This from Taipan Publishing Group:

The world is clearly afraid that “Great Depression 2.0” could be at hand. Downturns come and go, but the global economy as a whole hasn’t contracted since the 1930s. Some think it could happen again next year.

We hear less about it in the news, but there is another fear that keeps investors up at night – the off chance that America turns into Japan.

The Nikkei index has made a truly awful round-trip. It’s as if Japanese equities had been transported in a time machine all the way back to 1983.

If U.S. equities were to take a similar trip, we would have to see the Dow fall below 800 – more than a 90% drop from today’s depressed levels.

But there are some powerful arguments as to why this won’t happen. In fact, if things go deeply wrong in 2009, America is more likely to look like Zimbabwe than Japan.

A Vivid Example

For one thing, the powers that be have Japan’s example staring them in the face. In hindsight, we can clearly see many of the things we don’t want to do.

Some of Japan’s key errors leading to the “lost decade” – now lost quarter century – were these:

• Propping up “zombie” companies that should have been allowed to fail.
• Being forever guilty of “too little, too late” in regard to aggressive monetary policy.
• Dropping the hammer too quickly whenever signs of inflation appeared.
• Tolerating the Keiretsu system in which entrenched managements locked arms to block change.

Of those four mistakes, the United States is most in danger of emulating the first.

When government gets into the business of picking winners and losers (or propping up the losers), the invisible hand of markets is stymied. The market relies on an ongoing process of “creative destruction” to channel capital to areas where it is most needed – and to drain it away from areas where it is not.

When we get in the way of that flow, our meddling tends to gum things up. As U.S. policies become ever more hands-on, this danger increases.

Fortunately the long-term risk is lower in this area because the creative destruction tides are stronger. America’s entrepreneurial culture stands in sharp contrast to the old Japanese motto, “the nail that sticks up gets hammered.”

Going for the Gusto

Washington will be sorely tempted to meddle in many unhelpful ways. One mistake the Obama administration will not make, however, is that of “too little, too late” on the stimulus side.

Larry Summers, one of the key members of the Obama “brain trust,” has clearly stated his view that, in times of crisis, doing too little carries far more danger than doing too much.

It’s like trying to put out a house fire in some respects. If you use too much water, that’s okay – the house might be waterlogged but it will still be saved. Don’t use enough water, however, and the house is in real danger of burning to the ground.

This is why the Obama administration is planning a $700 billion stimulus package for starters, and will have no fear of spending more if the situation calls for it. Britain is thinking along similar lines. No government wants to copy the Japan experience – the risk is too great. In the name of the greater good, fiscal propriety is thus being thrown out the window.

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Quantitative Easing

Ben Bernanke is a big fan of going for the gusto too. The Fed is now embarking on an aggressive campaign of “quantitative easing,” much like Japan did earlier on – but with some important differences.

Stephen Jen and Spyros Andreopoulos of Morgan Stanley point out that, for the U.S. Federal Reserve, “quantitative easing” means three broad strokes:

• Telegraphing to markets that interest rates will stay low for a very long time.
• Drastically expanding the Federal Reserve balance sheet – to wit, printing money. (When the Fed buys assets for its balance sheet, the banks that sell those assets get new dollars that circulate into the system.)
• Buying large quantities of U.S. Treasuries outright.

The first two elements are already underway. The third has been all but promised by Ben Bernanke. Part of the reason treasury yields dropped to record lows – and prices soared to record highs – is because Bernanke has openly stated that the Fed may buy treasuries outright, targeting long-term as well as short-term interest rates.

Use It or Lose It

You can think of the Fed’s quantitative easing as a form of friendly blackmail to force savers out of cash and treasuries and back into productive lending and investing activities.

For banks, consumers and businesses alike, the strong temptation is just to hunker down amidst all this turmoil. Safe government bonds and money in the mattress – i.e. three-month Treasury bills and other cash equivalents – are the way to do that.

But if everyone hunkers down, the economy stays in the tank.

So the Fed in effect says, “We are going to penalize all you hunker-downers for holding onto T-bonds and cash. If you keep your money in dollars, you’re going to get burned as we flood the system with dollars. If you try to buy bonds, we’ll be in there buying too… pushing bond prices ridiculously high and long-term yields ridiculously low.”

It’s basically a question of “use it or lose it.” As we have stated before in these pages, inflation is a form of hidden tax. Through aggressive pursuit of inflationary monetary policies, the Fed seeks to tax the daylights out of dead money in order to get things moving again.

Someone’s Gonna Spend It

The main reason America won’t look like Japan is because we know the stakes now. The Fed, the Treasury and the incoming Obama administration are all focused on the dangers of doing too little, rather than doing too much.

So they will do whatever it takes in that respect – with little to no regard for the inflationary forces that are stirred up. That’s the legacy of Japan’s historic tendency to slam on the brakes at any small sign of inflation. We’ve learned to lay off the brakes and hit the gas instead.

And if you and I don’t get out there and lend and spend, the government will. All the panicked investors buying Treasury bonds hand over fist may have safety on their minds first and foremost, but what they forget is that they are lending to Uncle Sam. And Uncle Sam is not afraid to run wild.

We have already seen the Fed and Treasury “leverage up” to the tune of trillions. If 2009 is as rough as some forecasters fear, then the government’s leveraging up has only just begun. To keep socking away money in cash and treasuries will only encourage the torrent of spending to pour forth.

To sum up, we won’t walk down Japan’s road because we have seen that road, we know where it leads, and we will avoid it by any means necessary. And I do mean any. While Japan embarked on its own path of “quantitative easing,” the measures taken were timid, uncreative and downright puny in comparison to what the U.S. government is prepared to do.

If we err, it will not be on the side of caution. It will be on the side of breathtaking aggression. That’s the monetary policy lesson learned. If nothing else, the implications of this are surprisingly positive for equities.

The Endorsement From Hell

The frightening aspect of all this is what we haven’t learned – and the risks we are taking with our no-holds-barred, win-at-all-costs mindset.

As Marc Faber and others have pointed out, the USA and UK monetary authorities received the endorsement from hell earlier this year – a thumbs up from the Reserve Bank of Zimbabwe.

On Page 9 of the RBZ’s “First Quarter Monetary Policy Statement,” Dr. G. Gono, Governor of the Reserve Bank of Zimbabwe, gives the following praise (bold emphasis his):

Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

As of July 2008 (the latest month for which figures have been calculated), Zimbabwe’s inflation rate hit 231,000,000%. You read that right: two hundred and thirty-one million percent.

Hard assets anyone?

Source: Why America Won’t Look Like Japan

Well… Nothing has changed since I left you last Wednesday. The awful economic data just keeps piling on, and the dollar gets bid up on safe haven purchases. We did see the Eurozone and Japan announce that they are in a recession… Chris was kind enough to leave me the following, so here’s some more Chris….

“The dollar weakened slightly after the US Industrial production numbers showed a rebound in October. The 1.3% monthly gain sounds great, but it followed September’s drop of 3.7% due to the Gulf Coast hurricanes. After adjusting for the effect of the hurricanes and a strike at Boeing, output dropped .7 percent during each of the past two months. The trend continues to be very weak, and the recession which currently grips the US is now expected to last through 2010.

The US was rescued from the last two recessions by US consumers, who continued to borrow and spend right through the previous slowdowns. But we can’t count on consumers to pull us out of this one. Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture for the US consumers. The number of personal bankruptcy filings jumped nearly 8 percent in October from September. Filings totaled 108,595, surpassing 100,000 for the first time since the bankruptcy laws were changed in 2005. The number of filings were up nearly 34 percent from October 2007, and are expected to total over 1.2 million for the year.

Not only are bankruptcy filings up, but most filers have much more credit card debt than in years past. A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debt, and about 44 percent more in unsecured debts like credit cards than those that filed in 2001. Don’t count on US consumers to rescue us this time, so who will? Pelosi and President elect Obama are already talking about increasing government spending to try and borrow and spend our way out, but any stimulus or massive government projects will only add to the overall debt and increase the deficits. We are already being crushed by our debt load, and increasing it won’t be a long term positive for the US. The dollar continues to be propped up by safe haven purchases and the global deleveraging, but this dollar strength can’t continue. Once we return to the underlying fundamentals, the dollar will fall.”

OK… Thanks once again, Chris!

The BIG NEWS today should come in the form of a testimony by Treasury Sec. Paulson, regarding his TARP… This should be interesting folks… You see there is a whispering campaign to withdraw the “blank check” that lawmakers gave to Paulson and Fed Chairman, Big Ben Bernanke, and any attempt to not fully disclose the details of what has been given out to date, or… Any more changing of horses in the middle of the stream, could cause a ruckus. It could also cause the safe haven boys and girls to go “all in” on their safe haven purchases, because, it will be just like last week, when Paulson did change his course for the $700 Billion bailout money, and the blanket of “unknown” was cast upon the markets, and the risk takers ran for the hills.

In other words… The Trading Theme that is in place that rewards the dollar when things look darker in the U.S. will be working overtime, buying dollars…

For the sake of honesty… And not that I’m cheerleading the currencies (I get real tired of this… Recently I’ve had some readers turn on me and accuse me of “knowing nothing” and being nothing more than a “cheerleader”) Come on! Can’t you see the forest from the trees? This is simply telling it like it is… WE have a HUGE deficit problem, and unless you are willing to begin paying taxes that amount to about 75% of your income to pay the deficit down, then we need to get the dollar weaker now, for that’s the only way we’re going to be able to pay down the interest alone on these debt obligations is with a cheaper dollar! So, yes, I push for that dollar to get weaker now, so that the tax obligations of my kids and grand kids aren’t oppressive!

OK, sorry but I had to get that off my chest… So, for the sake of honesty, let’s hope Paulson comes to the lawmakers with a cup of honest, and let the chips fall where they will. Oh! And yesterday, the Wall Street Journal reported that Paulson is unlikely to launch new bailout (the used “rescue” but we all know what it is!) programs, saving his unused horde of cash to hand over to the new Treasury Sec. and say, “here you go, spend it wisely, but just between you and me, this isn’t enough to help anything”

Judging from happened in the overnight stock markets, with the risk takers nowhere to be found, the consensus being the overnight markets don’t believe Paulson will deliver the goods, and stocks sold off in Asia and early Europe… I suspect that the U.S. market will take a cue from those overnight markets as well, at least until Paulson talks… And the Dow only has 273.58 points to give before falling below 8,000… UGH!

All those “Safe Haven buyers” must really be “scaredy cats” because as I look at the bond screens, I see that you will get 13 basis points for a 3-month T-Bill, and 80 basis points for a 6-month T-Bill… By the time the broker takes his fee or commission you are left with nothing! So, that’s the same as putting the money under your mattress or stuffing it in coffee cans and burying it in the back yard! And, if you want to talk long notes and bonds… Well, you’ll have to go to the 30-year bond before you can get yield that comes near to covering the inflation rate! Uh-Oh! Negative real earnings for the “safe haven buyers”…

How long can that continue? How long… Can this be going on? How long… Can this be going on? How long are these guys and girls going to accept negative real earnings? That’s the $64 question… But, I have to believe that once these “safe haven buyers” decide that they’ve had enough, the unwinding will go very quickly, and the whiplash we’ll receive from watching yields turn around will hurt!

And, with the unwinding of the “safe haven buys” one would think that the dollar gets put on it ear once again… That is unless there’s a new “hoola-hoop” for investors to move into… But since there’s no “hoola-hoop” to speak of, and probably won’t be, given the fact that the regulators will be scrutinizing “new instruments” to make sure they “don’t get fooled again”…

Did you see the news yesterday that Citgroup plans to cut 50,000 jobs? That’s just awful! And if true, will be the latest jolt to Wall Street! Chief Executive Vikram Pandit addressed employees in a town hall-style meeting Monday morning, giving them the bad news. These job cuts won’t take place overnight… And that they plan to be finished with them by the 3rd QTR of 2009.

The data cupboard today will give us a look at the Producer Price Index (PPI) (wholesale inflation), which is expected to fall from previous printings, as Oil prices have fallen faster than anyone and I mean anyone could have imagined. We’ll also see the TIC Flows (net security purchase by foreigners) for September… This data should see some improvement, but remain well below the figure needed to finance the current account deficit.

Yesterday, Capacity Utilization printed for October, and improved (on first glance, wait for the revision) on September’s revised downward figure of 75.5%… Capacity Utilization has long been a fave piece of economic data of mine due to the fact that it is one of the very few / rare pieces of data that is forward looking. Capacity Utilization weakness was one of the factors I used in calling the recession in the U.S. back in January. Capacity Utilization and the ISM Index (manufacturing)…

So, how about that stirring communiqué’ from the G-20 crowd! I was moved! The chills went down my spine, my eyes filled with tears of joy, it was something to behold! Oh? They didn’t do all that? I must have been dreaming, eh?

What a joke! These leaders from around the world met and didn’t come up with anything other than rhetorical direction only? Fire them all! Throw the bums out! This is ridiculous! It just shows me that they are probably more interested in pointing fingers than actually agreeing to work together to deal with this global problem.

So… Look for more of the Trading Theme today, folks. The deeper, darker, more dangerous clouds are moving back in over the U.S. economy.

Currencies today 11/18/08: A$ .6465, kiwi .55, C$ .8115, euro 1.2635, sterling 1.5040, Swiss .8345, ISK 182, rand 10.2850, krone 7.0180, SEK 8.0425, forint 214.40, zloty 3.0475, koruna 20.4280, yen 96.10, baht 35, sing 1.5270, HKD 7.75, INR 49.65, China 6.8280, pesos 13.22, BRL 2.3215, dollar index 87.07, Oil $54.80, Silver $9.35, and Gold… $736.75

Source: TARP Testimony Today

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

The bloodletting continues.

On Friday the 15-nation Euro-zone announced that it is officially in a recession. GDP contracted by 0.2% for a second consecutive quarter over on the continent with Germany and Italy leading the way backwards. France narrowly escaped an “official” recession – two consecutive quarters of negative growth – by the narrowest of margins, posting 0.1% growth.

It has been 15 years since the last time Europe experienced such a large-scale downturn. Back then, of course, each country was able to act independently on monetary policy. Now they must seek permission from EU executive before rushing to save their own behinds. We wonder how the bureaucratic behemoth is taking the news and, more to the point, how it will react.

Socialist E.U. MPs were quick to satisfy our curiosity, outlining their solutions hours after the recession was announced in a report containing five helpful tips on how to deal with it. They read:

• Targeting measures to help on those who need it most and in particular small firms and vulnerable households. This will involve rapidly restoring levels of lending to households and businesses, especially SMEs
• A European ban on mega-bonuses and golden parachutes;
• Refusal of compulsory redundancies
• Implementation of a European Green Investment package to boost the economy, avoid a long-lasting recession and help Europe to meets its climate and energy goals
• Revival of the Doha world trade talks to reach successful, development-friendly conclusions.

Let’s see here… We’ve got a promise of more talking, an increase in needs-based lending, protectionism in the job market, oversight on private compensation and a twist of environ-socialism, just to keep the voters happy. We’ll be interested to see how that turns out for them.

Meanwhile in capitalist Japan, the world’s second largest economy is losing fluids quicker than like a hemophiliac in a samurai fight. It too announced this morning that the long gray cloud of recession hangs over its islands. Growth there slowed 0.1% during the past three months, on top of a 0.9% slump the previous quarter.

It seems recession known’s no party lines.

Here in the Middle East, where the political process has scarcely evolved beyond medieval feudalism, markets continue their relentless slide, wiping out billions of investor dollars and bringing the much-lauded real estate sector to its knees.

Since July 1, Dubai’s real estate index has shed a stunning 75%. Emaar, the largest developer in the region, has fallen more than 57% in the past seven trading days alone! When even the king’s newspapers start using words like “battered” and “thrashed,” you know you’re in trouble.

Preposterous as it may seem, the expectations of kings, prime ministers, dictators and the Joe the Plumbers of the world now rest on the shoulders of one man.

Source: Recession Runs Rampant