The Great Deception

It’s the Great Deception…

Not much time to write this morning. In a few minutes, we’re getting on a flight from L.A. to Buenos Aires. Now, in the lounge in Houston, we’re wondering if the bear market rally is over…

The Dow fell again yesterday – down 186 points. It could be that the rally is over…and at only about 15% up from the bottom. That would be a disappointment to many investors. They were just beginning to think the worst was over.

Which makes us think that the rally is probably NOT over. It’s too soon to hammer the bulls. Not enough of them yet. This market should rise more…in order to draw in more suckers.

You saw our guess yesterday. We’re headed towards a Great Deception.

The bulls are deceived into believing we’re in a new bull market. They’ll be disappointed when this rally falls apart. They’ll give up on stocks and sell the market down to the 5,000 level…or below.

The gold and commodities markets deceive the bears. They expect prices to go up as the feds put in more money. They’ll be disappointed when gold sinks. You saw the big whack they gave gold on Monday. It went down hard. Yesterday, it recovered slightly – back up $10.

The big spenders will be disappointed too. They’ve got debt. And they’re counting on consumer price inflation to lighten up those debts, making them easier to pay. Instead, deflation will make their debts heavier…weighing down so heavily on the debtors that many of them will be crushed by it.

This action in the gold market tells us that we’re a long way from the final stage of the bull market in gold. Investors sell it when they think things are getting better. But when things get better, gold will soar. Because then the monetary inflation the feds have put into the system will turn into consumer price inflation. We could see rates of consumer inflation substantially higher than we saw in the ‘70s. And we could see gold prices over $2,000…maybe over $3,000 per ounce. On an inflation-adjusted basis, the price of gold would have to go to about $2,300 an ounce just to equal its price in 1980. If this inflation is worse – as, most likely, it will be – gold should go much higher.

Then, it will be the dollar savers who are disappointed. They think dollars are the safest place in the world to put your money. But when inflation rises, their savings will lose half…maybe 3/4s…of their value in just a few weeks.

But don’t hold your breath, dear reader; the final stage could be years away…

Here’s Addison and The 5 with some insight on how the final stage might begin:

“Registered voters now consider ‘budget deficit and national debt’ the biggest threats to America’s future,” reports Addison Wiggin. “Check out this survey released by the Peterson Foundation this morning:


“Of course,” continues Addison, “the Peterson Foundation would benefit from the poll going this way… they’re debt hounds through and though, like us. David Walker, their President and CEO, was a protagonist in our documentary on fiscal irresponsibility.

“But best we can tell the poll was legit, and frankly the results are hardly surprising – consider that $11 trillion national debt and another $50-60 trillion in entitlements. Between The Fed, Treasury and FDIC tack on another $8 trillion in bailouts and purchase programs since the recession began. Bush’s $160 billion stimulus plan. Obama’s $787 billion stimulus…

“We know conceptualizing the debt a few years ago might have been tricky for ‘Joe Sixpack.’ But after all we’ve been through, how could even the most countrified American not see the forest for the trees?”

In lieu of writing their daily musings this week, Addison and the rest of Agora Financial’s editors are converging upon our Baltimore headquarters to discuss the market, the economy and the world as we know it. These editorial meetings typically bear some of our most exciting new investment themes and economic forecasts… ideas that will likely appear first in The 5 Min. Forecast. Stay tuned.

In the meantime, if you feel threatened by our booming deficits, check out our latest special report: What is Hyperinflation?

And back to Bill, with more observations:

This is the worst financial crisis since the ’30s. Housing in the Golden State is down 40%-50%.

Near Maria’s apartment, in the hills above Silver Lake, we saw a house for sale. A rundown affair, it was surrounded by bamboo, which at least gave it some privacy. “Bank Owned,” said the sign. Maria needs a new place to live, so we were curious. We jotted down the phone number and called. It turned out, it was two separate units…and it had just sold for $150,000. A couple of years ago, it probably would have brought twice that amount.

The place was a wreck, of course. But it was a small wreck; it couldn’t cost too much to set it right. Let’s see, if you rented each unit for just $1,000 net of direct expenses…you’d have rental income equal to about 15% of your investment. Not too shabby.

Unemployment in California just went over 10%. Tax revenues have collapsed, bringing Arnold Schwarzenegger’s state government to the brink of bankruptcy. Out of cash, the state was forced to pay its employees in IOUs.

Many people in the state must feel like they’re awaiting execution.

But there is no sign of panic…and no sense of alarm.

We saw no food lines. We saw no tent cities. We didn’t even see many “For Sale” signs on the houses – at least, not in the old parts of town. Instead, there were crowds in the shops…in the restaurants…and on the highways. And the cars on the freeways all seemed to be expensive brands – Audis, or Lexuses, or Mercedes…

At least in L.A.’s old neighborhoods, life seemed to go on as it always has.

What to make of it? How come there is no obvious sense of desperation? How come there is no hint of revolution?

More tomorrow…

Until then,

Bill Bonner
The Daily Reckoning

The Daily Reckoning