Today, investors in financials have lost nearly everything and before this is over, I suspect the majority of banks in the West will be nationalized. This would mean a total catastrophe for those who invested in bank stocks or corporate bonds. So, no matter how strongly your private banker pushes you to load up on "cheap" financial stocks, please DO NOT go "bottom fishing" in this bankrupt industry. Banking is no longer a growth industry and financials will disappoint investors for many years. Furthermore, if you have any exposure to hedge funds, structured products, accumulators or derivatives of any kind, I sincerely urge you to get rid of all this highly toxic garbage. Such Ponzi schemes were very good for the private bankers (due to the huge amounts of commissions involved) but they are a disaster waiting to happen. Today, our planet has roughly US$600 trillion worth of derivatives and this is roughly 10 times the size of the global economy! So, please get rid of your derivatives based "investments" immediately.

Even though the financials are getting killed, our fundamentally sound stocks in solid sectors continue to report good operating results and their stock prices are much higher than the lows recorded last fall. So, this is a positive divergence and shows that the market's internal breadth is improving with fewer stocks breaking down to new lows. Another positive sign is that the Asian markets are faring much better and are nowhere near the lows recorded last fall.

During such turbulent times, it is worth remembering that your stocks represent partial ownership in underlying businesses with real assets (plants, reserves, land, machinery, technology, cash and human resources). And even though the stock market's current appraisal is not favorable, it has no connection with the intrinsic value of your holdings.

Various central banks continue to steer this economy like drunken sailors and they are injecting TRILLIONS of dollars into the system. I would argue that many nations in the West are already bankrupt (US, Britain, Germany, Spain, Iceland and Ireland come to mind) and the ONLY thing they can do now is to print even more money. For example, America's total debt is worth US$54 trillion and there is no way the US can ever hope of repaying its debt in today's money. In other words, either the US will default (highly unlikely in my view) or it will print and inflate so that this huge mountain of debt feels much smaller in the future due to the loss of its purchasing power. Remember, the best way to make debt more manageable is by inflating the supply of money in the system. And this is precisely what the various central banks are doing.

It is worth noting that nations like Germany and the United States have already started using the printing press and more nations will soon follow. When the entire planet is covered with oceans of paper "money", its purchasing power will sink and hard assets will sky-rocket. At least this is what has happened throughout history. So, please don't be fooled by this temporary contraction in hard assets and hold on to your positions. If anything, take advantage of the ongoing fire-sale and if your financial situation permits, convert more cash to quality assets in the resources sector.

A bunch of turkeys have hijacked our monetary system and all they know is how to print money. Rather than let the market clear itself out, central banks continue to use taxpayers' money to bail out insolvent institutions. This brilliant strategy has NEVER worked in the past and it will not work this time around. Instead of robbing innocent people of their savings, the establishment must allow the weak banks to go bust. For example, if Citibank is on the verge of collapse, then the US Treasury must let it go bust! All Mr. Geithner needs to do is to protect the customers of Citibank, allow Citibank's investors (shareholders and bondholders) to suffer and sell the bank's book to another institution. This is all that needs to happen. This way, depositors will not lose anything and only investors in Citibank will suffer - and they should! Why should the public share the losses with these investors? When Citibank did well in the past, did its shareholders and bondholders distribute the profits to the public? Of course not! So, why should the reverse occur now?!

Personally, I find these bailouts absurd, unethical and a total waste of valuable resources! Who gave these politicians the authority to act like investment bankers? Mr. Geithner is not a qualified 'merger & acquisition' expert, so how does he have the audacity to use other people's money to take over insolvent banks? Likewise, Mr. Bernanke is now using American taxpayers' money and buying distressed debt! I find this outrageous! Is he going to act like a debt collector when people default on their loans?

Mark my words - the establishment is only making matters worse and prolonging the pain. Moreover, by printing insane amounts of paper, the politicians are setting everyone up for an inflationary nightmare! One thing is for sure - before this drama ends, the viability of the U.S. dollar as the world's reserve currency will come under question. When the U.S. dollar starts to implode, hard assets will go through the roof. Remember, commodity prices went ballistic in the late 1930s as well as during the 1970s. We should expect similar action in the years ahead

Regards,

Puru Saxena
for The Daily Reckoning Australia

• The Glass-Steagall Act Kept Banks in Order Until 1990
• We Are All Turkeys, Waiting for the Axe
• Alan Greenspan Bears Blame for Intensity of Financial Crisis
• Federal Reserve Wants to Debase the U.S. Dollar
• At a Time When We Are Drowning in Debt, We Are Also Out of Money

Well, that does it for us here at The Daily Reckoning . If Greenspan is in favor of it, we're against it. No one man bears more responsibility for the present worldwide financial crisis and coming depression that Alan Greenspan.

The Fed's job is to take the punchbowl away when the party gets too wild, said former Fed chairman William McChesney Martin. Greenspan did no such thing. As soon as the party began to quiet down and people began fumbling for their car keys, Greenspan added more rum to the punch and turned up the music. By the time the credit cops finally shut it down, people were dancing on tabletops all over the world.

And now, poor Mr. Obama has to deal with the headaches.

Yesterday, the Dow held steady. But the Dow is a bit of a fraud anyway. Failing stocks are routinely removed. In the present case, financial stocks slipped below $10 and were taken out of the index. Result: the index does not measure real world results.

Elsewhere in the financial news, oil traded at $37 at close of business yesterday. The dollar rose - to $1.25 per euro. And gold added another $10, to bring it to $978.

Gold looks a bit stretched. It could be ready for another pull back. But the bull market in gold is unlikely to end anytime soon.

What is odd is that while gold goes up, so does the dollar. And so do U.S. Treasury bonds. It is as if investors couldn't make up their minds. They bid up the price of U.S. Treasuries...and bid up the price of anti-Treasuries at the same time. What gives?

On the right side of their brains, they figure that U.S. Treasury bonds are the only place you can put your money and be sure of getting it back. Stocks are a disaster. Bonds - except for U.S. Treasuries - are too risky; heck, even England could go broke.

Commodities? We've seen what can happen there...just look at oil! Even gold could easily take a 20% haircut. That's why U.S. Treasury bonds are the place to be.

But wait... the left side of the brain is sending a message too. Buy gold, it says; something fishy is going on in the Treasury bond market, it tells us. How it is possible that the feds can borrow trillions of dollars without causing interest rates to rise? How can they increase the quantity of something so much...without lowering its quality? Where's the point of diminishing returns?

One question leads to another one: 'How are they going to pay this money back?' the left side wants to know.

The more the left side thinks about it, the more it doesn't understand what is going on. Let's see...the biggest spendthrift on the planet issues trillions more in IOUs...with no obvious way to pay back the money...

...and let's see...this same spendthrift actually has the right to pay off its IOUs with more IOUs that it prints up itself....

...and it actually WANTS to make its IOUs less valuable...so that people won't hold on to them. It wants people to spend its IOUs on goods and services...as fast as possible...in order to "get the economy moving again."

'What am I missing here?' asks the left side of the brain of no one in particular.

"The rest of the world has queued up to lend America as much money as it might wish to borrow in order to get its consumers to spend again," writes Spengler in the Asia Times . "It won't work, but that is another matter..."

Spengler is a clever guy. Unfortunately, many of his thoughts are unworthy of a clever man.

"A fearful world is buying trillions of dollars of securities from the US Treasury," he continues. "Of all the cash flows in the world, nothing is more reliable than the tax revenues of the American state, the longest-lasting government on Earth presiding over the world's largest economy."

Yes, and General Motors was the world's most successful automobile company - until it wasn't. The fearful world is buying Treasuries, but not because the tax revenues of the American state are so reliable; they're buying Treasuries because the United States is the only substantial debtor in the world that can make good on its debts with money of its own making. Tax revenues in the United States are falling sharply. Already, they're far short of what is necessary to cover America's public expenses. That's why both Republican and Democratic administrations have run deficits - real deficits - since the Nixon administration. And it's why the United States is now the largest Ponzi scheme in the world. The only way to pay off the old lenders is to bring in new ones - or run the printing press. That's all lenders have to worry about - inflation. And for the moment, prices are going down. They'll keep going down too - until they go up.

*** President Obama has come up with another plan - for $75 billion, he's going to try to prevent foreclosures. It was determined a half century ago that home ownership was a good thing. Since then, the government has bent the rules in favor of the homeowner - with artificially low mortgage rates...and substantial tax benefits. As an unforeseen consequence, the feds helped create the biggest mortgage-backed credit bubble in history. Not only that, they changed to geography of America - with vast suburbs stretching out in all directions, rather than cheaper and more efficient tightly packed apartment buildings.

Now, Obama compounds the mistake...

When he signed the $787 billion bailout bill on Tuesday, he warned the nation that we're not at the end of our troubles. "Nor does it constitute all of what we are going to have to do to turn our economy around," he said. "But today does mark the beginning of the end.''

Maybe so. But it feels like the beginning of the middle to us. We've had the initial shock. We've had a small rebound. Now, we're ready for the second phase. In this stage, we ought to have a better rebound...but also another big leg down. Stocks are still selling for 15-18 times earnings (which are falling fast). They need to get down to 5-8 times earnings. That will bring the Dow down to around 5,000, or lower. This could take a long time. We're in a depression, remember. And in depressions economies need to be restructured, not just refreshed.

In the '30s, none of the bailouts and stimulus packages of the Roosevelt Administration did any real good. At the end of the decade, the economy was about where it was when the decade began - with 11 million people still unemployed. And the poor Japanese have been waiting 19 years to get to the beginning of the end of their restructuring crisis. They probably would have gotten to it years ago, were it not for the diligent efforts of Japanese politicians. Instead of letting the banks fail, they bailed them out and propped them up. Result: an on-again, off-again depression that has lasted longer than most marriages.

*** Our intrepid correspondent, Byron King, offers some more insight:

"Congress collects a lot of funds through taxes. But not nearly enough to pay for all the spending. It's not even close. So will Congress raise taxes? And do it during a recession? I don't think so. Herbert Hoover tried that in 1930. Didn't work too well.

"What about the federal government borrowing? OK, it borrows a lot. But can it borrow even more? Trillions of dollars? From whom? Who has an extra trillion dollars lying around that they want to loan the U.S.? Will China and the oil-exporting nations continue to buy up U.S. Treasury paper? If so, with what? Chinese exports are down. Oil income is way down as well. (Oil is selling at $34 per barrel today.) So good luck with borrowing.

"That leaves the U.S. government with only one choice. The U.S. is about to embark on the greatest currency-creating binge in modern history (excluding that of Zimbabwe, perhaps.) A lot of that trillion dollars is going to come right out of nothing. The Fed is just going to monetize the debt. So we'll have new dollars chasing the same amount of goods. That's the basic definition of inflation.

"The bottom line is you need to own precious metals. Own gold. How much? For now, the more, the better. Own coins, if you can get 'em. Own bullion, if you can get it. Own shares in good miners with reserves in the ground while you can buy 'em. Just get some gold."

While there may a short-term pullback in the gold price, Byron believes that in the long-term, our favorite yellow metal is going to go to the moon...all the way to $2000 an ounce. If you haven't already, you're going to want to pad your portfolio with this precious metal. Find out how here .

*** On the other hand, our old friend Mark Hulbert notes that whenever investment advisors become this positive about gold the yellow metal usually goes down.

*** "Dad, this is the best house we've ever had...why would you want to sell it?"

We were sitting on the verandah last night, having dinner. Beneath us, the waves slapped against the rocks. In front of us, a long, wide beach curved around toward green hills. There are a few lights from the condominia in the distance. Above them, the stars began to sparkle in the sky and the moon lit up the ocean like an old newsreel.

To bring you further into the picture, dear reader, this is a house that we built about five years ago. At the time, we thought we might want to retire here. Property prices were rising so rapidly, we saw little risk. Besides, your editor can't help himself. Some men play golf; he works on houses. He's been at it for the last 40 years; at this stage he can't stop.

The house he built in Nicaragua is probably his best work. He didn't build it with his owns hands. "That's probably why," his wife would say. She is no fan of his handiwork. As a carpenter, she thinks he makes a good plumber. As a plumber, she would recommend him as an economist.

But with the help of a good architect and a good crew of workmen, the house went up and now is a delight. It has aged gracefully...and now looks like it has been here forever.

The idea was to build a new house on the beach that reflected the elegance and charm of Nicaragua's colonial past. And so it does. Columns, porches, arches, solid wood doors, shutters, cement tiles - all are recreated from elements found in Granada, one of the oldest cities in the country.

Unlike our other houses, this one is coherent. The whole place was done in one style...at one time...with one design. In France, for example, we have an old house, which was built, rebuilt, remodeled, expanded, reduced and redesigned a number of times over the centuries. To the architectural variety we added our furniture moved over from Maryland...ancestral portraits...sideboards that belonged to our great-grandmothers...and chairs found at a local junk shop.

We still have our house in Maryland too. It is rented out to a carpenter. We built it in the '90s...before we had enough money to build a proper house. Your editor did much of the work himself - including the wood parquet that he made from trees on the farm.

"It shows," says Elizabeth.

It is not a bad house. But it certainly wouldn't be mistaken for an elegant one.

People get attached to houses. That is why we have so many of them. We can't seem to sell them. One is an architectural gem. Another is where the children grew up. Still another is "our family home." And the last of them we keep only because we can't sell it; like one of Elizabeth's broken-down horses, we keep it because no one else will take it.

But each house is a glutton. It eats money. Time. Energy. Attention. Whoever thought houses would be good investments must not have known anything about investments. Or houses. Or women.

"Look," we said to Elizabeth, "we've got to get rid of these houses. They're costing us money. And in the spirit of the worldwide financial meltdown, we have to cut back."

"Are you kidding? They're not worth that much. Besides, the houses are solid. They're not going away. We enjoy them. We can use them. And we can leave them to our children. Not like those gold mining stocks you bought...or those Indian stocks; they lost half their value in just a couple of weeks. They could be worthless tomorrow, for all we know. I'd rather hold onto the houses and sell those stocks."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The World Economy is Re-examining Itself
• How Will the United States Finance the Biggest Deficit of All Time?
• The United States Matters Less and Less to the Oil Market
• Housing Market is Becoming More Affordable but That’s Not Necessarily a Good Thing
• Paying More Than 3 Times as Much for Gold

"This year the politicians are the real stars," says a commentary in the International Herald Tribune this morning. Which gives you a hint about how bad the show is...

"It's worse, quite frankly...than everyone thought it was...and it's getting worse every day," says America's new Vice President, Joe Biden.

Mr. Biden is talking about something he knows nothing about - the worldwide financial crisis. And this week, a large group of people who know nothing about it are going to travel to Davos, Switzerland, to talk about the financial crisis.

Davos was once made famous by Thomas Mann's book, The Magic Mountain. Now it is made famous by the movers and shakers who gather at the place each year to move and shake. Recent years have seen an explosion of glitz and glamour at Davos - led by Hollywood celebrities and big-spending financial firms. Goldman Sachs, for example, provided the money, hosting a party that was always the talk of the town. Brad Pitt and Angelina Jolie brought the intellectual gravitas. And politicians provided a comic element.

But no one is laughing at the politicos now. The whole world is making a shift...from the "innocent fraud" of the free market to the armed robbery of politics. People are taking politicians seriously again.

"The pendulum has swung and power has moved back to governments," says Davos organizer Klaus Schwab.

All over the world, capitalism is out...politics is in. Obama is a hero. Fuld is a schmuck. Politicians are taking control of banks. They - not investors - are deciding which firms survive and which perish.

For example, this morning brings news that the auto parts sector needs a bailout too. If it doesn't get $10 billion of somebody else's money, it will be in big trouble, it says. And there's Larry Flynt, over in the porno business. He says the bump and grind industry has fallen on soft times too. Will the feds rise to the occasion and pump in a little cash, he wants to know? We will see.

The problem is, practically every industry needs cash.

Leverage is a two-way street. When the going was good, a small addition to the financial sector's capital would be multiplied many times. The limit for Wall Street's investment firms was 12 to 1...until it was increased to 33 to 1 in 2004. Thereafter, if you put $100 into an investment bank...counterparties would soon have about $3,300 worth of credits.

Easy come...easy go! When the financial system rolled over last year, the banks lost money. Suddenly, $100 less in bank capital forced the banks to reduce outstanding credit by as much as $3,300. Cash disappears and everyone is forced to cut back.

The guy who was going to buy a new car decides he should wait a year or two...and then Detroit is hurting. And then, the assembly-line worker is laid off...so he cuts back on his porno purchases... Pretty soon, no one has any money.

Even the best companies - such as Microsoft - say that the days of easy-spending customers are over. (See below...)

So Obama is trying to come up with a global solution - tax cuts, infrastructure spending, rebates, handouts, bailouts, stimulus spending...a little of this...a little of that...anything that will get cash back into peoples' hands again.

The logic of it is so simple we can't understand it. People spent too much. Now the feds want them to spend some more. The crowd at Davos ought to put down their champagne classes and think about that. Instead, they will learn the latest claptrap theories and return home inspired by the latest self-serving hokum.

"Governments need to take a more aggressive stance," they will say. "We need to regulate morewe need to control more...we need to spend more! We need a worldwide, coordinated program of economic stimulus."

But when Republicans saw the details of Obama's big spending project - $825 billion worth - they weren't stimulated at all. Instead, they lost interest. Not that they mind throwing cash around wantonly...nor does it seem to bother them that the U.S. government doesn't have any cash to throw around...instead, they just thought they could do a better job of chucking it out.

"At the end of the day, we want him to succeed," said the Republican minority leader. "Because America needs him to succeed."

Will Obama's plan get the economy going again? Even one of his aides says it "may not be enough."

Here at The Daily Reckoning, however, we take a different view: to us, it is not too little; it is too much. It is bad money after good. Mistakes need to be corrected, not hidden behind the new furniture. Bad investments need to be reckoned with...not propped up with someone else's money. The mountain of debt is still there; there's no magic that will make it disappear.

*** Gold got a big boost on Friday - up to nearly $900. What does the gold market see? Inflation? Bankruptcies? Monetary chaos?

We don't know. But gold is what you buy when you fear that the financial authorities are making a mistake. And right now, central bankers worldwide are trying an experiment program called "quantitative easing." As we have explained, you can't slide a knife between "quantitative easing" and printing money. They're so close, you can't tell where one stops and the other begins. And when the other begins, inflation begins too.

At some point, inflation is likely to appear suddenly. In the space of a few days, prices could rise so sharply it will take our breath away. That is not likely to happen as long as the financial sector and the real economy are both imploding. But perhaps gold is looking a year into the future. Maybe less.

No matter when gold skyrockets, we will be prepared...and so can you. Find out the easiest way to pad your portfolio with gold by clicking here.

*** Our Pittsburgh correspondent, Byron King, former classmate of Steve Ballmer, passes along a letter sent to Microsoft employees.

" I wonder if Pres. Obama will send a memo like this out to the federal workforce?" he writes.

"Or will Gov. Schwarzenegger send a similar memo to the California workforce? Or Gov. Patterson to the New York workforce? Or Gov. Rendell to the Pennsylvania workforce?"

From: Steve Ballmer

To: All Microsoft FTE

Subject: Realigning Resources and Reducing Costs In response to the realities of a deteriorating economy, we're taking important steps to realign Microsoft's business. I want to tell you about what we're doing and why.

Today we announced second quarter revenue of $16.6 billion. This number is an increase of just 2 percent compared with the second quarter of last year and it is approximately $900 million below our earlier expectations.

The fact that we are growing at all during the worst recession in two generations reflects our strong business fundamentals and is a testament to your hard work. Our products provide great value to our customers. Our financial position is solid. We have made long-term investments that continue to pay off.

But it is also clear that we are not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures.

Our response to this environment must combine a commitment to long-term investments in innovation with prompt action to reduce our costs.

During the second quarter we started down the right path. As the economy deteriorated, we acted quickly. As a result, we reduced operating expenses during the quarter by $600 million. I appreciate the agility you have shown in enabling us to achieve this result.

Now we need to do more. We must make adjustments to ensure that our investments are tightly aligned with current and future revenue opportunities. The current environment requires that we continue to increase our efficiency.

As part of the process of adjustments, we will eliminate up to 5,000 positions in R&D, marketing, sales, finance, LCA, HR, and IT over the next 18 months, of which 1,400 will occur today. We'll also open new positions to support key investment areas during this same period of time. Our net headcount in these functions will decline by 2,000 to 3,000 over the next 18 months. In addition, our workforce in support, consulting, operations, billing, manufacturing, and data center operations will continue to change in direct response to customer needs.

Our leaders all have specific goals to manage costs prudently and thoughtfully. They have the flexibility to adjust the size of their teams so they are appropriately matched to revenue potential, to add headcount where they need to increase investments in order to ensure future success, and to drive efficiency.

To increase efficiency, we're taking a series of aggressive steps. We'll cut travel expenditures 20 percent and make significant reductions in spending on vendors and contingent staff. We've scaled back Puget Sound campus expansion and reduced marketing budgets. We'll also reduce costs by eliminating merit increases for FY10 that would have taken effect in September of this calendar year.

Each of these steps will be difficult. Our priority remains doing right by our customers and our employees. For employees who are directly affected, I know this will be a difficult time for you and I want to assure you that we will provide help and support during this transition. We have established an outplacement center in the Puget Sound region and we'll provide outplacement services in many other locations to help you find new jobs. Some of you may find jobs internally. For those who don't, we will also offer severance pay and other benefits.

The decision to eliminate jobs is a very difficult one. Our people are the foundation of everything we have achieved and we place the highest value on the commitment and hard work that you have dedicated to building this company. But we believe these job eliminations are crucial to our ability to adjust the company's cost structure so that we have the resources to drive future profitable growth.

I encourage you to attend tomorrow's Town Hall at 9am PST in Cafe 34 or watch the webcast.

While this is the most challenging economic climate we have ever faced, I want to reiterate my confidence in the strength of our competitive position and soundness of our approach.

With these changes in place, I feel confident that we will have the resources we need to continue to invest in long-term computing trends that offer the greatest opportunity to deliver value to our customers and shareholders, benefit to society, and growth for Microsoft.

With our approach to investing for the long term and managing our expenses, I know Microsoft will emerge an even stronger industry leader than it is today.

Thank you for your continued commitment and hard work.

Steve

And on that note...we will sign off for the day,

Bill Bonner

for The Daily Reckoning Australia

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In the United States, points out Bill, we look at countries like Zimbabwe and shake our heads in disbelief. It seems almost like slapstick comedy to us.

As Milton Friedman once said, "If you let the government run the Sahara Desert, soon there will be a shortage of sand." And in the U.S., we have Fannie and Freddie, who represent a huge nationalisation event in the United States.

"This is a remarkable thing for the supposedly most 'free market' country in the world," continues Bill. "Nationalising their biggest industry, the mortgage industry. Johnson trying to pretty up the nation's account, so he took Fannie and turned it into a private business."

This added a whole new innovation to the history of nationalisations. The United States created a company where the profits were private, but the losses were to be funded by the government.

"Nationalisation is a great milestone in our economic lives," Bill said to the 1,000 attendees. "Adjusted for the price of gasoline, no one has made money in stocks for 40 years. When you adjust American wages for inflation, you'll see that they've gone nowhere for the past 40 years, either. No one has been getting rich. How is this possible? you have to ask this to find out what's going on, where it leads and what we'll do about it.

"We take for granted that economics matter. We have only been thinking of this for the last 25 years. This idea of capitalism brought to us in the 80s was fatally flawed. People got the idea that to be rich you need a free market and free trade. But really, you don't get rich because of those things - those are just the circumstances that allow you to get rich... if you do the right thing. If you do the wrong thing, it will allow you to go broke. You can't get rich on consumption, as Dr. Richebächer used to say. You need capital formation. Save your money and invest it in productive enterprises."

Kate Incontrera
for The Daily Reckoning Australia

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