This from Investor’s Daily Edge:

It’s a bullish sign when the market turns its back on horrible economic news. How the market could ignore an historical loss of jobs and go up 259 points like it did last Friday is beyond me … unless the market has bottomed.

Maybe it has. Maybe my colleague Mr. Rick Pendergraft is right. He usually is.

But every fiber of my being is telling me, “Don’t believe it.”

When the dotcom fantasy caused the market to crash, Greenspan quickly lowered rates and gave the mortgage industry the green light to loan to everybody with a heartbeat. Even your pet dog could have gotten a loan.

Once again the economy was off to the races.

So what’s going to kick-start the economy this time?

The prevailing opinion is that looser credit and lower interest rates could do the trick. IF ONLY IT WERE THAT SIMPLE.

There are two “minor” flaws to this thinking…

1. Massive amounts of government handouts have already gone to the banks with disappointing results.

Banks have written off almost a trillion bucks. And they could have another trillion to go. OUCH!

Thirteen months into the credit crunch, it’s still not clear which are the “good” banks and which are the “bad” banks. There’s still a lot more septic debt that needs flushing out.

By the way, I haven’t recommended an American bank in my INCOME stock portfolio since September 2006, and I don’t plan on recommending one soon.

2. Lower interest rates? What good is that if credit card companies will be cutting your credit lines in half? It’s not a done deal yet, but that is where the credit industry is heading, “Banking on an Early Recovery? Think Again” (I wrote about banks not lending in May 2008).

Can the economy really rebound when households are getting poorer? What’s going to happen when the two-thirds of consumer spending which propels this economy gets cut back to one-half?

This fourth quarter has been one nasty ride. President-elect Obama is coming into a very difficult situation. I wish him luck. He’ll need it. Far from a let-up, next year the economy will get worse as in…

More jobs lost … housing prices slipping further … and a banking sector that unbelievably will continue to spin out of control while soaking up tens of billions of government dollars…

It won’t be pretty. And the government will do the one thing it always does: Throw loads of money at the multiplying problems.

It hasn’t worked so far. I see no reason why any of this money will stick to the wall next year. So how will some sectors do next year?

• Oil. Oil broke the $50 barrier decisively last week. $40 is next. Do you doubt that it will be broken? I don’t. $30 is another barrel of fish. If Russia and Mexico join OPEC in effectively reducing output, prices won’t go lower than $30-35. If not… be prepared for a new era of cheap gas and more SUVs on the road.

• Banks. The big money-earning days of banks are over. The price of getting government hand-outs will be much greater government supervision.

But before banks figure out their new business model, they have to stop writing down billions of dollars and closing down investment funds whose returns are negative.

Plus the banks are still on the hook for $50 trillion (this is basically insurance on the mortgages banks sliced and diced into groups with different levels of risk attached to them). If 40 percent of these exotic derivatives default, that’s $20 trillion that banks will have to pay the holders of the insurance contracts.

Where is that money coming from?

For those of you who think that losing 50-80 percent of your market cap is enough, think again. It ain’t over yet.

• Autos. Auto companies will probably get a lifeline from the government. But even with a new labor agreement in place, they still have to figure out how to be profitable with a 10-15 percent share of the market, “Is It Worth Saving the U.S. Auto Industry?”. Those days of supplying 30 percent of the market are gone.And how about this for irony. As the Big Three make the painful transition to smaller and more fuel-efficient cars, cheap gas will slow our hankering for such cars.Once again, American car companies will be out of touch with what Americans want.

  Home-grown companies have a place in this country. They can survive as a pared down but stronger industry. But getting from here to there won’t be easy – especially when demand is falling so fast.

I’ll leave it to my colleagues to find the silver (or gold) linings for next year. I hope it won’t be as tough a year as I think it will. The Dow is definitely heading into another swoon. 6,000 seems far away … but it’s only as far as 2009.

Source: Can It Really Get Worse Than This?

The following is an excerpt from Bill Bonner and James Davidson’s crisis report, How to Survive and Prosper in the Coming Global Depression.

To read the full report, simply enter your e-mail address below. You’ll also begin receiving critical updates to the report via e-mail.

Contrarian Profits readers are probably familiar will Bill’s commentary from his Daily Reckoning column. But here is some information about James Davidson:

Davidson is a self-made multi-millionaire, venture capitalist and best-selling author.

His books include Blood in the Streets, Financial Reckoning Day and The Sovereign Individual.

As an author and editor of private financial advisory service Strategic Investment, Davidson has made a number of bull’s-eye crisis predictions.

He is the founder and chairman of the National Tax Payers Union, the largest and oldest grassroots taxpayer organization in US.

His forecasts and his war against taxes and deficits have earned him frequent invitations on programs such as Good Morning America, The Tonight Show and MacNeil-Lehrer.

Read on…

This Is a ‘Credit Cycle’ Bust

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous.

We turn here to the words of American astronomer Carl Sagan because they so aptly describe our current economic predicament.

Americans have come to believe the particular bamboozle that we can get rich by spending…that we can get something for nothing.

As Bill put it in Financial Day of Reckoning, “Americans can no more retreat from this dream than Napoleon could have brought his troops back from Germany, Italy and Spain and renounced his empire.”

And here’s where our story gets really interesting.

Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.

- John Stuart Mill

Because what becomes clear is that this is no ordinary collapse.

Let us explain…

When left to themselves, the markets are natural phenomena. There is a wonderful simplicity about them.

Failure follows success. What goes up eventually comes down. Like a tree, they cannot continue to grow forever.

We can easily illustrate this by describing the pattern of pig farmers.

When the price of pigs rises, pig farmers naturally raise new pigs to increase production. About 18 months later, these new creatures arrive on the market. This increase in supply causes prices to fall. Farmers decide to cut back, which caused prices to rise again.

This is nothing more than the cyclical boom-and-bust cycle that defined the US economy from the end of World War II to 2001.

Then something changed radically. The Fed, under eager-to-please chairman Alan Greenspan, decided it could avoid the bust part of the cycle altogether.

The result is a different beast from your garden-variety downturn. You get a “credit cycle” bust instead.

This is exactly what we are experiencing now. And it’s more like the post-bubble depression of the 1930s than the downturn of 1973 to 1974 or 1981 to 1982…

‘Catastrophic Acceleration’ of Losses

Here’s the big worry.

The severity of this kind of bust depends on the magnitude of the bubble that preceded it. And the bubble that came before this bust was the biggest ever in history.

In fact, it wasn’t really a bubble at all. It was a “hyper-bubble.”

Now this hyper-bubble has popped, and the losses are catastrophic.

Billionaire investor George Soros recently explained just how dangerous the unwinding of these kinds of bubbles can be.

The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp.

The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage — borrowing for investment purposes.

At the peak of the boom both the value of the collateral and the degree of leverage reach a peak.

When the price trend is reversed, participants are vulnerable to margin calls and, as we’ve seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.

Of course, all this was inevitable.

Bill repeatedly warned the more than half a million subscribers of his newsletter, The Daily Reckoning.

No doubt, many got tired of hearing his warnings. But all he was doing was pointing out the obvious.

******************************************************************************************************

Audio Commentary from Resource Investor Rick Rule

Click to play with Media Player

Key points summary:

* The crisis is not limited to mortgages… Financial institutions are over leveraged
* There is a wipe out of shareholder equity in financial services
* Financial service companies don’t know what their derivatives are worth
* They are keeping liquidity for themselves because they don’t know value of derivatives of others banks
* The US is the leading edge of a worldwide trend of over-leveraged financial services
* An extreme example of over-leverage is Iceland

Rick Rule is chairman of Global Resource Investments. He has dedicated his life to all aspects of the natural resource industry. His contacts and knowledge of this market are unmatched.

*******************************************************************************************************

A Monster of Deleveraging

Instead of getting a typical bear market in 2001, we now face a monster of deleveraging as the biggest credit boom in history unwinds.

Deleveraging is simply the cutting back on the amount of money borrowed compared to equity.

In the case of this crisis, financial institutions sell off assets to recoup losses inflicted on their balance sheets by toxic mortgage-related securities.

These forced sales push down asset prices, hurting the balance sheets of other investors, forcing more asset sales and so on.

Nothing can stop this process. It’s a necessary cure for the credit bubble that Greenspan puffed up.

The problem is it is devastating the wider economy.

As The Economist magazine puts it, “What hurts finance affects the rest of the economy in spades.”

Because of leverage, a shortfall of bank capital of around $100 billion may reduce the potential supply of credit by $1 trillion.

This assumes banking system leveraging of around ten times…the geniuses running Lehman Brothers leveraged 25 times to equity.

But let’s assume that leverage of ten times to equity is about right.

So far, financial institutions have admitted to about $600 billion in credit-related losses and writedowns (net of re-capitalization via new equity issues).

This means cuts of $4 to $6 trillion to the potential supply of credit.

This, in turn, leads to higher cost and lower availability of credit to the real economy. And it forces consumers to reduce debt and consumption, most of which was based on borrowing in the first place.

This is bad enough. But it doesn’t end there…

So-called “negative feedback loops” mean the reductions in consumer spending and investment further hurt the economy. This puts further financial stress on corporations and individuals and triggers more debt defaults and more losses for the financial system. These then reduce lending capacity.

And so on…

Like a giant forest fire, the deleveraging process can’t be extinguished.

And although the government believes it can put the fire out with bonehead bailouts, at the very best all it can do is create firebreaks that limit the damage until the fire burns itself out.

Right now, the bailouts are stopping companies such AIG and Citigroup from going under. But banks are still refusing to lend to each other despite all the money the government is giving them.

The bottom line?

This massive unwinding is nowhere near finished.

Remember, Wall Street has only admitted to a small fraction of its mortgage-related losses and writedowns.

And the very, very bad news is total losses are estimated to clock in at $2.5 to $3 trillion…

PS. To read the rest of this report, simply enter your e-mail address below. You’ll also begin receiving critical updates to the report via e-mail.

This from Money Morning:

If you were counting on gold to boost your returns this year, chances are you’ve been cruelly disappointed. In fact, when it comes to gold-related investments, virtually every category is down, making this one of the worst years in history for gold investors.

So, why is it that the largest of the large futures traders have some of the lowest net short positions in years? And what does this tell us about gold prices in the near future?

I’ll get to that in a minute. But first …

What Went Wrong?

In my analysis, I’ve identified the three missteps most investors made. First, investors did what they’d been told to do. But in their panic, they flocked to gold on the assumption that the yellow metal would perform as advertised. They forgot the “safety first” strategy that we’ve emphasized this year – one that included a safer, more-conservative way of buying gold.

Strike one.

Adding insult to injury, very few investors (Money Morning readers aside) failed to understand that the massive “de-leveraging” process that’s been part and parcel of the global financial crisis would put downward pressure on virtually every asset class at the same time. And that includes gold. As we’ve seen in the last few months, during times of global panic, investors around the world want the safety of U.S. dollars – and a lot of them – even more than they want gold right now.

Strike two.

But, above all else, most investors failed to realize that gold, just like any other asset, produces the best returns when it is attractively priced. So most investors made the classic mistake of piling in on the basis of performance. In other words, they bought in at the top.
Strike three.

What’s Changed?

During times of crisis, investors have been taught to latch onto those asset classes with the highest relative stability – including gold and precious metals. More often than not, investors who have followed these time-proven practices have been handsomely rewarded for doing so.

This time around, however, the parameters have changed, as the increased use of such “derivative” securities as “credit default swaps” has exacerbated the fallout from the global financial crisis, and touched off the aforementioned de-leveraging process. As asset markets have melted down, hedge funds, financial institutions worldwide, and even government-controlled sovereign wealth funds have taken heavy losses, forcing them to deal with unprecedented margin calls and redemption requests. Because this has never before been part of their crisis-management process, institutional investors have engaged in a massive, concerted effort to sell anything that’s at all liquid – including gold.

Making matters worse, the so-called “carry trade” unwound with a vengeance, forcing offshore investors to buy U.S. dollars in order to offset the sell-off of dollar-denominated assets. In contrast to what you’re hearing on the news, this really is not a sign that the dollar is any stronger than other currencies. Instead it signifies that the greenback is still the global currency of choice – much to the chagrin of Russia, Venezuela and others who begrudgingly tie themselves to it.

It also highlights something that most investors forget, or perhaps never knew in the first place. For better or worse, the dollar is the most liquid of the world’s reserve currencies. Part of that’s because many assets – especially oil – are still predominately traded in dollars.

The problem is that the dollar’s healthy appearance may be just that – an appearance that covers up an inner ill health. These still-hidden maladies have been worsened by the recent machinations of “Bailout Ben” – U.S. Federal Reserve Chairman Ben S. Bernanke – and U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., whose fix-it programs have created a financial Frankenstein that will chase American taxpayers for years.

When the dollar was rallying back in May, and many experts were lauding the move as a turnaround in the making for the long-languishing U.S. currency, we warned investors not to be taken in by the market’s head fake. There were just too many underlying problems for the dollar’s rally to be sustainable. Ultimately, that rally sputtered, and the dollar reversed course and continued its decline.

This time, we again suspect that the dollar is rising too far too fast and that the spike we’ve seen in recent months may be nothing more than a flameout in the making.

However, given the relationship between the greenback and the yellow metal, this leads us to believe that gold could move higher next year if investors lose faith that the dollar merits their nearly exclusive attention right now.

Two pieces of closely related information appear to support this theory:

First, even though gold prices have tanked – a reality that under ordinary circumstances would mean more supply is available – dealers of gold bullion have experienced widespread physical shortages during the third quarter, according to the World Gold Council, a top trade association for the gold-mining industry. That, in turn, led dealers to both charge more and pay more than the spot price would indicate. Particularly strong demand was noted in China, India and the Middle East.

According to a Nov. 19 press release, the World Gold Council also noted that identifiable investment demand for gold in the third quarter was up $10.7 billion to 382 tons – double the levels of a year ago. At the same time, retail investment demand rose 121% to 232 tons, with especially for gold bars and gold coins reported in the Swiss, German and U.S. markets.

At the same time, the SPDR Gold Trust (NYSE:GLD) – the largest exchange-traded fund (ETF) that invests in the yellow metal – noted that it now holds 755.06 tons of gold in trust, up 6.12 tons from the prior week. This is significant because authorized market participants like GLD have to add metal and increase their trading float when buying pressure is higher than selling pressure. This suggests that gold may be reaching the end of its downside run and that it may behave more like investors expect it to in the months ahead.

Second, we find it especially interesting that the largest of the commercial futures traders now hold the smallest net short positions they have held in several years. According to the U.S. Commodities Futures Trading Commission (CFTC), large commercial traders combined net short positions reflect only 71,116 contracts net short, one of the lowest net short positions the CFTC has reported since January 2006.

Historically, low net short positions have proven to be bullish influences. And net short levels of less than 30% total open interest have proven to be especially bullish.

The wild card here, of course, is that the markets are working through a de-leveraging process that’s far from over, meaning that normal supply and demand relationships are out of whack. Longer-term, however, everything we know about those relationships still appears to be intact.

That’s why we suggest that investors make gold a part of their investment program – if for no other reason than we are approaching levels typically associated with higher, rather than lower, returns.

But we can’t just pile in.

Short-term market conditions will transform anything other than a measured approach into a hazardous foray.

That’s why, when it comes to gold, we’ve repeatedly recited the market mantra: “Gold works over time, but not all the time.”

Source: Don’t Give Up on Gold