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Monday, April 6, 2009 Every bear market has a surprise…people still don’t expect the worst… The only investments Richard Russell thinks you should be holding right now… The unveiling of the new DR motto…this rally will destroy both bears and bulls… The Mogambo on useless fiat currencies…and more! --------------------- Special Offer --------------------- Your Road Map to Easy, Fast Gains The money is out there for the taking…and I’ll tell you what, when and why to buy. No matter what the market does…you’ll be directed to triple-digit gains. Learn more here. -------------------------------------------------------- The Bear Market Surprise By Bill Bonner San Diego, California “People in this country don’t realize how bad things can be,” said Richard Russell on Saturday night. “I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency. And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds. “And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect.” Richard Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. This weekend a group of his admirers, including your editor, came together to say thanks. There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them. But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell. He’s been studying “the language of the markets” for more than half a century. Though no one ever fully masters the language of the market, Richard can at least carry on a conversation with it. “The primary trend is down,” says he. In the end, he continues, no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it “has fully expressed itself.” What does that mean? We don’t know...and no one else does either. But if this market has something to say, it’s probably something it’s wanted to get off its mind for a long time. And our guess is it’s not a message that people are going to want to hear. Richard is probably right. After so many years of watching markets, he’s developed an instinct for what is really going on. This is going to be worse than people expect, he says. Because despite all the whining and bellyaching in the press, most people still do not expect the worst. Over the last quarter century, they’ve learned to look for bottoms...and buy. Every time it looked like real trouble was coming, the Fed cut rates...and soon, it was off to the races again. Now, they’re afraid of missing this opportunity for another boom. But Richard is old enough to be able to look back much further than a quarter of a century. He’s seen the Great Depression…WWII…the bear market and stagflation of the ‘70s. He knows that sometimes it pays to be extra cautious. “Cash and gold,” says Richard, are the only investments you should be holding now; we’re a long way from the bottom.   One of the reasons we think that is because so many people are looking for the bottom. “Individual Investors Pile Into Citi,” says a headline from last week “The old Wall Street adage about the dangers of catching a falling knife doesn’t seem to be scaring individual investors away from Citigroup Inc. “Some discount-brokerage firms report a surge of individual, or retail, investors buying shares of Citigroup during the past five months, amid the New York bank’s stock-price slide.” These investors think they see an opportunity. What we see is a trap. The Dow rose again on Friday. Apparently, this is the rally we’ve expected since November. It could take the Dow back to 10,000 or so — before collapsing on the heads of naïve investors. Remember, this is a depression, not a recession. And thanks to determined government action, it is on its way to becoming a Great Depression. In a depression, you can’t revive the old economy. It needs structural change — eliminating the mistakes of the previous bubble period — and building new businesses with new ways of doing things. “Creative Destruction” Schumpeter called it. Things that don’t work need to be destroyed...so that things that do work can make use of the capital more efficiently. “What would you do if you were suddenly in a position of power in the United States?” asked one of crowd at Saturday night’s dinner. “Nothing,” replied Richard. “I’d do nothing. I’d let it happen. I’d let the bear market do its work.” Amen, brother. More news from Addison and Ian in Baltimore: “Another industry built on credit-fueled consumption, and thus, likely to get leveled during the great deleveraging, is looking a little gluttonous right about now,” writes Addison in today’s issue of The 5 Min. Forecast. “U.S. restaurant expansion over the past 20 years has vastly outpaced population growth.” “Since 1990, the number of bars and restaurants in the U.S. has grown 49%, to over 537,000. The American population has grown only 23% in that period,” Addison continues. “Growth in the restaurant industry has even outpaced the U.S.’s appetite for squandering money. According to the National Restaurant Association, in 1985 Americans spent around 40 cents of every “food dollar” in restaurants. Today, we’re closer to 48 cents on the dollar, a 20% bump. “Back in the 1950’s, the average Joe spent just 25 cents of his ‘food dollar’ in restaurants. If we’re to return to anything even resembling a post-Depression, post-War, way of life… tens of thousands of restaurants will go under.” Each weekday, Ian and Addison bring readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments — in five minutes or less. The 5 is free to subscribers to our paid publications, and one such publication, Penny Stock Fortunes, is showing ordinary investors how to use stocks that most ignore to pull in some pretty hefty profits. Get the full story here. And back to Bill with more thoughts: Many old friends were at Saturday’s dinner. Analysts, writers, opinion mongers, subscribers. One fellow said he had been reading Richard Russell for the last 30 years. “I figured I probably paid Richard more than $60,000 in subscription fees over that period,” he explained. “But it was the best investment I ever made. He helped me turn a few bucks into $30 million.” “Well, what do YOU think?” asked a local reporter, interviewing your editor at the Richard Russell dinner. “I agree with Richard,” we explained. “Let the free market do its work.” “But aren’t you afraid that the banking system will collapse and that millions of people will be out of work?” came the follow-up question. “Are you saying that the government shouldn’t even try to make sure that doesn’t happen?”   “Maybe the government should make sure there are enough parking places. It should probably make sure the grass is cut at Arlington Cemetery. But there’s no way it can do a better job of getting people what they want than they will do themselves. Even in a depression. “Here’s our new motto at The Daily Reckoning. You’re going to be the first to report it in the press. And when historians finally get around to discovering our oeuvre, they’re going to credit your paper as the first to publish it. Are you ready? Here it is: “The free market rarely takes you where you wanted to go...but it always takes you where you ought to be. “There...we think that pretty much says it all, no?” Rick Rule was there too. Rick provides finance capital to the mining sector — among other things. We asked him what he thought of the recent run-up in stock prices. “I’m a lender, mostly. And as a lender, I’m primarily interested in the credit quality of the people I lend to. Am I lending now? No.” Rick explains that stock prices in the mining sector are, generally, too high. Investors are betting that they go higher. That’s a bet a speculator may want to make, but not a lender. And it’s that kind of speculation that got people in trouble in the first place. Homeowners bet that their houses would go up in price. So did their lenders...and their lender’s lenders. They were so sure they were going to make speculative gains they forgot to pay attention to the quality of their credits. But a rally is underway...and our guess it will destroy both the bulls and the bears. The bulls will buy stocks believing that we have another bull market on our hands. After having lost 50% of their money since 2007, they’ll lose another 20%-30% when this rally collapses. The bears, meanwhile, are convinced that there is worse to come. They think the stimulus spending programs will cause inflation. So they’re buying gold and commodity stocks — sure that when inflation comes, it will cause mining and oil stocks to soar. Maybe it will — eventually. But the first big move will probably be down. They, too, will lose big. That could be the big surprise of this depression. It will kill the stock market bulls when the bear market rally collapses...then it will kill the stock market bears when the mining and commodity stocks collapse...and finally, it will wipe out the middle-class savers when inflation increases and the dollar collapses. Until tomorrow, Bill Bonner The Daily Reckoning P.S.: Rick Rule will be joining us again at our annual Agora Financial Investment Symposium in Vancouver, British Columbia. This year marks our tenth anniversary of The Daily Reckoning, so the theme of this year’s conference will be “A Decade of Reckoning.” All your favorite DR contributors will be there…along with a few special guests. Learn all about it by clicking the link below…and if you secure your spot now, you can still get the early bird special — $300 off the regular cost of admission. The Agora Financial Investment Symposium — July 21-24 --------------------- Special Offer --------------------- March 9, 2009: A Day That Will Go Down in History Early this month, science once again became a national priority...and this is just the tip of the iceberg. If you play this change right, you could quickly accumulate three generations of wealth. Real wealth. Wealth the markets can’t touch. What you are about to read is so lucrative, we can only offer it to the first 558 people who respond...and we’ve already filled most of these spots! Don’t let this once-in-a-lifetime opportunity pass you by. Read the full report here. -------------------------------------------------------- The Daily Reckoning PRESENTS: Okay, so the U.S. dollar isn’t what it used to be... Of course, as a fiat currency, it wasn’t really much to begin with. Now the Chinese want to “expand the supply of Special Drawing Rights.” But as the Mighty Mogambo points out, that’s just like going from one useless currency to another. Read on... Useless Currencies of the World Unite! By The Mogambo Guru Tampa Bay, Florida My brain went into some kind of weird spasm when Zhou Xiaochaun, head of the People’s Bank of China, went on record as saying that he doesn’t trust the dollar to be the world’s reserve currency anymore, and wants, instead of gold, the International Monetary Fund to expand the supply of Special Drawing Rights (SDRs), which is just another stupid fiat currency, to use as the world’s reserve currency! Gaaahhhh! I can tell by the way you are not screaming in fear and frantically clawing your way to the nearest exit in a generalized panic that you do not know what a Special Drawing Right is. So prepare to scream and claw when I tell you that — according to the Economist magazine, which I cite as a source since you never believe anything I say — an SDR is “a synthetic currency created by the IMF, whose value is determined as a weighted average of the dollar, euro, yen and pound”! I deliberately put that exclamation point there at the end so that Junior Mogambo Rangers (JMRs) around the world and across this quadrant of the galaxy would not miss the salient fact that there is something Really, Really Weird (RRW) when these Chinese bastards are smart enough to reject an over-valued fiat dollar, but then being so stupid that they prefer, over gold, a basket of four fiat currencies, one of them being the damned dollar, along with their four corrupt governments, which collectively own the IMF by virtue of having funded the damned thing in the first place! Hahaha! Brilliant! Hahaha! By this time I was laughing so hard that my stomach started hurting, which made me think that maybe I was hungry, and how maybe a taco would hit the spot right about now, which is Mexican food, as I suddenly suspected Chinese food for making them sound so ridiculous. So my mind was whirling, whirling, whirling with many thoughts as Zhou went on to say, “Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries”, which (as I understand it) means that governments should stand ready with their armies to lend a hand to fellow governments around the world with the unpleasant task of killing rebellious civilians who will inevitably riot when they run out of food because they cannot afford to buy food because the damned American government is still deficit-spending, but now measured in the trillions of dollars per year, a demand met with excessive amounts of new money and credit created by the Federal Reserve, increasing the money supply, which in turn creates inflation in prices. “Nothing has worked better as a long-term investment than gold, and so anything other than gold is a bad investment when the governments of the world are deficit-spending at record rates...” As usual, I get no feedback from the Chinese, perhaps thanking me for saving their economic butts by pointing out where they have been so stupid as regards this “gold money” thing by, you know, sending me a couple of tons of it, or even a fruit basket would be nice, ya know? So, I figure that their ignoring me means that maybe they have discovered, with their famed espionage networks, that I am not the world-famous guy I say I am (“They call me Big King Mogambo (BKM) back home!”), but am just some sort of mental case or something, usually described by the newspaper as “local lunatic.” So I figure that maybe someone of the stature of Bill Bonner here at The Daily Reckoning would have the desired impact, and so I tell them how Mr. Bonner writes that “one way or another...sooner or later, a new money system is bound to emerge. Most likely, it will have gold at its base. Why? Because in thousands of years of human experience, nothing better has ever been found.” Well, normally, you would expect someone being told that nothing better than gold has been found that could be used as a store of value to suddenly slap themselves on the forehead (“Ow!”), and say “Hey! You’re right! Nothing has worked better as a long-term investment than gold, and so anything other than gold is a bad investment when the governments of the world are deficit-spending at record rates and the money supplies are expanding at such preposterous rates that the sheer volume of money sloshing around allows interest rates to be temporarily lower than the real rate of consumer price inflation, which is a condition that is so freakishly insane that just thinking about it should make synapses in your brain burn to a freaking cinder with an audible ‘ssss!’ when you comprehend the enormity of it!” So, suddenly, you know something is wrong, and a chill overcomes you, when, even more mysteriously and spookily, the Chinese central banker says, “The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries’ demand for a reserve currency”!!! The three exclamation points indicates that I am on Full Mogambo Alert (FMA), as I now know that Chinese bankers are as duplicitous as all the others; he is proposing to create as much SDR money (which is just another fiat money composed of the fiat dollar, the fiat euro, the fiat yen and the fiat pound) as anyone in the world wants! Which is the problem that got us into the mess we are in, for crying out loud! Even more bizarrely, he states some ridiculous benefit of, “Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets”, which means that no country will have any reserves at all, and some mysterious “trustworthy country” acceptable to China means that China will hold all of the reserves, and therefore be calling the shots of the new currency, and since nobody has any reserves, they will be under complete control of the IMF, which will be under the control of China! Gaaaahhhh! Well, you know I must have hit a nerve, because they don’t answer me and thus quell my howling outrage and fear from even contemplating such a scary thing, and instead, they go on “The participating countries can also save some reserve for domestic development and economic growth”, which makes you go, “Huh? What in the hell are you talking about keeping ‘some’ for our own use? What else would I be using it for, you stupid putz?” Then I realized that this kind of crap leads directly to a pertinent lesson on why you should be buying gold, silver and oil so as to save your Fine Financial Fanny (FFF), but there are so many reasons that I groan with dismay at even listing them all. Until next time, The Mogambo Guru For The Daily Reckoning P.S.: Perhaps, the REAL lesson is in fact that there is a list — a long list — of Very Good Reasons (VGR) to buy gold, silver and oil, which makes investing so easy that you say, “Whee!” Here are just a few of them... Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter — an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.   The Daily Reckoning - Special Reports: A Golden Answer: Protection Against Untrustworthy Paper Currencies “Dollar Stores” Are Losing Money: The Untrustworthy U.S. Currency Introducing the Single Best Way to Make Sure You'll Never Run Out of Money... Click to Learn More About Mobs, Messiahs and Markets.