The biggest news to hit the markets yesterday was the Treasury Department’s report that the deficit in June totaled $94.3 billion. This monthly deficit pushed the deficit for the fiscal year to over $1 trillion dollars for the first time, and we still have another quarter to go until the fiscal year ends in September. It comes as no surprise to readers that the deficit is above $1 trillion, but what is a bit unnerving is the speed at which the red ink is flowing.

According to the Treasury department’s report, spending in June surged 37 percent to $309.7 billion while revenue fell 17 percent to $215.4 billion. June is typically a good month for revenues, and the reported deficit was the first since 1991. Individual and corporate tax receipts are falling while unemployment continues to rise. But the revenue picture isn’t nearly as bad as the other side of the ledger. The administration is just starting to ramp up the spending from the $787 billion stimulus package President Obama signed into law in February. And as Chuck has reported, the administration has already started to lay the groundwork for another big stimulus package.

Congress seems to be turning a blind eye to the deficit, why let some red ink keep them from accomplishing all they set out to do? Just this morning, the day after we surpassed the $1 trillion deficit mark for the first time, the democrats have unveiled their long awaited health care reform. The program, by most estimates will add another $1 trillion to the deficit over the next several years. Sure, I think we all would like to see an improvement on the current health care system, but what a time to try and shove it through congress! I’m sure you will start to hear a chorus of ‘deficits don’t matter’ by the media; as they try to convince all of us that these new programs are just too important to let a little thing like red ink keep them from passing.

But deficits do matter! Other than the fact that someone is eventually going to have to pay all of this debt off, financing this shortfall is going to continue to get more difficult. Interest rates will certainly rise from their current low levels, and for the fiscal year to date, the interest expense on the government’s outstanding debt was $320.7 billion. As rates rise, this interest component will also rise, chewing up a larger percentage of our overall spending. Rising interest payments will continue to push out spending for other, more productive programs and force either a reduction in government services, or a dramatic increase in government revenues. Look out for some dramatic tax increases!

The huge deficit continues to worry our foreign investors, who have thus far financed all of our free wheeling spending. China, Russia, and some of the oil rich Arab states have all expressed their concerns regarding the security of US debt and the stability of the US$. Japan’s opposition party, leading in polls ahead of next month’s election, is the latest country to question the long term viability of the US$ as the global reserve currency. Japanese investors are the biggest foreign holders of US Treasuries after China, so the talk of diversification away from the US$ could have a big impact on the currency markets. “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” said the opposition party’s finance minister in an interview. “Many countries are starting to diversify their reserves.”

The biggest currency gainers vs. the US$ yesterday were the commodity currencies of the Canadian dollar, Brazilian real, New Zealand dollar, and the Australian dollar. Yesterday Chuck let everyone know he had finally put the finishing touches on our latest index cd. It just so happens that the new index combines three of these top performers. The new index CD, named the Global Power Shift Index is a combination of the Australian dollar, Canadian dollar, Brazilian real, and the Norwegian krone. Chuck designed this new index CD to take advantage of commodity price increases which are bound to occur as the global economy starts to recover. Call the desk for more information on this newest addition to our stable of offerings.

The Australian dollar got a boost from the business sentiment which turned positive in June for the first time since December of 2007. This should help convince the central bank to keep interest rates stable as the Australian economy starts to show signs of a recovery. The kiwi also got a boost as Reserve Bank Governor Alan Bollard said “Early signs of a global recovery have now emerged.” Rates in New Zealand will likely remain stable as the commodity driven economies turn the corner.

Today and tomorrow will bring us a plethora of data, with PPI, Advance Retail sales, Business Inventories, and the ABC consumer confidence numbers today followed by the release of the CPI numbers, Empire manufacturing, Industrial production, Capacity utilization, and the minutes of the June 24 FOMC meeting to be released tomorrow. Thursday we will get the weekly jobs data along with the TIC flows and Philadelphia Fed index. We will close the week out on Friday with news on the US housing market with the release of Housing starts and Building permits. All of this data could bring some excitement to the currency markets, which have settled into a fairly stable summer trading pattern.

Currencies today 7/14/09: A$ .7878, kiwi .6336, C$ .8742, euro 1.3983, sterling 1.6317, Swiss .9227, rand 8.1989, krone 6.4653, SEK 7.8388, forint 197.26, zloty 3.1216, koruna 18.6183, yen 93.14, sing 1.4590, HKD 7.7505, INR 48.84, China 6.8328, pesos 13.654, BRL 1.9782, dollar index 79.97, Oil $61.10, 10-year 3.45%, Silver $12.935, and Gold… $926.19

That’s it for today…The home town favorites, Albert Pujols and Ryan Howard couldn’t quite get it done at the derby last night, but it sure looked like everyone had a great time. Three of the guys on the desk went down to the derby last night, and I actually saw both Mike Meyer and Tim Smith in the right field bleachers scrambling for one of Cecil Fielder’s 16 homers. My wife and I were lucky enough to get invited to tonight’s game by a good friend. I’ve heard we will have to be heading down a bit earlier than normal with President Obama in town to throw out the first pitch. Should be a great time; I just hope the rain holds off. Should turn out to be a Terrific Tuesday! Let’s go National League!!

Source: Blood in the Streets

Even worse – for anyone who was feeling optimistic about that market, the sharp decline in the prior quarter’s GDP was revised upwards, as well.

Japan’s embattled prime minister, Taro Aso, who came to office in September just as the downturn was beginning, has introduced several stimulus programs of extra public spending, but nothing seems to work. The stock market is trading lethargically at a level that’s about 80% below its 1990 high. And there’s an election that has to be held before September.

It’s not a pretty picture.

The Japanese are well aware of this; they were not particularly cheerful about their economy even before the present downturn.

There’s actually a great Japanese movie that I watched last weekend, called “Bubble Fiction,” that illustrates this very well. In the 2007 film, a young girl is down-on-her luck, deeply in debt, and being harassed by yakuza (organized crime) debt collectors. She goes back in time to 1990, in an attempt to stop the policy mistakes that burst the Japanese bubble. Back in 1990, she finds Tokyo a much more fun place, with money everywhere and everyone happy – she even meets her yakuza debt-collector, who is graduating from Tokyo University, and who has lined up a great job with the Long-Term Credit Bank of Japan Ltd. (which went bust in 1998).

Eventually, with the help of a buddy in the Ministry of Finance, she gets to the top guy in the Ministry whose policies caused the crash, and discovers that it is all a plot between him and some rich foreigners, who plan to become billionaires by exploiting the destruction of Japan’s economy. She foils the plot, returns to 2007 – and finds it magically changed, in a long burst of prosperity, with no government debt and her Ministry of Finance buddy just appointed prime minister.

So that’s the Japanese fantasy – to find some way to undo the malaise of the past 20 years and make the country’s economy work properly again. To some extent, Junichiro Koizumi, prime minister from 2001-06, played into that fantasy. He sorted out the banks, started to privatize the Japanese postal system and cut back on wasteful government spending. It seemed to be working, too, as Japan began to enjoy decent – albeit modest – growth again.

Since Koizumi left, however, the governing Liberal Democrat Party (LDP) has abandoned his policies, and current Prime Minister Aso is very much a part of the problem – and not the solution.

Whatever you think of “stimulus” strategies, there can be no question that it is the least likely to be effective in a country that already has a large budget deficit, and that already has public debt that’s more than 160% of GDP. If the Japanese economy is currently in a pit, Aso’s policies are creating a much deeper bottom.

Just last weekend, the opposition Democratic Party of Japan provided a genuine alternative. Its previous leader, Ichiro Ozawa, was an authoritarian personality who had formerly been a senior member of the LDP, and who had shared many of that party’s more unpleasant traditions. He was forced out by an election-funding scandal and the new leader, Yukio Hatoyama, is a milder personality, and a person who appears to offer a genuine alternative.

In his acceptance speech Monday, Hatoyama emphasized “sweeping away wasteful uses of tax money” and “moving from [a] bureaucrat-led to [a] citizen-led government.” He also denounced “amakudari” – the “descent-from-heaven” process by which top bureaucrats become powerful private-sector oligarchs.

The DPJ is an amalgam of LDP rebels and moderate members of the old Japan Socialist Party, and its basic philosophy has a plank of opposing “bureaucrat-led protectionism.” It is currently leading in the opinion polls, and with Hatoyama as its leader may well appeal to the Japanese longings embodied by “Bubble Fiction.”

All of this gives the DPJ a good chance of succeeding in the Diet elections, which must be held by Sept. 6, meaning Hatoyama & Co. would form the next Japanese government.

If Hatoyama does, indeed, clean out the bureaucratic deadwood and cut public spending – while at the same time restraining those on his left who will want more-extensive social programs – he will have an excellent chance of bringing the Japanese economy out of its 20-year downturn and restoring it to its former glorious technology-led growth.

That would cause a huge rebound in the Tokyo stock market, from which we should be poised to profit.

A lot can go wrong. But at current levels, the Nikkei 225 surely cannot go much lower, and Hatoyama now appears to offer a chance of restoring 1990, or at least the early 1980s, when the Japanese market was the best investment in the world. It must be worth a modest investment in the largest Japan ETF, the iShares MSCI Japan index (NYSE: EWJ).

At current levels, EWJ is sporting a Price/Earnings (P/E) ratio of 17, but that’s based on earnings in the recession – before the Time Machine takes off!

In Spite of a Grim Economic Outlook, Japan is a Promising Investment Play

Reassurances over the health of the U.S. banking industry have sparked something of a recovery in investors’ appetite for risk and Wall Street looked set to join Asia and Europe with strong gains at the open.

Executives from Citigroup , Bank of America and JPMorgan Chase said last week their banks had been profitable for the first two months of the year.

Federal Reserve Chairman Ben Bernanke also said on Sunday that he sees the U.S. economic decline moderating and recovery beginning in 2010, though he said risks remain that politicians will lack the will to do everything needed to fix the fractured financial system.

Global stocks as measured by MSCI rose more than 1.3 percent, bringing gains to more than 11.5 percent since hitting a low a week ago.

“The eternal battle between the bulls and the bears will intensify this week,” said Chris Hossain, senior sales manager at ODL Securities.

“Whilst it is hard to say if we have seen the worst, we certainly haven’t seen a week like last week in a long time.”

European shares also rose for a fifth straight session, led higher by financial stocks.

The pan-European FTSEurofirst 300 and 14 percent this year after plunging 45 percent in 2008.

Earlier, Japan’s Nikkei average gained 1.8 percent to post its highest close in a month, with banks such as Mitsubishi UFJ Financial Group  jumping amid the easing fears about the health of U.S. lenders.

The benchmark rose 134.87 points to 7,704.15, its highest finish since Feb. 16. The broader Topix  climbed 2.4 percent to 741.69.

BONDS FOR SALE

The equity charge undermined demand for government bonds with June Bond futures down 73 ticks, two-year Schatz yields rising 5 basis points to 1.381 percent, and 10-year Bond yielding 3.127 percent, up 8 basis points.

“At least risk aversion is decreasing and there was no disappointment on the back of the G20,” said Patrick Jacq, interest rate strategist at BNP Paribas in Paris.

“Clearly, as financial stocks still remain the driving force, this is helping stock markets to rebound further.”

Over the weekend, finance ministers and central bankers from Group of 20 countries pledged to use their full fiscal and monetary firepower to combat the economic crisis, but the decisions taken focused more on funds for the IMF and regulating hedge funds.

The dollar fell broadly, reversing earlier gains made in the Asian session, as stock markets rallied.

The currency market was also looking ahead to policy meetings by the Federal Reserve and the Bank of Japan later in the week.

The dollar fell 0.65 percent against a basket of currencies to 86.687, while the euro rose 0.8 percent from U.S. trade on Friday to $1.3022 .

The U.S. currency, however, gained 0.49 percent to 98.43 yen .

March 16 (Reuters)

We have the Bank of England (BOE) and the European Central Bank (ECB) meeting today. Look for rate cuts from both of them, as recessions are deepening in both camps. The BOE doesn’t have many arrows in their quiver, while the ECB has held some in reserve. I doubt the ECB would go for a “huge honkin’” rate cut today, as they are normally more stick in the mud thinking… The BOE will probably move rates nearer to zero…

The currencies all had a day to bounce yesterday, more on that in a minute… But the day on the trampoline had to end, and as the day turned to night, the overnight market participants took a look at the rate cut meetings and decided to sell… So, last night when I went to bed, the euro was 1.2645… And right now it’s 1.2585… Not a huge change, but one that’s going the wrong way for euro holders.

OK, back to yesterday… All my troubles seemed so far away… Now it looks as though they’re here to stay, oh I believe in yesterday… Suddenly… NO WAIT! My fingers were going to continue that tangent! UGH! Any way… Yesterday, the currencies all rallied on the news that China was going to introduce a new stimulus package and their leader Wen Jaibao said he believed there would be a return to 8% growth for the Chinese economy. This news got commodities rolling, and risk takers dipping their toes back into the water. But then… Stephen Green, head of China research at Standard Chartered Bank in Shanghai has this to say in rebuttal of Wen… “Every day the world economy gets worse and they’ve probably got two years of very slow global growth to get through.”

So… Either Wen was saying what he truly believed was going to happen… OR… He has taken a page out of the Bernanke / Paulson, un-dynamic duo’s book on how to deceive the public as to how bad things are… Oh, I know the un-dynamic duo eventually came around to say things were bad… But, all you have to do is go back to the last part of 2007, and the first part of 2008, to find all the quotes you need to fill your bag, from these two regarding how things weren’t that bad… It wasn’t a recession… And subprime won’t filter out into the economy…

What I believe is taking place in China is a move away from a dependence of U.S. consumers… Which won’t happen overnight… But, if I’m correct in this thinking, it would eventually lead to a HUGE problem for the U.S. For, if China can make this move, they won’t need to keep buying U.S. Treasuries… Uh-Oh!

There was other news that goosed the risk takers yesterday, and that came from the U.S. as reported by Reuters… “A U.S. House Financial Services subcommittee is expected to hold a hearing on mark- to-market accounting rules, which have been blamed for forcing banks to record billions of dollars in write downs, a source briefed on the matter told Reuters.

The congressional subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.  The U.S. Securities and Exchange Commission’s chief accountant and the chairman of accounting rule maker, the Financial Accounting Standards Board, will be asked to testify, the source said.”

So, recall about 10 days or so ago, I told you there was a rumor going around, that someone’s underground, and she will rock you in the, NO WAIT! Darn it! I’m really going off on song lyrics today, because it’s a Tub Thumpin’ Thursday! Any way, I told you about the rumor that was going around about how the dropping of the mark-to-market was being considered… Well, I said then, that I smelled smoke… And when there’s smoke there’s a fire… And here’s the proof in the pudding folks… They congressional subcommittee will talk about this next week!

I can’t believe that they will go through the effort of talking about his, dragging everyone up to Capitol Hill to testify, without suspending the mark-to-market… Now… Talk about unlocking the credit crisis! All those reserves being held to cover the mark-to-markets, could be released on the economy!

But wait! With over 500K being placed on the unemployment rosters every month these days, and most likely a number of 600K being placed on the roster last month, who in their right mind would make loans to consumers in an economy like that? Well, that will be the next hurdle, but don’t tell the markets now, as stocks really liked this news about the mark-to-market, and rallied on the day!

So… Commodities had a day in the sun, much like I will be doing in about a week from now! Or, should I say “hope there’s sun?” Doesn’t matter much to me, as I’ll be in the ball-park next Saturday watching my beloved St. Louis Cardinals with my family at my side… It doesn’t get any better than that my friends! Oh! I was talking about commodities… Well, the commodities that rallied didn’t include Gold, as the shiny metal has seen better days this past week after hitting $1,002… I would have to think that $900 or $890 is a level it will hold. Consider, if you will, the fact that there’s so much uncertainty in the world today… And… Surrounding that uncertainty is the fact that so many Central Banks are near zero with their rates, and have announced quantitative easing as their next move… Recall, I told you a day or two ago that the Bank of Canada has joined the ranks of those employing the quantitative easing measures… The list is getting longer all the time, and now includes the Fed, the BOE, the Bank of Japan, and Bank of Canada… There’ll be more, as we go along… What else can a Central Bank do, after they’ve cut rates to the bone?

So… As I said the other day… I truly believe that Gold is trading at a discount right now… But, that’s just my opinion, not that of EverBank’s, and I could be wrong… I certainly was wrong about the Obama bounce, eh? I wasn’t wrong about calling the end of the Great Unwinding of the Carry Trade, though! Nailed that one to the wall!

Speaking of the end of the unwinding of the Carry Trade (let’s see how would my friend, the Mogambo shorten that… EOTUOTCT!) Japanese yen continues to weaken, after being the best performing currency of 2008, it is now the worst performing currency of 2009! And there doesn’t seem to be any change in that selling patter for yen… In fact, there was a story yesterday on Bloomberg that caught my eye… “Scottish Widows Investment Partnership, which oversees 42 billion pounds ($59 billion) in bonds and currencies, cut its yen-denominated holdings by a fifth because of Japan’s worsening economic situation.”

Before I head to the Big Finish, I wanted to mention the Richard Russell Tribute Dinner that is going to take place in one of my fave cities, San Diego, on April 4… My friend, John Mauldin, is putting this all together, so if your interested in attending, here’s a link to click for more information…. https://www.johnmauldin.com/russell-tribute.html

Currencies today 3/5/09: A$.6425, kiwi .5010, C$ .78, euro 1.2565, sterling 1.4245, Swiss .8510, rand 10.5250, krone 7.1150, SEK 9.1325, forint 247.55, zloty 3.7675, koruna 21.9925, yen 99.40, sing 1.5540, HKD 7.7580, INR 51.70, China 6.8405, pesos 15.30, BRL 2.3680, dollar index 88.98, Oil $44.41, Silver $13.09, and Gold… $916.60

Source: China Announces A Stimulus Plan

When Japan’s so-called “Lost Decade” began with a bang in the early 1990s, she was an “OL” – an office lady – working in one of Japan’s mightiest corporations and she kept her job, despite the downturn.

She was one of the lucky ones. Her employer was a mainstay electronics producer and a key exporter, meaning the company’s business remained reasonably healthy.

This time around, she’s a housewife and mother. And she’s worried. Her husband, Masao, works at a local manufacturer that’s cut back production to only four days a week. He’s taken a part-time job, schlepping boxes overnight at the local convenience store, to make up for the reduced pay. Their son, Daiki, is headed for college – and for an uncertain future.

“I don’t know if I have the strength to go through this again,” she said. “This time, it’s worse,” noting that Japan never really recovered from its “Lost Decade.”

Anatomy of a Lost Decade

Having spent a substantial amount of time in Japan over the past 20 years, I agree and I’m struck with a tremendously foreboding sense of déjà vu that I just can’t shake no matter how hard I try.

What happened in Japan is being replayed in the United States – in exquisite detail, and with a bit of agony, too. Since 2001, I’ve been warning anyone who would listen that the Japanese experience was only a precursor to what we could experience here.

Naturally, that’s been a controversial view, particularly since it’s virtually unthinkable for an entire generation of politicians and financiers who thought they “knew better” and that it could never happen to us.

But lately, it’s not so unthinkable. In fact, if I were to take the names out of the Japanese experience, the story could easily be the one that’s unfolding now.
In the late 1980s, Japanese companies ran the planet. A strong currency, solid work ethic and close government connections created an unstoppable growth machine – referred to by the U.S. media as the “Japanese juggernaut,” or the “Japanese Superman.”

In the interest of additional growth and financial modernization, Japan deregulated its financial markets and began lowering interest rates. Not surprisingly, the Nikkei 225 stock index more than tripled in less than five years, companies blossomed and the use of debt skyrocketed.

Sound familiar?

Then all hell broke loose.

At the same time, real estate values began to waver, the government figured out that the entire Japanese financial system was a house of cards leveraged against collateral that didn’t exist and that wasn’t properly valued in the first place. And the Nikkei has collapsed to where it stands today – at one-fifth the value it had attained in 1989.

Once-stalwart companies began defaulting on loans and many went out of business entirely. Individuals couldn’t repay their debts. Real estate values fell dramatically and today remain as much as 50% below their 1989 peak. People simply turned over the keys to their homes to the banks or, like the family immediately behind our house in Kyoto, simply disappeared in the middle of the night, never to be seen again.

Unemployment rose to an unthinkable 5.5%. Suicides soared. And homeless camps, which Japan had never seen before in the post-war era, go-go years, dotted the banks of the rivers that wind their way through major cities like Tokyo and Osaka. In our neighborhood, the Kyoto city government built a brand new bathroom building for the children’s playground only to watch as a troop of six homeless men moved in – and refused to leave for the next four years. We also watched ubiquitous, blue-tarped “houses” appear under each bridge spanning the scenic Kamo River.

They disappeared when Japan’s economy improved in the late 1990s, or early this decade. They’re back now.

Making matters far worse, at the same time all of this was happening, deflation set in with a vengeance and brought matters full circle. Lower prices meant lower margins. Lower margins meant lower production and the need for lower production, in turn, created the need for smaller work forces.

Fast forward to today.

A Painful Replay

This same downward spiral that played out in Japan in the early 1990s seems to have taken hold here in the United States. Economists called this “excess” capacity and said that a short period of readjustment would be followed by new growth. But instead, they’ve gotten just more misery punctuated by a few fits and starts of economic recovery. And the resultant record job cuts hardly point to an imminent turnaround.

Even so, many people here in the United States remain in denial. They simply cannot accept that what happened in Japan appears to be replaying itself out here. They reason that our government is taking more aggressive action than the Japanese government did, that our corporations are better managed, that somehow they’ll pull through based on demand and, my personal favorite, that our bubble simply wasn’t the same as Japan’s.

They’re right … it’s worse.

According to a report in the Global Mail, in 1989 the Japanese economy needed a mere three yen of credit to make one yen of national income. Here in the United States, we’ve needed $8 dollars of credit for every $1 dollar of national income. And we may need more. In Japan, the “bubble” grew for only a few relatively intense years from 1985-1991. Here in the United States, it’s been allowed to fester for 30 years.

When the Japan’s bubble broke, it was a creditor nation, which means, overall, there was more money flowing into Japan than out. At the time, Japan had $1 billion surplus on any given day.

When the U.S. financial crisis started, this country was running a $2 trillion deficit, meaning we’ve spent that much more than we earn as a nation. Now, factoring in the stimulus plans and all sorts of bailouts, we’re arguably approaching $14 trillion.

In 1990, the Japanese were saving 17% of their income. At the moment, Americans have practically no savings to fall back upon and our savings rate has, in fact, gone negative several times in recent years (however, some reports indicate that U.S. savings rates have risen in recent months).

But what really makes me stop and think twice is this: At the time Japan’s bubble burst, the island nation still had extensive trade with its partners, and consumers around the world were spending. So there was a cushion. This time around, spending has ground to a halt and there literally is no safety buffer.
Just last week, in fact, Money Morning reported that Japan’s exports were cut nearly in half last month as the global downturn crushed demand for the country’s electronics and automobiles, a development that increases the odds that the Japanese yen could be poised for a tumble.

That, more than any reason is why the U.S. government – right or wrong – has stepped in to become the risk taker of last resort.

While that may actually be a good thing from the standpoint of intent, it hasn’t been great from an execution standpoint.

In as much as the U.S. stimulus programs being enacted by central bankers around the world will eventually take hold, that suggests that investors should continue to invest – albeit super selectively – throughout this mess in a couple of areas:

• Bond markets are especially overbought and I can’t think of more spectacular profit potential particularly at the long end of the spectrum. The U.S. government may borrow as much as $3 trillion dollars in 2009 alone, and it’s likely rising rates are not far behind.
• The Japanese yen itself seems ripe for a fall, so shorting both the Japanese markets and the yen itself may wind up being an outstanding choice, especially once the reality of falling global demand sets in.
• And, of course, infrastructure. Despite the fact that the world is pulling in its horns, the infrastructure we use is not getting any younger particularly with regard to electricity. Even if expansion plans are put on hold, existing grids will require repair and constant upkeep. The last thing any government will let happen is a complete collapse of the power grid, because it would mean the end of civilization as we know it, thanks to the social chaos that would ensue.

Source: Although Experts Said it Could Never Happen, U.S. Crisis Looking Like a Repeat of Japan’s “Lost Decade”

All three began in early September.  All three saw the big selling in late October. Both in the case of ’29 and ’09 a near-term bottom was hit in mid-November.

“Moreover, the percentage declines,” writes Dominic Frisby at MoneyMorning, “were virtually identical. An initial decline from the high to a late October low of about 40%, then a rebound of about 15%, followed by a final low in late November – down about another 22%. The parallels are uncanny.

“The worrying thing…it is not unreasonable to expect the eventual low to come no earlier than 2010-11.”

After the initial lows were hit in the Crash of 1873, a rebound continued until May of the following year. After the Crash of ’29, the rebound continued until late April of the following year. In the case of the 1873 sell-off, the final low was not hit until four years later, and in the case of the ’29, the final low was hit in 1932, with stocks 90% below their peaks.

This time the rebound following the November low only recovered 15% of the losses…then, stocks headed down again…and have just now slipped to a new low. If the pattern of the previous two major crashes continues; the final low won’t come for a couple years.

Unless we have a Japan-style slump…in which case, it will take much, much longer. Everything keeps falling in the land of the rising sun. Exports have fallen 45%. And stocks are now at a 26-year low. If we follow that pattern, the eventual low in the Dow may not come until 2019…when stocks will be back to 1994 levels.

And just look at what has already happened to some of America’s leading companies. Citigroup is down 90% from its high. You can buy a share for just $2. But be careful. A government takeover could wipe out the shareholders. The Bank of America has lost 90% of its value. GM is only worth about 3% of what it once was.

JP Morgan (NYSE:JPM) cut its dividend by 87%…to just 5 cents a share. Overall, dividends are being cut by a record amount.

Yesterday, the Dow fell again – down 80 points. We have been estimating that it would fall to between 3,000-5,000. But we are eternal optimists. Always looking on the bright side – every glass has a silver lining…and every cloud is half-full! But if the stock market repeats the experience of ’29, it will fall below 2,000.

Frisby reminds us that Bob Prechter has been right about deflation, but wrong about how gold would react to it. Prechter assumed that the price of gold would fall along with everything else. Instead, gold resisted the general downtrend and now seems to be moving in the opposite direction. How come?

We explained it yesterday. Investors aren’t buying gold as a protection against inflation; they’re buying it to protect themselves against deflation. Markets are always trying to figure out what things are worth. At times like this, it becomes obvious that they’re not worth nearly as much as people thought. One company doesn’t have enough sales to pay its overhead. Another can’t make its debt payments. One counterparty fails. Another was counting on that counterparty to pay a third.

When investors buy a stock…they wonder: does this company have unseen liabilities…hidden losses? How will it survive the financial crisis? Will it flourish in the post-bubble economy?

Even if the company is solid…what about the firms that owe it money? What about the firm’s assets? What about its bank account? What about the bank itself?

Question marks had been unwanted and unloved during the boom period. Everyone was so sure of everything. Every sentence was declaratory – stating a fact: ‘Stocks always go up in the long run.’ ‘You can’t go wrong in housing.’ ‘America has the world’s most dynamic and flexible financial system, where risks are spread thanks to the use of derivative instruments.’

Now, suddenly, question marks are in demand. People are pulling them out of closets and desk drawers; there’s hardly a sentence that doesn’t seem to need one. Every one of them is an interrogatory: ‘When will this bear market end?’ ‘What do you mean you can’t pay me?’ ‘Are you doing any hiring?’

Investors buy gold because they want something that doesn’t have a question mark behind it. Does the yellow metal depends on its lenders? No. Are its earnings at risk? No. Does it have any toxic assets? No.

Gold is what it is…and nothing more. Useless most of the time; occasionally indispensable.

*** Uh oh… gold is putting in a “double top” says Frisby:

“I remain convinced of gold’s long-term future, but it looks like we are in the early stages of an intermediate correction.

“I suppose a 50% retracement of the gains since October is not an unreasonable target. That would take us back to the $850 area. (It would also give us a superbly bullish, inverted head-and-shoulders pattern – more on that another day). I said in my new year predictions in MoneyWeek magazine that a retest of $1,000 was likely in the first part of the year, but that gold would not break through $1,000 until next autumn or winter. We still seem to be on course for that. For now though, the late February to March seasonal correction for gold is playing out to the script…”

*** Gold is correcting from its recent high. It rose over $1,000 last week. Since then, it’s been giving ground. Yesterday, for example, it lost $3 more…taking it down to $966. Colleague Byron King ruminates on the subject:

“It’s as if the ancient Chinese or Babylonians or Etruscans all figured out how things work in the universe of money, savings and exchange. The trick was to use gold as the key unit of monetary measure. They figured it out back in ancient days. They all had their own Galileo who explained the monetary equivalent of how planets orbit the sun, moons orbit the planets…how the universe worked…except it was that their Galileos explained the meaning of gold. When you have gold, you possess wealth. And it keeps your society honest.

“And in the 20th century, along came the central bankers of the world… modern monetary Copernicuses, of a sort. ‘No,’ they said. ‘Gold is irrelevant. It’s a barbarous relic.’ It’s the monetary equivalent of saying that the planets all orbit around the earth. So no wonder that nobody in modern monetary theory can explain anything, or solve the current mess. Just as you can’t explain the positions of the planets with Copernican methods, modern monetarism is unable to explain why the economy has frozen and won’t get moving again. No one can trust the money. The modern financiers created so much fake currency, that nobody trusts anybody anymore.”

*** There are 19 million empty houses in America. In Maricopa, Arizona, you can buy a house for $69,000, says a news report.

“Heck, you can buy good houses for just $50,000 in the Miami area,” reports a friend. “I’m beginning to think that property is the best investment I can make now. Stocks could fall another 50%. I’ve got municipal bonds, but who knows what towns are going broke. I don’t trust the dollar. What else can I do?

“I buy a decent house and I know what I’ve got. And right now, I can rent those $50,000 houses for $1,000 a month. So, figuring I miss a few months, I’ll get a gross return of 20% per year. I pay my expenses for half of that. So, I’m getting a very good yield. And I don’t think they will go down much further.”

*** Want an even better yield? As you know, we try to keep up with events in Argentina. The country is a mess, of course…but it’s always a mess. A major drought is killing thousands of cattle (we’re selling ours as fast as we can find buyers). And the government is losing whatever little credibility it ever had.

All of these factors, combined with the worldwide financial meltdown, hit Argentine debt like an Australian brush fire. Debt fell 58%. Yields rose to 30% in October ’08.

Since then, investors have calmed down. And now, analysts from Fidelity say they think the Argentine 8.23% bonds of 2033 are a good by. They say the government has enough money to keep going for a couple years. So, investors can collect a 25% yield while they wait for the government to go broke.

Source: Gold: The Barbarous Relic You Can Trust

The currencies had a split personality while I was gone too… At first, they rallied like there was no tomorrow, but then sold off, and then range traded. So, we’ll finish the year on a down note for most of the currencies, but knowing all too well that the markets are beginning to realize that the debts the U.S. is chalking up are not going to go away, and in fact they’re just going to get worse, and that spells bad times for the dollar… Eventually…

I did a lot of reading on my vacation, and the book I read the most was one by Christopher Wood, titled: The Bubble Economy… Now, on first take you would think that he was talking about the U.S…. But that would be wrong… This is an old book, and was written about Japan’s economy in the 90’s… I’ve spent a ton of time talking about the similarities between Japan then, and the U.S. now. And this book, just brings those thoughts even closer! For instance… In the book he quote the Levy Institute circa 1991… “monetary policy would not, on its own, be able to restart a depressed economy suffering from asset deflation and widespread financial crisis, for lower interest rates cannot motivate fixed investment when the market is glutted with existing assets worth much less than it costs to replace them.”

Oh my! We’re turning Japanese, I really think so!

So… Then this weekend, a Pfennig reader sent me a link to a story on Bloomberg regarding the Japanese… Here’s a snippet… “Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.”

Well…the “rest of the story” can be read by clicking here.

As I write, the euro is back on the attack VS the dollar, with it trading above 1.43 once again. There has been a 2 figure move up in the euro from just last night, as it appears that the markets are running from the dollar with the Israeli / Gaza thing going on. The Swiss franc is back above 95-cents, and so on… I also noticed, while on vacation, that the Aussie dollar bounced nicely off its 65-cent level. And Commodities staged a nice rally / comeback while I was gone. Gold is trading around $880 again…

When I left, I had told you about a Santa Rally for the euro, and it did just that, even with the profit taking after reaching 1.45, it’s still much higher than it was when I said that we should look for a Santa Rally. I also was hinting that the Trading Theme that we’ve seen in place since July, was beginning to show chinks in the armor. Those chinks are becoming major exposed areas, as the markets are returning to focus on the fundamentals the hang over the U.S economy and dollar like the Sword of Damocles.

So… I see that the Fed has opened the door to grease the tracks to make GMAC a “bank-holding company” Why? Ahhh grasshopper… If GMAC is a bank holding company, they would be eligible for TARP funds, which would put them on the fast tracks to obtaining taxpayer bailout funding.

The thing I see happening now is that “everyone and their brother” is going to line up for taxpayer bailout funding… We’ve already set the stages for car loans, and student loans, and next we’ll get real estate guys and who knows what else! Everyone is lining up at the Government bailout trough…

So, thanks guys… Thanks for running up the taxpayer costs… Thanks for making it possible that my grandchildren will be burdened with these unbelievable financing costs of all this debt we’re building… Thanks… But no thanks!

It’s all sort of like Humpty Dumpty isn’t it? You know, all the king’s men and all the king’s horses couldn’t put Humpty Dumpty back together again. All the Big Ben Bernankes and Henry Paulsons are trying to put the economy back together again, but it “ain’t happenin”! Just shows to go you that they should have left it all alone… Let it fail… Then pick up the pieces and begin again… I’ve had a few people along the way that tell me that I don’t offer solutions all I do is pick at the wounds… But they just don’t read into what I’m typing each morning… I’ve said all along that we would end up in a debt ridden society if we didn’t stop spending… So, there’s one solution… STOP SPENDING! And then I warned that these bailouts that began last spring with the $150 Billion in checks to consumers, was going to put us on the road to turning Japanese, and we should have let things go their normal business course… There was another solution!

Now, that we’re here in this quagmire of debt and there’s more coming folks… I recall telling Chris while I was gone that there are rumors that the next bailout amount could reach $1 Trillion! But now that we’re here, what’s a poor boy to do? Well… For me, it’s called savings… And when things look really bad, and prices have fallen to the core, then I’ll put those savings to work, and if everyone does the same, the economy will grow once again, but from a lower base, which is a good thing. Of course, should everyone begin to spend their savings at once, this will bring about inflation that comes out our ears, but let’s worry about that then, eh? Besides, like no one really thinks that with interest rates near zero, and all this money going into the system, that eventually we won’t have an inflation problem do they?

OK… Now, that was a lot to get off my chest on my first day back, eh?

We didn’t see any economic data on Friday after Christmas, so one would think that there’s some catching up to do this week to end the year. But the data cupboard is empty today too! And it looks like those that are responsible for restocking the data cupboard, have taken this week off too… One piece of data we will get is the ISM (manufacturing) Index for this month… And remember when this index was hovering around the contraction/ expansion level of 50 and I kept saying that it was going to go below it and fall? Well, the index number in Nov. stood at 36.2, that’s a long way from 50, eh? And the “experts” have forecast another fall to levels not seen since 1980! UGH! Now… Early last fall I fretted about the reversal in the weak dollar and its affect on manufacturing… Exports had just posted a strong performance in the 2nd QTR, boosting GDP, because the dollar was so darn weak! Well, I said then, that those wishing for a stronger dollar had better be careful for what they wish for…

So, with the trading desks still undermanned the volumes will be thin for the most part, unless… We see a ton of “book squaring” today, to settle before the end of the year… Either way, we need to be aware of the fact that thin volumes can cause wild swings in the currencies… Take last night’s action for instance. When I went to bed the euro was trading 1.4130, and that looked pretty darn good to me… But when I turned on the screens, here in the office, this morning, what did my wondering eyes did appear, but the euro trading at 1.4350!

This rally means the euro is only down 2.5% from a year ago, which is far better than it was showing a month ago! And the best performer of 2008? Like you didn’t know! It was Japanese yen, up 24.7% since last year! WOW! Of course there are some real “problem children” in the currency performance roster… Aussie, kiwi, pound sterling, loonies, and krone are all showing pitiful performances for 2008… But, if the recent price action is any indication of what could happen in 2009, if we return to the fundamentals, then these pitiful performances might get put in the rear view mirror…

U.S. Treasury Sec. Henry Paulson is just about at the end of his “tour of duty”, and you’ve got to think that he can’t wait for the new administration to take over! I don’t doubt for a minute that the new Treasury Sec. will pull back on the bailouts… But what I do question, with Paulson leaving, is what happens with China? Paulson didn’t make the progress with China that he set out to make, but what he did do is keep the knuckleheads in D.C. from slapping trade tariffs on China… I have to wonder if that will be the direction of the new Secretary… If it is, then that won’t be good for the dollar, as protectionism is never viewed as a positive for a currency. So, those questions and more are on the docket for 2009…

I received quite a few emails from readers while on vacation with a question about something that another newsletter writer wrote about the euro / dollar… The writer believed that deflation was going to be a big problem for the U.S. next year, and that would be a good thing for the dollar, thus pushing the euro to parity. Hmmm… Well, that may be true, for I don’t know what’s going to REALLY HAPPEN! But! I would just have to say that since we’re mirroring Japan so much, let’s go back and look at what deflation did for the yen in the late 90’s when deflation was so prevalent… Oh, it doesn’t look like deflation did yen any favors then… And I doubt it will do the dollar any favors this time around… So, there’s my answer to that call by someone else… To me, though, this is all good, as it still means that there is a two-way trade, and that not everyone is on the same side of the ship!

So… Before I head to the Big Finish, let me re-cap today’s action so far… The dollar has been hammered overnight on fears that the Israeli attacks on Hamas in the Gaza Strip will disrupt oil supplies to the U.S. This has driven the price of oil higher to $40.40, and has caused a traders to unload dollars… The data cupboard is empty today, and trading desks are undermanned, which could cause wild swings in the currencies this week.

Currencies today 12/29/08: A$ .6965, kiwi .5850, C$ .8210, euro 1.4355, sterling 1.4670, Swiss .9585, ISK 143.20, rand 9.55, krone 6.95, SEK 7.67, forint 186.10, zloty 2.9050, koruna 18.54, yen 90, baht 35, sing 1.4370, HKD 7.6710, INR 48.42, China 6.8525, pesos 13.46, BRL 2.3450, dollar index 79.70, Oil $40.40, Silver $11, and Gold $885.80

Source: A HUGE Currency Rally!

The world’s largest economy, as you already know, is in recession too. In the U.S., financial capitalism is imploding. Citigroup’s CEO Vikram Pandit told analysts the company would lay off over 50,000 workers. He cited rising loan losses and an economy slowing much faster than the company previously expected.

Gulp.

As over-sold as we believe Australian stocks are at the moment, we’d be foolish to ignore the warning signs flashed yesterday all over the globe. Bill had better take down the crash alert flag and run up the depression alert flat.

World GDP is around $54 trillion. The U.S., Japan, and Europe combined have a GDP of $33 trillion (according to 2007 IMF figures). When 60% of the world’s economy is in recession (and the majority of the developed world) it cannot be a good sign for anyone…including manufactures of finished goods and producers of raw materials (China and Australia).

If you operate on the premise that share markets lead stock markets, then there’s the chance that this synchronised global recession is already factored into share prices. We know the small Aussie juniors are down 50%, 60%, or more from their highs. And as the chart below shows, the All Ordinaries has matched the S&P 500’s historic decline from the October 2007 highs.

If there’s any good news, it’s that Aussie stocks have underperformed the S&P for most of the third quarter. The S&P has lately caught up. But now we must seriously reckon with the possibility that the current world recession could turn into the first word depression. If that is indeed the case, then the argument for buying any shares at all gets that much harder to make.

Enter stage right Jim Lennon, resource analyst at Macquarie Group. Lennon published a research note last night in which he and his team forecast a 60% decline in 2009 coal prices, a 20% decline in iron ore prices, and a 40% decline across the board in base metals. It wasn’t quite metals Armageddon, but you could hear some of the seals popping with each forecast.

Keep in mind coal and iron ore are coming off big years in 2008, where thermal and coking coal were up triple digits and iron ore an average of 85%. In other words, the declines are coming off a big increase. But let’s not sugar coat it. These are sobering forecasts for resource demand and for resource producers.

Comm Sec analyst Savanth Sebastian says, “If it [Lennon's forecast] was the case, you’d see a lot of marginal mining projects go under and as a result you’d see a lot of processing plants close up shop,” he said. Unemployment will rise – maybe as high as 10 per cent – spending will be cut back, property prices will fall, wealth levels will fall. It suggests that overall things will be very grim and very dire.”

We wish we could tell you with conviction whether the worst of a global recession is already priced into shares are not. But no one can know. All we can say for sure is that if we are on the edge of Japan-like 15-year global debt/deflation recession/depression, then stocks will be a horrible place to be.

If you’re going to be in the market though, then you want to want to keep looking for those businesses and sectors that throw off cash, don’t have a lot of debt, don’t require huge infusions of capital to generate new income, and are located in the few industries in the global economy where good things are still happening.

Speaking of which, Diggers and Drillers editor Al Robinson just published his newest research today for paid up readers. As we’ve said, we realise a lot of readers are looking at the market and deciding to forgo it altogether. But our analyst team is still on the case, looking for the best ideas. You’d be surprised what you can buy on the cheap these days. This month, Al took a close look at the uranium industry in Australia…and found something he really liked.

It may be good timing. Western Australia’s Liberal government has fulfilled its campaign promise and officially lifted its ban on new uranium mines. The action affects some 1,475 mining leases in WA.

Premier Colin Barnett told the press that WA, “Is now open to the mining industry in this state, if they so wish, to proceed with plans to develop the uranium industry…We are the world’s leading mining economy and it’s always struck me as odd that we would have a ban on uranium mining when that is one of the areas of growth into the future,” he’s quoted as saying in today’s Australian.

What’s do you get when you mix recession and depression? Repression.

Source: Europe and Japan are in recession