Lately, the stock market has been grabbing most of the headlines for its surprisingly strong performance since last March. But commodity prices have been surging as well. Favorable macro-economic trends are powering both markets.

The S&P 500 Index is up more than 50% from its March lows. Meanwhile, the CRB Index of commodity prices recently broke above the 280 level making new yearly highs - about a 40% advance from the lows of last year.

Therefore, no matter what America's grim economic data may be saying, the stock market and the commodity markets both agree that some sort of recovery is underway.

I how no opinion about where stock prices are headed next, but I feel fairly confident that commodity prices will continue trending higher over the coming years. That said, many commodity markets have already posted such large gains during the last few months that some investors may be skittish about climbing aboard.

I understand this fear, but investors must remember that commodities are not homogenous. Even though many of them have soared this year, some commodities have advanced very little. Corn is one of the notable laggards...and I think it has some catching up to do.

My recent research travels took me to the West Coast to revisit acquaintances made during the July National Chicken Marketing convention. (Yeah, that's what I do for fun!)

My big takeaway from this chicken confab was that most of the presenters and professionals in attendance believed that $3.00 corn was way too cheap and that corn prices would begin moving higher. I trust these guys. After all, it's their business to know the cost inputs from the egg to the bird on your plate. But their bullish outlook for corn was a minority opinion at the time.

Back in mid-summer, when this convention took place, the corn crop looked likely to make it through the summer months in great shape, with no threats in sight to disrupt high yields. Consequently, corn prices were languishing near multi-year lows.

But as it turns out, the "chicken crowd" was right to believe that corn prices were too cheap. And the corn price charts from last summer confirmed the strong potential for even higher prices. Though my view on trading weighs heavily on technical analysis, I learned long ago not to ignore important fundamental information. At the lowly price of $3.00 a bushel, the upside potential for corn seemed much greater than the downside risk.

That's why I urged the subscribers of my Resource Trader Alert (RTA) to enter a bullish trade on corn. Over at RTA we use options to directly play commodities themselves - options help limit our risks, while still providing ample opportunity to profit.

I recommended a six-month-long option play on corn, designed to benefit from any strong up-move in corn prices. The specific trade I recommended cost just a little more than $1,100 to initiate. I was looking for corn to move to $4.00 a bushel by then end of this year. But as it turned out, we hit that target in late October, which caused the value of the corn trade I recommended to more than double.

That's just how quickly the commodity options can move - a 25% rally in corn prices caused the recommended corn options to double. By using options we were able to maximize our profit potential and substantially limit our risk.

The reality of fundamental trading on things like weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. Often, price charts reflect this "insider knowledge."

In other words, a price chart can provide an early indication that a market is about move into a bullish mode, even before any broadly disseminated public information would confirm the rising prices. Therefore, when you combine technical analysis with the informed insights of industry insiders, you can shift the odds of success greatly in your favor.

After a brief correction, corn is on the rise again and trading just above $4.00 a bushel. I'm staying with this friendly trend for now.

Regards,

Alan Knuckman
for The Daily Reckoning Australia

• Corn Prices on the Rebound
• Wheat Prices Look Set for a Move Up
• The Aussie Dollar as a Measure of Global Risk Appetite
• Nervous Investors ‘Short’ the Market By Buying Commodities
• Macmahon Holdings Limited (ASX:MAH) Near a 52 Week High

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

"It's amazing; the US is doing everything that Japan did wrong," said a friend yesterday.

Let's see, in the 1980s Japan's corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the '80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights. For example, instead of saying that businesses always need to try to do things better, they referred to "kaizen" as if it were the secret of success. And US economists urged the Reagan Administration to have an "industrial policy" - because that was what Japan had. Japanese businesses were the envy of the world. Japan was the world's second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall. The stock market crashed in Tokyo in 1989. The Japanese economy entered a recession. At first, the experts believed it was temporary. They urged investors to take advantage of the opportunity to buy into Japan, Inc. at record low prices. They thought Japanese industry was unstoppable...unbeatable. It would recover in no time, they said.

But Japan, Inc. didn't recover. Instead, it went into a long, drawn-out recession that lasted year after year...with on-again, off again deflation...and several stock market rallies. Each time stocks rallied, they fell again. Each time the economy began to grow...along came another setback. This continued for the next 20 years...until March of this year...when Tokyo stocks hit their lowest point for the whole bear market. A generation of investors had been nearly wiped out. Over two generations they had made nothing. Trillions worth of wealth had been erased.

What did the Japanese authorities do during these last two decades? They fought the correction every step of the way, with the boldest attempt at fiscal and monetary stimulus every undertaken up to that point. Interest rates came down to effectively zero. And government spending soared, creating the largest deficits in Japanese history. Now, Japan's national debt approaches 200% of GDP - a peacetime record. If it continues to grow at this rate, it will hit 300% of GDP in just a few more years.

Sound familiar? It should. The key US interest rate is now effectively zero. The Fed says it will leave it there for "as long as it takes." And deficits have reached staggering levels - 13% of GDP. At this rate, the US debt/GDP ratio will hit 100% in just a few years. And if it continues, US debt/GDP will reach 200% not long after - as recession- reduced tax revenues meet stimulus-increased outlays.

But wait...the feds say they won't let it happen. They'll turn this thing around. The economy will begin to grow. Tax revenues will rise. Prices will go up.

Hey...that's just what the Japanese said!

So far, the US is doing almost exactly what the Japanese did...propping up zombie companies and stimulating the economy as best it can.

But if it does the same thing the Japanese did, won't the US get the same results the Japanese got?

Here is where it gets interesting. Because the US economy is not exactly like the Japanese economy. Japan had high savings...and a positive trade balance. It could run up huge government debts and "owe it to itself." It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds...or selling them suddenly.

America's government debt is different. The US doesn't save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America's ability or willingness to repay its debts, they'll drop the dollar like an annoying girlfriend. And when they do, the whole global monetary system will come crashing down.

But suppose savings rates go up in America - to, say, 10% of GDP, like they were before the bubble years. That would make $1.4 trillion of savings available to finance the feds' deficits. And suppose the slump continues...as we think it will, with another big scare in the investment markets. People will seek safety in...yes, you guessed it...US bonds. This will take the pressure off the dollar and permit the US to finance its countercyclical spending without depending heavily on foreigners. The recession/depression will be annoying...but not insufferable. And Bernanke will figure he has more to lose by undermining the dollar than to gain from it. In that case, the Japan- like slump could go on for many years - just as it has in Japan!

Bill Bonner
for The Daily Reckoning Australia

• Recession for the Japanese Economy Once Again
• Japan “Wasted Trillions” on Stimulus Programs
• Difference Between the Dollar and the Yen
• How Will the United States Finance the Biggest Deficit of All Time?
• U.S. Government Must Roll Over $3.4 Trillion in Debt Over Next Four Years

Australian baby boomers have never experienced a "rainy day" - so they've never planned for one.

But then why would you?

Over the last 20 years, virtually everything has gone up... and up...

A generational bull market has lifted the stock market, property values and commodity prices to dizzying heights. Most of us have felt the benefit of this in some way or other.

It's certainly made us feel a lot wealthier than we are. And when you feel wealthy, you tend to act wealthy.

And that's just what we've been doing - in some style... We've bought bigger houses, newer cars, nicer TV sets - and in the process, we've racked up more personal debt than the Americans were in just before the U.S. sub-prime crisis hit.

How deep in debt are we?

According to the Bank of International Settlements (BIS), during the 1980s, the ratio of household debt to disposable income for Australian households was around 45%. For every dollar an Aussie earned he owed 45 cents. Not ideal - but manageable.

Since 1990, the BIS reports that this ratio has risen rapidly, reaching an incredible 157% in December 2007. That means for every dollar the average Aussie earns, he owes $1.57.

In an October 2008 article, The Australian reported:

"By 2008, Australian households carried 35 per cent more debt relative to their income than Americans. The great Australian middle class has become more addicted to credit and more spendthrift than the US, the home of consumer capitalism."

We all know what happened in America after their debt bubble exploded...

But despite that warning, and despite debt far in excess of their incomes, Aussies are STILL spending money like it's going out of fashion.

In June 2009 the government handed out $900-a-piece to low and middle-income earners as part of a $23 billion stimulus package. By August, Australian National University economist Professor Andrew Leigh found that 40 per cent of those who'd received that cash had spent the lot. That's some stimulus for the economy!

"This is approximately twice as high as the share of United States residents who reported that they spent the tax rebates handed out in 2001 and 2008," noted Professor Leigh.

We all love spending free cash - who doesn't? - But every dollar you fritter away now is a dollar your future self will have to find when there's no regular money coming in.

The fact is, despite the overwhelming warnings, many of us spend more than we earn without any thought to the consequences... we believe that house prices will always rise... that high asset values equate to "true" wealth... and that we don't have to save any of our income because our super will provide us with a comfortable retirement.

But hang on a second - How often do you audit your super?

How regularly do you check to see whether your nest egg is still growing... or, at the very least, well protected against the economic downturn? Every month? Once a year? Never?

Have you checked it recently? Maybe you should...

Many Aussies opt for their company approved super fund and then forget about it, expecting to be handed a huge cheque at the end of their working life.

Granted, it's convenient: no research, no hassle, no worries. There's usually a big name behind the fund, and the glossy brochure your HR Manager hands you makes you feel cosseted and reassured.

It's the easy choice so you take it. And you stick with it - because you never physically see the money... it's just another deduction on your pay slip. It's not as if you're actually handing over piles of notes to someone to safeguard and nurture for you.

According to a recent report by superannuation research firm Chant West, the majority of retail super funds (i.e. yours) are classed as "growth" funds; defined as containing between 61 and 80 per cent of their allocation in assets such as shares. Even if you're invested primarily in a "balanced" fund, 40-61 per cent of your retirement cash will still be held in "growth" assets, says Chant West.

Growth assets are great when the market is going UP... but you want to limit your exposure to these assets when the market goes DOWN. And that's the problem: in the same report Chant West states that the average 'growth' super fund fell by 13% in 2008/09.

This is the worst return since the introduction of compulsory superannuation in 1992.

The worst return in the history of super.

That's a real kick in the teeth.

And the thing is, unless you've been paying attention, you may not have even noticed it. Rest assured, it'll smart pretty badly when you're still doing that early morning commute five... or even ten years after you'd planned to retire.

Please understand: sticking with the 'default option' of your company super allows someone you don't know to make all the crucial decisions that affect your financial future.

In terms of committing crimes against your future self, this is just about the worst thing you can do. Believe me - you may as well jump forward in time to the day you retire and punch yourself square in the face.

Kris Sayce
for The Daily Reckoning Australia

• Your Average Australian Super Fund
• World of Super Collides With World of Credit Crunch
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
• European Governments of the Eurozone are Separately Responsible for Their Euro-debt
• Your Actively Managed Superannuation Fund Cannot Beat the Market

It's not really...it's just the point where this bounce will equal the bounce following the crash of '29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn't either.

Gold rises with the stock market. The yellow metal hit a new record over $1,100 yesterday. Why is that that important? Well, it's not important either. But gold still has another $1,000 or so to go before it equals the last bubble peak in gold, set in 1980 - on an inflation- adjusted basis.

The point is, there's plenty of room on the upside for gold...and not much room left on the upside for stocks...

Stocks are going to be hit hard when people realize that the recovery is a fraud. When will that happen? We don't know. But another big wave of foreclosures might be the thing that sets it off.

"The Second Wave Begins..."

This was the title of a report over the weekend from John Hussman. The gist of it is that the long-awaited 'second wave' of foreclosures has, perhaps, finally begun.

First, many of the Top 50 metro areas in the US are reporting "sharp increases in foreclosure activity.

"Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation's foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave," said James J. Saccacio, chief executive officer of RealtyTrac. "While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009."

Hussman:

"While the news itself is no surprise in the sense that we have expected and written about this situation repeatedly in recent months, the phrase 'sharp increases in foreclosure activity' is notable in the context of widespread views that credit difficulties are abating. Below is a reminder of where we stand in relation to the reset curve. This news of a shift in the character of foreclosure activity comes precisely in tandem with the beginning of the predictable second wave. The pleasant lull in the reset schedule is decidedly behind us.

"The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR. Instead, they reset to a 'premium' spread above those rates. That 'yield spread premium' is precisely what the homeowners agreed to in return for the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport very high loan-to-value ratios."

So, there you go.

If Hussman is right, we'll soon see real estate prices take another tumble.

Bill Bonner
for The Daily Reckoning Australia

• New Default Wave Hits Mortgage Industry
• The Interest Only Mortgage Option
• Bank Stress Test Not Stressful Enough
• House Prices in California and Las Vegas Hit Hard by Wave of Foreclosed Properties
• Recovery for the Real Estate Market

The stock market rallied throughout most of yesterday's trading session, then stumbled into the close. This pattern has become unnervingly familiar of late. It's true that the Dow has only dipped 2% since closing a notch above 10,000 on October 19, but the decline feels a bit worse than that. Maybe that's because so many midday rallies have turned into late-day selloffs.

Or maybe the market feels so weak because it IS so weak. Most of the broad indices like the S&P 500 and the NASDAQ Composite are down more than 5% from their recent highs. Meanwhile, former market leaders like the BKX Index of financial stocks have tumbled more than 10% from their recent highs. These corrections aren't devastating, just discomforting.

Every rational investor knows that the market recovered much more ground from its March lows than economic fundamentals warranted. But that doesn't automatically mean that the market is a "sell." Maybe it is just a "do nothing for a while." Your editors are agnostic on this topic. But almost no one else seems to be. When the stock market becomes as volatile as it has been lately, every stock market commentator from Pensacola to Pismo Beach trots out a forecast - usually based upon stock charts that show trendlines, resistance levels, Fibonacci retracement points, stochastic indicators etc.

Unfortunately, the identical price charts can yield completely opposite forecasts. Show us a trendline, and we'll show you two emphatic forecasts - one bullish, one bearish. Both forecasts will be honest and informed by experience, but only one of them will be correct.

That said, our friends over at "Penny Trends" delivered a very persuasive (and bearish) forecast yesterday, based on a very clever technical indicator:

"The market is rolling over... The transformation is amazing... Our list of exchange-traded funds (ETFs) is one of the best tools we've ever developed for determining the trends in the markets. By distilling the investment universe into just 87 'baskets' of stocks, and then ranking them by three-month performance, we get a fantastic sense of the big picture. We can tell immediately if investors are building optimism or sinking into pessimism. And we can see which individual sectors and markets are strong and which are weak by the way they react relative to one another. For example...

"A month ago, the five best-performing ETFs in the world were showing an average three-month gain of 34%, while the five worst-performing ETFs in the world were showing an average loss of just 8%. Now, the five best-performing ETFs are up an average of just 17%. The bottom five are down an average 15%. In other words, uptrends are getting weaker and downtrends are getting stronger. It means the market is probably rolling over.

"Here's another way of looking at the same thing: The 87 ETFs we monitor represent every major currency, stock market, sector, and commodity. A month ago, only eight of the ETFs on our list were showing a three-month loss. That means 79 were showing a three-month gain. Now, 22 ETFs are in negative territory and only 55 are in positive territory...another strong sign the market is rolling over."

But don't let this forecast bring you down, dear investor. Things could be worse. The stock market could be just as bad as the housing market.

"But wait just a minute!" some readers may protest. "Isn't the housing market recovering?"

Well, sort of. Prices are no longer in freefall. But a sustainable recovery still seems like a delusional hope...especially when one considers that there's a lot more pain to come in the mortgage market.

Eric Fry
for The Daily Reckoning Australia

• A Bull Market That’s Missing Parts
• ETFs Are Now Available in Australia
• The Actual Money Supply
• Gold Nears Record Highs on Investment Demand
• Stock Markets All Over the World are Getting Whacked

The challenge of today's Daily Reckoning is to separate the short-term trends in financial markets from the long-term trends in geopolitical history. It's a big challenge. But let's break it down and see where we go. And let's begin with U.S. Bank Wells Fargo.

The Dow Jones slipped under 10,000 at the end of the day Wednesday largely because analyst Dick Bove changed his call on Wells Fargo from "neutral" to "sell." Bove said the quality of the company's third quarter earnings was, "pretty poor." "If you take a close look at the earnings, what you can see is that the improvement is due to a hedging profit made on the mortgage service portfolio, about $3.6 billion...You can also see that they cut their tax rate," he told Dow Jones news wires.

Imagine that; a major bank boosting earnings with one-off events. This is why we said last week that quarterly earnings (and whether they are above or below analyst expectations) don't always tell you what you need to know about a business. Granted, Bove is still bullish on Goldman, Morgan Stanley, and Bank of America. But his comment set off a small chain reaction on the Street.

It was a weird reaction too. Stocks fell and the Aussie dollar briefly faltered against the greenback. But commodities like oil and gold continued to power ahead. Oil is at a 12-month high and trading over US$81. Gold futures again traded above $1,060. And the U.S. dollar kept falling against commodities and other currencies.

So does this disprove our trading idea that the dollar index is due for a rally? Nope. The index could make a new low below 70. And that would certainly confirm what we already know: the rest of the world is on to America's habit of living way above its means. The dollar index could plumb a new low until there is an improvement in America's trade deficit or its fiscal deficit. However...

Don't discount the rally! "We should be prepared for a counter trend rally," wrote Slipstreamer Murray Dawes earlier this week. "RSI are entering long term oversold levels (although in a downtrend they can remain oversold for long periods of time of course and so are not a good trading signal against the trend) and market news is constantly bearish the US dollar so trader positions may be getting a bit full up on the short side."

"A short squeeze would not be out of the question, but I would not be trading a squeeze unless it breached the 81 level to confirm the re-entry into the last year's range," Murray concluded. A short squeeze in the greenback would see oil and gold correct, along with the Aussie dollar and stocks. Mind you this is a trading trend, not a long-term investment call. But we're tracking it and will keep you posted.

For a top-down view of just what's happened to the dollar this year and what it means for your investments, have a read of David Einhorn's speech at the Value Investor's Conference in New York City. It's a real page turner. And it's only eight pages!

Einhorn made a few great points worth considering. The first is that Australians should watch out for a second period of slower growth (maybe even recession) once the effects of the stimulus exhaust themselves. It wouldn't be the first time something like this happened. The attempts to stimulate America out of the Depression boosted GDP for a few years, but didn't solve any of the problems which really ailed the economy.

"An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fallout. Our [America's] choice may be to maintain large annual deficits until our creditors refuse to refinance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline."

Einhorn is writing about the U.S. In Australia, the government is hoping the removal of the fiscal stimulus won't result in "significant economic fallout." It must be hoping that capacity expansion by the mining industry is enough to support employment and consumer spending...and that house prices (and home building) keep the rest of consumer spending buoyant...and that businesses begin to reinvest.

That's a lot of hope. But hope has been pretty easy to sell these days.

The other factor which makes Australia's situation slightly different than Americas is that funding Australia's comparatively small deficits shouldn't be too hard, given the strength of the Aussie dollar. Not that racking up long-term debts to China or other foreign creditors is good, especially when the borrowed money is just going to your mates in the building industry or to prop up select retailers.

But it's probably true that Australia's creditors won't squeeze the government until much later, after the current government has been replaced. That will happen years down the track, when tax payers will still be paying off today's debts. Perhaps they will be wondering why no one [today] thought it was immoral to steal money from the future in order to maintain over-leveraged lifestyles today.

But that is the future's problem. So we'll let them deal with it. Einhorn is right to point out that policy makers tend to favour short-term benefits over long-term prudence because it's easier to get elected that way. And news organisations always spin the policy in terms of who the narrow groups that benefit rather than the unknown parties in the future that don't. But maybe this is just too abstract a point for people to understand these days. In any event, years down the track when Australia is paying off its debt to foreigners, the question may come up again.

Today, there are other more critical events that could rock financial markets. "As we sit here today, the Federal Reserve is propping up the bond market, buying-long dated assets with printed money. It cannot turn around and sell what it has just bought," Einhorn says.

The Fed has no exit strategy! The U.S. bond market has become a quagmire from which Geithner/Westmoreland and Obama/Johnson cannot escape! But hyperbole aside, what does that really mean?

It means that TARP and TALF and CAP may eventually wind down. But the Fed is subsidising mortgage rates and short-term Treasury rates in the U.S . This is what's going to drive the next down move in the dollar and the dollar index (it will make new lows). The Fed will continue "monetising the debt" and there will be fewer and fewer foreign takers (willing to finance U.S. deficits by buying bonds and notes).

This quantitative easing is incredibly bullish for gold. And it's a liquidity trap for the Fed.

"There is a basic rule of liquidity," Einhorn says. "It isn't the same for everyone. If you own 10,000 shares of Greenlight Re, you have a liquid investment. However, if I own 5 million shares it is not liquid to me, because both the size of my position and the signal my selling would send to the market. For this reason, the Fed cannot sell its Treasuries or Agencies without destroying the market. This means that it will be challenged to shrink the monetary base if inflation actually turns up."

We'd argue there already IS inflation, but it's in assets...stocks, bonds, commodities, and real estates. The Fed's nightmare is that it is unable to shrink the monetary base without collapsing the Treasury market (sending yields to the stratosphere). You'd get a collapse in asset values and devaluation in the dollar, which, in the real economy, would lead to rising prices. A loss of net worth coupled with a rising cost of living...is not a good formula for getting re-elected.

And one more point on the U.S. debt. It is now extremely interest rate sensitive, as we wrote here in April. Einhorn writes that, "The Treasury has dramatically shortened the duration of the government debt. As a result, higher rates become a fiscal issue, not just a monetary one. The Fed could reach a point where it perceives doing whatever it takes requires it to become the buyer of Treasuries of first and last resort."

Besides taking U.S. monetary policy into the land of the absurd, you would also want to buy long-dated calls on U.S. interest rates if Einhorn is right. You can trade it two ways actually. You can be short U.S. bond prices through exchange traded funds like TLT and IEF, or long U.S. bond yields by buying call options on U.S. Treasury yields.

And what about the other dodgy currencies like the Euro and the Japanese Yen? They are doing well against the Greenback now. But at a fundamental level, both have the same genetic defects as the U.S. dollar. "I believe there is a real possibility that the collapse of the major currencies could have...a domino effect on re-assessing the credit risk of other fiat currencies run by countries with large structural deficits and large, unfunded commitments to ageing populations."

The "domino effect" Einhorn is referring to is the collapse of Lehman Brothers. For at time, until it was clear the government would not allow the other investment banks to fail, it was clear to investors that if Lehman's leveraged model was dead, so was Goldman's and Morgan Stanley's and Merrrill Lynch's.

In a world where credit was not so ready and the unwinding of leveraged assets threatened to wipe out equity capital, those major levered up firms faced an existential threat. The government stepped in at that point and bailed them out, preventing the free market from doing what it was about to do: punishing the firms, their creditors, and their shareholders for incredibly bad risk taking.

Now you have the goofy situation where a government pay Czar is intervening to cut executive salaries at those firms by 90%. If the government hadn't intervened in the first place, the salaries would have been cut by 100% and the bad bets by the firms would have been written off and the economy would be closer to recovery. But that is neither here nor there.

Einhorn's warning is that currency devaluations force investors to revalue the idea that sovereign bonds are risk free. This is another way of saying that the nation state as a fiscal enterprise is every bit the failed model that investment banking is today. Investment banks borrowed money to bid up assets. Governments borrow money, securitised by tax revenues, to "invest" in policy objectives.

But as we are finding out now, those "investments" have not been self-sustaining in an economic sense. Einhorn, if we read him right, is reaching the conclusion that the nation state financial model (the fiscal warfare/welfare state) is in deep, deep trouble. It is the next institution that is "too big to fail." And it's going to fail because its funding model is based on the fraud of an idea that we can all live at one another's expense and that you can get something for nothing.

Here's a question, though: who bails out a failed nation state? Will the IMF bailout America? Will the World Bank lend to Japan? Will China establish a line of credit for Europe?

Speculators who like what Einhorn is saying would consider buying long-term put options on the Euro and the Yen too, not just the U.S. dollar. But what do you do if you're not George Soros? Why not try gold?

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible."

Sounds pretty sensible.

Dan Denning
for The Daily Reckoning Australia

• Recession Where Short-term Benefits of Consumption Belie Long-term Debt Consequences
• U.S. Treasury Auctioning Off $81 Billion in New Debt
• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy
• HSBC Reveals Days of the Dollar are Numbered
• U.S. Government Must Roll Over $3.4 Trillion in Debt Over Next Four Years

We're not sure if there are still places available. It's free, but you'll have to RSVP. You can do so here. It's a great chance to hear two independent thinkers offer an alternative explanation for what's going on, an alternative to the rosy everything's fine clap trap in the mainstream.

If you're not in Melbourne or can't make it, don't worry. We're going to take up some of Dr. Hudson's main contentions over the next month and "unpack them" as the saying goes. Among other things, he's arguing that we are moving to a "Neo-Feudal" world where the landlords and the bankers are again in charge of the economy (and the world).

Their strategy is to get the rest of the country into as much debt as possible. Whether this is so they can increase their claims on financial wealth (rents, interest payments, and capital gains on asset prices) or whether it's a political program to subjugate the population...that's one of the questions we were going to ask.

We were also going to ask if the "de-industrialisation" of advanced Western economies that Dr. Hudson talks about is a reversible process. Can Europe and America ever compete with China and Asia in manufactured goods? And if they can only do so in high-end goods (capital goods, technology, aerospace, IT etc.) what does that mean for the structure of employment in Western economies and corporate earnings.

Dr. Hudson, it seems to us, is right to point out that there is a kind of "Financial Oligarchy" that seems to be benefitting the most from the financialisation of the economy. But everyone else - those betting on higher share and house prices to pay for retirement (and pay off huge debts) - may not fare so well. What should you do? What can you do? More on this in future reckonings.

For today, we'll go to the mailbag and see what your fellow readers have to say.

Dear Dan,

Dear Dan

Hi,

From another Ralph...

Hi

Ralph F.
Little Hartley, NSW Australia

Dan Denning
for The Daily Reckoning Australia

• Announcement: Welcoming in the Holidays With a Beer
• Government Takes Away Almost Two Billion Dollars from Telstra’s Market Cap
• Deficit Spending in Australia Reaches a New Era
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But a strong currency can also be a sign of economic strength. One way to view a currency, we read somewhere recently, is as a national obligation secured by national assets. Those "assets" are loosely defined as economic growth (GDP) or the tax revenues a government can generate. A growing economy generates royalties and income taxes and demonstrates to international bond investors Australia's ability to service interest and principal on debt.

At least that's the theory. We hope the strong news from the Aussie labour market yesterday doesn't encourage the government to borrow even more (not that government's ever need an excuse in the era of perpetual debt).

In fact, as our friend Dr. Steve Kates explains in his latest contribution, the Reserve Bank's interest rate rise earlier this week is a clear warning to the government to cut it out already with spending other people's money. Dr. Kates has the details on how the public sector borrowing is driving down the national net savings rate.

And the underlying psychological issue is whether this apparent recovery causes Australians to throw caution to the wind and resume "asset based saving." You remember what that is, right?

It means you stop real saving from your income (which is declining in real terms anyway) and instead take on debt to pile into assets like shares and houses. You lever up again. As long as those assets are going up, having a negative real savings rate doesn't seem like a big deal. It just means you have a "preference" for asset based saving.

But as we've said many times before, the stock market is not a savings account. It's a casino. But for now, it sure looks like there is plenty of trading opportunities. The joint is jumpin'! And as long as you think of them as trades and realise its money you could lose, it's actually pretty exciting.

For example, we've just reviewed an alert to Slipstream Trader subscribers from analyst Murray Dawes taking a small profit on a very short-term trade in a major financial stock. Not that we're agnostic on financial stocks. We hate them.

But traders are market neutral. It's all about the signals and the risk/reward ratios on each discrete opportunity. Murray also outlined what he thinks is the weakest of the Big Four banks and the weakest of the regional banks. But don't go shorting them just het. He says all the momentum indicators in the market are up and now is not the time to go short.

Dan Denning
for The Daily Reckoning Australia

• The Aussie Dollar as a Measure of Global Risk Appetite
• The Only Thing Really Going Down Right Now is the U.S. Dollar
• Gold, the Aussie Dollar, the Greenback and You
• Saving Money, Not Spending it, is the Key to Getting Wealthier
• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy

Two important things happened yesterday, both of which cast a crimson light on things.

First, the Dow dropped again; it has only gone up one of the last 7 days. It went down 203 points. Could be nothing. Could be something big...the beginning of the long awaited 'next leg down' for the bear market...the opening day of a bloody Red October.

Charts of oil, commodities, copper, the dollar, and Treasury bonds tell us the same story. The greed investments are topping out. The fear investments are headed up.

What's a 'greed investment?' It's anything that benefits from an improving outlook for the economy and inflation - oil, commodities, and stocks, mainly.

What's a 'fear investment?' It's something that goes up when people begin to suspect the boom is a phony - namely the dollar and US Treasury bonds.

The dollar is rising. So are Treasuries. Yesterday, 30-year US Treasury bond yields fell below 4% for the first time since April.

And what about gold?

Well, that's the other important thing that happened yesterday. Gold held above $1,000.

So what?

So what?? Well, dear reader, you are in a prickly mood this morning, aren't you?

This is important because gold could go either way. Gold is a refuge in times of fear - especially when people fear inflation or a falling dollar. Gold is also a target of greedy speculators sometimes, even when the going is good. According to a study done by the World Gold Council, you never know what gold will do. That study was a great comfort to us here at The Daily Reckoning; we thought we might have missed something. But no. We may not know what gold will do, but neither does anyone else.

Looking around, we see no sign of consumer price inflation. So gold's recent rise must have been driven by optimistic speculation - along with oil and stocks. Now, when oil and stocks go down... we have to wonder whether gold will go down too. The answer, given yesterday, was what we expected - yes, but not as much.

There's substantial risk in gold as well as stocks. The ultimate low for the Dow should be below 5,000. That is, let's say, about a 50% haircut from current levels. And let's assume that gold does what it did yesterday...let's suppose that it goes down only 40% as much as stocks. That would still be a drop of 50% of 40%, or 20% - to the $800- an-ounce level.

If you would be gravely upset by a drop of that magnitude...you probably shouldn't buy gold at this level. And, of course, you should have sold your stocks already. Stick to cash - and gold, if you're long-term oriented - until this next phase is over.

The economic news was mixed, as usual...with nothing to make us think that our basic outlook is wrong.

On the optimistic, bullish side...consumer spending rose in August. Pending homes sales went up too.

But on the pessimistic, bearish side... "September auto sales plunge," says a Reuters headline. Yes, auto sales drove off a cliff last month - just like we said they would. GM reported a 47% drop.

What happened? The clunkers program was an economic fraud. Like all attempts to boost consumption, it merely shifted sales from the future to the present (now the past). Which is a big reason why August consumer spending looked good too.

But wait a few weeks for the September consumer spending numbers. Especially if the stock market continues to fall... Then we'll find out how sustainable those retail sales numbers really are.

As you know, here at The Daily Reckoning headquarters...in the building with the gold balls on the south side of the Thames...we are often accused of 'pessimism.' We deny it. We're optimistic about the fate of mankind. But we are pessimistic about many of his current pretensions - such as health food, enlightened central banking, contemporary art, mass education, global climate control and progressive democratic government.

But maybe we are wrong to be optimists. Pessimists always have the last laugh - when the optimists die. "I told you so," they say, under their last breath.

Bill Bonner
for The Daily Reckoning Australia

• Is Gold Going Up Because People Fear Inflation?
• Biggest Factor Affecting Consumer Price Inflation is Growth in Bank Credit
• Abandoned Shopping Malls to Follow Abandoned Houses
• China Stepping Up Purchases of U.S. Treasury Debt
• September is the Best Month for Gold

And on to today...Shouldn't this be an interesting week? "Markets have gone up too much, too soon, too fast," says Nouriel Roubini. The ASX 200 fell nearly 100 points on Friday, or 2.11%. This echoed the previous day's trading in New York.

Friday wasn't so bad on the Dow. But the jobs report released by the U.S. Department of Labor showed 263,000 lost jobs in America and an official unemployment rate of 9.8%.

That rate is undoubtedly much higher, once you figure in people who've given up looking for work but are no longer included in the survey. In fact, the "U-6" figure kept by the Department measures labour "underutilisation" in the economy. And according to that figure, U.S. unemployment is at 17%, nearly twice the figure quoted on Friday.

There have been jobless recoveries from recession before. But you still have to wonder how there can be such a big difference between the stark news in the job market and the behaviour of the stock market. True, economists will tell you that jobs are the last thing to recover from a recession. Businesses don't hire until they are sure everything is in the clear.

And we are often told that stocks lead the economy. The market has priced in a recovery which the labor market will confirm...eventually. At least that's the conventional wisdom. It's reassuring.

But the unconventional wisdom is probably more correct. The unconventional wisdom is that low interest rates (near zero in the U.S.) have driven people out of cash and forced them into higher-yielding and often speculative assets. The biggest obvious beneficiaries of low rates and credit facilities has been financial sector stocks themselves (and presumably their options-laden directors).

The question this week is whether there is any momentum left in that trade. Can easy central bank policies keep stocks going higher? Or has the trade exhausted itself? And if it has, what happens next?

Well, one answer is that you may again see a mini-rally in the U.S. dollar and a fall in common stocks and commodities (oil and gold especially). We'd expect this to a cyclical dollar rally. In the bigger picture (a secular trend) the dollar is toast. But markets do not move in linear fashion. They give and they take. And the dollar may be due.

If we do get a greenback rally, this may pave the way for a higher Aussie gold price. The strength of the Aussie dollar has capped the gold price here in Australia. But we reckon you may get a nice move in the Aussie gold price if the greenback rallies. The question is whether U.S. dollar strength takes gold down too, neutralising the benefit of the weaker Aussie.

How do you sort out the relationship between two currencies, one commodity, and many stocks? It all sounds complicated. That's why we've added another mind to the trading desk here at Daily Reckoning Australia headquarters on Fitzroy Street. Murray Dawes is at the helm of the trading desk today. We'll keep you posted on what he has to say.

One question we'll have for him: what the heck should investors do with Woodside Petroleum (ASX:WPL)? Dow Jones newswires is reporting that over the weekend, Federal Resources and Energy Minister Martin Ferguson awarded permits to explore ten new off-shore oil and gas blocks in the Carnarvon Basin off the Northwest coast of Australia.

Woodside is one of the firms that won a permit. Ferguson said that, "The additional investment in Australia's offshore petroleum exploration sector not only offers exciting potential for petroleum discovery but will ultimately help to further develop our petroleum resource and underpin our security of energy supply,"

The security of Australia's energy supply is exactly the issue our special situations analyst Mike Graham took up in his research about Australia's oil industry. You can find that complete report here. The findings may surprise you.

With respect to Woodside, there are not too many better blue-chip energy stocks in Australia. Unlike the smaller explorers though, the blue chips are valued differently. Adding to their reserves is crucial, so that the company is not inexorably depleting its assets. But the energy blue chips like Woodside are well known by analysts and they are well-traded by institutions.

This, in our mind, makes Woodside a perfect candidate for a Slipstream trade. That is, if we were a full time trader, we'd be looking for a pattern in the stock chart to see where key levels of support and resistance were. But since we don't run the trading desk, we'll ask Murray and see what he says.

Today's thought of the day from John Robb at Global Guerrillas, "The American 'kleptocracy' has run out of steam due to too much debt and is already in the midst of a perpetual depression. Why? The US middle class -- faithful to the cult religion of free markets even while being taken for all they are worth via a 35 year process of substituting debt accumulation for income gains -- is financially broken. If this is even remotely true: is the US headed for Privatopia and the viral spread of Global Guerrillas?"

Substitute "Australia" for "America" and it makes just as much sense, doesn't it?

Dan Denning
for The Daily Reckoning Australia

• Looking at WPL and Oil Side by Side
• Apparently More Debt is Now Acceptable in Australia
• Commodities Tell Us the World Won’t Stop Turning in a Financial Crisis
• Oil Prices Under $70
• The Future of the Australian Resource Market, Two Ways the Boom Could End