While Washington’s all-powerful ego may have our leaders believe they still control our fiscal fate, they lost that power long ago. Now, the Fed and the Treasury may dictate who gets what, but China decides how much and when.

That’s scary.

After yesterday’s unnerving trade-deficit report, Americans are waking up to Beijing’s power and its dangerous shenanigans. If it continues unabated, this nation’s role as a supreme power is over.

It is absolutely no coincidence China unveiled new banking reserve requirements on the very same day the Commerce Department reveals the largest trade gap in ten months. With a seriously undervalued currency working to its advantage, China needs to appear like it cares about America’s financial future.

In reality, we know the truth. China doesn’t care. It already owns us.

All across the globe, calls for yuan (China’s currency) appreciation are growing louder by the day. Of course, you won’t hear much from the Obama administration. After all, it’s hard to talk when an important appendage is getting squeezed in a vice.

But France’s Nicolas Sarkozy has the, um, guts to say what needs to be said. He doesn’t have a $400 billion trade imbalance to worry about. Flat out, he tells the world “The monetary disorder has became unacceptable.”

But as American voters have learned. Talk is cheap. It won’t get you anywhere, especially with China.

If America is not willing to politically attack Beijing’s manipulation, it will have to do it by good old-fashioned belt tightening. Stop asking China for so much of its goods and free cash and the country’s ears will quickly bend our way.

Obama has his chance to stand up for you and me next month. But will he do it? Has he ever?

The political and financial pundits will be all over the president in February as he reveals his latest budget proposal. If he does what is best for this country, this will be a watershed event for the world markets.

But if Obama falls to the pressure of ever-political Pelosi and the constituents that elected him, it will be a non-event that proves we are enslaved to Asia.

As for me, I’m hoping Obama does what he’s promised (for a change) and cuts the nation’s spending by at least 5% next year. That would show China that we’re not ready to lie down just yet. Even better, it would slow down our government’s massive growth.

You and I know Obama is not about to cut tens of billions of dollars without slipping an equal amount through some sort of accounting loophole, especially when the Peace Prize winner is about to ask for another $33 billion on top of an already record-shattering defense budget.

If all goes as planned, Obama will allocate close to $750 billion in Defense Department spending next year.  Who will be lending us that money? You guessed it, China.

But don’t expect that to be a line item on Obama’s upcoming budget. If Bush managed to hide defense spending, you know this “ultra-transparent” administration will find an even better way.

We are in the midst of a critical year for this country’s fiscal fitness. By my calculation, we have not fallen of the cliff yet, but the ground beneath us is crumbling. If we don’t swallow our pride and jump to safety now, we will likely never get another chance.

China has open arms, awaiting our fall.

*** As investors, this is heavy stuff. If the value of the dollar falls, so does our wealth. If national security weakens, so does our wealth. And if our taxes rise, we lose even more wealth.

The future is scary. But inaction will make it even worse.

For many investors, gold is the fallback. But I don’t buy it. If America fails, Washington will either steal your gold or unload its own onto the market.

Diversification is the key. If you are holding a portfolio filled with domestic stocks, you are sitting on a time bomb. You don’t want to own American companies when the Chinese are increasing their share of the global market. You want Chinese companies.

And you want Indian firms. And you want Japanese companies. And you most certainly want exposure to Australia’s vast natural resources.

You don’t need any more exposure to the land of broken promises and empty rhetoric. Talk is cheap and Obama’s only making it cheaper.

I made a promise to my wife late last fall. Once the holidays were over and she was well on her way to recovery after a recent surgery, we would hit the local furniture stores and redecorate our living room.

Next time I make such a promise, I’ll research current furniture prices first. With four-digit price tags for a simple sofa, it is no wonder just about every furniture pusher is hocking no-payment, no-interest plans to unload their stock.

As a cash-only kind of guy, I didn’t fall for the gimmicks. But judging by the looks on the salesman’s face when I handed him a pile of crisp bills, I am in the majority.

For years, all sorts of retailers offered “money-saving” financing schemes to entice cash-strapped buyers into the checkout line. For somebody with the financial might to pay off such accounts before the massive interests and penalties kick in, these plans really could save some dough.

But as Congress was eager to prove recently, most Americans end up in a very expensive trap. That’s why the folks in Washington outlawed the no-payment plans starting next month. Our leaders know the dangers of getting in too deep.

Why shouldn’t they? Washington’s got $12 trillion of debt to manage that it isn’t making payments on, at least not any substantial payment.

If you and I tried what Washington is doing – paying off debt with more debt – they’d put a stop to it in a heartbeat. But because they are too concerned with the next election to listen to some geeky economist, our lawmakers keep hiking down a deadly path.

If you listen to the growing chorus of pundits (I am one of them), that path is going to lead to a dead-end in the very near future.

One look at the gold markets today (an ounce is up by more than fifteen bucks) will show you investors are once again worried about the strength of the American economy. With an employment market that is the worst since the Great Depression began (a U6 reading of 17.3%), the hopes of an easy, painless recovery are waning fast.

In an economy leveraged to the max by credit, “painless” is never an option.

While lawmakers and government policy makers are worried about propping up the average Joe, a new, virtually unstoppable crisis is building. The collapse of sovereign debt – the money owed by the world’s governments – is going to be huge.

The only way out of the situation is severe pain.  Venezuelans know what it feels like. Chavez and his politicos cut the value of the nation’s currency in half last week to battle the nasty effects of a crippling recession.

Just imagine the ramifications as this wave slowly creeps across the globe. One country after another, in a rapidly growing crescendo will be force to restructure their economy and their balance sheets to battle the natural effects of credit overload.

National banks will default. Inflation will soar. Stimulus will be a word of the past. Welfare programs will be cut.

The only good thing is the government’s natural tendency to continue growing will be destroyed.

Washington and its global counterparts will be forced to contract. There is no debate. It won’t come after months of political debate. Instead, the markets will do the thinking for them. Eventually, nobody, not even China, will lend to us or our over-burdened brethren.

When it happens, it won’t be pretty. Unfortunately, it is happening far faster than anybody predicted.

Every day, I prepare for the horrific headlines.

You should too.

***One of my favorite classes in grad school was a statistics class. I know I am not supposed to admit a fondness for the subject, but there is nothing better to shut somebody up than the right set of numbers and a statistical formula.

Correlation analysis is good for anything from finance to fisheries management. But I like it most when it proves Washington’s fiscal ignorance.

According to a recent Associated Press study, Washington’s construction-related stimulus package has done nothing to improve local economies. No matter how much Uncle Sam sent local bridge workers and road constructors, the study was unable to find any correlation to employment figures. None!

One would think that would instantly eliminate any calls for another round of stimulus, but we all know the truth. It will only force Washington to ask for an even larger sum of cash or a new set of statisticians.

The Obama administration just doesn’t get it. In an economy valued at over $14 trillion, even a hundred billion in construction spending won’t create more than a ripple, especially when the tide is gushing in the opposite direction.

The only thing saved or created by Obama’s massive spending is the notion that stimulus works. Politicians say it is worth every penny. But those of us that bother to run the numbers know the truth.

The truth is, we’re in trouble.

Baltimore — (TFN): You don’t believe all the hype do you? As we close out another year and another decade, the pundits are busy rehashing the action of the past ten years.

The political types are discussing the rise and fall of the Bush administration, a couple of wars and the nation’s first black president. The Hollywood folks are talking about the end of the sitcom, the death of an icon and the phenomenon that is American Idol.

And, of course, the financial types are talking about the decade that never happened. You know, the fact that at the start of the decade, the Dow was actually worth more than it is today.

Sure, if you happened to be the poor sap that bought the Dow on January 1, 2000 and held it until today, you’d be down about 9.5%. But I’m willing to bet that is not you.

As a contrarian investor, you are more likely to be holding a pile of gold. In that case, you are sitting on gains of about 300% over the past decade.

But again, I don’t think that is you, at least not entirely. If you are anything like me, you are sitting back, wondering if the next decade is going to be as good as the last.

Think about it. We had high interest rates, record low rates, a housing bubble, a tech bubble, record high oil prices, ultra-low natural gas prices, a couple of wars and the biggest government bailout you could ever imagine.

If you can’t make money in that kind of environment, you flat-out aren’t trying. Even if you racked up 300% gains from gold, you could have and should have done better.

The only thing the last decade proved was buy-and-hold investing is dead. But that’s why we have exchanges, so you can buy and sell assets when the mood strikes.

If you were a true contrarian investor – bought when nobody else was buying and sold when nobody else was selling – you probably just locked in monstrous gains on gold, you are rolling in cash at the moment and are looking for the just the right opportunity to hop back in.

If so, the next year and the next decade are going to treat you very, very well. If you think the last ten years was full of upside downs, wait until you see what’s in store.

Government healthcare, more bailouts, more regulations, more taxes, more government control, more investing options, more interest rate movement, more bubbles, more international exposure… the list goes on and on.

Yeah, we may be back to where we started, but it took one hell of a journey to get us here.

Take my word for it; the next ten years will be the decade for contrarians. Gold will soar. The dollar will fall and interest rates will rise. Better yet, the exact opposite will happen during calculated, short-term blips.

That means we have the kind of market active forward-thinking traders yearn for.

Now is the time to make your move. If you have been sitting on the fence, waiting for the right time, take the end of the year to approach a new starting line and join one of our three services, TFN Strategic Trader, Hot Stock Confidential or Penny Stock Confidential.

All three perfectly play the contrarian viewpoint, and better yet, as a member, you’ll never have to worry about saying, “where’d the last year go?”

You’re at the start of the best decade of your life.

*** As contrarian investors, we like hard assets, the more down and out, the better. Right now, there is no better tangible good, with a worse reputation than good ‘ole American coal. Politicians hate the stuff, factories love it and investors have yet another shot to get rich off of it.

In 2006, I was a bit of a coal industry junkie. I read books on the stuff, wrote countless articles about my research, even went on the radio, TV and the seminar circuit talking about the nation’s dirtiest fuel source.

In today’s world of “green energy” and global warming scares, coal is a nasty four-letter word. But with a couple centuries worth of the stuff buried underground, we all know that’s going to change. Come the next political campaign or environmental hype, coal will launch back into the foreground.

You know it. I know it. And the folks at Bucyrus (NYSE:BUCY) know it. That is why the heavy equipment maker is placing a $1.3 billion coal-industry bet this week.

In a move that tells Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOYG) that they had better pay attention, Wisconsin-based Bucyrus is cutting a check to Terex (NYSE:TEX) in exchange for the company’s mining business.

Again, this is the kind of far-sighted, buy-when-nobody-else-will move that pays incredible dividends in upcoming years. It’s the kind of stuff contrarians dream about.

Just when the coal industry could look no worse, the sector’s biggest names move their bishops in an ever-lasting game of chess.

Today’s move is beneficial for both sides of the bargain. Terex gets a cash infusion that allows it to concentrate on its core business and Bucyrus gets a hunk of assets that allow it to up the ante versus the industry’s behemoths like Cat and Joy Global.

Here’s what you can expect out of the coal industry over the next year: more consolidation, greatly increased share price, strong demand growth, and, most importantly, better representation amongst the nation’s politicians.

Now’s the time to make your move.

*** I wish I had better news for the gold bugs. It has been dang near a month now since I said to sell the stuff and prices have gone ever since. Don’t blame me. I’m merely the messenger.

There is good news. The downturn won’t last long. It’ll be just enough to get the speculators and the hyperbolic masses off the wagon and then prices will turn north once again.

As soon as the magical metal bars are selling for less than $1050 an ounce, put in your buy orders once again. My take is we’ll see $985 by mid-January, but just in case China makes more waves between here and there, $1050 is a good entry point.

When the stuff is selling for $1250 in April and $1,500 this time next year, the cushion won’t matter so much.

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

True story. But it gets better.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You’ve got to read his report.

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

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

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

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

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

That was the general reaction from the press when US food giant Kraft launched its first bid for British confectioner Cadbury less than two months ago. Pundits spewed out potential target prices like bingo numbers – £8, no £10, no £12! – and analysts scribbled out scenarios involving white knights and rival bidders from across the globe.

Reality has been a little more disappointing. Despite attempts to talk up the deal, no rival bidders have come forth. And yesterday Kraft came back to the table with an offer that can only be described as – as Cadbury’s board put it – ‘derisory’.

It’s just another sign that there’s a vast gap between conditions in the financial world and those in the ‘real’ world…

Market hopes are stretched far beyond reality
The Cadbury / Kraft bid saga shows just how far market hopes are stretched beyond reality.

Right up to yesterday’s bid deadline, analysts and investors were clearly expecting Kraft to pull some rabbit out of the hat that would give them an excuse to drive the confectioner’s share price higher from its already optimistic level of around 760p.

Instead, Kraft came back with an offer that suggested that, frankly, they can take Cadbury or leave it. The bid terms were exactly the same, which – because Kraft’s share price has fallen since the original bid was made – meant that the actual per share value had fallen, from the equivalent of 745p to 717p.

Yet, the Cadbury share price is still hovering pretty much exactly where it was yesterday. You can read more about the background to the story, and what we reckon Cadbury shareholders should do now, in my colleague David Stevenson’s blog on the topic.

What’s perhaps more interesting about this bid battle is what it says about the bigger picture and the market’s psychology right now. When this deal was first announced, the excitement in the City pages was palpable. This was the return of big deals, a sign that the recovery was on track.

Click here to finish this article at Money Week UK.

So gold is now publicly loved by armchair investors, famous hedge fund managers and central banks… even as we write, Erin Burnett is “squawking” about it on CNBC. Are your contrarian senses tingling yet?

“So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries,” our friend Dan Denning wrote in today’s Daily Reckoning. “The bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you’d be worried about becoming a victim right about now.”

Finish reading this article on DailyReckoning.com.