So with some historic irony, one year and two weeks after Lehman Bros. bit the dust, another debt-burdened, credit-reliant, potentially “too big to fail” institution is looking to either stick its bondholders with a raw deal or enter sudden bankruptcy. We won’t pretend to know exactly how this one will end, but the market has certainly voiced its opinion:

Heh, and of course, Goldman Sachs (NYSE:GS) has a horse in this race. They stand to make about a billion bucks if CIT goes into bankruptcy — the fruits of a smartly designed loan agreement. Hank Paulson, despite his GS pedigree, didn’t make such a deal when he put $2.3 billion in TARP funds on the line… a CIT bankruptcy would mean a near-total loss of taxpayer bailout loans.

CIT is one of the biggest lending sources for small- and medium-size business in America… what happens to this recovery when this well runs dry?

With or without CIT, “The real job creators in the U.S. economy, small businesses, will not expand hiring as expected,” forecasts Dan Amoss. “There are many reasons for subdued hiring plans; an emerging reason to avoid expansion and hiring will be heightened expectations that tax rates will soar in the future to pay for out-of-control government spending.

“So I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows. As we ‘lap’ the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I’m amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality…

“The labor market is dealing with a structural imbalance fueled by government-sponsored housing and credit bubbles. Many will call for the government to ‘solve’ this labor market problem, which will cause a new type of market dislocation. By early 2010, some will push for the federal government to start hiring the chronically unemployed in ‘New Deal’ types of programs.”

Source: The Lehman of 2009

The Dow slipped a bit yesterday – only 39 points. Everyone is watching. They want to see how far this rally carries on. Many think it is more than a bear market bounce; they think it is for real.

The prevailing opinion is that quick action by the feds avoided a more serious meltdown. Ben Bernanke says he was working to prevent a “second great depression.”

And now that the crisis is past, the economy is slowly climbing out of its hole. The second quarter showed GDP falling at 1% per year in the US… rather than the 6.4% rate recorded earlier in the year. Housing sales have perked up. Oil is trading above $71 – a sign of renewed economic activity. And gold seems to be getting ready for another assault on the $1,000 mark – a sign of growing inflation pressures.

At least… that’s the way the world sees it.

Here at the Daily Reckoning, we look… we squint… we wipe the fog off our glasses and try to tear the scales off our eyes. What do we see? We see a financial world gone mad.

Or, perhaps we should say… a financial world that has still not recovered from the Bubble Madness of 2002-2007.

One bubble begat another. We have previously reported that the bubble era was over. Because the machinery that made it possible – the bubblelized financial industry – was broken. Well, we were only half right. The finance sector has exploded. Bear Stearns was sold for peanuts. Lehman Bros. went broke. Merrill was forced into a shotgun wedding with the Bank of America (NYSE:BAC); with Hank Paulson holding the firearm. JPMorgan (NYSE:JPM) is still in business. So is Goldman (NYSE:GS).

But now we know that even Goldman might have gone under if Paulson – ex-Goldman man – had not engineered a stealth bailout. He brought the feds in to save AIG, and in the process he saved his old alma mater too… AIG’s biggest trading partner, Goldman Sachs.

And now Goldman is in the news almost every day. It reported spectacular trading results for the quarter, lifting the entire world stock market. What’s good for Goldman must be good for the whole world economy, investors reasoned.

Then it was reported that Goldman made its money in a variety of ways – none of which had anything to do with providing genuine service to the economy. Goldman made a fortune on the feds’ own money-raising, it came out. And then it came out … Goldman was making billions by trading at lightning speed — clipping investors for fractions of pennies each time a transaction passed through the markets.

The Italians think Goldman runs their country. They’ve got the top three posts in Rome… Premier Romano Prodi is an ex-Goldman guy. So is the headman at the Treasury. And the chief of the central bank too.

They think Goldman is like a cult… a semi-secret society of insiders with the power to rule the country – surreptitiously. Like the free masons… the Jesuits… or the Illuminati.

Goldman has its boys in important posts in the US too – but not at the same level as in Italy. Tim Geithner is not a Goldman graduate. Neither is Ben Bernanke. But both have plenty of in-put from ex-Goldman associates, colleagues and handlers.

We confess an interest – we have relatives working at Goldman. But we doubt that Goldman rules the world. Just look what they said and did over the last couple of years; they had no more idea of what was going on than anyone else. No, they don’t rule the world… but they do manage to persuade it in their direction from time to time…

During the bubble years, they urged consumers, bankers, and investors to borrow… to speculate… and to ruin themselves. Naturally, Goldman made out like… well… like a bandit.

And now Goldman guys urge the government to ruin itself too. Yes, dear reader, the bubble age is not quite over. Now, there’s a bubble in government debt… Here too Goldman makes money like a bandit. The more the feds borrow… the more debt there is to buy and sell. And the more the feds stimulate… the more acts of reckless speculation there are to finance.

And the more money Goldman makes… the more politicians the firm is able to buy. Of course, they welcome campaign contributions.

And of course, Wall Street is spending record amounts in lobbying. But the real appeal is the lure of being able to join Goldman itself… of being able to spend some time in Washington… pushing business Goldman’s way… and then cash in big by joining the firm and getting a piece of the action…

*** There are two big bubbles now. There is the familiar one in federal government debt. The other is the Peoples’ Republic of China.

Andy Xie says China is a ‘giant ponzi scheme’ fed by new investors hoping to get rich. Of course, the China story is an attractive one. China’s growth rate is spectacular. Even in a worldwide financial meltdown… and the biggest depression since the ‘30s… China is still growing at greater than 8% per year – or so the figures tell us. New cities are still being built… at a breathtaking pace.

Stocks on the Shanghai exchange are up 80% so far this year. China has the biggest pile of cash on the planet — $2 trillion worth. And it has more bright, well educated engineers, accountants and economists than anywhere else… In fact, it has so many economists trained at Western universities, it is almost sure to blow itself up…

Maybe this is the Chinese Century. Maybe it is not. Either way, it seems inevitable to us that the Chinese bubble economy is going to pop. Banks are lending 3 times as much as they lent last year. You can’t increase lending at that rate and still maintain credit quality – if there was any in the first place. A lot of buildings are going up that won’t find tenants. A lot of factories are expanding that won’t find customers. A lot of speculations are going on that investors will later regret. That’s just how a bubble works!

Mr. Xie says, for example, that the cost of property in China is about the same as in the US. But wait, the average income in China is only 1/7th what it is in the USA. How can the Chinese afford American prices? Well, they can’t. They’re all betting on the greater fool theory – that they can pay any price, because some greater fool will come along and pay more. Trouble with that is that the Greatest Fool of All finally shows up… and then the whole structure collapses.

*** Barron’s says that “The Greenback is Broken.” True, the dollar has been losing ground as the stock market gains it. Yesterday, it took $1.44 to buy a euro.

“I was amazed at how expensive everything is in Paris,” said son Will. “You go into a shop to buy a few groceries… You expect to pay about $12. Instead, the bill comes to $40. Or, you stop to have a cup of coffee and a croissant. It costs you $10. I don’t know how you can afford to live in Paris…

Will lives in Buenos Aires… with frequent visits to in-laws in Florida…

“You know, it used to be so much cheaper to live in Buenos Aires than just about anywhere. But now, I think the prices are about the same as in Florida. Everything seems so cheap in Florida. And you can make some very good deals on property…

“Remember that house that I bought in 2006. You warned me not to do it. But right after I bought it people were coming to my door asking if they could buy it. One guy offered to write a check for $600,000. Then another guy offered $675,000. I began to think I really had something hot.

“Of course, then the market crashed. Now, I’m thinking of selling it for $300,000 – if I could find a buyer.

“But that’s in South Florida… only about an hour up the coast from Miami. There are places in the US where things are really, really cheap. In Iowa, maybe… Arkansas… Michigan. You can get a nice house for less than you’d pay for a garage in Paris. From that standpoint… the US seems like the place to be. You can live so cheaply. And fairly well… but quality of life is another thing… ”

The dollar is low… America is cheap. Barron’s is probably wrong about the buck. It’s not broken – not yet. Our guess is that it will rise when stocks crash this fall.

*** We’ve thought a lot about quality of life. It is not a constant, fixed thing we conclude…

There are only three main decisions you make in life – what you do; who you do it with; and where you do it. Typically, these decisions are made without much real thinking – which is probably the best way. They are not things that lend themselves to thought… but to feeling. Pity the more man who marries a woman after a prolonged and logical thought process. The poor sap is doomed. His head may be in the game, but his heart will drop the ball. The next thing you know, he will be in divorce court or therapy.

Likewise, the decision about where you live is not one that is readily subject to logical analysis. You like a place because you like it… And you may like it for a variety of reasons that defy analysis. There’s no accounting for tastes, as they say.

Living in rural Iowa probably wouldn’t suit us. We don’t have the stomach for it. We couldn’t draw enough nourishment out of such lean meat. We need more stimulation.

We like Paris for the street scenes. Everywhere we look, we see something we like to look at – people, buildings, shop windows, streets, bridges, river boats… Same thing out here at our summer place. We work in an octagonal office that sits in the park. No matter what window we look out of we see something that pleases us. A stone barn with a red barrel tile roof. Those big limousine cattle grazing in the field. And there’s the house itself… a conglomeration of a fortified farm house from the middle ages with a Renaissance-style faux-chateau cobbled onto it in the 19th century. And there is our grandson… 16 months old… playing in the gravel…

… wait… what’s he doing? Uh oh… he’s eating the gravel…

Gotta run…

Source: Goldman…Goldman…Goldman…

David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis.

Paulson just plunked down $1.3 billion for an 11% stake in AngloGold (NYSE:AU). He’s also got a big position in Kinross Gold (NYSE:KGC).

Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal. “I have had more phone calls in the past six months than ever before – from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,” he says. “I am not saying George Soros, but people of that caliber have told me they are buying gold.”

You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb – to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.

Why? The biggest reason is that the value of the dollar looks about as brittle as a 90-year-old’s hip socket. And if you worry about the value of the dollar – or any paper currency – then gold is a good alternative.

In fact, gold has held up well while most everything else has taken a beating over the last year. On a recent conference call with investors, First Eagle fund manager Abhay Deshpande points out that gold is at a new high in just about every currency apart from the U.S. dollar and Japanese yen. “It has performed its job for everyone in these countries,” he says. “It has held its value.”

Take a look at the nearby chart and you can see the falloff of the dollar in recent years and the rise of gold.

“But there have always been worries about the value of the dollar,” you say. “That’s not new.” True. What is new is a global financial crisis unlike anything we’ve seen in the post-World War II era. And that crisis has brought with it serious doubts – the most serious in decades – about the dollar’s ability to keep its top perch in the aviary of world currencies. As that doubt increases, gold gathers new fans.

As I write, the headlines are abuzz with China’s proposal to replace the dollar as the world’s reserve currency. (The U.S. Treasury secretary, in a weak moment, said: “We are quite open to that.” He took back those words, but the hammer had already hit the nail.) China and other countries hold a lot of dollars. And they are not too happy to see the U.S. government handing out bills like after dinner mints. America’s $2 trillion (and ballooning) annual deficit and ballooning national debt causes them to wonder about the value of all the paper they hold.

They are not the only ones worried, as I noted up top. Many top investors are already buying gold.

It is easy to buy gold today with gold exchange-traded funds (ETFs). They are like mutual funds that hold gold. As investors pile into these ETFs, the ETFs’ gold holdings also go up. It’s one way to see the dramatic increase in demand for gold in just the last few quarters. (See chart below.)

So we have to ask: At $900 per ounce, are all the fears baked in or are we on some new history-making path?

I have a good friend who advises institutional clients on investing. As he reminds me, the really big money hasn’t started buying yet. There are no big pension funds or endowments with significant gold holdings. That could change. If so, the gold price will go wild.

“Gold is a small market,” Munk notes. Munk’s career spans 60 years and he knows the gold market as well as anyone. Says he:

“Let’s say a small percentage of the world’s central banks – or simply the United Arab Emirates itself – do not believe President Obama’s pledge that he will halve the U.S. deficit by the end of his first term. They shift some of their dollar reserves to gold. It would not take many decisions of this kind to push the price above $2,000 per ounce.”

That’s how gold gets to $2,000 per ounce – just a bit of doubt turning into action. The mind boggles at what would happen if China decided to hold more gold! Gold could well hit $5,000! As long as President Obama, Fed Chief Bernanke and pals treat the dollar like confetti, gold should continue to gather new fans. And gold stocks should do even better.

Gold stocks are supposed to do especially well as gold rises. But that has not been the case over the last year and a half. Mostly, this was because mining costs were rising as fast as, or faster than, the price of gold – thanks in part to record-high energy prices. But as Deshpande points out: “These things have reversed in recent months as gold stocks became quite cheap relative to the underlying value of the gold in the ground.”

The case for gold and gold shares is a nice and clean setup, like one of those toy houses in the window at Macy’s on Madison Avenue. The world order will not always hinge around the dollar. Global finance will not always find its center on Wall Street. As Munk pointed out: “Look around Davos this year. So Goldman Sachs (NYSE:GS) cancels its dinner party. In its place, a Kazakh company has a dinner party.”

As the dollar goes bust, who knows what will replace it? With gold, you don’t have to worry too much about the answer.

Source: How Gold Will Top $2,000 Per Ounce

Sullivan follows the departure of a wave of Wall Street top execs, including the recent bloodletting at ailing investment bank Lehman Brothers.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning.

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

“As recently as a month ago,” says Justice Litle in Taipan Daily, “Erin Callan was on top of the world.”

The WSJ did a glowing piece on her rise through the ranks. Condé Nast’s Portfolio magazine dubbed her the most powerful woman on Wall Street.

If you don’t recognize the name — and don’t worry, most won’t — Erin Callan is the chief financial officer of Lehman Brothers (LEH:NYSE).

Or was the CFO, rather, because Ms. Callan holds that title no more. She was ousted this morning, along with chief operating officer Joseph Gregory, as a result of Lehman’s nearly $3 billion loss. Someone had to take the fall. She and Mr. Gregory were offered up to the volcano.

Ten days or so ago, Taipan Daily tagged Lehman Brothers as a downside bellwether. (You can read it here.) Watch LEH and watch the Philly Bank index, we said. Now they are both in the tank — and the markets are, too.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning.

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

Shares in the Wall Street powerhouse tumbled 31% last month on the NYSE on expections of heavy Q2 losses and the likelihood that the bank will have to raise cash to cover subprime-related writedowns. However, unlike rival Bear Stearns, the word on the Street is that Lehman will survive.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

Yesterday, we were full of doubts…

But today, we’re not so sure…

Ah, that’s the trouble with growing older. You lose your dreams and youth. You lose your bearings too. We had lunch in the House of Lords yesterday, with our old friend Lord Rees-Mogg, who turns 80 next month. But more on that in a moment…let’s first turn to the financial news.

Today’s big headline concerns Fed chief Ben Bernanke. According the Financial Times, he broke with long standing tradition in order to express himself on the dollar yesterday. Alas, the fall of the greenback has “contributed to the unwelcome rise in import prices and consumer-price inflation,” he said to an international banker’s forum.

The headman at the Fed may want a stronger dollar…or a weaker one; it’s usually not his place to say so. That’s what the Treasury Secretary is for. Henry Paulson, of course, says the same thing; the United States wants a strong dollar. But nobody believes him. Investors seemed to take Mr. Bernanke more seriously.

Stock market investors sold shares and drove the Dow down 101 points. Over in the oil market, the black goo sank $3.45. And gold, too, was sold on the news…it sank $11 to $885.

But let’s think about this. What could the Fed do to protect the dollar? Easy…it could raise interest rates. But if the Fed wanted to protect the dollar, why has it waited so long? The greenback has lost about half its value since 2000, why didn’t it try to protect it sooner?

Ah, dear reader…the plot has become a bit confused. Let’s see if we can remember it.

In the 15-year period known as the “Great Moderation” central banks could increase their supplies of money 2, 3, 5 times as fast as GDP growth. Normally, this would cause inflation. But it didn’t, because globalized markets…along with a few other key trends…we’re holding consumer prices down. So, the inflationary money went into asset bubbles…dotcoms, houses, and the financial industry.

But after the housing/finance bubble popped last year, consumer prices rose – even while the world economy softened. All of a sudden, the world seemed to be spinning in the wrong direction. Instead of holding down prices in the United States and Europe, China was increasing them. China’s domestic inflation is running at more than 8%. And she’s exporting her inflation to the rest of the world. Import prices from China into the United States are now rising at 4% per year…after falling about 1% each year during most of the 21st century. As for imports from the rest of Asia, they were falling in price as recently as the first half of ‘07. Now, they’re going up by 4.3% per year.

And even as demand for basic commodities slows in the developed world, demand from the emerging markets makes them more expensive. Ai yi yi…globalization is no longer a force for good…but a force for evil! Now, earnings and housing prices fall in the United States, for example – while Americans are forced to compete with Asians for food, fuel and jobs too.

House prices in America are still falling. Foreclosures continue to rise – especially in places such as Las Vegas, which has the distinction of being the “mortgage fraud capital of the world.” And now comes word that people are not only abandoning their houses – but their pets too. Yes, the Society for the Prevention of Cruelty to Animals says that owners are leaving their dogs and cats behind. And pet food banks, operated by the SPCA, are said to have people lined up down the block to get free food for their pets.

Meanwhile, Winnebago says it has had to put its Iowa plant in neutral. The company makes luxury land barges, which have been a big hit with Americans for many years, allowing retirees to take to the open road whenever the mood strikes them. Problem is, motor homes are expensive to buy…and now, with gasoline over $4 a gallon, extremely expensive to operate. In real terms, gasoline is higher than it has ever been in the United States…considerably higher than the $3 it hit (in today’s money) in 1981.

On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts. But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

Of course, we can’t tell you what the name of the firm is here – but Dan will in his new special report…along with advice on how to pile up as much as 200% gains, as this firm pays the piper for its massive mistakes. Clink on the link below:

Money-Tripling Gains on the Next Wave of Wipeouts and Write-downs Ahead

The feds’ response to this situation – so far – has been to cut rates, bail out financial firms, and hand out money (rebate checks). This inflation (along with robust demand from the emerging markets) has made itself felt, mainly, where the feds didn’t want it – in oil, gold and commodity prices.

Google says the term “solar powered car” is one of the hottest search trends on the internet, as Americans seek alternatives to high fuel costs.

According to a recent Lehman Brothers report, the solar-powered-car revolution may not be coming anytime soon. The Wall Street bank in predicting crude oil prices at $83 a barrel in 2009 and as low as $70 in 2010.

Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon. This is up 22% from this time last year! 22 percent! 22! Hahahaha!

Just when I thought I had completely lost my sense of humor, I ran across a MoneyNews.com article titled “Lehman Bros. Report: Oil Bust in the Cards”. Hahahaha! Thanks, Lehman!! Hahaha! I needed the laugh!

“Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon,” says The Mogambo Guru. “This is up 22% from this time last year! 22 percent! 22! Hahahaha!

“It gets even funnier when Lehman is not just predicting lower prices, but “Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010.” At this point I am laughing so hard that my stomach hurts, and since I am on the verge of pooping in my pants, I am desperately trying to stop laughing by sticking my own thumb in my eye, but it does no good!”

We are back among civilized people. People who worry about money, that is.

So, what has happened in the world of money since we were gone?

Not too much, apparently.

U.S. stocks are still down about 7% for the year. The NASDAQ has lost 12%.

The dollar is still near its all-time low against the euro, at $1.57. And the yen, too, is near an all-time high. And gold?

Maybe we were right. Maybe we just had our last chance ever to buy gold for less than $900 an ounce. And maybe what we have now is our last chance to buy it for less than $1,000. The price today is $931.

Now, you can still get in on gold at just a penny per ounce, but only for a limited time. Start collecting the change off the floor of your car and click here .

We are bullistic on gold because we are realistic about human nature. Give someone an opportunity to print money and you can be sure that sooner or later, come what may, he’ll take it.

The feds no longer tell us how much money they’re ‘printing,’ but experts say M3, the broadest measure of new money creation, is higher than 15% per year. Let’s see, money increases at 15% per year…and how fast is the supply of goods and services increasing?

Uh-oh…the IMF says the United States is headed for recession. Some economists think the country is already in recession. What that means is that the supply of goods and services is barely increasing at all. Which means, the extra money has to bid for the EXISTING goods and services.

No need to beat around the bush about it. What this means is that monetary inflation is driving up prices.

The price of oil is $112. Wheat, corn, soybeans, rice – all the grains are near record highs too. Many countries are banning exports. Many are controlling prices. (See below…) Mexico, for example, has price controls on tortillas.

Of course, the real cause of rising food prices is a falling value of paper money. But only the European Central Bank seems to take its mission to protect the euro seriously – it’s holding rates steady. While the ECB tries to hold the line against inflation, the rest of the world’s central bankers are giving inflation all the slack they can. The Bank of England, following the U.S. lead, cut its key rate yesterday by a quarter-percentage point

Let’s go back to our war analogy. It’s a battle between the forces of inflation and the forces of deflation, we keep saying – one side unstoppable…the other immovable.

But what kind of war is this? Glad you asked because we were thinking about that very question as we sat in front of the fire up in the mountains yesterday.

The Franco-Prussian war of 1870 was a great war. The French declared war on the Germans, for some reason that no one seems to recall. The Huns attacked, rolled up the French army …and laid siege to Paris. In the city, residents soon had to eat rats and cats to stay alive. Parisians exchanged recipes and made the most of it.

The whole thing was over fairly quickly. The Frogs capitulated, agreed to pay reparations, and the Germans withdrew (keeping the Teuton-speaking area of Alsace.)

It was a nice war because it had a clear winner…and because it was over like a good street brawl, before the cops came. And the Germans were very civilized about it. They didn’t set up bases in France. They didn’t stretch out the war for years…or make the French learn to speak German. They won it fair and square, and then went back to their strudel and frauleins. Which made Europeans think that war was not such a bad thing.

Then, came WWI. Oh la la…this was a war of a different sort. It went on for four years. At enormous cost to everyone…millions of dead…trillions in financial losses…

…and who won? Nobody.

We bring it up because this financial battle looks to us like that kind of war. A war of liquidation…in which people lose money they thought they had – either to inflation or to deflation.

Yesterday, Lehman Bros. liquidated three of its funds. And, as mentioned above, a big part of the stock market has been liquidated. And housing gains are being liquidated at about 10% per year…

…and remember, inflation liquidates almost everything…including the value of American labor. As consumer prices go up and the dollar goes down, the relative price of American labor falls. The working man is liquidated.

We are speaking about the entire financial industry, in general, and hedge funds in particular. Picking at the innards of the deceased, we find their plumbing so twisted, it’s a wonder they lived as long as they did.

Of course, every mother wanted her babies to grow up and work on Wall Street or the City. Why? Because the money was so good. No sector was more profitable; no employees were better paid. But that was the basic problem too. People who worked in the financial industry were encouraged to take outsize gambles in the hopes of outsized bonuses. And as long as the credit cycle was on the upswing, the wagers paid off.

“Until the recent tempest,” says Fortune magazine, “Wall Street firms looked like just about the world’s best businesses. Year after year they boasted sumptuous profitability, ever-rising share prices, and, if you believed their claims, a new generation of chief executives who had mastered the art and science of risk management.”

In the period, 2002 to 2006, the sun never shined more brightly for the five big independent firms – Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Bros., and Bear Stearns. Their earnings rose 200%, to more than $30 billion, with an average return on equity of 22%. Too bad they didn’t hold onto the money. But when the money was on the counter, the clerks at financial firms didn’t put it in the till. They took it home.

Fortune continues with the numbers: In 2006, the top six employees at Lehman pocketed $150 million, and James Cayne, who was at the time Bear Stearns’s CEO, paid himself $40 million. Employee compensation at Wall Street’s big five investment banks included restricted stock and options equal to 26% of the companies’ outstanding shares.

As long as the weather was good, no one complained. But in 2007, the monsoons began. Since the middle of the year, just three firms alone – Bear, Merrill Lynch and Morgan Stanley – have taken more than $40 billion in writedowns. Bear drowned…while managers at other firms looked for ways to stay afloat. Shareholders, meanwhile, raced to the cupboard to look for the companies’ rainy-day reserves. Alas, employees had stripped the company of capital.

As for hedge funds, we have nothing against them. Au contraire, we value them as we value influenza and Russian roulette….they help carry off the weak and eliminate the stupid.

It was a bad week for hedge funds. Poor John Meriwether, for example, was back in the news; we get to laugh at him twice. He was the captain of LongTerm Capital Management which sailed along beautifully – thanks to the aid and comfort provided by two Nobel Prize-winning economists, Myron Scholes and Robert Merton – until it hit a reef in 1998. After the LTCM sinking, Meriwether swam ashore, dried himself off, and went back to doing what he did best – taking a big piece of investors’ money. But in 2008, his flagship fund is down 28%. And he’s not the only one. It was the worst quarter ever for the hedge funds. And March was almost as bad for hedge fund managers as it was for Julius Caesar; the average fund was down 2.4% in the month alone. Some of the big, well-known funds fell much more. Endeavor Capital dropped 34%. London Diversified Fund Management’s flagship fund lost 10%. And in New York, Pardus Capital Management, which seems to specialize in airline stocks, refused redemptions on its $2 billion fund.

Alert readers will already be asking questions. Isn’t the whole idea of a ‘hedge’ fund to hedge against market disasters, by taking countervailing positions in different asset classes? We assume that was a rhetorical question, since everyone knows hedge funds ceased to hedge a long time ago. Instead, they are some of the biggest go-for-broke gamblers in the financial world.

It is the old principal/agent problem – a traditional bugaboo among economists – says a colleague. You hire someone to do a job for you and you assume he’s on your team. And then you discover than your doctor operates a funeral parlor on the side. It’s a problem in business and politics as well as the investment world. Turn your back for just a moment and your CEO is awarding himself stock options and your kids are wearing your socks; your local politicians are hiring their girlfriends, and your hedge fund manager is taking extraordinary risks with your money.

In the world of hedge funds, the problem was particularly acute. Because the managers have such lopsided incentives. If they make money, they take 20% of it off the table and put it in their own pockets. If they lose it, you, the investor, get to keep the whole loss. Heads I win, tails you lose. This is why Warren Buffett calls hedge funds a “compensation system,” not an asset class. Over time, the hedge fund manager is practically guaranteed to end up with more of your money than you have. John Kay, writing in the Financial Times last month, demonstrated that if Buffett had charged like a hedge fund, he would have ended up with 90% of his client’s money in the 42 years he’s been investing.

But in the recent stormy weather, 50 hedge funds have washed up. Only about 7,950 left to go.

Until next week,

Bill Bonner
The Daily Reckoning

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics , written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets