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

Far be it for us to call an end to the party. We’ve been warning of the dangers of this rally since it began. And it looks like nobody’s been listening: stocks have continued to climb in the most dizzying Wall Street rally since the infamous bear market bounce of 1929-1930. But that’s what we do here at Notes – we bring you the other side of the economic story. So we figure we’ll plow on.

Legendary short-seller Doug Kass called a bottom in US stocks in March. He was dead on with this call. Now Kass is has turned seriously bearish on the prospect – now almost a matter of dogma in the mainstream financial press – of a V-shaped recovery.

Kass’s reasons for being suspicious of the mainstream’s recovery mantra are eminently sensible… which almost guarantees that nobody will pay any attention to them. They’re even (gasp!) realistic and based on observable facts.

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high health and energy bills also loom.

(Hat tip, MarketFolly.com)

Reason number 10 scares us, dear reader. Kass is really just stating the blindingly obvious: massive deficits will have to be paid for sooner or later, and when they do, they’ll be paid for by higher taxes.

This hike in taxes isn’t lying somewhere in the distant future, either. It’s happening right now. This from Kass:

We have already witnessed the start of what is likely to become an avalanche of changing tax policy. New York City imposed its first sales tax increase in 35 years (rising from 8.375% to 8.875%), and, on the same day, the state of New Jersey imposed an additional tax hike on wholesale liquor distributors’ sales of liquor and wine, which is sure to be passed on to the consumer. In Oakland, Calif., even the “high life” is being taxed as the city has recently passed a tax on marijuana sales and the state of California appears to be close in following Oakland’s example.

This is just the start of a nascent and broad trend toward much higher taxes, a growth-impeding and P/E-diminishing secular development

Kass not only identifies the obvious when it comes to the future of the US tax regime, but he also hits the nail on the head (in our humble opinion, at least) when it comes to the future of US stocks.

The market optimism that we are now experiencing in the expectation of a clean handoff of the baton of stimulation from the consumer (2000-2006) to the government (2008-???) might be more short-lived than many believe, as the price of stimulation, regardless of whether it’s source is the private or public sector, holds the promise of being more of a growth-retardant. With the debt super-cycle continuing apace (but in a public sector context), the fragility and inherently unstable “balance of financial terror” argues for a not-so-benign and extremely volatile stock market future.

Unquestionably, the animal spirits have been in full force as shorts are scrambling to cover and many more are joining the ever more vocal and growing bullish chorus. But to me, the margin of safety is becoming ever more thin as the enemy of the rational buyer – namely, optimism – reaches new heights.

In summary, since a self-sustaining economic recovery appears doubtful, I do not believe that we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges discussed above.

*** Here’s Kass’s model portfolio as of June 2009. Interestingly, he recommends holding 29% in cash… a very smart move in our opinion, considering the state of the markets right now.

http://4.bp.blogspot.com/_9MYixPWxtF0/SjbACP6_syI/AAAAAAAAAn0/dG_f2yx8p0I/s1600/doug-kass-model-portfolio.jpg

All we know, dear reader, is that following great crashes we get great bear market rallies. And these euphoric rushes of blood to the head have a nasty habit of suckering overoptimistic investors. As resource investing legend Doug Casey put it in yesterday’s Casey’s Daily Dispatch, there were eight such rallies during the Great Depression. These rallies lasted an average of 11.3 weeks, during which time the average increase was 52.6%.

Simple math will tell you that this rally has lasted almost twice as long as the average bear market rally during the Great Depression.

Doug reckons what he calls the “wonder rally” on Wall Street won’t survive the September. He points out that options traders are now betting that the VIX – the volatility index – will increase 13% in the next five weeks, according to data compiled by Bloomberg.

That’s the biggest spread since August 2008 – just before the S&P 500 saw its worst two-month plunge in 21 years. See, these two indexes – the VIX and the S&P 500 – have moved in opposite direction 81% of the time over the last five years.

As Doug says, however, it’s critical that underground investors keep an open mind regarding equities right now. The reason is simple. The government is pumping phenomenal amounts of funny money into the economy. And equities are extremely sensitive to this kind of fiscal policy (more sensitive, that is, than the wider economy, which tends to react slower to stimulus).

This is a big wild card. And in our humble opinion it’s a big reason behind why stocks are doing so well right now. Long suffering readers will recall that here at Notes we believe traders and investors are betting on the government’s ability to backstop the market rather than on the market itself.  There is also a strong likelihood that Washington’s fiscal and monetary stimulus will trigger an inflationary cycle, which would also benefit stocks in the short-term.

Common sense isn’t exactly fashionable these days. But take a moment to think about just how extraordinary a 49% rally stocks is over just five months. As our favorite underground analyst, David Rosenberg, points out, this is “unprecedented back to the 1930s.”

In the last cycle, it didn’t happen until February 2004 – 18 months into that bull phase where again there was tremendous policy stimulus and an oversold low to climb out of. In addition, household credit was expanding rapidly. Even coming into what was a secular bull market in 1982, it took a good seven months to rally 49% – and that was with the benefit of a V-shaped economic recovery. Going back to 1950, it has taken an average of around 18 months for the market to rebound 49% from a recession trough, not five months as has been the case thus far.

That stocks have climbed out of their recent recession trough over three times as fast as after the average recession sets serious alarm bells ringing here at Notes HQ. As we’ve said before, if you have money in stocks right now, you better be sure that money is nimble.

As you review your investment portfolio to size up your current exposure to gold, keep one key point in mind: When it comes to profits, there’s no rush like a speculative gold rush.

And that’s just what we have at hand.

Inflationary fears are on the march the world over. And most of those worries are due to the trillions of dollars in stimulus spending the world’s central bankers have engineered. Those worries about the pressure from rising prices are destined to cause the next big asset bubble.

And the color of this particular bubble will be gold.

The irony here is that even though central bankers are the cause of this looming bubble in gold prices, a higher gold price isn’t their objective.

They apparently believe that freshly minted “fiat dollars” – trillions of them – are just what’s needed.

Let me explain.

The plan, you see, is quite ingenious – on its face, at least. With a simple wave of their monetary wands, and a midnight run of their printing presses, central bankers such as U.S. Federal Reserve Chairman Ben S. Bernanke will be able to “create” the money that’s needed to repay their governments’ obligations, shore up their financial systems and jump-start their economies, all at the same time.

But nothing is ever that simple.  And there’s a problem that’s been overlooked, or perhaps just ignored.

It’s called an “imbalance.”

As central bankers flood the world’s financial system with ever-increasing amounts of cash and increasingly easier credit, there won’t be an offsetting increase in the amounts of goods and services available for purchase.

The result: you have more capital chasing the same amount of production.  As your mind treks back to Economics 101, you’ll realize that the laws of supply and demand haven’t been rewritten. The additional dollars will cause the prices of the goods (especially such commodity assets as precious metals, crude oil, industrial metals, agricultural commodities, and later on even property assets such as global companies) to rise in a scenario that’s akin to a global auction.

That means there’s only one possible outcome.

Higher prices. Just around the bend.

As that almost-certain inflation tsunami approaches, gold will be your safest flotation device.

The Three Trigger Points of the Coming Global Gold Rush

Every bull market in gold runs through three stages:

• Stage One: Currency Devaluation.
• Stage Two: Investment Demand.
• Stage Three: A culminating Mania-Buying Spree.

In Stage One, gold gains the most ground against the leading global currency. This one’s easy.  Gold, and virtually every other commodity I follow, is quoted in U.S. dollars. Despite the many epitaphs that have been written, the greenback remains the world’s dominant legal tender.  Its status is very likely to change someday, but that’s fodder for another essay.

Since April 2001, and until a couple of years ago, the increase in the price of gold was much more muted in other currencies. With gold seemingly locked in a sideways trading market, demand for the “yellow metal” remained low.

In Stage Two, gold begins to decouple from the dominant currency (the U.S. dollar), rises versus most other monies, and investment demand kicks in.  That inflexion point was reached by mid-2005, and gold’s upward slope began to take shape.

It’s at this point that foreign investors begin to take notice. Investors from Asia, Europe and other key markets outside the United States have a much stronger attraction to gold than we do, and often better recognize its ability to preserve wealth.

Just as important: At this point in the cycle we see sophisticated individual investors – and professional institutional investors – increase their portfolio allocations.

Twice before gold has taken a shot at the psychologically significant $1,000-an-ounce price level, even eclipsing it for a time and setting a new record high in March 2008.

Already, demand for physical bullion has been on a marked rise since entering Stage Two. And with last fall’s stock-market panic, demand zoomed almost vertically.

During the fourth quarter of 2008, for instance, North American and European purchases of gold coins and gold bars rose 811% over the same period the year before, and premiums on physical gold escalated stratospherically.

Overall, this intensified interest in the yellow metal pushed the global retail investment in gold up n early 400% in last year’s fourth quarter, compared with the final three months of 2007, according to the World Gold Council.

Exchange-traded funds (ETFs) have been a tremendous catalyst for swelling gold demand. SPDR Gold Trust (NYSE: GLD), the largest physically backed ETF on the planet, is now the sixth-biggest holder of gold bullion in the world, holding more than 1,000 metric tones of the precious metal.

Indeed, the fund’s influence on the market is such that it actually seems as if every year or so it moves up past year another nation in the global rankings of gold-bullion holders.

Because it’s becoming so much easier to invest in gold, individuals are becoming much larger owners and holders of the yellow metal, a reality that’s gradually decreasing global government influence over the valuable commodity.

We’ve clearly passed Stage One. And we’ve certainly completed much of Stage Two.  That means the fun is about to begin.

Enter Stage Three …

Stage Three is when all the stops get pulled out.  That’s when the public finally becomes aware of gold’s progressive rise.  It’s when we see a market bubble akin to what we saw with “dot-com” stocks back in the late 1990s, or U.S. stocks (and a Dow Jones Industrial Average inexcess of 14,000) in late 2007.

A mania sets in and higher prices, by themselves, beget higher prices, with gold now rising in the kind of near-vertical climb that is the hallmark of a speculative mania – a bubble.

According to famed market observer Richard Russell, publisher of theDow Theory Letters, we have entered the beginnings of Stage Three.  Russell has the perspective to understand what he’s saying: He’s been following and writing about the markets for more than 50 years – without interruption – having started all the way back in 1958. And Russell says that “my belief is that we’re now nearing the beginning of the third speculative phase of the great gold bull market …”

And Russell’s not alone.

In an interview with Bloomberg TV, Marc Faber – another noted writer and commentator – was asked about the inflationary pressures facing the United States, and responded by saying that he is “100% sure that the U.S. will go into hyperinflation. The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

So if Russell is predicting a bubble (Stage Three), and Faber is predicting a huge surge in demand (inflation – Stage Two), that leaves us to find a recognized outside expert to address Stage One (currency devaluation).

For that we turn to noted author and global adventurer Jim Rogers, who has been interviewed many times by Money Morning.

And Rogers isn’t keen on the future of the U.S. dollar.

“We’re going to have a currency crisis, probably this fall or the fall of 2010,” Rogers said recently. “It’s been building up for a long time. We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”

How Dark Will it Get for the Dollar?

Currency crises occur all the time. Even the really bad ones – known as “hyperinflation” – have occurred on a fairly regular basis throughout history: Zimbabwe has experienced this extremely painful affliction for much of this decade; in Germany’s Weimar Republic, the paper mark/gold mark ratio went from a one-to-one ratio in 1921, all the way to a one-to-1.0 trillion ratio in 1923 (see accompanying chart).

Now just imagine what would happen to gold in any remotely comparable situation involving the U.S. Dollar.  Remember, the dollar is the world’s reserve currency today.  Simply put, this is an experiment pure and simple, since there is no precedent for the current world money order.

All it would take is a loss of faith in the greenback. It’s important to understand that dollars are nothing more than paper and ink, backed by the full faith and credit of the U.S. government.  In a year in which the budget deficit could easily top $2 trillion, this does not reassure me.

The dollar holds its value only as long as the greenback’s holders maintain their faith in the currency. The moment people decide they don’t want your dollars, they become worthless, or at least worth much less.  In that case, it will take a lot more dollars today to buy the same thing you bought with many fewer dollars only yesterday.

Historical anecdotes recount stories of workers having to be paid several times a day (because the Weimar mark was falling in value so quickly), or of wheelbarrows full of marks being trundled up to the local store just to purchase a loaf of bread. At one point, the mark had fallen so far that it had more value as a wallcovering than as a currency.

The worst part of such a scenario is when there’s an actual “panic run” on the dollar, where holders dump it en masse, meaning there are a lot of folks trying to exit all at once through a very narrow doorway. For the greenback, it would be nothing short of the currency’s death knell.

Painting a Picture of a Powerful Profit Play

But in the dollar’s demise would be a major profit opportunity. As noted, gold is priced in U.S. Dollars all around the world.  That’s why I have no doubt that gold will absolutely soar, as people the world over will seek refuge in its anti-inflation properties.

Add into the mix the fact that – compared to stocks, bonds and currencies – gold is actually quite a small market, and you start to understand the magnitude of the opportunity we’re depicting.

Add in the cash held back by investors who were burned by last year’s panic sell-off, coupled with the liquidity being created by the often-profligate government stimulus programs. That’s a potentially hefty catalyst in such a small market.

How hefty? Just think back 10 years to the dot-com bubble of 1998, 1999 and the first part of 2000, when any company with a “dot-com” suffix was automatically lumped into the “Gold Rush” in cyberspace.

Or, if you want something more recent, think about the near-vertical-ascent in housing prices we watched just a few years ago – a real estate bubble that induced countless numbers of homeowners to take cash advances on the homes that they lived in to buy second homes, vacation houses, or rental properties “as an investment.”

In both cases, think about the profits reaped by those who got in early, and who understood the game that was afoot.

Fueled by the long-term, inflation-supercharged changes in the world financial system, the flood of newly printed money, and the looming demise of the dollar, the imminent gold mania will put the dot-com craze, and even the real estate frenzy, to absolute shame.

Here’s one last point to consider: We’re only about seven to nine years into a “secular bull market” in commodities that was poised to play out anyway, and that has an additional eight, nine or 10 years to run. And key among those commodities is gold.

But if you really want to juice your returns, be sure to get some exposure to companies that explore for and produce gold, as their margins will rise exponentially along with a rising gold price.

After all, as history shows us, there are a lot of ways to profit from a gold rush.

Source: The Three Triggers of the Global Gold Bubble ]]> http://www.contrarianprofits.com/articles/the-three-triggers-of-the-global-gold-bubble/19497/feed 1 http://www.contrarianprofits.com/articles/inflationary-surprises/19485 http://www.contrarianprofits.com/articles/inflationary-surprises/19485#comments Wed, 29 Jul 2009 00:06:25 +0000 Bill Bonner http://www.contrarianprofits.com/?p=19485 We love surprises! But only when we see them coming. We’re always wondering: how will we be surprised? What will happen that we don’t expect?

It’s easy to make money…if there are no surprises. You just put your money in something that is going up and let it go.

But surprises sink ships, marriages, military campaigns and investment portfolios. Things happen that you’re not prepared for…

A friend told of what happened to a mutual friend:

“I guess it was the embarrassment that bothered him most. I don’t know. He was happily married…or he thought he was. They had three children. They must have been married 10 years. And then, she announced she was a lesbian…and moved in with a woman.

“I imagine he was devastated. He…