Oddly, the action reminds me of my first few days as a fishing guide. There I was, a typical East Coast grad student with a vision and not much of a plan.

As I dropped my bags on the dock outside the state’s southernmost airport, I used the change in my pocket to dial my only contact in the 49th state. She did not answer. In fact her phone was disconnected.

Great… 4,000 miles from home and stranded in the rain.

I must have looked lost because a bushy bearded that most resembled the kind I’m used to see begging for change, asked me where I was headed. I told him some basic details and he grabbed my bags.

With nothing to lose, I followed.

Within an hour, I was strapped into a floatplane cruising 750 feet above what would turn out to be my new home for the next two years.

On the dock, I saw a figure.

Little did I know it would be the girl I would marry and who is now eagerly counting down the last four months until she becomes a mother.

For me, uncertainty led to great things. I see much the same for the country today.

Over the last six months, the economic data has told us very little. For the last several quarters, we’ve been told to “wait for next month’s figures.”  Or we heard “this time next year, things are going to be better.”

So far, even with the help of massive stimulus and governmental manipulation, we’ve done little more than tread water. Instead of following the creepy guy on the dock, we’re waiting around for somebody familiar to pick up the phone.

Until, that is, today. Look at the market. It’s in crazy rough shape, cutting nearly two percent from the top indices.

At first glance, it’s horrifying.

But with some careful studying and a keen eye for what it all means, it is fantastic news. Right now, we’re circling over our destination and are closer than ever to uncovering our fate.

For America, until last night, the question was if the country’s citizens would roll over and let a government force us into something highly unpopular. Today, we know democracy still rules and the political power players are laying flat on their butts from a catastrophic blow.

They may get back up and throw a few more punches our way, but they will never have the deadly dangerous momentum they had just 48 hours ago.

For the nation’s economy – here’s the truly good news – a strong dollar and slipping interest rates proves we remain the beacon of safety for global investors. China may be a powerhouse, but when things get tough, we always run to those we trust the most.

As commodity prices plummet today, the prices you and I pay for just about everything from heating oil to creamed corn will follow. Just as inflation threatened to crimp our shot at growth, Mother Economy proves her ability to create equilibrium.

If all of this is sounding different than what you are hearing on TV or reading in the rags, you’re right. It is different. It’s the contrarian’s take. When everybody is fleeing for the exits, we’re holding the door open, eagerly waiting to take what they left behind.

It’s a good idea to be buying what these folks are selling today.

***As a guy that has spent thousands of hours on the nation’s coastal waterways, I have had my share of run-ins with the Coast Guard – all of them good.

To prove that the core of this nation remains strong and true, I have included a press release my friends at the Coast Guard emailed me this morning. It’s a small glimpse of what Americans are doing to help their global brothers in trouble.

Here it is:

The first U.S. asset to arrive on scene to Haiti after the earthquake remains engaged in Haitian relief operations one week later.

The Portsmouth based Coast Guard Cutter Forward arrived off Port au Prince Jan. 13, at about 8 a.m. The crew provided air traffic control for military aircraft due to the damaged and inoperable control tower at Toussaint Louverture International Airport. They also began assessing the port, and ferrying supplies and injured people with their small boat and helicopter.

One of their primary missions was to pave the way for supplies to be delivered into the port of Cap Hatien. They began assessing the port and noted significant damage and destruction of its infrastructure adding to the difficulty of bringing aid to the country.  The Detroit based MH-65 Dolphin helicopter crew, that deployed with the Forward, flew over some of the roadways leaving the port and verified that relief efforts delivered to Cap Haitien can be trucked to Port au Prince. They also observed multiple oil, fuel and sewage spills in the area.

Monday they were able to perform medical evacuations with their helicopter from the Killick Haitian Coast Guard base to the Sacred Heart Hospital in Milot.

“The flight mechanic talked about two children on the first flight who wanted to hold his hand for comfort,” said Cdr. Diane Durham, the commanding officer of the Forward.

“I am glad to be a part of the relief efforts in Haiti. It is a life changing experience and is the reason I joined the Coast Guard. It feels good to be part of something bigger than myself,” said Fireman Kendall Wilson, a crewmember aboard the Forward.

The Coast Guard Cutter Forward deployed with Maritime Intelligence Support Team 0410 and an MH-65 Dolphin helicopter crew from Air Station Detroit.

In total, the Coast Guard has medically transported 29 critically injured U.S. Embassy personnel out of Haiti, evacuated approximately 662 American citizens and delivered 512 urban search and rescue team members to Port au Prince.

The Coast Guard will continue to support the massive relief effort in Haiti by providing humanitarian assistance to Haitian survivors, evacuating critically injured U.S. personnel and evacuating U.S. citizens from Haiti. The complexities crews face with this massive relief operation are immense due to the magnitude of damage to Haiti’s infrastructure.

Additional Coast Guard assets responding to the area are:

- An HC-144A Ocean Sentry aircraft from Coast Guard Aviation Training Center, Mobile, Ala.
- An HC-130J Hercules fixed-wing aircraft from Coast Guard Air Station Elizabeth City, N.C.
- An HC-130 Hercules fixed-wing aircraft from Coast Guard Air Station Sacramento, Calif.
- Two HC-130 Hercules fixed-wing aircraft from Barber’s Point, Hawaii.
- Two MH-65 Dolphin helicopter crews. They are from the Coast Guard HITRON based in Jacksonville, Fla., and Coast Guard Air Station Detroit, Mich.
-Two HU-25 Falcon jet crews from Coast Guard Air Station Miami, Fla.
-The Coast Guard Cutter Valiant, a 210-foot medium endurance cutter homeported in Miami, Fla.
-The Coast Guard Cutter Mohawk, a 270-foot medium endurance cutter homeported in Key West, Fla.
- The Coast Guard Cutter Tahoma, a 270-foot medium endurance cutter homeported in Portsmouth, N.H.
- The Coast Guard Cutter Oak, a 225-foot seagoing buoy tender homeported in Charleston, S.C.

That’s the kind of showing that makes me proud to be an American, even if I am contrary.

For years, the Street has looked at any Chinese economic data with a weary eye. Without the checks and balances of a democratic government, Beijing had plenty of reasons to manipulate its growth figures.

Even though all signs point to a strong, stimulus-fueled recovery, most pundits refuse to believe the country’s tales of double-digit GDP growth.

But the folks at Goldman Sachs are taking the disbelief in a different direction. According to reports from the banking behemoth’s analysts, China likely grew by 13.1% last month.

It is a bold claim in a year when Chinese officials estimate domestic growth of a much more moderate 8.5%. It is also a bold claim for a company whose “book” is filled with Chinese investments. After the action of the past two years, Goldman is obviously just as adept at using its shaky “research” to its own advantage.

But why is China’s GDP debated so ferociously? And more importantly, why do we care how fast the country expands?

It’s all about the currency. Without a yuan that freely floats against the dollar, it is in China’s best interest to put its best foot forward. Right now, with such a large gap between American and Chinese economic growth, it is strategically important for China to appear weaker than its foreign competitors.

Weakness means strength.

For Goldman, perceived strength equals stronger trading profits.

Believe who you want. They’re all liars.

*** It is a different story a third of the way around the world in Iceland. For the country that has become the punch line of banking circle jokes, the government’s recent decision to repay its obligations to the Netherlands and Britain was an important step in the recovery process.

If it were not for the Icelandic president’s veto, the country would be cutting a check for $5 billion to the Dutch and British.

With nearly a fifth of the economically ravaged country’s citizens signing a petition stating their disdain for getting stuck with such a sizeable bill, President Grimsson was compelled to veto his government’s legislation for just the second time in the country’s 66-year history.

Now it is not his constituents Grimsson has to worry about. It is his European brethren.

Obviously, London and The Hague are none too happy. The International Monetary Fund, with its plans to send the troubled country a bailout check worth $4.6 billion, is downright confused. And the European Union doubts whether Iceland will maintain its fast track to joining the pact.

All in all, this is a no-win situation in Iceland that proves even the most expensive of government bailouts and stimulus programs will not erase the far-reaching effects of a global financial meltdown.

What these two stories should tell investors is there is one thing controlling the markets these days… greedy, selfish, economically retarded governments.

China is lying about its economic growth. Iceland is realizing why its government up and walked out. And Goldman is raking in money like never before.

All of the conniving and manipulations adds up to volatility and, more importantly, unpredictability.

By traditional measures, market volatility is on the decline. But let me ask you, do things feel any safer than a year ago? Is the future really that much more clear? Absolutely not.

We’ve got guys trying to blow up planes with their underwear and a congress trying to skirt the democratic process to pass legislation that will rewrite a huge chunk of the nation’s economy.

It is far from safe out there. That’s why gold remains above the $1,100 mark, the dollar remains historically weak and it is why few businesses are willing to seek out growth.

The situation is as bleak as ever.

I am not saying we are going back to Dow 6,000 anytime soon, but all this nonsense about the recession being over and a straight road to recovery awaiting us is pure junk.

I’d rather believe in global warming than a safe and secure economy. And we all know how Al Gore is feeling these days.

*** Since China is a hot topic today, you can add Australia to the list of countries not so happy with Beijing’s antics.

After entering a $20 billion deal to buy liquefied natural gas from Australia’s Woodside Petroleum, China has announced the contract’s deadline has passed and it is backing out of its previous decision.

As natural gas prices have plummeted over the past two years, thanks to massive efforts in drilling technology and recovery techniques, China now realizes the figures in the proposed deal are no longer viable.

This is good news for gas investors across the globe.

If you recall, over at TFN Strategic Trader, we recently locked in gains of 400% by playing the industry’s moves. China’s indecisiveness and a recent surge in prices have created yet another profit opportunity.

The LNG market is on the ropes. With the help of economic recovery, gas exporters may be able to gain enough strength to re-enter the fight. But if traditional fuel sources begin to pay off like they are expected to, there may be no reason to endure the hassle and expense of compressing gas and shipping it across the globe.

This is going to be an interesting industry over the next year. Contrarian investors will be wise to pick up any of the “apparent” losers on dips. What is a loser today is likely to be a winner tomorrow. At least until it’s a loser again.

Got it? That’s trading for you.

Since I first scraped my knee chasing the neighbor’s cat across the street dozens of years ago, I have been a fan of the get-it-over-fast strategy. Rip the stitches, dry the tears and move on. Dilly-dallying is for sissies and I’m no sissy.

But the nitwits in Washington beg to differ.

After the first round of trillion-dollar stimulus failed to ignite anything but tempers, Congress is hitting us with a slow, but steady stream of economy-boosting spending. They won’t call it a bailout or stimulus, those terms have been politically wasted, but they continue to pour money into the economy like its water on a broiling fire.

They are pulling the Band-Aid off one painful follicle at a time. And I’m getting sick of it.

We’ve got homebuyer incentives. Business loans. Green tax incentives. Car interest deductions. And now more deadbeat homeowners are getting off easy as Obama takes more money from my wallet and gives it to some McMansion owner.

All this hoopla in Dubai proves the point the markets have no clue as to proper valuations. Given just one minor hiccup in the global economy, Wall Street was poised to sell off like never before. The over-leveraged, over-hyped Dubai World comes to the world on Friday and asks for a delay in paying its $60 billion obligations and pundits react like Iran launched “the bomb.”

Come on folks. Dubai’s financial situation is little removed from Donald Trump’s recent woes, including the funky head piece. That much leverage and something will eventually snap.

Even with this notion, the markets were ready to succumb with just one headline.

“Give me just one reason,” you could hear the investors muttering as their nervous finger hovered over the sell button. In the back of their mind, every investor is nervously awaiting the one final catalyst that sends this top-heavy market back where it belongs.

The words “double-dip recession” are on the tip of everyone’s tongue, even Obama’s, but nobody is ready, or politically willing, to call a spade a spade. They’d rather leave the Band-Aid in place for just one more day.

Instead, we are going to sit back, watch unemployment remain over 10% for the next eighteen months and let our government get away with murder. Just like G.W. used 9/11 as a springboard for his defense initiatives, this administration is using a nasty economy as an excuse to move us one mandate away from socialism.

And we are taking it. We are taking it like a herd of cattle take an invitation to a feed lot. This is not a free lunch, folks. Someday soon we’re going to get slaughtered.

*** Investors had better be prepared for what lies ahead. The swift reaction after the news from Dubai proves the markets are uncertain.

Uncertainty creates problems.

If I had to pick just one sector of the economy to be the model of uncertainty, it would be consumer spending. With Black Friday data looking lackluster at best, retailers have little idea what to expect going forward.

Instead of watching the six o’clock news for a hyped up version of the antics at the local mall, I fired up Ole Betsy and drove to a friend’s local shop. What I saw was far different than the frenzied lines at the local Best Buy.

Sure, there were sale signs everywhere, but two customers hardly form a line worth photographing.

When I asked how many of the big sale items were pulled off the shelf, the answer was a big fat goose egg. The big names may draw a crowd, but with razor thin margins they need crowds. To get a scaled-down view, take a look at the little guy.

That scene isn’t pretty.

But there is good news today. Early reports show that Cyber Monday traffic is up by more than 40%. While clicks don’t equal sales, buyers are at least scoping the deals.

That is good news for the online world and is part of the reason shares of Amazon hit new record prices this morning.

Before Jeff Bezos and his troops were celebrating, I was writing a piece for TFN that highlighted a company that will likely be a winner as cash-strapped consumers search out the best deals.

Here is a bit of what I wrote:

“One stock all traders should be aware of on this so-called “Cyber Monday” is ValueVision  Media (NASDAQ:VVTV), the home of ShopNBC.

“As consumers cut back this holiday season, shoppers will diligently search for the best deals. One place they will find them is on the company’s home-shopping network and the ShopNBC web site.

“I have tracked ValueVision for numerous holiday seasons. It is a predictable, cyclical play with the holiday season the catalyst for strong swings in either direction.

“Historically, buyers that got in before the holiday season and got out early in the New Year made sizeable and reliable gains. But predictability kills Wall Street.

“Over the past several years, buyers that got in on December 1 and out on January 1 lost money. That’s because after years of predictable gains, the bandwagon become overloaded.

“But this year I am expecting another turnaround in the trend. We’re back to buy now and sell in January. You won’t get rich from the play (20% upside), but you will find a way to eliminate most market volatility and put weaker consumer spending on your side.

“ValueVision is a small, $107 million company. It has no long-term debt and is poised to rebound to positive cash flow this quarter.

“The real kicker to this stock, however, is its high beta score.” Keep reading here.

*** And now for a new feature this week. Over the past month (it’s been thirty days now since I took the helm), I noticed that Notes readers are incredibly unique. They don’t follow the herd. They think for themselves. And they have interesting insights.

My kind of people. I like it.

That’s why each week, I am going to toss out a “question of the week.” I trust I won’t even have to ask for your thoughts on the subject. Let me have it and we’ll discuss the varying opinions as the week goes by.

This week’s question: Is it a coincidence the weekly political roundtable programs air at the same time churches offer their weekly services?

Looking forward to your thoughts.

It’s the same way for politicians. Give them some cash and they’ll have it spent in no time flat, even if they can’t find anything worth buying.

Take, for example, the infamous Troubled Asset Relief Program, TARP in informal nomenclature. Passing the $700 billion program was a matter of financial and economic life and death according to Washington.

They gave us the same panicky “must-have” arguments as a six-year-old in the toy aisle.

But once they got what they wanted, their “toy” sits unused in the corner. As I write, TARP has over $140 billion in uncommitted funds and $300 billion that has yet to be spent.

Yep, they really need that money, didn’t they?

But the story gets even better. Fully expecting a miraculous recovery by the end of this year, our policymakers set TARP to expire on the final day of the 2009. They figured Obama would certainly prop all 300 million of us on his shoulders and carry us to safety by year’s end.

Now that the economic situation is not nearly as rosy as Obama promised a year ago, Washington is crying once again how badly it needs the money. It’s just how little Johnnie cries and moans when little Janie plays with the toy truck he hasn’t touched in months.

Geithner and his team have hundreds of billions of borrowed money up their sleeves with few viable ways of spending it. But now that we are asking for the money back, they say they need it… at least through next October (definitely not through November elections).

Do we ever grow up? It’s like a bunch of kids playing with very expensive toys in Washington.

*** Have you noticed a lot of Washington’s “economic recovery” programs are up for renewal these days?

TARP, the housing stimulus and all sorts of unemployment benefits have been or will be extended. I’m surprised we haven’t seen the resurgence in Cash for Clunkers.

There’s even a bill that would tax Wall Street to the tune of $150 billion annually to help create new jobs. It’s called, get this, “Let Wall Street Pay for the Restoration of Main Street Act of 2009.”

All these extensions and new programs are a surefire signal that all is not grand in the economic world and Washington had absolutely no idea what it was getting itself into as it spent nearly three trillion dollars to supposedly prop up the nation’s economy.

With Congress continuing its reach into the chest of the domestic economy, its no wonder gold prices are hitting new records day after day. By the time Washington is done, nothing “American” will have any intrinsic value left.

But just as I said yesterday about investing in the dollar’s downturn, be cautious of jumping on the golden bandwagon. It could be trouble.

So far this year, gold’s Street value has increased by 32%. It’s a strong gain when compared to historic moves, and it beat’s the S&P 500’s year-to-date climb of 22%, but how far will the bulls take it before they say enough is enough and the bottom falls out once again.

After all, gold really isn’t worth a lick.

You can’t eat it. It won’t fuel your truck. It won’t give you shelter and it won’t protect your house (unless you’ve got a good arm). When the dung really hits the fan, gold’s only strongpoint is it’s more valuable than a fancy certificate that says you own 1,000 shares of XYZ.

But even then, it’s only valuable because we say it is.

Let’s be flat-out honest with each other here. What are the chances of full-on economic calamity? I mean the kind of situation where you will dig your gold out from beneath the old oak tree and take it to the grocery store to buy a slab of bacon.

In other words, what are the chances you will actually use gold for its “emergency” purpose?

Slim to none, and I’m more pessimistic about this economy than any Roubini-following perma-bear.

Gold’s a trap, especially for the folks buying at today’s prices and actually paying to store the rare metal in some vault.

If you absolutely have to own gold, keep your ownership to a minimum, a few grand worth of coins or so. Nothing more.

Better yet, take advantage of the gold rush of ’09 and invest in the world’s gold miners. They are the ones fleecing the bandwagon riders and creating the ultimate market-beating profit potential.

In this market it is more important than ever to not be a clueless sheep merely following the herd.

Be the shepherd and lead the lambs to slaughter.

*** As options investors we love to lead the pack. That’s why over at TFN Strategic Trader, we are all smiles today. After locking in gains of 400% last week, we sold another set of call options for quick-and-easy gains of 60%.

On Friday I sent out a buy alert. This morning I said sell. Traders that followed my advice locked in three-day gains of 60%. Way better than gold.

Bill Bonner (The Daily Reckoning, UK Edition):
The Dow fell slightly on Friday. Oil ended the week at $77. The dollar went nowhere.

But gold rose to a new high – $1,146. Today it’s hitting more new highs above $1,160…

Whatever else may be going on, there’s a real bull market in gold. It’s a bull market that began ten years ago. If you’d bought stocks then, you’d have about what you have now… less inflation. If you’d bought gold… you have about 4 times what you had then.

Today, a quick glance at a chart shows gold looking a little toppy. Expect a correction. But remember, this is a bull market. In a bull market, you buy the dips.

Stocks, meanwhile, are in a bear market. In a bear market, you sell the rallies. This looks like a good time to sell – if you haven’t done so already.

“Take Your Gains,” says Forbes. And once you’re out of stocks, stay out until the bear market is over… probably at around 3,000 – 5,000 on the Dow. When the price of gold equals the price of the Dow, it will be time to switch.

We haven’t seen the last of this bull market in gold. It’s what you buy when you think government is making a mess of the monetary situation. You put your trust in gold as an antidote… as protection… as wealth insurance.

Are the feds making a mess of the monetary situation? Oh dear, dear reader… please ask us something harder. Trillion dollar deficits as far as the eye can see… Stimulus spending that turns the US into a Zombie Economy… Handouts to the bankers… gifts to the carry traders…

The feds are out-doing themselves… more below…

As for the bear market on Wall Street, investors are counting on a miracle… a ‘recovery’ that doubles corporate earnings in just a couple years. They think it’s “just like 1982”. Of course, it is just the opposite of 1982… see the table below.

Besides, there is no recovery… and profits will go down, as businesses compete for less spending.

The recovery may be all in your head, writes Robert Shiller, in the New York Times:

“Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

“Back in 1931, for example, The New York Times attributed the emerging economic cataclysm to a “mood of pessimism which had been carried to grotesque extremes.” In 1932, it compared reckless talk about “depression” to shouting “fire” in a crowded theater.”

It doesn’t matter what anyone says. It’s a depression. It’s nothing like the garden-variety recessions of the Post-War period.

It’s a depression because of the nature of the work it has to do. It has to clean up 3 decades’ worth of filthy balance sheets.

Click here for the rest of Mr. Bonner’s insightful commentary at The Daily Reckoning, UK Edition.

Judging by the sudden rise in fame of Levi Johnson or Balloon Boy’s antics, the human brain is far feebler than we give credit.

And so are the markets.

If you have taken a basic finance class anytime between 1965 and the present, you have likely studied Eugene Fama and his efficient market hypothesis.

Essentially, the University of Chicago professor created a cult-like following of investors and academicians that believe markets entirely reflect all known information and instantly react to new information.

For example:

When I told my ever-optimistic, ever-“hopeful” colleague, Laura Cadden, the news the majority of Obama’s infrastructure stimulus would finally be doled out sometime early next year was already priced into the market, I was showing my belief in efficient markets.

When she gave me a look that curled my toenails, I knew she didn’t believe in such “nonsense.”

The difference between efficient market “believers” and “non-believers” is as strong and divided as the difference between the Left and the Right. In many cases, in fact, the same arguments are involved.

It’s obvious these days that the Left does not believe in Fama’s theory. Why else would it build new regulations and reforms in an effort to limit market freedom?

The Right, on the other hand, with its unending determination to “let the markets handle it,” believe efficient markets will govern and regulate themselves as long as politicians keep their busy hands out of it.

Most of Wall Street tends to follow the Right’s path, realizing the more we know about an investment, the better the decisions we can make.

But it doesn’t matter what you and I think. We aren’t in charge.

Right now, the Left is in charge.

That means free market economics have got to yield to big governments and ever-increasing regulations.

That makes guys like Chris Dodd happy.

Just a few of hours ago, the Senate Banking Committee’s chairmen released an 1,100-page draft bill that takes the very notion of efficient markets and capitalism working hand in hand and tosses it out the window.

Instead of letting a Darwinian-style market separate the strong from the weak, Mr. Dodd wants the government to do the work.

His monstrous bill, which is still nearly 50% shorter than Pelosi’s anti-market healthcare package, finally calls for the “change” so many folks voted for last November.

The Feds power to regulate banks is eradicated. The FDIC role is limited. A new consumer protection agency is created. Executive compensation is in play. Credit-rating agencies will get new guidelines. And of course, the derivatives industry will be re-tooled.

Welcome to the new America, my comrades.

Washington is working to do everything it can to make the markets as inefficient as possible.

It is one more piece of information that proves that human mind is greatly overvalued.

*** Just to prove that efficient markets are still at work and new information can make or break a portfolio, the natural gas industry is reeling today as the International Energy Agency officially warned of a global glut of the vital energy source.

Gas prices are down to their lowest levels in weeks after the agency warned of a strong decline in demand this year and a massive spurt in new production.

As I write, natural gas is trading for $4.483 per MMBtu. Less than a month ago, that figure was just shy of the $6.00 mark.

It’s a downward trend with no end in sight.

Fortunately for TFN Strategic Trader, the news means just one thing, big gains.

I recommended four ways to play the situation recently. Earlier today, all four picks were worth double-digit gains, with one doozy up by 324%.

There’s still time to get in on the action. Read my exclusive report right here.

And Warren Buffett came out saying he’s buying equities again. All the while, the dollar is sitting at an 11 month low, and gold touched $1006 this morning.

As I perused the underground, I came across a piece by Jeff Harding of the Daily Capitalist that I had to share. He begins by asking, “how has the playing field for our economy changed and how will those changes affect our future? The answer to these questions will determine the future of the world’s economies.”

He then outlines the 7 mega-trends that will dictate our economic future. We’ve touched upon many of these ideas in previous issues. But here they are:

• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No. 2. Consumers will continue to increase savings to prepare for retirement.
• Megatrend No. 3. Declining U.S. consumer demand will continue to negatively impact the world economy.
• Megatrend No. 4. Deflation will continue for some time.
• Megatrend No. 5. Home ownership rates will decline to more historical levels of, say, around 66%, down from the high of 69% during the boom, which will keep a lid on home prices.
• Megatrend No. 6. Government stimulus and recovery programs only delay recovery and deepen the pain for workers.
• Megatrend No. 7. Massive federal deficits will double the national debt, result in higher taxes, and will act as a permanent drag on the economy.

If you have a chance, you should check out the piece in full. It is jam packed with facts and figures that will give you something to chew on for breakfast, lunch and dinner.

So where do these trends all lead?

All cycles eventually bottom out and growth resumes. The timing of any recovery is impossible to predict and for the most part it depends on what the government will do (or, hopefully, not do). The more the government interferes with the recovery process by propping up bankrupt banks, by manipulating the economy with fiscal and monetary stimulus, by creating a huge national debt, and by increasing taxes, the longer it will take.

With commercial real estate in serious decline, deflation will continue, and we’ll see more bank failures. While we may see a “bump” in GDP in Q3 and Q4, the liquidation of commercial real estate assets and other debt will accelerate. At some point, deflation will stop, and asset prices will find a bottom, as housing is starting to do now. My view is that the post-deflation economy will remain sluggish with high unemployment for some time. I believe that, unlike Japan, we will eventually see inflation.

There are significant differences between our economy and Japan’s and the comparison to Japan in the 1990s may not be entirely applicable here. The Japanese were reluctant to let banks and companies fail, but, despite a few notable exceptions, we aren’t. This is a necessary requirement for recovery, and we are better at “creative destruction” than are the Japanese.

Also, we have a more dynamic culture of entrepreneurship than Japan, making us more responsive to a recovery. However, the main difference is that Japan’s debt was largely financed internally due to their very high savings rate in the 1990s (about 14%). While our savings rate will continue to grow, I do not believe it will keep up with rising federal deficits, and we will need to finance our national debt on the international markets. This will drive interest rates up and put pressure on the dollar.

Then I believe inflation will assert itself as banks renew the lending cycle. I believe the Fed will maintain its loose monetary policy in order to keep interest rates down to stimulate growth. Governments always find it expedient to create inflation to give people the impression that the economy is growing. The problem is that inflation will depress the formation of real savings necessary to finance growth, and like the 1970s, we’ll see stagnation and inflation (”Stagflation”). If inflation gets out of hand, then, for a while we may see price and wage controls.

After that, who knows? Cut the money supply as Paul Volker did, and drive up interest rates and bring on a new recession? Continue to inflate? That’s too far in the future and politicians don’t think that far ahead.

Existing home sales rose 7.2% to a 5.24 million annual rate in July, the most since August 2007 and the fourth straight month the figure increased, the National Association of Realtors (NAR) said Friday. Year-over-year sales grew 5%, the increase since September 2007, just before the markets came crashing down the following month.

“The housing market has decisively turned for the better,” said NAR chief economist Lawrence Yun. “A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales.”

Rising sales numbers in the past few months may have triggered previously discouraged sellers to re-list their homes, according to Yun.

Total housing inventory at the end of July grew 7.3% to 4.09 million existing homes available for sale, representing a 9.4-month supply at the current sales pace. However, the raw inventory totals are 10.6% lower than they were last year.

Sellers are responding to rising inventories accordingly: The national median existing home price was $178,400 in July, 15.1% lower than a year ago. But the fact that buyers are dipping their toes back into the murky depths of the housing market doesn’t necessarily mean the sector is trending toward a full-blown recovery.

Turn of the Year Makes for Uncertain Future

One in three homes sales last month came from first-time buyers who benefited from the Obama administration’s $8,000 tax credit, which ends after November. First-timers accounted for almost the same amount in June with 29%. That means there could be a significant drop in purchases when that program expires.

The real estate industry is lobbying Congress to extend the first-time buyer tax credit, and Nevada Democratic Senate Majority Leader Harry Reid told reporters earlier this month an extension is “something we can get done.”

With or without a tax break, consumers in this economy are looking for a bargain much like they are with retail sales and auto sales. The bulk of the first-time tax credit sales have come from lower-priced homes, and NAR data supports that. Sales of homes that cost less than $250,000 were up almost 17.8% year-over-year through June. Meanwhile, sales decreased 13.3% in the $250,000-$500,000 bracket, 18.6% in the $500,000-$1 million range, and 32.7% in the $1 million – $4 million range.

Lost pricing power in the more expensive homes wasn’t lost on Pulte Homes Inc. (NYSE: PHM), which last Tuesday finished its acquisition of value-priced homebuilder Centex Corp.(NYSE: CTX), making Pulte the largest homebuilder in the United States.

“I’m not seeing a tremendous amount of good news on the job or economic front, so I do think it’s important that the [tax] credit get extended,” Pulte Chief Executive Officer Richard Dugas told The Associated Press.

The turn of the year isn’t likely to yield much good news on the job front. Most economists are expecting the unemployment rate to top out around 10%, and although July’s rate dipped one-tenth of a percentage point, the latest weekly initial unemployment insurance claims were discouraging, rising 15,000 to 576,000 for the week ended August 15.

“The improvement in the labor market has stalled,” Scotia Capital Inc. economist Derek Holt told Bloomberg News following the latest jobless claim figures. “Consumer spending will be pushed back on its heels for a longer time than markets are expecting.”

When the bleeding of jobs does peak, an upturn in employment could take some time as the United States experiences a jobless recovery. With an unemployment rate at or around 10%, home inventory levels could creep back in to 2008 territory.

“[The unemployment rate projection] indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate,” Fed economists wrote.  “This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing work forces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.”

Source: Home Sales Will Struggle to Rebound Without Tax Credit Extension

In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock