China and Greece Slam Stocks, Marc Faber's Latest Forecast, Strange Lumber Prices and More!

5 Min blog | agorafinancial.com | login | contact February 12, 2010 Retail sales delight… The 5 suggests a reason that should give Pollyannas pause China and Greece send U.S. stocks tumbling… Why the Greek bailout is looking shaky Forget "the next Greece"… Faber forecast sends CNBC talking heads into frothing frenzy A real-world economic stat that actually looks healthy Readers write: Are the Olympics a boondoggle? Are taxes really going up? Sit back and watch the show… Bummer. The federal government is back on the job today -- just in time to juice up Wall Street with these retail figures: Retail sales for January rose 0.5% from December -- more than the mainstream consensus expected. Even better, the numbers weren't particularly skewed by rising gasoline prices. Take away gasoline and auto sales and retail sales rose 0.6%. Looking over these numbers, we recall a little news that flew under the radar last week. A report from TransUnion revealed the percentage of consumers current on their credit cards but delinquent on their mortgages grew to 6.6% in the third quarter of 2009 -- up substantially from 4.3% a year earlier. That's a lot of people who can maintain -- or even increase -- their standard of living by staying in their homes for free. Their lenders are only too willing to go along because they don't want to book the losses that would come with foreclosure. Everyone is happy in this fantasy world. Alas, strong retail numbers aren't enough to perk up traders this morning. The major U.S. indexes opened down 1.4% because… The China sneeze play is back in action. For the second time in a month, Beijing has jacked up banks' reserve requirements. Big banks now have to keep 16.5% of their deposits on reserve, smaller ones 14%. Evidently, the last tightening wasn't enough to slow the growth in either loans or property prices. Once again, U.S. traders assume Chinese domestic demand will collapse, and so will the world economic recovery. Nor is the news from euroland helping matters. The Greeks have put Wall Street in a headlock for more than 24 hours now. Let's recap… Before market open yesterday: Greek debt deal announced, traders rejoice. Futures up After market open: Traders realize there are no specifics to the deal. Market down By midday: European Council president clarifies -- the EU stands ready to help Greece, but help isn't actually needed right now. Best of all worlds. Market up After market close: German Chancellor Angela Merkel let it be known Athens would have to get its own act together and, in the words of the U.K. Guardian, she "brushed aside all questions of financial support." Bummer. Is Frau Merkel acting wisely? Behold… Fourth-quarter German GDP figures just came out… and they're flat. Not good after two consecutive quarters of growth. Year over year, the German economy shrank 1.7%. French fourth-quarter GDP came in better than expected, up 0.6%. The eurozone as a whole grew barely -- 0.1%. This news sent the euro to a nine-month low against the dollar, at $1.3533. The dollar index in turn is up to 80.75, a seven-month high. For now, as long as the euro looks shaky, the dollar retains its sheen as a safe haven. For now…. The U.S. Treasury auctioned $16 billion in 30-year bonds yesterday, and it didn't go very well. Before the auction began, yields were 4.68%. Afterward, 4.72%. Clearly, buyers are getting more nervous about the notion of going "long America" for the next three decades. The bid-to-cover ratio looked lousy, at 2.36. Maybe all this talk of who's going to be "the next Greece" is rather beside the point when debt is weighing everyone down -- including the keeper of the world's reserve currency. "All governments will eventually default, including the U.S.," says Marc Faber -- except for a handful like Singapore that have their debts more or less under control. This comment drew gasps, first of horror, then of outrage, from CNBC anchors Sue Herera and Dennis Kneale. You can watch for yourself here -- the moment of truth comes around 2:15. Still, the guardians of the Temple of the Perpetual Bull gave Faber a chance to explain himself. "In the developed world, we have huge debt to GDP, in terms of government debt to GDP and unfunded liabilities that will come due, and these unfunded liabilities are so huge that eventually these governments will all have to print money before they default." (An aside: if you type Dennis Kneale's name into Google, the first auto-fill suggestion that pops up is "idiot." Seriously. Heh.) Dr. Faber was one of the most popular speakers at last year's Agora Financial Investment Symposium in Vancouver, and we've just confirmed he'll be back this year as well. There's nothing like seeing and hearing him and his candid assessments in person. Early bird registration is still available. I urge you to book early… make a vacation out of it. Vancouver is very nice in July. "Like Pandora's box," says our forex maven Bill Jenkins, "what is let out is not so easily put back." "The widely heralded recovery that we heard about during the closing months of 2009… rising CPI, increases in retail sales, the uptick in home prices and sales, increases in manufacturing, elevations of consumer confidence… it's all completely and fully because of the stimulus that has been delivered -- and it will absolutely require additional and ongoing stimulus in order to continue. However, even with additional doses of money, the outcome is still problematic. "If the powers that be actually believe that removing stimulus will work, and they continue to attempt to do so, I will tell you now, what they will see is a decline in demand. "Take my word for it. With the same confidence with which I predicted the massive debt troubles in Europe and the contagion it would become, this too is my prediction for the United States. Sadly, when it comes to adding stimulus, we'll be danged if we do and danged if we don't. If we don't, the economy will tailspin. If we do, it only becomes more apparent that the debt we have racked up has become insurmountable." A review of the open positions in Bill's Master FX Options Trader shows his readers are sitting on quick gains of 36% and 66%. For access to all of Bill's recommendations, go here. Meanwhile, dividend hounds are taking note of a proposed takeover in the utility space. Electricity provider FirstEnergy is offering $4.7 billion for Allegheny Energy -- forming a mid-Atlantic powerhouse in four states. Assuming it gets past the usual regulatory hurdles, this is a big deal to our income investing specialist Jim Nelson. "It would create one of the largest electric utility companies in the country, with more than $17 billion in annual revenue. FirstEnergy also expects an additional $530 million in cost savings in the first two years. "We are bullish on the utility industry in the long term. This proposed deal marks the beginning of what we expect to be a massive industry consolidation. We could easily see a few of our plays experience the effects of this merger-and-acquisition landscape." Jim has two companies in mind, already in the Lifetime Income Report portfolio. For access to his full range of star dividend payers, go here. For reasons we can't quite figure out, the Internet is awash with jobs forecasts for the rest of 2010. Here are a few: A consensus of 62 economists polled by Bloomberg says unemployment already peaked last October, and will close the year at 9.5%, slightly below the present 9.7% A consensus of 56 economists surveyed by The Wall Street Journal believes unemployment will fall to 9.4% at year's end The White House, choosing to be gloomier (perhaps on account of our relentless mockery), is figuring on average 10% unemployment throughout 2010. The economy needs to add at least 100,000 jobs every month just to accommodate new entrants to the work force. And the White House expects average monthly job growth of only 95,000 for the rest of the year. Not ones to miss a party, we'll offer our own 2010 jobs forecast: On the first Friday of each month, much like we got this month, we'll learn where the economy is losing jobs, but the unemployment rate will continue to go down… as "discouraged workers" no longer count. Good times. After a post-credit crisis lull, looks like thefts of scrap metal are back. Someone's removing the brass hardware from plumbing fixtures all over the University of California-Berkeley campus. Total losses to date: $9,000. For the record, copper is about $3 a pound right now, about 25% off its 2008 high. Zinc is just under $1, still 50% off its 2006 high. Now for a "real-world" statistic that would make Warren Buffett and James Howard Kunstler giddy. As you'll recall, the brand-new Pulse of Commerce Index measuring truckers' purchases of diesel dropped like a stone in January. But rail shipments are looking sharp… This looks especially encouraging compared with two weeks ago, but we caution this number is still skewed by a big increase in auto shipments -- 53% over this time a year ago. Lumber and coal traffic are actually down year over year. Still, lumber prices stand at a two-year high -- up 60% year over year. How can that be when home building is in such sorry shape? Turns out production is down by around 30% over the last two years. Supply and demand. Our short specialist Dan Amoss sees the price spike as a "likely temporary" phenomenon. He tells MarketWatch that "if not for [the] stimulus and housing tax credit, there would be practically zero housing starts in the U.S." You can read more of his comments here. For steps you can take to profit from the slump, you can still take advantage of Strategic Short Report for up to 60% off full price. Here's how. "I am from Vancouver too," a reader writes in objection to yesterday's Olympic kvetching, "and most of us are proud to host the Olympics and welcome the visitors. "I also remember 1986, and at the time, the situation was much the same. There was intense opposition to Expo 86 from those who believed the money should be spent on health care and housing for the poor, but after the fair got under way, most of them participated and we lived to see the great benefits to the city. The same seems likely happen again." "To correct any misunderstandings concerning Olympic costs for the complainers from Vancouver," writes another, "I would like to point out to them that all residents of British Columbia are on the hook for the costs of this fiasco. Just like the Montreal Olympics, we'll be paying for this extravaganza for years to come, yet we in the outback will have to content ourselves with watching events on television (not necessarily a bad thing) with little likelihood of attending in person. "Already our provincial government is covering some of the costs with reduction in services (already paid for with taxes) and additional fees, increased premiums for health care insurance and cancellations of other services also already paid for through taxation. The whole catastrophe is all about egos, politician's legacies; vanity, vanity, all is vanity. 'Twas ever thus." "It's not a new tax in B.C.," writes yet another reader, calling foul on someone who wrote in yesterday. "The current provincial sales tax (which has been around my entire life) is being HARMONIZED with the federal sales tax (GST). "It's impossible to sell tax reform to the public, because they don't understand. When the GST replaced the MST, the GST was called a new tax on the public, but they never mentioned the ending of MST. "I actually thought your readers were smarter." The 5: We thought they were smarter, too. Darn. After yesterday's comments, we took a look under the hood: Last year, we brought speakers, investors and thinkers from 22 countries to Vancouver. And all seven continents, as one attendee had come from a "vacation" at the science outpost in Antarctica. Heh. That's part of what makes the Vancouver event so great. You never know who you'll meet. Just one more reason to carve out space in your calendar and join us this year. Regards, Addison Wiggin The 5 Min. Forecast P.S. "Chocolate has emerged as an inexpensive indulgence," Alan Knuckman reports keeping an eye on another popular commodity, "along with coffee, that has remained popular during this current economic crisis," he comments in a recent MarketWatch article. Members of Alan's Resource Trader Alert just laid on a cocoa play this week he figures has $3,500 profit potential. Just three weeks ago, he recommended closing out a play that delivered a 67% gain. If you'd like in on his next recommendation, here's where to go. Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to 5minforecast@agorafinancial.com You could have turned $5,000 into $1 million in just 5 years! A California Energy Site So Secret, You Can't Even See It Without a Top-Level U.S. Navy Clearance... How To Legally "Hack" Your Way Into the World's Most Secretive "Millionaire's Market" A California Energy Site So Secret,You Can't Even See it Without a Top-Level U.S. Navy Clearance The 5 Min. Forecast is a paid subscriber only , daily e-mail service brought to you by the publishers at Agora Financial, L.L.C. You are receiving Agora Financial's 5 Min. Forecast because you are a paid subscriber to one Agora Financial's paid publications. Agora Financial Resources: Economics & Politics Crisis & Opportunity Gold, Oil & Energy Growth, Tech. & Medical Options Investing Executive Seriers Editors: Executive Publisher & Founder: Addison Wiggin Editorial Director: Eric J. Fry Editor, 5 Minute Forecast: Ian Mathias Editor, Rude Awakening: Joel Bowman

Taipan Daily: Does China Want a Lower Gold Price?

Online Version | Mobile Version Wed., February 10, 2010 42 Times Better Than Gold Download Your Free Report Now! Taipan Daily: Does China Want a Lower Gold Price? by Justice Litle, Editorial Director, Taipan Publishing Group As you have no doubt heard, Beijing is sitting on something like $2 trillion in excess reserves. It's actually more than that. According to Michael Pettit, a noted in-country China watcher, the figure is "pretty close to $3 trillion" depending on how you account for it. This massive sum is no guarantee against a China market crash. Pettit goes on to point out that China's huge reserves amount to "5-6% of global domestic product." This is the same rough percentage as the total central bank reserves accumulated by the United States in the 1920s. It was fashionable to sweat the hoard of U.S. reserves back then, just as it is fashionable to sweat China's hoard now. In the late ‘20s, John Maynard Keynes spoke of "all the bullion in the world" piling up in America's coffers. And yet, despite all that backstopped loot, 1929 still happened. The 1930s still happened. Get a Full Year Free! An unprecedented decision just handed you a full year of our revolutionary new service – Currency Profits Trader (valued at $5,000) – absolutely FREE! But you must be among the first to claim your "free slot" today. Reserve your space here… More evidence that even a rich-as-Croesus central bank can lose control, perhaps... or never had true control in the first place. This makes sense when you think about the monetary "pipes" analogy we used just recently in these pages. It's no easy to trick to pump a vast quantity of cash into the system without seeing it pool stagnantly – or making the boiler explode. Bernanke and crew are like plumbers wearing oven mitts. Are the Fed's Beijing counterparts really that much smarter? Of Gold and the Dollar But anyhow, moving on to today's inquiry: Does China want a lower gold price? In the long term, almost certainly not. But in the short term, maybe so. Consider the following: Via its mountain of excess reserves, China has the biggest "long dollar" trade on the planet. China hopes to build a far larger "long gold" position than it has right now. When building a long-term position, lower buy-in prices are preferable to higher. On balance, a strengthening $USD is a mixed bag for China. The stronger the greenback gets, for one, the more that U.S. politicians squawk. (American exporters of manufactured goods want a weak currency, not a strong one, and they see China as "cheating" by holding their currency down to spur exports. This creates a natural correlation between a rising dollar and rising trade tensions.) A firmer buck is a good thing for China, though, in that the dragon has such a huge pile of them to dispose of, i.e. to exchange for more useful assets. When the dollar gets stronger, all kinds of things get cheaper in relative terms. Like South American farmland, for instance... or metal mines in Africa... or coal and LNG from Australia... or gold. One Stock Every Month is All You'll Ever Need For the entire 2009 calendar year 100% of my trades have been winners. All of my stock picks are up with an average annualized return of +116.2%. I'm putting my money where my mouth is -- I've got $100,000 in these picks. My subscribers are making money hand over fist alongside me. D. Wernette of Hinsdale, IL has made $10,272. And J. Reisman of Cambridge, MA has made $46,002. Get my latest stock pick now. The Long-Run Perspective In the long run, China craves power (or at least the mandarins who run the place do). Economic power, financial power, military power, you name it. In getting from here to there – from a world where America is top of the heap to a world where China is – China will have to do a few key things to see its geopolitical ambitions met. It will have to dig out from under a mountain of paper dollars. And it will arguably have to build up a massive stash of gold, much bigger than the one it has now. The strategic nature of this endeavor creates some odd incentives in the short term. Think of two large investors: one who is trying to quietly buy up the shares of a small public company, and another who is trying to get rid of a massive stake. Gold is like the small public company in this analogy. The total "float" of gold available for purchase is tiny – a few trillion dollars' worth at the maximum. (Much of the world's gold is in private hands and not for sale.) China is like the large investor trying to quietly buy up shares. Given the intimate knowledge of its own long-run plans, China likely wants to exchange dollars for gold at the most favorable price possible – which, here and now, means a lower gold price. This is no different than a large investor wanting to get the best average cost on his position. China is like the other large investor – the one who wants to get shed of a massive stake – in terms of its divesting its mountain of dollars. In this case, it is a higher price (i.e. stronger dollar value) that is desirable, as it means a better rate of exchange on greenbacks going out the door. Playing the Game This is why, your editor would argue, China is predisposed to a lower near-term gold price, not a higher one. As a large buyer with a very long-term outlook, Beijing wants to get the best prices it can... both on the dollars it sends out and the metal it takes in. This is also why, from an investment standpoint, your editor is not perturbed by a near-term weakness in gold. To the degree that the gold price falls (and the dollar rises), we are witnessing a giant geopolitical chess game in progress. The endgame, when it comes, will look very different. Warm Regards, JL Government Conspiracy Ignites Historic Profit Opportunity! If you don't mind making money at the U.S. government's expense, I urge you to read the following Investigative Exposé immediately. It will make you mad as hell. It could also make you very rich, very soon. Follow this link for all the details… Taipan Daily - a free e-service of Taipan Publishing Group - is easily the most profitable 5 minutes of your day. To become a Taipan Daily member sign up here. For more information, about Taipan Daily and Taipan Publishing Group, visit our home page. TPG Resources VIP Inner Circle Taipan's Safe Haven Investor American Wealth Underground Taipan's New Growth Investor Taipan's Velocity Trader Macro Trader WaveStrength Options Weekly Taipan Insider To advertise in our e-letters or on our Web site, contact us. Republish Taipan Daily on your Web site, blog, or e-mail w/o charge. Learn how. Have a question for our editorial team? E-mail us. Interested in our team covering a topic in Taipan Daily? Send us an e-mail.

The Global Guru: Asian Tigers Revisited, Part 4

TheGlobalGuru.com | GlobalBullMarketAlert.com | GlobalStockInvestor.com February 9 , 2010 Vol. 5, No.6 Fellow Investor, Asian Tigers Revisited, Part 4 Hong Kong: China's Capitalist Success Story Hong Kong is a paradox. Although it reverted back to Communist China's rule in 1997, Hong Kong has remained the "freest” economy in the world for 15 consecutive years, as ranked by the Index of Economic Freedom. As one of the original Asian Tigers, Hong Kong also is one of the world's great economic success stories. Its GDP per capita not only soared 87-fold between 1961 and 1997, but also by 2010 Hong Kong had successfully transformed itself into one of the world's leading financial centers. Despite the global economic slowdown last year, this city of only seven million attracted over $60 billion in foreign direct investment in 2008 -- more than twice the figure of India, a country with 157 times Hong Kong's population. Sponsored Content Alpha Traders Are Buying This Now... You Should Too Discover the secrets of Alpha Traders... and shoot for 48% annualized returns (like I've been getting since 2005). Now the Alpha Traders are taking aim on new trades... trades so profitable that I'll guarantee you at least 7 triple-digit winners in the next 12 months! Click here for details Hong Kong's liberal tax regime, respect for property rights, flexible labor market, and highly motivated workforce have all combined to make this city-state one of the world's most prosperous economies. And as the only member of the original Asian Tigers that can claim to be the West's gateway to mainland China, Hong Kong offers the prospect of a uniquely profitable investment in your portfolio. Hong Kong: The World's New Financial Center If Asian Tiger rivals South Korea and Taiwan boast more developed technology sectors, and Singapore is arguably the world's most attractive place to do business, Hong Kong is the only Asian Tiger to claim a role as a global financial center rivaling London and New York. Hosting the largest initial public offering (IPO) in the world -- China's ICBC bank in 2006 -- marked a watershed in the development of Hong Kong's Stock Exchange. By 2009, Hong Kong had eclipsed the United States by raising $27.2 billion in IPOs -- compared with only $26.5 billion in New York. Up until last year, the United States had dominated global IPOs in all but one year since 1995. London fell even further. Although the British capital was #1 in 2006, it did not even make the top 10 in 2009. And Hong Kong's figure does not even include the high-profile but delayed $2.2-billion IPO from Rusal, the aluminium group controlled by Russian billionaire Oleg Deripaska -- the first Russian group to be admitted to the exchange. Hong Kong: The Asian Tigers' Leading Stock Market Hong Kong boasts by far the largest and most developed stock market among the Asian Tigers. But from a U.S. investor’s standpoint, the Hong Kong market benefits from another tailwind. Although it is thousands of miles away from Washington D.C., Hong Kong's stock market is subject to wild "booms and busts" every time the Fed loosens monetary policy. Here's why. For the last 25 years, the Hong Kong dollar has been worth about $7.80, a level enforced through an interest-rate policy implemented by Hong Kong's currency board. The result? Every time the Fed cuts real interest rates to zero -- as it did in 1992-1993, and again in 2003-2005 -- as the Hong Kong stock market has doubled. With the Fed firmly committed to its zero interest-rate policy, it's likely to do so this time around, as well. Sponsored Content How to Recession-Proof Your Retirement Very few people are financially prepared to make their retirement dreams a reality, especially after the devastating market implosion of the last few years. And it really is important that you take steps to prepare yourself. Because corporate pensions are rapidly becoming relics of a previous era... and any money you receive from Social Security will be a mere pittance -- at best! Click here to learn how you should be preparing RIGHT NOW for retirement. There are other reasons to be bullish about the Hong Kong market. After the collapse in global stock markets in 2008, Hong Kong stocks hit single-digit, price-to-earnings (P/E) ratios. In the past, every time the market collapsed to such low levels, Hong Kong stocks have gone on to double, and even triple, within a few years. Hong Kong also offers the most direct way for Western stock market investors to profit from the $585-billon Chinese stimulus package. And despite hitting five-month lows in the recent sell-off, like the other Asian Tigers, Hong Kong -- through the iShares MSCI Hong Kong Index (EWH) -- has comfortably outperformed both the U.S. S&P 500 and the mainland China's Shanghai composite over the last 12 months. The bottom line? For the attention given to mainland China, Hong Kong's rule of law, free press, open markets, transparency, unfettered capital mobility, and a fully convertible currency have given it a distinct advantage over its mainland rival. Sponsored Content Profit from Wall Street’s Biggest Mistakes A small group of investors are turning Wall Street's biggest mistakes into their golden profit opportunities. Superstar investors like Warren Buffett, Eddie Lambert, Sumner Redstone and a host of other investment masters have rapidly multiplied their fortunes routinely with this widely-ignored trading strategy. Right now, I’m tracking several life-changing Market Mistakes that I want to share. Get the full details now… For now, at least, Hong Kong, an original Asian Tiger, has the upper hand. Sincerely, Nicholas A. Vardy Editor, The Global Guru

The "Second Round of Pain"

The Daily Reckoning Tuesday, February 9, 2010 Dow goes sub-10,000...but on the way to where? Sovereign debt crises threaten to dwarf Greenspan's bubbles, Plus, Bill Bonner discusses the economic battle on all fronts and zombies at the Treasury... --- Secret Meeting in NYC Could... --- Double Your Money in the Next 48 Hours Just days ago, three of the world's largest oil producers all signed confidentiality pacts with this tiny oil company. Why? They've quietly entered formal talk to take over the company. Such an announcement would likely double the penny shares overnight - and it could come as soon as within the next 5 days. (The three majors are still in New York conducting due diligence and reviewing the books.) So what happens if no formal offer materializes? Investors could get much, much richer. For details on this "win-win" situation, please go here now for the full report. --------------------------------------------------------------- Eric Fry, reporting from Laguna Beach, California... A moment of silence, please, for our fallen comrade, the Dow Jones Industrial Average... Yes, it's true; the beleaguered index fell through 10,000 yesterday to finish the trading session below where it stood last November. But yesterday was not the first time the Dow ever fell below 10,000. In fact, it was the 28th time since March 29, 1999 - the Dow's very first close above 10,000. When the Dow scaled 10,000 in March of 1999, the stock market had been rallying for several years already. Just five years earlier, the Dow had breezed through the 5,000-level. Therefore, almost no one doubted that 10,000 would be a mere stepping stone to 15,000...or 20,000...or yes, even 36,000, as James Glassman and Kevin Hassett infamously predicted in their 1999 classic: Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. But Dow 36,000 would have to wait awhile. Instead of continuing its vertical ascent, the Dow would spend the next eleven years tripping over itself. On twenty-eight separate occasions, the Dow would climb through 10,000...only to slip back below 10,000 sometime later. Each failed attempt produced more discouragement and fatalism than the time before. Stocks are supposed to appreciate over time, we are told - not to muddle along for years at a time. The Dow was supposed to blast through 10,000 in 1999 and never look back. It was not supposed to return to 10,000 as frequently as a "B-actor" to rehab. What went wrong? The short answer is: Alan Greenspan. (The long answer is also Alan Greenspan). The former Chairman of the Federal Reserve nurtured an epic financial bubble during most of his 19-year reign. After slashing interest rates sharply during the early 1990s, Greenspan hiked them a bit in 1994, before cutting rates again between 1995 and 1998. The stock market tripled between 1990 and 1998. But here's the interesting thing: when Greenspan hiked rates in 1994, the stock market struggled...and so did Greenspan's popularity. Greenspan did not regain his adoring followers until the back half of the 1990s, when he resumed cutting interest rates and stocks resumed their climb. But then he hiked rates slightly once again, as the stock market bubble reached its zenith in 1999. The bubble burst...and so did the aura of infallibility that had calcified around Greenspan's reputation. Suddenly, he had critics again...and he did not seem to like it very much. He had learned his lesson: He would never be unpopular again...no matter how many bubbles he would have to inflate or reflate. As the stock market bubble began bursting in 2000, Greenspan quickly sprung into action - replacing the stock market bubble with an even more magnificent housing bubble. Between mid-2000 and mid-2003, Greenspan slashed short-term interest rates from 6.5% to 1.0%. He implemented "emergency interest rates without an emergency," as Jim Grant observed at the time. The rest is history. The stock market rebounded, home prices rocketed and Wall Street bankers figured out how to convert junk mortgages into AAA securities. Greenspan is not to blame for everything, of course, just...almost everything. What does this condensed and biased portrayal of history have to do with Dow 10,000? Just this: without easy credit, and the mania it spawned, Dow 10,000 would not have been possible. When the Dow first reached that magical level in 1999, the blue chip index was trading hands for about 28 times earnings - its highest valuation in 70 years. Stocks were grossly overpriced. No doubt about it. Thus, to be an eager buyer of stocks in March 2000 was to believe that price mattered less than Alan Greenspan's magic touch. Eleven years later, we have discovered that price matters more. But don't be discouraged. The Dow's disastrous decade does not invalidate the theory that stocks are an excellent long-term investment. Instead, the Dow's lost decade merely adds two corollaries to the theory: 1) Beware popular Fed Chairmen; 2) Price matters. --- Gold: Time to buy the Dips --- From Hulbert's No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet... Gold $2,000 "I'm so sure gold will soar higher I'll even make you a guarantee... plus, I'll give you five entirely new ways to play the trend..." "Including one hidden way to snap up gold... for less than one penny per ounce..." How can that be possible? Give me the next four minutes and I'll show you how... --------------------------------------------------------------- The Daily Reckoning PRESENTS: The plot thickens by the day...the global players are all lined up...the talking heads say we're in the clear...but have these recoveristas made a crucial error? It wouldn't be the first time. Dan Denning lays down some hard facts in today's guest essay... The "Second Round of Pain" By Dan Denning Melbourne, Australia If you've been thinking about reducing exposure to stocks, now might be a good time. And if you've been thinking about increasing your exposure to precious metals, now might be a good time. According to Morgan Stanley economist Gerard Minack, the stock market is in for a correction after its 9-month "relief rally." In a note to clients Minack wrote, "We see the rise from March 2009 as a typical relief rally that follows major bear markets. Those relief rallies can occur regardless of underlying macro conditions, regardless of liquidity conditions and - most importantly - regardless of what happens next... We think risk assets have swung to pricing a better outlook than is likely." Minack says that a 25% correction is now in order. To be fair though, he doesn't think the market will make new lows after that, only that it's gotten way ahead of itself at these levels. The Grand Old Man of Dow Theory, Richard Russell, is even more direct. He's predicting a "second round of pain" for stock markets. "I note that most analysts are now bullish," he observes, "and that they are recommending stocks for the 'continuing advance.' At the same time, most economists are optimistic, arguing that the 'longest recession since World War II has ended.' "Typical," Russell gripes, "last March everyone was bearish and the market was establishing a temporary bottom. Now that everyone is optimistic, the stock market is topping out and the public (the amateurs) are about to receive their second round of pain." What to do? Last time the world's financial markets panicked, something strange happened: the US dollar and US bonds rallied while stocks, commodities, and emerging markets sold off. The same thing could be happening now. It's not so much a flight to quality as it is a flight to liquidity and a massive case of global risk aversion. During the dollar's big rally late 2008 and early 2009, stocks and commodities fell. Yet once low interest rates and government stimuli found their way into stock markets, leveraged traders again bet on equities and higher-yielding risk assets around the global. The dollar fell and the stock market rally got pretty carried away with itself. This time around, we wouldn't expect the dollar rally to go as high or last as long. We don't think the monetary authorities would be inclined to let a deleveraging positive feedback loop set in again. That is, the powers that be don't want to see falling asset values trigger forced liquidations by leveraged players, leading to more asset sales and further liquidations in property, commodities, and equities. Now just because Ben Bernanke and the global cabal of counterfeiters don't want something to happen doesn't mean it won't happen anyway. The deflating of the world's asset bubbles is going to happen sooner or later. The world's massive inverse pyramid of debt is supported by a very small asset base. When the underlying assets (often commercial and residential real estate) fall, the whole structure becomes unstable (this is what happened in 2008). That means that this time around, you wouldn't expect the monetary authorities to let liquidity to dry up again. A ten percent fall in stock prices is just the thing to get policy makers in an accommodative mood again. The US employment figures still stink. And markets are increasingly confused and worried about whether certain sovereign nation states (like Greece and Portugal) can finance their deficits and/or reduce public spending without increasing civil unrest. Mind you, we don't think more money, credit, or liquidity is the answer. It is, in fact, the problem. The modern world economy is built on a foundation of unsound money. When central bankers change the cost of capital willy nilly, they corrupt all sorts of incentives in the real economy. And they alter the economics of tens of thousands of investment decisions. If they make money too cheap (always the preference of governments), they create asset bubbles (in stocks, real estate, and commodities). In fact there's a pretty persuasive argument that the commodity super cycle is itself a symptom of the de-facto dollar devaluation engineered by Richard Nixon in 1971. Once the world moved to free floating exchange rates and fiat currencies not backed by any metal, a tsunami of paper, credit, and debt has lifted (inflated) prices for everything (houses, stocks, commodities, and bonds). Some people call this wealth. But if the super cycle of paper money is ending (a big claim for sure), wouldn't it mean a dramatic contraction in global economic activity? Not just a severe recession like in 2008 but really, a long depression in which debts are worked off and paid down, or in which debtors simply default and their creditors must take capital-destroying losses? Well, yes. All that would happen if the super cycle in paper money is ending. We've argued that it IS ending and that one symptom is a series of escalating sovereign debt crises. The funding model for the welfare state is broken because it's base on unsound money. But paper money has always been a con game based on belief. Neither the emperors of Rome, the Kings of France and England, or the chairmen of the Federal Reserve have been able to resist debasing the currency. It makes both warfare and welfare possible. Guns and butter are the health of the state and the death of sound money. The counterfeiters always get first use of the bogus money before its purchasing power is diminished by the increased supply. This is a pretty dodgy way to run a world economy. But the assumption - encouraged by the powers that be - is that the an economy can be controlled with the right tweaks to the right dials by the right people wearing the right suits in the right government offices with the right university degrees. This is also absurd. But enough of the theory. What now? If the correction becomes a rout, expect more quantitative easing or policy measures designed to mask the pain (more stimuli). In other words, expect measures that will rekindle inflationary forces. Gold is correcting at the moment. But the risk of inflation remains as real and as potent as ever. So we'd say this is a chance to "buy the dip" on gold and other precious metals. Regards, Dan Denning for The Daily Reckoning --------------------------------------------------------------- And now to Bill who has today's reckoning from TK... Trichet to Greece: Drop Dead! Obama to California: Uh... Yesterday, stocks lost 103 points on the Dow. This looked like a confirmation to us. The stock market appears to have begun its next and final phase... AP seemed to think so too: "Stock investors see threats from all directions," said the headline. We didn't bother to read the article. We already know the directions. From the north, investors worry about falling consumer demand. Consumers are in a funk - they have more debt, less income, fewer jobs, and less access to credit. The only news on that front we have today is that even jumbo housing loans are going bad...delinquencies are up to 9.6%. From the east, investors worry about the continued invasion of cheap consumer goods and cheap services. China's economy is said to be growing at double-digit rates. How can US firms compete? And what if China is a bubble, as Jim Chanos believes? When it blows up, US stocks will come down too. From the south comes the threat of higher interest rates. The poor dopes think the recovery might be for real. If so, inflation will rise and the feds will increase interest rates...possibly cutting off the new boom. And from the west what do they have to fear? Well, there's that business in Europe. You know, Greece and all. The PIIGS - Portugal, Italy, Ireland, Greece and Spain... Europe's peripheral countries are in trouble. Lenders fret that they might be forced to default on their debt. So, they want higher interest rates. This, of course, just makes state finances worse...pushing the PIIGS closer to default. The PIIGS owe $2 trillion, which might need to be restructured. Yes, dear reader, the sovereign debt problem is a big one - much bigger than Bear Stearns, Lehman Bros. and AIG. But the biggest porker of all - the USA - has fives times as much sovereign debt as all the PIIGS put together. It won't take investors long to figure out that there isn't a whole lot of difference between Greece's finances and those of the US. Each has about the same amount of debt and the same size deficit, relative to GDP. The big difference is that the US ultimately controls the currency in which its debt is calibrated. Greece does not. Neither does California. Both California and Greece borrow long-term at about the same rate...around 6%. Lenders know that when their backs are to the wall, both governments will have only two choices, not three. They can cut spending. Or, they can default. What they can't do is wiggle out of their obligations by inflating their currencies. Jean Claude Trichet has already made that clear: "...belonging to the euro area, you...have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency." He went on to say that Greece contributes only about 3% to the total output of the euro-zone. If push comes to shove, Greece will be pushed out rather than allowed to weaken the euro. Then, Mr. Trichet made an odious comparison. California is a much bigger part of the US economy than Greece is of the euro economy. In fact, it is more than four times as large. Will the US come to California's aid? Mr. Trichet didn't say. It is possible, of course, that Mr. Obama will say to the Golden State what Gerald Ford said to the Big Apple. In 1975, New York City's back was to the wall. It appealed to Washington for help. "Ford to City: Drop Dead," was the famous headline in the New York Daily News, reporting the president's response. New Yorkers were incensed. Later, they realized that by vowing to veto a bailout President Ford had done them a great favor; he forced New York to clean up its act. The city went on to its greatest years. Likewise, the feds would be doing all of us a favor by letting failure fail with dignity. Will Obama help California mend its ways? Or will he turn it into a zombie state? --- Dan Amoss's Strategic Short Report Presents... --- How to Lose Friends and Alienate People In his latest report, controversial market analyst Dan Amoss shows how to protect your wealth and profit by doing the OPPOSITE of everyone else. To top it all off, the strategy he recommends you use is highly frowned upon! This won't win you any friends, but who cares when you're taking gains of 161%, 220% and 461%... WARNING: By following this link, you may feel compelled to think for yourself. Click here now for details. --------------------------------------------------------------- And more thoughts... Snowmageddon has paralyzed the nation's capitol. Once again, the feds announced that only 'emergency workers' had to report to work. And once again, we wondered about all the rest. As near as we could tell, the pumps still worked when we went to fill up our pick-up truck. The coffee tasted the same. Plumbers still plumbed. Bakers still baked. Economists still pretended to know what they were talking about. All the things that mattered continued...without the intrusion of federal employees. And here comes more snow! No kidding. Now we have a storm warning for this afternoon. Ten to twenty inches of new snow are forecast. The highway crews are beaten. They've been piling up snow since Friday. Many have worked around the clock. This new weather forecast must be depressing to them. They must feel like Custer's troops when scouts reported that more Sioux warriors had arrived. We spent the weekend digging out our driveway. We had only begun when a young man with a heavy Spanish accent came up to us. "You want some help?" "How much would you charge?" "One hundred dollars." "Hmmm....well, thanks...but I'll do it myself." Actually, we didn't do it ourselves. Daughter Sophia and son Edward lent a hand. Between the three of us, we did the work in about 3 hours. It was fun. Besides, what else did we have to do? We were snowed in. As we were working, we noticed other Latin Americans walking up and down the street with snow shovels on their shoulders. After 3 hours, your editor felt his muscles ache. These guys must have done it all day long...Saturday and Sunday. In this area, the Latinos seem to do all the housework, the roadwork, gardening, landscaping and much of the construction. They truck, they bus, they tote and lift. They're everywhere. They don't seem to mind hard work. And they are enterprising - like real Americans! This weekend, they hustled. And each one of them probably made $500 to $1,000. In cash. By 6PM yesterday, Baltimore had an eerie feeling to it. The sky was clear. The park in front of our office was covered with snow. No car moved. No human being either. What had happened? There was something unearthly about it... So quiet. So dead. Had zombies taken over? Life imitates art. There are so many movies about zombies. Maybe now, zombies really are taking over. They don't foam at the mouth. They don't eat human flesh in public. But many of our fellow Americans are exhibiting some very strange behavior. Mr. Timothy Geithner, for example. We're not saying he's a zombie. We're not accusing him. We just don't know. All we know is that he's saying remarkable things. For example, he told the nation that the US bond rating was safe. The Wall Street Journal went on to report that he said we would 'never' lose it. Huh? Of course, US bonds will lose their triple-A rating. The only serious question is when. Zombies will say the damndest things, won't they? Regards, Bill Bonner, for The Daily Reckoning --------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.

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