Economists surveyed by the Wall Street Journal said things are going to get worse before they get better, but that they should start getting better around, oh, say, mid next year. “For the household sector, this will be the worst event we’ve had in the post-World War II period” says Bruce Kasman of J.P. Morgan Chase & Co.

Event? A rock concert is an event. A wedding is an event. A spelling bee is an event. A recession/global depression is not just an event. It’s a way of life, at least for awhile.

In the stock markets, Aussie stocks followed the negative lead set by New York overnight. And boy was it negative. It wasn’t so much the size of the fall in New York (the S&P was only down 2.85%). It was the news that Bank of America would be laying off 30,000 people.

Then there was the news that GM has hired bankruptcy lawyers. Then there was the news that Bernard Madoff was charged by the FBI with running a $50 billion ponzi scheme-a term he apparently used himself when confronted by senior employees. He also said the business was “one big lie.”

You get the drift. And to be fair, there’s been a whole lotta lying going on everywhere over the last few years. The net result is wealth destruction and, at least for some people, a real sense of shame. But people are resilient too. They’ll get back to the business of making ends meet. More on that below.

It’s not all bad news. The U.S. dollar called in sick again yesterday. Gold and oil, however, showed up bright and early and took advantage of the greenback’s illness to rally. Gold was up $17 and is up over 12% in the last month. Oil is trickier. But January crude futures were up over 10% as well on a weaker dollar and a possible OPEC production cut.

Gold, oil, and yields. These are the signals and prices we’re watching for signs of stress and leakage in the bond bubble. We mentioned yesterday that the popping of the bond bubble would unleash financial chaos. But that’s not a very useful term. So what did we really mean?

Well, the popping of the bond bubble is going to lead to a kind of financial Diaspora. Capital will flee from bondage to the U.S. government. But where will it go? Where is the land of milk and honey? Forty years is a long time to be wandering in the desert with a bunch of cash in your pocket.

This raises an interesting question. There are 14,600 days in forty years. You could wander a long way in that many days. What in the world were the Israelites doing the whole time? Going in circles? Arguing over directions?

Hmm. Maybe it took them so long to find the Promised Land because they didn’t have a map. That map, you could argue, came down in the form of the ten commandments Moses brought with him. Even peripatetic nations need laws. It is hard to have order with them (even if the laws are unwritten, they’re still there.)

What are we getting at? The investment laws of the universe have not been rewritten with this financial big bang. But you have a whole generation of personal, corporate, and government behavior that’s not fit for the purpose of living in a world where money is tighter. People will have to learn new habits, live within their means, and not rely on access to debt to improve their standard of living.

Investors have already begun the switch, with a preference for income and safety over capital gains and risk. The equity premium-what investors get over and above the so-called risk-free rate of return on government debt-is going to have to widen considerably to tempt people back into the capital markets with their savings.

But this is what happens with market cycles. Investors and institutions over indulge in the boom phase, using leverage to buy financial assets because the equity premium is so high. Now, the equity premium has all but collapsed. Some stocks have compelling value. But no one is interested in buying them.

What breaks the cycles? Entrepreneurs. Keep in mind the great Austrian economist and economic historian made a great distinction between capitalists and entrepreneurs. The capitalists provided the capital. But in Schumpeter’s theory, it was the entrepreneurs who unleashed the gales of creative destruction that blew down failed businesses and replaced them with newer, more competitive firms, better adapted for the world.

Right now, one set of failing institutions (governments) are trying to prop up another set of failing institutions (financial companies, auto makers, etc). This effort actually retards the very process that would cleanse the world of all its misallocated capital and investment. Real Schumpeterian capitalism is being gelded by a new generation of Keynesian socialists.

These socialists have always feared the risk of personal failure that’s inherent in any wealth-producing system, where there have to be winners and losers in the game of enterprise. Instead of accepting the naturalness of failure-and softening the blow where they can-they instead institutionalise failure.

So that’s what we have now. Welcome to the State of Failure. Your mission, should you choose to accept it, is to avoid citizenship in this State and carve out a semi-sovereign State of your own, at least financially. More on this ambitious plan to find the Promised Land next week. Until then…

Source: Search for the Promised Land

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.

…Markets work. Raise prices and, ceteris paribus, you will reduce sales. Increase production and, ceteris paribus, you will lower prices. Bring on a correction and people will change their feckless ways.

But one scam gives way to another. During the Great Moderation we were assured that our financial authorities had found the magic formula; henceforth, enlightened economic management, along with sophisticated, risk-dispersing financial instruments, would practically eliminate recessions and crashes. There was no need to save for a rainy day, we were assured; because it would never rain! But now we have a downpour… with markets crashing and the world facing its biggest slump ever. And now we are told that markets have failed. Now, we need Barney Frank, Ben Bernanke and Hank Paulson to run our financial system.

Wait a minute…we don’t recall Ben Bernanke warning that the world faced a meltdown when he took over at the Fed in Feb. 2006. And wasn’t Barney Frank the chairman of the House Financial Services Committee even as Wall Street was running amok, inflating the biggest asset bubble in history? We don’t remember him holding hearings about the dangers it presented until after the thing blew up. And Hank Paulson… while all this was going on, wasn’t he the head of one of Wall Street’s most go-go, derivative saturated, billion-dollar-bonus-driven firms?

Well, never mind…

But now we are supposed to believe that markets don’t work… and that these well-meaning public servants are going to save us from the evils of capitalism… and that bureaucrats will be able to fix prices and allocate capital better than Mr. Market.
Deception gives way to hallucination… correction is followed by depression.

Source: Election Day. Pity The Poor Fellow Who Wins

More from today’s Daily Reckoning:

The First World War: 1914-1918. The First World Depression: 2009-??

“This is going to be even worse that I thought,” said our old friend, Doug Casey.

He was referring to what will most likely become the world’s first global depression. “What happened while we were away?” was the question we had asked.

We just got back from our trip out to the ranch. What do we find? More of the same:

The Dow fell another 312 points on Friday. The index now stands at 8,379. This morning, stocks are falling again in Asia. And in Europe.

‘Dow 5,000’ is our prediction. Not that we have any inside information. But when we look at a long-term chart of the Dow, we notice that it goes up and down. It tends to go way down after it has been way up – in long, 15-20 year waves. The top of this wave washed over us in January 2000. Since then, the index has been higher… but not when you adjust it for inflation.

It probably would have corrected to the 5,000-range already. But the feds intervened. And now we’ve really got trouble. Because in trying to head off a recession/bear market, the authorities provoked a housing bubble, a financial bubble, and a worldwide credit bubble. Homeowners over-bought. Banks over-lent. Consumers over-stretched. Almost everyone seemed to over-do it. So, what might have been a typical bear market has been transformed into a monster of de-leveraging.

The planet’s financial press is beginning to see things our way. “In the first place, the US federal reserve applied a very expansive monetary policy.” This is a quote from La Prensa in Buenos Aires. The article goes on to explain that a combination of fiscal and monetary stimulus in the early 2000s produced a huge party in the financial sector, with most of the liquor coming from residential mortgages. Banks all over the world got in the bubbly spirit. Too bad. Now, they’re all reporting in sick and calling the doctor.

The paper does not point it out; so we will: The world’s worst headaches will be felt by America’s baby boomers.

“I don’t know what they’re going to do,” said another friend over the weekend. “I know I’m in good shape. I’ve saved a lot of cash. I began reading the Daily Reckoning about two years ago… and actually started following your advice. I sold almost all my stocks. I’m in cash in and gold. I don’t even have a mortgage.

“So I don’t have too to worry about. But I’m worried anyway. I don’t know… maybe it’s just catchy. I’m cutting back as much as I can. For example, I was going to buy a new car. I went in the showroom and picked one out and everything. But I think I’m going to cancel the order. Well, the salesman’s not going to get his commission. And I’m going to start doing my own yard work. It’s silly in a way. Because I don’t have to. But it makes me nervous to spend the money. Which means, there’s some minimum-wage guy who’s wages are about to become even more minimal. And I figure that if I’m thinking that way, there must be millions of other baby boomers in worse shape than I am and they’re probably cutting back as fast as they can. Businesses have got to be cutting back too. And when employers look for fat to cut, they’re bound to find the baby boomers. And then what do these people do? They don’t have savings. And they’re not likely to get another job… not in a major downturn. It could be pretty grim all around.” The latest report says unemployment in Rhode Island has topped 9% – the highest rate in the nation.

“But this has barely begun,” continued Doug. “The real cuts only began a few weeks ago. They don’t show up in the figures yet. All this takes time. First, it was only the bankers who were panicking. Then, it was investors. Now, it’s businessmen. And soon, it will be consumers. This kind of crisis runs downhill.”

Investors had plenty of reason to panic. This month alone, stocks worldwide lost $10 trillion. The world stock index is down 48% so far for the year.

Businessmen have reason to panic too. They’ll have a hard time raising money in this market. So, they have to cut new projects and old employees.

The next stage will come when consumers go on a rampage of thrift. Credit cards will go in the trash. Malls will be silent. Sales clerks will fall asleep on the job – and then be fired. Higher unemployment. More foreclosures. More bankruptcies.

And when Americans don’t shop, it will be products Made in China that they aren’t shopping for. That’s why the depression will be worldwide – the first ever.

“China, India, Brazil and Russia (the BRICs), the biggest emerging economies, export most of their products either to each other… or to the developed economies [mainly, the USA],” continues La Prensa.

Yes, Dear Reader… our “Crash Alert” flag is still up – even though the stock market, the housing market, the financial market, and the commodities market have already crashed. But now, there’s another flag up on our mast, a black flag. On it is a white duck laying on its back with its feet up in the air.

It is our way of warning you: “Global Depression Alert” it says at the bottom.