David Fessler (Investment U):

As the old saying goes, “You’re either a contrarian, or a victim.”

It just so happens that one of the savviest contrarians I know is my colleague, Louis Basenese.

And nobody takes that to heart more than Lou does. I’ve scratched my head in bewilderment on many occasions after reading one of Lou’s bold predictions – only to see his intuition prove uncanny time after time.

So today I’m stealing a page from the “Basenese Playbook” and taking a look at the severely battered transportation sector, one that pretty much everybody hates. However, I think, it’s not only about to come off life support, but perhaps become one of the hottest investments in 2010.

The Transportation Sector: The Market’s Most Important Domain

Airlines, railways, package carriers, even oil and gas pipelines are all industries that make up the transportation sector.

But why should you care about it?

Because transportation is actually the most important sector – and for good reason: growth or contraction here serves as a proxy for both U.S. and global economic growth.

It stands to reason that if more “stuff” is being shipped, it means companies are producing more goods to satisfy business and consumer demand. In turn, this is a good indication that the U.S. economy – and that of the rest of the globe – is in decent shape.

Right now, however, there’s a big change underway in U.S. freight transportation. Thing is though, it’s hardly received any attention. So let’s take a closer look…

And the World’s Most Efficient Transportation System Is…

Let me toss a few statistics your way…

Click here to read the rest of Mr. Fessler’s article at Investment U and uncover his three transportation sector picks.

Guess what happened last year? According to a study from Boston Consulting Group, the only area of the world that got richer last year was Latin America… led by Brazil!

The rest of the world got poorer. By 11%, according to BCG. Down in the rum and sun zone, on the other hand, they got 3% richer.

So maybe our investments in South and Central America will turn out all right after all.

Meanwhile, back in the developed world… what’s going on? There are two main schools of thought. Ours. And theirs.

Who’s right? You decide.

They say – the crisis is over. We can thank our lucky stars – and the feds.

Now, we’re getting back to ‘normal’… or maybe a ‘new normal,’ with lower growth rates than before. Janet Yellen, San Francisco Fed governor, says the recovery will be ‘tepid.’ Others say it will be weak… soft… drawn out.

“The slowest recovery since 1945,” says a Bloomberg report.

It may be slow, they say, but it’s sure. The stock market proves it.

Stocks are up 65% worldwide, with the US a laggard… stocks in the US are up barely 40%. The Dow rose 21 points yesterday – still a long way to go to get to the 50% rebound mark, at 10,300.

Gold closed down, but still over $1,000. And the dollar continued falling – reaching $1.46 per euro.

In our view, there is no recovery. None. All of the improvement in the economy can be traced directly to bailouts. None of it – not a single penny – is organic, natural or durable. When the subsidies for new cars go away, for example, so do auto sales.

We wrote a book, with Addison Wiggin, several years ago. In it we predicted that the US would follow Japan into a long slump. We thought it would begin after the tech crash of 2000. We were wrong about that. But it seems to be beginning now. And the government, predictably, is doing the same things the Japanese government did – despite Bernanke’s assurances that he won’t allow the country to fall into the Japanese deflation trap.

One thing the Japanese did was to reduce interest rates… practically giving away money to anyone who would borrow it. But Japanese consumers didn’t want to borrow; they wanted to save. They had speculated on the bubble and lost money. Then, with retirement approaching they wanted to replenish their savings and rebuild their balance sheets.

So, the Japanese government put out money… and it was taken up by speculators, not by the real economy. The speculators borrowed yen, at very low interest rates, and then reinvested the money in go-go sectors elsewhere – such as the US dot.com bubble. The yen became the world’s “financing currency.” If you wanted to build a factory in China or speculate on Argentine bonds, you could begin by borrowing cheap money from Japan. Thus, Japan contributed to a huge boom all over the world. But not in Japan. The land of the rising sun never seemed to get up in the morning. Property investors lost 80% of their money. Stock market investors lost as much. Even now, nearly 20 years later, they’re still 75% down.

And now, along comes the United States of America with super-low lending rates. But who’s borrowing? Not the moms and pops of Middle America. They don’t have anything to borrow against. And the banks won’t lend to them. The banks need money for themselves. Besides, everybody knows the average household in America is losing income.

What’s more, mom & pop don’t want to borrow. They’ve been through 10 years of losing money on Wall Street. Stocks are no higher now than they were a decade ago. And their houses – on whose rising prices they had counted for their retirements – have gone down 20% – 40%. And they’re still going down.

The poor moms & pops can’t seem to get a break. They’re now desperately saving for retirement – at the worst possible moment, when jobs are scarce and wages are falling. But what else can they do?

Spengler, in Asia Times:

“An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past 10 years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances. Americans will work more, spend less, and save more. America may have the worst of both worlds: currency devaluation and price deflation, as in the 1930s.”

*** So, the feds push money into the economy, but it’s hot money. It’s money that speculators use to place bets on gold… or on Brazilian bonds… or on oil exploration companies. The money never ends up in consumers’ hands. It never bids for consumer goods. It never pushes up consumer prices.

As in Japan during the ‘90s, America’s hot money may go all over the globe. It may turn the entire world into a casino. But it won’t bring about a real recovery…

…if cheap money from the government were all it took to bring prosperity Zimbabwe would be richer than Switzerland. Obviously, it doesn’t work that way.

But here’s the shocker. While we know easy money policies don’t create prosperity, you may be surprised to learn that they don’t necessarily cause inflation either. In other words, government may be incompetent, even at what it does best.

So, why is gold rising?

Ah… we were afraid you were going to ask. We’ve been doing a lot of thinking about it. Partly because our family office partners are smart fellows who ask smart questions. And partly because we’re wondering what to do with our own gold. Buy? Sell? Do nothing?

We spent half the night drinking and meditating on the subject. Finally, we’re not sure we had a clearer idea… but at least we were able to sleep.

We’ve already unveiled the idea to you. The feds can cause speculation in gold; but they can’t easily cause consumer price inflation. As explained above, they can get cash into the hands of speculators, but not into the hands of consumers. Not in the middle of a major consumer retrenchment.

The Roosevelt Administration was faced with the same problem. But back then, gold and the dollar were linked. Roosevelt could devalue the dollar by edict. The Japanese couldn’t do that. Nor can the Obama Administration.

In a deflationary credit cycle, you may only be able to cause consumer price inflation by resorting to extraordinary Zimbabwe-style money printing. You can drop money from helicopters, as Ben Benanke promised. But as Zimbabwe demonstrated, that cure is far worse than the disease it is meant to heal.

All of that said… gold can rise… partly because people are betting on it as an antidote to inflation (not realizing that consumer price inflation may be a long way off)… and partly for other reasons.

Lately, one of those other reasons may be heavy buying by the Chinese. The Middle Kingdom wants to diversify out of the dollar. It also has a central bank with very little in gold reserves. What better to do than to diversify out of the dollar by adding gold to its central bank reserves? Word on the street is that it is buying steadily.

The Chinese have made a number of announcements on the subject. We don’t really know who’s in charge there, so we don’t know whose comments to weight most heavily. One Chinese official has said that the government is buying gold and intends to buy more. Another says they will buy “when people don’t expect it.” Another says the Chinese expect gold to go to $3,000 an ounce.

The Chinese have the money and the motive. They alone could move the price of gold to $3,000 if they wanted to. And maybe they do.

Until tomorrow,

Bill Bonner

Source: What China Could Do to the Price of Gold

U.S. crude prices for October delivery rose 2 cents to $68.07 a barrel by 11:44 a.m. EDT (1644 GMT), after earlier reaching a high of $69.40 on U.S. stock gains and a weaker dollar.

London Brent crude was down 32 cents at $67.34 a barrel.

“Right now, there’s not a whole lot of momentum here in either direction. I think the trend for the week, which has been down, is still in force,” said Tom Bentz, senior commodity analyst, BNP Paribas commodity Futures Inc in New York.

“Everything seemed to kind of slip right after the jobs data,” he added.

U.S. jobless claims fell last week, according to a report released by the Department of Labor on Thursday, but the prior week’s figure was revised up.

The number of people collecting long-term unemployment benefits rose to 6.23 million in the week ended Aug. 22, well above market expectations for 6.12 million.

U.S. stocks edged up on Thursday on better-than-expected sales from retailers in August.

The Institute for Supply Management released a report on Thursday showing that while the U.S. services sector shrank in August, an index measuring activity was at its highest in nearly a year.

RANGEBOUND

Oil prices are not likely to break out of the confines of the current range in the short term, analysts said.

U.S. crude prices have been rangebound, between $65 to $75 a barrel since the start of August, fluctuating on the latest clues about the speed of an impending economic recovery.

“There isn’t the structural tightness for the market to break out of this range,” said Petromatrix analyst Olivier Jakob, pointing to brimming global distillates such as diesel stored on land and at sea.

Traders were also eyeing news that big oil producers are increasing output. Russian oil output hit a record high in August, nearing 10 million barrels per day as the country launched a new giant field.

OPEC is expected to leave output targets unchanged when it next meets on Sept. 9 in Vienna.

Sept 3 (Reuters)

“The Obama administration, for example, expects to run $9 trillion in deficits over the next 10 years – and that number is based on a recovery! Imagine what will happen if the economy doesn’t recover?”

Now, that’s a nice comforting thought to start our day right? NOT! WAKE UP! Morning has broken, and the coffee is on… If you are still of the thought that this is all going to end up seashells and balloons, then you need to stop and smell that coffee!

Oh brother! Looks like I’m full of you know what and vinegar this morning! Let’s try to calm down, Chuck, you’ve only just begun to write, you don’t want to peak so soon!

OK… Yesterday, I told you that the Asian stocks had sold off and that risk assets were being taken off the table. But that didn’t last long, and by mid-morning, I witnessed a nice currency rally, that wiped out the overnight selling. At one point during the morning a customer called to buy some euros, and when the sales person asked me for a price, I said, “you know, they may want to come back tomorrow morning, after the overnight markets beat the euro up, like we’ve so many times lately.”

But wait! That did not happen last night! So, I was wrong! The euro is getting some real love this morning after German unemployment fell in August, which was totally unsuspected. Euros and Swiss francs are the only currencies I see that have gained on the news this morning. So the Big Dog, euro, must have told the other little dogs to “stay on the porch”… Stay Rex!

German unemployment fell by 1,000… OK, now I know that this has the same feeling as removing a bucket of sand from a beach, when unemployment in Germany is 3.46 million! But, I never said that Germany’s economic recovery was a tidal wave! It’s smoking embers, that are in need of stirring, some small twigs, and leaves… My beautiful bride is an “expert” and getting a fire started like that, I should send her over to Germany, that would really kick the domestic demand to another level! HA!

Baby steps… That’s the way we’re going here… So, we’ve had IFO and ZEW think tank reports on Confidence all print stronger… We had the GDP surprise on the upside… And there was something else last week, but it slips my mind right now. The point here is that the Eurozone’s largest economy is waking up… We just have to hope it doesn’t hit the “snooze” button, now!

A reader sent me a note yesterday asking if I thought there would be a collapse of the Eurozone and thus the euro… If I had $5 for each time these stories have hit the streets, I would be sipping on a multi-colored drink in a tall glass with one of those tiny umbrellas, in a tropical setting… The point I’m making here is that on the outside Spain and Italy have problems… But what’s changed? These two had problems before they joined the Eurozone, and have had problems since joining the Eurozone… Me? I totally believe that these two get down on their knees each night and give thanks for being allowed to join the Eurozone!

So… In case you missed my answer in there… I don’t see that happening, at least not in the near future…

OK… Enough of that! The Reserve Bank of Australia ( RBA )met last night, and left rates unchanged, as suspected they would, and the following statement regarding their thoughts on the economy was relatively upbeat… However, the markets were looking for an indication of “when” the RBA would hike rates, and that didn’t happen… So… The markets were disappointed, and when they are disappointed with a Central Bank, they take it out on the currency! So the A$ got pounded overnight.

Now… Aussie GDP for the 2nd QTR is going to print tonight, I would have to think that the RBA maybe had a peek at the report, and thus their gearing down the interest rate hike talk… So… We could be looking at even weaker A$ prices tomorrow morning… Unless, that is, 2nd QTR GDP is as strong as it was once believed it would be!

Did you see where Canada printed a HUGE Deficit last week? Not a good thing… But, the Canadian balance position has teetered back and forth between Surplus and Deficit, but recently has remained in the red… You know me and deficits, so, I put a red mark next to the Canadian dollar / loonie… But then, you hear news like last night… Get this! PetroChina has agreed to pay C$ 1.9 Billion for a stake in a Canadian oil sands project. PetroChina will buy 60% of Athabasca Oil Sands Corp.’s MacKay River and Dover oil-sands projects.

That’s 1.9 Billion Canadian dollars / loonies that will have to be purchased… And You would have to think that China will be spending the “few loose dollars” they have in their pockets, which would put pressure on the green/peachback!

Canada is still in a recession, here folks… But… Could these be cheaper levels given the merger and acquisition activity? Only the shadow knows!

OK… So, here I am, 1 hour from when I began writing this morning, and all that glossy and shiny talk about the euro’s rally is fading… The Big Dog has lost 1/4 euro in the past hour… So… I wasn’t wrong after all!

OK, you’ll love this, or maybe you won’t, but I do, and since I’m writing this letter, I get to talk about it! HA!

Here’s the title of the story that flashed across the screen, and of course, caught my attention… “Goldman Sachs Wrong on Economic Recover, Macro Hedge Funds Say”

You’ve got me on this one! I’ve got to read on… “Paul Tudor Jones, the billionaire hedge-fund manager, who outperformed peers last year, is wagering that Goldman Sachs Group, Inc. and Morgan Stanley to it wrong in declaring the start of an economic recovery.”

“If we have a recovery at all, it isn’t sustainable.” One Hedge Fund Manager said… Calling this a “ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

WOW! These guys must be reading the Pfennig! OK, I kid, because these guys would never bet caught with the Pfennig in their hands… They probably put it between the pages of the “Economist” so that others think they’re reading the Economist! HAHAHAHAHAHAHA!

Speaking of “must be reading the Pfennig”… I saw a thing that came across my desk yesterday that 57% of Americans would vote out every politician if the vote were taken right now! WOW! I didn’t know the Pfennig was read by so many people! Recall, I said weeks ago, to “fire them all”… Well, let’s hope that 57% grows to 95%, and Americans really do go through with their threat to vote them all out, if they continue to take us down the road to socialism / fascism / collectivism…

OK… You may recall a couple of weeks ago, I started asking you questions about the stock market rally, and it’s ability to continue on… I truly believed that the stocks were overbought, and the P/E ratios were out of control… Now, I see quite a few jumping on that bandwagon, and calling for a stock market reversal.

Do we really think the Gov’t will allow that to happen? Didn’t the President himself, say that he thought it to be a good time to buy stocks… Isn’t that sort of like a wink and a nod from the President that everything will be OK?

Beyond those conspiracy thoughts, let’s just say the markets get to go where the participants take them ( I know, it’s not reality, but let’s just play along ), and stocks begin to reverse their gains from March… I would think it to take an adverse affect on the currencies and their gains since March too… Throw Commodities in there too!

Now, in the old days, I would look at a stock sell off and say, currencies will rise… “Honey, put on the red dress tonight, we’re going out on the town!” but… These aren’t the old days… This is the new improved way of throwing all risk assets into the same barrel! And I don’t like it at all!

Ok… The Norwegian krone, traded with a 5 handle yesterday for the first time in a month of Sundays! It has traded back over 6 overnight… But, it was a good strong move from the krone yesterday nonetheless!

Well, today, we’ll see the ISM Index (Manufacturing) from August, and for the first time in 19 months, it is expected to be above 50! New readers might wonder what I’m talking about here… But it’s simple… 50 is a line in the sand that says any number below it represents contraction of manufacturing, and any number above it represents expansion of manufacturing… So, if it prints above 50 as expected one would say that manufacturing must be recovering…

Let’s look at that closer… Come on, closer, closer, closer! We’re experiencing a global recession, and global trade has been sketchy at best… But here’s U.S. manufacturing showing expansion… And… The rise has been quite steady since March… With March printing at 36.3, April 40.1, May 42.8, June 44.8, and July 48.9… See the steady rise?

What else has happened since March? That’s right, thank you for paying attention there in the back of the class! Yes, the currencies have been rallying VS the dollar… So, the dollar is much weaker than it was in March… The dollar index was 89.05 on March 5th, and today it is around 78… So… How did manufacturing / exports rise during this period of time? Because the dollar was weaker!

Let’s keep that in mind, eh? For if we get an adverse affect on the currencies from a stock sell off, this recovery in manufacturing could go kaput!

We’ll also see Pending Home Sales for July, and Vehicle Sales for August… Cash for Clunkers will push up the Vehicle Sales… But what happens next month?

Gold has backed off by about $8 in the past two days… It’s a dip… Therefore it must be an opportunity to buy at a cheaper price! I was reminding all my friends that we spent the weekend together at a lake, that I had told them to buy Gold $400 dollars in price ago… I was booed out of the room at that point, because you see, they didn’t buy it $400 dollars in price ago!

And on that note… I’ll head to the Big Finish!

Currencies today 9/1/09: A$ .8355, kiwi .6820, C$ .9125, euro 1.4295, sterling 1.6220, Swiss .9440, rand 7.7975, krone 6.0275, SEK 7.15, forint 192, zloty 2.8780, koruna 17.9110, RUB 31.8325, yen 93.10, sing 1.4430, HKD 7.75, INR 49, China 6.8303, pesos 13.44, BRL 1.88, dollar index 78.35, Oil $69.69, 10-year 3.38%, Silver $14.75, and Gold… $949.50

That’s it for today… Well, it’s been an unusually cool summer here in St. Louis… We had two separate weeks of hot weather, and that was it! It normally is much hotter, with very high humidity… I wonder what that means for this coming winter! UGH! Just found out yesterday that I won’t be going to Marco Island this December to speak like I had the previous two years… UGH! September is the last full month of baseball, and with the Cardinals in first place in their division, this should be a good month! There are two middle of the week day games in September, and I always enjoy those! So… Summer may be coming to an end, as along as September takes a long time to work through, I’ll be OK! All righty then, let’s get going on this Terrific Tuesday, the first day of September!

Source: More Baby Steps For A German Economic Recovery

Then, he followed his own theory… coolly… confidently… cutting Fed rates down to nearly zero, pushing Congress to pass a huge ‘stimulus’ bill, and even forcing Bank of America (NYSE:BAC) to take over Merrill Lynch. In this last event, he is accused of deliberately hiding Merrill’s enormous losses and then threatening the BofA board with dismissal if they refused.

Because of Bernanke’s swift and assertive action, the nation’s banking system held together during those critical weeks of late-2008. And because of his monetary (and fiscal) policies, all the worlds’ economies are now in some stage of recovery. Stocks are rising. House sales are increasing. All the indicators point to a better world.

In recognition of the fact that he saved the world, Ben Bernanke was given the nation’s highest honour; Obama picked him to continue as head of America’s central bank, the Federal Reserve… even though he was appointed by his predecessor, a Republican.

Everyone needs a story. It’s the way we understand things. Data is just data. Numbers are just numbers. Facts are just facts. Without the framework of a good tale to hold them together, they are worthless.

That’s why, here at the Daily Reckoning, we are suspicious of facts, data and numbers. As for the numbers, they are wrong before they get to us… often intentionally. Then, when they are later straightened out, they sometimes tell a completely different story. Even the ‘facts’ often turn out to be not facts at all… but distorted data, information has been twisted to fit into a storyline.

The more precise the data, meanwhile, the more they lie. Give us a CPI rate of 6.24% and we will give you back two numbers that are total fictions… and another one that turns out to be wrong later. As for the GDP growth rate… don’t even bother to give us a number at all. Whatever the digits say, it’s a lie.

This week came news that the GDP is falling at a 1% rate. This number surprised economists. They thought it was falling at a 1.5% rate. This better-than-expected number encouraged investors to buy stocks; the Dow rose 37 points yesterday. Oil and gold remained more or less where they were.

Economists are frequently surprised. In a study of GDP forecasts, a researcher found that economists did nothing more than extrapolate current trends into the future. If the GDP was growing at 2%… they projected that it would grow at 2.3% the following year. Or maybe 1.9%. These projections were mostly correct. Generally, one year is a lot like the year before. But whenever the direction changed dramatically, economists missed it completely. In other words, they’re not really capable of telling us what the economy will do – unless it does nothing different.

We’ve discussed the emptiness of the GDP figures many times. Just because the GDP is growing doesn’t mean people are really any better off. In fact, GDP growth during the Bubble Epoque was really a measure of how fast people were ruining themselves. Seventy percent of the GDP was consumer spending; as consumer spending went up so did debt. The result was a paradox and a shame – at the end of one of the longest periods of uninterrupted GDP growth in history, the typical householder was poorer than he was than when it began.

That’s why we are skeptical of numbers… especially precise numbers. They lie through their decimals.

What matters is the story… and our story now centers on the role of one man: Ben Bernanke. But the story that most people hear… and believe… is false. It is like GDP growth in the Bubble years… it may sound right on the surface, but the real story is opposite to what is commonly believed.

Bernanke ‘wrote the book’ on avoiding deflation, ‘tis true. But he doesn’t really have a clue what he is doing. He didn’t really avoid a Second Great Depression. There isn’t really a genuine recovery underway. And the world is not becoming a better place as a result of Ben Bernanke’s exertions.

Au contraire… he’s making a natural mess into an unnatural one. He’s turning a depression into a Great Depression… He’s making a bad situation worse.

At least, that is OUR plotline. But we’ll let the story tell itself… day by day… and see where it leads us. If we are wrong about the plot… we’ll find out…

*** What a summer.

Last night we invited our neighbours over for a barbecue. Damien, our gardener, manned the fire. Jules took care of drinks.

Along with the farmers, their wives and their children, came the girls from across the road. You’ll recall THAT storyline, dear reader. This has been a summer of awakening for the teenagers. For the first time since we’ve been here – 14 years – our boys have noticed our neighbours’ girls. Every summer before, we would only see them in church, lined up in pretty dresses… quiet… polite… We exchanged kisses, in the French manner, after the mass, but that was it. Otherwise, we never saw them.

“This is a summer the boys aren’t likely to forget,” began their older brother at breakfast this morning. “They all went down to the pond after dinner last night. I went down to say hello, but after a few minutes, I felt out of place. It was pretty hot down there.”

Yes, the girls have grown up. And so have the boys. Back and forth, all the month of August. Playing tennis and swimming in the daytime. Having dinner and hanging out at the pond at night.

“It’s a lot of fun,” our youngest boy, 15, reported earlier in the week. “But it’s complicated. We all seem to like someone else… but not the one who likes us. Eloise likes Henry, but Henry likes Claire. Claire likes me, I think, but I like Sylvie. I don’t know who Jules likes, but I think all the girls like him.”

Last night, however, it looked as though the iron filings were finally lining up. Your editor went down to the pond at 2AM; it was time to take the girls home, he told them.

“I don’t care if the girls want to stay or not… Take them home,” he told them.

The boys obeyed. But it was obvious that none of them wanted to leave. Edward had one of the girls by the arm. Henry and another were deep in conversation on the other side of the fire. Jules was nowhere to be seen.

It was the last time they would see each other until next summer. The girls would go back to their lives in Paris or elsewhere. Our boys would go back to school or on to their careers. Tonight was their last night together. The goodbyes were long… and, probably, tender.

“C’mon… get going,” said Father, heartlessly. “Wrap it up…”

Source: Making a Bad Situation Worse

The FTSEurofirst 300 <.FTEU3> index of top European shares rose 1 percent to 978.34 points. Over the week, the index climbed 1.2 percent, its sixth weekly gain in the last seven weeks.

The European benchmark index is up more than 51 percent from its lifetime low of March 9, as investors have become more confident on the prospects of economic recovery.

“Things look good for the time being, but the higher we go the more we could be setting ourselves up for a disappointment,” said Andy Lynch, a fund manager at Schroders.

“The world economy is doing well, French and German GDP are positive, but that’s not surprising given the amount of stimulus being pumped into the market. I have a concern about what happens when the sugar rush is withdrawn, though that may be a problem for 2010, rather than now.”

Nokia rose 3.1 percent, taking its gain in the last three sessions to 9.9 percent, with traders citing positive momentum following the announcement of its first Linux phone to compete with Apple’s iPhone.

STMicroelectronics rose 12.4 percent after a bullish note on the chipmaker from Banc of America-Merrill Lynch, which raised its price target for the stock by 17 percent to 7 euros, and retained its “buy” rating.

The sector was further boosted by upbeat statements from U.S. bellwethers. Intel raised its third-quarter outlook and results at Dell were ahead of forecasts.

Macroeconomic news was also mostly positive. U.S. consumer spending rose as expected in July, lifted by the government’s “cash-for-clunkers” programme that fuelled demand for autos. The Commerce Department said spending rose 0.2 percent after rising by a revised 0.6 percent in June, previously reported as a 0.4 percent gain.

The European benchmark had risen to a 10-month high of 986.59 before gains were tempered by Reuters/University of Michigan surveys showing U.S. consumer confidence falling to its lowest level in four months in August on worries over high unemployment and dismal personal finances.

L’OREAL RISES

Among other individual movers, L’Oreal advanced 7.4 percent to a 10-month high after the French beauty products giant posted better-than-expected first-half profit.

French conglomerate Bouygues surged 9.1 percent after raising its full-year sales target and posting better-than-expected first-half results.

Commerzbank jumped 7.2 percent on talk Germany might be seeking to reduce its stake in the country’s second-largest bank. A spokesman for the finance ministry denied the speculation.

Intesa Sanpaolo SpA , Italy’s biggest retail bank, rose 2.4 percent as second-quarter profit beat analysts’ forecast and it confirmed its outlook for the full year.

Other banks to rise in the heavyweight sector included Barclays , HSBC , Lloyds , Societe Generale and UBS , up between 1.3 and 6.3 percent.

Miners rose as copper touched 11-month highs. BHP Billiton , Anglo American , Rio Tinto and Xstrata rose between 1.7 and 4.4 percent.

A slew of macroeconomic data also signalled improving conditions in Europe. Britain’s economy shrank a smaller-than-expected 0.7 percent in the second quarter. Euro zone economic sentiment, too, improved more than expected in August.

Britain’s FTSE 100 <.FTSE> index closed 0.8 percent higher. It has gained 6.5 percent in August. The London market will be closed on Monday for a holiday.

Germany’s DAX <.GDAXI> and France’s CAC 40 <.FCHI> rose 0.9 and 1.2 percent, respectively.

“There is only one clear trend in the market and that’s on the upside. People are coming back with a lot of inflows in favour of equities and outflows are coming from the money market,” said Romain Boscher, head of equity management at Groupama Asset Management, in Paris.

Aug 28 (Reuters)

The stock market crashed in ’29. The market then bounced. After a few months almost everyone was persuaded that the “worst is over.” But the worst was just beginning. It wasn’t until 1932 that the stock market finally hit bottom. By then, it beginning to seem like a depression… and only years later did economic historians tag it as a ‘great’ depression.

This depression is still wet behind the ears… We’re still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode.

Neither will be true.

The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression… possibly a ‘great’ one.

How can we be so sure? Well, we’re not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It’s been going up ever since. By 2005 it nudged against 15% — 7 times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future.

But you can’t take an infinite amount from future earnings. You reach a point when the future can’t handle it. As more and more future earnings are absorbed by past consumption, pretty soon there’s not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down.

Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care… but many fewer in manufacturing. Net gain: zero.

The only job gains have been in the parasite sector – government. On the evidence, this trend is going to continue. Now, the feds have a new post called “pay czar.” As near as we can tell this is a busybody who undertakes to control salaries in the industries that the feds have bailed out.

There will be a lot more jobs running the regulatory/bailout apparatus. Then, too, there are all the make-work jobs of the shovel ready boondoggles the feds began in an effort to replace private spending.

Back in the private sector, 72 banks have failed so far this year. And a record 34 million Americans are getting food stamps.

Naturally, incomes are falling. Now, imagine the consumer… he’s already paying 15% of his disposable income to debt service… and then his income is cut in half! This means that 30% of his remaining income must be used just to service the debt. Impossible to do without big cuts in spending…

The poor consumer hit the wall in 2007. He was spending all he earned… and paying more of his income in debt service than at any time in the last 60 years. He couldn’t continue to live on future earnings – there just weren’t enough of them. That is why the finance industry has topped out. It loaded Americans up with enough debt already.

And it’s why the credit cycle has turned. All of a sudden savings rates are back up to 7%. Consumers are cutting back… raising chickens in their back yards… driving less… planting gardens and squeezing their nickels. The private sector is de-leveraging. And there won’t be any durable economic boom or lasting bull market on Wall Street until this process is finished.

How long will that take? Read on…

*** Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let’s see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.

Taking the period of the bubble years, in 2000 total debt in the US came to $26 trillion. Now, it’s twice that amount — $52 trillion, of which $38 trillion is private… or more than 2 and a half times GDP. At this level, the private debt absorbs roughly one out of every 7 dollars in consumer earnings – in interest and principal payments.

If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years – or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion?

Well, inflation is running below zero – so that is not now a source of debt reduction. Between write-offs and pay-downs, about $2 trillion has already been cut – over, very roughly, the last 2 years. At least the math is easy. At that rate, it will take 19 years.

Now, let’s go back and look at the Japanese. How long have they been deleveraging. Gosh all mighty… 19 years. From 1990 to 2009.

Are we looking at a 20-year period of on-again, off-again deflation… of bear market rallies followed by real bear markets… of weak employment and weak or no growth? That’s what we argued, along with Addison Wiggin, in our first book, Financial Reckoning Day. Then, the stock market took off… and the bubble years came. It looked like we were dead wrong. Maybe we were just early. Or maybe those bubble years were just a feint… a fake-out that convinced the entire world to invest in stocks and property, just before the biggest crash in history.

In that book, we guessed that the crash in the tech sector marked the beginning of the end. By 2005, it didn’t seem at all as though we were in a down-cycle. But adjusted for inflation, stocks never beat their January 2000 high. And outside of government, the economy has no more jobs than it did in 1999. We’ve had wars against terror, bubbles in practically every sector, trillion-dollar boondoggles, bailouts, bamboozles and Michael Jackson’s tragic cooling… but what is the only durable thing to come out of the last 10 years? Just Google and debt.

*** “When you have a big family there is always someone in the family who is in trouble,” said another friend.

“I thought that when the children left home to go to college, we’d be more or less free from problems. They’d be on their own. We could turn our attentions to other things.

“Well, it didn’t turn out that way. There’s always one of them that has a problem. And we spend a fair amount of time worrying about them… even if there’s nothing we can do to help. Or trying to help them if we can…

“And then the grandchildren come… and then we worry about them. It just goes on and on. It’s not disagreeable, of course. I’d rather have children and grandchildren to worry about than not have them. But there doesn’t seem to be any end to it… ”

Source: Still in the Bounce Phase

U.S. crude rose as much as $2.37 to hit $71.82 a barrel, the highest since July 1. By 1351 GMT, it was trading $1.73 higher at $71.18.

Brent crude gained $1.46 to $73.16.

“We are getting close to the resistance area for crude oil and we need the continued support of equities,” said Olivier Jakob, an analyst at Petromatrix. “As long as this continues, the dips are going to be bought.”

European shares hit a new high for 2009, led by banks. U.S. stocks opened higher.

The latest gain in oil prices brings oil within sight of the 2009 high of $73.38 set in June, where Jakob and other analysts who use past price moves to predict direction see key resistance that prices could struggle to rally beyond.

On Friday, crude rallied almost 4 percent as data showed the U.S. economy shrank at a smaller-than-expected 1 percent annualised pace in the second quarter, raising hopes the recession was easing.

The market climbed about 2 percent last week — the third straight week of gains — which helped to reverse steep losses in the middle of the month and brought July’s monthly decline to a marginal 0.6 percent.

“The U.S. growth number has confirmed that the worst is behind us and the focus now is to find out how quick the recovery will be,” said Ben Westmore, a commodities analyst at the National Bank of Australia.

China’s crude stockpiles in June, including both state strategic and commercial reserves, declined 2.7 percent from a month earlier, the first fall in four months, China OGP, a newsletter run by Xinhua, reported on Monday.

Analysts said a weak dollar, which slid to its lowest point this year on Monday against a basket of currencies amid increased risk appetite, would offer support to oil.

Supply curbs by the Organization of the Petroleum Exporting Countries since last year in response to falling demand have helped crude rally from below $33 in December.

However, output from 11 members from the OPEC rose slightly in July, lowering its compliance rate to its agreed supply curb to 71 percent from 72 percent in June, a Reuters survey showed.

LONDON, Aug 3 (Reuters)