This rally has gone on for so long most people think it is not a rally at all, but a new bull market. Worldwide, it has taken equities up some 73%…making it one of the greatest rallies ever.

What are we to think? Are we alone in thinking it’s still a trap? What happened to the problems that led to the crisis of ’07-’09?

If you don’t think about it too much you might think everything is fine. Stocks are up. Business profits are up. GDP is up. Housing and unemployment seem to be stabilized. What’s not to like?

The recovery is a done deal as far as most people see it. The rescue efforts, initiated by the feds, were a big success…or so they believe. It has been 12 months since the bottom…and the world still has not ended. Everything is back to normal…isn’t it?

The problem in ’07-’09 was that too many people owed too much money.

And what has happened to change that? The net level of indebtedness in the US has actually gone up since ’07!

Huh? How’s that? We’re in a de-leveraging phase, aren’t we?

Well…yes…but only in the private sector. The feds are still adding debt.

Let’s look at the private sector first. There, we find unemployment still around 10%. Adult males in their prime working years, however, have fewer jobs than ever before. One figure we saw shows that only 4 out of 5 of them are working.

That is just the beginning of the problem for these fellows. They’re getting fewer college degrees, compared to women, than ever before. They’re earning less money too – again, compared to women. Fewer are the chief breadwinners in their households. And fewer are even in a household at all – more are alone.

Let’s not get distracted by the suffering of the masculine part of the population…

…we’re looking at what is going on in the broader economy. Is it healthy and growing? Or is the stock market just a honey trap…a bear market trap for the unwary investor?

The private sector is de-leveraging. Not only is the unemployment rate high, the typical family also lost a lot of money when its house went down in price. And since the typical householder is also in his 40s or 50s, he has to consider his retirement and how he’s going to fund it.

Stocks? While they’ve bounced back nicely, the stock market is still well below its highs…and still in a losing position over the last ten years. A 73% gain sounds nice, but it would take a 100% gain to recover the losses of the ’07-’09 bear market.

Houses? One out of four mortgaged houses is still underwater. In some new developments, the figure is as high as one out of two. And there is little likelihood that the owners will be high and dry anytime soon. People no longer expect to retire on the gains from their houses.

This leaves the middle-aged householder without much choice. He has to save money. Remember, the boom of the 2003-2007 period was caused by dis-saving. Now, a higher savings rate will mean less spending for many, many years. This is a fundamental and important change of direction for the economy. It will restrict business growth and restrain profit growth too.

So, is it possible to slough off the crisis and return to business as usual? Nope. Not possible. You can pretend that things are back to normal. You can act as if they are back to normal. You can invest as though they are back to normal. But you can also lose your money.

But they’re not normal at all. They’re different. The 1982 to 2007 period was…mostly…a boom time, caused by rapid increases in debt, asset prices, and consumer spending. The next period is…mostly…a bust time – when asset prices, private debt, and consumer spending go down.

Sooner or later, but probably sooner, the stock market will realize it. Our Crash Alert flag – tattered and faded – is still flying.

Bill Bonner
for The Daily Reckoning

Private Sector De-leveraging: A Rally in a Bull Costume originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Since touching a 12-year low on March 9, 2009, the Dow has bounced more than 61%. Over the same timeframe, the S&P 500 has soared 72% and the NASDAQ has jumped 84%. These eye-popping numbers could lead one to believe that all is right with the world…or at least that all is much better than it was one year ago.

But your editors are skeptical of this assessment. It’s true that the widespread panic of early 2009 is gone and the crisis mentality has vanished. But here in early 2010, the seeds of the next crisis are germinating nicely.

Even without any new problems, the economy is still struggling with serious difficulties like sky-high unemployment and stubbornly high mortgage defaults. But new problems are already on their way. In the private sector, for example, commercial real estate defaults are rising exponentially. That’s bad. Over in the public sector, government indebtedness is rising exponentially. That’s really bad.

“The CBO’s latest numbers reveal that America’s national indebtedness will increase by $9.7 trillion over the next 10 years,” our colleagues at The 5-Minute Forecast report. “The White House projection is only slightly less staggering – $8.5 trillion. Further, the CBO projects the national debt will be 90% of GDP by the end of this decade – higher than the 83.4% recorded at the end of fiscal 2009 last fall.”

Unfortunately, America’s finances are not unique; they are emblematic. Sovereign borrowers are out of control.

“It amazes me how complacent the market remains about the situation in Europe,” says Dan Amoss, the mind behind the Strategic Short Report. “It’s become quite obvious that there are no easy, painless solutions to the crisis in Greece. Economic growth in Europe will disappoint, because governments and banks taxed and borrowed from the productive private sector about as much as they can.

“It’ll be very difficult for Europe to avoid painful reforms to its gold-plated welfare state programs,” Dan continues. “Government spending will fall. Tax rates will go up, but may, in fact, lead to lower tax revenues. Yet the market is acting as though this huge problem will just be swept under a rug.

“The youth throughout Europe are suffering from chronic levels of high unemployment,” says Dan. “This not only includes countries like Greece and Spain, but also includes Germany and France. The powerful influence of unions has limited the opportunities of new entrants into the labor force. And a high youth unemployment rate is not good for social stability. The disease that will afflict financial markets in the coming years is unaffordable debt at all levels of society. Greece is just one symptom. More will pop up in 2010.”

Ironically, as government finances around the world deteriorate, many corporate bonds will begin to provide a more compelling destination for investment capital than government bonds. In other words, the uglier that government finances become, the prettier corporate finances appear…

Eric Fry
for The Daily Reckoning

Are Sovereign Borrowers the Next Crisis Catalyst? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Not much in the financial news worthy of comment this morning…

The Dow gained $13. Gold lost $13. Nothing much to say about it…

So we will comment on something beneath comment…something so low we have to dig down to find it…something so unworthy we hardly imagine we are mentioning it…something in the newspapers…

We’re talking, of course, about politics…

The love-fest with politics is heating up. The drugs have been passed around. Now, the clothes are coming off…

“France keeps steady course in economic upheaval,” says a headline at the International Herald Tribune. Steady course? You bet. It kept subsidizing, bailing out, protecting, coddling and otherwise meddling in its economy – just like it did before the crisis began. Had it not done so, the story continues, France might not have been the first major economy out of the worldwide recession.

On the other hand, the French never went deeply into debt… So maybe they just didn’t have so much exposure to the worldwide debt crisis in the first place.

Never mind. The papers don’t know what the problem is, but they’re convinced that government interference is the solution.

Over at The Financial Times, Clive Crook is breathing hard, too. He reckons that the “downturn called for a big stimulus,” and that the US stimulus effort headed off a worse recession. He then explains that the feds’ stimulus really didn’t stimulate at all, it merely offset a decline in spending at the state level. State tax revenues fell; states spent less. State tax revenues declined $87 billion in the last 12 months, the biggest drop on record. The feds made up for it by spending big.

Meanwhile, The New York Times tells us that the whole downturn is now behind us. The economy is “surprisingly normal,” it says.

The US economy is some 11 million jobs short of full employment. Nothing very normal about that. But February saw an unexpected upturn in consumer credit, reports the Times. And unemployment seems to have bottomed out, adds The Wall Street Journal.

Surprisingly normal?

Well, there’s a big difference from something that looks surprisingly, reassuringly normal…and something that is actually working normally.

Which is it?

The New York Times is right; it is an economy that looks surprisingly normal…

Zombies can look surprisingly normal too. If you clean them up.

Bill Bonner
for The Daily Reckoning

Championing Stimulus and the Economics of “Surprisingly Normal” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Well… Friday’s Jobs Jamboree turned out to be very interesting, after looking under the hood… According to the Bureau of Labor Statistics (BLS) the US lost 36,000 jobs in February, much less than what was expected (-68K), and the unemployment rate remained at 9.7%. Of course we all know that the “real unemployment rate” is 21%. It all comes back to the games people play, now… The most important piece of the Jobs Jamboree is the Avg. Hourly Earnings, which printed at 1.9% gain… So, those that are working are seeing some increases… Marginal increases, but still!

And… The BLS did add 97,000 jobs out of thin air, so the job losses were really -133,000… I also found it suspicious that the BLS waited for some time on Friday, before posting that +97,000 adjustment… Before they did, the markets were led to believe that job losses were dwindling. Again… The games people play… It sure looks like they tried to pull a fast one on the markets… But, I’m sure it was just a technical thing… Right?

So… The dollar began to go into the tank shortly after the BLS adjustment, and traded down for the rest of the day on Friday, and the overnight markets of Asia and Europe have not reversed that move from Friday. In fact, the overnight markets have added to the gains by the currencies.

Recall on Friday I told you that Pending Home Sales had dropped 7.6% last month, and then that was followed up by a not-so-good Jobs Jamboree… The rate hike campers here in the US are beginning to feel like a forgotten lover… There’s just no love coming from the Fed regarding rate hikes, and with that thought falling over the markets, the high yielders took off, as rate differentials came back into play.

The other currencies that took off were the petrol-currencies… You know them, you love them, here they are…. The currencies of: Norway (NOK), Canada (CAD), Mexico (MXN), and… Even the beaten and downtrodden, UK (GBP) are gaining ground versus the dollar as the price of oil nears $82!

OK… A Greece update is needed here, I think… Basically, the Greek 10-year bond issue was taken down by dealers, but at a cost to the Greeks… This is exactly what I keep talking about regarding the US debt and the need to finance… If we keep kicking the deficit spending-can down the road for someone else to deal with, we will run into a financing problem like Greece; and to take our bonds, the buyers will demand higher yields… Uh-Oh!

There was news over the weekend, that France was ready to give Greece some financial support… And former Federal Reserve Chairman, Paul Volcker, has this to say about the euro (EUR)… “I’m still a believer in the euro, the lack of a unified government to back up the European Central Bank is a ‘structural crack’ and maybe fortunately it’s tested with a country as small as Greece, which doesn’t present an insuperable financing problem.”

I was typing that, and I just couldn’t get that Monkees song, “I’m a Believer”, out of my head!

OK… I’m back now… Looks like we have two central bank meetings this week, the Swiss National Bank (SNB) and the Reserve Bank of New Zealand (RBNZ)… Although the RBNZ has been talking hawkish lately, it might be too soon for them to hike rates this week, although they have to be feeling a bit behind their kissin’ cousins across the Tasman, who have raised rates four times in the past six months!

The Swiss will not and can not raise rates at this time…

There will be two jobs reports this week from Australia and Canada… So, there are a few things on the plates of the countries we follow this week.

Here in the US the data cupboard is pretty empty most of the week with some real data coming in Thursday and Friday… First we’ll see the Monthly Budget Statement, and I have no idea why, but the expectations for February’s deficit is $210 billion! OUCH! Then the trade deficit prints for January, and then finally on Friday the retail sales for February… I don’t think any of this is going to be rate hike positive, and therefore not dollar positive… But we’ll have to wait-n-see, eh?

OK… Call me clairvoyant… Nah… I’m not that! I’m just a guy that sees things and thinks of ways to make them work better… In this case I’m talking about the announcement over the weekend of the European Monetary Fund… That’s right! I did talk about the Eurozone creating this European Monetary Fund, a week ago, long before anyone even whispered it! Why did I think this? Because I knew that the European Central Bank (ECB) and the European Union were not going to go for any assistance to Greece by the IMF… So… I figured that it would be best for them to form their own IMF… And lo and behold, look what they announced this past weekend!

“The European Monetary Fund, patterned after the International Monetary Fund, is a key part of an initiative backed by Germany and France to strengthen cooperation and surveillance of public finances across the Eurozone, government officials said. German Finance Minister Wolfgang Schäuble revealed details of the plan during the weekend.”

OK… I’m going to have to come back down, now… I was floating after hearing that announcement! I’m sort of like those Windows 7 commercials… The European Monetary Fund was my idea, and I’m a PC!

While I was looking around The Wall Street Journal this weekend, I saw a story that caught my eye… Here’s a snippet from the WSJ… “Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and other lenders reported a large increase in the volume of troubled loans they bought back last year. Barclays Capital estimated that banks repurchased about $20 billion in such loans, with half of the total written off. ‘Most investors haven’t really focused on this issue and are surprised on how much impact this could have, including on earnings,’ said Ajay Rajadhyaksha, head of US fixed-income and securitized strategy at Barclays Capital.”

Doesn’t that stuff scare the bejeebers out of you? Mortgage loans that were made in the past six years are toxic! Of course, not all of them are… But it seems like all we ever hear about are these mortgage loans going bad and having to be written off…

Well… China was in the news this weekend, talking about their shrinking trade surplus… The thought here is simply that if China’s trade surplus continues to shrink, the pressure applied to the Chinese to allow the renminbi (CNY) to float, will be eased… For those of you keeping score at home, China’s trade surplus was $44 billion a year ago… Today, it is $8 billion.

One of my fave economists, Nouriel Roubini, said that he believed the Chinese would “limit the renminbi’s appreciation to 4% over the next 12 months because of a super cautious outlook on the global economy.”

I personally think that China will allow more than that as we go along, starting with a 2% or so gain by summer… But then, that’s just me.

There was a good story in the USA Today regarding gold, this past week, that long time colleague Ed Bonawitz, sent me… Here’s a snippet…

“If you like to have your investments close at hand – say, buried 12 paces northeast of the old apple tree – then gold bullion is the kind of investment you’d like. But even if you’re not worried that the dollar will plunge, owning gold isn’t a bad idea.

“You hear many people pushing gold these days, citing our nation’s $12.4 trillion debt. Gold is the classic hedge against inflation. If the US resorts to printing money to repay our debts, the value of paper dollars will fall, and gold prices will skyrocket.”

To recap… The Jobs Jamboree was worse than printed by the BLS, and not dollar positive… The price of oil is shooting higher again, and taking the petrol-currencies of Norway, Canada, Mexico and even the UK higher versus the dollar… Recent data has the rate hike campers here in the US feeling left out, and therefore the rate differentials kick in for Australia, Brazil, and South Africa… And… Oh yes! Chuck was in The Wall Street Journal Saturday!

Oh.. And one more quote… This one from John Maynard Keynes… “When the facts change, I change my opinion… What do you do, sir?”

Chuck Butler
for The Daily Reckoning

European Monetary Fund: You Heard it Here First originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Well… On the first count… I still believe the markets are barking up the wrong tree when they believe that the Fed is going to begin rate hikes soon… And on the second count… Poor Germany… They’ve got to be feeling like Charlie Brown in the old song… Charlie Brown, he’s a clown… Why’s everybody always picking on me?

For when is Moody’s going to have the intestinal fortitude to downgrade US debt? When, I ask… Just when? Or, even the financial institutions that are still walking on eggshells, here in the US? But nooooooooo! Let’s go pick on Germany’s largest bank!

Now… Here’s what I found yesterday to be the biggest story… Greece was going to seek the aid of the IMF… Whoa there partner! The ECB is going to have none of that! And I told Chris Gaffney just that, yesterday… For if the IMF were to come in to save Greece, the ECB would have egg all over their faces.. And an admission that the ECB can’t deal with problems in its own region.

Instead… I proposed this last week at our editors meeting in Scottsdale… That the European Union set up its own monetary fund and call it the European Monetary Fund, to act like the IMF, but it would be made up of nothing but European nations, and would help when times got bad… Sounds like a viable plan to me! Hey! Maybe, they should put me in charge over there! HA!

And looky there! I’m now seeing a story on ECB President Trichet saying that Trichet pressed Greece to halt their flirtation with the IMF, and instead work with European Union officials to tame their deficits.

Well… Today, being the first Friday of the month, is a Jobs Jamboree Friday here in the US… I would have to think that the government officials who claim that the stimulus created/saved jobs last year, would be dreading the print of the jobs report… You see, somewhere along the line, that line about “saving jobs” is nothing but rearranging the deck chairs on the Titanic… All the while, the job losses, albeit not as deep as they were a year ago, continue to mount… And that’s what’s expected this morning… More job losses…

I’ll tell you this now, so you when you hear it on your cable news station, or wherever you get your news, that February’s job losses are going to be blamed on the weather… That’s right, all the snow in February will be blamed for the job losses… More rearranging going on, I see!

The data yesterday, again, did not inspire me to think that the Fed is going to raise rates any time soon… Pending Home Sales here in the US fell 7.6%! That’s right… The number of buyers who agreed to purchase previously occupied homes fell sharply in January, a sign that demand for housing is sinking. (I’m sure there was some reference to the snowy weather, too!)

The National Association of Realtors says its seasonally adjusted index of sales agreements fell 7.6% from December to a January reading of 90.4. It was the lowest reading since last April.

The Weekly Initial Jobless Claims printed at 469,000, putting the four-week average at 470,750… So, the job losses keep coming… What the Bureau of Labor Statistics claims is that on the other side of the job losses there is job creation going on. Well, that’s what I call “ghost jobs”…

The US Factory Orders printed a very solid 1.7% gain in January, so that was good! The bad part is that the gain was dominated by a one-time increase in aircraft… So, don’t get too lathered up with that number!

Ok… Enough of that!

Yesterday, I told you that Canada was going to present their budget… And… I took a peek at it… WOW! Canada is planning on cutting their deficit spending, and bringing their balance sheet back to balanced by 2014! Now… We have to take this with a grain of salt, given the known fact that in 1999, the US Budget Office predicted that in 10 years, (that was last year) we would be nearing a budget surplus! Yeah, like that even had a chance to happen, once 9/11 happened, and eight years of the previous administration’s spending, and so far one year of the new administration’s spending!

But, getting back to Canada for a minute, for they deserve this moment in the spotlight… I applaud the Canadian government for their efforts to cut spending… And before anyone gets the idea that Canada’s deficit is similar to ours, you need to think again… For the Canadian deficit is a mere $54 billion!

Hey! It sure looks to me as though gold has reversed its downward mini-trend! I don’t know if you’ve been keeping score at home or not, but gold has quietly inched higher and higher, until it erased the downward movement! This should get interesting from here… And.. I hope you took advantage of the price dip in gold… It sure was very much cheaper for a while, there!

My friend, David Galland, was talking about the Taylor Rule, in his most excellent newsletter yesterday… This Taylor Rule is a formula that calculates what the Fed Funds rate should be, based on inflation, and other data… It showed that during the years around 2004, when I claimed rates were too low, for too long and fueled the housing bubble, the calculation confirms that rates were too low… And for now? Well, for now, it shows that the Fed Funds rate should be 4%… Not 0.25%… Lucy! You’ve got some splainin’ to do!

And this leads me to say, once again, that the Fed is and will continue to be behind the inflation 8-ball… And that, my friend, will lead us down the road of inflation! Yes, monetary inflation, not wage inflation, for that couldn’t happen in a million years, when you have 21% unemployment! The Fed will bungle this operation, and we’ll be left holding the bag… You see, buying those mortgage backed ARMs from lenders is going to have unintended consequences for the Fed… To raise interest rates, the Fed would take HUGE losses on the trillion-dollar ARMs holdings… To not raise interest rates, the Fed will, and already is, allowing inflation to rule the roost.

So… That’s just peachy, eh? We’ve got the reduced purchasing power of a weak dollar, and whatever dollar value we have left is going to be eaten away by inflation. WOW! Where do I sign up for that? Shoot Rudy, that’s pretty good stuff, right there.. Yes sir, may I have another?

To recap… The currency rally, led by the euro, from Wednesday, faded yesterday, when the ECB announced extended stimulus plans, which led many to believe the US rates would be higher soon… Deutsche Bank saw their rating cut by Moody’s… Today is a jobs jamboree, and Canada is taking steps to eliminate their deficit!

Chuck Butler
for The Daily Reckoning

Deutsche Bank Rating Downgraded originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Market flash:

The Dow was flat yesterday. Gold rose $2. And Greece said it was making progress towards cutting its deficit.

Yesterday we looked at America’s most miserable cities. Today, let’s take a gander at its new “ghost towns.”

There are many towns and cities that are losing population…losing key industries…and probably on the verge of extinction. USA Today mentioned some of them in a cover story this Tuesday.

Ravenswood, W. Va., for example. It has 4,000 people and one major business. It’s a one-horse town, in other words, and the nag is leaving. The aluminum works are partly shuttered already, says USA Today; the rest is for sale.

What’s going to happen to Ravenswood? It could become a ghost town.

There are already dozens of towns in West Virginia that are inhabited mostly by ghosts. They’re relics of the booms and busts of the past. Mining, logging, railroads – each one created it own towns. Then, the profitable industries of the 19th and 20th century became unprofitable somewhere along the line. People left. Those who remain live among the shades.

The booms and busts of our time are simply claiming more victims. Cleveland is losing population. So is Baltimore. So are dozens of US cities.

“In the America where things are made the recession has a depression,” continues the report. “According to a new Northeastern University study, one in every six blue-collar industrial jobs have disappeared since 2007.”

And one in five adult males of prime working age is out of work. There are fewer and fewer factory towns in the US…and fewer and fewer jobs for people who work in them. And now comes word that auto sales in February fell nearly 4%. And early estimates suggest that the job report coming tomorrow will be depressing.

“Industrial workers are dinosaurs,” says one laid-off worker, now retraining to be a traveling nurse.

Hmmm… Let’s see. How does this work? No one makes anything anymore. We all become service industry workers…looking out for one another. I give you $5 for cutting my lawn. You give me $5 for cutting your hair. Neither of us has a penny more. How then do we afford to buy anything?

“An industrial town makes products that bring wealth into a community; a post-industrial ghost town as a zero-sum economy – people in marginal jobs ‘serving and paying each other,’” says USA Today.

Services don’t make people wealthier. They may make them more comfortable. But real prosperity requires real stuff – food, cars, tables, light bulbs, iPads.

Of course, you could offer services to people who make these things. A small nation, such as Singapore, for example, could earn a living by offering financial services. A Caribbean island could offer vacations. But what can a great nation like the US offer? It can’t get by on services. And it can’t support half its population on welfare, unemployment and food stamps. It needs manufacturing…it needs to make things…and sell them.

Why doesn’t it do that already? How come so many people are out of work? How come men can find jobs?

Ooh la la…too many questions. But when was the last time you heard a mother proudly announce that her son was going into manufacturing? Or that he was learning to be a machinist? When was the last time you saw a major factory under construction? When was the last time you picked up something in a shop, turned it over and found “Made in America” stamped on the underside?

Bill Bonner
for The Daily Reckoning

America the Service Industry originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

According to Irwin Kellner, chief economist at MarketWatch:

1. Both consumer confidence and sentiment have fallen unexpectedly.

2. After-tax personal incomes adjusted for inflation have flattened.

3. Sales of both new and existing homes took a surprising stumble.

4. Orders for most durable goods are down.

5. Manufacturing has slowed.

6. Jobless claims are up.

7. Fourth-quarter GDP growth came largely from a slower pace of inventory liquidation, not from an increase in consumer spending.

8. And, as a matter of fact, consumer spending weakened last quarter.

Kellner also points out that consumer confidence has dropped to a nearly 30-year low, new home sales hit record lows, existing home sales are at a seven-month low, and even unemployment claims rose six of the past eight weeks.

In case you need an updated dose of cold, hard reality about the economy, this MarketWatch coverage of the recovery running out of gas is a worthwhile read.

Best,

Rocky Vega,
The Daily Reckoning

7 Critical Data Points Show the US Economy is Hitting a Wall originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession. New data released today seems to support this view, with consumer spending up 0.5% in January.

However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.

I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. Most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.

Beyond the question of “how” the spending could be achieved, is the deeper question of “why” such activity should be sought at all. Excessive spending, fueled by an insane housing bubble and catalyzed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?

During the run up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labor, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behavior was influenced by overly optimistic assumptions regarding real estate related riches.

However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behavior should necessitate a dramatic shift in the labor market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.

The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace – the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.

Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being “created” by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their paychecks than they were in the past.

Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it’s not just about confidence; it’s about cash.

The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.

That, in a nutshell, is our government’s plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way.

Regards,

Peter Schiff
for The Daily Reckoning

Don’t Bet on a Recovery originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Is this time different? I doubt it… Lose value for six more months? In my opinion yes… But then returning to the underlying weak dollar trend. Look, folks… If you really think that by sending me emails telling me I’m wrong, and I’m stupid, and everything else, that I’m going to change my mind on this… Then you might as well stop! Or… Start writing that great American (NOT!), George Soros, and tell him how great he is…

Here’s the thing… The US dollar entered the long-term weak trend in 2002, after posting a deficit of 4.5% of GDP, which historically meant that the country posting such a deficit would experience a currency crisis… THIS WAS A FUNDAMENTAL REASON FOR THE WEAK DOLLAR TREND! And guess what the CBO told us about 10 days ago? That’s right… That the US deficit is going to average 4.5% of GDP for the next 10 years! Where’s the cleaning out of the fundamental reason for the weak dollar trend?

I told many people last week, “Yes, the dollar can rally… But these are merely circuit breakers so that the dollar’s direction isn’t a one-way street, for if it were to become a one-way street, then… Everyone would head for the exits at the same time!”

OK… Sorry, but sitting at home yesterday, reading those notes, just got my temper raging, and I experienced “writer rage”!

Well… The Reserve Bank of Australia (RBA) did, as I said they would, hike rates yesterday… Adding another 25 BPS to their internal rate to 4%, the RBA made a statement that leads me to believe they are nowhere near an end to the rate hike cycle. The RBA’s statement ended with this… “Interest rates to most borrowers nonetheless remain lower than average and it is appropriate for interest rates to be closer to average”. Sounds like more rate hikes are on the way to me!

Australia also printed a strong retail sales figure for January of +1.2%… Tomorrow, we’ll see the color of fourth quarter GDP, which will really tell us for sure if the rate hike cycle continues higher.

Yesterday morning I told you about how I expected Canada’s fourth quarter GDP to show a greater than 4% figure… Well, 4% was conservative! Fourth quarter GDP actually printed at 5%… And, the recession officially ended earlier than thought, as the third quarter GDP was revised up to 0.9%! This 5% print of GDP was greater than the experts and the Bank of Canada (BOC) were forecasting (3.3%)… So, as I said yesterday, maybe this moves the BOC to raise rates earlier than they stated they would… But raise them now, or next week, or next month? I don’t think so… But before the summer sun is hot, and the tall colorful cold drinks with umbrellas are prevalent around the pools… I DO think so!

The data in the US yesterday was, as Yogi Berra says, déjà vu all over again! What am I talking about here? Well… Personal Spending far outpaced Personal Income… So, what does that remind you of? Yes, of course the go-go days that helped fuel this financial mess we’re in… We can’t continue to spend more than we make, folks… When will this become part of our inner thoughts?

Hey! John Williams, over at Shadow Stats, confirmed my belief that we have greater than 20% unemployment, as he printed a greater than 21% figure for his latest reports… And yes, I know, the government is doing everything it can to keep those unemployment benefits going, but their motives are dark, as they want to get money in your hands to spend, not save, or pay down debts.

The data cupboard is pretty bare today with only Vehicle Sales for February to print…

I have to tell you that what I’m seeing in pound sterling (GBP) is really a driving force for the euro weakness… I’ve explained all this before, but for those of you new to class… The FX market is made of currency pairs… Since we’re mostly dollar-based investors, we care about dollar/whatever currency… But all currencies are tied together with these pairs… And if there’s a ton of selling of pound sterling versus dollar, that would carry over to dollar/euro, and dollar/ krone, etc.

The thought in the UK these days is that the economy is facing the risk of a double dip recession… Well… If they get one, you can bet your sweet bippie that we’ll get one here in the US, because it seems that for the last two years, whatever happens in the UK carries over to the US short positions in sterling are piling up, and I doubt there’s anything that can save the currency from bigger declines at this point.

OK… Yesterday, I told you that I would give you something different to think about rather than all the destruction and loss of life in Chile… This is very similar in theory about what I wrote after the Tsunami in Thailand a few years ago.

First of all… This is a well-managed economy and they have enough policy flexibility to deal with this devastation. There may well be selling of Chilean pesos in a knee jerk reaction to the earthquake, but I doubt that will continue. You see, Chile has an $11.3 billion savings fund that will stabilize the peso… And, while copper mining is put on hold right now, the government will likely tap the $11.3 billion fund, stockpiled with copper revenue, to finance reconstruction projects… And the rebuilding of their infrastructure will regenerate their economy. You see bridges falling down, and roads buckled… I see the need for new bridges and roads that will require jobs, equipment, etc.

Yesterday, I said we would have to wait to see the US reaction to the news that a 34 billion euros package had been put together to help Greece… Apparently the US traders didn’t like it… Of course it was different when the US financial institutions were getting bailed out… I wonder if it will remain different when California has to be bailed out… Or Illinois… Or Michigan… Or New York…

And I could sit here all day telling them they are forgetting about the US states nearing default… But it doesn’t do me any good, for they have their focus on Greece and the euro right now… I have to say that yesterday, I woke up from a nap, and right there on my TV, on the Glenn Beck show, they were talking about Greece and California, and all the things I’ve been saying to you for over a month now! Maybe, there’s a Pfennig reader over at Fox…

Then there was this… Talk about getting out of Dodge before sundown… Fed Reserve Vice-Chairman Donald Kohn, announced that he will retire from the Fed. Kohn was a very close friend and advisor to both Greenspan and now Bernanke… Given what we now know about Greenspan, thanks to Bill Fleckenstein and his book, The Age of Ignorance at the Federal Reserve, knowing that Kohn was a close advisor is probably not a good thing on a resume, eh? Now, the president has to find three new Fed Heads… This is going to be pretty interesting to see whom he picks.

To recap… The RBA did indeed hike rates by 25 BPS, and gave a statement that leads one to believe more rate hikes are coming. Canada posted a strong 5% figure for fourth quarter GDP, but rate hikes there will have to wait a month or two. Pound sterling crosses are hurting euro, krone and other currencies, and the Chilean earthquake will provide infrastructure rebuilding projects…

Regards,

Chuck Butler
for The Daily Reckoning

US Traders Dislike Greek Bailout Package originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The early data releases here in the US were a bit confusing, as Durable Goods Orders in January jumped 3%, double the expected increase of 1.5% and well above December’s number, which was adjusted up to 1.9%. But much of this big increase came from large plane contracts, and the more important Ex-Transportation number unexpectedly fell 0.6%, the most since August. We also got more bad news regarding the housing market, as the average prices fell 1.6%. The Labor Department followed these numbers with the weekly jobs report, which showed that an additional 22,000 workers applied for unemployment last week, raising the weekly number to 496,000.

We have all heard the administration’s constant reminders that the jobs numbers are a lagging indicator, and the economy will recover well before any improvement is seen in the jobs numbers. But eventually we have to see some improvement in jobs, right?? If the US economy started to ‘turn the corner’ last year, and is expected to grow 3.1% (NABE’s numbers) in 2010, shouldn’t we start to see some improvement in this data? Instead, the weekly jobs numbers are back on the upswing after bottoming late last year.

The data yesterday morning didn’t really give traders a clear picture of the state of the US economy, so the currency markets remained in a fairly tight trading range. The only currency that moved more than 1% versus the US dollar yesterday was the Japanese yen (JPY), which had appreciated 1.2% as I left for home. But when Tokyo got into the market, they sold the yen and pushed it lower. The Japanese have a long history of currency intervention, and the selling certainly had that feel.

But traders also got some help from data released in Tokyo, which showed that Japanese retail sales unexpectedly rose. Retail sales jumped 2.6% from a year earlier, and another report showed Japanese manufacturers increased production at the fastest pace since May. Factory orders rose 2.5% in January from a month earlier, the 11th straight gain. Increased Asian demand (mainly from China) has helped to offset reduced demand from Europe and the US. This supports what we have been saying for several months now, that Asia will lead the rest of the world out of recession, and that increased demand from China will propel global growth no matter what happens here in the US.

So overnight, the dollar was sold along with the Japanese yen as investors moved back into ‘risk trades’. This is the new name for carry trades, but it is the same old story. Investors move out of the low yielding currencies of Japan and the US and into the higher yielding currencies. The main benefactors of this move overnight were the South African rand (ZAR), Brazilian real (BRL), and the New Zealand dollar (NZD).

The rand was the biggest gainer as both gold and platinum moved higher. The Brazilian real moved up versus the US dollar as the central bank announced a return to reserve requirements which were in place prior to the global credit crisis. The move unwinds anti-crisis measures the policy makers put in place at the end of 2008. Currency traders pushed the real up after the announcement, predicting that the central bank will probably raise interest rates next month as the economic outlook improves. Interest rate differentials will continue to be an important driver of currency prices in 2010, and Brazil has one of the largest yield differentials to the US dollar.

Australia was also up a bit overnight as a report showed that banks increased lending in January and business investment rebounded in the fourth quarter. This data convinced traders that the nation’s policy makers would likely raise borrowing costs next week, pushing the yield differential versus the US even higher. With the carry trades back on, the Aussie dollar should benefit dramatically from any interest rate increase. Especially with US rates remaining near zero for an extended period.

Today we will get a revised look at fourth quarter GDP, which surprised everyone when it was reported to have risen 5.7%. The economists don’t expect any revisions to this strong number. Economists really don’t expect any negative data this morning, as they also think the Chicago Purchasing Manager number and U of Mich. Confidence numbers will be positive. Finally, we will see Existing Home Sales, which are expected to have risen slightly after December’s record decline. The extension of the federal tax credit is predicted to have stabilized this number, but it sure didn’t help the new home sales numbers we got on Wednesday! After those terrible new home numbers, I think this existing home number has a pretty good chance to surprise the markets in a negative way.

The currency that has been getting beat recently is the pound sterling (GBP) which is now down nearly 6% versus the US dollar in the past month. While the media has been focusing on the euro’s problems with Greece, the pound sterling has been dropping like a rock. The pound has been coming under pressure as investors have focused on the UK’s budget problems. As rating companies take a closer look at Greek’s ratings, the UK’s record deficit has many worried that their ratings may be adjusted as well. At 12% of GDP, the UK deficit is on par with that of Greece. Even Spain has a better number than the UK. Not good news for the pound sterling!

To recap… Data released yesterday didn’t give traders a clear indication of the US economy… Japanese investors took the dollar lower as money was moved into higher yielding currencies… Brazil and Australia will look to raise interest rates, benefitting their currencies… And the Pound Sterling is under pressure as their deficits are equal to those of Greece…

US Jobless Numbers: A Lag in a Lagging Indicator? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."