Dow, Oil and Gold all Doing Well.

Yesterday was beautiful in London. We wandered along the banks of the Thames and crossed Waterloo Bridge over to Covent Garden. Everywhere, people were sitting out on the grass… standing outside pubs… walking hand in hand. Everyone had the same idea – to take advantage of the nice weather before it goes away.

Last year, London had a beautiful summer too. But we were gone that week and missed it.

Alas, many of the best things in life are fleeting. And thankfully, so are the worst things.

What put us in such a reflective mood were yesterday’s news reports. The Dow rose again – up 19 points this time. Gold edged closer to the $1,000 mark – at $984. Oil traded at $68. And the dollar fell to only $1.43 against the euro.

These trends – not to mention the broad rise in commodities and stocks worldwide – lead many investors to think that the fair weather is back, permanently. Asset prices are rising. Investors are less afraid of risk. Hallelujah – a dove with a sprig of green in its beak!

Of course, it may be true. But our advice, dear reader, is to take an umbrella with you anyway. As far as we can tell, nothing has happened to disturb the major weather pattern that began developing two years ago. Anyone could see it coming years in advance. ‘You gotta expect trouble when the average house is more expensive than the average person can afford,’ we kept saying.

But it was only when high winds hit the housing market that the newspapers took notice. Then, for 40 days and 40 nights the rain came down.

First, the house flippers were caught off guard. They were in the middle of flipping condos when all of a sudden the wind shifted and sent their contracts aloft. Mortgage rates were rising and buyers disappeared. The flippers lost their deposits and walked away from empty buildings.

Then, resets and higher rates blew the roof off the sub-prime market.

Then, the whole housing sector was getting knocked down – builders, suppliers, and financers.

Next came the credit crunch… when major lenders and investment banks realized that they were in heavy seas. Their ships were swamped with mortgage-backed debt and derivatives… and their captains were morons. Lehman went down. Wall Street abandoned ship. And the feds sent out rescue planes.

By late in 2008, everyone was taking shelter. Businesses were cutting payrolls. Banks were squeezing their reserves. Consumers were staying at home. And GM was hiring bankruptcy lawyers.

Everything was falling in price – houses, office buildings, stocks, commodities… practically everything except the US dollar, US bonds, and gold. These three were seen as the only safe refuges for storm-tossed investors.

But on March 9, 2009, came a lull. Reluctantly, investors came out of their storm shelters. The skies lightened…the sun shined. Oil has gone up 53% since then. Stocks worldwide are up about 30%.

And now…people say “the worst is behind us.”

We meteorologists here at the Daily Reckoning watch the skies like everyone else. But we also read reports from big storms of the past. And what we notice is that this doesn’t look like the passing storms of the ‘80s or ‘90s. It looks to us like a major change in weather patterns. To be more precise, it looks to us like the Great Storm of the ‘30s. Do you remember that one, dear reader? No? Well, we don’t either, but we’ve read the histories. It was a doozy. And it began… well… just like this one.

In 1930, six months after the initial storm front passed world output was down about 15%. Today, it is down about 15% too. Stock markets were only down about 20% in mid-1930. Today, they’re down about 35%. And world trade slipped about 15% in the six months following the onset of the Great Crash of ’29. Today, it is down 25%.

One thing you notice is that like the Great Depression, this downturn is global. A collapse in world trade followed the Crash of ’29. It is usually blamed on two protectionist bumblers in Congress – Smoot and Hawley. But in a real depression trade falls anyway. World commerce needs to readjust to new realities… whatever they are. That’s happening again now.

The other thing you notice is that this adjustment takes time… and takes the losses much further… much deeper… than anyone expects. The actual bottom in the ‘30s didn’t come until 2 to 3 years after the crash. And it took stocks down all over the planet to about 65% below their peaks. World output eventually fell to only about 2/3rds of what it had been in the late ‘20s.

It took two decades and a major world war before the world was back on its feet.

More news from Manraaj Singh on emerging markets….

“Over the last four weeks $12 billion in new money has flowed into the emerging markets. That has triggered the biggest rally in the benchmark MSCI Emerging Markets Index since it was set-up in 1987. It’s up by 61% since February. That brings us right back to where markets were before they tanked.

“No one in their right mind honestly believes that the global economy is going to return to the pace of growth that we saw before the crash anytime soon. Not even Alastair Darling. But it’s all a matter of timing. I believe that the emerging markets offer the best value over the long-term. That’s why I am now looking at India and China for our next investment plays. But investors who pile-in right now risk getting badly burnt.

“You see, analysts are viewing the short-term outlook for the emerging markets right now through rose-tinted specs. They have hugely over-estimated how much emerging markets companies will earn this year. Figures for the first three months of this year show that analysts’ estimates were 41% above what the companies actually earned.

“There may still be one more surge in the emerging markets before the correction. We seem to be reaching the point when every money manager without a clear idea of what’s going on jumps on the bandwagon. You can bet that many of them are going to be in tears before the leaves turn gold.

“An extreme fund flow like this is a contradictory indicator. It points to a coming market drop rather than a sustainable rise. The crash in emerging stock markets is on its way. I’ll let you know when it is time to get in.”

Publisher’s note: Manraaj Singh is chief investment strategist of Profit Hunter, which looks to profit from special situations around the world. To learn more about his service and discover his latest investment recommendation, click here.

And more thoughts…

*** “Treasuries Tumble,” announced a cover of Barron’s recently. Oh my. Long bonds are down 20% since January.

Pity the poor Chinese. They’ve got $768 billion worth of them.

And pity poor Tim Geithner. He’s over there right now on a fool’s errand, lying to the Chinese:

“Geithner Tells Chinese its Holdings Are Safe,” says the Washington Post.

Reuters went on to report:

“His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.”

More about this later in the week… *** “Those people did not become French in the last five months,” says Mitch Daniels, Republican governor of Indiana.

He was referring to the people who re-elected him. His point was that Americans are not necessarily in favour of socialism. They may be fed up with what they see as the failures of capitalism. But they’re not ready to vote for Nicholas Sarkozy.

But the country has clearly moved towards more government intervention in the economy. In 1986, 40% of Americans thought government regulated the economy too much. Now, 40% think it doesn’t regulate enough. And get this. The Economist reports the results of a worldwide poll. Asked “are people better off under free markets,” 75% of Indians say ‘yes’ and so did about 72% of Chinese. But put the question to Americans and only about 69% think so.

Even Italians are more in favour of free enterprise than Americans. Go figure.

The Economist passes along the thoughts of an American lawyer to explain it: “The disaster in the housing and mortgage markets shows that free markets don’t always get incentives right or generate the information people need to make wise decisions. There may be times, he adds, when government is better suited to giving people the information they need.”

Ha. Ha.

Information? What information was it that people didn’t have? All the information was not only available – it was free. We reported it here at the Daily Reckoning – for free. Day after day… we read the headlines and passed along the statistics. What was hidden from view? What was unknown?

This information was available to the government too. Its thousands of regulators, representatives, researchers, and consumer advocates had computer terminals and newspaper subscriptions. They even had thousands of Ph.Ds in economics whose JOB IS TO STUDY THE ECONOMY!

If government were really able to give “people the information they need,” you’d think that one of these earnest meddlers would have whispered to Secretary of the Treasury… or maybe to the head of the Fed: ‘Hey… better tell the voters to watch out… this thing is getting out of control.’

But do you remember a word from the Secretary of the Treasury… from the Fed… from the SEC… from the other busybody parasites who live on the public payroll? We don’t. All we remember is how they told us to “buy an SUV” and how derivatives “spread the risk to those who are able to bear it” and how “sub-prime mortgages help increase home ownership.”

The government does a better job of running the economy? Ha. Ha.

Source: A Storm on the Horizon