Baltimore — (TFN): I don’t know whether to laugh or cry. Down in Chattanooga, Tennessee, a four-year-old boy managed to grab a beer, walk out his front door and break into a neighboring house to steal Christmas gifts.

True story. But it gets better.

Inside of one of those gifts, was a girl’s dress. The youngster donned the new attire and continued his late-night spree. His mom tells us it was all in an attempt to get in trouble so he could spend a night in jail… with his old man.

Smart kid. He’s going to have a great career as a banker some day.

Although the names and the ages are different, it’s essentially the same story on Wall Street and in Washington. Drunk on greed and wearing a stolen cloak of authority, our elected officials and the pigs that feed at their feet have stolen from you and I once again.

Remember way back when in the days when the financial collapse was still fresh on our minds? Do you remember the pundits warning that the federal government’s decision to buy a massive stake in Citigroup was a disaster in the making?

Washington poo-pooed the notion, saying it has to be done, right now, right here. The consequences of the future don’t matter today.

Guess what… the future is knocking and it’s not wearing a frilly little dress.

In an effort to get out from Uncle Sam’s massive shadow, the boys at Citigroup decided to offer up more shares of the company and even managed to convince Geithner and his gang at the Treasury to unload their shares.

Turns out, the free market wants very little to do with owning a stake in Citigroup. It’s over a year later and the bank is still just as financially repulsive.

With news like this, does anybody really believe the notion of economic recovery is sustainable? Not me.

Judging by the quickly strengthening dollar and the drastic drop in gold prices today, the situation across the globe shares similar pessimism. When the greenback looks like the best place to park your money, you know there is trouble brewing.

That reminds me. Want to know the best Christmas gift this season? Cash. It’s the only thing going up in value these days.

You can thank your leaders in the nation’s capital for that.

*** Actually, that is an oversimplified view. Of course cash is not the only thing going up in value. Put options are soaring, too. But so is one tiny, overlooked segment of the commodities market.

During the couple of summers I spent as a fishing guide, one of my good friends was a real-live Alaskan lumberjack. After a couple of tours in Vietnam, the woods were the only place he felt “comfortable.”

Although he is the foulest man I ever met, he has great insight. One day while we were tossing streamers in front of migrating silver salmon in Alaska’s Tongass National Forest, he looked around and said, “Yep, we’re surrounded by millions and millions of dollars.”

He went on to tell me North America’s forests aren’t worth much right now, but they would be as soon as “those Asians” started buying. His words, not mine.

How right he was. I plan on calling him up this weekend to ask if he heard the news out of Shanghai. China’s largest city just changed its building codes and opened the door to wood framing.

Almost overnight, it opens the market to a construction industry that is half the size of our domestic market. And that is just one city.

As the housing market comes back to life (hopefully with a little bit of juice from Washington), we are going to watch timber prices soar. When it happens, my lumber-cutting friend will be onto to something very, very big.

But so will we. Not only did I just recommend a set of timber-related options this morning to TFN Strategic Trader readers, but the group’s publisher, J. Christoph Amberger, recently pulled the curtain on his latest research.

He recommends three unique ways to play the upcoming boom in the timber industry to Hot Stock Confidential members. It’s a down-and-dirty report you won’t want to miss.

You’ve got to read his report.

*** Finally, we got out of the natural gas markets just in time. After locking in gains of 400% on the first half of one play, 100% gains on the second half, 50% on a separate play and 56% gains on a third natural gas pick, the sector has turned around and shot right back up.

Thanks to word of a record withdraw for this time period, natural gas prices are on the rise. While we are still holding a couple of related plays and half of an original position, the plays are far enough removed from the effects of rising prices that we don’t have to worry.

But going forward, with natural gas prices on the rise once again, we are on the brink of yet another major opportunity. With word this week that Range Resources (NYSE:RRC) has nearly quadrupled its Marcellus gas production, we have all the proof we need to say the gas industry is in for a rough ride.

It’s simple supply and demand. Now that natural gas is all over the place, and far easier to pull from the ground than once estimated, the markets will continue to be oversupplied.

Even with today’s strong withdraw, storage levels remain well above five-year averages. I am convinced we will have yet another set of triple-digit winners on our hands in no time.

Buiter warns that the “the next big crisis … will be a crisis of state ‘overreach’ and of government failure” and that “stultifying state capitalism, initiative-numbing over-regulation and overambitious social engineering may well be the defining features of the next socio-economic system to fail.” We’ll drink to that.

What follows is the conclusion of the Den Uyl lecture Buiter gave in Amsterdam on 15 December 2008 (emphasis added). Print it out and stick it to the door of your fridge. It’s one of the best accounts we’ve read of the brave new world will be ushered in by the recent financial collapse.

Reaction follows action in politics as in physics. The inevitable result of the financial collapse and deep contraction we are going through now will be at least a decade of over-regulation in the financial sector. Popular outrage at the excesses that were permitted to range unchecked during the era of self-regulation and light-touch regulation will have to be assuaged. The ‘pound of flesh’ demanded by the body politic is likely to involve a fair amount of ‘if it moves, stop it’ type regulation. That is regrettable but politically unavoidable.

The public no longer trusts the captains of finance and the politicians and appointed officials who either actively contributed to the excesses (like Larry Summers and Timothy Geithner during the Clinton administration or Gordon Brown in the UK) or failed to warn or protest sufficiently vigorously when these excesses begin to materialise on their watch (Ben Bernanke (in public service since September 2002), Mervyn King (at the Bank of England since March 1991) and most other leading central bankers). Neither the public nor the new vintage of politicians that will take over is likely to listen to those who either actively contributed to the disaster or failed to foresee it or warn against it.

Over-regulation will harm the dynamism of the economy. How serious the damage will be is not clear. What is clear is that a lot more regulation, and regulation different from what we have had in the past, will be required to reduce the likelihood of future systemic failures and to better align private and public interests.

Buiter message is clear: the rules are going to change, whether you like it or not. Investors who fail to understand this will get badly burned as they try to make their way in the new economy.

Now that it’s here, we turn our attention to trying to discern, “How bad can it get?” and “How long can it last?”

While such questions can never be answered with anything approaching absolute certainty, there are methods that can be used to assess what may lurk over the horizon. With that goal in mind, this article focuses on – and then expands upon – the recent work of two economists who painstakingly analyzed a substantial number of previous banking and currency crises in an attempt to derive potentially useful lessons. I have then taken their data and applied them to the current circumstances to see where we are, relative to those other experiences.

The Data

The data are from a study called “The Aftermath of Financial Crises” by Carmen M. Reinhart of University of Maryland and Kenneth S. Rogoff of Harvard University. In their study, the authors summarize the results of a broad sampling of banking crises, with between 13 to 22 crises analyzed for each of the variables.

The Reinhart/Rogoff study is based, in turn, on data extracted from an even more comprehensive study of events in 66 countries, titled “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises,” by the same authors.

I’ve summarized the findings from the latest study in the table below:

The economic measures in the left column show how far the U.S. situation has deteriorated so far. The next columns show the average historical deterioration and the worst case of the crisis analyzed.

I then applied these data to calculate the levels that the U.S. could reach if it followed the path of the historical examples. The projected level is based on the measure analyzed, either from the peak prior to the downturn (e.g., the S&P 500) or from the bottom prior to the downturn (e.g., the lows in unemployment). Thus, as you can see in the table here, the S&P 500 has already dropped from its October 2007 peak of 1565 down to 766. If this crisis were to end up being only “average,” then it would drop to 690.

If, however, the worst case of a 90% drop were to occur, as it did in Iceland last year, then the S&P 500 would trade down to the shocking level of 157. For further reference, if the current crisis were to cause the stock market to fall as sharply as in the Great Depression, the S&P would touch 469.

Duration of Crisis

As you can see in the summary table below, it took 3.4 years, on average, for the stock market to fall from the peak to the bottom. In the worst case, it took five years. With the recent peak in the S&P 500 occurring in October 2007 – just one and a half years ago – the crisis is likely to have some time to go before reaching even an average duration. More specifically, if this crisis turns out to be just “average,” we would not expect to see the low before the first quarter of 2011.

Crisis Horizon: Some Conclusions

The global economic situation continues to deteriorate on all fronts (see charts below).

Housing Prices Can Take Years to Decline	U.S. Federal Debt Is Likely to Jump from Crisis
Unemployment Could Jump over the Decade

Housing prices are down 28% from their bubble peak in 2006 but still have a ways down to go to get back to their pre-bubble levels. Even an average downturn will mean that housing remains a problem for several more years. Unless, of course, the government steps in to stave off those resets… a “solution” that carries with it a separate set of problems, making things worse. We continue to expect very serious problems in the commercial real estate sector.

The stock market is approaching a 50% decline, the average of what has been observed in past crises. Further slowing in U.S. corporate activities and profits means additional increases in unemployment, establishing a negative feedback loop that pushes corporate profits – and stock prices – even lower.

The only growth trend at this point is in government bailouts, which are in high gear, indicating we’ll experience the serious growth of outstanding debt seen in other crises. The elevated levels of government borrowing required to fund that spending are absorbing all available credit from foreigners, directly competing with business in need of the new financing that will be required to expand the economy. The combination of declining business activity, coupled with declining levels of household income, will result in declining tax revenues, increasing the budget deficit beyond the size of the new bailout programs. State and municipal governments across the nation are already being confronted with large shortfalls in their budgets, shortfalls that will only widen as the crisis worsens.

The combined business slowing and jobs contraction assure that the GDP will decline. Components of GDP having to do with necessities like food and shelter will continue to bump along regardless of the economic conditions, but the lack of growth in GDP could extend for years as it did in Japan and as it did after the 1929 stock crash.

Inflation/Deflation

Given that we are currently in a deflationary phase, it is easy to dismiss the case for inflation – and many do. We think that is a mistake. Even a summary tabulation of the unprecedented increases in government debt at this relatively early stage in the crisis make a compelling case for higher inflation, if for no other reason than that it shows clear intent on the part of the government to spend “whatever it takes” to offset the deflationary forces now stalking the land.

The research paints a dismal story of years of economic stagnation. In our view, the trend is now firmly established for dollar debasement, a debasement that will eventually overwhelm the deflationary pressures from collapsing asset values. Therefore, don’t listen to the happy faces on CNBC spouting off, for the umpteenth time since this crisis began, that now is the time to jump back in and buy stocks. It isn’t.

Be extremely skeptical when you hear some pundit pronouncing that this piece of short-term good news or another is an “all clear” signal. Until we start seeing a systematic improvement in the economic fundamentals – for example, an upward movement in consumer confidence – the only signal the economy will be hearing is that of a runaway train coming straight at it.

The numbers paint a dark picture… but it is in crises like today’s where unusually good opportunities arise for investors. Take our investors, for example, who made money shorting financials over the last year. The Casey Report focuses on recognizing and analyzing market trends way ahead of the investing crowd – a strategy that has already provided its subscribers with up to four-digit returns. The latest edition includes an update on the analysis you’ve read above. Try it risk-free for 3 full months, with our 100% money-back guarantee: click here to learn more.

Source: Bad, Worse, or Worst?

Tomorrow, the man called Obama takes up the president’s job. Poor man. He seems like a decent sort. A shame…something like that happening to him.

But he hung around with the wrong crowd – lowbred types in high political circles – and look where it has gotten him. Tomorrow, he’ll be called upon to stand before a hundred million viewers, put his hand on a Bible, and lie.

To the question – will he swear to uphold the Constitution of the United States America – he will give the answer he has rehearsed. Yes, I can! Then, like almost every American president since John Quincy Adams, he will ignore it.

But before we return to tomorrow, let’s turn back to yesterday…or, Friday. So far this year, stocks are down nearly 7%. But at least the Dow bounced a little at the end of last week – up 68 points.

Oil held at $42. And dollar was steady at $1.33 per euro.

The excitement on Friday was in the gold market – the yellow stuff bounced $32. Why would gold go up…when the world economy is clearly going down? We don’t know. But if we were Mr. Obama, we’d approach this new job like renting a car from a disreputable agency. We’d want to take a good look and take note of all the dents ands defects before driving off the lot. We wouldn’t want to get charged for the previous drivers’ mishaps!

The founding charter of the U.S.A. made no allowance for going into the banking business…nor the auto business…nor any other kind of business. Neither did it allow invasions of foreign countries, without a declaration of war…or imagine a standing army that costs about as much as all the rest of the world’s armies put together.

In the beginning, the U.S. government was specifically limited in what it could do. Now, very little remains that it can’t do. But in all matters – big or small…torturing people or taking their money – government leaders must pretend to be acting in the national interest. It’s a low-down, dirty business that usually attracts people of the same sort. People like George W. Bush and Joseph Biden…people with no sense or no principles – or neither. People who don’t know a lie when they hear it or…don’t mind telling one.

That’s why we’re sorry to seem Obama in the trade; he seems like such a nice fellow.

But politics…alas, someone’s got to do it. As the old Latin expression puts it: The voters want to be deceived; then let them be deceived.

So many patsies…so little time. Bernie Madoff could barely keep up with all the people who wanted to give him money. The hopefuls joined his Palm Beach country club just for the opportunity to slip a few extra large bills in his pocket. Old buddies sought him out…eager to part with their entire fortunes.

And look at the Treasury market! The patsies line up to buy I.O.U.s from a deadbeat debtor who already owes money all over town. And now he’s passing out more I.O.Us…at a faster and faster pace…trillions of dollars’ worth of them. Not only that, the debtor in question has said publicly that he intends to lower the value of his paper – at all costs.

And now the voters…the general public…the lumphouseholders – they’re dying for a lie too. They want someone to tell them that he’s got the recession under control.

Well, if they’re going to be deceived someone’s got to tell them lies. Barack…you’re up!

The people want to believe that if the president weren’t such a screw-up, we wouldn’t be in this mess. In other words, if the administration would get its act together, it could “do something” to get the good, ol’ times back.

Rarely do we get an opportunity to come to the defense of George W. Bush. But here we will say without equivocation: this financial crisis is not his fault.

Sure, he made it worse by wasting $2 trillion on that silly war of his – the ‘war against terror.’ And sure, he should have gotten rid of Alan Greenspan at the beginning of his term…and he should never have signed so many spending bills without a fight. And, it’s too bad he didn’t understand what was going on in the financial sector and warn people – instead of jawing on about how great the U.S. economy was. But, heck, who did? He acted like a moron; no doubt about it. But who didn’t?

So give George W. Bush a break. Let the man skulk back to the ranch without trying to pin this financial collapse on him. He didn’t cause the problems; and he couldn’t cure them either. The financial problems faced by the U.S.A. cannot be solved by politicians. They can only be made worse by politicians.

The problem is that there are a lot of bad loans, bad investments and bad businesses that need to be cleaned out. All the politicians can do is to try to prevent the clean up…

*** The lumpen want to be deceived; so the politicians take it as an opportunity. Last October, for example, they raided the Treasury for $700 billion that they could pass out to their friends on Wall Street. Of course, that program was supposed to be in the ‘national interest.’ The banks were supposed to lend the money out to the taxpayers whence it came.

As absurd as it sounds, and as unconstitutional as it surely is, it is nevertheless the law of the land. And now that a few months have passed…and a few hundred billion have been passed around, we’re beginning to understand what happened to it.

The New York Times reports:

“Speaking at the FBR Capital Markets (NASDAQ:FBCM) conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.

“‘With that capital in hand, not only do we feel comfortable that we can ride out the recession,’ he said, ‘but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.’

“‘The Treasury secretary, Henry M. Paulson Jr., said in October that banks should ‘deploy, not hoard’ the money to build confidence and increase lending. He added: ‘We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.’

“But a Congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures, raising questions about whether the Treasury has complied with the law’s requirement that it develop a “plan that seeks to maximize assistance for homeowners.”

What did they think? Bankers don’t make loans in the hopes of getting ‘good citizenship’ awards. They lend money when they think they can make money at it. Now, with so many balance sheets in such bad condition, they are afraid their loans won’t be repaid.

Typically, Thomas L. Friedman has a solution. The president should get 300 banking presidents in a room and give them a “come to Jesus” speech, he says. By that, he means the feds should play a more muscular role in the banking crisis. Good banks should be saved. Bad banks should be dissolved.

And what about all those bad loans? Ah…the New York Times columnist has a solution for that problem too. The government should buy them up…hold them…and then “sell them later when the market rebounds.”

See how easy it is, dear reader. Problem solved. That’s what Obama should promise the voters.

And if the patsies will believe that…maybe they’ll kick in a few hundred billion more for Wall Street.

Source: A Nation of Patsies…in a World of Hurt

Yes, I know the government circus has come to Wall Street Wall-Street-Layoffs . Hank and Ben are performing their tightrope act, and the clowns of Washington are piling out of their not-so-tiny black SUV.

But now that Congress is getting involved, we should see some decisive action, a clear and easy solution to eliminate the financial collapse now knocking on our doors… and if you believe that, I’ve got these great banking shares to sell you.

— John Browne wrote some great commentary on Henry Paulson’s plan, which, he says, effectively puts the American public on the hook for all current and future screw-ups of Wall Street speculators. U.S. hyperinflation here we come, even faster than before.

— Laura Cadden discussed the strength of the U.S. dollar with currency expert Jack Crooks and found out some worrisome things about our current situation. According to Jack, America is staring down the barrel of a Western sequel to the Asian currency crisis in 1998. And it could be just as bad. Jack explains why in this week’s Smart Trading Action Alert.

The dollar is heading toward ruin and Bernanke and Co. are doing their best to refill the liquidity swimming pool with taxpayers’ hard-earned cash. So how do you know when the worst is over? And when should you get back into the markets?

— Krista Das asked those exact questions of Money Map advisor Martin Hutchinson. He tells her three signals that Wall Street is safe again. And you may be surprised to find out that one of those signs is the firing of Ben Bernanke Bernanke-Changed-Course Nov-07 . Martin is serious about that. He believes Bernanke’s days are numbered, and you can find out why in this week’s Smart Investing Market Insights.

— But while Bernanke takes one step closer to his own demise this week, the kids in the TFN camp were sniggering over our April Fool’s Day joke on our boss J. Christoph Amberger.

On Tuesday, April 1, we released a very special Amberger’s Smackdown, just like I promised you last week. And how, exactly, was it special? Well, for starters, it was a SmackUp featuring “Christoph” expounding on the virtues of the Democratic party.

If you’ve ever seen one of Christoph’s Smackdowns, you know that our fearless leader enjoys nothing better than stomping all over liberal philosophy, Democratic candidates and what he calls their proto-Communist economic policy.

So unbeknownst to our boss and with the help of a little high-tech trickery, Christoph became a democrat, if only for the day. And surprisingly, he didn’t fire any of us for it, when it showed up on the TFN Web site on Tuesday.

— Speaking of proto-Communism, Mexico’s president Felipe Calderon is trying to push his country farther away from it’s remnants of nationalization. Mexico’s government-controlled oil company Pemex, which holds a monopoly on the country’s oil industry, is floundering, but will Calderon convince his people and his congress that they would make more money and have a stronger economy by following the lead of Brazil’s Petrobras?

— While oil has fallen from its peak, to the chagrin of oil companies worldwide, Dominic Frisby of Money Week thinks it could reach as high as $160 per barrel as soon as next week. And he has a pretty convincing argument to back up his claim.

So where do you put your money in this market? How do you find a company that isn’t going to suffer from the current crisis? We have two answers for you this week.

— Lynn Carpenter will show you how to predict performance using stock charts. She gives easy instruction for technical traders in her series on Stock Chart Smarts in our Investment Strategies section.

— And Andrew Snyder has discovered what he calls a Diamond in the Mud for value investors in this week’s Hot Stock Pick. Andrew explains his three criteria for finding a good value investment in today’s volatile market, and he gives you a company that has the potential to bring in nearly 60 times its current revenue in coming years.

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