"Okay."

"Why so serious? I mean, all you do every day is write about the worst-case scenario. It's depressing. Who died and made you the harbinger of financial doom? How about something positive for a change?"

"Is that code for, 'buy me another beer?'"

"No, seriously. It's not all bad all the time is it?"

We'll tell you how we answered our friend's question below. But first up, the markets. It was another red day in New York, with Dow stocks down over one percent. Tech stocks on the Nasdaq - the ones enjoying a bit of euphoria renaissance - were down 2.67%. September new home sales in the U.S. fell 3.6% from the month before. The Aussie dollar shed 1.44% against the greenback.

Is that all just noise? Or is there a melody building in the markets? The chorus chanted by Ken Henry, Wayne Swann, and most of the media is that the strong Aussie dollar, the strong market, and the strong(ish) economy are all factors of Australia's great policymaking and unique relationship to the China boom.

But the alternative tune - the one which we've been humming - is that most of the rally in stocks since March and most of the 30% rise in the Aussie dollar is a result of the carry trade. Yes, Aussie assets are relatively more attractive when the cost of capital in the U.S. is zero. But this can change in a flash when foreign speculators change their trading minds.

That's just what happened last year. Only then, it was both a dollar and yen carry trade that led to a rise in Aussie assets. Once the credit crisis set in, the yen carry got dropped and investors fled risk assets and piled right back into the greenback and U.S. Treasuries. Stocks fell, commodities fell, and the Aussie dollar plummeted to nearly 60 cents against the USD.

It doesn't have to happen that way now just because it happened that way then. But since our main job here is to question conventional wisdom and offer you an alternative explanation, that's the one we're offering you. Beware carry trades promising false permanent prosperity!

But what about today's earnings? ANZ followed up yesterday's bad debts bonanza from NAB with one of its own. ANZ reported an 11% fall in net profits (to $2.94 billion) and a 46% rise in bad debts to $3 billion. But both banks hinted that the end of the "bad debt cycle" is over and that things can only get better.

Let's take the other side of that trade. Again we'll focus on two risks: access to foreign funding and asset values on the balance sheet. ANZ sourced more of its funding from domestic savers and less from short-term whole sale funding, according to its report. Aussie savers funded 55% of ANZ new loans for the year (up from 50%) while the company reduced its reliance on short-term whole sale funding by 17% (now just 17% of all funding).

What does that mean? It means the company is making plenty of new loans (you'd want to, especially to the housing market, to prop up the value of your real estate portfolio). But it means the company is relying a lot less on short-term borrowed money from overseas in order to boost lending to Aussie homes and businesses.

Whether it is doing this by necessity or by choice is big question. But all we want to point out is that if your economy relies on imported capital to finance investment (or consumer spending, or new mortgage lending) you're vulnerable if that capital is not forthcoming. It's great when the dollar is high and capital is flowing. But if those capital flows reverse, the banks may find themselves in a jam that even a government guarantee makes it hard to escape.

It's not just us saying this, by the way. "We need to figure out how we can become less dependent on wholesale funding to finance our economic growth," said Commonwealth Bank of Australia chairman John Schubert in last Friday's Australian Financial Review. "It is not assured that we will get the funding into the future."

No foreign funding, no continued housing boom. In fact, we'd be willing to say that a cut off from short-term wholesale foreign funding is just the sort of thing that could lead to a major correction in Aussie house values. Naturally, the government here would step into the mortgage finance market in a big way, and not just for non-bank lenders, as it's done with the Australian Office of Financial Management buying securitised residential mortgage backed securities.

The U.S. government has done everything it can to keep the mortgage credit flowing and household net worth from imploding. Australia would do the same if it had to. But like in the U.S., this means more government borrowing to prop up the property market. More debt, higher interest payments, less capital available for lending to the rest of the economy.

But let's assume for now the public sector does not enlarge again to Depression-era levels of debt. Let's assume that Aussie banks have access to overseas credit. There is still the issue of asset values. ANZ says it is leveraged about 17 to 1. With $476 billion assets, that leaves it with about $28 billion in equity (according to how it calculates both assets and equity). And like yesterday, it's fair to say that a few billion in loan losses and bad debts are hardly the sort of thing to wipe out that much equity.

That's not where the real risk is, though. The real risk is to the asset portfolio. Twenty eight billion in equity capital is just under 6% of total assets. Or, put another way, a 6% loss in assets wipes out the equity.

A six percent loss in assets? Is that possible? The IMF and APRA have stress tested Aussie banks for scenarios in which large chunks of homeowners can't pay their mortgages. They chuck in large corporate bond default rates just to make things more stressful. And after all that, they've concluded that most of the banks' assets are solid and safe and unlikely to incur mammoth losses that would jeopardise the equity capital (solvency).

And maybe they are right. But we're just saying...in a world dominated by massive credit write downs...where we have just seen six months of re-leveraging...and where house values here in Australia have managed (thus far) to escape massive deflation...is a six percent loss on assets totally unimaginable?

We can imagine it, although we don't relish it. Either way, we wouldn't buy the banks just now.

But if you're looking for the most over-valued asset class in the world - the one worth a punt for going short - it has to be U.S. government bonds. Paolo Pelligrini, the man who helped John Paulson make a mint shorting the U.S. housing market, told Bloomberg that shorting long-term U.S. debt is the "only attractive bet" going at the moment.

"I always like to think about assets that are likely to experience a breakdown; the only thing I'm pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage-backed securities...I think that those are overpriced so they are attractive shorts."

If you're not going to short the U.S. long-term bond market any time soon, the take away from this is to look for assets that go up when U.S. bond prices fall. If U.S. bond prices fall it means U.S. interest rates go up. That might, for a bit anyway, lead to a stronger USD and a weaker AUD.

For a trader - other than cash and gold - we'd look to see which of those Aussie stocks hammered by the stronger Aussie dollar have been beaten down the most. They might be due for a quick rebound - although they will be fighting the general trend in the market. We'll ask Murray what he thinks and get back to you.

So what did we tell our drunk friend when he asked us why were so critical, sceptical, negative, and gloomy all the time?

"Relax dude. It's my job to plan for the worst case scenario. It makes me happy to have a purpose in life. If you want the best case, turn the TV on and turn your brain off. And I object to your overly negative characterisation of my work."

"Huh?"

"My work isn't negative. It only seems that way because we live in a period of wealth destruction. I wish it were a world of wealth creation. But in a world of wealth destruction, you have to focus on preserving your wealth and maybe, when you can, growing it if you've got the big picture sorted out correctly."

"But you make it sound like the end of the world every day."

"It is the end of the world every day. But it starts all over the next day. And it is just the end of the financial world as we know it. Not the end of the world world...Besides, it's a lot less scary when you face up to what is really going on and make a plan for it. Uncertainty is scarier than risk because with uncertainty, you have no idea what to expect. Risk you can at least manage."

"But how can you be so sure you're right about the big picture? Everyone else I talk to says there's no way the dollar is going down as a reserve currency and that only kooks believe that. Are you a kook?"

"Certified. But that doesn't mean I'm wrong. You can't keep adding debt forever to fund your way of life. Debts have to be repaid. And interest has to be paid on the money you've borrowed. The politicians in America keep making new promises they aim to keep with borrowed money. This borrowed money is massively interest rate sensitive. And it's in addition to a huge amount of money they've already borrowed. It's the end-game for the whole financial/fiscal/political model."

"But so what? Isn't everyone else doing the same thing?"

"Well yeah. All fiat money is a scam. It's a way for the government to run perpetual debts and steal savings through inflation. It's an immoral living arrangement in that respect. But more importantly, from a financial perspective, it's a way of funding a political arrangement. And that way of funding it - borrowing more and raising taxes on a small productive class to pay for a larger public sector - is every bit as dead as the funding model for investment banks."

"But the government bailed out the investment banks. Who is going to bail out the government?"

"No one. Nothing. It will try inflation. But that doesn't work. Printing more money to pay off your debts just destroys wealth. That's where we're headed. That's what you should plan for. Sooner, not later."

"I would like to begin my plan with another beer, if it's all the same to you."

"No worries."

Dan Denning
for The Daily Reckoning Australia

• Aussie Banks Addicted to Foreign Borrowing
• IMF Report Concludes Aussie Banks are “Very Sound”…
• A National Mortgage Bubble
• Fed Now the Middle Man in Interbank Lending Market
• Borrowing and Paying Back in a Foreign Currency

Where have all the jobs gone
long time passing
Where have all the jobs gone
long time ago
Where have all the jobs gone
Gone to graveyards everyone
When will they ever return
Oh when will they ever return

- Sung to the tune of "Where Have All the Flowers Gone?"

"Many lost jobs in US will never come back..." says The Wall Street Journal.

Need we explain why? Because they're not lost, waiting to be rediscovered. They're not missing in action, to be repatriated after the fighting stops. Instead, they're dead. Gone forever.

There have been 7.2 million jobs lost since recession began. Many of these jobs were Bubble Age jobs. Millions of people, for example, earned their money in 'housing.' They were putting up houses in the sand states...or building granite countertops...or selling, flipping, financing the houses. Those jobs are gone forever. Never again in our lifetimes are we likely to see such an explosion in the housing industry. Sure, people will still build houses...and do all the other work involved in the traditional housing industry. But it will be only a fraction of the industry it was in the 2002-2007 period.

There were also all the jobs involved in selling things to people who didn't need them and couldn't afford them. Labor was needed at every step of the way - manufacturing (perhaps in China), shipping, stocking, retailing, fixing, and financing the stuff.

And don't forget all that mall space...and all the trucks...and all the other things that supported the over-consumption of the Bubble Age.

And now the Bubble Age is over. It will not come back, no matter how much cash and credit the feds pump into the system. (Not that they can't make things worse...in a BIGGER bubble...but that is not yet in sight.)

In The Wall Street Journal yesterday was an item about Las Vegas. The casinos are folding up their expansion plans, says the WSJ.

But the big news yesterday was that the service industries are growing again...at least that's what the latest figures show. This news so delighted investors that they bid up Dow stocks 112 points. Oil rose above $70. Gold posted a $13 gain.

Don't get too excited about that rise in the service sector. Everything bounces...even dead jobs. Dead jobs bounce; they still don't get up. After months of decline, it may be true that the service industries have had a rebound, but don't expect them to begin recovering the stamina and strength of the bubble years. A few more people may have gotten jobs serving drinks in Detroit's bars last month, but it is not likely to turn into a durable recovery of the job market.

In the 1990s, the US economy added 2.15 million new jobs every year. It needed to add at least 1.5 million or so just to remain at full employment - that is, with about 5% of the workforce unemployed at any time.

To put that number in perspective, this year the economy as LOST 2.5 million jobs, just in the last six months. Those jobs aren't coming back. As we keep saying, this is a depression. It is a major correction, in which the economy needs to find new jobs...because it can't continue to do what it has been doing.

New jobs are typically created by new businesses - small businesses that are growing. Big businesses already have all the market share they're going to get. They also typically have all the employees they need. Then, when hard times come, they discover that they don't need all that they have, so they cut back.

Job cuts from large businesses is what you expect in a recession. But this time it is different. This time, big businesses have let people go by the million. But small business has not been hiring them either. So not only is unemployment growing...the trend shows no signs of coming to an end.

Economists are reconciled to high unemployment levels for a long time. The head of the IMF says unemployment might peak out in 8 to 12 months. Even if that were true, it will be a very long time before the job market recovers. Just do the math.

We'll keep it simple. The economy needs, say, 1.5 million new jobs per year. Instead, over the last two years, it lost 7.5 million. Now, it has to stop losing jobs...let's just say that happens a year from now. By then, the total of jobs lost may be near 10 million. Plus, there are the new jobs it needed - but never got - over that 3 year period. That's another 4.5 million. So, the total will be about 14.5 million jobs down. Then, let us say, because we are in a generous and optimistic mood, that the economy then begins creating jobs again...at the rate it did during the '90s. What ho! After five years, that still leaves the economy more than 10 million jobs short, doesn't it?

In order to get back to full employment, the economy has to surprise us on the upside. It has not merely to return to the growth levels of the '90s...it has to surpass them. It needs to grow so fast it creates 3 million jobs per year. And even then, it would take nearly 10 years to get back to full employment.

Pretty grim, huh?

Well, don't worry about it. It won't be like that. It will be worse.

"Uh...Bill...what do you mean, 'worse'?"

Glad you asked.

In the typical post-war recession, jobs are lost...then they are recovered when the economy gets on its feet again. But this happened in the credit expansion of the '45-'07 period. Each recession was just a pause, when the economy was catching its breath. Then, it was off again...in the same direction - up the mountain of credit.

This time, it's not a typical post-war recession. It's something different. Now, we've reached the peak. We're coming down the other side...wheee! Look out below!

Now we don't need all those people building houses, stocking the shelves and selling things. We don't need such a big financial industry either. Now, people want to get rid of credit, not get more.

And the businesses that were goosed up in the credit bubble are now deflating fast. They're not just taking a break. They're lining up the jobs and shooting them in the back of the head. Those jobs are gone. (See below...)

In a 'normal' recession, jobs reappear because the economy continues in the same direction. In a depression, it changes course. Debts are paid off. Spending goes down, more or less permanently. The economy actually contracts...until consumer debt is once again down at an acceptable level...or a new model for growth can be found.

The Wall Street Journal mentions a statistician who was making $100,000 a year. He too is a victim of depression. His job has been outsourced to India. Businesses, with less revenue coming in the door, must cut costs in whatever way they can. Labor is the single biggest item on most firms' ledgers. They will reduce it however they can. And once the change is made, there is little chance that the job will come back.

It is a little like a battle. In an attack, troops often get separated. They are 'lost' - for a while. Then, the winning side is able to recover its missing troops as it advances. But the losing side gives up its troops forever. They are stuck behind enemy lines and cannot rejoin their units.

We are now on the losing side of a credit battle. Having gained so much ground, and so many jobs, in the advance, the United States is now giving them up.

"I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows," Strategic Short Report's Dan Amoss chimes in. "As we 'lap' the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I'm amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality."

And here is a story we foretold years ago. Private equity was mostly a fraud, we said. Sharp operators bought companies for more than they were worth, loaded them with debt, collected huge fees, and then sold them back to the public or to other private equity firms. Come the revolution, we mused, these deals would go bad.

Well, the revolution has come. The deals have gone bad. The New York Times reports:

"Simmons [the mattress company] says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company - the seventh time it has been sold in a little more than two decades - all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

"For many of the company's investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company's downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees - more than one-quarter of the work force - laid off last year.

"But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

"Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Normally Small Businesses Lead the Economy Out of Recession
• No Way Today’s Economy is Going Back to What it Was Pre-2007
• Job Losses From Private-sector Rose Since Beginning of Recession
• Predictions for a Polite and Mild Recession
• One of the Biggest Humbugs in Capitalism is Private Equity

Only the very brave would think of trying to trade against the trend. Even if your natural inclination is to be bearish on the Australian stock market you should suspend these thoughts for now.

I will explain now, why the technical indicators are pointing towards a higher move for the market.

And why this higher move could see the Australian index add another 6.4%.

The S&P/ASX 200 cleared an important technical level last week. This level was the resistance line set around 4,530 points.

Let me take you through what happened...

The first breakout occurred last Thursday when the index closed at 4,570.80 points. After another positive session last Friday the index corrected on Monday before moving sharply higher yesterday.

This is a typical sequence after a breakout. Let me explain in details. Typically, when a resistance line has been cleared, it immediately becomes the new support line for the price action.

A breakout is a clear positive signal.

This is especially valid when the resistance was in place for a long time. It means the breakout is a significant trading event and that the strength of the bullish signal triggered is high.

The second observation is that the previous resistance is generally tested just after the breakout. If validated (therefore if the price action finds support on the previous resistance), it gives confirmation to the market players that the bullish signal is solid. In this scenario, the set-up is ready for a further upside move.

This is what happened here.

The pull-back last Monday was a move that tested the previous resistance identified now as the new support. That's why the index closed at 4,531.10 points and 4,540 points on Tuesday. Lower points were posted during intraday sessions at 4,518 (Monday) and 4,526 points (Tuesday).

However, most traders usually pay most attention to the closing prices rather than intra-day price points.

As the new support has been validated, this gave a confirmation to the bulls that some further momentum is ahead. As a result, the index soared yesterday and closed at 4,650 points. This morning it is currently trading around 4,695 points.

And as the title of this analysis suggests, it looks set to head higher.

In fact, the road to 5,000 points is now open.

Click to enlarge

Why 5,000 points? Well, first and foremost, it's obviously a clear round psychological level that is an easily identifiable target.
Second, it corresponds to the 50% Fibonacci retracement ratio of the decline occurred between points A and B.

If you are not totally familiar with this powerful technical indicator, it detects and identifies support and resistance levels when a price action retraces a previous trend.

In other words, after a significant move (either up or down), prices will often rebound and retrace a significant portion (if not all) of the original move. As the price retraces, support and resistance levels will often occur at or near the Fibonacci Retracement levels.

The target of 5,000 points corresponds to the 50% retracement ratio of the downtrend started in November 2007 (point A) and March 2009 (point B). Therefore the 50% ratio corresponds to half the distance between those two points.

This represents a potential strong resistance level for the rising price action.

The 50-day Momentum indicator is heading north, whereas the Relative Strength Index (14-day RSI) does not yet detect any obvious overbought configuration. Consequently, the medium-term objective is clearly the level of 5,000 points. On the downside, the immediate support around 4,530 points remains of course valid.

At the moment, the bulls are winning the battle. It may not last, but the safer bet is to run with the bulls rather than against them...

For now!

Gabriel Andre
Slipstream Trader

for The Daily Reckoning Australia

PS. My new trading alert service, Slipstream Trader, has just gone live. To find out how you can make "slipstream" gains from mainstream stocks - and to take a risk-free 60-day trial of my new service, click here

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Not at all! The world's bankers say the economy is recovering. Investors believe them; they're bidding up stocks.

The Dow rose 155 points on Friday. And today, stocks are rising in Asia. Oil is over $74. Gold rose $13 on Friday...to close at $954. And the dollar is killing us softly...sinking to $1.43 per euro on Friday.

Stocks and oil are at their highest levels so far this year. With such profits at hand people figure they don't need the dollar. Investors run to the safety of the greenback when financial storms approach. But now...they think it will be clear sailing.

"Worlds bankers suggest rebound may be under way," says a headline at The New York Times.

Is the world economy really recovering? Should you buy stocks now to take advantage of this new bull market?

You already know the answer, dear reader.

After a fall comes a bounce. And along with the bounce come a lot of silly ideas. You see how it works? "Markets make opinions," say the old timers on Wall Street. When stocks are going up investors find reasons why they are going up. Pretty soon, they've convinced themselves that they'll go up forever.

But bounces do not last forever. They aren't giant turtles...they're moths. After a few months of flitting around bright lights, they dry up. When exactly this summer of winged love will end, we don't know. September or October is our guess. But we have little doubt it will come to an end soon.

Ultimately, stock prices depend on earnings. People compare the rate of return they can get from stocks to what they can get from other investments. Rising earnings signal higher rates of return, so investors pay more.

During the great credit expansion of 1945-2007, businesses could anticipate, generally, rising earnings. People were buying more and more things on credit. In a national economy, businesses pay wages and then the employees use the wages to buy products. The wages are a 'cost' to the business...but they are also the source of business revenue. When sales come from credit, on the other hand, businesses have the revenue but no wage cost. Profits go up.

Now, the cycle has turned. Businesses still have the wage cost. But instead of using the money to buy things, the employee uses it to repay loans for purchases made last year or the year before. Now the business has the cost but not the revenue.

As they say in the economic textbooks: bummer.

The process of de-leveraging will be slow. Maybe five years. Maybe 15. Maybe 25. It will go up and down...with high unemployment (businesses will cut their wage costs as sales fail to recover)...low prices (at least in real terms)...low profits...and slow growth, or none at all.

Is that bad? No, not at all. It's good. Economies need to adjust to the new realities of the post-credit bubble world. It will take time. And with the world's financial authorities fighting it every step of the way...it could take a LONG time. As we've explained in these daily reckonings, government is a profoundly conservative, parasite- protecting enterprise. It cannot draw forth the future - it has no idea what the future will be. Instead, all it can do is to try to recover the past. That's the idea of the 'recovery'...to try to coddle, protect and pay-off yesterday's success stories. From Wall Street to welfare...governments attempt to prevent correction.

Of course, it makes sense. Government's only real function is providing protection and order. What can it protect? Only what is...not what is to be.

And so the feds try to forestall and prevent the future from ever happening. Will they succeed? Of course not. The future will happen whether they like it or not. They can't stop it. The future will come.

But they can still make a mess of it.

Bill Bonner
for The Daily Reckoning Australia

• U.S. Markets Could Rally on Oil Price Decline
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• Reader Mail: Manufacturing is Not a Dirty Word
• We Don’t Gamble on Stocks in a Depression
• A Natural Time for Stocks to Object to their Own Valuations

"You can forget about getting anything done in the month of August," said colleague Simone Wapler. "The French are busy with serious things...real things...like painting shutters and picking green beans...fixing curtains and making strawberry jam. They don't want to hear about economics or markets..."

France begins its summer vacation today. We've come to join them...

But we will keep an eye on the money anyways...because it's just getting interesting...

Two interesting things are happening. First, the feds are facing a showdown with the vigilantes...you know, the people with money - $2 trillion worth of reserves, $1.5 trillion of it in U.S. Treasury paper. They've got to convince them that they'll protect their investment. If they fail, the vigilantes sell their bonds...cause the dollar to collapse...and force up U.S. interest rates - which will come down like Round-Up on those green shoots of recovery.

Meanwhile, stocks are not only anticipating a recovery, they're counting on it. And for that, they depend on stimulus from the feds. But what Bernanke gives in stimulus, the vigilantes are likely to take away...

More on that in a minute...

The other big thing that is going on is the rally in the worlds' stock markets. On Wall Street, for example, the Dow rose 96 points yesterday. How far will this rally go? Should you try to take advantage of it?

As a rough rule of thumb, a bounce can be expected to recover half of the losses from the crash. The Dow went down 7600 points below its pre- crash high. So, we can expect a rebound of about 3800 points - which would put the index back around 10,300. By that measure, this rally could still have a lot of life in it - enough to convince practically everyone that the depression will soon be over. Don't believe it. This depression is going to last at least a few years...and the bear market isn't over. The Dow will eventually close below 5,000. At least...that's our story and we're sticking with it.

But let's go back to poor Ben Bernanke. And poor Tim Geithner. The poor fellows don't seem to know what they are doing. But why should they? Ben Bernanke spent his career as a professor of economics. Modern economics is fundamentally an intelligence-destroying trade. The longer you spend in economics, the less you know about how the economic world functions. Many years ago, the profession got the wrong idea of what it was up to. Ever since, it's been barking up the wrong tree. (More below...)

As for Geithner, he is a smart young man...destined for hackdom almost from the day he was born. Ivy league university...consulting firms...government - a protégée of Robert "Nobody Saw the Crisis Coming" Rubin - you can't blame Geithner either; he hasn't had time to think about how an economy really works.

But at least their mission is clear: to convince the world of two things at the same time...both impossible and mutually exclusive! The Chinese vigilantes must believe that the feds won't undermine the dollar...and the rest of the world must believe that they will! Inflation is necessary for recovery and growth in the United States...or so everyone believes.

It was French economist Jacques Rueff who revealed the scam more than half a century ago. The whole idea of Keynesian stimulus, he explained, was to cause inflation...which would reduce the real price of labor. In a modern democracy, politics prevents wages from falling. But in a correction, if wages don't fall people don't get jobs. Keynes' didn't mention it, but the only reason his stimulus works is because it pulls the wool over the eyes of the working classes - reducing their wages by inflation so employers can afford to hire them again. Ergo, no inflation...no recovery in the job market. No recovery in the job market...no recovery in the economy.

But inflation will cost the Chinese plenty. And they've let it be known they won't sit still for it. Keep reading...

"China seeks assurances that US will cut its deficit," says a New York Times report:

"China sought and received assurances from the Obama administration that the United States would reduce its budget deficit once an economic recovery was under way, a senior Chinese official said Tuesday at the end of two days of high-level talks between the countries.

"Attention should be given to the fiscal deficit," said Xie Xuren, the Chinese finance minister. He said Treasury Secretary Timothy F. Geithner had assured the Chinese that once the economy rebounded, the deficit would gradually come down from its current record levels.

"Mr. Geithner confirmed that, saying, 'As we put in place conditions for a durable recovery led by private demand, we will bring our fiscal position down to a more sustainable level over time.'"

Did you notice, dear reader? Geithner promised a "durable recovery led by private demand." In other words, it won't be government spending that pulls the United States out of its slump, he told the Chinese.

He must have had his fingers crossed behind his back. At this stage, what other kind of demand is there? Are factories being built? Are they hiring? Are consumers borrowing and spending more? As we pointed out yesterday, private demand has collapsed ...and it's likely to collapse even more.

But let's stick with our vigilantes for a while. Inflation would cause them to lose money. More importantly, it would cause them to lose face. American officials have told them not to worry; the Chinese seem satisfied. But woe to the debtor who lies to his creditor; he gets cut off.

Meanwhile, a report from the IMF names Britain and the United States as the world's two biggest spendthrifts...and sees no end coming soon.

A global recovery is "not yet under way" and likely to occur at different times around the world, so pulling back public spending and investment may be "premature," the IMF staff said.

Additional discretionary spending may be needed in 2010, the report said.

The staff report also said inflation expectations are picking up, posing a risk to a rebound in economic growth.

"Preserving investor confidence in government solvency is key to avoiding an increase in interest rates, thereby not only preventing snowballing debt dynamics, but also ensuring that the fiscal stimulus is effective," the report said.

The IMF noticed the fix U.S. officials are in.

"On the one hand, a too hasty withdrawal of fiscal stimulus would risk nipping a recovery in the bud," the report said. "On the other hand, with a delayed withdrawal investor concerns about sustainability may increase, leading to higher interest rates on government paper, undermining the recovery and increasing risks of a snowballing of debt."

The IMF staff urged countries to develop medium-term strategies to rein in rising debt levels. Some countries already have begun to do so, the report said.

The economists at the IMF see this as a problem of "balancing risks." Here at The Daily Reckoning, we see it differently. To us, it is lies colliding with each other. Stimulus will not produce genuine prosperity. You can't cure a credit-caused crisis by offering more credit; it just won't work. But rather than let the system correct itself, the feds are determined to 'do something!' What can they do? They can only destroy the dollar - or try to - thereby destroying the value of China's $1.5 trillion treasure.

Now, more on why private demand is going to weaken, not increase.

As the boom of the post-war period continued, consumer spending played a larger and larger role in the economy. It averaged 64% of the GDP during most of the period, but increased to 70% in 2007. Likewise, debt service as a percentage of disposable personal income rose too - from less than 5% in the '50s and '60s to over 14% now.

If, as we suspect, the trend towards more and more consumer debt has finally peaked out; consumption should have peaked out too. We should now see the percentage of the economy devoted to consumption go down...year after year...until it reaches the 'normal' level. Private debt too should go down, until it is at a more 'normal' level.

We calculated that during the last 7 years of the Bubble Epoque consumers added $1.4 trillion in debt per year. That was the spending that made the old mare go. But now what? They are now adding no debt - zero. In fact, they are paying off debt. This alone removed $1.4 trillion in private demand from the economy.

The savings rate is up dramatically too - from zero to 7%. This is another way of measuring the same phenomenon: the decline in consumer spending.

The only thing that would cause consumer spending to go would be a substantial increase in real wages. This would allow Americans to buy more - while simultaneously paying down debt. But with 16% unemployment (Rosenberg's estimate) it will be a long time before real wages increase at all...let alone substantially.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Investors Are Betting On Recovery
• Roubini Says United States Will Climb Out of Recession Towards End of Year
• Optimists Expect Mild Inflation in a Decent Recovery
• Boomers Made a Mess of the United States of America
• Why Weren’t Economists On Top of This Thing?

Yesterday, the Dow rose 235 points. And the public's mood is at an 8- month high.

"Look, things seem a lot better now than they did back in October," said a lawyer we spoke with yesterday. "I think we really hit bottom towards the end of last year."

Our friend's view is probably the dominant one. Things are looking up. Not that the news is good...but it just seems "less bad" than it was...or even less bad than was expected.

Foreclosure filings are at a record high. But "most homeowners think bottom reached," said a news item on the internet.

"Bank crisis in US could last to 2013," adds a headline from Reuters. Yet, most people think the banks are on the mend. They don't expect any further major bank failures. They think the financial sector will come back...maybe slowly, but more or less steadily and satisfactorily.

The average bear market bounce in the stock market lasts only 2 months. By that measure the current rebound should be at an end. It began on March 9th. Since then, stocks have recovered 30% to 40% - all over the world. But this rebound doesn't seem to be ending. Why?

Well, it might last longer than most because the crash that preceded it was stronger than most. Or, it might last longer than most because the feds are fighting this downturn far more than they usually do. We're trying to remember the figures...but the total response is at least 10 times greater than normal.

So, it wouldn't be totally surprising if the rebound were robust. But if it's what we think it is - a bear market bounce, not a genuine new bull market - the government's support is pernicious. It helps disguise what it really going on...and draws even more investors into the trap. And the longer it goes on, the more investors will come to believe that this is bull market is for real. As it continues, they'll commit more and more of their money to it...

When the market was still falling last autumn, we looked at other bear market rallies and guessed that there would be an "Obama Bounce" coming. We thought it would begin after the election...and then, when there was only a weak ricochet after the election, we thought the bounce would come after the inauguration. Instead, it didn't really get underway until March. Since then, it has been following the usual path.

How far could it go? Who knows? But it wouldn't be extraordinary if it took the Dow back to 10,000. And it would not be unusual at all if people stopped talking about the 'green shoots' and began noticing entire fields of clover.

So, let's take a minute to try to remember why we think this is only a bear market trap...

The problem is debt. It built up over a quarter of a century to levels that even President Obama says are "unsustainable." People have too much debt - student debt, credit card debt, private equity debt, mortgage debt, and every other kind of debt you can imagine. As long as the economy is expanding...and the credit markets are offering more debt...the problem is not critical. One debt is paid by taking on another, greater, debt. Houses are refinanced, for example, at higher prices...but lower interest rates.

Then, the cycle turns. Instead of continuing to expand, credit begins to contract. When people go to refinance, they discover that their collateral is worth less than it was before, real interest rates are higher, and the lenders don't want to lend any money anyway.

Bummer...

And then, all that debt that they built up over the last quarter century is a problem. It has to be paid down to the point where it isn't a problem. And that means the obvious thing - people have to cut back on their spending. As long as the amount of debt is contracting...as long as interest rates are rising...as long as asset prices are falling...and as long as people have more debt than they feel comfortable carrying - sales, profits, and stock prices are going to be depressed. No reason for a new bull market.

This process should last a long time. Why? Because it takes a lot longer to pay off debt than it does to run it up. People have to earn the money to pay down their debts. And it's harder to earn money in a declining economy than it is when the economy is booming. People have to make changes...they have a lot to figure out...and a lot to reorganize. It could take two years...4 years...10 years or more.

But wait a minute. What about all this government bailout money? What about the biggest government program since WWII - the fight against capitalism? What about the most expensive financial commitment every made? Bigger than the pyramids, more expensive than Alexandria and Babylon put together, more colossal than the Colossus itself...

About $15 trillion has been earmarked for the big bailout/stimulus program. Surely, it will short-circuit the correction and get the economy going faster...won't it?

No, it won't. You can't wait for it to happen either.

Because you can't correct financial mistakes by subsidizing them. You can't erase bad investments by putting more money in them. You can't turn bad businesses into good businesses by giving them money. And you can't cure the problem of too much debt by borrowing more money.

Instead of forcing people to correct the mistakes of the bubble era, the government is doing all it can to keep bad investments in the money, brain dead firms alive and keep zombie banks in business. The more money the feds put to the task, the less quickly the economy corrects errors and adjusts to the new realities.

Still, all that money has to go somewhere, doesn't it? Won't a lot of it go into stock prices?

The answer is 'maybe.'

But this money that might go into stocks, where does it come from? Ah, dear reader, there's the glitch...there's the fly in the ointment...there's the rub.

Every dollar that goes to prop up Wall Street, for example, must come from somewhere else. A headline we saw yesterday reported that the "Rich get richer on Wall Street." Of course they do. Instead of going broke and getting fired - as they should have - the government steps in with more money. Not only do the banks stay in business, they're able to pay their managers even bigger bonuses.

The government borrows from the private economy - money that might have been lent to a developer...or to a bakery...or to a homeowner - and puts it to work. Now, it's true that in a credit contraction, borrowing seems to go down. But it does so for a good reason. The economy is not working properly. People don't know what projects will work and what ones won't. Besides, asset prices - which tend to support lending - are falling. Who wants to take a chance on lending money when the collateral might be disappearing? So, new lending tends to freeze up...until the period of shock, adjustment and restructuring is over.

The feds' theory is that they are merely putting idle resources to work...and getting the economy going again. What they are really doing is taking resources out of safe idleness, and wasting them on active projects that don't pay off. That is not the basis for a genuine new bull market. It is the basis for a big disappointment.

And it's adding nearly $2 trillion of new debt to the federal balance sheet each year.

But wait again...the government is not just borrowing money, it's also creating money 'out of thin air.' Surely, THAT will light a fire under the economy, no?

Well, yes and no. But it's too big a subject for this morning...

We'll save it for another day.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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If you were drawing up a plan for your dream economic recovery, this is how you would draw it up. The weakness emerging in the Australian housing sector (the fastest decline in prices in six years) would be made up for by resurgent Chinese demand for Aussie resources, led by the first growth in China's manufacturing sector in nine months.

Of course it may not be quite THAT simple. Australian data sent mixed signals yesterday. House prices fell in the first quarter despite the flood of first home buyers in the market. In fact, you could say it's the worst of all worlds in the housing market. At the low-end of the price spectrum, the grant is driving prices up, essentially wiping out the benefit of making prices more affordable. At the high end, prices are falling anyway as investors keep their powder dry (and realise that interest rate will rise again).

Prices at the lower-end of the market rare rising. "New figures from property analysts Residex show that 57 per cent of suburbs with average house values below $350,000 experienced a price increase of more than $7000 in the six months to March," reports the Sunday Age. "A similar rise was recorded in almost half the suburbs with house prices below $500,000," in the Melbourne property market.

"Average prices soared by $30,500 in Werribee South, $26,500 in Kilsyth South, and by $24,000 in Broadmeadows and Albion - all of which are suburbs with house prices at the lower end of the market favoured by first home buyers." Hmmmn.

Should it surprise anyone that housing values in these places have already grown to exceed the value of the first home buyers grant? It wouldn't surprise anyone who knows how markets (and real estate agents and mortgage lenders) work. And to be frank, state governments that generate income from stamp duty probably have no problem with higher home prices, even if the simple price inflation leaves new home buyers with a more unbearable mortgage and a less affordable home.

So how will the RBA wade into this morass of data today? It would have learned that job advertisements have fallen by 49.9% in the last year and 7.5% alone in April, according to a survey by the ANZ Group. If businesses aren't hiring now, won't it lead to higher unemployment later (which would put even more pressure on mortgage owners?) We'll have a better idea on Thursday, when the 'official' employment numbers come out from the ABS.

In the meantime, the TD Securities-Melbourne Institute Monthly Inflation Gauge says inflation is up just 2.1% in the last year. Couple that with the rise in the Aussie dollar lately as the "yield trade" is back in vogue, and you can make a pretty strong case for the Reserve Bank cutting rates when it meets today. Why?

The RBA doesn't have to defend the dollar. The markets are doing that. With inflation seemingly tame, the Bank can give mortgage owners more relief until the employment situation improves in Australia (if it does so this year, that is).

What do we think? Central Banks always overshoot in both directions. It's ridiculous to think that a small committee of men and women know exactly what the price of money and credit should be at any given moment. However, since the mandate of the bank is both price stability and growth, you can expect the bank to over-stimulate now, leading to much higher inflation later.

But really, who is worried about such things today? The S&P 500 has entered positive territory for the first time since early January. According to Swarm Trader technician Gabriel Andre in Money Morning, the Aussie market (measured by the S&P ASX/200) is now entering the second wave of a rebound rally up from last year's 48% decline.

S&P ASX/200 to Embark On Second Rebound Wave?

Click to enlarge

Source: www.moneymorning.com.au

Gabriel says wave one of the rally took the index from around 3,100 to around 3,700. It ran into resistance at 3,800. But it seems to have smashed through that this week. The second wave, he says, could take it up to 4,500. That would constitute a 50% rebound from the total decline between the 2008 high and the 2009 low.

We'll leave the technicals to Gabriel. But at the fundamental level, you'd certainly think the postponement of the government's Emissions Trading Scheme (ETS) is a breath of fresh air for the energy and mining stocks that would have been hit hardest by it. LNG producers and miners may see an especially big tailwind, especially when you factor in the idea that China's $781 billion stimulus is leading to a recovery in that economy.

So is it all over? The crash? The depression? The credit crisis?

Well, no. We wouldn't expect the banks stress tests to reveal anything at all later this week. If bad news is already priced into bank stocks, less than bad news coming from the stress tests might even lead to a rally in financials. The market anticipated that result today, driving the financials up on the S&P. And in the end, perhaps the stress test was Tim Geithner's way of forcing the banks to raise capital more quickly than they otherwise might.

But in a lot of ways, this feels like a "catch up" rally, where timid investors "catch up" with the trend buy getting off the sidelines and into the market. Or should we say "ketchup" or perhaps "catsup?" It's the kind of rally that makes things seem (or taste) better than they are (like a meat pie at the footy). And it's driven by people who are afraid of missing out on an even bigger rally.

If that's correct, then it's exactly the sort of convincing move that the insiders would ride early while selling into retail strength. Get everyone back in the game, sell for a tidy 35-40% profit on a short-term basis, then hunker down to see what the second half brings.

After all, the old trading adage is to "Sell in May and go away." It's supposedly based on the idea that the stock market generates its biggest returns between November and May on the calendar. The gap between May and the last quarter is a kind of no man's land for investors. We have no idea if that's true.

We do know that there's more than one second wave out there, though. A second wave rally in the ASX is a great time to make trades and take some profits on recovering shares. But let's not forget the second wave of bad housing debt in the U.S. (Alt-A mortgage) and the second wave of real estate losses coming from commercial property.

Those losses are going to further impair bank capital, put pressure on lending, and lead to larger declines in employment. Economies that live and die by credit growth and residential real estate still have some dying to do, we reckon. But for us the living today, the rally is something to enjoy while it lasts.

Dan Denning
for The Daily Reckoning Australia

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" Most of the market players who made quick and decent money during the past few weeks do not believe in a deep reversal trend on the markets," Gabriel wrote. "They just took advantage of a technical rebound that already drove the S&P/ASX 200 twenty percent higher than the lows posted early March.

Is this rebound over already?

Take a look at the chart below. Gabriel says, "There is a potential resistance around 3,800 points. This level corresponds to a previous low posted in late October last year (point A) that became a new high this year during the first fortnight of January (point B). Today the index closed at 3,756 points. We are there. We expect a first correction towards 3,500 points."

If charts give you a picture of collective psychology-via the aggregate buying and selling decisions that make up a market-then this chart tells us investors are going to be disappointed with the Reserve Bank today, no matter what it does. A 50 point cut in the cash rate is just the sort of thing to normally cheer investors. But that may not be the case today (if the RBA cuts rates at all). Why?

First, a big rate cut tells investors the RBA is worried about the slower economy and rising unemployment, both of which are bearish for shares and property. Besides, the cash rate is already at a 45-year low of 3.25%. The bank is running out of bullets. What happens beyond monetary policy when rates can go no lower?

We'd suggest that the credit bubble deflates even faster. But in point of fact, is begun deflating already. Check out the chart below from the RBA. Does this not explain how Australia's house price boom began earlier than the boom in the States? And does it not suggest that the collapse in the annual rate of growth in credit is going to remove a regular supply of money to the property market?

The disaster is now occurring, but in a slow motion fashion. The government has sucked first home buyers into the market with an increase in the first home buyers grant. House prices are hovering just below their highs thanks to the influx of new money. But after that? Look out below.

The other reason that investors will be disappointed regardless of today's decision is that the warm, fuzzy-glow from the G20's big announcement has already worn off. Bank stocks in New York sold-off over night after Calyon Securities analyst Mike Mayo said loan loss levels at U.S. banks would exceed the levels seen in the Great Depression.

In his report on the Seven Deadly Sins of Banking, the Old Testament-minded Mayo cited, listed the reasons for his downgrade as "greedy loan growth, a gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators."

How about a little Old Testament to follow up? "But let justice roll down like waters And righteousness like an ever-flowing stream," writes Amos, chapter five, verse twenty four.

Investors threw the book at bank stocks in the States. It didn't help when billionaire eccentric and never-shy George Soros said that the new mark-to-market rules that led to Friday's rally only create a new tribe of American Zombie banks. Soros told Bloomberg that the banks are, "Weighed down by a lot of bad assets, which are still declining in value...The amount is difficult to estimate, but I think it's in the region of maybe a trillion- and-a-half dollars."

More losses. More capital. Less lending. That is what the global banking future looks like to us. It is not a recipe for the recovery the G20 leaders talked about last weekend. We're not yammering on about it because we're stuck in a rainy day Melbourne funk.

Quite the contrary. It's opening day in baseball season, a day that always cheers our hearts. But for investors, the big risk is in thinking that the recent rally means the worst is behind us with the financial crisis and job losses in the real economy. The likely scenario is that we're about half way through, and anyone who says otherwise is...not in touch with reality (or perhaps, talking his own book).

How about some reader mail?

"Gold falling! Isn't that the greatest store of wealth man? I know the story now, it must be oil, wow that must be worth more, the world is running out stuff aren't they? He you fools, least if you keep the crystal ball predictions coming something will go your way one day. Lucky for us you are not talking to world finance ministers.

Philip Davis

Yes Mr. Davis, gold did fall over night. It's back under US$900. The headlines say it's falling because risk aversion and fear are receding. That's nonsense. But it does bring up a simple question: how will gold and gold shares behave during another round of deleveraging and asset deflation?

Our guess is it will do relatively better than financial stocks and absolutely better over the next five years. But by all means, enjoy yourself on days like today. It's hard to believe that anyone really takes comfort in the efforts of the world's finance ministers, though. You may want to see a doctor. Or a therapist.

Hi Daily Reckoning,

Nick

This is a version of the same issue with gold above. When you have a bear market in stocks, most stocks got down. You find exceptions from time to time. Our take in Diggers and Drillers is that investors should definitely own energy stocks-especially producers. You can read that argument here.

As we've said before, the oil crash of 2008 virtually guarantees a price spike sometime later this year, even if the economy is not going great guns. The larger issue which you should take up with your financial planner or adviser or your own brain is your overall asset allocation. How much of your money should be in stocks over the next five years? After you decide that, you can work on sector analysis and stock selection and valuation.

Dan

F. Power

It does look like if the heads of the G20 have their way, the IMF will become something of a global central bank. Other institutions like the OECD or the Bank of International Settlements could play a role too. But will it work?

Frankly we have no idea. Nations have competing interests, despite what elected leaders say publically about the need to cooperate. It is hard enough for the nations of Europe to have a common economic policy, given their very different economies. We can't imagine a global central bank having any real power to regulate interest rates in respective national economies.

What you might get, though, is a new institution to dole out fiscal stimulus to keep States from failing. For example, the increase in funding for the IMF that the G20 engineered will go to prop up governments in places like Hungary, Latvia, Ukraine, and Mexico. As John Robb has pointed out at his blog, this entire crisis is a stress test for National governments too, not just banks. In that light, the G-20 action is an effort by the State as an institution to preserve and grow its power at the expense of the market economy (which it blames for the crisis).

Of course, it would be fair to wonder who the State really represents anymore. It's certainly not "the people" who elect official to serve in Parliament and Congress. Is it industry? Is it finance? Is it itself? This article in the Atlantic magazine suggest that the world's bankers have engineered a quiet coup.

This is not that different than an idea we had a few years ago to write a report on how Goldman Sachs had become an unofficial fourth branch of the American government (behind the Legislature, the Executive, and the Judiciary). What we meant is that the economic policies of the nation were being determined by men (and they were mostly men) who clearly favoured creating a national economy based on finance. They preferred a capital account surplus and a current account deficit to a nation that produces real things and trades them. For more on that, look at the second half of the article here, with the sentence that starts, "It's a remarkable thing."

No matter how you stack it, it does look we live in a world where the interests of the governed are increasingly divergent with the interest of the governors. This is not that different than the financial industry, where customer and business interest are rarely aligned. It's just that ordinary people are starting to notice it. And they're not too happy about it.

Dan Denning
for The Daily Reckoning Australia

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Poor Warren. He's down to his last $25 billion. And Bill Gates can barely hold his head up; his pile has shrunk to barely $18 billion.

And do a Google search of "AIG outrage" and you will get 621,000 hits.

Alas, being rich isn't as easy or as much fun as it used to be.

The rally paused yesterday. The Dow lost 7 points. It could be over. More likely, it will run for a few months. Gradually, people will come to think that this is the real thing. They'll begin to imagine that it is 2003 all over again. Of course, it's not...this market has nothing in common with the Great Rebound of 2003-2007. (More below...)

Oil traded at $47 yesterday; it is slipping toward the $50 level. And the dollar is slipping around too - it is losing ground against the euro, now trading at $1.29/$. But it is mostly steady against gold, which seems to like the $900-$950 range...for now. We have a feeling it's going to go much, much higher before all this is over.

AIG is today's main story. Everyone is appalled, outraged...or apoplectic about it. First, we under-reported the amount in bonuses paid out. The real amount is $450 million, says the Wall Street Journal...and one member of Congress charges that many bonuses were disguised as other things...and that the real total is more like $1 billion.

The average lumpenvoter has no idea how bailouts work. He was willing to believe that giving Wall Street hundreds of billions in taxpayer money would somehow make his house go up in price, but now that he sees how it really operates, he is ticked off about it. He may not understand macroeconomics, but he knows chicanery when he sees it.

Under pressure, AIG revealed what it did with the bailout money. It came as no shock to us to discover Goldman Sachs at the top of the list of recipients. Goldman's main man was in the room with the feds - the only representative of Wall Street - when the decision was made to rescue AIG. What's more, the feds' main man at the time - Hank Paulson - also used to be the top honcho at Goldman. So the fix was in. The government gave money to AIG and AIG gave it to a long list of speculators - including Goldman.

This seems perfectly natural to us. If we'd been in on the fix we would have steered some of the loot our way. But the politicians are feigning shock and horror. Senator Grassley even said AIG management should "resign or commit suicide." He later calmed down and said he didn't mean it.

But we would have simply edited his remarks, giving the schmucks at AIG a last chance to exit with honor: "Resign AND commit suicide, in that order."

Barney Frank added that "maybe it's time to fire some people." Why not? The feds own 80% of the insurance giant now. Go ahead; fire all the people you want. That's about the only pleasure a real capitalist has left to him. Reach out...and fire someone today!

Elsewhere in the news, the economy continues to deteriorate. Industrial production fell 1.4% in February. And credit card defaults are at a 20- year high.

Misters Smoot and Hawley seem to still be on the federal payroll. The news this morning is that they began a trade war with Mexico and the Mexicans have already retaliated. That's all we know about it...

But back to the tribulations of the rich...

First, Mr. Market is downsizing fortunes - fast. In the last 12 months, the average rich person has probably lost half his wealth. Not only did he own millions worth of stocks and real estate...he was also among the privileged few to get into good deals on derivatives, SIVs, hedge funds and private equity. Many of those complicated and conflicted assets have been wiped out completely. Or, maybe he was unlucky enough to count Bernie Madoff as a friend.

Second, what Mr. Market doesn't take, Mr. Politician is looking at. All over the world, plans are afoot to increase his taxes...and close down his tax havens. President Obama has already revealed his plans to soak the rich. Every other group will come out even...or better...from Obama's tax proposals. But the rich are going to be saturated...marinated...soaked to the bone.

And third, the poor rich guy has become a pariah. He doesn't get invited to charity events anymore - or even to join the guys after work for a beer. Europeans have always distrusted rich people. But in America, a rich man used to be respected - just because he was rich. People asked his opinion on politics...on fashion...on art. He was presumed to be an authority on all things and was generally treated with respect...even deference.

But now rich are seen as chumps, losers, incompetents and malefactors. Even Americans look at rich people and think they must be either stupid or corrupt.

"Le secret des grandes fortunes sans cause apparente est un crime oubli , parce qu' il a t proprement fait." said Balzac. Which has been paraphrased to "Behind every great fortune lies a great crime." Of course, he was referring to France, where it is has probably always been true. Money is dirty in France. But in America, money was supposed to be clean...innocent...honest and forthright. The richest man in town always sat in the front pew in church and stood for election to local office.

But come the depression and even the rich suffer. And unlike the starving urchins, unlucky widows and innocent orphans, no one cries a tear for the rich. Here at The Daily Reckoning we always take the side of the underdog...and always support the lost cause. So when we think of the rich...those darling people with their Italian suits...German cars...and Swiss bank accounts...our cheek gets a little moist. For we - and we alone - still admire and respect the rich. Of course, the rich are human beings too - just like the rest of us. And yes, dear reader...we still despise them as much as anyone else. When it comes to intelligence or moral rectitude, they are probably no better than the lower classes, though probably no worse. But we still admire and respect their money. Their money is no better either - but they have more of it.

Now over to Baltimore, where Addison at The 5 Min. Forecast gives a St. Patty's Day look at the Emerald Isle:

"What's the difference between Iceland and Ireland? 'one letter and six months,' or so goes a joke making its way around the Internet," writes Addison.

"Aye, on this St. Patty's day the Emerald Isle is suffering the mother of all hangovers; the embodiment of a boom gone bust.

"With official unemployment now over 10%, GDP shrinking at a 6.5% clip, a proper housing crash and a 10% federal budget shortfall, Ireland has seen it's glory days crumble into one of the Eurozone's most beaten down economies.

"Ratings agencies are on the verge of downgrading Ireland's sovereign debt, which will assuredly make the whole matter even grimmer.

"The opening joke is so pointed," Addison continues, "Irish Finance Minister Brian Lenihan is now on a global PR tour to help rekindle the world's love of shamrocks and Guinness. Despite Lenihan's denials, many expect the IMF to swoop in and become Ireland's banker of last resort."

Addison writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

Back to Bill in Paris...

It's NOT 2003. Just in case you had any doubts.

You remember 2003? After a phony recession in '01-'02 came a phony boom in '03-'07. Stocks had driven into a ditch following the crash of the NASDAQ. The Dow had fallen down to about 7500. And then, when it looked like they were going nowhere for a long time...along came Alan Greenspan's friendly towing service. In a jiffy, he winched the economy back onto the road...and it was soon flying along at the fastest speeds every recorded. The Dow went all the way to 14,000 and beyond...before crashing into a stone wall.

And now the financial media is on "bottom watch." No, we're not talking about the kind of bottom watching you do on a Brazilian beach...we're talking about looking for the end of this bear market.

"Are stocks and oil bottoming," asks a headline at Seeking Alpha.

"How will we know..." when we hit the bottom? Asks the New York Times.

The answer: we will know when we no longer want to know.

For the moment, we believe we are beginning a classic rebound. The news seems to have turned positive...along with the weather. It's sunny and warm in Europe this morning. And investors are focusing on the positive.

"IMF poised to print billions in global quantitative easing," says a headline in London's Telegraph.

All over the world, the feds are working the pumps. And investors are watching their little boats begin to rock. If history is any guide, this rebound will recover 20% to 50% of what was lost. Then, the bottom - so recently spotted and revered - will fall out.

This is not 2003. In 2003, there was no collapse of the financial sector...banks didn't fail...major companies didn't face bankruptcy...consumer spending didn't fall...house prices didn't collapse...savings rates didn't go up...capitalism wasn't called into question...there were no tax rebates...there were no bailouts...not even a stimulus plan (though the feds did spend much more money...and the Fed did cut rates to 1%).

This time it's different. This is not a recession. Not even a phony recession. It's a very real Depression with a capital D...and all that goes with it - including whole industries that go broke, a credit crunch, a big drop in consumer spending, a huge political shift toward socialism, interest rates at zero, falling prices, and widespread bankruptcies - both of households and companies.

In 2003, a quick cut in interest rates - along with a boost in federal spending - produced a fast turnaround. Within months, prices were rising again. Consumers didn't even pause...they kept spending and borrowing all the time. This time, the world has never seen stimulus efforts of such huge magnitude - and still no real uptick. This time, consumers are running scared...they're losing their jobs and closing their wallets. This is the real thing. It won't end quickly...or easily.

Here's a calculation for you. The amount of excess debt in the United States is about $20 trillion. That's the difference between the usual level debt - about 150% of GDP - and today's level - about 350%. That $20 trillion in surplus debt probably has to disappear before a true growth cycle can begin again. The best way is simply to let nature take her course. Much of it would be written off in a few months. But the feds won't let that happen. They're doing all they can to prevent assets from getting marked down...and to prevent debt from getting written off. So far, they've committed $11.7 trillion to the fight against debt deflation.

So instead of writing it off, it will have to paid off...or ultimately, inflated off.

Currently savings rates have risen from zero to about 3% of GDP. That's about $420 billion per year put to paying down the debt. Let's see, at that rate, how long will it take to erase the $20 trillion in excess debt? Hmm....about 47 years!

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• What Did the Feds Think When They Gave AIG Money?
• Temptation for the Investors
• OPEC May Cut Oil Production
• Japanese Practically Gave Away Money to Anyone Who Would Borrow It
• Investors’ Objective: To Make 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
• China Using Holdings of U.S. Treasury Bonds as Cudgel to Bludgeon United States