Another national emergency! Terrorism...the banking crisis...now Swine Flu.

Why it is an emergency, we don't know. Our sister, living in Virginia tells us that several of her grandchildren have come down with the Swine Flu. It doesn't seem to bother them anymore than any other flu.

But every emergency is an opportunity. The feds don't want to waste it. Instead, they swing into operation with a rescue plan. It will end up costing billions...hundreds of billions...or maybe even trillions. We don't know what they've got in mind. But we know what will come of it. It will end up extending the power and influence of the government. So far, the feds are the only real winners from any of these crises. Federal outlays, as a percentage of GDP have shot up from less than 20% of GDP in 2000 to more than 26% in 2009.

Will it do any good? Public health is not central banking. And it's not economic planning. Force everyone to wear a surgical mask and maybe lives would be spared. Or, maybe not. Without the immunity of occasional bouts of flu, who knows? Maybe people would be more susceptible to the next disease. The American Indians were almost wiped out...because they had no immunity to European diseases.

Interesting...

Ain't nature amazing? Disease works like an economic correction. It winnows out the weak...and it toughens up survivors. Allowing people to get sick is a little like allowing them to go broke. It keeps the whole system from softening up...from becoming more vulnerable. It protects people from moral and biological hazard. In other words, it's the correction that really provides protection...the disease itself, not the cure. Or, to put it another way, it's the crash that is beneficial, not the rescue.

David Einhorn, one of the few people to make money in the crash of sub-prime debt:

"The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone's shampoo. It gives the appearance of 'doing something' and adds to our bureaucracy without really making anything safer."

The Wall Street Journal reports that even bankruptcy can be a good thing. "Household Debt Can Hasten Recovery...when it goes unpaid," says a headline.

The whole idea of a correction is to wash out mistakes. If people can pay their debts down, the mistakes are corrected. The system is strengthened. If they can't, the process of correction can happen faster. Bad debts are written off quickly. Then, a real recovery can begin. Either way, the system comes back in better shape.

Too bad the feds are getting in the way!

A decent correction should carry off those who made the biggest mistakes - in the present case, the firms on Wall Street that wagered billions on a bigger and bigger bubble. But instead of letting them go broke, the feds rewarded them.

Wall Street profits are a 'gift' from the state, says George Soros.

But wait, what kind of gift is this? If you give $100 to your neighbor, that's a gift. But what if you tax your neighbor on the left $100 in order to give the money to your neighbor on the right? That's a gift too...but of a special kind. You're 'redistributing the wealth,' you might say.

And what if you do a quantitative easing? You know, you print up a $100 bill and give it to your neighbor? That's a gift too.

Yeah, thanks a lot.

Meanwhile, the recession is said to have come to an end in the US. GDP growth is positive, say the papers. But if this is a recovery, let's hope it comes to an end soon.

Existing house prices continued to fall in September.

Unemployment continued to worsen. "Signs of recovery don't extend to jobs," says the WSJ.

Bill Bonner
for The Daily Reckoning Australia

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The silent crew parades the aisles, examine your eyes and flash a beam on your forehead to check your temperature. They are looking for symptoms of swine flu.

Only after every passenger has been checked and approved, they allow the pilot to move the plane to the parking gate and offload the passengers.

You land in India and are back to Indian-ness: passengers coming down two escalators and one flight of stairs quickly fill a makeshift queuing system. Within minutes, the continuous stream of people coming down the escalators can no longer get off - the space ahead of them is a stationary wall of people. A lady on crutches falls - the escalator blades disappear from under her feet and she has nowhere to stand.

There is chaos. The airport staff looked on - and did nothing.

I alert them. "We will tell the management," they respond.

Once you get to the people behind the desk with your medical form, they stamp it - without even looking up. You then proceed to immigration and you are cleared to officially enter India.

If you had swine flu, the Chinese would catch you. In India, the swine flu would catch you.

China, said a friend, has learned from its mistakes.

He was referring to the SARS epidemic that reached frenzy in March 2003. When the medical team from the World Health Organization landed in China to inspect the patients, the hospital administrators bundled all the affected SARS patients in ambulances and made them circle the city.

The WHO inspectors found nothing in the hospitals.

China got a clean chit.

But the Chinese ended up living through the horror of SARS.

Do you think, my friend continued, it is a coincidence that WHO is the only international body that is now run by a Chinese person? China really wanted its nominee as head of WHO - Dr. Margaret Chan. And, within China, there are only two ministries that are run by people who are not from the Communist Party: the Ministry of Health and the Ministry of Science & Technology.

Having made a mistake, the Chinese gulp a bit - and then go on to ensure it does not happen. So going forward China will have fewer cases of swine flu, I guess.

India will have more cases of people's clothes, shoes, and limbs stuck in escalators as they queue up to go through the motions of a useless medical "examination".

But no, this is not about swine flu - but about investors that flew out of the Indian stock markets in the year 2008.

The Participatory Note, or "P-Note" investors - the sub-set of foreign institutional investors (FIIs) who have caused havoc in the Indian stock markets on the way up in the year 2006 and 2007 - and on the way down in the year 2008.

These flows (Table 1 above) represent the total net foreign money entering the stock market. On average, the foreign money flows are 4 times those of the money flows from the domestic mutual funds.

However, we don't know what percentage of this foreign money flow belongs to P-Notes. The P-Notes are a strange animal in the Indian capital markets.

As an Indian, if you want to buy shares, the government wants to know everything about you. As an Indian, if you wish to buy a mutual fund, the government wants to know everything about you.

If you are a U.S., European, or Japanese pension fund, university endowment, or charitable foundation, then the government also wants to know a lot about you.

But if you are a P-Note holder, heck no one cares at all about who you are!

Foreign investors who have a long term interest in investing in India - and by "long term," I mean a minimum 5 year time horizon (if not twenty and thirty year time horizon) have not yet come into the Indian stock markets in a big way.

I know this because some of them are my clients.

And I meet many of these long-term investors many times in a year. The "genuine foreign institutional investors" (long term pools of capital) painstakingly fill in the foreign institutional investors application forms and sit on the plane as the Indian authorities thoroughly check them out, to ensure they are sound people.

On the other hand, the P-Note pool of money - hot, short-term money - that gets India exposure via Participatory Notes does not even have to fill in that health examination form. Their broker fills it out and confirms they are good people!

Imagine an airline crew in Shanghai airport vouching that the passengers are not affected by swine flu - and signing the form on their behalf. The Chinese would take the crew out of the plane and shoot them or send them off to the hinterland.

In India, we worship these unknown pools of capital - and shoot ourselves in the foot.

Finance Ministers of this country have, time and again, made trips to Tokyo, Hong Kong, Singapore, London, and New York to pay homage to these great hedge fund and P-Note owners.

Rather than being suspicious of short-term money, India welcomes it. We don't seem to understand that we need pension fund money to build India's economy over the long term.

Our Indian ministers have probably never visited many of the pension funds. They generally don't sit in exciting cities. And the brokers don't really want those pension fund folks investing in India. Because they buy shares and hold them for 5 years or more, the brokerage commissions will collapse and the brokers will be out of jobs.

Unlike China, India is not willing to learn from its mistakes.

When questions are asked about P-Notes, the treatment is similar to that of the ambulance incident with the SARS affected patients.

We will ooh, and aah, and steer the discussion towards thoughts on building a world-class and open capital market.

Our intellectuals mislead us and get caught in their own web.

After the election of the Congress-led coalition, many commentators and representatives of the intellectual community came on TV and said, "We hope this new government will allow higher foreign equity ownership in insurance companies".

Why? Pray tell, why?

Because, they said solemnly, India needs long-term capital to sustain its development.

I was laughing - and crying.

It is true that India needs long-term capital.

But then - this same set of people - go about saying that banning P- Notes is a bad idea.

On the one hand, they say India must have long-term capital and yet - with a very straight face - they want the Indian stock markets to be reliant on short-term capital via unknown pools of P-Notes.

Having seen the Indian election results, the P-Note owners are now ready to head back to India to ride the gravy train - and add their own flavor to it by sloshing around playfully with their gambling money.

"P-Notes need to be banned." The Reserve Bank of India wrote in December, 2003.

And, they were finally, thankfully, in a limited ban and phase out by October 2007.

But by October 2008, P-Notes were back in action.

We are back to the future, and looking at an ugly past

India should only accept long-term foreign capital via "genuine" foreign institutional investors. This is not about making the markets a more "perfect" place and advocating "price discovery".

Speculation and price discovery is not an end in itself. Markets are not gods to be worshipped. They are created to help an economy reach its goal.

But, in India, we will continue debating and discussing and throwing intellectually stimulating arguments to explain why what we did in the years 2006 and 2007 was not wrong - and therefore there is no need to learn from the past.

Because the past mistake was not a "mistake", it was just an event in time that occurred and had to do what it had to do.

I stand by what I said in October 2008 - and reiterated again after May 15th - one can make a case for the Bombay Stock Exchange's BSE-30 Index to head back to a new peak of 21,000 by June 2010.

A better economy, better company results - and higher foreign institutional investors flows are all positives for the market. It could happen.

But if P-Notes are a part of that rise - god help us. Because some event in the United States will frighten the owners of short-term capital and then we will see how pigs can flap their wings.

Swine flu or swine flew - I don't know which one is more frightening. But India is vulnerable - and could be attacked on two fronts.

Regards,

Ajit Dayal
for The Daily Reckoning Australia

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Here at the Daily Reckoning headquarters, however, we keep our eyes open 24/7 - well, unless we are on vacation...or sleeping...or having dinner...or have something better to do.

What we've been watching is a bear market rally. Stocks have bounced...and with them good news is beginning to appear. Commentators keep saying that "maybe the worst is behind us." Analysts keep claiming they see "signs of a recovery." Economists think the results are "better than expected."

All over the world, people are breathing a sigh of relief. The end of the world did not come. Asian economies are still growing. Even with GDP falling at a 6% annual rate in the U.S.A., unemployment seems to be moderating...and house prices are falling not quite as fast as they were a few months ago.

Yesterday, the Dow fell 17 points. Oil traded at $51. The dollar dipped a bit - to trade at $1.32 per euro. And gold gave up $9 - ending the day at $891.

Hallelujah! Things seem to be coming back to 'normal.' No more 500- point drops in the Dow. No more oil at $149. No more nerve-shattering bankruptcies.

We will consider whether it is time to stand down or not in future Daily Reckonings. Today, we pause briefly to consider what it cost.

In the news this week, the headlines were dominated by the swine flu. Each day, the death count mounted. Each day, new cases were reported in new places. And each day, the world seemed to come closer to a pandemic that would take millions of walking, talking Homo sapiens and lay them silently under the ground. Almost every day, we were reminded of how much damage the last big pandemic - 1918-1921 - did. Thirty to fifty million was its toll, we were told...along with the additional warning that "major epidemics seem to strike every hundred years or so." Even math-challenged Americans could figure out that their time might have come...

Included in the panicky chatter were announcements, warnings, and provocations from the various health authorities. The 'alert level' was raised to 5 (on a six-point scale)...travelers' advisories were posted...the World Health Organization pestered member states to beef up their stocks of vaccines and to put in place preventive measures. "Wash your hands," said one doctor. "Cover your nose and mouth with a mask," said another. "Run for the hills," said a joker.

The actual price in lives has been very, very modest. Thousands of people die from flu and colds every year. Still, people go about their business. They sneeze on the subway...they accept change from vendors in bare hands...they sit next to coughing passengers on airplanes. Life goes on.

But this new strain of flu spooked them badly. They feared it might be like the plague...a curse from the gods that could exterminate millions for their wicked ways. Humanity itself seemed at risk.

Yet, in response to the threat of extermination, the Obama government has proposed to spend $1.5 billion. By our calculations, that is approximately 0.0001% of the amount the feds are spending to fight capitalism's correction.

Why is the threat of death less disagreeable than the threat of letting capitalism do her work? We don't know.

The feds may be reluctant to spend on the swine flu because they are unsure about how bad it will be...and unsure how much they can do to prevent it. But couldn't the same thing be said of the swinish financial correction? Of course it could.

The feds have no idea what they are doing. All they have is a crackpot theory...and some guesses. And yet...on the basis of these fantasies...they are spending an amount equal to the nation's entire annual output. And you, dear reader, will be the one paying the price.

Bill Bonner
for The Daily Reckoning Australia

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What gives? As far as we can tell, the rally that began in March continues.

While it might peter out any day, we continue to believe that this market intends bloody mayhem...and that it won't stop until it has killed both the bulls and the bears.

The bulls will be killed in the classic way. A strong rally on Wall Street...or a series of minor ones... will lead them to believe that "the worst is over." They'll get back into stocks after a 20% or 30% advance - hoping to recover what they lost last year.

Then, the stock market will make a new dramatic move to the downside. This will probably happen several times...each time leaving bullish investors with more losses. Finally, the bulls will give up. They will sell stocks...driving prices down and dividend yields up. By the time the bottom is reached, former investors will neither know nor care. P/Es will be scarcely more than 5. Dividend yields will rise above 5%. The Dow will sink to 3,000 - 5,000.

Then, it will be the bears' turn. When stock prices go down, they'll sit smugly with their cash, Treasuries and gold. But gold will not resist the deflationary whirlpool. It could get sucked down violently...or might just float down gently, remaining low for a long time. Either way, the gold bulls will give up. Only the gold bugs will hold on. Cash and Treasuries, meanwhile, will look smart - for a while. Then, suddenly, they will look like the stupidest investment on the planet. In a matter of days...maybe weeks...the dollar could lose half or more of its value. Savers will suffer staggering losses.

No, dear reader, the months ahead will be a challenge. The world economy is telling a story no one has ever read before. Every day we turn the page just to see what happens. We have no idea how the story might develop. It's all guesswork.

Still, when the final chapter is read out...the moral of the story will probably be familiar to us. It always is.

China has increased their gold holdings 75% in the last six years. They recently announced that the gold holdings have been transferred from the State Administration of Foreign Exchange (SAFE) books to the People's Bank of China. PBOC. Our intrepid correspondent, Byron King explains what this really means:

"China is monetizing its gold!

"This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But in keeping with a nation where youngsters get their Sun Tzu with their mother's milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not "monetary," then it was just another nonmonetary investment commodity like iron ore or copper or petroleum.

"But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves.

"This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset. Gold has not been a factor in global trade and currency exchange since the late 1960s. But there's a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It's because the U.S. dollar has been so badly mismanaged over the decades. No, you won't read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It's happening.

"So now the Chinese are primed to begin using gold as a monetary asset. What's the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBOC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. In the future, only central bank suckers and losers will be net sellers of gold. (Take note, IMF.)

"And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly. Need I say more?"

The plane coming back from Buenos Aires wasn't full. Air traffic is down 11% from a year earlier.

And this was before people began worrying about swine flu.

Today, commentators are fretting about how a serious epidemic would affect the "recovery." They needn't worry. First, because there is no genuine recovery to worry about. Second, because if a serious epidemic were to hit the world, economic growth would be the least of our problems.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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Governments are swinging into action. They're checking their stocks of vaccinations...and threatening to 'shut down' Mexico City.

Major epidemics come along about as often as new imperial currencies. The French currency - the gold Louis - was the money of choice in the 18th century. In the 19th, it was the pound sterling. The U.S. dollar dominated the 20th century, it took over at about the same time as the Spanish Flu ran wild. The epidemic of 1918-1921 killed 30 million to 100 million people. It was the worst ever.

But this flu seems to move too slowly to be a major threat. People are able to see it coming, and take precautions. The next major epidemic will probably move much faster. When you will see the TV news reporter drop dead in front of your eyes, you will know trouble is coming.

Yesterday, the Dow fell 51 points. Oil stayed at $50. Gold lost $5 to close at $908.

The mood of the market is fairly positive, at least as we hear it. The last few weeks have produced an upward trend on Wall Street. The press is reporting "early signs of a recovery."

Of course, the crisis has to end sometime. But it seems much too early to us. Remember, this is a depression, not a recession. It is not a pause in an otherwise-healthy economic model. This time, the model itself is insolvent. Americans cannot continue going further and further into debt in order to provide huge bonuses for Wall Street and employment for China.

It's over. Fini. Caput.

It will take time to destroy the industries, investments and lifestyles that depended on the old model. And it will take even more time to find new ones.

Corporate earnings this year are expected to come in 35% below last year.

The insiders seem to realize that the game is over. They're selling into this rally - the highest level of insider selling in two years.

As Strategic Short Report's Dan Amoss put it "the rally is getting tired."

Zimbabwe, as long-suffering Dear Readers know, is a monetary pacesetter. It led the world in inflation - with a CPI estimated at 230 million percent. And then, it suddenly took the zeros off its currency - leading the world in deflation.

The latest report from that benighted land tells us that the chief of the Zimbabwe central bank, Gideon Gono, has found even more novel ways to get his economy rolling. Ben Bernanke, are you paying attention?

"Zimbabwe's central bank head admits robbing private bank accounts," says a headline.

Need money? Just take it directly from accounts in the country's banks. Of course, thanks to Mr. Gono and his friends there isn't a lot of money in Zimbabwe's banks. Who would keep money in Zimbabwe's banks, unless they had to? Still, a few international aid agencies had significant accounts - which Mr. Gono cleaned out. He said he only did it because he had to, in order to keep the economy functioning. Besides, he's going to put the money back just as soon as Zimbabwe gets back on its feet.

Finally, we cast a nostalgic look backwards at Argentina, where we spent our recent vacation. Newsweek reports that Buenos Aires seems untouched by the global financial meltdown:

"Take the city of Buenos Aires, capital of an economy built on the export of food and leather, and acutely sensitive to downdrafts in global trade. The sprawling old neighborhood of Palermo and its subsections "Palermo Soho" and "Palermo Hollywood" see new clubs, bars and restaurants opening weekly. Hip spaces are filled nightly with the young and sleek, including young American and European expats with funds to spare."

Bill Bonner
for The Daily Reckoning Australia

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