Yet there is a common thread to the current state of economic melancholy. It's money. Most failed marriages, we've heard, end up breaking up over money. Why would Europe or America or Australia be any different?

But before we get into family counselling, let's have a look at markets. Over in America the Dow Jones Industrials Index has closed at its highest level since October of 2008. The Dow sits at 10, 979 and has risen eight days in a row. Woop woop.

The volume figures on the Dow, however, show a disturbing lack of faith, or conviction if you prefer. The chart below shows the Dow since the March 9th low of 2009. It's been a pretty steady rise since then. But you can see that average daily volumes are less than half of what they were when the low was made a year ago. What does it mean?

"It's bearish. That's what it means," said Murray when we ambled over to his desk to show him the chart above. "It means there's a general lack of conviction by buyers. You'd want to look out below."

Where are all the buyers? Is the market just drifting higher based on programmed money flows by institutions? Granted this is an index of just thirty U.S. stocks. But it shows you that once you go below the surface of the index levels, the waters in the market are eerily calm and not frothy at all.

The other point about this is that in market-cap weighted index, a few key constituents can account for big day-to-day moves. For example, the table below from Standard and Poor's shows the top ten weightings in the ASX/200. The financials and the miners dominate, with property, telecom, and consumer staples all making cameos.

Click to zoom in on Top Ten Weightings table

In other words an up or down move in BHP or Commonwealth Bank has a bigger effect on the direction of the index based on the size of their respective market capitalisations. That sounds like gobbeldy gook. But the takeaway is you should beware light volumes and indexes whose higher movements are driven by just a few stocks. It shows a lack of breadth which can turn quickly and result in big sell off.

Now, you probably don't want to talk about this. But we need to talk about Greece. Its on-again, off-again bailout flirtation with the European Union is driving the market nuts. Its reality sovereign debt finance theatre at its most dramatic. But what, really, is at stake?

The European monetary family is in crisis. It meets on March 25th and 26th to discuss whether to kick Greece off the island (survivor style) or to intervene and save the prodigal son. The problem, from a German perspective, is that Europe is full of prodigal children. To save Greece means to save the rest of the economies troubled by rising public debt-to-GDP ratios. Where will it stop? With the trashing of the euro.

But is doing nothing an option? The Greeks have already said they will meet with the IMF on April 2nd if Europe resolves nothing by the end of March. And in the meantime, bond yields on Greek debt are left twisting in the wind. Rising bond yields wipe out the benefits of austerity measures and deficit reduction.

According to Bloomberg, "The yield on Greece's 10-year government bond rose 12 basis points to 6.21 percent. The euro fell for a second day against the dollar, slipping as much as 0.7 percent to $1.3648. Credit-default swaps on Greek sovereign debt rose 7 basis points to 295, the highest in a week, according to CMA DataVision prices."

It's hard to imagine the Northern European powers hanging Greece out to dry. Families are supposed to look out for each other. You do more for your family when the chips are down than you do for most people in the world. But maybe Greece will spare Germany the hand-wringing and default on its own....just throw up its hands and shrug.

The willing default on sovereign debt is what Societe Generale analyst Albert Edwards expects. In a note to clients earlier this week Edwards wrote, "Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime."

This is the old "asset-deflation-first-then-hyperinflation-later" two-step. It's the Big Crash dance, with the Bernanke/CNBC orchestra providing mellow tunes as your promenade your way to the lifeboats. Edwards writes that, "In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort."

Some readers think we're trying to have it both ways on the inflation/deflation debate. But it is one of the issues you have to be flexible about and be willing to go both ways on in order to keep your money safe. Prepare for falling asset prices and a sovereign debt crisis. And then watch out as central banks reach out and take us to strange new monetary places and boldly go where Weimar Germany and Argentina have gone before.

Buckle up buttercup.

Dan Denning
for The Daily Reckoning Australia

• USA Has Fives Times As Much Sovereign Debt As All the PIIGS Put Together
• It’s the Little Economies that Have Trouble
• The Sovereign Debt Disaster
• Historians May Write: In Order to Save Greece, it Was Necessary to Destroy the Euro
• European Governments of the Eurozone are Separately Responsible for Their Euro-debt

Only an economist would dare to look 10 years ahead. Only a fool would put money on it. Today, we do both. But our new "Trade of the Decade," is not so much a look into the future as it is a look at the past.

Ten years ago, your humble correspondent offered his first 'Trade of the Decade.' He should have stopped there, for the trade was a big success. It was a simpleton's trade: Sell US stocks/buy gold. That was in the year 2000. At that time, US stocks had been going up for the previous 18 years, multiplying investors' money 11 times. By then, stocks had been going up for so long that the memory of man ranneth not to the contrary. Investors' imaginations saw no alternative. Stocks for the Long Run was the title of a popular book. It was also an investment formula that seemed unbeatable.

Alas, the formula proved beatable. It was time for stocks to go the other way. The first decade of the 21st century proved to be the worst time to hold stocks since the '30s. Net returns were negative - especially when adjusted for inflation. Adjusted to the CPI, the Dow ended the decade down 40%.

The other side of the trade - the buy side - was just as simpleminded. Gold hit a high over $800 in 1980. Then, it slipped for the next 20 years. It didn't come to rest until September 1999 at $260. That was the famous "Brown Bottom" in the yellow metal...when the then chancellor of the exchequer, Gordon Brown, sold Britain's gold at the lowest price in two decades. (To bring readers up to date, now Mr. Brown applies his vision and energy to Britain's economic recovery efforts.)

Gold is real money. But in the years when gold was being beaten down, other forms of money were running wild. Financial assets mushroomed all over the globe. A whole new 'shadow banking' system emerged...with new financial instruments, representing trillions...no, hundreds of trillions...of dollars. Prices on everything were soaring - equity, debt, real property. It did not take a genius to see that gold would have to catch up, sooner or later. As it turned out, no major asset class did better. Gold finished every single year higher than the year before. It doubled. Then, it doubled again.

What made the trade a success was neither clairvoyance nor omniscience; it was merely an observation known as 'regression to the mean.' The word 'normal' has been in the dictionary for a long time. It must be there for a reason. What it describes is where things tend to go when they've gotten out of whack. Regression to the mean is so powerful, no one escapes it. For every decade of walking around time, a person spends a million years dead. Over a century, practically every human regresses to the grave. So, what is so abnormal now that regression to the mean is as certain as death?

Almost all investments are expensive by most historical measures. But if all go down, what will they go down against? Money! That's why real money - gold - is likely to go up again in the next 10 years. But gold is not cheap. It rose nearly 400% over the last 10 years and now is fairly priced. Gold in the treasure trove found in England last year is worth today about the same thing it was when it was buried 12 centuries ago. It cannot regress to the mean; it is already there.

On the buy side, we are looking for an investment that is despised...not one that is admired. And so, back to Japan, where equities peaked out in 1990 and have been going down ever since. While the Japanese government wanders among the stars, the private sector has dropped back to the ground. Or beneath it. Tokyo-listed stocks have lost 75% of their value, wiping out an entire generation worth of growth. Many Japanese companies sell for less than the value of their current net assets.

And now, after twenty years, Japan's private businesses are finally benefiting from the stimulus programs. The government will go broke, but by destroying its own credit, Japan cuts the value of the yen and boosts profits for its exporters. Toyota's local labor costs - in dollar terms - fell 5% in the last three months. And by the time the catastrophe is complete, Japan's businesses could be the most competitive in the world. One way or another, 10 years from now, we'll wager that Japanese stocks will be higher...if only relative to the rest of the world's equities.

But of all the whack that investments might be out of, US Treasury debt stands above them all. For the last 27 years, the US government's cost of borrowing has gone down. But while bond yields declined, the quantity of US debt exploded. Official, on-the-books debt trebled. Include off the books, unfunded financial obligations and the total reaches $118 trillion - 8 times GDP. And now the explosions come every month. As the depression continues, US deficit-financing needs could rise to $150 billion every 30 days. So far, the bond market has absorbed the shocks with good grace. But sometime in the next 10 years, the angels are bound to be proven right.

Sell US Treasury bonds. Buy Japanese stocks.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Will Gold Have Another Great Year in 2010?
• Trading Airline Stocks in an Energy Bull Market
• Investors Better Off Investing in Anything but Stocks
• Paying More Than 3 Times as Much for Gold
• Typical Japanese Investor Would End Up With Less Than What He Started With

Probably a good thing US markets were closed for Thanksgiving when this news came out. In Europe, the Dubai affair caused the biggest drop in 7 months. European banks have lent $40 billion to Dubai.

Jim Chanos, a famous short seller, thinks Dubai is merely the camel's nose in the tent, so to speak. "China is Dubai times 1,000...if not a million."

"People are panicking: this whole process counters everything that the rulers have been saying and the way it has been communicated before the holidays is confusing," said one hedge fund manager.

The 'rulers' are the fellows who run "Dubai World," and incidentally Dubai itself. Whether they are fools, knaves or sly geniuses was what everyone wanted to know. Dubai officials announced that they had raised $5 billion on Tuesday. Two hours later they said they weren't paying interest on it or on any of the rest of the $80 billion in borrowings. What's going on? Are they really broke? Or are they playing for some kind of advantage?

"Dubai gambles with its financial reputation," says one headline at the FT.

Then, on the facing page, the editors think they know how the gamble will turn out:

"A breath-taking blunder in Dubai...Dubai is looking more like Argentina than Singapore - but a lot less predictable," says the FT editorial.

No on is sure what is going on. Most people take from this story what we knew all along: lending to shady characters in sunny places is not an easy way to make money. Especially when the shady characters own the country.

Trouble is, shady characters run near all the world's countries. If an investor cannot trust the ruling family of Dubai, how can he trust the commies who run China? Or the hacks who run the United States of America?

To err is human. For a central banker, it is practically a professional requirement. Count on a major 'error' to trigger a sell-off in the world's bond market.

But Dubai's mistake did not infect all other sovereign debt. German bond yields went down, not up. Investors sought safety from Dubai debt in Deutschland debt.

But what is the real meaning of what is going on in Dubai? It's the story of the collapse of the financial industry. Dubai has no oil...no natural resources...and no real industry. The rulers tried to turn it into a financial center. Entirely financed by debt. And now finance itself is falling apart.

"The camel put his nose in the tent," says colleague Simone Wapler. "He saw that there was nothing there."

What will he think when he gets a closer look at Britain's finances? Britain, too, relies heavily on the financial industry. And Britain, too, is heavily dependent on debt. Its public finances are among the worst in the world. Japan's public debt, to add another example, is already 200% of GDP. It's expected to reach 300% in a few years. And yet, Japan - like the US and Britain - just keeps borrowing. How long can this go on? When will Britain, the US, and Japan announce their own moratoria on debt service payments?

This bubbly bounce must not have much time left. And it is surrounded by 10,000 pins.

On Friday, US markets reacted to the Dubai news. The Dow lost 154 points. Gold lost $14. Oil slipped to $76.

Our crash flag is still flying. But that was not a crash. Just a bad day. And today's news tells us that other Gulf States are rallying around Dubai, ready to extend a helping hand and lend a buck or two. Oil is rallying on the news.

Does that mean this bubbly trend is stronger than we thought? Is this a bubble made of Kevlar? Will it resist other pins?

We wouldn't count on it. When China pops, we'll see US stocks down a lot more than 154 points. In fact, we expect to see the Dow in 5,000- ish territory when this bounce is over. And when that happens, emerging markets will probably be hit even harder.

Dubai was a "wake up call," for investors in emerging markets, says The New York Times today.

But the pin that pricks recovery hopes won't necessarily be imported. There are plenty of sharp objects in the homeland too. There is, for example, the growing realization that the recovery is a fraud.

"Half a recovery," says a New York Times columnist, may be all we get.

Today, the press will concentrate on analyzing Black Friday sales results. Already, The Wall Street Journal has rendered its verdict: more shoppers; fewer sales.

If the initial reports are correct, the traffic wasn't bad on Friday. But retail outlets were only able to snag sales by offering discounts. It's a deflationary world, after all. Shoppers want lower prices to make up for the fact that they have less money to spend. And they'll get lower prices too. Because this is a de-leveraging cycle. The world has too much debt, too many factories and too many workers...at least for the real, available purchasing power. Prices will go down naturally until excesses are absorbed...dismantled...or converted to other uses.

But wait...there are also unnatural forces at work. Governments are bailing out bungled companies. They're supplying zombie industries with fresh blood from the taxpayers. They're standing in the way of the de- leveraging progress. They're creating "money" out of thin air.

It's this last point that is most explosive. As long as government is just stalling the correction, it doesn't cause too much distortion or volatility. But when it fiddles with the money...oh la la; that's where it gets interesting.

Traditionally, people buy gold when they think the monetary authorities are up to something. Throughout the world, investors are getting edgy...they're wondering how it is possible to add so much cash and credit to the economy without sending prices to the moon.

We'll tell you how it's possible: there's a depression. In a depression, the flow of cash and credit coagulates. Even if you increase the cash in bank vaults, it doesn't circulate into the real economy. Banks don't lend. People don't borrow. Consumers don't consume.

It just sits there...waiting for the end of the depression...like a teenager waiting for Friday...

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Dubai, Built on Debt and Sand
• Arab Wealth Pours Back into Dubai
• Qatar Relies on Natural Gas Reserves While Dubai Leans on Trade and Finance
• Dubai Debt Story More Like Bear Stearns Less Like Lehman Brothers
• Is Dubai the Bubble It’s Made Out to be?

The front page of today's Australian Financial Review has a time-lapsed picture of cars travelling on what apparently is a "Superhighway Paved with Gold." Ah! No wonder gold is going up. It would take a lot of gold to pave a superhighway.

The caption underneath the picture reads, "There's big money to be made from the new tech boom by investing in internet stocks and telecommunications players." And this story just so happens to be published hours after Apple told the market it sold more iPods and Macintosh computers in the fourth quarter than ever before. The crowd went wild.

Apple shares finished up about 5%, just under US$200. Since they bottomed at $78.20 in January, shares in the company have soared by 154%. That's certainly a big enough rise to get your attention. But as with the A-REITS we mentioned yesterday, if you were going to buy into the bogus recovery, the time to do it was eight months ago - not yesterday.

Mind you Apple is an interesting business that might have the ability to deliver great earnings growth through the teeth of a global depression. We doubt it. But iPods have become pretty indispensable in modern culture. You never know.

But today's Daily Reckoning has a simple point to make: watch out! The only thing really going down right now is the U.S. dollar. And that gives us the heeby jeebies. Last time there was such a consensus about the dollar's short-term direction, everything reversed, and quite suddenly.

The last time the dollar index broke out from its lows was in June of last year. Once it busted out, it set off a chain reaction in financial markets. Investors got out of risk assets and back into short-term U.S. Treasuries. Stocks went down, and Aussie stocks were no exception.

In fact, as you can see below from the chart (courtesy of Slipstream Trader Murray Dawes), there is a pretty clear relationship between the week greenback and the All Ords. Murray inverted the dollar index scale to show the correlation more clearly. The bottom line is that if the dollar index strengthens (the blue line goes down), the All Ords will weaken (the black line will go down too).

Click to enlarge

A dollar rally and an equity selloff are even more likely now for two other reasons. First, any time you get a carry trade - in which investors borrow a cheap currency to buy assets - there is always the risk of a short squeeze. Investors who are short the dollar cover that short by buying back the currency.

Right now, as you can see from two more charts below, investors are about as bearish as they've been on the dollar (or least bullish, if you prefer). The Powershares DB US Dollar Index Bullish and Bearish Funds measure the greenback versus a basket of six other currencies, the Euro, the British Pound, the Canadian dollar, the Japanese Yen, the Swedish Krona, and the Swiss Franc. One shows dollar bullishness nearing a new low. The other shows dollar bearishness reaching a new high.

Click to enlarge

Click to enlarge

The second reason to expect a reversal in the dollar and a sell-off in stocks is that stocks are pretty overvalued at the moment. John Hussman at Hussman Funds writes, that, "On the valuation front, stocks are presently overvalued, but to levels that we've observed at least several times in history. The anomaly relates to market action, where we can no longer find a single historical instance where stocks were more overbought on the combination of short - and intermediate - term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980.

Hussman then adds that, "One of the notable features of extreme overbought conditions is that investors rarely have much opportunity to get out, just like the fast and furious advances that clear oversold conditions tend to occur too quickly to capture unless one has already established a position. As for the present, we have rarely seen 90% of stocks suspended above their 50 - and 200 - day moving averages for as sustained a period as we have now observed."

Of course Hussman is writing about U.S. stocks. What about Aussie stocks? We asked Murray to see if the Aussie market looks overbought on a technical basis as well. He sent us the chart below, and the brief answer is "Yes!"

Click to enlarge

"A quick look from 10,000 feet really shows us how overbought the market is at the moment," Murray comments in his note. "The weekly MACD (which shows us the relationship between a long term and short term moving average) has not been this high very often in the past 30 years. A quick look at all of the times it has been this high shows some interesting facts.

"The final blow off rally before the 1987 crash took the weekly MACD to a level below where it is now (the thin blue line). In 2006 when it reached the same level as in 1987 we did have a correction in the market, although it didn't last too long and we eventually headed higher for another year.

"The final rally before the credit crunch in 2007 took us to a level which is about where we are now. Do you think it was a good idea buying stocks in early 2007?? Not really. The market has now retraced to within a whisker of the 50% Fibonacci level. And the long term moving averages are saying that we are still in downtrend.

"The risk of entering the markets at this time is very high. Any longs should have tight stops, but any shorts need to wait until short term momentum indicators have shifted into negative territory which they haven't as I have stated in the past. It could be a good idea to take a bit of money off the table if you are sitting on good profits from the past few months. When the music stops you will only get a chance to sell with everyone else and it will be at much lower levels in the blink of an eye."

Have we switched religions on you? Not all. We're still a confirmed U.S. dollar bear. But a sudden collapse in the dollar is not in the interest of any trader or investors who have large dollar-denominated assets. And traders are amoral anyway. You trade the trends and the trends never move in a uniform direction.

So consider yourself warned. Though we are confirmed U.S. dollar bears, the dollar is looking oversold. Stocks are looking overbought. And frankly the reflation of all asset markets (bonds, stocks, commodities, and real estate) is looking over cooked.

Dear Dan,

Merv

We'll have a think on it Merv. "Dan Denning, hanging out with the meth heads and prostitutes in St. Kilda" doesn't seem very family friendly. But truth be told, the company you find in St. Kilda is still better than hanging out on Collins Street.

Dan Denning
for The Daily Reckoning Australia

• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy
• Looking at WPL and Oil Side by Side
• S&P/ASX 200 Clears Resistance Line
• The U.S. Dollar is Not the Euro
• Investors Think Things Will Return to the Way They Were in the Bubble Epoque

Keep in mind most of the earnings news is garbage. Earnings are whatever an accountant wants them to be. Compared to last year - which was a shocker - this year's earnings are bound to be better. And when analyst's expectations are subjective, are you surprised to learn that the people who sell you stocks think that earnings are "surprisingly" good?

That said, the official unemployment figures in Australia appear to be going down. Consumer confidence numbers are back near all-time highs. At least here in Australia, the stock market and the economy are reading from the same prayer book. Both are singing the praises of the recovery (second coming of the Goldilocks Economy).

Amen.

In the States, it's a little harder to figure out why stocks are singing such a different tune than the American economy. But it's not impossible. Take oil.

While the higher price is good for oil companies and investors, you know it's going to take money out of the pockets of consumers. Lower oil prices were a windfall for drivers all over the world in the last year, putting more discretionary income into the family budget. A higher oil price, as always, is a tax on consumer spending.

But we come here neither to praise nor bury the recovery. In fact, we come here to point out that the recovery is an imposter. It's a financially-fuelled bear-market rally dressed in respectable clothing. The underlying problems in the economy are still there, dishevelled, dirty, and unwelcome in polite company . And the main problem is simple: too much debt (public, household, and corporate).

Or as Michael Hudson said in a previous interview, "The economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored."

It cannot be restored, but the rate of its collapse can be arrested so that the members of the financial oligarchy can sell their stocks to a gullible public. And that's what you're seeing now. It makes for an incredibly tradable market. But it does make it harder to value corporate assets when balance sheets remain so badly skewed by a) bad assets b) unrealistic expectations of future consumer demand based on credit.

Advantage speculators. Disadvantage investors. And speaking of speculators...

Here's a prediction about the U.S. dollar. It will find a floor. But that floor could be much lower. The greenback's collapse is driving more countries to hold Euros, yen and gold in their foreign currency and monetary reserves. This could have a funny effect, though. It will put the spotlight on the fiscal conditions of Europe and Japan. And what do you think could happen then?

The Euro and the Yen may be better off, relatively speaking, than the dollar at the moment. But only relatively. In absolute terms, they are "deeply flawed" currencies as well, to use a Jim Rogers phrase. In the long run, most paper currencies fail. In the short run, there's going to be a lot of volatility until a new monetary regime replaces the old one.

All of this bodes well for precious metals investors...in the long run. But don't be surprised if governments get hostile to gold, at least for every day investors. Central banks will own it. But it might get harder for everyone else.

We began the week wondering about the cycles of history and markets. We wondered whether Australia is following the Anglo-American cycle into a long-winter...where people lose confidence in each other, in government, and in the institutions they relied on in the past for law and order, employment, and prosperity.

We're not much closer to answering that question, and there's only one day in the week left! Perhaps it will take more time. In the meantime, if you are interested in the idea of cycles and history, there's a great article by Nick Paumgarten in the October 12th edition of The New Yorker. There are a few quotes from it below.

"Cycle theory is a kind of Gnostic offshoot of technical analysis. The nothing that things generally happen in cycles goes back thousands of years - Joseph's seven-year-fat-lean cycle - but in the West the formal inquiry into economic cyclicality too hold in the mid-nineteenth century. The British economist William Stanley Jevons correlated economic cycles to the sun, proposing the fluctuations in sunspot activity might affect crop outputs.

"Around the same time, a Frenchman named Clement Juglar identified an economic cycle of seven to eleven years. In the nineteen-twenties, Nikolai Kondratiev, a Soviet economist, concluded that capitalism was inclined to half-century cycles of boom and bust and boom again, rather than, as Marx believed, a single inexorable collapse..."

"It was the Austrian economist Joseph Schumpeter, he of 'creative destruction,' who called these cycles Kondratiev waves and popularised them in the West. In the Kondratiev waves and other commonly cited cycles - the Kitchin (three to five years), the Kuznets (fifteen to twenty-five years)-the time span is flexible.

"They are suggestions, not rules. Hardcore cyclists, on the other hand, often seek and find instances of periodicity as rigid and fixed as the laws of physics, which is why hardcore cyclists are often dismissed as mystics and freaks.

"It is easy to scoff at cycle theory. Its whiff of predestination chafes the scientific mind. Our culture's fundamental belief in causation and consequence, to say nothing of free will, does not easily accept the suggestion of helplessness, or of some kind of as yet unidentified exogenous force. God may decide the outcome of football games and debilitating illnesses, but he does not intervene in matters of investing and finance.

"And yet patterns exist, and we slowly discover them. Seasons, migrations, moons: the template is there. Consciously or unconsciously, most people accept certain components of cycle theory. We seek and see patterns in things. It is the way our minds work, presumably, for the purpose of survival."

Dan Denning
for The Daily Reckoning Australia

• Business Cycle Theory Explained by Joseph Schumpeter
• There Are Two Ways of Studying Economic Theory
• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• Economic Crisis Discussions in the House of Lords
• Modern Economic Theory

- Edward Gibbon

Warren Buffett famously says that people do not make money by betting against the US economy. But two years ago we decided to take a chance.

"We are short the United States of America," we announced from the comfort and safety of our headquarters in London. "Sell its stocks. Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell the debt. Sell everything."

What we saw was an over-stretched empire getting ready to snap. But we were also allowing ourselves to be lazy. Rather than deconstruct the capital structure of the world's largest economy, we decided to sell the whole damned thing.

All Hell broke loose in September 2008. Since then, US stocks have gone down about a third. Real estate too. Unemployment has doubled. Consumer prices are going down at the fastest rate since the '50s. And the economy is in the worse recession since WWII.

Meanwhile, Americans' per capita wealth has fallen from $172,000 in September from $212,000 two years earlier. And the UN reports that the quality of life in America has gone down too...from #5 on its list in 2000, it fell to #13 in 2007. No doubt it is below #20 now.

Buffett has lost billions betting on the US economy while our gold positions are handily up; gold was the most profitable major asset over the last ten years.

So you see, we were right; America was a sell two years ago.

And now it is the dollar that is falling. It's gone down 12% in the last six months - a huge move for a major currency.

"Asia tries to slow dollar fall," is the lead story in today's Financial Times.

Today, a buck and forty-seven cents will buy you only 1 euro. Ten years ago, you could have gotten a euro for less than a single dollar. A falling dollar makes imports more expensive, say analysts...raising the cost of living in the homeland. But you wouldn't know it from walking around on the streets of Miami or Las Vegas. You can get a house at 50% off its price three years ago. As for the breakfast special - for less than 3 euros you can get enough food to kill a Pakistani.

By European standards, America is cheap.

"Europeans again interested in Florida houses," says a headline in The New York Times.

House prices are down 30% to 50%. The dollar is down about a third too. That makes the United States a bargain.

But is the United States of America about to become even cheaper?

One thing we were wrong about when we issued our 'sell America' call two years ago was US debt. Treasury bonds have resisted the general downward trend of things with the stars and stripes on them. Bonds have not gone down; they've gone up.

Private households are buying them for their retirements. Banks are buying them for risk-free profits. Speculators are buying them in anticipation of deflation.

David Rosenberg:

"The big story yesterday was the further massive $12 billion decline in outstanding consumer debt in August - the consensus was looking for an $8 billion contraction. This was the seventh month of debt retrenchment in a row. In other words, the tidal wave of the credit collapse continues unabated, and this is the primary reason why bond yields are still in a fundamental downtrend.

"Over the past year, consumers have run down their debt by a record $113 billion (and this does not include mortgages). This is an absolutely epic shift in household attitudes towards credit and discretionary spending."

Americans are saving. And they're buying US Treasury bonds. (More below...) But how safe is their money? Is it a good idea to buy US debt now?

On Wednesday, Latvia tried to raise a trivial amount of money. It offered $17 million worth of 6-month bonds. How likely is it that Latvia will default before Easter? We don't know, but investors judged it not worth the risk. Not only did the bond auction failed, it failed with no bids.

That's what happens when lenders lose faith in a government. They refuse to lend it money - except at high rates of interest. But the high rates of interest work like a noose on the neck of a cattle rustler. They block the vital flow of oxygen - not to mention breaking his neck.

Note that the US federal government is still functioning like an empire at the peak of its power. The Pentagon is still rustling up trouble all over the world - at a cost of trillions. US government employees are growing more numerous and richer - with twice the annual incomes of the private sector. And the Obama Administration - apparently unaware that the total unfunded debts and obligations of the federal government have soared to nearly $120 trillion - is considering new ways to get rid of cash.

Remarkably, investors still lend the US government money - asking only 4% annual yield on a 30-year loan. As for 91-day money, they practically give that to the feds for free; it sports only a yield of 0.066%.

This will surely be a point of puzzlement for the financial historian of the next century. It is certainly a point of puzzlement for us.

Yesterday, gold hit a new record at $1057. Doesn't gold go up when inflation rates rise? And don't bonds go down when inflation goes up?

So why are people buying bonds with such puny yields?

There is a lot of whispering in this market. Gold is trying to tell us something. Bonds are trying to tell us something. The dollar seems to have something on its mind too. Stocks are just babbling.

If gold is trying to signal that inflation is coming, the bond market is not paying attention. Bonds seem to be saying that it is deflation we should be worried about; but the stock market doesn't seem to hear.

And there's the dollar. The greenback is in the same choir with stocks and gold, as near as we can tell. They all seem to be chanting about inflation coming back.

But what if they're all wrong?

Just look at what is going on in Washington, if you can bear it.

The feds have a budget that anticipates inflation and growth. Spending is supposed to remain flat until 2013. Tax receipts, which are no higher today than they were 10 years ago, are supposed to rise, gradually filling in the Grand Canyon of deficits. The number crunchers think we're headed back to the Reagan years - when the tough-love policies of the Volcker Fed squeezed out inflation and created a real boom. Then, tax revenues rose 9% per year between 1984 and 1989.

How likely is that today? Not very. Instead, what is likely to unfold is a deflation story. Instead of staying flat, federal expenses are likely to rise as one failed stimulus gives way to another failed stimulus. Then, instead of going up, tax revenues will go down...digging an even grander canyon between out-go and income.

Then, or long before, there will be a panic out of bonds, the dollar, stocks - practically everything. Everything goes down!

At this point, the US will be in about the same situation as the Roman Empire as it approached retirement. Expenses kept rising. Rome had to pay the Blackwater-type military contractors of the era...in addition to keeping Roman mobs supplied with food stamps and unemployment benefits...while its tax base fell. Gradually, the empire lost the ability to defend itself.

When Edward Gibbon began his history of Rome's decline and fall, Roman real estate had probably been in a bear market for at least 1300 years. Rome's population fell from over a million to under 20,000. Politically, Italy had broken apart more than 1,000 years before Gibbon was born, and it wouldn't be put back together again until nearly 100 years after he was dead.

It's far too early to write the story of America's decline and fall. That job will fall to some future historian, perhaps seated on the ruins of the Lincoln Memorial, wondering how people made such a mess of things.

Our guess is that he will come to the same conclusion we have: Stocks? Bonds? The dollar? Investors should have sold them all!

Bill Bonner
for The Daily Reckoning Australia

• America’s Decline as a Great Empire
• Deleveraging Will Give Us a Bout of ’30s-Style Deflation
• Warren Buffett Says American Economy is a Shambles
• Mistakes Made By America Are the Same Mistakes That Empires Make
• The Major Difference Between Rome and the U.S. – Electronic Transfers

It's back to business. No more long lunches. No more afternoons painting windows. No more soirees in the evening.

We return to our lonely métier - chronicling the decline and fall of the US economy...and the Anglo-American empire too....

Two bits of news signal the scale of this trend. But first, here's one two-bit piece of news: the Dow lost 185 points yesterday. Could this mark the beginning of the end for the rally? Yes, it could. Should you be out of US stocks? Yes, you should.

But let's turn back to our 'decline and fall' chronicles...

From Florida, comes news of the first drop in population in 60 years. "Unemployment is soaring," reports USA Today. "Florida is second to California on foreclosures."

Yes, dear reader, there is trouble in the sand states...

Florida lost a net 58,000 people this year...for the first time since the 1940s.

Why would that be? We'll take a guess. Florida is a state where people go to retire. It is where people go when they stop producing and begin consuming. The major industry in the state was housing...building houses for consumers!

But now, the turn has come. Fewer people have money to consume. And those who do are keeping their money in their pockets. We even saw a report in The Wall Street Journal that people are cutting their own hair to save money. They're also staying put, rather than moving to Florida. So Florida needs fewer new houses...and fewer people to build them.

Second, from national income statistics comes a report that the typical US household has less discretionary spending than at any time in the last 50 years. Why? Americans have no money to spend because they already spent it! Now they're paying the price. And it will take years - maybe 10 years, maybe longer - before they've paid down their debts to more comfortable levels. In the meantime, they are poorer than they've been since the Eisenhower years.

Keeping it simple: Our view is that there is a major transition underway. There will be no genuine recovery, not now...not never. That is not to say the world economy is doomed to perpetual darkness and misery. Not at all. What it's doomed to is a long period of adjustment...with high unemployment, on-again, off-again recession, and desperate efforts by the feds to return to the good old days of the bubble years.

But there's no going back. It was as if the economy was playing a game of Russian roulette...and then the pistol went off - the debt bubble blew up. Once the bullet left the chamber, the game was over. Recovery? Forget about it. The old economy isn't going to bounce back; it's dead.

Still, just because a thing is hopeless doesn't make it unpopular. The feds are fighting the correction every step of the way. They're propping up brain-dead companies...and keeping zombie banks going by feeding them the blood of taxpayers. It's ghoulish...it's a very scary movie!

Unfortunately, the ghouls vote! And everywhere the feds look there's a campaign contributor or a lobbyist or a voter...and they all want the A-positive blood of taxpayers. They look to the feds for a transfusion in order to keep living in the style to which they've become accustomed...

Just what you'd expect, in other words. And with so much debt in the system, the feds are desperate to raise inflation levels. They must increase the CPI to persuade consumers to spend money rather than save it. Otherwise, the nation risks falling into a deflation trap - the very thing Ben Bernanke has pledged to avoid. So they'll continue going down that road - towards inflation - until they finally get there. And they'll keep pressing harder and harder on the monetary accelerator until they finally run into a tree. Again, just what you'd expect.

So, where's the surprise? We're on the road to destruction; that's clear. But it may be a much longer road than most people expect.

Ambrose Evans-Pritchard in London's Telegraph:

"'The current financial crisis is unlike any others,' says the Bank for International Settlements. Lasting damage has been done. The 'cumulative output loss' is likely to reach 20pc of GDP in the major economies.

"The message is the same at the International Monetary Fund. 'The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,' said Olivier Blanchard, the Fund's chief economist.

"It has certainly alarmed US retail tycoon Howard Davidowitz. 'As a country we are out of control, we're in a death spiral,' he said.

"Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. 'Generational destruction of a society's balance sheet will not rectify itself in a matter of months.'

"'How about a quarter century?'"

Bill Bonner
for The Daily Reckoning Australia

• Economy Not Going Back to Normal Any Time Soon
• Baby Boomers Face Early Retirement With No Money Saved
• Recession Did More Damage Than You Think and it Isn’t Over
• We Trust Gold Because We Don’t Trust Central Bankers
• Feds Want to Increase the Money Supply and Induce People to Spend Money

Except for the jobs, of course.

And except for the retail sales.

And except for the foreclosures...and house prices. And incomes. And consumer prices. And business profits.

It's like a female impersonator...just like a real woman in every way, except for the essential ones.

At least stocks are doing well. The Dow rose another 36 points yesterday. In terms of time, it's already beat the bounce of '30...it's in its sixth month. In terms of stock prices, it's still a laggard, however. US stocks are up about 45% from their low of 6,547 on the Dow. By that measure, the current reading of 9,398 falls a little short of the 50% increase registered five months after the '29 low.

Yesterday's news was a big disappointment for mainstream economists. It's 'back to the drawing board,' says The Wall Street Journal.

The dumbbells were already celebrating the end of the recession. Just yesterday, we reported on a survey of 53 of them. They figured the stimulus was working and the recession was coming to an end.

Even the Fed seemed to think so. The Washington Post headline: "Fed views recession as near end."

But here at The Daily Reckoning summer headquarters we were doing some more painting yesterday...

..which means, we were doing more reckoning...

We don't know when the recession will end...but we're dead sure that those 53 economists interviewed by Bloomberg...and those at the Fed too...don't know either. Few of them seem to have any idea what is really going on.

And now comes news that the economy is not recovering as planned.

"Even with Cash for Clunkers retail sales fall," reports The New York Times. Retail sales were expected to go up in July. Instead, they went down.

Bummer.

Economists also expected unemployment numbers to go down. Instead, they went up in July...and last week, 558,000 people filed for unemployment benefits - up from the week before. That brings the total to 6.7 million jobs lost since the downturn began in December '07.

Oh...and what's this? Foreclosures hit another record high in July...making the third new record in the last five months.

This is a "recovery that only a statistician could love," says another Washington Post headline.

You can prove anything if you torture the numbers enough. But if you need a job...or need to sell your house...or refinance your mortgage - good luck to you!

And here...in the spirit of summer...of warmth and camaraderie...we would like to offer the above-mentioned economists a little help: Pssst....it ain't a recession; it's a depression.

Since 1945, the US economy - and much of the rest of the world economy - has been carried on the backs of American consumers. First, they spent money they earned during the war years. Then, they spent money they earned in the big boom of the '50s and '60s. And then they spent money they hadn't earned at all. They borrowed from future earnings...increasing total US debt from just 120% of GDP in the '70s...to 370% of GDP in 2007.

In the last 15 years of that period, especially, each time the consumer showed a reluctance to continue spending, the feds rushed to give him more credit. And during the final five years - the Bubble Epoque - debt doubled.

Now, the consumer has dug in his heels. He's not going a step further until he unloads his excess baggage of debt.

Once again, the feds are trying to stimulate him. The Fed's key interest rate is practically at zero. The feds are pumping money into the economy as fast as they can. And they'll give a fellow up to $4,500 if he'll agree to kill his old car. The Cash for Clunkers programs seem cruel to us auto enthusiasts, but they have been popular, all over the world (more below.) But what good do they do?

Even with the stimulus spending...and the stimulating low interest rates...he's still not willing to add debt. Of course, this is just what happened in Japan. The public sector spent; the private sector saved. Net result: an on-again, off-again recession that has lasted almost 20 years.

That's a depression. It's a point where the model no longer works. Look, how could the US economy recover? It's a consumer-led economy, so the consumer would have to spend more money. But he's not earning more money. He has no prospects of earning more - not with 10% unemployment and a punky economy. So, the only way he can spend more is by borrowing. Ergo, the only way the consumer economy can grow is by adding more consumer debt. Is that possible? Could the ratio of debt- to-GDP go to 400%...500%...to the moon?

Well, we've weren't born yesterday. We've been around long enough to know that almost anything is possible.

This morning's news tells us that the federal deficit through July comes to $1.27 trillion. We didn't think that was possible. And despite this inferno of new debt...the 10-year Treasury bond yields barely 3.6%. We never thought that was possible either.

So, anything could happen. But generally, government stimulus only works when it is not needed. That is, it only works when it goes in the same direction as the underlying trend...not against it. Just like you can make a sailboat go faster by unfurling the sails, you can speed up an expansion by offering more and easier credit.

But now, the underlying trend has reversed. It's no longer a credit expansion; it's a credit contraction. The consumer has had his fill of debt. He's cutting back on his spending and paying off debt. That's what the July figures show. That's been the history of entire downturn. That's why it's a depression, not a recession. It's a major change of direction that will take years to accomplish. Now, stimulus is not only useless - since it is against the major trend - its counterproductive. It delays and contradicts the adjustments that need to be made.

But wait. We know what you're thinking - that the Cash for Clunkers program is a success, because it encourages consumers to buy. See. Sometimes central planning really works, right? Yes, and if you look no further than the auto sales figures for proof, who can argue? Alas, a centrally planned economy is a perverse thing...where every positive statistic has the crumpled up bodies of tortured numbers buried beneath it. Take away the 'free money' from the feds and there's nothing left. No real increase in demand...just a temporary demand based on a temporary and unsustainable stimulus.

Encouraging people to buy too much was what caused the problem in the first place. Encouraging them to buy more now is not a solution; it's just a continuation of the same flawed policy of stimulating consumer demand...a policy that has been in place for decades.

But now the wind is blowing in the other direction. The government may not like it, but they can't stop it.

Bill Bonner
for The Daily Reckoning Australia

• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression
• Why Weren’t Economists On Top of This Thing?
• China, the Miracle Economy
• Recession is Over, Welcome Back to the Depression
• Where, Exactly, is this Economy Headed?

"Building and construction activity has weakened for a 16th straight month as firms grappled with delayed projects and difficult credit conditions...The Australian Industry Group-Housing Industry Association performance of construction index (PCI) fell by 4.3 index points in June to 42.6 points. The index has been below the 50 level, which separates expansion from contraction, since March 2008."

But let us not be accused of being pessimists. Take a look at the chart below. It's from a 2002 book called Triumph of the Optimists by Elroy Dimson, Paul Marsh and Mike Stanton of Princeton University. It shows that over the last one hundred years-and importantly, prior to the blow-off phase of the credit bubble in 2000-dividends accounted for half of your total return in U.S. and U.K. common stocks.

Dividends went out of fashion in the tech boom. To be fair, many companies had no earnings at all from which to draw a dividend. But as you can see from a second chart (below), the dividend yield on the S&P 500 is coming off a historic-low in 2000. Even so, the current yield on the S&P is just 2.4%, compared to the 3.5% yield on ten-year Treasury bonds.

The yield on Aussie stocks, for whatever reason, has tended to be higher than U.S. stocks. For example, let's say you read the APRA report on Super we mentioned yesterday and decided your best approach was to passively track the ASX/200, thereby reducing management fees and not trying to beat the market with your own skill. How would you do it?

Well-we're not recommending it-but this is precisely what Exchange Traded Funds are for. The SPDR S&P/ASX 200 Fund (ASX:STW) tracks the ASX. It's also going to sport a yield near 10%, based on 2009 earnings projections. So for investors interested in "one-decision" stocks, this one decision on the whole market that pays a surprising high-yield.

That's not to say there's no risk, or that you couldn't do better picking your own high-yield stocks. And that's only if you thought yield was the way to go. But the idea occurs to us because we believe that with financial assets anyway, the name of the game in the coming years is to find a rate of interest (or yield) that exceeds the inflation rate.

Come to think of it, that's always the name of the game. It's just particularly the case when fears of inflation are more pronounced. And incidentally, this also bears on the housing market. That is, it's possible Aussie house prices will stay the same or even rise nominally, but fall in real terms as the rate of inflation in the rest of the economy far exceeds the rate of price appreciation homes (homes propped up by government aid and reluctant sellers, but not powered higher by new buyers because of rising rates and affordability issues.)

But leaving the housing debate aside, we turn the case for dividends over to none other than Ben Graham in The Intelligent Investor. Chapter two of that must-read is called "The Investor and Inflation" and in it Graham writes the following (emphasis added is our own):

Inflation, and the fight against it, have been very much in the public's mind in recent years. The shrinkage in the purchasing power of the dollar in the past, and particularly the fear (or hope by speculators) of a serious further decline in the future, have greatly influenced the thinking of Wall Street.

It is clear that those with a fixed dollar income will suffer when the cost of living advances, and the same applies to a fixed amount of dollar principal. Holders of stocks, on the other hand, have the possibility that a loss of the dollar's purchasing power may be offset by advances in their dividends and the prices of their shares.

It's an intriguing statement, isn't it? We have every reason to believe that deleveraging in the economy is generally bearish for stocks. But Graham is looking past debt-deflation and toward the moment when monetary excess begins driving prices up again (inflation).

In that environment, Graham reckons you hedge against inflation best with common stocks that pay dividends. At least, that's our reading of it. And if it's correct, it means you need a two-stage plan. Stage one is to survive further deleveraging by being more in cash and tangibles than shares. The second-again speaking generally-is to be ready to deploy your cash into assets going up faster than the rate of inflation.

That is enough on the subject today. More tomorrow. And we meant to discuss another 100-year trend, that of global energy production per capita. But it will have to wait. Until then, we've published some more reader mail on property and adolescence.

--Guys,

I am truly disappointed to see you give any credence whatsoever to these clowns.

A fair cop. We're not saying the ratings agencies are going to get it right. But in the aftermath of their complicity in subprime crime, we expect them to err on the side of caution going forward. And correct or not, the downgrades-if they come-will have an impact on what pension funds and other institutions can own debt that is not investment grade. It will have consequences.

--Just read your Monday report. What a load of Crap! Didn't anyone tell you if you have nothing worth saying, then keep your mouth shut.

David P.

We're afraid you misunderstand the purpose of the DR David. It's not to tell you what to do with your money. It's to make you think-or at least share in our own thoughts. If you're not enjoying it, we suggest you get off the pot. And if you want analysis of specific shares, that's for paid subscribers to Diggers and Drillers and Australian Small Cap Investigator.

--Dear Dan,

Ross

Dan Denning
for The Daily Reckoning Australia

• S&P 500 Index Total Return Was Actually Negative
• Stocks Better than Bonds When Inflation is a Big Threat
• Dividend Drop-Off: When Cushions Turn To Rocks
• Consumer Price Inflation has Spooked Investors Everywhere
• Banks or BHP?

Meanwhile all sorts of mischief is afoot in financial markets and the Australian energy market. U.S. stocks fell over 1.5% in Thursday trading. The minutes of the Federal Reserve's April meeting were published. The notes said there were "significant downside risks" to the U.S. economy and that the global financial system remains "vulnerable to further shocks."

You don't say?

The minutes also showed the Fed is willing to print more money to buy more bonds in order to keep U.S. interest (and mortgage rates) low. This, by the way, is spurring the trade out of financial assets and into real assets. The Fed has already purchased $450 billion in mortgage backed securities to keep the flow of credit going to the U.S. housing market. It's also purchased $79 billion in bonds issued by government sponsored enterprises Fannie Mae and Freddie Mac.

What would you expect to happen if the central bank of the world's largest economy reduces its growth forecast and says it is willing to step into the bond market to "support the recovery" by keeping yields low? Check out the chart below.

Fed Buying Sends Yields Down...For Awhile

Source: Wall Street Journal

When the Fed first announced its intention to buy mortgage backed bonds and Treasuries in November of last year, it sent yields on ten-year U.S. notes and 30-year bonds tumbling. Traders and banks front-ran the Fed and got in ahead of the Fed buying, which they expected to push up prices. But by the time 2009 began, the Fed buying (or threat of buying) was no longer enough to keep yields low. They've been climbing ever since.

And Thursday, even after the meeting notes revealed the Fed might go beyond spending $1.75 trillion on Treasuries and mortgage-backed securities, ten-year and 30-year yields moved up. So, by the way, did the gold price ($953.90) and crude oil ($61.21). The Fed is losing control of bond yields. It's going to have to wade in with trillions more. That will push up commodity prices.

There's something happening here. What it is, well that's not exactly clear. But it sure looks to us like the Fed's indication that it's willing to ramp up purchases of U.S. assets to keep rates low is actually causing investors to sell U.S. assets. Investors are beginning to wonder what the inflationary effects of such a large money-printing campaign might be, and what it would do to the value of their existing bonds and notes.

This is one reason why the largest holder of publicly traded U.S. debt (China) has shifted its purchasing of U.S. debt to the short-end of the yield curve. The good news for the big spending American government is that its creditors are willing to finance its deficits. The bad news is that those deficits are now a lot more interest rate sensitive. If shorter-term yields start trending up along with the longer-term yields, it's going to get really expensive for America to borrow.

Do you sense a theme here? Deficits DO matter.

The other big news on the day was that Standard and Poor's announced it could cut Britain's credit rating from Triple A on account of that nation's massive deficits. It moved Britain's rating from "stable" to "negative." Ireland, Greece, Portugal, and Spain have already lost their Triple A ratings because of massive fiscal deficits. But Britain is beginning to cause a lot anxiety in global bond and currency markets.

The U.K. is going to run a £175 billion fiscal deficit this year alone. That's 12.5% of GDP. It will need to sell £220 billion in bonds to cover the gap. And mind you, it's a big gap. The nation's total debt is nearing 100% of GDP.

The government deficit was £8.5 billion in April alone. That was the highest monthly deficit since 1993. And it speaks to a point we made earlier this week that once a government debt-to-GDP ratio reaches 10% and beyond, it begins to drag on GDP growth and lead to even higher deficits (lower tax takings, higher debt-servicing costs). Pimco's Bill Gross went on Bloomberg television and said markets are, "beginning to anticipate the possibility" that the U.S. will face a similar credit downgrading.

Let's recap. Stocks are down. British gilts are down. U.S. bonds are down. And both the pound and the U.S. dollar were weaker against other currencies.

Who says deficits don't matter?

Dan Denning
for The Daily Reckoning Australia

• New Trend in the Market: Sell Bonds and Buy Commodities
• U.S. Bonds Better than Greek or Other Sovereign Bonds
• U.S. Bond Prices Rose and Yields Fell
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• Choking on Debt in the Unfolding Anglo-Saxon Bond Crisis