Hot Stocks Market Deceptions

Happy days are here again! Enjoy them while they last...

"Optimism builds," says a headline in the Financial Times.

As predicted, the world markets are enjoying a bounce. People who had no idea there was anything wrong with the world financial system two years ago, now say the problem has been fixed.

Who fixed it? The people who had no idea what was wrong with it, of course.

What did they fix it with? The same thing that caused the problem they didn't see - debt.

Who makes sure it won't break again? The people who didn't notice the wheels coming off the last time.

Yesterday, the Dow rose 214 points. Oil closed over $54. Gold ended the day over $900. And dollar sank to $1.33 per euro.

Most interesting...bond yields, though still pathetically low, are rising. The U.S. 10-year note yields more than 3%. The long bond yields more than 4%.

The longer these trends go on, the more reasons people will find to believe that it is not just a bounce...but another major boom.

New York-based Economic Cycle Research Institute says, "The U.S. is on the cusp of a growth rate cycle upturn," the article explains.

Let's look at whether this optimism is justified.

On the housing front...U.S. houses are down 30% from their highs. The Case-Shiller index of housing prices has fallen for 30 months in a row. Isn't that enough?

Maybe. The latest data shows more sales - of new, as well as existing houses. And there are more housing starts too. But in the former boomiest states - California, Nevada and Florida - about half the sales are of foreclosed properties. These properties are hitting bargain prices...but pulling down the value of the entire housing stock. And there are still lots of houses to sell. So don't expect any major turnaround in prices. If prices have hit bottom - which we doubt - gains are likely to be very small...and they'll come very slowly.

When the housing crisis began, we estimated that prices needed to come down about 40% in order to make the average house affordable by the average person. But that was before the average person's income came down. If the depression continues, as we think it will, house prices should come down a further 10% to 20%.

And don't forget about the second wave of defaults headed our way. The Richebacher Letter's Rob Parenteau tells us that in 2011, the "Option ARM" and "Alt-A" home loans will reset at a higher rate...and some unlucky homeowners could see their mortgage payments as much as double. Millions will see their wealth disappear...and the ripple effect it will have on the banks and economy as a whole will be devastating. There is still time to protect your assets...read Rob's special report here: Super Shields Against the Next Round of Market Wipeouts.

Besides, if the United States is entering the "worst downturn since the Great Recession," who will have the money to buy a house? But that's the issue. Maybe the world is not entering a major downturn, after all. Maybe it was just a case of mass hysteria...a panic, like the Y2K bug...or terrorism...or swine flu. Maybe people are now getting over it...and getting back to business, just like they did before.

Consumers are becoming bolder. Consumer confidence measures are about 20% below the baseline metric of 1985...but that's a big improvement; they had been nearly 40% below the '85 standard.

There is some evidence that consumers are returning to their bad habits, too. Consumer spending is picking up - at least, that's what recent numbers from the discount stores show. They're taking up cheap thrills and necessities again. But luxury shops are still reporting drops of about 20% per year.

Major stock markets have rebounded 20% and more. But the real excitement has come in emerging markets. A few months ago, it looked as though China would be unable to decouple from the developed world. They were stuck, said analysts, like a rusty sink drain. The Middle Kingdom was headed towards recession just like everyone else. But then those clever Chinese seem to have found a wrench big enough to pop the joint. Almost unbelievably, China seems to have pulled off the much desired "V-shaped recovery." Instead, of contracting, China's figures show it expanding at a more than 8% rate.

China might be lying, of course. It seems very unlikely to us that China could have recovered so quickly. This is not a recession, we keep saying. It's a depression. And depressions demand structural changes - the kind that takes time.

Besides, eyewitness reports tell a story that sounds like a cross between "Grapes of Wrath and a repeat of Mao's Long March." That is Elliot Wilson's description after a recent trip into the heartland of the communist giant.

More on this below, but first, we turn to Addison to see what's driving the S&P rally:

"Ariba! Cinqo de Mayo herald's big news for the S&P 500 this morning: The S&P 500 is now registering a small gain for the year," writes Addison in today's issue of The 5 Min. Forecast.

"After a manic 36% bounce from its March lows, the S&P 500 has turned positive for 2009. It's now sitting on a whopping 0.4% gain, thank you very much.

"But before you down the Cuervo Gold and shimmy onto the parquet for a hat dance... consider this:

"The resurgence in the S&P 500 is being driven by only three sectors: Consumer discretionary, materials, and tech. See for yourself.

"It's hard to believe in a 'bull market' when 2/3s of the players are in the red.

"We're taking a closer look at tech, but for the time being � as if you need another reason to turn off CNBC - healthcare, utilities and consumer staples, the classic refuge for mainstream money managers aren't such a good choice during this sucker's rally."

Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial's paid publications, such as Penny Stock Fortunes. Its latest special report details the easiest way to make money in this market - by focusing on top stocks most investors overlook. Read all about it here.

And back to Bill, with more thoughts:

"Once-bustling malls are now empty," Wilson continues. "Plaza 66 in Shanghai, owned by Hong Kong-listed Hang Lung Properties, is a case in point. On a Friday afternoon, the 51,700 square meters of high-end retail space boasted exactly 11 customers...

"Everywhere's the same. I talk to the concierges of Shanghai's leading hotels, always men in the know. At the JC Mandarin, occupancy is at 40 percent in early February, against 80% a year ago. At the vast JW Marriott, it's even worse; just 25%..."

Office complexes too are "empty, empty, empty...Gemdale... 50 floors of office space completed last summer are all empty..."

But what the heck? Maybe we're wrong. Maybe China is already recovering. It may be a structural depression - but only for the developed countries, particularly the United States. Maybe it's only a recession for China. And maybe it's over. Seems almost unbelievable...but now, with so many wonders to wonder about we wonder why we bother to wonder at all.

Besides, other developing economies are reporting the same things - increases in exports after a catastrophic collapse at the end of the last year. You can measure the collapse easily just by looking at the Baltic Dry Index - which keeps track of bulk shipping rates. It fell by more than 90% last year. From its low, it's doubled - up 100%. But that still leaves it down 80% from a year ago.

Stock markets in emerging markets show similar increases. Brazil's stock market is up almost 90% from its low. South Korean stocks are up 71%. And Chinese stocks - those listed on the Shanghai exchange - have gained 50%.

Apparently, someone thinks the worst is over. Maybe that person is right. But we doubt that this rebound is the sign of a new, healthy boom. Credit expanded for half a century. The Bubble Epoch at its end caused trillions of dollars worth of errors. Many of those errors have already been corrected. But the economy the bubble built remains unreconstructed. Same mismanaged companies...same mismanaged regulators...same mismanaged banks. Exporting nations had gotten into the habit of earning net sales from the U.S.A. of $2 billion per day. Those earnings provided much of the speculative capital that created the Bubble Epoch prices. But that money has all but disappeared. And there's not much chance that it will return anytime soon.

Instead of a healthy new boom, our guess is that the world is enjoying a sick echo of the old one. Governments, led by the U.S.A., attempt to reinflate the bubble with guarantees and giveaways equal to an entire year's annual output of the world's largest economy. Since every penny of this money is borrowed, it makes sense that every penny will have to be withdrawn from the world economy at some point.

In fact, economists are already looking ahead to the moment when deflation fears give way to inflation fears.

"Inflation Nation," is the title of an editorial in today's International Herald Tribune. In it, Alan Meltzer argues, "If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflation years [the 1970s]."

Professor Meltzer reminds us that cutting off the inflation of the '70s wasn't easy. The feds turned the screws...and let the prime rate go above 21%. Of course, today's Fed has this information. And Paul Volcker, who was Fed chairman during that period, is now an economic advisor to Barack Obama. Still, "I do not worry about their knowledge or technical expertise," continues Mr. Meltzer, "What I doubt is the commitment of the administration and the autonomy of the Federal Reserve ... Under Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury..."

"The Fed's job is to take the punch bowl away," said an Eisenhower era chief. But we have come a long way since the Ike and Dick years. This time, the inflationary party is likely to get out of control, happy days will be here for a while...and then some very sad days are likely.

When the I.O.U.S.A. team interviewed Paul Volcker in December of 2007, he said, "...when I look back on my lifetime, it is obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the'70s led to a very uncomfortable crisis. We don't want to have to go through big recessions again to teach people fiscal responsibility. Instead, we should anticipate what needs to be done while maintaining the growth of the economy. And the threat will always be an unstable economy and an unstable currency. And that's not just destructive to economic life, but it can be destructive to America's position in the world, which to me is the greatest concern."

You can read his full transcript in the companion book to the award- winning documentary film. Learn how to get the I.O.U.S.A. DVD, companion book - and your own personal bailout strategy by clicking here.

"Bill, you should move to Argentina," said our old friend Doug Casey. "So should your Daily Reckoning readers. I really think people that come down here are going to fall in love with the place."

We caught up with Doug in Buenos Aires. But, like your editor, Doug is looking forward to spending time away from the city...up in the wine area in the northwest of the country.

"This place we're developing - Estancia - is turning into one of the most enjoyable places in the world to live, even if you can only spend a couple months a year there to recharge. It's got one of the best climates in the world, and I speak as someone who's been to 180 countries. It's a short horse-ride away from Cafayate, a town like Aspen. You wouldn't dare ride a horse into Aspen, trust me. Cafayate has a score of good restaurants and sidewalk cafes.

"The key is that Estancia has everything a civilized person could want, right there. I wanted a mellow place to hang out, but couldn't find anything - anywhere - that suited. I've lived in Aspen for many years, but it's become, frankly, unacceptable. Way too expensive, too snooty. Incredibly over-regulated. Rife with class warfare. And, frankly, the United States is just not the place it used to be. But Aspen has elements worth retaining, like the restaurants, gyms, the intellectual activities. So I figured the only way to do it right was to build it myself. I'm a huge fan of spas in the Orient, for instance, so we're doing a fantastic health center, spa, and gym - including a parcours, and a lap pool. Yoga, pilates. I don't believe we've missed a trick, anywhere."

We went to look at Doug's place the last time we were in Argentina. It's only about 2 hours from our ranch...and worth the drive. He's building what will probably be the finest place to live in South America. To disclose an interest, and admit a weakness for property...we were so impressed; we invested in the project...and even bought a lot.

"I know people sometimes worry about the political and economic situation in Argentina. But it's actually a plus. Since the Falklands War the army, and the police have been held in low regard - a very good thing in Latin America. Most Argentines are of Italian extraction - the country is, at this point, perhaps the most demographically European in the world - and have a natural aversion to paying taxes. The place definitely has a gently anarchic flavor. The fiscal problems of the government don't affect foreigners, unless you lend them money - which I don't advise.

"The Argentine government has been incredibly stupid for well over 60 years. The good part of that is the average person has learned to live with it, and work around it. The Argentines are much more able to adapt to the things the world is going into now - Americans are going to have an unpleasant learning experience."

Doug is planning to live through what he calls 'the Greater Depression' in comfort and style:

"We've got a Bob Cupp golf course, which we expect will be perhaps the best in Latin America. I've taken lessons, but don't consider myself a golfer. I've played polo for years, so we've got a couple of polo fields, for friendly farm-type games, rather than the type of thing they do near Buenos Aires. Salta is also an epicenter for Paso Fino and Peruana horses, which have the smoothest gates in the world; you can ride them for hours on our trails. Or days in any direction out of town, probably without seeing another person. Estancia answers the question of what you do after a golf, polo, or tennis. Some people (I'm among them) will shoot skeet. Others, including me, will relax at the library, or the cigar bar. Have a game of billiards, or croquet, or bocce. Or perhaps play bridge, chess, or poker. I like all of these things. We've got 200 acres of grapes, partially because they're economic, to keep the fees as close to zero as possible but, also because they're quite aesthetic. In addition we're putting in every description of fruit tree, berry bush, and veggy we can think of. Plus fresh dairy, Argentine beef - which is not processed in feedlots, and actually is the best in the world - and fresh fish from our own lakes; it's a chef's delight. Our concierge is a great Belgian chef who, coincidentally looks like a carbon copy of Jean-Claude Van Damme.

"Best of all, so far we have buyers from 12 different countries. I've met many of them, and can tell you they're all the kind of people you want to hang around with - smart, successful, and libertarian oriented. It's a pace where a Renaissance man can feel at home.

"If your readers want to find out more they can go to estanciadecafayate.com. Sign up to come on down this October."