The Dow rose again yesterday – up 33 points, to close at 9,320. We set 10,000+ as our objective for this bounce. We’ll stick with it for a while longer.

Make no mistake though. No one knows how long this rally will last – certainly no one here at the Daily Reckoning vacation headquarters. It will continue until it runs out of gas. That could be tomorrow. It could be months from now.

It will run out of gas sooner or later, and probably this fall. A real, durable bull market would require an economic boom – a genuine recovery. We don’t see that happening…

But people must think it is happening…

“There are signs of a recovery in the US… ” was a popular line at last night’s cocktail party. Several friends mentioned it. Each time, we had the same reply – we wouldn’t bet on it.

Yesterday, the price of oil rose; it ended the day at $71. And the dollar stayed where it was – at $1.44 per euro. Investors are betting on recovery – despite our advice.

And when the recovery turns out to be a clunker, they’ll probably put these trades into reverse. Oil will go down; the dollar will go up.

You want to speculate, dear reader? Sell oil… buy the dollar. Wait for another crash this autumn.

Why will there be another crash?

Because people believe something that isn’t true. People believe that there is a recovery… and that it is the result of stimulus efforts by the feds. The results from the second quarter show the economy still contracting… but at a slower pace, just –1% annually, rather than the -6.4% recorded in the first quarter. This is heralded throughout the world as proof that the crisis is receding.

“It if weren’t for stimulus spending, the contraction [in the 2nd quarter] would have been closer to 4%,” says the editorial in the International Herald Tribune. “The stimulus is helping… and more stimulus would help even more.”

Oh? Would it? Let’s look at stimulus-in-action:

Cash for clunkers is a hare-brained scheme… but that doesn’t make it unpopular. The idea is to stimulate demand by, well, giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decide they need a new car. In order to get the money, people have to buy one.

According to the press reports, the program has been a great success wherever it has been put in place – in France and Germany as well as the US.

If so, why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?

What’s so special about autos, in other words? And why is it a good thing for people to buy cars?

Oh c’mon, dear reader, don’t pretend you don’t know. The auto industry is huge… with many lobbyists and many organized groups interested in its well-being. It is an old and well-established industry with plenty of political clout.

Tomorrow’s industries, by contrast, have no lobbyists… no organized labor… no pet congressmen… no political action committees. So who gets the money?

Here’s the problem: the meddlers are not only up against tomorrow’s industries… they’re up against tomorrow itself. It’s not as if Americans needed cars. Not at all. They’ve got plenty of wheels already. Three car households are typical. And they’re fairly new cars. Americans were on a buying spree during the bubble era, 2001-2007; they bought new cars along with everything else. So, the goal of the cash for clunker scheme is not to increase the size of the US auto fleet, it’s to make it newer.

People don’t need more cars. They only need to replace cars that get worn out. If they bought a car 5 years ago, they may be ready to buy another one. Or, they could probably wait until next year. Along come the feds with cash… and the buyer decides to replace his car this year rather than next.

This is heralded as a success. The feds have stimulated demand. But what about next year?

We’ll have more to say about this on Friday… but the auto example helps us see what a scam these stimulus schemes really are. They claim to boost demand. But they can’t really increase demand. All they can do is roll next year’s buying into the present year.

Sound familiar? That’s the very thing that has been happening for the last two generations. Consumers didn’t want to wait until they’d made the money to take their vacations or buy their houses. They turned to credit. They borrowed against future earnings. They spent money they hadn’t earned yet… thus bringing forward purchases that should have been made in the future. That’s why we have a depression; now, we’re in the future!

It had to come sooner or later. After drawing consumption forward for decades, Americans had to stop. Time had to catch-up. Homeowners had to pay down debt. Ken Rogoff, Harvard professor of economics, believes it will take them 6-8 years to do so.

But consumers spent more than they could reasonably be expected to pay back. They out-spent the future! They bought a ticket to somewhere beyond the future… to a place where they would never actually arrive. In many cases – especially in the housing market – lenders discovered they couldn’t get their money back, which is what led to the credit crunch and the collapse of Wall Street.

Of the big five – Bear, Lehman, Goldman (NYSE:GS), JPMorgan (NYSE:JPM) and Merrill – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.

From one scam to another… that’s the way the feds do it. From bailing out Wall Street they now turn to bailing out the entire world economy – in a similarly fraudulent way. Tim Geithner told the Chinese last week that the US would revive thanks to increased private demand. But the feds cannot really increase demand in the private sector. Increasing real demand would mean increasing real wages. And there’s no sign of that. To the contrary, incomes are going down.

Yesterday’s news tells us that personal incomes went down 1.3% in June. . Incomes had gone up in May, by precisely the same amount – 1.3%, thanks to stimulus payments. Then, too, commentators saw it as a sign of recovery. But what the feds gave in May was taken away in June. The future caught up with the Obama administration’s stimulus efforts within 30 days. Net result = zero.

The June number reflected the biggest drop in income in 4 years. It is not surprising. We’re in a depression, remember? Salaries and wages fell 0.4% in June… the 9th drop in the last 10 months.

*** “It looks like there are finally some signs of recovery in the US,” said more than one person we talked to last night.

The occasion was a cocktail party… held on the grounds of a stately chateau. The summer social season is underway in Poitou. We are attending dinners, plays, cocktail receptions, barbecues and weddings.

Last night, waiters in tuxedos passed out champagne, foie gras canapés, and desserts while hundreds of guests milled about and talked.

“You might want to hedge your bets on this recovery,” we told one Daily Reckoning reader. “It’s probably not going to work out.”

“But I’m confused about something,” he continued. “You’ve been urging me to buy gold for years. And now you seem to be changing your mind.”

“No… no… not at all. I’m still a gold bug. It’s just that I expect this rebound to end… and for stocks to go down, possibly down a lot. The dollar is what people want when they are frightened. The dollar is going down now because they think there’s no longer anything to be frightened about. But when this recovery disappoints them, investors are going to be more frightened than ever. Because they’ll realize that we’re faced with a depression… and that the feds can’t do anything about it. They’re going to rush to the safety of dollars… at least for a while. Probably long enough to shake out a lot of gold buyers.”

Source: Cash for Liquor Anyone?

Is it on… or off?

The bear market rally, that is? The Dow was down again yesterday, but by just a little… 52 points.

The short-covering rally is finished, says David Rosenberg, formerly one of Merrill’s top analysts.

“Everyone I know is laying people off… cutting back… and generally struggling to survive,” said a colleague from Florida. “I don’t believe this recovery story. The stock market might be up, but the real economy is still sinking.”

Yesterday, we went to get our teeth checked out.

“Hey… I’m a Daily Reckoning reader,” said our dentist. “So, I knew you were in town.

Asked about the state of the economy, he had this comment:

“Our business is a little counter-cyclical. People get laid off from work, but they still have their health benefits – at least for a while. They want to make use of them while they can. And they’ve got the time to do it. So, our business actually goes up.

“But then, when the recovery comes they go back to work… they’re busy… and they’ve already had their teeth fixed. We’re not seeing that yet.”

House prices are still falling. The average house in Southern California has fallen to $247,000 – a big drop from the top set two years ago. Toll Bros., one of the country’s biggest builders, reports revenues down 51%.

If the US economy is really following Japan, things are going to get a lot worse. Japan’s output is collapsing – at a 15% annual rate last quarter. The Land of the Rising Sun is a major exporter. For the first time ever, exports are falling… taking the Japanese economy down with it.

Internally, the Japanese are still not big spenders. The population is not only ageing… it’s shrinking. That’s not happening in the US. Thanks largely to its immigrants and Hispanics, the US population is expanding. But this new population is not the same as the old one. At the top of the socio-economic pyramid in the US is a huge group of aging, mostly white baby boomers. Naturally, the geezers vote. And naturally, they vote themselves more benefits at the expense of the next generation.

In fact, you can look at the entire bailout/stimulus program and the $1.8 trillion US budget deficit for 2009, as a huge transfer of wealth. Benefits are provided to the present generation at the expense of the next generation. The white boomers borrow – through their elected federal representatives. The next generation – much more Hispanic and much more immigrant – is stuck with the bill.

But it’s not that simple.

The bailout/stimulus program is a scam on top of a scam. One generation may be trying to get something at the expense of the next – but they’re both losing. On the surface, the next generation gets stuck with the cost of bailing out the present generation. But underneath, the bailout is a sham; it doesn’t really work. It doesn’t revive the economy. All it does is move money from sensible households and good businesses to reckless spenders, mis-managed firms, and foolish projects. The losers are the winners.

What it doesn’t do is bring about a general recovery in the economy. It can’t – for all the many reasons we’ve described in these daily reckonings. The feds can spend money. But they can’t turn bad investments into good ones… nor turn hopeless, brain-dead companies into successful ones… nor erase $20 trillion of excess debt.

All the feds can do, in other words, is make a bad situation worse.

First, they mislead investors into believing the fix is in. With all that money coming into the market, people think the problems are going away. “Everything is under control,” they say to themselves. Then, they put their money into stocks, deluding themselves that a new boom is underway. Later, when it becomes clear that the boom is a long way off, they are deeply disappointed. Stocks fall… and the economy enters a long, dark period of workouts, defaults, bankruptcies, disgrace and suicides.

Then, as we have explained many times, the feds’ money actually delays the process of creative destruction. Instead of burning off the dead wood and making room for new growth, the smoke jumpers at the Fed parachute out of airplanes to smother the flames. Instead of a hot fire that burns itself out in 24 months… the economy suffers a slow burn for 10 years.

Another way they make the situation worse is by undermining the rule of law and the predictability of economic rules. When a corporation goes broke BOTH the bondholders and the stockholders should suffer. But in bumbles the Federal government with bailout money. The share price plummets as investors anticipate a clumsy takeover – wiping out the shareholders. But the bonds could even go up – as the firm is given easy credit, allowing it to stay out of bankruptcy and continue paying off the bondholders.

Worse, in the case of the Chrysler bailout, the feds jumped in and upset everybody. Instead of letting the markets sort out the stockholders and bondholders, they forced a political settlement that rewarded one class and punished another. Bondholders got less than they should have… and the autoworkers union got more.

What is this? A free-market country with the rule of law? Or a third-world basket case in which the politicians decide who gets what?

And more thoughts:

*** Are you watching the dollar? Maybe the unwinding of the dollar-based paper money system is coming sooner than we expected. Yesterday, the dollar fell again – now it costs $1.37 to buy a euro. And if you want an ounce of gold, it will cost you $937.

It looks to us as though gold is headed to $1,000 again. This is not what we expected… not yet anyway.

What we still expect is a broad, long rally in stock prices. We think the Dow might go back to 10,000 before it is over. This is the rebound we were waiting for. It should boost asset prices generally – including gold, commodities and oil – as well as stocks.

Oil rose $2 yesterday too. It’s back to $62.

But this trend is probably a fake out. Underlying the positive market news is an economy that continues to decay, degrade and deflate. Remember, this is a depression, not a recession. The bubble era is over. Because the transmission is broken. The financial industry has blown up. It won’t be repaired. Instead, it will be bailed out… nursed along… and mollycoddled.

Once a bubble blows up, it is never repaired and reflated. Instead, if new money is added to the system, it goes into a new bubble. Right now, the new bubble is in the US Treasury market. How long that will last, we don’t know. But currently, if you put your money into Treasury bills – short-term US paper – your yield will be negative. This does not happen very often. If it ever happens in our lifetimes again, it will be when the moon turns blue. And anyone betting on an indefinite continuation of this bubble is probably a lunatic.

But when it blows… we wish we could tell you.

*** “Can I get a bottom of wine… ”

A drunk had wondered into the dentist office in downtown Baltimore while we were waiting to have our teeth cleaned.

“I’m sorry sir, you’re going to have to leave,” said the blond woman at the desk. “This is a dentist office. You come here to get your teeth worked on. This isn’t a liquor store.”

“Wha… .? I’m s’posed to be here… I think… .my mother sent me down here… ”

“What?”

“My mother… ”

“Wait a minute,” said an older woman behind the desk. “That’s Henry. That’s Ms. Rogers son.”

The man was very drunk. His eyes were out of focus. He was about 40 years old… wearing what looked like a hunting jacket. Wobbling as he stood before the desk.

“Okay… ” continued the blond woman. “Henry… we’re not going to work on your teeth if you’re drunk. You come back straight… and we’ll take you.

“Besides, your appointment is for tomorrow at 9:30… not today. You run along… and come back tomorrow at 9:30… and come back sober… okay?”

“Henry,” the older woman took up the conversation. “Do you have bus fare? How you gonna get home?”

“Bus fare… why? I’m not going anywhere… ”

“Yes you are… ” said the blonde woman… and she escorted him to the door and pushed him outside.

Source: The US Stimulus Program is a Scam on Top of a Scam

This secret is important… It is the only way I know for you to really make ridiculous gains from investing without taking on crazy risks. The man I first heard the idea from actually did make ridiculous gains following it…

Jim Rogers made more than 4,000% in his Quantum Fund in the 1970s, when the overall stock market only rose 47%. (Then he retired in 1980, at age 37.)

Jim’s track record when he ran the Quantum Fund may be the best of anyone, ever. He was interviewed after he retired for a book called Market Wizards (which first came out in the late 1980s). In that book, he said something that has stuck with me since:

Markets often rise higher than you think is possible,
and fall lower than you can possibly imagine.

This was a revolutionary idea for me, at the time – a true “secret” to ridiculous gains.

Using his own secret, Jim Rogers could have bought oil at $13 a barrel a few years ago, and he could still be holding it at $130 a barrel today. Your typical investor would have sold somewhere along the way. But not Jim.

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(If anyone actually did buy at $13 and hold to $130, it was probably Jim. He started his Rogers Commodity Index Fund back in 1998, when oil bottomed, and he’s still a commodities bull today.)

In the mid-1990s, Jim and I sat next to each other at a black-tie dinner. We talked for hours. He struck me as one of the most original thinkers I’d met. After that dinner, I went back and re-read his chapter in Market Wizards.

I realized his quote, “Markets often rise higher than you think is possible, and fall lower than you can possibly imagine” was incredibly powerful. Once I adopted it, it allowed my readers to make huge fortunes…

The most recent huge winner is Seabridge Gold. I recommended shares of Seabridge at $2.64 to my subscribers a few years ago. Today it’s up to $23. We knew the markets could go higher than we imagined, so we didn’t get out too early. I might not have had the conviction to hold it that long without help from Jim Rogers.

Jim Rogers’ quote has made me – and my subscribers – large amounts of money. But this year, my biggest mistake was forgetting the other half of the quote: Markets can fall lower than you can possibly imagine.

Banks and homebuilders – two things I believe are cheap and hated – have fallen lower than I could have possibly imagined. I bought in too early. I thought I saw a glimmer of an uptrend. So far I’ve been wrong. Jim’s rule was right, as always. So right now, I’m watching my trailing stops closely on these.

If you want to make a whole lot of money investing, you have to stick to your rules. Jim Rogers’ rule is one of the most difficult to stick with… but it is one of the most profitable.

Oil moving up 900% is a great example of the market rising higher than you think possible. And financial stocks and housing, unfortunately, are a good example on the downside.

“Markets often rise higher than you think is possible, and fall lower than you can possibly imagine.”

This rule will make you a lot of money. And both halves of the rule are equally important.

Good investing,

Steve

Source: Fixing My Big Investment Mistake This Year