A survey showed that only 1 in 10 workers say his income is going up. This is the lowest reading since 1946.

Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse - down 35%.

Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren't sure the politicians would be witless enough to renew it.

They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit.

You'd think that would have revived animal spirits a bit in the residential construction industry. But today's news tells us that mortgage applications are falling - even with lower interest rates.

How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The "quantitative easing" has come to a halt...that is, the Fed is no longer buying US Treasury debt (it doesn't need to). But its buying of mortgage backed securities continues. That program will last until March of next year.

Still...housing is not cooperating.

This news hasn't had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days.

Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49.

Investors must still believe in what The Washington Post calls a "lukewarm recovery." It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid... Not quite alive. Not quite dead.

Too close to the quick to bury...too close to the grave to boogaloo.

Bill Bonner
for The Daily Reckoning Australia

• Housing and Unemployment Are Weaknesses in the U.S. Economy
• Most People Still Think – “You Can’t Go Wrong in Property”
• Economy Free to Recover?
• Aussie Housing Market Actually Leads the U.S. by Three Years
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression

I hopped in and we zipped through traffic. At one point, he crossed over the double-yellow line daring oncoming traffic. "You don't see any taxicab get away with that!" he hollered back at me after blowing through a red light. Just like being in Asia again!

It was a different way to look at Manhattan, with its towering skyscrapers as far as the eye could see. Somehow, it all seemed a lot bigger in a rickshaw. Hard to believe that within six years, New York will no longer be among the world's five largest cities.

The new top five? Tokyo is No. 1, with a population (35 million) greater than all of Canada. Then follows Mumbai, Sao Paulo, Delhi...and Dhaka. Dhaka? Yes, Dhaka. It's the capital of Bangladesh.

There are some big changes afoot in the world's cities. These changes will create enormous opportunities for investors that a previous generation could barely imagine.

Consider some of these notes from National Geographic Traveler:

• In the past 20 years, the world added about 3 million people a week to its urban populations
• More than half of the world's populations live in cities and more two-thirds will by 2030
• The fastest growing cities are all overseas: India has 40 cities with more than a million people; some Chinese cities are growing at more than 10% per year; and Africa's population should double by 2050.

"All cities are cities of the moment," says Richard Wurman, the celebrated American architect says. He is right. No city stays on top for long. In the year 1000, the most populous city in the world was Cordova, Spain. Beijing was tops in 1500 and 1800. London was the biggest in 1900, New York the biggest in 1950. Today, Tokyo.

The pace of urbanization is particularly swift in China and India. More than 25 million people move to cities each year. Some of the numbers are hard to fathom. As US Global Investors points out in a recent presentation, China will add more people in 15 years than the entire population of the United States.

"There will be up to 50,000 new skyscrapers," the company notes, "the equivalent of building 10 New Yorks. There could be up to 170 new mass transit systems. There are only about 70 in Europe today."

This massive population shift has enormous effects on infrastructure spending. Trillions of dollars will have to go toward building power systems, roads, water and wastewater systems, ports and more.

It's like what the US went through in the early 20th century - only on a much more massive scale. Historian Scott Nelson likens the current period to the Long Depression of 1873-96 vintage. Then, a banking crisis toppled Wall Street, too. Unemployment in New York hit 25%. But the Long Depression also paved the way for rising industries such as railroads, oil and steel and spawned a period of innovation and industrial growth.

As Richard Florida comments in The Atlantic:

In 1870... America's population overwhelmingly lived in the countryside. By 1900, the economic geography had been transformed from a patchwork of farm plots and small mercantile towns to a landscape increasingly dominated by giant factory cities like Chicago, Cleveland, Pittsburgh, Detroit and Buffalo.

Depressions destroy some things and make others anew. Before the Great Depression, few Americans owned a home. But government policies created the long-term mortgage that led to the rise of the suburbs and homeownership of nearly 70% by 2004. The malaise of the 1970s created the Rust Belt, but also saw explosive growth in the Sun Belt.

Now imagine a transformation very much like America's from 1870-1900, as people moved off farms and into cities. Especially imagine it on a global scale in China and India. Future historians will wonder how we couldn't see this great boom unfolding before our eyes - the boom in the building of cities.

This trend creates awesome opportunities for companies that make the bricks and sticks that create cities. Some of the companies that seem especially well positioned to benefit for the "City boom" are Flowserve Corp. (NYSE: FLS), ABB Ltd. (NYSE: ABB), Northwest Pipe (Nasdaq: NWPX) and Astec Industries (Nasdaq: ASTE).

I am bullish on the cheap stocks of debt-light companies that keep civilization a going concern.

Regards,

Chris Mayer,
for The Daily Reckoning Australia

• The World’s Largest Cities
• Price of Water Rises in China
• If You’re So Rich, Why Aren’t You Smart?
• The Chinese Work Their Way Up the Ladder, As Americans Work Their Way Down
• What Makes the Wheels on a Bus Go “Round and Round”? Electricity!

No jobs...

No credit...

No sales...

But look at those stocks!

And oil! And gold! And even London property!

Real estate agents in London say they are sold out...as prices go to records. Well, asking prices...that is. As for sales prices, that is another story.

Still, London is driven by finance...and finance seems to have gotten out of rehab. It's party time again.

The Wall Street Journal is talking about a "full recovery" in luxury goods sales by 2011. And Wall Street itself is pricing stocks as if the record profit margins of '05 and '06 were just around the corner.

In other words...investors' expectations have not changed. They think things will return to the way they were in the Bubble Epoque.

How could that happen? A full recovery implies a number of things...

..that the 'Son of Bubble' will be as big as his dad...

..that all those people without money or jobs will somehow find the wherewithal to spend again...

..and that the baby boomers will stop saving for their retirements and begin to party like it was 2006 again...

Remember, Bubble Epoque spending, sales and profit figures were made possible by borrowing. People spent every penny they earned...and then "took out equity" from their houses in order to spend more.

What they really got was a house with a bigger mortgage - without moving!

At the height of the bubble period, if we recall correctly, Americans were taking out more than $500 billion per year. Now, they're putting back nearly $500 billion a year in savings.

We don't like to be party poopers here at The Daily Reckoning. But there is no way to get a rerun of the Bubble Epoque on those numbers.

What we see happening is a typical post-crisis bounce...powered by easy cash and credit from the feds. How long can it go on? How far can it go? No one knows. But if you want answers, we'll go way out on a limb:

It won't go on forever. And it won't go to the moon.

And most likely...it won't be long before the whole thing comes to a crashing end.

Here's noted analyst John Hussman:

"The stock market has never been this overbought."

Hussman says that the only time stocks were this overbought was on Nov. 28th, 1980. That was the last rebound in the great bear market that had begun in 1966. Afterwards, stocks fell another 30% before finally hitting bottom in August 1982.

That's why we have our Crash Alert flag flying over the headquarters of The Daily Reckoning. We put it up two weeks ago. No crash so far. But it can't be too far in the future.

And more thoughts...

While champagne and caviar is served out in the speculative economy of bankers and hedge fund managers, its bread and branch water for the poor folks stuck in the real economy.

First, we have some figures from the Center for Responsible Lending. Nearly 3 million houses are expected to be foreclosed in 2009. And there are 8 million still to go!

Yes, we've crossed the foothills of sub-prime already. But the Rockies of Alt-A, jumbos, and other salacious mortgage instruments are still ahead.

Bill Bonner
for The Daily Reckoning Australia

• Another Big Wave of Foreclosures
• The Only Thing Really Going Down Right Now is the U.S. Dollar
• La Bubble Epoque
• The New Chinese Era
• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End

"Yes, we just built it ourselves. You know, nowadays you can't do this. You certainly can't do this in England. I'm sure you can't do it in America either. But we just didn't say anything about. And we did it all ourselves so not many people knew about it."

The house was hidden from the road by a dense hedge.

"And cheap? The whole house barely cost anything. We got a few truck loads of stone delivered. Then, I just bought mortar - one bag at a time - as I needed it. We recycled the floor tile. And the roof tile too. And we made the wood beams ourselves. We just cut down a couple trees and then cut them to the sizes we wanted. It took a little time. But we just did it on weekends and vacations. One of my nephews came to help too. It was fun.

"The only things that really cost money were the roof tiles, which we had to buy...and the doors and windows, which we had made by a local woodworker. Everything else was very cheap or we found it or recycled it ourselves. So, in the end, we have a nice house with no mortgage."

Bill Bonner
for The Daily Reckoning Australia

• Illegal Gold Mining
• A Great Place for a House in Southern Maryland
• Price of Gold Today is About Where it Was 26 Years Ago
• Prisoners of the House
• A Flock of Sheep Without a Shepherd

Know what that means? It means the "Age of Thrift" is here...and that consumers really are cutting back - just like we said they would.

And it means that the consumer economy is not going to return to robust growth anytime soon. And it means, too, that people will find it hard to find jobs for a very long time.

Another thing it means is that housing prices are not likely to recover - not in our lifetimes. That was a once-a-century bubble and it has blown up.

Mortgage lenders say they expect the peak in foreclosures to come about a year from now. As for the bottom of price declines, you can expect that in 2013 or beyond. A housing bubble typically takes prices down for six years, says a study by professors Reinhart and Rogoff. But this was not a typical bubble; it was an extraordinary bubble. Seems logical that the correction will be extraordinarily deep and long too.

And it also means that this stock market rally is very vulnerable. The stock market and the economy seem to be reading different newspapers!

The Dow fell 14 points yesterday. It could begin a major drop any day. That's why our 'Crash Alert' flag is flying from our London headquarters.

Yesterday, we reported the curious fact that consumer spending as a percentage of the GDP had increased. But it only increased because the other parts of the GDP - notably business spending and investment - fell off even faster.

With output falling...sales falling...and investment (in new plant and equipment) falling even faster...who's going to hire new workers? Not many companies. And which companies are going to invest in young workers...who will have to be trained - sometimes over a period of many years - before they are really productive? Not many.

It's the "Lost Generation," says BusinessWeek. Unemployment nationwide is officially 9.8%. But for young people the rate is nearly twice that level - at 18%.

Their elders aren't doing so well either.

"Baby boomers working longer hours, for less," says a Financial Times headline. What do you expect? Their currency is going down in value. Their customers are disappearing. Their retirement savings disappeared with housing prices. They can't even borrow money anymore.

David Rosenberg:

"Now that lenders have started to respond to their record-high delinquency rates by rationing credit, a mad scramble for cash is occurring to replace the loans - food stamp usage is up 22% year-over- year, pawn shop business is up nearly 40%, and there is a tidal wave of applications for Social Security disability benefits that are not explained alone by workplace mishaps."

Boomers have no choice. They need money. So they work harder, and longer. And they get paid less. Why? Because prices are falling. Even the price of labor. It's a deflationary world.

Meanwhile, The New York Times reports, "China consolidates its lead in global trade."

This headline is a little like the announcement that consumer spending is a bigger part of the economy. It might lead you to think that global trade is growing - or, at least that the Chinese part of global trade is growing. Not at all! Global trade is still shrinking. Chinese exports too. It's just that China's part of the global marketplace is increasing...because America and Europe are losing market share. China is gaining market share because it competes on price. And price competition is what is driving this market.

No discount? No sale!

Power and wealth are shifting east. No doubt about it. The Chinese took over the Hummer this week. And they are even building a 'big plane' - the C919 - to compete against Boeing and Airbus.

Is there any business they can't compete in? We don't know...but we're counting on them to stay out of financial publishing at least until we retire!

Bill Bonner
for The Daily Reckoning Australia

• If Americans Do Not Return to Work, There Is No Recovery
• Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings
• Stock Prices Down Signals Bears to Hold onto Cash, Treasuries and Gold
• Economy Has to Grow at 1% to Stay Even With Population Growth
• We Expect No Recovery from the Economy

"What?" we replied to one of our analysts this morning.

"He's the only Storm Trooper named in the Star Wars movie. I bought a card board cut out of him pointing his laser rifle at you. It was on sale the Science Works exhibit. I've put him behind your desk to remind you that you're under the gun."

True enough. It's not just your editor under the gun, though. What's at stake this week is whether attempts by governments and central banks to prevent more credit writedowns have succeeded. If they have, it could prevent the further transmission of the credit crisis from the financial sector to the real economy. And for investors, it could kick off a Great Releveraging.

Are we changing our tune, then, about what to expect from markets? Not one bit. But the question now is timing. The collapse of 2008 was so severe because of the sudden reduction in leverage in the financial sector. As assets fell in value, the most highly leveraged firms (or lenders who raised money by selling debt) went out of business.

This kicked off a chain reaction in which other market players were forced to sell assets and preserve capital. Banks preserve capital by not lending. This is how the credit crisis "jumped" from the financial sector the medium and small businesses (those not big enough or politically connected enough to qualify for government bailouts). And from businesses the deleveraging crisis went straight to households, who began saving more and cutting back spending.

And now it comes full circle. When households cut back, it eats into corporate profits and bank profits. Households with members who've been fired get behind on bills. Securitised credit card receivables, car loans, and mortgages - a large chunk of bank assets - start to go pear shaped. And banks face more credit writedowns, accelerating the cycle.

This is the cycle the Feds and global monetary authorities set out to short circuit this time last year. Their main objective: increase asset prices to stabilise bank balance sheets and prevent the spread of the credit crisis. How did they do it? TALF, TARP, CAP, the suspension of mark-to-market accounting rules, and the maintenance of low interest rates (in the States especially).

All these clearly did support asset prices, and especially allowed banks to post a quarter two of quarter over quarter earnings growth. This has created the appearance of stability. But what has not improved one bit is the quality of those bank assets purchased with borrowed money. There will be more writedowns to come. But when?

We should entertain the possibility that the Feds can support asset prices for some time. Take Australian housing for example. This week the Federal government announced that it would chuck another $8 billion in taxpayer money to purchase residential mortgage-backed securities (RMBS). Treasurer Wayne Swan says he's doing it to support "the home lending market."

We'd say he's doing it to keep money flowing into the housing sector so builders stay busy, banks stay profitable, and house prices stay high. Remember, this subsidy to non-bank lenders in the RMBS market is there because other investors won't fund these lenders. And why would they when the government is happy to put your money on the line.

The government says the securities are collateralised by high-quality residential real estate. But that's what pretty much anyone who was hawking this kind of debt said in the U.S. for the three years of peak mortgage issuance. This is how real estate - traditionally a local industry where prices vary from place to place - becomes a national market - through the nationalisation of the mortgage bubble. A national mortgage bubble can inflate house prices across the board-making the entire country vulnerable to higher interest rates and/or a credit crisis.

Here you see the public sector adding debt while the private sector scales back. Also, in Australia, there is still widespread public belief that house prices only ever go up. That means the government can support lending because borrowers are still borrowing. This just makes the inevitable house price correction much more devastating. The borrowers with the smallest margin for error are going to be hurt the most.

Here's something else to think about: what happens when the stimulus spending dries up? Treasury Secretary Ken Henry says that the economy could lose another 100,000 jobs and that the withdrawal of stimulus spending will shave 1.5% off Australian GDP in 2010. This is another way of saying the peak effect of the stimulus (in terms of supporting both consumer demand and employment) was in middle two quarters of the year.

So how will Aussie consumers and businesses behave when the stimulus is withdrawn? Did the Rudd government give the economy just enough free money smack to keep its credit high going? Or will the comedown be just around the corner around Christmas? If they're cautious, Australians will put away their wallets and cut up the credit cards and reduce spending growth to match income growth. The retail sector and retail stocks will be hit hard.

There's one other big question for investors heading into the end of the year. We know the government can support some sectors more effectively than others. Big ticket items like housing and cars can be subsidised with tax rebates or, in the case of housing, with a fresh injection of credit to support politically connected non-bank lenders in the RMBS market.

But you have to reckon the economy boosting effects of supporting the housing market are limited. The main beneficiaries are the banks and the builders. Granted, if you're a politician, those are two important constituencies to keep happy. But what about the rest of the economy?

The basic question is how much of it will stand on its own two feet once you remove the stimulus. The stimulus, the FHOG, the government backing of the RMBS market...these are all attempts to revive an economic growth model that's dependent on asset inflation and credit bubbles. That's the model that led to the bubble that led to the bust.

Papering offer the holes blasted in bank balance sheets by the credit crisis seems to have worked in terms of restoring confidence. Call it a successful psychological operation by the government spin doctors and their buddies in the media and banking. The whole purpose of the operation was to appear to recapitalise banks to healthy levels. But really it was to prevent the banks from having to take further credit writedowns, which itself feeds the process of forced asset sales, declining asset prices, and more household deleveraging.

One immediate risk to watch for is Australia's resource export industry. Export volumes are down year. But for the largest export categories, last year's contract prices are still in effect. Looking forward, 2010 could see lower export volumes AND lower prices for bulk commodities like iron ore and coal (especially if Chinese inventory restocking is complete). This would make the current valuations on resource earnings look pretty generous. You'll read more this week on which sectors are going to thrive and fail in this Great Releveraging.

Back to gold and the dollar and the new world currency order. A simple question: what was all the fuss about last week with a new reserve currency anyway? Here is an answer. If OPEC demands payment for oil in something other than U.S. dollars, then people who buy oil (and who doesn't?) have to stockpile the other currencies in which oil is priced and traded. That would be pretty tough on America.

To support its oil appetite, the U.S. would have to buy the currencies in which oil is priced. It couldn't use good old greenbacks. How do you buy foreign currencies?

Well, you can sell your assets (gold, real estate, stocks) and use the money to pay for oil. This is what Australia does. Or you can borrow in a foreign currency (did anyone say future Chinese bond market?) It's also possible you can use earnings on your foreign-owned assets - provided those assets generate enough money to support your oil habit.

These are all options within the free market system. The main point is that all other things being equal, you have to sell something to pay for something. This is why the foundation for economic health is always wealth production, not consumption. Production creates the goods that facilitate the trade that creates the profits to increase purchasing power for the things you don't produce.

But outside the free market system, you could opt for just taking the oil by force. By that we meant that should the U.S. be put in the position of having to pay for oil with new borrowings or asset sales, it might take the geopolitical path of least resistance and resort to a good old fashioned overt resource war. The declining Empire will strike back with its principal remaining asset, its military.

Likely candidates for an oil war? Not Iran. It's too far away. There are too many U.S. troops in Iraq and Afghanistan that would become targets. And the effect of a Middle East war would be too destabilising on oil prices. But Venezuela, on the other hand, is much closer to home.

Granted, comrade Obama is a peace maker. He was a won a price for it. Peace be upon him. And it would not seem like he's not likely to attack his good friend Comrade Chavez.

But if the current president flounders in the fiscal morass he finds himself in, he'll be a one term savior. Some pundits are already calling him "America's Gorbachev." He's the man who will preside over the swift fall from grace of a Superpower.

There will be no second coming (term). And that leaves room for a challenge from a more hawkish member of his own party (Hillary Clinton) or a populist Republican with a handy doctrine of liberty within the hemisphere (let's call it the Palin Doctrine). If Obama is America's Gorbachev, who is America's Putin? That's what Glenn Reynolds at www.instapundit.com is asking.

Naturally all of this is pure speculation. But our main point is that the oil game is not just a currency game. It's a power game. And it's silly to think the U.S. would relinquish its control over the oil market so easily. There will be a fight.

Not that the U.S. could maintain the reserve currency status quo by force. But sooner or later someone at the policy level in America is going to realise that once the reserve currency status is lost, the country loses a huge strategic and competitive advantage. Its standard of living, already in major decline, would face a major body blow.

Just how American policy makers plan on maintaining that advantage is yet to be seen. Of course maybe they don't plan on it at all. The Empire could be so narcissistic and full of false confidence that few people fail to see the inevitable chain of events the country faces. You'll just get more spending and more chest-thumping and more fiddling. Or more war.

Dan Denning
for The Daily Reckoning Australia

• Banks Could Face Larger Asset Writedowns and Losses than IMF has Modelled
• Gold Sales Cost Europe’s Central Banks Billions
• Biggest Factor Affecting Consumer Price Inflation is Growth in Bank Credit
• Everyone is Busily Debasing Their Currency
• The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It

When you get to the bubble phase, few people stop to ask questions. Instead, everyone assumes that the trends in place will remain...and even intensify. So even into 2008, in Phoenix as well as other growing areas - principally in the sand states - the building continued. And now it is 2009. Where are the shoppers? Where are the renters? Alas, they are thinner on the ground than anticipated...and the developers are having trouble paying their mortgages. Commercial mortgage backed securities are carrying 5 times the unpaid balances they had in June '08, says Bloomberg.

Imagine how disappointed lenders will be when these loans default. And then, imagine how American investors will feel when a new wave of mortgage defaults and foreclosures is hits the commercial property market.

A new wave of foreclosures and falling house prices may be approaching the housing market too. Alan Abelson, in this week's Barron's, reports on the outlook as described by Amherst Securities. The research group estimates an overhang of 'hidden inventory' of some 7 million units. These are properties owners would like to sell - if and when the market strengthens. Trouble is, the market may not strengthen soon enough. Then, many of these hidden properties could come right out in the open, as mortgages are reset, marriages break up, and people move on. Amherst says these people are in the "delinquency pipeline" which eventually flushes out the market. And it calculates that another 300,000 properties enter the pipe every month.

Falling prices have reduced 'owners' equity' - the part of the house the homeowner owns free and clear of a mortgage - to only about 43%. This number includes people who have no mortgage at all - more than 50 million of them. Abelson speculates that the actual equity in the hands of the 'owners' of mortgaged houses must be substantially less. Pushed by joblessness...not to many life's other, normal hazards...many of these people are surely going to default. Of those in the "delinquent pipeline," nearly 10% haven't made a payment in more than two years. Sooner or later, the banks and mortgage holders will be forced to take action...and more houses will come onto the distressed property market.

Eager to put this recession behind us? Hey, don't be in such a hurry. Recessions do good work. Depressions are even better (see essay below....)

More and more people get something from government. Fewer and fewer are net taxpayers. This is the basic formula that bankrupts democracies. The political system becomes skewed towards spending; then, there's no stopping it. Once the majority of voters and special interests has an interest in increasing spending - even by borrowing - rather than in limiting taxes and debt, the game is practically over.

USA Today reports on the number of children whose lunches are furnished partly at taxpayer expense. The figure rose from 24 million in 1990 to 31 million today. That is, the welfare program increased by a third during the biggest boom in history. Think what will happen during the bust.

Bill Bonner
for The Daily Reckoning Australia

• Another Big Wave of Foreclosures
• House Prices in California and Las Vegas Hit Hard by Wave of Foreclosed Properties
• How Did Australia Get Caught Up Losing Money in Commercial U.S. Real Estate?
• Commercial Real Estate May Be the Next to Fall
• Commercial Mortgage Backed Securities Are Back

Not much happened yesterday. The Dow fell 47 points. The newspapers attributed the reversal to surprisingly low consumer confidence numbers. Apparently, consumers aren't so sure this crisis is over. As we reported yesterday, they're saving money...maybe even at an 8% rate.

Oil didn't move yesterday. Neither did gold.

The Wall Street Journal reported that markets were reacting to "mixed data."

That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard and the other for sunny skies and warm temperatures. Investors didn't know how to dress.

Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year. Since states cannot print money, they're forced to make cutbacks - typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base, leading to less consumer spending.

Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace.

Well, don't worry about it. We met a guy who explained the timeshare business to us.

"What you're selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn't work that way. They get stuck in the cheap unit and the dream gets a little faded. And then, they stop coming...and then they try to sell the timeshare. Timeshares are rarely a good investment."

Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it's sunny skies.

House prices seem to be stabilizing. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That's why we like falling prices in housing; we get more for our money. But most people want a rising housing market. They think it makes them richer.

They're likely to be disappointed. They show up at the beach with their umbrellas and sun tan lotion...just as a winter storm hits the coast.

Forbes lists eight reasons to "remain worried about housing":

• The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers.
• The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops?
• Mortgage lending standards are tightening up generally.
• Houses are still not cheap. Forbes cites Shiller's numbers, putting the average house 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive.
• Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.
• The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, when school is out. Then, sales fall with the autumn leaves.
• There are still huge numbers of houses that will be foreclosed. Forbes says only 12% of option ARMs have been reset. More foreclosures will increase the supply of desperate sellers and decrease prices.
• There's a 'shadow inventory' hanging over the housing market; it could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilize. As they put their houses up for sale, that too will hold prices down.

Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression...a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy...and through the US housing market...for many years.

Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time.

Bill Bonner
for The Daily Reckoning Australia

• Housing Market is Becoming More Affordable but That’s Not Necessarily a Good Thing
• Property Spruikers Claim Australia Suffers from a ‘Chronic Housing Shortage’
• When Will Housing Stop Falling in Price?
• Underlying Demand During a Housing Shortage
• The Kitchen is the Place to Be

"US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about 'getting small' and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata - Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

"Not only are the rich trading down, but the article quotes a high net worth financial advisor who said 'many of our clients are very happy to be sitting on bond portfolios and cash reserves.' And see the article on page 2 of the Sunday NYT - Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the 'natural look' - "some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores."

Right on, David!

And here's the CEO of Pepsico:

"The age of thrift is here."

Even in Japan, after 20 years of coughing and sneezing, people have caught "the thrift bug," says The New York Times.

What's a consumer economy need in order to keep growing?

Uh...it's needs consumer spending.

What do consumers need in order to boost spending?

Uh...they need more money!

Oh, there's where it all starts to come apart, doesn't it? Where do they get more money? They either earn it...or they borrow it. And right now, they can't earn it - not with 12% unemployment in California! Workers have no bargaining power. And they can't borrow it either. The banks won't lend - not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here's a headline warning of worse to come:

"$30 billion home loan time bomb set for 2010."

Even solvent homeowners who aren't forced into foreclosure still find it beneficial to walk away from their houses. "Strategic defaults,' says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn't read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy...walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what's smart. And now it's smart to walk away from any debt that you don't actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They've seen what happens when they go too far into debt. They're older and wiser than they were in the bubble years. It's been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing - zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren't so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find 'solutions' to the 'problem.'

Actually, there is no problem at all. It's just the way capitalism works. There are booms. And there are busts. Periods of growth...and periods when the mistakes made during the boom are corrected. There's a time for every purpose under heaven. That's the way it works. The economy breathes in and it breathes out.

And there's always some dumb economist trying to smother it with a pillow!

Bill Bonner
for The Daily Reckoning Australia

• Consumer Economy Not Going to Return to Robust Growth Anytime Soon
• Two Ways to Deleverage an Economy
• The Percentage of the U.S. Economy Devoted to Consumer Spending Went Up and Up
• America’s Consumer Economy Needs to Consume Less
• The Interest Only Mortgage Option

"The incoming economic data in both the US and Canada have improved and for the most part [are] bettering expectations. The dilemma is that market pricing has moved far beyond the fundamentals. Despite the temptation to jump into a 'liquidity-induced' rally...they cannot be sustained without a durable organic economic expansion. The problem is that the global economy in general, and the US economy in particular, is operating on so much medication that it is difficult to conduct an appropriate examination of the patient at the current time. All we know is that the markets seem to have very rapidly now priced in three years worth of recovery.

"The S&P 500 is now up more than 60% from the lows, which is truly amazing and kudos to those who called it. But the question is whether the fundamentals will ever catch up to this level of valuation - usually after a 60% rally, we are fully entrenched in the next business cycle. Never before have we seen the stock market rise so much off a low over such a short time period, and usually at this state, the economy has already created over one million new jobs - during this extremely flashy move, the US has shed 2.5 million jobs (as many as were lost in the entire 2001 recession)."

The markets rise. The economy sinks. It is not sinking as fast as it was. But it is still going down. Month after month, the number of people without jobs increases. Even Paul Krugman says that unemployment won't reach its peak until 2011.

And house prices? Hard to tell what is going on. As Rosenberg puts it, this patient is so hyped up on drugs it's not possible to make a diagnosis. Still, he doesn't look good. There are millions of mortgages that still haven't been tested. Interest only...Alt A...commercial...even prime mortgages. They are facing reset...and refinancing...with collateral prices down 20-30-40%. How can you refinance when you are underwater?

Let's look at the basics. We had a nice thing going. From 1945-2007, consumer spending and credit increased. As long as lenders were willing to lend...and consumers were willing to go further into debt...the economy expanded.

Towards the end, it got a little crazy. And then it blew up.

As predicted, the feds rushed in to save the situation. But they only have one trick - adding more cash and credit. That works every time...until it stops working. And it stopped working in 2008.

Banks don't want to lend against falling house prices. And consumers don't want to borrow when their incomes are going down.

Ergo...the end of consumer credit expansion. Get over it.

But the feds keep at it. And with their help, the markets have bounced up. Of course, a bounce is one of the most reliable features of a market economy. A 50% bounce in the Dow - roughly equal to the bounce after '29 - would take the index to 10,300. We're not there yet.

So, there's nothing unusual or unexpected about this situation. The markets have done what they were supposed to do. The feds have done what they're supposed to do.

So what next?

Ah...dear reader...if only we knew the answer to that question...

Here we are in uncharted territory...terra incognito...

Never before has there been an international monetary system based purely on paper. And never before has it been run by people who believe they can force the market to do their bidding. They are convinced that they can avoid the Japan situation - where the economy dragged along for twenty years - by adding more cash and credit. Bernanke said he would drop it from helicopters if necessary.

Just one problem.... Bernanke can inflate...but only until the Chinese tell him to stop. When China pulls the plug on the bond market, the party comes to an end. That's why the helicopters are still on the ground. And it's why they will only take off when the situation becomes desperate.

In the meantime, we await the ordinary...that is, an ordinary end to a post-crash bounce. That will come with another crash. And another. And another. Until stocks finally hit bottom...and bubble-era delusions are finally all crushed out.

Bill Bonner
for The Daily Reckoning Australia

• The Economy is Getting Worse Not Better
• U.S. Economy is Still Growing but GDP Growth Rates Are Mostly Fraud
• Feds’ Plan is to Reflate the Economy
• Alan Greenspan Says “the Seeds of a Bottoming” Becoming Visible
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression