And the truth is, when adjusted for inflation, the market didn't break even again until 1960. (If you're a "buy-and-hold" investor, you MUST account for inflation. It is the single biggest "invisible" tax in our wonderful Fed managed economy.)

But before people could get too happy with making money again, along came President Johnson and the "Great Society." I don't know who it was so great for - the market began crashing again in '66. Once again, adjusted for inflation, it didn't get back to breakeven for another 30 years.

So, 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines. Of course, they didn't fall straight down. That's the "trick" of the whole deal.

Each rally draws in a few more people, a little more money, until there are no suckers left. Then when the bottom hits, it has takes 15-20 years to "recover."

It will take a very long time to recover from what we've been hit with: Exxon/Mobil lost two-thirds of its profits... that's 66%! The "World's Company," GE, saw a 47% collapse in profits. Toyota, the recession- impervious carmaker, posted its largest yearly loss EVER and is looking at losses this year, too. Insurers have been hit. Computer giants have taken a whacking. Even Disney is down over 25% in the third quarter.

These are not "bumps in the road." They are "driving off a cliff." By some estimates, inflation-adjusted earnings are down 90% in the last 20 months.

We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

At the end of June alone, there were over 5,300 commercial properties in the United States in default. That's more than double the number from the end of 2008 - and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

So don't let the recovery pundits fool you, even though they're out in force.

No doubt you've heard the optimists: "The Recession is over." "The Recovery has begun." "Better get in on the ground floor now if you hope to recover all that retirement money you lost last year."

Just look at the evidence, they say:

• Markets up 50%. In the greatest bull run since the Great Depression, stock indices are forging higher. The numbers are swelling. Ride the wave!
• Housing numbers are turning north - Over the past six months, there have been some the fall in some housing numbers are slowing, and some have turned up. Building permits. Existing home sales. New home sales. New housing starts. Pending home sales. Hmmm... nice!
• Manufacturing looks like it's exploding. Earlier this week, the Institute for Supply Management manufacturing index posted a stronger- than-expected rise at 52.9. Well above expectations, and well into the 50+ territory that signals expansion. Looking better and stronger than it has in 2 years. It would be a mistake to bet against it!

But you probably know what I'm going to say right now: Don't believe a word of it!

No market goes up forever. Isn't that one of the first lessons we learn when chasing a bull market?

This one is no different. Could it go higher? Sure. But just how far can you stretch a rubber band? Eventually, it is going to snap back.

And, as it happens, we're heading right into "snapback" season.

Historically, the month of September is the worst month for stocks. Hands down. Indices fall more in this month on average than in any other month of the year.

In fact, the S&P has declined in 11 of the past 20 Septembers. You may be inclined to say, "That's not so impressive." But an average decline of 10 points is something worth noting. Additionally, 40% of those falls consisted of declines that were 75-125 points. That's huge. No other month has such an anomaly. And it seems to me that this September may be ripe for the picking.

In fact, the first day of September was a real whopper. And Monday (although technically an August day) was not so august for US equities. Thus, as the calendar turns over, we have two days in the down column.

But as bad as September is, October has the reputation for being a real bloodbath. It certainly possesses a number of the largest down and crash days. But in order for a crash of monumental proportions to take place, there has to be some lofty level from which to fall.

I get physically sick when people tell me how they are moving (what's left of their money) back into equities. I try to reason with them; I try to warn them. It breaks my heart to see pensioners barely getting by. You remember all the drama from recent years, how we were told that the elderly were forced to choose between food and medicine? Do you remember the seniors who were reportedly sharing their cat's food so they could buy their prescriptions?

And that was during the go-go boom years. I cringe when I think of what lies ahead for them.

Will it start this fall? Has the band stretched far enough? Has Wall Street suckered in all the money that will venture out into the street? That's all they're after. Draw everyone out of the woods. Get all those who believe that it's time to buy and hold into the game again. A 50% rally? Child's play! This time the Dow is headed for 18,000!

Better tread carefully. This is without question the area of thinnest ice. One misstep by the government, a foolish line slip or a negative surprise, and the entire "recovery" falls like a house of cards.

Keep your money, and your exits, close... and don't be afraid to take profit.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

• September is the Best Month for Gold
• Should You Buy Stocks Now to Take Advantage of Bull Market?
• Dumb Money Eyes Stock Market While Smart Money Watches Economy
• Are Stock Market Investors Really Such Optimists?
• Equity Premium Will Be Replaced With a Tangible Asset Premium

Poor Bernie. The man has been ordered to spend 150 years in the hoosegow. What for? Who did he kill? A century and a half seems a little excessive for a financial crime. You could hold up three liquor stores and rape a whole convent and still not get 150 years. With a little bit of good lawyer-ing, a history of child abuse in the family, and good behavior in the big house, you'd be back on the street in 18 months.

But all the papers seem delighted. "Locked up for Life!" says one of today's headlines. The judge "threw the book at him," says another. His victims wanted him to get no mercy. The judge gave him none, imposing the maximum sentence. He is "extraordinarily evil," said the man on the bench.

Justice has been done. Right?

Here in the building with the gold balls on the roof, we're not so sure. We stand up for lost causes...die hards...and scalawags. Besides, we're not convinced that Bernie is extraordinarily evil at all. He seems much more like an ordinary evil to us.

They say he defrauded investors out of $65 billion. The amount is unusual, but the crime is as common as income tax evasion. Who gets 150 years for evading income taxes? Heck, in civilized countries it's not a crime at all - but a civil misdemeanor, subject to fine and retribution, not punishment.

But didn't he lie to investors? Well, yes...he exaggerated the returns investors were likely to get from his fund. But if you put every fellow on Wall Street who does that in jail, you wouldn't have any room for stick-up men and wife beaters.

Isn't he the biggest financial scammer of all time? Well...he's the title-holder now. But he has a lot of competition close on his heels. Bernie's crime was taking money from people under false pretenses...and then being unable to give it back to them. How is that different from the financing activities of the US government?

This year alone, the feds will borrow 50 times as much money as Bernie managed to take in during his whole 20-year career. They can only pay it back by borrowing even more money from more lenders. This is not very different from the typical "Ponzi" scheme, except that it's the government doing it. Eventually, the suckers are going to lose a lot of money.

And when you balance Bernie's sins against his virtues, we're not sure the man doesn't come out at least as well as many of his accusers. While Bernie was pretending to make his investors rich, the SEC was pretending to protect them from Bernie. In fact, neither were really doing what they claimed. Which is to say, both are guilty of ordinary evil.

As we pointed out yesterday, nothing is as dangerous as good luck. Madoff was not extraordinarily evil; he was just extraordinarily lucky. He was plying his trade when the feds were pumping up the biggest financial bubble in history. No wonder so much hot gas came his way. His luck ran out when the bubble popped. And now a court has found him guilty of fraud and a judge has ordered him locked up for a period equal to roughly the time between the end of the US War Between the States and the resignation of Richard Nixon.

While Bernie is behind bars, the SEC and FED officials are still at large. Both are clearly guilty of dereliction and negligence.

But, what is the point of keeping Madoff in prison? He represents no threat. Rather than pay $30,000 per year to keep him locked up, we suggest that he be forced to do community service work. He should be pressed into service as the next head of the Federal Reserve after Ben Bernanke's term expires in December. With Madoff in the big office, there would be no longer any illusions about what sort of bank the Fed is running.

Illusions are aplenty. In the popular mind, the slump of '07-'09 is coming to an end by Christmas. Practically everyone says so - including Ben Bernanke himself. All the bailouts and stimuli are paying off, they think. Soon, it will be business as usual.

Yesterday, the Dow rose 90 points. Oil rose a bit too - to $71. The 10- year T-note rose too...with a yield falling below 3.5%. And gold held steady at $940. If the markets know what happens next, they're keeping mum.

But this morning comes news that the Dow is off more than 100 points on news of a consumer confidence pullback. Apparently consumers are getting concerned about the jobs situation and the supposed 'economic recovery.'

We have already told you, dear reader, why we do not expect business as usual ever again in our lifetimes. From WWII to 2007, the world economy had a single important driver - the US consumer. At the beginning of that period, he consumed because he earned. By the end of it, he earned because he consumed. That is, the more he was willing to borrow and spend, the more the whole world economy seemed to bubble up.

But now, that era is over. As Jeff Immelt, head of GE says, "You're going to have a world where the US consumer won't be the main driver."

Clearly, the US consumer no longer has the positive effect they once did on the US economy...and it's only going to get worse from here.

"Where was the SEC?" asked a sign outside of the courtroom where Bernie Madoff was sentenced.

Good question. And guess what. We have the answer. While Madoff was taking in his billions...and the biggest financial bubble was preparing to explode...the SEC was asking questions - of your editor!

Yes, dear...dear reader. All over the world, responsible authorities are demanding a more muscled approach to financial regulation. "Bernie Madoff's life sentence should galvanize regulators everywhere," says today's TIMES of London editorial, speaking for the majority.

But it was not muscle that kept the SEC off Madoff's case. At the very moment when a freelance informant was tipping off the SEC about Madoff...the agency's goons were beating up innocent victims...and grilling innocent publishers:

The New York Times reports:

"The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. [Richard] Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C.

"In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.)

"The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him.

"Mr. Kwak's life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker - he certainly can't afford to retire - he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was.

"'It pretty well wiped me out,' he said a few days ago. He is extremely bitter."

The story of our own brush with the SEC will have to wait for another day. It is still subject to a gag order imposed by our own lawyers. The case is still undecided - four years later. We can't tell the whole story yet...but we can pass along the moral of it now: anyone who believes government regulators will stop investors from losing money to fraudsters is dreaming...

Stay tuned.

Bill Bonner
for The Daily Reckoning Australia

• Who Was the SEC Harassing Instead of Madoff?
• Madoff Astonished SEC Didn’t Verify His Claims
• Put Bernie Madoff at the Treasury!
• Bernie Madoff is a Giant in His Field
• Social Security a Bigger Scam Than What Bernard Madoff Schemed

Yesterday, both the Bank of England and the European Central Bank announced moves to boost the economy. They're both falling in line behind Mr. Bernanke, who is "pulling out all the stops" in order to avoid a deep depression. Both the BoE and the ECB are going to take up forms of QE - quantitative easing - in which the banks buy government debt directly.

Don't try QE at home, dear reader; you'll be arrested for counterfeiting. QE so closely resembles old-fashioned printing press money that you couldn't tell them apart in a police line up. Both are ways to increase the supply of money...which, according to theory, leads to consumer price inflation.

The Dow fell 102 points yesterday too. The bear market rally has gone on for nearly 9 weeks. It's probably ready for a rest...and maybe a pullback. We doubt it's over though. There is still far too much money and far too many suckers who have not been pulled back into the stock market. The next leg down of this bear market will have to wait - most likely.

Another ominous thing that happened yesterday was that bond yields increased. The yield on the 10-year Treasury note - at 3.3% - is more than a full percent above its low. The yield on the 30-year bond is at 4.26%.

These yields are still very low. But they seem to be moving higher. They are ominous because at some point in the future we expect all Hell to break loose in the bond market. The slippage we're seeing now in bond prices (when prices go down, yields go up) may or may not be an early warning.

But we probably have a few new readers of The Daily Reckoning...let us backtrack in order to bring them into the picture.

We begin by going back half a century. America emerged the world's biggest, strongest, most innovative and dynamic economy after WWII. Then, it went from strength to strength...to weakness. Gradually, Americans turned their attention away from production and towards consumption. And gradually, America's most profitable businesses shifted from making things to financing them. That's why GM created GMAC...and why GE staked its future on GE Finance. And it's why the center of American economic power moved from the manufacturing hinterlands of Detroit and Cleveland...to the financial centers on the coast...notably the big one in Lower Manhattan.

The financial sector boomed by supplying credit. Americans borrowed. And so, their debt increased. From being the world's leading creditors in the '50s and '60s...they became the world's leading debtors in the '80s and '90s. Gradually, the consumer economy required more and more debt to produce an extra unit of output. Debtors had to borrow not only to buy...but also to pay back, or pay the interest on, previous borrowings.

In the Eisenhower years, it took only an extra $1.50 or so of debt to spur an extra dollar's worth of GDP. By the end of the century, the cost had risen to over $4...and then to $6 a few years later. Total debt, which had been about 150% of GDP before Ronald Reagan took office, shot up to 370% in the final years of G.W. Bush.

By the late '90s and early 21st century, the American economy had entered the Bubble Epoque. The financial industry - aided and abetted by the Fed - was providing so much 'liquidity' it was causing asset prices to bubble up everywhere. Of course, bubbles always blow up - without exception. And when the dot.com bubble exploded in 2000, at first, we thought that was the end of the Bubble Era. Little did we realize, the biggest bubbles were still to come. Then came the bubbles in housing, art, emerging markets, oil, and commodities. All blew up. But the biggest bubble of all - the bubble in credit - blew up too, bringing the Bubble Epoque to a close. Capitalism giveth. Capitalism taketh away. The process of what Schumpeter called "creative destruction" continues.

We are now in the post-bubble era. The financial industry has been bombed out. It can no longer create bubbles. Governments all over the world are propping up the walls...and shoring up the foundations. But the Bubble Epoque can't be revived.

Is that the end of the story? Not at all. The feds' efforts to stop the progress of capitalism will have some spectacular consequences. The fireworks will start when the bond market cracks...sending yields through the roof. And that's all we have to say about it today...stay tuned.

Bill Bonner
for The Daily Reckoning Australia

• Trends in the Post-Bubble Era
• Between What Bond Investors Stand to Gain in Yield and What They Stand to Lose from Inflation
• La Bubble Epoque
• Investors Think Things Will Return to the Way They Were in the Bubble Epoque
• Finding Assets that Out Run Inflation as Bond Yields Move Up

*** Hotels are going into foreclosure too, says USA Today.

*** Dow Chemical is trading at a 24-year low.

*** And the "Great Red Hope" - the idea that China will pull the entire world economy out of a depression - is "pure fantasy," writes William Pesek.

China relies on exports. And the export business sucks. It will be lucky to get through this downturn without a revolution.

*** An Economist headline: "Are Investors Still too Optimistic?"

Our guess: yes. Most of the action on the stock markets is professional buying and selling. The amateurs seem to be largely sitting on the sidelines, waiting for a rebound to get back in.

They still haven't gotten the message. This isn't a recession. There won't be a quick recovery. And the bailout/stimulus plans won't work.

This is depression. It will take years to restructure the economy. And bailout/stimulus plans just slow down the process.

Looking back at the Dow...if you take the market peak of January 2000 as the long-term cyclical top...you might expect an eventual bottom 10- 20 years later...and then a new bull market that would return prices to their peak highs 10-20 after that. Between the high of '29 and the next major high in '66 was 37 years. Between the '66 high and the '00 high was 34 years.

So sit back. Relax. Most likely, we'll see stock prices much lower...for much longer. Look for a return to '00 highs in 2035.

Learn to make a correction your friend. Remember, this is a positive collapse, not negative growth. It is correcting the stupid 'growth' of the bubble years. What really grew during that period was consumer spending in the United States and Britain. And it grew far beyond the ability of Anglo-Americans to pay for it. Because they were spending too much, the whole world economy bent to sell them too much. The Chinese built too many factories. The shippers built too many vessels. The truckers bought too many trucks. The homebuilders put up too many hovels. The retailers expanded too much...the malls were overbuilt...etc. etc. etc.

Now, in this period of positive collapse, all that surplus capacity is being marked down to what it is really worth...liquidated...and restructured.

Give it time, dear reader. Let Mr. Market do his work.
Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• When the Stimulus Money Stops Flowing Will the Recession Get Worse?
• Largest Spike in U.S. Wholesale I/S Since 80s Recession
• U.S. Recession: Is the End Nigh?
• Recession is Over, Welcome Back to the Depression
• China Makes Recession Recovery

General Electric is a world-class jet engine maker. It's also a shameless money-lender.

General Electric's commercial finance business in Australia has a much higher profile than its business in the States, which goes under a different name altogether But the company's dirty little secret is getting out: it's really a financial company masquerading as an industrial.

The company generated huge earnings during the credit boom as a commercial lender, not an industrial manufacturer.  General Electric reported a double digit decline in first quarter earnings, and promptly blamed the whole thing on Bear Stearns. But if General Electric's CEO Jeffrey Immelt were being candid with investors, he would admit that the problem isn't with Bear Stearns, but in the performance of General Electric's financial segments. Don't take out word for it. Look below.

GE Summary of Operating Segments (unaudited)


Source: Edgar Online

You can see that General Electric's two big financial segments, Commercial Finance and GE Money, showed a twenty per cent and a nineteen per cent decline in profit in the first quarter, respectively. Earnings in the infrastructure business were actually up.

General Electric used to be company that made money by making things. Now it's a company that loses money by lending money. It's a pretty good symbol for much of what's wrong about American capitalism. The truth is, it should probably be two companies, not one.

But it's the collapse of yet another Australian broker, Lift Capital and its 1,600 clients, which threatens to swamp the Aussie market this week.

But wait, it's not just Lift. "The list of stock brokers that have been engulfed by the tumbling stock market may be expanded to a fourth victim with concerns growing about Melbourne stock lender Chimaera Capital," reports today's Herald Sun. We are finally learning just how many people bought their way into the boom with borrowed money.

Valuations are out the door for now. If small brokers that offered their clients leverage keep collapsing and liquidating their portfolios, you'd have to be a daredevil or playing with someone else's money to be a buyer.

It's not that there's no value in the market. It's that there are so many sellers. The trouble is you just don't know how much more forced selling there's going to be. With so much stock being dumped on the market, it pays to be very discrete.

Dan Denning
The Daily Reckoning Australia

• Wesfarmers (ASX:WES) Increases Revenues But Not Earnings With Coles
• Rising Coal Prices to Increase Electric Bills in Australia
• Dow Jones Has Worst June Since Great Depression, American Model in Decline
• Money Lending: Rotten to the Core
• A Depression Long and Deep