Another Bernanke "Guru Moment" - An Instant Classic?

The man who proclaimed the subprime problem was "contained" in March 2007 (after which Jim Grant hilariously quipped "yeah, to planet earth") - is back in the news again with another "guru moment".

The Wall Street Journal reports:

The U.S. economy should continue to recover at a moderate pace this year, but it will take time to restore all the jobs lost during the recession, Federal Reserve Chairman Ben Bernanke said Wednesday.

In his latest assessment of the economy, Mr. Bernanke told a congressional committee the pace of the recovery this year will depend on if consumers spend and companies invest enough to make up for fading government support.

"On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters," the Fed chief said to the Joint Economic Committee.

Any fellow contrarians want to take the "under" on Ben's latest gem?

Scary Chart of Delinquency Rates Skyrocketing

Can you spot the trend?

Chart courtesy of http://www.calculatedriskblog.com/

Hat tip to friend, reader, and monetary expert Dave for sending this gem along.

For further reading on the real estate trainwreck, check out this interview with real estate entrepreneur and guru Andy Miller.

Doug Casey: How You Can Survive the Upcoming Financial Apocalypse

Here's an excerpt from the latest issue of Conversations with Casey - an absolutely must read that Doug Casey and his team publish every Wednesday. If you're not yet a subscriber, I'd highly recommend it - it's a free pub, so you can't beat the price, and Doug definitely doesn't pull any punches!

***

(Conversations with Casey: Interviewed by Louis James, Editor, International Speculator)

L: Doug, last time we spoke, you said quite a bit about debt, in the context of your expectation that the euro is on its way out. At the end of that conversation, you mentioned, of course, that the problem is not limited to Greece, nor the eurozone. America as a country has become a world-class debtor, and many Americans seem to think a maxed-out credit card is a reason to get a higher credit limit, not to economize. It’s like a global epidemic. Let’s talk about debt.

Doug: Sure. This is a story that’s going to end very badly for a lot of people. I’ve said this before, in many different ways, but I think it’s worth saying again, because most people just don’t grok it…

L: Grok. From the Martian word for “drink” and “understand.” In Heinlein’s novels, water was a critical element of Martian culture – makes sense, for a desert planet. When you grok knowledge, as when you drink water, you don’t just hold it in your mouth and spit it out. You take it into yourself, it goes into your blood, and eventually into every cell in your body; it becomes part of you. This is heavy-duty understanding… Sorry for jumping in with the spontaneous lecture. I just suspect many readers will not know the term.

Doug: Or put another way, in the negative case, most people just don’t get what money really is – and what it isn’t. They take it as a given, as part of the cosmic firmament. But it’s not. A prime example of this is the mistaking of debt for money, a phenomenon David Galland pointed out in a Casey’s Daily Dispatch a few weeks ago. This is why the entire world’s monetary system today is headed for a disastrous failure. And this is absolutely inevitable. There’s no way around it.

L: Why?

Doug: Because you can’t use debt as money. As I’ve pointed out before, Aristotle, in the fourth century BC, was the first person to define what money is. And what is it? It’s a store of value and a medium of exchange.

The paper we use today is a medium of exchange – it got that way because governments made it illegal not to accept it – but it’s not a good store of value. And it’s rapidly and radically becoming less of a store of value. What we use as money today is actually not money; it’s currency. Technically, that’s simply a word that indicates a government substitute for money.

What does make for good money? Again, Aristotle gives us the answer. It’s something that has five characteristics: it’s durable and divisible, consistent and convenient, and has value in itself.

L: Some of our readers who’ve studied Austrian economics challenged us on that last bit, last time we talked about gold, because, as the Austrians pointed out, value is subjective. But you don’t mean some sort of value that’s independent of people making value judgments. You mean that people value something that makes for good money, because of its innate qualities – not something “valued” because of government threats of force.

Doug: Right. And for these reasons, gold is almost certainly the best thing to use for money. Not because I say so, nor because Aristotle said so, but because, over time, people have found it to be the most durable, divisible, consistent, convenient, and inherently valuable thing to use. Silver is also good, but it’s less durable because it corrodes. And less convenient, in that it takes about 60 times more of it – at the moment – to offer the same value as gold. Copper is the next traditional step down the ladder.

L: That, plus one reason that’s pertinent today but was not a problem in Aristotle’s world: gold can’t just be printed up on the arbitrary whims of those in power.

Doug: That’s the big one. Using metals as money takes the whole matter out of the hands of the government and its bureaucrats.

L: But we don’t use gold today…

Doug: No, as per David’s example, it’s as though a bunch of friends without any real money started exchanging IOUs for money, and then after a while forgot that the IOUs were supposed to represent, and be redeemed in, real money.

The problem with this is that, in the case of the IOUs between friends, paper is based solely on hope and trust. One can move away, or die, or turn dishonest, or become insolvent – many other things could happen. A guy stuck with a dead man’s IOU has nothing.

With government IOUs, or currencies, it’s worse, because they can increase the number of IOUs in circulation without telling anyone – that’s what inflation is. Since the government creates the IOUs, it gets the benefit of spending them before the inflation they create raises prices, which is basically stealing from the people. And, of course, sometimes governments do “die,” leaving the holders stuck with nothing, just as with the IOUs between friends. In fact, it’s arguably far more likely that such problems will arise from trusting a government to print IOUs than from trusting a friend.

[To read the full 8-page interview with Doug Casey and what he thinks will happen to the American middle class, sign up here.]

An Exclusive, Insider View of the Real Estate Market (Hint: It Ain't Pretty)

Is real estate bottoming? Ummmm, I guess it depends what you mean by bottoming...but unless you work for the NAR, probably not!

Here's an exclusive, insider look at the "real estate train wreck" as Casey Research's David Galland sat down with real estate entrepreneur and guru Andy Miller.

This read will make you think twice about "bottom fishing" in real estate just yet!

***

An Insider’s View of the Real Estate Train Wreck

By David Galland, The Casey Report

The first time I spoke with real estate entrepreneur Andy Miller was in late 2007, when I asked him to serve on the faculty of a Casey Research Summit. And there was no one in the nation I wanted more than Andy to address the critical topic of real estate.

My interest in Andy was due to the fact that he has been singularly successful in pretty much all aspects of the real estate market, including financing and developing large projects – such as shopping centers, apartment communities, office buildings, and warehouses – from one end of the country to the other. His expertise has also allowed him to build an impressive business providing assistance to large financial institutions that need help in dealing with problem commercial real estate loans. As you might suspect, business is booming.

Back in 2007, however, what most intrigued me about Andy was that he had been almost alone among his peer group in foreseeing the coming end of the real estate bubble, and in liquidating essentially all of his considerable portfolio of projects near the top. There are people that think they know what’s going on, and those who actually know – Andy very much belongs in the latter category.

In fact, he initially refused to speak at our event, only agreeing very reluctantly after I had hounded him for several months. The reason for his refusal, I later found out, was that he had spoken at several industry events before the real estate collapse and had been all but booed off the stage for his dire outlook.

The happy ending of this story is that Andy’s speech at our Summit was a rousing success, and he enjoyed it so much that he has now spoken at several, and has kindly agreed to sit for periodic interviews to keep our readers up to date on the latest developments in this critical sector. So far, Andy’s real estate forecasts continue to come true.

As you’ll read in the following excerpt from my latest interview with Andy, who now spends considerable time each day helping the nation’s biggest banks cope with growing stacks of problem loans, he remains deeply concerned about the outlook for real estate.

David Galland

No one has been more right on the housing market in recent years. So, what’s coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?

MILLER: I don’t think so.

For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.

If it's true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn’t help a homeowner whose property is worth less than the mortgage. So when the supply of government-facilitated loans dries up, it's going to put the home market in a very, very bad place.

Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.

The public doesn’t have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It’s huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can't get people to focus on it, and it's very esoteric, it's very hard to understand. But it’s not something the bond market won’t notice. The government can’t keep doing what it has been doing to support mortgage lending without pushing interest rates way up.

Refinancings of single-family homes are very interest-rate sensitive. Consumers have their backs against the wall. They have too much debt. Refinancing their maturing mortgages or their adjustable-rate mortgages is very problematic if rates go up, but that's exactly where they’re headed. So anyone who’s comforted by current statistics on single-family homes should look beyond the data and into the dynamics of the market. What they’ll find is very alarming.

On that topic, recent data I saw was that something like 24% of the loans FHA backed in 2007 are now in default, and for those generated in 2008, 20% are in default, and the FHA is out of money.

MILLER: Fannie Mae had a $19 billion loss for the third quarter of 2009, and they are now drawing on their facility with the U.S. Treasury. We have all forgotten that Fannie and Freddie are still being operated under a federal conservatorship. On Christmas Eve, the agency announced that they were going to remove all the caps on the agencies.

So what about commercial real estate?

MILLER: When I saw what was happening in the housing market, I liquidated all my multifamily apartments, shopping centers, and office buildings. I liquidated all my loan portfolios, and I'm happy I did.

Then it occurred to me in 2005 and 2006 that the commercial world had to follow suit. Why? Because it's a normal progression. Obviously, when single-family homes decline in value, multifamily apartments decline in value. And when consumers hit the wall with spending and debt, that's going to have an impact on retailers that pay for commercial space.

Furthermore, the financing for retail properties had gotten ludicrous. The conduits were making loans that they advertised as 80% of property value when they originated them, but in reality the loan-to-value ratios were well over 100%. And I say that to you with absolute, categorical certainty, because I was a seller and nobody knew the value of the properties that I was selling better than I did. I had operated some of them for 20 years, so I knew exactly what they were bringing in. I knew what the operating expenses were, and I knew what the cap rates were. And, you know, the underwriting on the loan side and the purchasing side of these assets was completely insane. It was ludicrous. It did not reflect at all what the conduits thought they were doing. They were valuing the properties way too aggressively.

I became very bearish about the commercial business starting in late '05. In fact, I think I was in Argentina with Doug Casey, sitting on a veranda at one of the estancias, and he and I were lamenting what was going on in the real estate business, and I said there was going to be a huge adjustment in the commercial market.

Beyond the obvious, that the real estate market has taken pretty significant hits and some banks have been dragged under by their bad loans, what has really changed in real estate since the crash?

MILLER: I think the first thing that changed was that people learned that prices don’t go up forever. Lenders also saw that underwriting guidelines for commercial real estate loans, especially in the securitization markets, were erroneous. They realized that some of their properties had been financed too aggressively, but still, I don't think even at the fall of Lehman, anybody was predicting a wholesale collapse in commercial real estate.

But they did see they should be more circumspect with loan underwritings. In fact, after the fall of Lehman, they completely stopped lending. I think they realized we had been living in fantasy land for 10 years. And that was the first change – a mental adjustment from Alice in Wonderland to reality.

Today it's clear that commercial properties are not performing and that values have gone down, although I've got to tell you, the denial is still widespread, particularly in the United States and on the part of lenders sitting on and servicing all these real estate portfolios. People still do not understand how grave this is.

Right now there are an awful lot of banks that do an awful lot of commercial real estate lending, and for about a year now you’ve been telling me that you saw the first and second quarter of 2010 as being particularly risky for commercial real estate. Why this year, and what do you see happening with these loans and the banks holding them?

MILLER: It's an educated guess, and it hasn’t changed. I still think that it's second quarter 2010.

The current volume of defaults is already alarming. And the volume of commercial real estate defaults is growing every month. That can only keep going for so long, and then you hit a breaking point, which I believe will come sometime in 2010. When you hit that breaking point, unless there's some alternative in place, it's going to be a very hideous picture for the bond market and the banking system.

The reason I say second quarter 2010 is a guess is that the Treasury Department, the Federal Reserve, and the FDIC can influence how fast the crisis unfolds. I think they can have an impact on the severity of the crisis as well – not making it less severe but making it more severe. I will get to that in a minute. But they can influence the speed with which it all unfolds, and I’ll give you an example.

In November, the FDIC circulated new guidelines for bank regulators to streamline and standardize the way banks are examined. One standout feature is that as long as a bank has evaluated the borrower and the asset behind a loan, if they are convinced the borrower can repay the loan, even if they go into a workout with the borrower, the bank does not have to reserve for the loan. The bank doesn’t have to take any hit against its capital, so if the collateral all of a sudden sinks to 50% of the loan balance, the bank still does not have to take any sort of write-down. That obviously allows banks to just sit on weak assets instead of liquidating them or trying to raise more capital.

That's very significant. It means the FDIC and the Treasury Department have decided that rather than see 1,000 or 2,000 banks go under and then create another RTC to sift through all the bad assets, they’ll let the banking system warehouse the bad assets. Their plan is to leave the assets in place, and then, when the market changes, let the banks deal with them. Now, that's horribly destructive.

Just to be clear on this, let's say I own an apartment building and I've been making my payments, but I'm having trouble and the value of the property has fallen by half. I go to the bank and say, "Look, I've got a problem," and the bank says, "Okay, let's work something out, and instead of you paying $10,000 a month, you pay us $5,000 a month and we’ll shake hands and smile." Then, even though the property’s value has dropped, as long as we keep smiling and I’m still making payments, then the bank won't have to reserve anything against the risk that I’ll give the building back and it will be worth a whole lot less than the mortgage.

MILLER: I think what you just described is accurate. And it’s exactly a Japanese-style solution. This is what Japan did in '89 and '90 because they didn’t want their banking system to implode, so they made it easier for their banks to sit on bad assets without owning up to the losses.

And what’s the result? Well, it leaves the status quo in place. The real problem with this is twofold. One is that it prolongs the problem – if a bank is allowed to sit on bad assets for three to five years, it’s not going to sell them.

Why is that bad? Well, the money tied up in the loans the bank is sitting on is idle. It is not being used for anything productive.

Wouldn’t banks know that ultimately the piper must be paid, and so they'd be trying to build cash – trying to build capital to deal with the problem when it comes home to roost?

MILLER: The more intelligent banks are doing exactly that, hoping they can weather the storm by building enough reserves, so when they do ultimately have to take the loss, it's digestible. But in commercial real estate generally, the longer you delay realizing a loss, the more severe it’s going to be. I can tell you that because I'm out there servicing real estate all day long. Not facing the problems, and not writing down the values, and not allowing purchasers to come in and take these assets at discounted prices – all the foot-dragging allows the fundamental problem to get worse.

In the apartment business, people are under water, particularly if they got their loan through a conduit. When maintenance is required, a borrower with a property worth less than the loan is very reluctant to reach into his pocket. If you have a $10 million loan on a property now worth $5 million, you’re clearly not making any cash flow. So what do you do when you need new roofs? Are you going to dig into your pocket and spend $600,000 on roofing? Not likely. Why would you do that?

Or a borrower who is sitting on a suburban office property – he's got two years left on the loan. He knows he has a loan-to-value problem. Well, a new tenant wants to lease from him, but it would cost $30 a square foot to put the tenant in. Is the borrower going to put the tenant in? I don't think so. So the problems get bigger.

Why would the owner bother going through a workout with the bank if he knows he’s so deep underwater he’s below snorkel depth?

MILLER: It's always in your interest to delay an inevitable default. For example, the minute you give the property back to the bank, you trigger a huge taxable gain. All of a sudden the forgiveness of debt on your loan becomes taxable income to you. Another reason is that many of these loans are either full recourse or part recourse. If you're a borrower who’s guaranteed a loan, why would you want to hasten the call on your guarantee? You want to delay as long as possible because there’s always a little hope that values will turn around. So there is no reason to hurry into a default. None.

So that’s from the borrower's standpoint. But wouldn’t the banks want to clear these loans off their balance sheets?

MILLER: No. The banks have a lot of incentive to delay the realization of the problem because if they liquidate the asset and the loss is realized, then they have to reserve the loss against their capital immediately. If they keep extending the loan under the rules present today, then they can delay a write-down and hope for better days. Remember, you suffer if the bank succumbs and turns around and liquidates that asset, then you really do have to take a write-down because then your capital is gone.

So here we are, we've got the federal government again, through its agencies and the FDIC, ready to support the commercial real estate market. They’ve taken one step, in allowing banks to use a very loose standard for loss reserves. What else can they do?

MILLER: Well, obviously nobody knows, but I can guess at what’s coming by extrapolating from what the federal government has already done. I believe that the Treasury and the Federal Reserve now see that commercial real estate is a huge problem.

I think they’re going to contrive something to help assist commercial real estate so that it doesn’t hurt the banks that lent on commercial real estate. It’ll resemble what they did with housing.

They created a nearly perfect political formula in dealing with housing, and they are going to follow that formula. The entire U.S. residential mortgage market has in effect been nationalized, but there wasn’t any act of Congress, no screaming and shouting, no headlines in the Wall Street Journal or the New York Times about "Should we nationalize the home loan market in America." No. It happened right under our noses and with no hue and cry. That's a template for what they could do with the commercial loan market.

And how can they do that? By using federal guarantees much in the way they used federal guarantees for the FHA. FHA issues Ginnie Mae securities, which are sold to the public. Those proceeds are used to make the loans.

But it won’t really be a solution. In fact, it will make the problems much more intense.

Don’t these properties have to be allowed to go to their intrinsic value before the market can start working again?

MILLER: Yes. Of course, very few people agree with that, because if you let it all go today, there would be enormous losses and a tremendous amount of pain. We're going to have some really terrible, terrible years ahead of us because letting it all go is the only way to be done with the problem.

Do you think the U.S. will come out of this crisis? I mean, do you think the country, the institutions, the government, or the banking sector are going to look anything like they do today when this thing is over?

MILLER: I know this is going to make you laugh, but I'm actually an optimist about this. I'm not optimistic about the short run, and I'm not optimistic about the severity of the problem, but I'm totally optimistic as it relates to the United States of America.

This is a very resilient place. We have very resilient people. There is nothing like the American spirit. There is nothing like American ingenuity anywhere on Planet Earth, and while I certainly believe that we are headed for a catastrophe and a crisis, I also believe that ultimately we are going to come out better.

Andy Miller is the co-founder of the Miller Frishman Group (www.millerfrishman.com), which includes three companies serving different sectors of the real estate market – from mortgage brokerage and banking, to the building, management, and marketing of commercial real estate across the United States. His firm is currently deeply involved in the distressed real estate business, assisting lenders across the nation with their growing portfolios of non-performing loans.

Real estate crashing, unemployment rising, sky-high government debt – is there any silver lining in all of this? There is, and the editors of The Casey Report are pros in locating it. Analyzing tomorrow’s mega-trends and finding the best opportunities to profit from them is what they do. Learn how these expert trend hunters can help you make money even in the toughest crisis… click here.

Ed. note - I've been a Casey Research subscriber since 2006, and an affiliate since 2008.

Financial Reckoning Day Fallout: Surviving Today's Global Depression - Book Review

Coast to coast flights are fantastic for getting uninterrupted reading time in, and on my flight back to the West Coast last Monday, I was able to devour Financial Reckoning Day Fallout: Surviving Today's Global Depression, by Bill Bonner and Addison Wiggin.

Bonner and Wiggin are the two top guys at Agora Financial, an extremely successful investment publishing house that is as renowned for their marketing prowess as they are for the high quality of their investment research and newsletters. You may be familiar with many of their free or paid investment products, such as The Daily Reckoning, a free daily e-letter they've published since 1999.

A quick note on Bill Bonner before we get into the book - the more I follow his writings and career, the more I'm in pure awe of the guy. A really, really smart dude...and that's an understatement. Not only is he an astute investor, a stellar writer, but he also founded and built Agora Financial into a publishing powerhouse. A true renaissance man with awesome accomplishments.

Bonner and Wiggin originally wrote Financial Reckoning Day earlier this decade, predicting a long, soft depression for the United States. I've been a reader of The Daily Reckoning since 2004, where they've continued to follow, update, and expand upon their original hypothesis that the US was destined to follow in Japan's economic footsteps with a long, slow, soft depression.

The credit and debt explosion in the middle of this decade drove up one last asset bubble that tested the patience of investors who shared these bearish views. But ultimately their patience has been rewarded, as the authors;: "trade of the decade" - long gold and short stocks - has been right on the money.

Financial Reckoning Day Fallout begins by revisiting the hysteria of the tech bubble, which, as time passes, seems to increase in absurdity for me personally. The authors polk fun at George Gilder, the "messiah" of the of the New Era.

Gilder's articles in Forbes ASAP were not merely hard to read, they were incomprehensible. But never mind. He was a genius...but he had worked himself into such a state of rapture over the possibilities of the Internet that he seemed to have gone a little mad.

One caveat, "I don't do price," Gilder commented. Too bad. Because, as investors would discover later, prices are important. A technology may be spectacular; the company owns it may be a great company; but the stock is only a good investment at the right price.

Lest we be tempted to think of the tech bubble as a unique occurence, the next chapter, entitled Progress, Perfectibility, and the End of History, pays an amusing tribute to other times in history in which men have declared the entire race of humanity to have been perfected, or nearly so.

Francis Fukuyama takes a solid ribbing for his essay, which he published in 1989, entitled "The End of History."

The document was remarkable; for rarely did someone manage to get so much so wrong in such a short essay. Fukuyama saw all of history as a march toward democracy and capitalism. He believed the collapse of communism marked the triumph of both...and hence, history was dead.

If sarcasm, witty humor, and history are your cup of tea, then you'll get a real kick out of this book. Bonner and Wiggin are real students of history, and their true talent is their ability to relate back tales in a very funny, insightful way.

John Law, perhaps the ultimate target for the authors, has a whole chapter devoted to his financial shennanigans. Law, you may recall, is the "financial genius" who is largely credited as the father of paper money. An innovative money printer who would even put Bernanke & Co to shame, his inflationary creation is largely responsible for the Mississippi Scheme and South Sea Bubble manias - amusing accounts of both are contained in this chapter.

Alan Greenspan's career is also traced through, also in farcical fashion. I knew he had libertarian leanings when he began his career, but did not realize the extent to which he was a disciple of Ayn Rand and hard money. It was eye opening to see how much the political world corrupted Greenspan's views - which were reinforced by the seeming success he was having in "guiding" the economy to steady booms and soft landings.

There are a couple of chapters devoted to the comparison of the US with Japan (the parallels of which are downright scary), along with the demographic sledgehammer the US is about to be hit over the head with. Some of Harry Dent's demographic research is cited here.

The book wraps up with one of my favorite chapters, in which the authors introduce the concept of Ought. The idea is that no matter how many numbers you crunch, markets are the ultimate arbiters of morality. Everything that "Ought" to happen usually does, in which financial sinners are published for their transgressions, and fools are ultimately separated from their foolishly invested capital.

Here's an intro to Ought - which made me laugh out loud several times on the plane:

If "Ought" were a person, Ought would not be a bartender or a good-hearted prostitute. Ought is not the kind of word you would want to hang out with on a Saturday night, or relax at home for it would always be reminding you to take out the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but more like a shrewish wife than a willing mistress. For Ought is judgemental - a nag, a scold. Even the sound of it is sharp; it comes up from the throat, like a dagger and heads right for the soft tissue, remembering the location of weak spots and raw nerves for many years.

Ought is neither a good-time girl nor a boom-time companion, but more like I-told-you-so who hands you asprin on Sunday morning, tells you what a fool you were, and warns you what will happen if you keep it up. "You get what you deserve," she reminds you.

Financial Reckoning Day Fallout is different from most investment books in that it will not give you specific investment advice per se - which is exactly what I like best about it. Most investment books that give advice end up being completely wrong - typically more of a contrarian signal than anything - seen any good books about making millions in real estate lately?

I prefer books like this one, which challenge your assumptions, and help develop and shape your thinking. I tend to read very few newly released books in the finance/investing genre, finding most of them to be shallow and full of bad advice. Tried and true investment insights, though, are timeless. And I think this is a book you could pick up 25 years from now, and still get just as much out of.

I'll close by sharing that I find the doom and gloom that Bonner and Wiggin revel in absolutely hysterical. When my wife saw the title of this book, she remarked that it's a wonder I'm not suicidal. I happily showed her a few of the chapter subheads during the flight, my favorite being "How to Relax and Enjoy the End of the World." Really funny stuff.

Marc Faber in the Daily Reckoning

Speaking of The Daily Reckoning, Marc Faber wrote a guest essay in Wednesday's edition entitled When Currencies Crash.

Faber believes the US is dedicated to debasing its currency - which I think everyone agrees upon. The question is - will they be able to successfully do it?

Anyway a good read for Faber fans - I love to read anything he writes.

Is This Rally Finally Losing Steam?

Tom Dyson believes so. I know we've been crying wolf about this for a little while, but there are some real telling signs that could be foreshadowing an end of this rally.

Positions Update - Short the S&P, Long the Dollar

That's our story, and we're sticking to it! I was definitely early on both trades - time will tell if I was merely early, or flat wrong. Reason #78 why trying to time tops/bottoms is a fool's game!

The market is quite overbought, and should open lower this week. How much lower it heads will be interesting to see.

We have many divergences taking place - the "junk", such as bank stocks, have not confirmed these new highs yet. Neither has oil, and neither has China. So for now, we wait.

The dollar still searches for a bottom.

(Source: Barchart.com)

Was last week a countertrend bounce for the S&P, or the start of a rally to new highs?

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $20,012.03

Cashed out: $20,000.00
Total value: $40,012.03
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

Depression Averted Folks - Christina Romer Says So - Oh Boy, Contrarian Indicator?

Move along everyone, no depression to see here - so says Christina Romer, the White House's chief economic adviser. Yes, the same adviser that recommended massive debasement of the US dollar to get us out of this mess.

Christina Romer, chair of the Council of Economic Advisers, said Tuesday evening the main difference between last year's economic crisis and the Great Depression was that the federal government took decisive action to shore up financial institutions and stimulate the economy. (Source: CNNMoney.com)

Can't help but think that this strikes me as a premature victory celebration of sorts. I don't really see anything getting better fundamentally. And this massive stock market rally has just now matched the 1930 rally. Remember, rallies like this don't happen in bull markets.

In fact, around this time in 1930, we were also treated to similar declarations of economic victory:

• "The worst is over without a doubt." - James Davis, Secretary of Labor
• "The Depression is over." - Herbert Hoover

Further reading:

• Is 2009 a repeat of 1930? Why Depressions May Rhyme
• Newspaper headlines from 1930 that will remind you of headlines today.

Echoes of 1930 - Do Depressions Rhyme?

Mark Twain famously said "History doesn't repeat itself, but it does rhyme."

Several weeks ago I observed that we appeared to be exactly on the pace with 1930. From the stock markets furious rally, to the Fed generating inflation fears, to the self-congratulatory economic comments of leaders proclaiming "the worst is over"...it all seemed to be lining up eerily.

Today Tom Dyson wrote a great piece for DailyWealth, musing about a newspaper he just picked up from September 1930. Tom writes:

This morning, I scanned a list of Wall Street Journal headlines from September 1930...

"We have passed the low point of the depression," says R. Proctor, President of the New England Council, on September 13, 1930.

"Over 75% of brokerage houses now recommend buying stocks," says a headline from September 14, 1930. "Brokers, businessmen and even the general public are more optimistic."

Another story from the same edition reports some retailers have been "caught unawares" by an improvement in business since Labor Day. Some shoppers have had "difficulty finding goods," added the writer.

That damn history - why does it always have to ruin all the fun?

You can check out Tom's full piece here - He also writes an excellent premium newsletter called The 12% Letter, which I read regularly and enjoy very much.

The Onion: Beer Consumption Improves Economic Outlook

Stated as eloquently as only The Onion can:

WASHINGTON—Despite ongoing economic woes and a jobless rate that has been approaching 10 percent, U.S. unemployment projections drastically improved Monday after the consumption of five beers.

"It's going up," leading economist David Singleton said confidently, indicating the predicted growth in jobs with an upward wave of a Bud Light bottle. "All the way up. By the end of the month. No problem."

Hysterical piece - read the rest of it here.

Free Special Report - Is the Economy Actually Recovering?

Here's a guest piece by Bud Conrad and David Galland from the Casey team, with an opportunity to check out their free report on the current state of the economy. As always, these two do a bang up job of looking under the hood of rosy government figures and media reports to get the real story.

I love their analysis and completely agree that the economy is a trainwreck, with the ugliest carnage around the corner. I'm not sure if I still agree with their inflation hypothesis...though with gold pushing $1,000, the market may prove them right and me wrong, perhaps sooner rather than later!

Enjoy this piece and free special report. And have a great Labor Day too - if you're short on investment reads, you can check in here - I'm not going anywhere, and my wife is out of town...so when I'm not drinking beer, I'll probably be catching up on reading and cranking out a blog post or two.

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Green Shoots or Greater Depression?

By Bud Conrad/David Galland, Editors, The Casey Report

While we aren’t contrarian for the sake of being contrary, more often than not that is the position in which we find ourselves. Today, with the media falling all over itself to paint a rosy outlook for the economy while simultaneously voicing encouragement to the new administration in its remake of the nation in previously unimaginable ways, it’s hard not to question our conviction that the worst is yet to come.

Could the economy really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse? We don’t see it as remotely possible, but yet… but yet… there for everyone to see are countless happy headlines and breathless exhortations that the worst is behind us.

So, is it Green Shoots or Greater Depression?

Getting the answer right is critical, because from it flow serious consequences to each of us. And not just in our investment portfolios but in how we organize our lives.

Looking for an evidence trail leading to the correct conclusion, Casey Chief Economist Bud Conrad once again put in very long hours digging through the data. Here’s what he uncovered, about the claims of green shoots, and what may actually be in store for the economy moving forward.

David Galland

Rather than accepting the many commentaries that our economy may be improving, let’s focus for a minute on the important forces that will play out over the decade ahead, and the minor improvements – from disastrous levels – that have given commentators such hope that the worst of our problems are behind us.

What Do the “Green Shoots” Really Look Like?

While some individual measures of economic activity appear slightly less dire than previously, it’s important to understand that most improvements are largely attributable to government intervention.

For example, at the onset of this crisis, commercial paper spreads rose to the point that this important source of corporate short-term funding had virtually shut down. Today, those spreads have returned to almost normal levels. But the bulk of this improvement is not due to a return of confidence in the economic system but rather to the Federal Reserve directly intervening in the market with several hundred billions of dollars.

And mortgage interest rates, which briefly dropped into the 4% range, did so not because of a surge in creditworthy borrowers or eager lenders… but rather because the Federal Reserve launched a program of buying $1.25 trillion of mortgage-backed securities. Doing its part, the Treasury has poured billions into Fannie and Freddie and provides guarantees for their mortgages.

In these and many other instances, the "green shoots" that optimists have spotted are really just the visible manifestations of the massive interventions by an increasingly bankrupt government.

Indeed, the massive fiscal stimulus provided by the federal government – and by the Fed, which has slashed interest rates to near zero, purchased mountains of toxic waste, and bought up Treasury debt with billions in freshly printed money – are unprecedented in the history of the U.S.

But even a cursory review of key metrics reveals continuing declines in housing prices, rising unemployment, and slowing consumption as measured by falling retail sales, GDP, and the collapse of world trade. Sure, housing unit sales recovered a little recently, but that’s due mostly to the distress sales of foreclosed homes and houses worth far less than the outstanding mortgage. These are not signs of a strong economy.

The only rational conclusion to be drawn is that the crisis is far from over and that we are not likely to see a strong recovery anytime soon. In fact, things are likely to get much worse before they get better.

The massive debt expansion that played a crucial role in creating the disastrously overleveraged economy is not shrinking. As you can see in the chart here, it’s growing ever bigger.

That debt growth was fostered by U.S. government debt growth, which is now getting out of control.

[Don’t just believe what you hear about “green shoots,” or you could lose some serious money. To find out what’s really going on and where all this is leading, read the rest of Bud’s in-depth article here.]

Bob Prechter's Newsletter, Free - The Depression is Young

The newsletter that I most look forward to these days is Bob Prechter's...his views are unique, insightful, and I'm really starting to believe he's one of the only guys with a clue right now!

It's important to mention that while Prechter is extremely bearish now, he's by no means a perma-bear. I tend to discount folks who are perenially bearish - because even a broken clock is right twice a day! I want to follow the "gurus" who get the bullish and bearish angles right, at the right time.

I just got done reading Prechter's Elliott Wave Principle book, which I'll be doing a review on soon in this space. It's a great read - written in the late 70's, Prechter used it to outline his case for a massive bull market to come.

With the DOW floundering below 1000, and many financial types speculating that the US economy was in a state of permantent plateau/decline, Prechter put an aggressive 3000 price target on the DOW in what he predicted would be "the mother of all bull markets." Of course the bull ran much higher and longer than even Prechter envisioned, but as far as I can find, he made the most aggressive, correct call, during that time period. (Other examples are greatly appreciated!)

With that, here's a free excerpt from Prechter's latest newsletter - with an opportunity from EWI to get your hands on the entire piece. Enjoy!

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The Bounce Is Aging, But The Depression Is Young
August 26, 2009

By Bob Prechter

The following is an excerpt from Robert Prechter's Elliott Wave Theorist. Elliott Wave International is currently offering Bob's recent Elliott Wave Theorist, free.

On February 23, EWT called for the S&P to bottom in the 600s and then begin a sharp rally, the biggest since the 2007 high. The S&P bottomed at 667 on March 6. Then the stock market and commodities went almost straight up for three months as the dollar fell.

On March 18, Treasury bonds had their biggest up day ever, thanks to the Fed’s initiating its T-bond buying program. The next day, EWT reiterated our bearish stance on Treasury bonds. T-bond futures declined relentlessly from the previous day’s high at 130-15 to a low of 111-21 on June 11.

That’s when there were indications of impending trend changes. The June 11 issue called for interim tops in stocks, metals and oil and a temporary bottom in the dollar. The Dow topped that day and fell nearly 800 points; silver reversed and fell from $16 to $12.45; gold slid about $90; and oil, which had just doubled, reversed and fell from $73.38 to $58.32. The dollar simultaneously rallied and traced out a triangle for wave 4. Bonds bounced as well. As far as I can tell, our scenarios at all degrees are all on track.

Corrective patterns can be complex, so we should hesitate to be too specific about the shape this bear market rally will take. But from lows on July 8 (intraday) and 10 (close), the stock market may have begun the second phase of advance that will fulfill our ideal scenario for a three-wave (up-down-up) rally. In concert with rising stocks, bonds have started another declining wave, and the dollar appears to have turned down in wave 5 (see chart in the June issue), heading toward its final low. Although commodities should bounce, their wave patterns suggest that many key commodities will fail to make new highs this year in this second and final phase of partial recovery in the overall financial markets.

Meanwhile, our forecast for a change in people’s attitudes to a less pessimistic outlook is proceeding apace. Here are some of the reports evidencing this change:

More than 90 percent of economists predict the recession will end this year. [The] vast majority pick 3rd quarter as the time. (AP, 5/27)

Manufacturing and housing reports this week may offer signs that the recession-stricken U.S. economy is within months of hitting bottom, economists said. (USA, 6/15)

Fewer people say they’ve prospered over the past year than in decades, a USA TODAY/Gallup Poll finds. Over the past two months, however, expectations for the future have brightened significantly amid rising optimism about a stock market rebound and economic turnaround. “I think the administration is going in the right direction,” says… Now 36% of those surveyed in the Gallup-Healthways well-being poll say the economy is getting better. That’s not exactly head-over-heels exuberance, but it is double the number who felt that way at the beginning of the year and a notable spike in the nation’s frame of mind. Thirty-three percent say they’re satisfied with the way things are going in the United States; in January, just 13% did. (USA, 6/23/09)

If only to confirm the socionomic causality at work, an economist quoted in the article above muses, “The one anomaly in the puzzle is that people shouldn’t be feeling better because the jobs market is so terrible and unemployment is likely to keep rising.” Of course it would be an anomaly, and people should not feel better, if mood were exogenously caused. But it is endogenously regulated, and it precedes social actions, which produce events such as job creation and elimination. That people feel better is evident in our rising sociometer, the stock market. If the rally continues, economists will soon agree that the Fed’s “quantitative easing” and Congress’ massive spending are “working.” Those predicting more inflation and hyperinflation will have the last seeming confirmation of their opinions. Then, a few months from now, some economists will probably express similar puzzlement when the stock market starts plummeting again despite the fact that the economy has improved.

But all of these considerations are temporary. Conditions are relative, and behind the scenes, the depression has been, and still is, grinding away.

For more information, download the FREE 10-page issue of Bob Prechter’s recent Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future.

Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Is 2009 A Repeat of 1930? Why Depressions May Rhyme

As financial pundits and common investors breath collective sighs of relief that "the worst is over" and "the bull is back", let's explore the possibility that 2009 may be following a script that was originally penned in 1930.

After the initial crash in 1929, the markets staged a powerful rally that retraced 60% of these losses...

Images source: Mywealth.com

Since the March 6 lows, the 2009 S&P has also retraced a significant portion of its losses - rallying over 50% in the last 5 months - one of the sharpest rallies ever!

By the summer of 1930, just as the markets were peaking, Herbert Hoover and his team were declaring:

• "The worst is over without a doubt." - James Davis, Secretary of Labor

• "The Depression is over." - Herbert Hoover

We are seeing the same types of self-congratulatory talk from our modern day heros in the summer of 2009:

• "We have avoided the worst." - Ben Bernanke

• "I can tell you, without question, the Recovery Act is working." - Joe Biden

What "solutions" were being heralded in 1930 as saving economic graces? "The coordination of business and government agencies in concerted action," according to Hoover.

Sound familiar?

Finally, I find it very interesting that during these times, the Fed's actions were viewed as wildly inflationist. From Murray Rothbard's America's Great Depression:

If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state.

President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates.

Bottom line: While history may never exactly repeat, it certainly has a tendency to rhyme (to quote Mark Twain). Cast a skeptical eye on folks who believe that we're through the worst - we're not through anything yet!

Right now, we're exactly on pace with 1930. While we can't be sure that history will repeat (or rhyme) - it's too early to rule out this possiblity as well. Proceed with caution!

Recommended further reading: How Herbert Hoover Put the "Great" in the "Great Depression"

Quick Market Hits for the Week Ahead

• Natural Gas fell below $3! Here's why oil may be next to slide.

• Private sector valuations and VC/angel funding are still in the tank - despite the run-up in the public equity markets.

Positions Update

No new trades this week...I am less than thrilled with cotton's weak performance. With oil and the S&P index hitting new 2009 highs, I would have liked to have seen cotton confirm these highs.

I don't think it bodes well, but with cotton prices appearing to be at solid points of resistance, I think it's a hold for now.

Cotton continues to "range trade".

(Source: Barchart.com)

And, as mentioned in previous weeks, I'm planning to "go long" the dollar index very soon.

Current Account Value: $24,378.91

Cashed out: $20,000.00

Total value: $44,378.91

Weekly return: -4.4%

2009 YTD return: -52.0% (Ouch, that's gonna leave a mark)

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

A Redneck Recession Rant...Absolutely Hysterical Video Clip

Amidst all of the inflation/deflation debates, here is THE best summary of the current crisis I've seen to date...enjoy!

Warning: Definitely NSFW!

Shout outs to my friend JL for sending this along, and to the excellent financial blog Zero Hedge for originally posting.

Why Green Shoots Are Just Compost in The Greater Depression

In this week's installment of Conversations With Casey, Doug's doing a little yardwork...moving down those pesky green shoots!

The stock market may be up, but are economic conditions really improving? Also - who the heck is going to buy all the debt the US Treasury is issuing?

Enjoy this week's bearish rant, courtesy of the legendary Doug Casey...

Doug Casey on Mowing Down Green Shoots (Interviewed by Louis James, International Speculator) L: So, Doug, we're sitting here in Vancouver, epicenter of many of our investments, thinking about the future. Meanwhile, the U.S. Treasury has announced some mind-boggling debt auctions for next week. Any comments? Doug: Yes, the size of this auction coming up, $235 billion, is really rather shocking - especially when you consider that that's roughly the cost of the entire Viet Nam war. That was considered off the scale and lasted ten years. This action is just in one week. It's an amount that annualizes to $12 trillion - and it's still just starting. They are going to have to borrow even more money to bail out all of the other banks that are going to fail (which is going to completely bankrupt the FDIC) and all the pension funds that are going to fail (which are insured by the Pension Benefit Guarantee Corporation). And there are lots of other financial catastrophes still on the runway. This $235 billion is just a drop in the bucket - and I'm not entirely sure where they're going to get this money. If I were a foreigner and I already owned massive amounts of U.S. debt, would I want to buy that much more? That's especially questionable when any intelligent person can see that interest rates are being artificially suppressed. That makes buying this debt a guaranteed loss. It just doesn't make any sense to me. The Chinese have, say, $2 trillion in foreign-denominated reserves, of which they say about $1.4 trillion is U.S. paper. They realize they're holding a burning match; they want to get rid of what they have, not buy more. But here's the scary thing: even if the Chinese lent the U.S. all their $2 trillion of FX, it would only cover this year's U.S. borrowing. Where is the U.S. going to get next year's? Because next year, it's going to need even more. Let me be as clear as possible. There's no way out of this without major structural changes. It's not going to be just a disaster. Catastrophe is a better word. L: Well, we heard today that the government of Dubai did a public offering of debt, and it had to be rescued by Abu Dhabi, because no one else would take it. We've heard other, similar stories. You'd think that at some point, these people would begin to worry that there might be a limit to how much debt they can peddle. Doug: It seems to me that it's almost the endgame for this financial system. Since the depression of 1929 to 1946, we've had a worldwide economic boom; in its early stages it was quite real, since it was based on the savings that were accumulated during the depression. But over the last generation, starting in the 1980s, we've had a phony boom, driven entirely by debt. The whole world is awash in debt. Individual consumers are head over heels in debt. State and local governments are head over heels in debt and going bankrupt. National governments all over the world are deeply in debt. And businesses that are catering to old patterns of consumption are going to find they have no earnings to service their debt with, and their assets are unsalable at acceptable prices. One of the problems we've got here is that people confuse paper money with real capital. This is an important distinction that's being overlooked. Capital is actually just another word for "savings" - the excess of production over consumption. I can't emphasize that enough. Unfortunately, people are used to thinking of capital as being the same as the dollar bills or other paper money in their wallets - and that can be created out of thin air. But capital can't be created out of thin air. So, I'm very concerned that all these governments are going to destroy the world's monetary system in tandem. I don't know exactly how it will end up, but it's going to be really ugly. This is compounded by the fact everybody is looking to the governments to solve these problems. Government is the cause of these problems. And the people it employs are not the best and the brightest (how that ridiculous canard ever got traction astounds me) but the poorest and worst part of humanity. Boobus americanus is looking to the type of people employed by their DMV or the TSA - albeit sporting prestigious degrees and expensive suits - to solve a millennial economic crisis. Good luck, suckers. There are lots of reasons I say that the Greater Depression is going to be even worse than I think it's going to be. L: That's a pretty negative view, Doug. What about all these green shoots we keep hearing about? Improved housing numbers, improved unemployment figures, the Dow up over 9,000 again... There are all these signs of recovery, but you say you don't see any green shoots. Are you myopic, or is everyone else in the world wrong? Doug: I don't want to be seen as a perma-bear who's negative on the economy no matter what happens, but this is a time when I'm very happy to be a contrarian. In fact, I'm not negative. The future should be, and can be, better than all but what the most optimistic science fiction proposes. So let me put it this way: I've believed for many years that the Greater Depression was in the cards, simply because I believe that cause has effect, and actions have consequences. All the distortions and misallocations of capital caused by government interventions in the economy have to be liquidated. So, no, I don't see any green shoots. The talk of green shoots is all PR, because the morons running the government actually believe the economy is based on psychology. In fact, psychology has zero to do with it. If it did, then all the Zimbabwe government would have to do to solve their depression would be to slip everyone a Prozac tablet every day. But maybe we've already tried that here, since something like 50 million Americans are already on antidepressants.... There may seem to be green shoots in the same way it seemed that way for a while in 1930. After the stock market went down for six or eight months, it reached a temporary plateau and bounced back up. People thought it was just another recession, that they'd pull through as they did after World War I. L: Safe to get back in the water. Doug: Safe to get back in the water. But that's not the way it is this time. For example, people are now saying that housing is looking up because the rate of collapse has slowed. Of course, nothing goes straight down - or up - without retracements. The fact is that there's been immense overbuilding in housing for a long, long time. It's been the epicenter of speculation in the U.S. and many other places around the world. There's a huge supply of square footage that people simply can't afford to live in. Even if Obama were to freeze people's mortgages, so they don't have to move out of their houses and into tent cities - who's going to pay the real estate taxes on those houses? The local governments are bankrupt, so, if anything, they'll want to raise real estate taxes. And even if the federal government pays the local taxes - who's going to pay the utilities? Right now, oil and natural gas are at relatively low levels. When you see oil going back up over $100 - which I think you will in the next few years - and when you see natural gas doubling, or even tripling, in the next few years, people aren't going to be able to pay their utility bills. Besides, all these McMansions are going to have a lot of deferred maintenance. The fact is that people have been living way above their means in terms of housing. The same thing is true of cars. People have bigger, newer, more expensive cars than they did during the last recession, and they have lots more of them. Cars are on average of much higher quality now, unlike those of the 1970s - which you might call the first federal period of auto manufacturing; those were perhaps the worst cars ever made. During the 1980 - 1982 recession, the average car in the U.S. fleet was something like seven years old, and the average family didn't have more than one or two cars. Today, most cars are way above those of past years in quality. They basically last forever, the car fleet is almost brand new, and Americans have lots of cars. What makes that even more troubling is that cars are no longer minor assets on most people's balance sheets. Back in those days, if they didn't buy them for cash, most people bought cars with a two- or maybe three-year financing. Now, everyone finances cars for five years or even leases them for that long. They've gone from being a minor asset to a major liability on families' balance sheets. So, forget about the auto industry recovering. That's not going to happen. No green shoots there. In addition to the fact the cars that will be made by a nationalized and bankrupt GM and Chrysler will be politically correct crap. Nobody but people like Barney Frank and Nancy Pelosi will want to be caught dead in them. Forget about housing, forget about autos, forget about almost anything you hear about on the news. For years, the whole world has overconsumed and lived above its means. It was great fun while it lasted, but now the party's over - and for a long time. You won't see any green shoots. What you are going to see is lots more corporate bankruptcy and lots more unemployment. All those people giving $150 massages and $40 haircuts are going to find that people can no longer afford them. Professions like personal trainers are going down the toilet. There are going to be lots of unemployed carpenters, financial planners, mortgage brokers, department store clerks, and car salesmen. On the bright side, there will be legions of unemployed lawyers - unless they're bankruptcy specialists. There are so many businesses - almost everything you look at, from restaurants to car washes - that are still catering to old patterns of production and consumption. Many people are simply not going to be able to afford these things anymore, so lots more people who have been hanging on by their fingernails are going to fall off the cliff. What are they going to do to provide goods and services in a new world? I think the world is going to change more radically in the next ten years than it did from 1929 to 1945. So, forget about green shoots. If you believe in them, you're going to be in for a sucker punch. L: What about the companies that are rebounding, like Goldman Sachs? Doug: Goldman is a special situation. Much of their competition has gone out of business, so a lot of what business there is, is going to Goldman. And they're very politically connected, so they'll be handling lots of state-sponsored deals. It's so brazen as to be shameless. I wouldn't be surprised if the American hoi polloi - with no jobs, no houses, no money, and no prospects - react in a most unpleasant manner against people who appear to be profiting from their distress. L: Do you even believe Goldman's numbers, or is it all a function of them being able to change the rules that govern how they book things? Doug: That's a good question. What can you believe today? The government has a vested interest in casting everything in the most favorable light possible. And the newspapers, magazines, and TV more or less parrot what they're told. I prefer not to clutter my mind with what official sources say but make my own observations and interpretations of what others put together. And my view is that the Greater Depression has barely even started. L: What about recent reports that Americans actually have started saving again? Doug: I believe that. That's definitely a major part of the cure, a very favorable thing. It's a sine qua non - critically important. Naturally, and stupidly, the government and mainstream economists are all against it. I say stupidly not as a pejorative, but in the sense that "stupid" means "an unwitting tendency towards self-destruction." They don't want to see people saving (the only cure), they want to see people consuming and spending. They're trying to prolong the totally unsustainable patterns of production and consumption the Long Boom engendered. Fortunately, the average person is watching out for his or her own welfare, despite that being the opposite of what conventional economists are telling them to do. Saving is the only solution to the depression. In addition to massive deregulation, huge tax cuts, and the institution of a sound currency. But since those things are totally in the hands of the government, you can forget about them happening. Look, you can't solve the problems created by decades of building debt with a few months of higher savings. It has to go on for years to rebuild the capital base. L: Okay then, for the person who's expecting the sucker punch you mentioned, what's the best way to play it? Shorting masseuses and restaurants? Wall Street? What? Doug: I want to go for the low-hanging fruit. What the stock market does and what the economy does are really two different things. Stocks could actually skyrocket because of all the dollars the government is creating. People might want to buy stocks because they actually are equity; they represent real wealth. I suspect that in this depression, the stock market isn't going to bottom until we're looking at dividends in the ten percent range across the board, after being cut from present levels, which implies a much lower stock market. But do I want to make a bet that way? Not particularly. All that money creation could drive the stock market up in spite of much lower earnings and a bad economic situation. It seems to me that the sure bet is to be short bonds. Interest rates are going way up. Why? There will be tremendous demand for capital, of which there's a limited supply. Interest rates are the price of capital. So they're going up for that reason - and because of the trillions of paper dollars the government is creating, inflation is going to skyrocket. High inflation will itself guarantee high interest rates. So, the trade of the decade is going to be to short long-term bonds and to go long precious metals (which are the only financial assets that are not also simultaneously someone else's liability). These are two excellent investment plays, but there are many others. We go into a lot of detail on the best ways to play them in The Casey Report and the International Speculator. However, just as important is political diversification. The main risk you have is your own government. You have to diversify your assets out of the control of your government. This is even more important than picking the right investment today. L: Great advice - thanks Doug. Doug: Till next time. To the editors of The Casey Report, shorting interest rates is one of their favorite investments of 2009... and there are different ways to do it. Learn all about how you can participate in the huge gains this investment promises in Chief Economist Bud Conrad's new report - just click here.

More recent Conversations With Casey:

• Doug Casey: The Supreme Court Doesn't Matter
• How to Stash Gold Bullion