. One reason is that prices in the spot uranium market have trended between US$40 and US$50 all year. They soared to US$140 along with oil in 2007, but have since fallen, stabilised, and consolidated.

In other words, uranium is one of the assets to resist the rising tide of global liquidity. That doesn't mean it's coiled like a spring and will inevitably rise. But there are some good reasons to take a closer look at it now. And Alex pointed out an important fact in his November article: future uranium producers will have to produce above a certain number of pounds per year for at least ten years in order to enter into agreements with the utility companies that buy uranium for fuel.

That means that not just any explorer or developer is going to win the uranium sweepstakes if prices begin to rise in the spot market. And, of course, if global GDP and industrial production again collapse because of a second credit crisis, demand for electricity - including future projections - will go down. Maybe the world will build fewer nuclear reactors than planned, needing less uranium than expected.

Dan Denning
for The Daily Reckoning Australia

• AUD Price of Gold a Measure of Gold’s Strength Against Other Currencies
• Good Month for Aussie Stocks, While U.S. Stocks Fell to Close the Quarter
• Uranium: A Carbon-friendly Substitute for Coal
• Thorium as a Nuclear Fuel
• Uranium and Gold Exploration Spending Both Down in Last Year

Then on Tuesday the market snapped up $25 billion in ten-year notes and yields fell. Sovereign debt? Big whoop! Whether it's the end of the year and investors feel safer in Treasuries, or some other reason, Tuesday's auction showed no signs of an impending "bond fire of the vanities." The bond bubble keeps getting bigger.

Today, though, the market gagged. In an effort to lock-in low rates for longer terms, the Treasury served up $16 billion in 30-year bonds. The market turned sour. Reuter's reports that demand for the 30-year was the weakest since May and that yields moved up as the weak auction triggered selling.

And then everyone seemed to lose their nerve. Stocks fell across the board. Gold set a new high at $1,123.40 in New York trading, before retreating. The weak 30-year auction has people thinking...what happens when Treasury supply overwhelms demand?

What will happen to bond prices then? To inflation? What should I do?

The rest of today's Daily Reckoning will be devoted to some constructive apocalysm. We may have left the impression yesterday that there was nothing but pain and heartache ahead for investors. But that doesn't have to be the case. But you have to start with the big picture. And that begins with the end of the bull market in bonds.

Check out the chart below from Ron Greiss at the www.thechartstore.com. Ron's chart shows long-term U.S. bond yields since 1941. Mostly this reflects the yield on 30-year bonds, although there were periods where 30-year issuance was discontinued. Either way, it shows a great cycle...which appears to be bottoming out.

What story does this chart tell? We reckon it shows you why the U.S. government (and so many banks and borrowers) are eager to sell as much debt now as possible. Rates are near historic lows. If and when they go up, it's going to make borrowing and servicing new debt even more expensive. Bond prices will fall and yields will rise again.

Now you could say that, according to the chart, there is room for another decade of low yields. The Fed, for example, could move to set rates further out on the yield-curve. It only sets rates right now for short-term debt. But the quantitative easing program has moved the Fed out to ten-year yields. It's done this to try and keep mortgage rates low, as mortgage-rates are keyed to U.S. ten-year yields.

But we reckon not even the Fed can keep yields low forever by supporting prices. It will have to wind down its programs eventually. For example, the U.S. government ran its largest October deficit ever last month, at $176 billion. Between demographics and existing debt, the Fed may not have the resources to support bond prices too.

Besides, you'd think markets would begin to tire of U.S. debt, given the lousy fiscal position of the American government. At least that's what we'd think. And if we were trading it, we'd look for put options on ETFs that track bond prices, or call options on ETFs that track bond yields. That would be the cheap trade.

The investment decision is to find assets that out run inflation as bond yields move up. Granted, this assumes there is going to be inflation, which is a whole other argument. But if you'll grant us the assumption, we'll continue with the strategy...of finding assets that beat inflation.

You don't have to look far. Gold...oil...iron ore...tangible assets are what you're after. Does this conflict a bit with our analysis yesterday that China's resource demand is more fragile than reported? Yes, it does. But it still pays to focus on those resources that will be in demand no matter how bad the global economy gets again. What do nation states really want to own? What can they not do without?

You know they can't do without oil. And you know more and more of them prefer to own at least some gold rather than rapidly devaluing foreign currencies. That leaves us where we began, buying oil and gold and selling U.S. sovereign debt. Production of the first two is hard to increase. Supply of the last one is growing.

"There is a strong case to be made that we are already at 'peak gold'," Barrick's Aaron Regent told London's The Daily Telegraph today. Regent was speaking at RBC's annual gold conference in London. "Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore."

Gold exploration budgets are up. But with the exception of China, gold production from traditional stalwarts like South Africa and Australia has trended down. Alex Cowie at Diggers and Drillers recently wrote a report suggesting that the best Aussie gold stories are listed here in Australia but digging for gold in Africa, where they incur production costs in U.S. dollars and where there are more greenfield projects than recycled brownfield projects.

Frankly, we have no idea if gold production has peaked. Mine supply could grow this year for all we know. But finding and mining gold is not easy and it's not cheap. And even if the gold supply does grow, we'd take it to the bank that the global gold supply will not grow faster than global money supply.

And oil? Any scenario in which an economic collapse leads to falling GDP ought to mean lower demand for oil and lower oil prices. But the case for oil is not really about the demand side. You reckon that's bound to grow over time anyway, unless someone comes up with table top cold fusion. The real oil bull story is on the supply side.

Earlier this week the U.K.'s Guardian reported that, "The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying."

" 'The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year,' said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. 'The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.'"

We remember writing about the IEA figure a few years ago. And we remember pointing out that producing 120 million barrels of oil per day would be a 44% increase on producing 83 million barrels per day. And you'd have to find that oil first. You'd have to explore, drill, and produce it. And you'd have to maintain existing production levels at the world's big elephant fields like Cantarell and Ghawar.

In point of fact, production at Cantarell has fallen by 25% since 2004. Energy expert Matthew Simmons says Mexico's days as an oil exporter will end in 18 to 36 months. This makes Mexico's government-which derives 40% of its revenues from oil sales-the most likely candidate for "next failed state."

By the way, if you think illegal immigration is problem in America now (and it is), imagine what would happen if the finances of the Mexican state imploded with a production catastrophe at Cantarell. The Obama administration would face another crisis, but this one right on its massive southern border.

Not everyone believes in Peak Oil. But it's not really a matter of faith. Either oil production is declining or it is not. It does not mean there isn't any oil left. In fact, technology has lengthened the life of productive fields. And technology has also made it possible to find and produce oil in increasingly hostile environments (deep water drilling, the Arctic, etc.)

Even rank and file petroleum geologists are mostly in agreement (and sometimes in disagreement with their corporate overlords) that Peak Oil is real and it's here now. But we make this point not to say that all is lost. It isn't. It's just the great changes in the world are afoot.

You have a secular bond bull that's long in the tooth. The post-war monetary system that supported the expansion of the fiscal welfare state through perpetual debt is failing. Energy, which has been getting cheaper and cheaper for years as we found more and more of it, may start becoming more expensive and harder to find.

That's going to make the world a slightly less friendly place. But for investors, there are heaps of opportunities. For example, right now Alex is looking at what the fallout from next month's Copenhagen summit is. It has opened the door to a great entry point for energy investments, but not necessarily oil. Fear not! Or fear a little. But prepare.

Dan Denning
for The Daily Reckoning Australia

• Attack of the Bond Yields
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• U.S. Bond Prices Rose and Yields Fell
• Higher Oil Prices, the New Normal
• Choking on Debt in the Unfolding Anglo-Saxon Bond Crisis

We did some thinking yesterday, on our trip to Uruguay. Why Uruguay? We thought we should have a look around. Montevideo is a cheap place to live. It's on the sea, with beaches near the downtown area. It is an old town, with many fine buildings. It is clean. It is safe. It has history too. When the English invaded Buenos Aires, the Spaniards launched a counterattack from the fortress at Montevideo and got it back.

"It looks like a nice place," we said to our local contact. "But it seems a little like a resort town out of season; it's very quiet."

We were having dinner in the best restaurant in town, next to the opera house. The restaurant was large and well fitted out. But it was almost empty. A French group sat at one table. An American group sat at another. The only other diners were sitting with your editor. Outside on the street, it was as if everyone else had been warned of an approaching tsunami; there was no one.

"Well, it's out of season all year round," our host replied. "It's a nice place to live. But it's not very lively.

"Montevideo used to be a lot richer. You can tell that just by looking at the public buildings. They're very grand. We couldn't build those places today. We don't have the money. But during the war years, Uruguay was booming. We were leading exporters of beef and grains. We're still leading exporters...but the margins are no longer there. You can make money in farming, but not enough to get rich."

We wonder what people are going to be saying a century from now.

"Yeah, Manhattan used to have the richest real estate in America...back in the financial boom. Wall Street was the center of the financial industry. People made fortunes from high-margin financial products. But then, the financial industry went into decline...and new financial centers in Shanghai and Singapore took the business."

Could New York have already passed its peak? Perhaps not quite. The papers are reporting record bonuses on Wall Street. But the story has an undertone of desperation about it...like the wild parties in Berlin in 1945, just before the Soviet Army arrived. Maybe that's why the bonuses are so high. Get it while you can! This could be the last hurrah for the US financial industry.

Private sector credit is still contracting. In fact, it's shrinking faster than at any time in the last 35 years. And this trend is not likely to change. As we keep saying - you're probably getting tired of hearing it - the private sector has 7 to 15 years of de-leveraging to do. The financial industry will be forced to downsize, along with the economy.

Wall Street's leveraged debt bombs are still blowing up. Banks are going under. As we reported yesterday, the 'second wave' of residential mortgage defaults may be just beginning. Commercial real estate debt isn't far behind...with no Fannie Mae to help the wounded or pick up the dead.

And how about all those private equity deals Wall Street financed? Of the top 10 deals from the bubble years, 6 are in trouble...and 4 have already defaulted.

The idea of private equity was that the hotshots were so smart they could take over a company, re-organize it, restructure it, and sell it back to the public market at a higher price. What they actually did was merely to load up the company with debt - using the money to pay themselves lavish fees.

And as we know...and maybe we alone know it...debt hurts. Run up enough debt and sooner or later bad things will happen. But not necessarily to the borrower!

Right now, the dollar is at a 15-month low. The speculators borrow dollars. Then, it doesn't matter what they do with them. Everything is going up against the greenback.

But that's why our Crash Alert flag is flying. Mr. Market doesn't like it when morons make money. We wouldn't be at all surprised to see these carry trades go bad in a big, big way. All of a sudden, stocks...bonds...emerging markets...commodities...and even gold...could go down against the dollar. Watch out!

The Dow rose another 20 points yesterday. It is now only 54 points below the 50% retracement level...where the bounce of 1930 peaked out.

Gold, meanwhile, held above $1,100.

As we were saying...once in a while, we think. The last few days have been so busy, we didn't have any time to think. But, now things are settling down, so we've had a chance to put our thinking cap on.

What are we thinking about?

Well, of course, we're trying to understand the basics... George Soros had the right idea: Find the story whose premise is false...and bet against it. What premise is false?

The major premise that almost everyone believes is that government economists can improve the workings of an otherwise free economy. That leads people to believe that the feds have pulled off a save...they've now got the economy well along on the road to recovery...the recovery is getting stronger as time goes by...and soon, the feds will begin to exit from their stimulus efforts.

The big question in most investors' minds is this: how quickly will the feds exit? As long as they keep up their stimulus efforts, investors expect rising prices for everything but the dollar.

Those who think the feds will be able to exit quickly believe growth will come without too much inflation. Those who think the exit will come slowly expect higher rates of inflation.

Well, guess what? The whole premise is false. From top to bottom. From beginning to end. Even the air it breathes is tainted with the smell of fraud and self-delusion.

The theory behind the recovery concept is that government spending and stimulus from the Fed has a "multiplier" effect. That is, the feds spend...the money goes into the economy...and then, the private economy multiplies the spending by growth in consumption and investment of its own. If there were no multiplier effect the whole exercise would be a waste of time, because we know that government spending in itself is a cost to an economy, not a source of real wealth. Government spending, generally, is a drag on prosperity. The Soviet Union proved that. The question remains however, can extra government spending at critical moments "prime the pump" so that it is multiplied by the private sector?

Answer: no.

"Our new research," writes economist Robert Barro in The Wall Street Journal, "shows no evidence of a Keynesian 'multiplier' effect...the available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise the GDP by less than the increase in government spending."

Now, we turn to the current situation. Is there any evidence of growth beyond the government's own stimulus efforts? From what we can see so far, again, the answer is 'no.'

The premise of recovery/multipliers/growth/and exit is false. We want to bet against it. Tomorrow we'll talk about how.

Real economists know that there are no secrets. You work hard. You invest carefully. You save your money. That's the best you can do. There are no multipliers. There are no miracle cures. There are no easy exits from trouble.

That's why the world has little use for honest economists; they tell you what you don't want to hear. So, people turn to the phonies...the charlatans...the imposter economists who say "yes we can!"

Trouble is, they can't.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Government Debt
• Keynesians Believe Governments Have to Manage Economy in Macro-Economic Way
• Why Weren’t Economists On Top of This Thing?
• Can Government Bureaucrats do a Better Job of Allocating Capital than Free Markets?
• Have the Feds Given the Economy a Miracle Drug?

"Why don't you move back into your own house," his father wanted to know.

"Dad, I've got a good tenant in there. Besides, it's not in very good shape. I'd rather sell it than invest more money in it. And there are so many places on the market, I can rent something better. Even after a big drop in prices it is still cheaper to rent than it is to buy something."

There are probably millions of homeowners who would like to sell - if they could. This hidden inventory of unsold houses will depress housing prices for a long time.

But there's a crisis coming in commercial real estate too.

"An extreme amount of commercial debt is to mature over the coming years," writes real estate investor George Karahalios in Marc Faber's Gloom, Doom and Boom Report. "And unlike the residential market, there is no safety net (Fannie Mae) for commercial loans. Instead investors must rely on financing through commercial banks, a few insurance companies, and other private lenders who now demand much higher interest rates and more equity for the risk associated with these investments. Thus, not even the Fed's printing presses can save commercial property prices, and I am expecting certain locations to crash, perhaps falling as much as 50-80% from the peak."

So you see, dear reader, there is bad news ahead - a lot of it. Stocks will go down. Gold will go down too - most likely - when people realize that the economy faces a long, deflationary depression...not a period of inflationary growth.

But while stocks are fair weather friends, gold sticks by you in foul weather too. Right now, gold is rising on good news. Eventually, it will soar when the news turns bad. (Though...not necessarily right away...)

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The Housing Slump Has Fattened the Inventory of Unsold Homes
• Commercial Real Estate May Be the Next to Fall
• Trends Make Investors Less Afraid of Risk
• Ireland Going Through Same De-leveraging Process as the US
• Housing Prices Follow GDP Growth and Inflation

Most people find it both galling and absurd to see the bankers getting $10 million bonuses while there is 10% unemployment. Here at The Daily Reckoning, it's just a matter of curiosity. You'd think there would be more wage competition to drive down bankers' compensation. Why doesn't Goldman go to an unemployment line and make an offer...

"Any of you guys want to earn a $9 million bonus?"

Surely there would be a few takers. And Goldman would save $1 million.

Of course, we're joking. Banking is not a trade you can pick up just like that. Borrowing from the Fed at 1%...lending back to the Treasury at 4%...hey, it must take a few days of training to be able to turn around money like that.

On the other hand, there are periods when speculating for a big bank is a breeze. Over the last 7 months, for example, there was almost no way fed-financed traders could lose money. They borrowed dollars - the new carry-trade funding currency - at next to zero interest. It didn't matter what they did with it...they could trade it for Brazilian reals...or buy stocks in Singapore...or buy gold. Almost everything went up against the dollar.

Institutional investors - such as those managing money for banks - are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too.

So, they're in a "doom loop," where they continue to bid up asset prices - even at the beginning of a depression.

Meanwhile, over in the real economy...the deflation continues. David Rosenberg:

"It is like a magic show - the US economy is somehow out of recession with both employment and consumer credit outstanding still in full- fledged contraction mode.

"In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment - an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totaled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply- demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors."

Let's see. We've tried several ways to gauge how long it will take to de-leverage the private sector (which is another way of figuring how long this depression will last). At 6% a year - assuming private sector has about 2 times as much debt as it should have - it will take about 7 years to get down to a more comfortable level?

Did we do the math right? Well, who knows? But every time we do it, we come up with about the same answer - 7 to 10 years, more or less.

But it's not that simple. Because as the private sector de-leverages the feds try to prevent it...while they leverage up the public sector. This is bound to stretch the whole thing out...and bound to lead to some serious bust-ups.

Bill Bonner
for The Daily Reckoning Australia

• Baby Boomers Face Early Retirement With No Money Saved
• Feds Want to Increase the Money Supply and Induce People to Spend Money
• No Evidence of Recovery as Unemployment Getting Worse
• Have the Feds Given the Economy a Miracle Drug?
• Bankers Betting That the Money Given by Feds Will Be Worth Less Next Year

"So what you're saying is that if the Fed leaves rates low, the market basically has permission to rally to new highs, even if they have no basis in projected earnings and stretch valuations even further?"

This was the question we put to our editorial roundtable yesterday. Kris Sayce, Murray Dawes, Alex Cowie, and Shae Smith were all there. The office was hot and sweaty. The air conditioners broke under Melbourne's mild heat wave. But everyone at the table seemed to be in agreement: the Fed has put a rocket under the market.

The conclusion is important to your investment strategy for the rest of this year and probably through half of 2010. The Fed is giving traders as much fuel as they'd like - via low rates - to borrow low and invest high (high yielding assets). The conclusion of the traders, the small cap guys, and the resource guys and gals in our office is that the whole market is going to float higher on a sea of liquidity.

That's just what happened yesterday in New York. The Dow rose over 2% to reach a new 2009 high. The S&P 500 was up 2.2%. And tangible assets like gold and oil surfed higher too. Only the sorry old excuse for a currency, the U.S. dollar, was lower.

Tactically, the editors here at the moon factory reckon that the way forward is up. But it's a dangerous journey. Valuations in a credit boom go out the door. If you participate in this kind of move, you have to be aware that it's liquidity driven (the Fed's liquidity) and not anything else. All the editors agreed to ride it with their open positions, but to initiate trailing stops in all the positions.

Why? The reversals - and they always come - can be brutal. A trailing stop locks in at least some of your gains. So here's a free piece of advice today: set some mental trailing stops on your open positions. No sense in not profiting from a good rally if you are in the market.

If you're not in the market, is now the time to jump in? Will you miss an even bigger upside by staying cautious? Probably. But we reckon that in the longer-term you're better off using moves like this to reduce your allocations to stocks. Sell into strength and get out while the getting is good.

Of course that's a pretty bearish view, not held (or spoken very loudly these days) by too many people. The conventional wisdom is that the stock market really is telling us that the economy is on the verge of a big breakout next year. And besides, stock rallies are always driven by liquidity.

The unconventional wisdom is that the Fed has learned nothing from the last bubble - or is so scared of deflation it's willing to gamble on another bubble in asset prices. The trouble , the eventual bust in asset prices has to be reckoned up. And the Fed, along with all central banks who key off the Fed's policy, are just kicking the can down the road, hoping asset values improve.

But stocks are not engaged in this debate. They are moving up nicely. One sign of a toppy market is an acquisition where the big fish try and eat each other (as opposed to dining on the little, more manageable fish). Yesterday AMP made a $12 billion bid for AXA. That's about all we have to say about that, almost.

Late yesterday afternoon, Kris Sayce sent out a note to Australian Wealth Gameplan readers advising to take a 37% gross profit and sell AXA (ASX:AXA) shares. He recommended the stock as an income play back in June - when we launched the super, income, and safety-focussed letter (as a companion and counterpart to the small cap letter).

Why sell a stock that's giving you capital gains as well as income?

"It's like getting nine months of income in one day," Kris reckoned. And that sounded about right. There will be other higher-yielding stocks on the market (and probably with less risk). Kris isn't changing the income strategy for AWG. But it is a good example of how you can use rallies like this to take profits on existing positions and gradually re-allocate your assets to a longer-term plan.

And speaking of super, the pressure seems to be mounting on the funds management industry to change its compensation model. That will tend to happen when you have two consecutive years of losses and charge people for the privilege. This exposes in plain sight the fact that most funds simply mimic the market (because most funds own the same big cap stocks). When the market drops, the funds go down.

Boom goes the dynamite!

"The reality of a rising market is that many managers generate large fees from general market growth rather than actually delivering out-performance for clients," wrote Frontier Investment Consulting's CEO Fiona Trafford-Walker, quoted in today's Australian Financial Review, under the category of "Gee, you don't say?"

But what's bad for the funds management industry - and end to management fees based on compulsory super contributions - is probably a good thing for investors. We say probably because most investors are lazy and don't want to actively manage their money. It involves thinking, and that competes with watching television, going to the beach, and pruning the hibiscus plants.

For those that do see this as the chance of a lifetime to take more control of super AND get better performance, it means fund managers will have work a bit harder, not just for their money. But for you. And obviously this is good news for the good funds managers. They'll get more business.

And what would a good funds manager recommend right now? Well, we're not running anyone's super. In fact, as an American we don't even have a super fund here in Australia. But we are doing exactly what we recommend to readers anyway: building a position in gold when prices look cheap and being very selective about how many and which stocks to own for this market.

By "this market," we mean one where it looks like another monster low-rate-rally....exactly the sort that preceded the all-time highs in 2007 - right before the reckoning. Once more into the breach...

By the way, we're trying out a new name for our newish offices, "the moon factory." It turns out the building we are now in is an example of Edwardian Freestyle architecture. What's more, historical records show the building has a name. It's called Thalassa.

Wikipedia tells us that Thalassa may be a primordial Greek goddess of the sea, and also a moon of the planet Neptune. The moon options just felt more appropriate than...writing as a primordial Greek goddess of the Sea. That might be interesting too, but what happens in St. Kilda should probably stay in St. Kilda.

Finally, you know you've had a good night when your dinner companion says "Waiter, could we have the cheque and another bottle of wine please?" Former Rude Awakening editor and current US DR editor Joel Bowman was in Melbourne last night with his lovely partner Anya. We joined them for dinner at Fed Square looking over the Yarra, although they had to catch a late flight back to Taiwan, hence the unusual request.

Joel is an Aussie living abroad, while your editor is an American living in Australia. We compare expatriate notes from time to time and talk about the market. We both agreed that the world is an exciting place with lots of opportunity, but probably with more risk than every day Australian and Americans are used to, or, in most cases, financially prepared for.

That's changing. For Australia, it seems to be a positive change. There are lots of income and capital gains opportunities in the Aussie stock market, although being coupled to the Chinese economy certainly has its own set of risks for the next few decades. And there is always the risk that Australia's current prosperity is largely a function of reflated asset bubbles, and thus just as vulnerable as last time (2007).

For Americans, the change is not so positive. The U.S. dollar is a secular decline, yet the American political establishment refuses to accept the fact that nation's finances are in massive disarray. They are either in denial, or just exceptionally stupid, even for politicians. Not surprisingly, their sense of entitlement knows no bounds.

They believe they will be able to keep borrowing from foreign creditors to enjoy a high standard of living. This is the same as saying that the social promises fulfilled with other people's money really are non-negotiable. This isn't high-minded. It's childish.

From our time abroad, we'd say that day of reckoning - where the world's up and coming populations subsidise American consumerism - is upon of us. Has been since 2000 really, when gold became the trade of the decade. The decade isn't quite over yet, and neither is gold's run. But we have a feeling the political, economic, and even military aftershocks from the dollar's decline are just beginning.

Dan Denning
for The Daily Reckoning Australia

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The Dow went up too - 203 points yesterday. It's over 10,000 again. Not very impressive for a bear market bounce. A 50% retracement would take the Dow to 10,300.

But you have to give the bounce credit. It's been going on since March. That is impressive.

And now everyone is bullish, except us. We'll see who's right... in the fullness of time...

Gold seems to be advancing towards a new milestone - $1,100. Makes us nervous. We always feel more comfortable out in the wide, open spaces...that is to say, in trades we have all to ourselves.

But gold is still a marginal holding by marginal investors - like us. Central banks - especially those in emerging countries - have very little gold. The man on the street doesn't know anything about gold. He wouldn't know a gold coin if it hit him on the head.

As gold becomes accepted as a true store of value, we can expect more and more people to want to own it.

Governments are running breathtaking deficits...and accumulating alarming debts. Japan has a national debt of nearly 200% of its GDP. Where did that debt come from? It came from 20 years of trying to buy its way out of a slump with borrowed money. Of course, it didn't work. But now, Britain and America are following the Japanese lead...and the Japanese are still at it! At the present rate, Japan's government debt will grow to 300% of GDP in 10 years. America's debt could grow to 100%...and then 200% of GDP...over the next decade (depending on whose projections you believe). And Britain, if we read the report in The Financial Times correctly, will have debt equal to 200% of GDP within 3 years.

Just what kind of crisis do these numbers portend? It's hard to say. Probably a combination of confidence, followed by debt default and inflation.

Would the US actually default? We agree with Paul Samuelson; the answer is 'maybe.' Samuelson, writing in The Washington Post:

"The idea that the government of a major advanced country would default on its debt - that is, tell lenders that it won't repay them all they're owed - was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn't. Well, it's still a very, very long shot, but it's no longer entirely unimaginable. Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?

"...People have predicted such a crisis for decades. It hasn't happened yet. The currency's decline has been orderly, because the dollar retains a bedrock confidence based on America's political stability, openness, wealth and low inflation. But something could shatter that confidence - tomorrow or 10 years from tomorrow.

"Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates - and we don't know when, how or whether that may happen."

Why wouldn't the US just "print its way out of debt?"

Because it's not that easy. In effect, the feds are trying to print their way out of debt now. They've added huge amounts to the monetary base. But that money is not getting into the real economy. Instead, it's going into vaults and speculations.

"Jittery Companies Stash Cash," says The Wall Street Journal.

And banks, too, borrow...but they don't lend. They can borrow at negligible rates of interest...and buy US Treasury bonds on a leveraged basis...producing a 20% yield. That means, the US dollar has replaced the yen as the go-to currency for speculators.

Net effect? Lots of cash in what appears to the Mother of all Carry Trades. The Financial Times:

"The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualized - as the fall in the US dollar leads to massive capital gains on short dollar positions."

But in the economy itself? As in Japan, very little economic progress comes from this kind of speculation.

Bankruptcies rose 7% last month. Unemployment gets worse.

The financial markets bubble up. The real economy shrivels up. And people with any sense are stocking up.

David Rosenberg, again, on gold:

We are still contemplating the massive gold purchase by the Reserve Bank of India - the largest in at least 30 years that took up half of what the IMF intends to sell. Look for China to come in next.

But here is the reality. All India did was bring gold to a 6% share of its total FX reserves from 4%. Fifteen years ago, that representation was closer to 20%. China has increased its gold holdings by 76% over the past six years but they are a mere 1.9% of the aggregate 2.2 trillion of reserves and Russia's gold holdings is just under 5%. This is not the 1990s when Bob Rubin was running a hard US dollar policy, US fiscal deficits were vanishing and gold production was on the rise. Today's world is exactly the opposite. Policymakers beginning in the 1990s wanted disinflation and got it. Now they want inflation - it will take years, maybe a decade, but it will come. For the near-term, we are still optimistic on Treasury securities but be forewarned that this view has an expiry date that is earlier than the peak we are likely to see in gold.

It is very clear that central banks are behaving in a way that would suggest that gold is now again being considered a currency within the global monetary system. As we said before, it is all about relative scarcity and a well-defined supply curve - fiat currency at this juncture does not share that quality. As a good friend reminded me yesterday, when the Fed was created nearly a century ago, it was acceptable to have at least 40% of the money supply backed by gold reserves. The US now has 8,133 tons of gold in reserve, which equates to $285 billion at this year's pricing.

Meanwhile, the Fed has spiked the punchbowl to such an extent that the monetary base now stands at $1.7 trillion. Do the math - under the old regime (which indeed hamstrung the Fed), the US alone would need to buy an incremental $400 billion of bullion or the equivalent of what would be nearly four times the typical level of annual demand. We could do the same calculation based on M2 but we don't want anyone falling off their chairs.

And finally today, we're still ruminating about what to tell you about our trip to the ranch. The funny thing was...it had little to do with cattle ranching...and a lot to do with the personalities that we brought with us. It's no easy job being a parent...especially when the kid is 38 years old...and not your kid.

More to come on that another time...

Bill Bonner
for The Daily Reckoning Australia

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But along came two very important bits of information.

First, we got word that the crisis was officially over. GDP grew last quarter. Thanks to all the Cash for Clunkers, Cash for Bankers, Cash for Houses, Cash for Trash, and cash for every other blessed thing under heaven, the number crunchers were able to report positive economic growth for the third quarter.

Let's not get too excited. Stocks bounce. Bonds bounce. An economy bounces. Even dead economists bounce. And if we're following the Japanese experience, with a long, slow on-again/off-again period of depression, we can expect some quarters of growth, followed by quarters of non-growth. It's going to be a painful adjustment to the 'new normal,' whatever that is.

The other important bit of news was that the Fed - faced with undeniable evidence of growth and prosperity - decided to err on the side of caution. It will keep monetary policy loose from here until kingdom come, if necessary, in order to avoid a Japan-style slump.

But so far, a Japan-style slump is just what we seem to have...and our public officials are fighting it, Japan-style.

Unemployment is headed up. The U6 figure - a more accurate picture of how many people are out of work - is up to 17%. There are 1.5 million homeless children in the US now, including 300,000 in the state of California alone. One out of 10 Americans will not bite the hand of government - for it is the hand that gives him his food stamps.

Foreign direct investment has dropped 30%. International trade is down 10%.

Do you call this a recovery? We don't.

As David Rosenberg puts it, the man on the street is perhaps "less enthused by the fact that a lower rate of inventory de-stocking is arithmetically underpinning GDP growth at this time."

In other words, it's 'growth' that only an economist could love...and then, only an economist who was an idiot. Rosenberg:

"Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go - and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

"Only 29% of those polled believe the economy has hit bottom - imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally - not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned."

Growth is largely illusional. It is the result of delusional policy- making at the Fed.

So, we'll just keep our Crash Alert flag flying.

Bill Bonner
for The Daily Reckoning Australia

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You have to wonder who is willing to loan money to the United States government - given the state of its fiscal and monetary policies - for thirty years at below 5%. But the Treasury is anxious to auction as much long-term debt now as it can, locking in what it believes are low rates. This is another way of saying the Treasury thinks rates will rise (creditors will ask for higher rates when lending to Uncle Sam).

In the report from the Treasury's borrowing committee to the Secretary, the committee said it was getting a wee bit worried that the maturity schedule of the Treasury debt portfolio could be in trouble if rates go up. Specifically, it wrote that, "The potential for inflation, higher interest rates, and roll over risk should be of material concern."

Perhaps this is why the Treasury and the Fed are considering whether to "move out on the interest rate" curve and try and set rates for longer-term debt. If the market is going to push them up, the Fed will have to push them down (as it has been doing anyway with its purchase plans). Rules are made to broken!

Take the statutory U.S. debt ceiling for example. The Treasury's borrowing committee writes that, "Based on current projections, Treasury expects to reach the debt ceiling in mid- to late- December. However, the government's cash flows are volatile, and forecasting a precise date is difficult. Treasury is working closely with Congress to pass legislation to increase the debt ceiling. We will keep financial market participants apprised of developments as the debt outstanding approaches the statutory limit."

In other words, the jack asses in the U.S. Congress will have to pass a new law allowing the Treasury to borrow more. This would be comical if it weren't so disgraceful. U.S. monetary authorities continue to tell the world's savers that the U.S. standard of living is not negotiable, even if it means increasing public sector debt to over 100% of GDP.

But the world's creditors may not be in the mood to negotiate anyway. We think the rise in gold is one example of creditors deciding there are better things to do with their money. And in the meantime, take a look at the graph below from the Quarterly Refunding Statement of the Treasury's Office of Debt Management. It's a doozy!

Click to enlarge

Sorry about the size. We had to reduce the chart to get the whole thing in. In case you can't read the fine print, it says that in the next five years, there will 73 days on which more than $20 billion in Treasuries mature and 46 days on which more than $30 billion in Treasuries mature. That's 119 days of major league reckoning.

Normally, that debt is simply rolled over as a new (or often the same) buyer refinances it. But what do you think will happen in the next five years? The U.S. will be borrowing more and more and probably at higher rates. Our guess? It won't be good for the dollar.

Dan Denning
for The Daily Reckoning Australia

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We're back in civilization... Wait...you call this civilization? Looks more like Bubble Land again!

Gold is headed towards $1,100...

Bonds are soft...so is the dollar...

Speaking of old friends, Marc Faber says he's long the dollar. Faber thinks the buck is over-sold. It could rise 10% in this last quarter.

But the Fed says it will keep interest rates low for an "extended period." So there is still no sign of the kind of policy turnaround that might send the greenback back up.

Instead, we'll have to wait until the bubble pops!

Oil is over $80...

Republicans are winning elections...

Hey, party like it was 2006...

The Dow is moving back up, too...and so are all the world's markets...led by Asian stocks. China is booming...with its stocks up 4 days in a row...

The rise in gold comes as India's central bank does the smart thing. Central banks need reserves. And historically, the only reserve a central bank can trust is gold. Putting US dollars in your vault - instead of gold - is a little like laying in a supply of lettuce to tide you over in a bad harvest year. Imagine what would have happened if pharaoh had stocked up on radicchio instead of grain? Those 7 lean years would have been a lot leaner than they were.

The Chinese have seen what happens when you rely on dollars for a reserve. You're stuck. Because your reserves can wilt fast.

The Indians have a better idea - they're buying gold.

The metal has outperformed stocks and bonds this year as it heads for the ninth straight annual gain. The Standard & Poor's 500 Index has risen 15 percent in 2009 through yesterday while returns on the benchmark 10-year US Treasury note are down 5.7 percent.

Gold may average $1,125 in 2010, "with strong investment demand anchored by a negative real-interest-rate environment and probable central bank purchases," analysts at Toronto-based Desjardins Securities Inc. said in a report.

And here's another interesting item we found when we got back to an Internet connection: "Companies that become too big, complicated and debt-ridden should be allowed to 'creatively destruct,'" says our friend Nassim Taleb, author of The Black Swan.

Taleb likens the process to natural selection. "Why is it that there are no land animals bigger than an elephant?" he asks. "Because nature doesn't permit it. Bigger animals die off. Likewise, the market system disposes of companies that are 'too big to fail.' It gets rid of them."

Unfortunately, says Taleb, the US government is impeding this natural process. The government is preventing the bankruptcies of large corporations that would clear the way for a new generation of healthier, more nimble, corporate organisms. Furthermore, these trillion-dollar bailouts are polluting the financial ecosystem with toxic piles of debt.

"We're not destroying debt," Taleb complains. "When you move it into the government, it stays in the government and that's a problem."

Bill Bonner
for The Daily Reckoning Australia

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