Half Empty Becomes Half Full

Hello again. How are you holding up?

I welcome all your comments and feedback and trust my words each week are helpful in such a tumultuous time.

To be honest, it can get very lonely in my seat. Not only do I speak through cyberspace with no indication of who is listening, but I'm also a contrarian, as long-time readers will know.

Being a successful contrarian money-maker means doing something that most people (at the time) believe is completely crazy... without actually doing something that really is completely crazy.

Over winter, I've never felt so alone. I continually banged my fist on the table making the case for commodities such as oil, gold, silver, wheat, copper etc.

Maybe even you, dear reader, thought I was a fool for doing so. But now, I don't feel so alone. It seems the world has caught up with me as those commodities have been soaring. How much money did YOU make from this? Perhaps from buying commodity stocks or futures??

Why have things turned around?

The reason I had told you about all along: commodities are priced in US Dollars and the government is deliberately devaluing the currency. You see, everyone was reading it wrong. They (rightly) looked at world demand plummeting and priced commodities lower (too low), BUT it's not lack of demand that raised the prices- the Federal Reserve did with their printing press.

As in life, the markets move in a herd-like fashion. Safety in numbers. It's all psychological. People assume tomorrow will be like today.

If you can resist this attraction to be with a herd, or even better to be REPELLED by a herd, you can make money from ANY market, in ANY economic climate.

So, the stock market rally continues as I had expected and hoped. It's all positive action so far and it looks like this might, just might be the start of the awaited bear market rally.

As I detailed last week, this rally should continue until people stop calling it a bear market rally and think it's actually a bull market. How high is that? Anyone's guess, but I reckon around 10-11,000.

I know most people are hanging on to their stocks and waiting for the bounce-back. If things play out as I expect, that really will be their last chance to dump everything... unless they want to wait 10-20 years to get their money back.

You see, nothing has really changed in this crisis... apart from sentiment. But sentiment is powerful. It can drive markets and it doesn't have to be right. What's effectively happened here is that the glass is now being seen as half-full rather than half-empty. The amount of water in the glass hasn't changed.

Look, here's the problem and this is what almost everyone is overlooking...

The problem, it is perceived, is that the economy has crashed because credit has dried up. Mortgages, personal loans, car finance, credit cards etc.

So the obvious solution to this is to get banks lending again, right?

Yes, correct. If that is the problem, then this is indeed the solution. That's why the Obama administration is on a tear to clear the so-called "toxic assets" from banks' balance sheets using wonderful new jargon that amounts to nothing more than chicanery.

But the starting premise is faulty! What if credit drying up isn't really the problem at all?

We as humans look for a reason for everything, when often the answer is at best elusive or abstract.

So what is the cause then?

Let me ask YOU what the cause is...

Let's say right now, you could get all the credit you wanted. Would you go out and get a bigger house/mortgage? Would you buy a new car? Would you blast your credit card at the mall on a load of stuff??

Maybe, if you felt reasonably confident of being able to pay it back through job security etc., but, and here's the kicker, maybe people are just spent out!

Maybe people are tired of living month to month, revolving credit, bills, stress, arguments. Maybe people just want a simpler life.

The government is engaged in a very simple policy now: get people spending again and borrowing more, and FAST. The entire world economy has now been built around people in the street spending like crazy on a load of stuff they don't really need.

I think we've reached saturation point. There's only so many flat screens you can enjoy.

People tried to leave the party in 2002, but Alan Greenspan (the "maestro") locked the doors and ignited a housing bubble to keep the celebration going. In 2007/8, people finally got out the front door and made it to their cars, staggering down the driveway.

And now, the new Fed chairman, Ben Bernanke, holds up 2 bottles of vintage Champagne and beckons you back in.

My feeling is he's throwing a party that people won't show up for, but you be the judge.

This will drive Bernanke insane. He will keep throwing money at this problem and it will go nowhere except the destruction of the currency. Like the crazed Ahab in "Moby Dick", in an all-out attempt to crush his nemesis (deflation), he will destroy himself and take the dollar with him.

The United Nations have just proposed the US dollar be stripped of its reserve currency status.

This last week, Bernanke brought out the big guns and printed money to buy government bonds. They call it "quantitative easing". I call it a ponzi scheme.

Which paper currency should rise most against the dollar? In my opinion, Norway's. It effectively has an "oil standard". It rose 7% last week alone against the dollar. Of course, all this is not lost on gold. Gold is now eagerly eyeing the $1,000 mark again and probably the most successful fund manager - Paulson- just bought a huge stake in a major gold mine.

Meanwhile, enjoy the rally. If it proceeds as I hope and expect, banking and commodity stocks should lead the way.

Until next time,

Mark Patricks