It was just too easy for us last year…

In lower Manhattan, we could throw a brick in any direction and be sure to hit a major swindler and at least two knuckleheads. And as for making money, everywhere we looked, we saw something to sell - art, oil, retailers, finance…you name it. The only things that went up last year were gold and U.S. government bonds. All we had to do was to stick to our Trade of the Decade…sell stocks on rebounds, buy gold on dips…and we made money.

A year like that doesn't come along very often. We can't remember when we had so much fun…

A real boom lasts longer than most marriages. This last one began in 1982 - during the first Reagan term. Now it is gone…over…fini…kaput. Just like that.

After so many happy years spent together, you'd think there would be some kind of ceremony…some suitable last rites and requiem mass to mark its passing. Instead, people turn their backs on the past like it was day-old bread. They clean out their cupboards on January 1st, and toss out the dead year to bluejays and starlings.

Here at The Daily Reckoning we are sentimental fuddy duddies. Hardly a day goes by that we don't recall the many good times we had during the madcap years of the boom. We still haven't even been able to take down our Christmas tree or hang up our 2009 calendar…and, below, we turn our heads back for one last, nostalgic look…

And now we face a grim task; for now we have to reckon with the year ahead. Stocks are no longer absurdly over-priced. Nor is oil. Nor is anything else - with one major exception - U.S. Treasury debt. Should you buy stocks…or sell them? Should you buy more gold now…or wait for the first signs of inflation? Is it time to buy the oil producers…or the gold miners? Will the world economy sink into a Japan-like slump…or will the feds cause a Zimbabwe-like catastrophe?

Every day, our head aches from trying to figure it out…

How do you make money, dear reader? You look for the fool who wants to give it to you. Who is the fool in the market in 2009? He is the fellow who buys U.S. bonds. But taking his money may not be as easy as it looks.

Let's first turn to the headlines…and we'll come back to the fool later.

Yesterday, the Dow sold off a further 27 points. The stock market looks to us as though it wants to go up. We're tempted to bet on…since a rebound is usually the safest bet you can make after such a major tumble. But there is no guarantee it will work that way.

But Mr. Market is full of tricks. Who knows what he'll get up to?

Oil is trading above $40 this morning. And gold rose $12 yesterday.

The news from the economy tells us that the financial losses are working their way into the business world.

Retailers had their worst December in 40 years, says the LA Times.

Loan delinquencies hit record highs last year, says the Washington Post.

"Job losses stack up as recession deepens," is one of today's headlines. Unemployment numbers have reached a high not seen since the beginning of the boom - 26 years ago.

Layoffs in China are beginning too. At least China has some savings it can use to fight the downturn. America can only borrow…and borrow…and finally, print up money.

That is our forecast, by the way.

First, we don't believe that a generation's worth of errors can be corrected in 6 months. Investors and consumers have had a shock. But they are still hopeful. After the worst crash in stock market history they are nevertheless holding onto their stocks. They see a recession…but they don't quite believe it. Just wait. First, there's the financial shock. Then, the economic shock. And then, another financial shock as investors realize how bad the situation really is. Shock after shock…knock after knock…investors, consumers and businessmen get the boom year reflexes beaten out of them.

*** Dividend yields are now higher than Treasury bond yields, but they are still not at sold-out, depression bottom levels. And the Dow, now down about 35%, is far above the depths you'd expect in a generational downturn. To get down to real bargain levels - such as those of 1932, 1949 and 1982 - the Dow will have to go well below 5,000…say, to around 3,000. And investors' attitudes will have to change. That's when they cease believing that prices bounce at all; instead, they come to think that they are leaden…and begin to believe that holding stocks is always a losing proposition.

Bounce or no bounce…stock prices are probably going a lot lower.

Second, the feds are hell-bent on preventing this kind of severe, natural correction. The Fed has already cut its key lending rate to zero. Yesterday, the Bank of England hacked its own key rate to the lowest level since the bank was set up in the late 17th century. Apparently, this is the most menacing situation faced by the British economy since the reign of William of Orange. Or to look at it with a bit of historical imagination, not since the beginning of the industrial revolution has the Anglo-American empire needed such emergency-level interest rates:.

 The New York Times provides the latest details:

"Crisis Trumps Restraint

"As the ranking Democrat and then chairman of the House Budget Committee, Representative John M. Spratt Jr. of South Carolina accused President Bush for eight years of recklessly running up huge fiscal deficits.

"But by noon on Wednesday, after listening for two hours as economists explained why it was crucial to run a large deficit - one that would triple the previous record and vault far above $1 trillion - Mr. Spratt looked shell-shocked.

"Lingering in his chair as the cavernous hearing room emptied, he stared into the distance and gave vent to his concerns.

"The thing I wanted to ask," he said, "was if there was some limit which we should be wary of? Is there some limit in terms of how much borrowing and debt creation we should take on?"

"For the moment, the answer is no."

*** And here we spare a moment to return to one of our own old dicta:

People come to think what they must think when they have to think it.

The House Budget Committee listened to Martin Feldstein and Mark Zandi - both conservative economists - along with Robert Reich, Bill Clinton's Secretary of Labor.

All sang the same Keynesian tune. The refrain, as rehearsed by Martin Feldstein, goes like this:

"Reviving the economy requires major fiscal stimulus from tax cuts and increased government spending."

When America's economy was young and competitive it survived slumps and crashes without medical intervention. Now, every passing cold requires feeding tubes. And this latest bout of influenza has the doctors in a panic. They are casting aside warnings and giving the patient masses doses of the old quack treatments. They'll increase the dosage - until they run out of supplies - and then switch to those new, experimental medicines that have recently been used in field trials by Dr. Gono in Zimbabwe. Since they cannot leave well enough alone - the public won't stand for it - they will keep giving bigger and bigger doses, of more and more dangerous medicines, until the patient dies.

When? How? We wish we knew. But yesterday, we got word that the European Central Bank has found a way to do what the U.S. Fed is already doing - buying up government debt. As you may know, dear reader, when central banks buy government debt, the money supply increases directly.

Surely, Gideon Gono must feel his chest swelling with pride. He must be in line for a Nobel Prize…or a hanging. Against, we quote his approving words:

"Banks, including those in USA and Britain are not now just talking of, but actually implements flexible and pragmatic central bank programs where these are deemed necessary in their national interests.

"That is precisely the path that we began only 4 years ago in pursuit of our national interest and have not wavered from that critical path despite the untold misunderstandings, vilification and demonization we have endured from across the political divide."

*** One last note before we turn you over to today's essay. If you still haven't seen I.O.U.S.A., here's your chance to watch it from the comfort of your own home. The documentary, followed by a panel presentation, will air on CNN this Saturday 2PM and Sunday 3PM (10th & 11th). Be sure and tune in…

The Daily Reckoning PRESENTS: Despite the U.S. Treasury Secretary, and the U.S. President saying that the U.S. economy was in good shape, by July of last year, several things were clear: housing had not bottomed out, the subprime problem was not contained, the banks did not have enough cash, and every official - public or private - who opened his mouth was either a joker or a thief. Bill Bonner explains…

SAID THE JOKER TO THE THIEF
by Bill Bonner

The year of our Lord 2008 died in disgrace. It was tossed in a hasty grave…and mud was thrown on its face as though on a dead dictator. 'Good riddance' says practically everyone. But here at The Daily Reckoning, we're going to miss and mourn it. It may have been the worst year in stock market history, but we can't remember when we had such a good time. We barely broke a sweat the entire year; never were there more jackasses to laugh at or more con artists to admire. So, today, we hang black crepe…spread tea roses…and bid adieu.

Among the other milestones of 2008 came word that 1 out of 100 adults in the USA was in prison; but as the year progressed, that seemed like hardly enough. Each week brought new evidence that there were still many miscreants who should be behind bars. On January 11, 2008, when one of the nation's biggest mortgage lenders - Countrywide Financial - went bust. On February 17, Britain's Northern Rock was nationalized. Still, America's rulers missed the calamity taking place right under their noses.

"I don't think we're headed to a recession," said George W. Bush. "I don't think I've seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars," added Henry Paulson. Then, on March 11th, the Treasury Secretary went on to explain that the fallout from sub-prime mortgages was "largely contained." From the report in the Wall Street Journal:

"Paulson, a former chief executive of Goldman Sachs Group, repeated his view that the U.S. economy is fundamentally on sound footing and would dodge a recession."

The very next day, Bear Stearns CEO Alan Schwartz told the world that his firm faced no liquidity crisis. In an exclusive interview with CNBC, he said the nasty rumors were unfounded: "We finished the year, and we reported that we had $17 billion of cash sitting at the bank's parent company as a liquidity cushion," he said. "As the year has gone on, that liquidity cushion has been virtually unchanged." That same week, SEC Chairman Christopher Cox added that his agency was comfortable with the "capital cushions" at the nation's five largest investment banks.

Four days later, the cushions seem to have mysteriously disappeared. Bear Stearns, faced bankruptcy brought on by collapsing sub-prime prices. In a desperate measure, the firm sold itself to J.P Morgan the next day for $2 a share - a 98% discount from its high of $171.

But by May things were looking up again. On the 6th of the month, Cyril Moulle-Berteaux, managing partner of Traxis Partners LP, a hedge fund firm, wrote in the Wall Street Journal: "…it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now."

But by July, several things were clear: housing had not bottomed out, the subprime problem was not contained, the banks did not have enough cash, and every official - public or private - who opened his mouth was either a joker or a thief.

On July 16th Fed Chairman Bernanke told Congress that troubled mortgage giants Fannie Mae and Freddie Mac were "in no danger of failing." The next day, ABC interviewed Fannie Mae CEO Daniel Mudd. Would Fannie Mae need a bailout, he was asked. "I think it's very unlikely," was the opinion of the top man. " And I think everybody that has described it… [says it's] a backstop in case things turn out different than everybody predicts."

If anyone knew what was happening in the nation's housing market, he wasn't sitting in the CEO's seat at Fannie or the Fed. By September, things were turning our different than everybody expected. On the 6th, the US government nationalized both Freddie Mac and Fannie Mac, wiping out the shareholders. On the 14th, Lehman Bros. went broke. Lehman's main man, Dick Fuld, blamed the few people who actually seemed to know what was going on - those who sold the company's stock: "When I find a short-seller, I want to tear his heart out and eat it before his eyes while he's still alive." The day after, Merrill Lynch ceased to be an investment bank; it was taken over by the Bank of America. And the following day, the Fed bailed out American International Group Inc in return for 80 percent stake.

But by the middle of September, the financial authorities - who neither saw no evil nor heard any - were on the case. On September 18 the UK Financial Services Authority took the Dick Fuld approach; it banned short-selling financial stocks. The next day, US Treasury Secretary Paulson took aim at the problem he never saw, calling on Congress to ante up $700 billion. Whence cometh the $700 billion figure? "It's not based on any particular data point, we just wanted to choose a really large number," said a Treasury Department spokeswoman.

Besides who had time to look for data points? "If we don't do this, we may not have an economy on Monday," said Ben Bernanke to the U.S. Congress. Mr. Bernanke was as wrong about that as about everything else. Monday came. Monday went. The economy never seemed to check its agenda. But then, the U.S. House of Representatives rejected Paulson's rescue plan and stock markets all over the world crashed. The Dow Jones posted its largest point decline ever. "I believe companies that make bad decisions should be allowed to go out of business," opined George Bush.

By early October, however, the world's rescuers had their defibrillators plugged in; Congress approved the acquisition of up to $700 billion of Wall Street's toxic assets and the UK government announced 400 billion pound bank bailout. "We not only saved the world…" began Gordon Brown's victory speech, before he was drowned out by howls of Tories.

"I got to tell you," said Paulson on November 13th "I think our major institutions have been stabilized. I believe that very strongly. " Two weeks later, America's largest bank and its largest automaker were on the verge of bankruptcy.

By yearend, the thieves had been blown up by their own debt bombs and the jokers were in control of most of America's major industries - housing, autos, banking and finance. "…The lack of specifics [in the bailout legislation," explained a Bloomberg report, " gives President-elect Barack Obama plenty of leeway to decide who succeeds and fails…"

And as 2008 began its death rattle, America's president managed to capture the zeitgeist of the whole remarkable period with just a few flagrantly absurd bon mots: we had to "abandon free market principles to save the free market system" said he.

Au revoir, 2008…sniff, sniff.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

-- Posted Friday, 9 January 2009 | Digg This Article