Things are rarely simple just because their size causes the assumption of insignificance, but poor Ireland is merely the latest catalyst to a much larger issue that has been the root cause of most of the economic misery of the past two years: bankers’ greed. Unlike Greece, Ireland’s government did not bring its citizens to ruin. It was the lenders who had overextended themselves, lending irresponsibly to everyone and anyone asking for a loan, completely ignoring even the most blatantly obvious risk flags.

This has been debated long and hard: the reckless abandon of risk management on the global level, as well as how wild lending is even possible after the fall of Lehman Brothers. Most have thought the issue of risk management, or lack thereof, resolved. Only, the problem with reactive measures is that they cannot erase what has happened before or the fact that there are no easy and fast fixes of systemic problems.

The systemic problem that has obviously been systematically ignored is that Eurozone lenders, just like the U.S. subprime lenders, have enjoyed lax supervision for so long that losing perspective was easy. The problem was further exacerbated by the fact that the Eurozone has attempted one economy and one interest rate without accounting for the impact of separate tax regimes and the vastly different spending habits of citizens of individual European Union (EU) members.

A comparison between Ireland and Germany provides for a quick litmus test. Germans are well aware that their industry has matured and that, as a behemoth, it cannot move fast. That is why Germans would rather save than spend. The Irish, in contrast, love to go on fancy shopping sprees, courtesy of the cheap euro, regardless of whether they can actually afford them or not. In the end, Ireland’s government, although not directly guilty, other than perhaps by being willfully blind, had to ask for the EU’s help to rescue its irresponsible banks. Making things exponentially worse is the fact that Ireland’s bailout and relying on short-term loans could export its crisis to other vulnerable states in the Eurozone. The trouble not just with the Eurozone but the entire global economy is that everything is so interconnected, so a single stone thrown into the pond can have powerful ripple effects.

Perhaps the German chancellor Angela Merkel is onto something more than a “share the pain” lesson with her propositions to inflict some of the pain on future sovereign debt-holders, and not only taxpayers, and certainly not only the German ones. This seems to be a case of simple mathematics. It does not seem likely that either Greece or Ireland can continue financing themselves without robust economic recovery and without increasing their revenues through taxation, neither of which is forthcoming or easy. So how will they pay off the bailouts and continue to attend to their long-term debt?

Not without miracles. Germany wants future holders of the Eurozone’s sovereign debt to take haircuts in case of defaults when buying the risky treasury bonds of countries such as Greece, Ireland or Portugal. Who would buy such bonds, considering the excess of risks that accompanies them? Perhaps only speculators could show some interest, but at exorbitantly high costs of borrowing. Eventually, when houses of cards start collapsing, stronger players in the Eurozone might finally “see” what Germany has been harping about for months and expel those who cannot afford their EU membership, leading to the Eurozone’s potentially unavoidable shrinking. Perhaps this is Merkel’s ultimate goal, perhaps it is not, but it should certainly give the Eurozone and the rest of the world pause.

By now, it seems there is little doubt that Portugal is next on the list of applicants for a financial bailout. But the really scary prospect is that Spain might need help, too, and that the debt situation there has reached the eruption point. If Spain indeed becomes in need of a bailout, at that point, the future of the Eurozone will be anyone’s guess.

Salvaging Iceland, Greece, Ireland and Portugal is one thing, as these are relatively small economies within the EU. But salvaging Spain could bring the Eurozone to its knees, because the German taxpayers cannot be expected to foot the bills for refinancing every European country that cannot manage its own finances.

Things are so bad that it matters little how terribly unfair they are, too. Unlike Greece, the Irish government’s recklessness was not the reason it almost went under. Instead, the country’s banks have led Ireland down the path to ruin. Irish banks have idiotically peddled cheap loans and amassed a mountain of debt that way. Portugal’s government has tried its best to rein in spending and tame its real estate market, and it still ended up going backwards instead of forwards.

In such sensitive and prone-to-overreaction markets, even a hint of bad news creates a ripple effect. The Portuguese trade unions will have muddled the waters further with their general strikes this week. What are they protesting? Austerity measures, of course, just like Greeks did.

Fears are swelling to the bursting point regarding the ability of Spanish banks to refinance their loans. This summer, coinciding with the Greek bailout, Spanish lenders experienced what interbank lending drying up means. In March and April next year, over 50 billion euros in Spanish government and bank loans will mature, requiring refinancing. However, right now, there is much doubt that Spain’s debt market will be able to deal with the volume when repo markets are deteriorating.

This potential tsunami of maturities appears at the core of Europe’s debt problems and it seems that each tidal wave is bigger than the last one. Take Greece for example. By 2014, Greece will need to pay back 28 billion euros to the EU and IMF. This means that at least by the end of 2013, Greece will need to borrow money in the public debt market. The only problem is that Greece not only needs to borrow 28 billion euros, but also additional money will be needed to service the maturing debt.

On the latter, Germany might come to rescue. Germany has fought and won the fight on bond haircuts, whereby any new bonds issued will have a covenant that implies that when the time comes for debt restructuring, bondholders will have to take a haircut if the bond defaults.

But haircuts do not deal with repayment of the rescue loans. At this point, there are no answers on how Greece, Ireland and Portugal will repay their rescue loans. Also at this point, no one knows for sure where this particular train is going and whether there is potential for it to get derailed. Finally, at this point, no one knows if this train is indeed heading for a six-foot-thick brick wall or when the crash will occur.

The Fed has decided to release another $600 billion into the U.S. financial systems in an effort to boost the stalled recovery. It will do so by buying longer-term Treasuries. Even when the speculation around the move that started in August, dubbed QE2, has created much controversy both domestically and internationally.

When the QE2 rumors became fact, the Fed and its chairman Ben Bernanke came under fire, forcing them to fight back and publically defend their decision, which is certainly something you don’t see every day. Now economists, traders and investors are waiting for the minutes from the Fed’s November 3 meeting, which is widely expected to offer clues on whether QE3 or QE4 or QE5 may also be in the cards.

Aside from the Fed’s policies, discouraging economic data are also weighing heavily on the stock markets. While U.S. incomes and spending are expected to move slightly upward, the weekly jobless report is expected to disappoint, as the unemployment rate remains obstinately high, close to 10%.

Then there is the Eurozone’s sovereign debt saga and the news that Ireland was not talking about weather with the EU officials after all. They were talking about the bailout package. While the deal for Ireland is still being worked on, all eyes are already on Portugal and Spain. Europe’s seemingly undefeatable mountain of debt is adding even greater volatility for most asset classes, but equities in particular.

Further worrying equity investors and traders are U.S. municipal bonds. The number of municipalities seeking state permissions to file for bankruptcy is increasing. For the time being, states seem to be denying such requests and offering alternative refinancing arrangements. Regardless, a trend is emerging that points towards severe weakness in this market segment. To illustrate, Moody’s bond rating agency has downgraded the cities of San Francisco and Philadelphia, which, in turn, sent municipal bond prices down and yields through the roof.

Perhaps municipal bond yields are a sign of a similar systemic problem the Eurozone is facing, and perhaps they are not. But, if the fear of default on government debt takes flight in North America, regional stock markets could end up in a world of hurt.

To say that the last few years have been volatile for stock markets around the world would be quite an understatement. In just a matter of months, stock markets have been seen creating and annihilating 20% or more of their value in fell swoops. Such rollercoaster rides have left many ordinary investors bruised, battered, and disenchanted with equities.

Unfortunately, there are no easy markets and there have never been any guarantees when it came to investing in stocks. My usual answer would be to focus on commodities, particularly gold, but even this area is a minefield that needs to be carefully navigated. At this point, I don’t see many viable solutions other than diversification, perhaps, across asset classes, geographic regions and world economies.

But I don’t think we have discussed bonds or, more precisely government bonds, in the context of gauging commodity prices. Actually, until recently, commodity prices and government bonds did not have an especially correlated relationship, either converging or diverging. As our world is rapidly changing, it seems certain new relationships have been forged, such as the inversely correlated relationship between commodity prices and government bond yields.

Now, this inversely correlated relationship is anything but logical or historically substantiated. Firstly, the traditional school of economics does not see commodity prices and government bond yields as tightly correlated at all. However, if there were any relationship between the two, typically it would be a positively correlated one.

How can something so essentially illogical be happening? Apparently, the blame lies with the U.S. dollar. Granted, where we are in the economic cycle also plays a role, but to the extent of reinforcing the positively correlated relationship between commodities and government bond yields, not the other way around. This time around, it is the greenback that is fuelling the inverse correlation between the two.

It seems that whatever happens with the dollar, investors are reading its “exploits” into nearly every other asset class. For example, the dollar and the 10-year U.S. Treasury yield have been dancing a similar dance to a similar song. When the Federal Reserve first speculated and then openly came out with the second round of quantitative easing, the intention of which was to keep U.S. interest rates depressed, this created an exodus from both the bonds and the U.S. dollar. As the greenback kept declining, assets priced in the U.S. dollars surged, trying to make up the difference.

But, in the past few trading session, the new bond-commodity inverse correlation has been established, and it is holding, apparently. Analysts are describing the surging government bond yields and downward trending commodity prices as the preview of QE2 unwinding itself in the financial systems. It seems that bond traders have jumped the gun and overpriced the Fed’s quantitative easing into the bond market. In turn, the U.S. dollar seems to be reversing their bets, as the market tries to stabilize interest rates.

There are plenty of signals to read from government bond yields when it comes to commodities. Their relationship with commodity prices is no longer a distant one or necessarily a positively correlated one. There are plenty of factors that could drive bond yields upward, from QE to economic recovery to a higher price environment. If they head higher, they could take the greenback for a ride. If this newly forged inverse relationship between commodities and bonds holds and if the bond yields head up higher, we could see more downward pressures on commodity prices and vice versa. In other words, it might pay to watch the direction of government bond yields if you are an active commodity investor.

Most of the jabs concentrate around two questions. Firstly, does QE2 have any chance of actually working out? Secondly, and more importantly, will QE2 tip the scale towards inflation?

I thought it amusing to hear that Alan Greenspan thinks quantitative easing is a mistake; this from a man who is regarded as the poster boy for easy money. Paul Volcker also thinks QE2 is the wrong move, although his words might actually carry some weight. Then there is a neat line-up of foreign governments from China to Germany, which are against the Fed’s latest move for their own self-serving reasons. Finally, the ranks within the Fed are not as tight as they used to be, as there is a handful of insiders who believe what Bernanke has done will make things exponentially worse.

Predictably, the Fed is fighting back—but with the semantics defense. According to the Fed’s Chairman, quantitative easing and printing money are not one and the same. He said, “The use of the term quantitative easing to refer to the Federal Reserve’s policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors’ portfolios, on a wide range of assets.”

Huh?

Despite Bernanke’s riveting analysis, I still think that the Fed’s move is quantitative easing and I’m still seeing it further debasing the U.S. dollar, which could lead to inflation, albeit mild, most likely, as assets priced in U.S. dollars, like crude oil, for example, seek higher prices to make up for the greenback’s continuous devaluation.

Then I thought some more about the atmosphere of fear we have lived in for almost a decade. If I were truly to argue both sides of the case, I would also have to accept the possibility that if we are conditioned to fear something, such as Fed’s policies leading to hyper-inflation, eventually, whether the policies are working or not, we could all start reading too much into signals that only feed the fear theory.

This is how the worst-case scenario rooted in fear could look like: QE1 and QE2 debase the U.S. dollar beyond recognition, assets priced in the U.S. dollar seek higher prices, start the chain reaction and, voilà, inflation gets out of hand. The bond traders get really antsy and jack up yields from three percent to six, seven, even eight percent. The costs of maintaining debt at eight percent become impossible and all hell breaks loose again, potentially leading to dramatic political changes.

But if you think about it objectively, what was the root cause of the Great Recession? Credit freeze. What have central bankers around the world focused on the most during the recession? Lending, borrowing and spending. What has not yet panned out despite all the money pumped into the financial systems? Lending, borrowing and spending!

In other words, for the Fed’s latest $600-billion infusion to result in an unmanageable inflation, many factors would have to occur in near-perfect sync, primarily more lending and more borrowing to result in more spending. Yet, the reality is that the current velocity of money is anything but fast enough to produce inflation. In fact, the velocity of money keeps going down, and that downward momentum is what the Fed is perhaps trying to arrest with the recent round of QE.

All of this “arguing both sides of the case” tells me one thing: the U.S. economy has reached the point that not even $600 billion of QE is enough to impact the real economy and reduce the exorbitantly high U.S. unemployment rate. This is why stimulus proponents are already shooting for the $2.0 trillion in asset purchases, and this is why stimulus opponents go into a tizzy the moment someone mentions more economic stimulus.

Having that much moral and financial power has given Germany the role of knight in shining armor to countries with sovereign debt problems, albeit it would rather not have that dubious honor. Still, things are what they are and Germany found itself the Eurozone’s official rescuer when it first agreed to foot most of the bill for Greece’s bailout. Ireland is likely to be next, once it exits the denial phase, and possibly Germany could come to the aid of Portugal and Spain, two other heavily indebted countries apparently unable to drive their finances out of insolvency.

Germany really does not like where its own fiscal prudency has brought it. It does not want to reward bad behavior by rescuing every neighbor that has fallen on hard times just because. Germany is particularly not disposed towards helping neighbors that are hiding the true state of their balance sheets and how much money is actually owed. Greece did it for years—hid the true scope of its troubles, that is—which was why Germany had to be dragged kicking and screaming into signing off the bailout.

Contrary to the popular opinion among the Eurozone’s laggards and deadbeats, bailouts are not free and they come with heavy strings attached. Government bailouts have to be paid by someone and that someone consists of taxpayers. The bigger the bill that German taxpayers have to foot, the fewer the votes for Chancellor Angela Merkel. No wonder Merkel wants a new bailout system. She wants to keep her job.

So Merkel came up with an idea to spread the pain among private bondholders, whereby the latter would be forced to accept “haircuts” that would shave significant value off their bonds’ principals. The sharing the pain idea is a good one. The only problem with it is that, like many other ideas coming from Germany, the timing is really lousy. Hearing of Germany’s plan and realizing that bonds issued by the Eurozone pariahs, such as Ireland, Portugal and Greece, are spiraling down the toilet, short sellers had a field day. As the yields of Europe’s weaklings rallied, prices dropped and short sellers pocketed their profits only six months after the Greek disaster. Things got so bad for the EU finance ministers that they immediately engaged in damage control. As a result, haircuts would not apply to bonds issued before middle of 2013.

There is no way that Germany could go on saving the Eurozone. There has to be a shift of responsibility and haircuts could be a way to facilitate that shift. It is also not only a question of responsibility, but also it is a question of what works in the long run. As we already know, financial bailouts are short-term solutions, not long-term ones. So, in a way, Germany is both a part of the problem and a vital solution to it. Without a doubt, financial bailouts are tricky business and, when the main player is a reluctant participant, it only adds to volatility, as if anyone would need more of it.

The Federal Reserve has already flushed $600 billion to keep interest rates low to stimulate spending, as well as to weaken the dollar to stimulate exports. With boom times behind us, investments offering a semblance of returns have became sparse, which is why some analysts predict that oil will become attractive as a potential source of at least decent, if not spectacular, returns.

Now, $600 billion in newly printed money may or may not bring inflation. Some argue that it will not, and are already vindicating Ben Bernanke’s decision to start with the QE2. I would be careful jumping on the celebratory wagon, however, because, if the past few years have taught us something, it is that too much cheap money in the system usually goes into commodities and, more often than not, into energy. Signs that history might be repeating itself are already here. Since early September, oil has gained about 17%, recently trading around $87.00 per barrel. However, if the price of oil goes up, it will not be due to inflationary pressures, but rather due to the weak U.S. dollar.

Perhaps it would be better to watch what OPEC is going to do next. As the greenback depreciates, cartel members may be in the mood to push for a higher price of oil, which is denominated in the U.S. dollar. In fact, they may have already started. Recently, Saudi Arabia’s Oil Minister, Ali Al-Naimi, said that an appropriate price range for oil should be between $70.00 and $90.00 per barrel, which is in contrast to the previous statement on how Saudis would be satisfied with the price of $75.00 per barrel.

This is the first time such a price range has been mentioned by an OPEC member and it may become modus operandi for other members, too. Namely, Al-Naimi also said that, until oil hits $90.00 per barrel, Saudi Arabia is not likely to pump more oil into the market. Mind you, the rest of OPEC is not thinking out loud yet, which could mean that members are simply waiting for the oil price run-up to materialize before nailing down the acceptable price range.

One more factor plays favorably for higher oil prices: rapidly growing emerging markets that are expected to reduce stockpiles significantly next year. Analysts estimate that the global oil demand could rise next year from 86.9 million barrels a day to 88.2 million barrels a day. Not surprisingly, speculators are already getting into the game and placing bets on rising oil prices.

Honestly, I don’t know what to think about oil. For years, we have been conditioned to think that the world is running out of oil and that the shortages would launch prices into space. Now it turns out that there is plenty of oil to have the world running in a moderate price environment. Sure, a deteriorating greenback is likely to put some pressure on OPEC to seek higher prices, but I don’t think that is a sufficient driver to push oil prices over the $100.00-per-barrel mark. In the end, the only fundamentals that matter are supply and demand. And, on that front, I don’t foresee any material changes in the near future.

The markets are clearly afraid of the impact of Ireland potentially going up in flames. Fearing default risk, Irish bond yields have shot into the stratosphere relative to German government issues. Additionally, an index comprised of credit-default swaps, and that is used typically to gauge costs of protecting investors stuck with Greek, Irish, Portuguese and Spanish treasuries from non-payment, has actually more than doubled compared to six months ago. Incidentally, compared to six months ago, the euro has risen by about 15%, while currency observers expect it to gain an additional 15% in the next six months, for an estimated 30% gain in the 12-month period from mid-May 2010 to mid-May 2011.

What does the euro strength says about the Eurozone? It says that, collectively, the Eurozone is capable of weathering another sovereign debt crisis. Six months ago, the Eurozone’s central bankers and finance ministers agreed to help any member that finds itself in fiscal difficulties. To facilitate the rescue, Eurozone leaders have set up the European Financial Stability Facility and pumped about $1.0 trillion into it, which can be tapped into through loans and guarantees if and when the sovereign debt problems get hairy again.

To some, this is a sufficient reason to be cautiously optimistic. With $1.0 trillion on tap, currency traders might feel that, if there is a fire in one room, the whole house may not have to burn down to its foundations. The only problem with optimism is that the real test of both the euro’s strength and Eurozone’s unity will be if and when one of the bigger players ever becomes an increased default risk, such as perhaps Spain. Ireland, Greece and Portugal’s sovereign debt problems are big, but not dangerously big, because those countries’ GDPs are less consequential. In contrast, if for example Spain’s default risk increases or if Germany’s economic output suddenly evaporates, it would be a whole other ball game. To put things in perspective, in 2009, Ireland’s GDP accounted only for about 1.8% of the Eurozone’s total output, while Germany’s GDP accounted for 27%.

Oddly, Germans are not particularly fazed by the euro’s performance in the past six months, in spite of it being a considerable drag on the country’s exports. The way this industrious nation of savers perceives it, Germany has returned to its old days of economic glory when its deutsche mark ruled Europe. Germans also believe that, if they are doing well, so would others in the Eurozone, now that the region is so deeply interconnected.

That said, the outlook for the euro and Eurozone’s credit markets is not that clear cut. Contrarians believe the euro has peaked and that it may soon be coming off its recent highs. It is true that large EU players have been plugging along and it is true that Germany is not showing any signs of slowing down…yet. However, the sovereign debt issues among the small players, despite their size, have been persistent and the main cause of the tizzy in the credit and currency markets. It is possible that Europe will survive its sovereign debt crisis, but if another Greece-like bailout is needed, things will not be pretty, for sure.

Of course Ireland needs a bailout and of course it is talking to its EU buddies about how to go about getting it. It is all in plain sight, too, in British newspapers, where embarrassing headlines are splattered all over, sporting British taxpayers potentially on the hook for about $9.7 billion of Ireland’s debt. Now, this will be a tough sell for the UK government, because it has always claimed that, unlike Greece and other sovereign-debt-heavy eurozone countries, the debt drama was never an issue for the UK. This is true, to an extent, as obviously the UK has not incurred Irish debt per se. However, it has allowed the troubled Irish banks to invest in the UK, which, in the end, amounted to the same thing.

Now, this debt mess is not just an embarrassment for both the Irish and Brits. If it ends up with the UK having to bail out Ireland, ancient animosities are likely to be resurrected, invoking Ireland’s resentment for falling so deeply into the smelly stuff to have to ask Britain for help. And Britain is likely to be infuriated to be dragged into the EU’s financial problems—as if it does not enough of its own!

Still, the British can be angry all they want, but chances are that will not change a thing. Just as Germany was infuriated for having to bail out Greece and had zero choice about it, the UK is in the same boat. The only thing that is likely going to pay the price is eurozone unity.

Ireland has fought long and hard for independence from Britain, both political and fiscal, but it has gambled most of that credit away, particularly the fiscal one. Crying now about “hard-won sovereignty,” as Batt O’Keefe, Ireland’s enterprise minister put it, sounds hollow, considering that most of Ireland’s growth in the past few years has been due to the EU’s loans and subsidies. Additionally, the tax and tariffs that Ireland has introduced recently have stirred up quite a storm on the topic of unfair competition.

Old animosities are a problem, but they are not the biggest problem that the eurozone faces. The real issues revolve around bringing the fiscally irresponsible, debt-laden and slow-growing European economies back on track and back into the fold. However, bringing them back as truly fiscally sovereign nations has come into question. When Greece stood with its hand out before the financially strong and fiscally efficient Germany, it got the money, but it lost its fiscal independence. If Ireland takes the money after the “talking” is done in Brussels, it will likely have to surrender its fiscal independence, too.

If this is something that no one can live with politically, then there might be another solution. Some economists are invoking the dreaded idea of a two-tiered eurozone: one tier for the strong, such as Germany, France, Benelux and Nordic countries; and the other tier for those on the periphery, still tied to the euro, but only loosely and at a significantly lower conversion rate. There might be fewer strings attached, but the severance is not going to be pretty. Even on a purely academic level, the two-tiered eurozone does not seem palatable. Then again, difficult choices usually are not easily digested.

Well, raw numbers, without a doubt, shout “bull,” loud and clear. Investor gains are keeping them returning for more. Spot gold, for example, touched, albeit briefly, an all-time high of $1,420.90 per ounce last week before dropping back under its new resistance level of $1,400. At the same time, copper is attacking its record high as well, while silver has hit a 30-year high before retreating about three percent on the same day. As for oil, it is hovering around its two-year high, spot trading within a narrow range between $86.00 and $88.00 per barrel.

At face value, commodities, it seems, are soaring, and commodity-based economies, like those of Australia and Canada, are prospering. Sure, the world would be a better place if there were not a “but” coming up every time something good is happening, but (pun intended), there is one. What those fearful of the commodity bull are saying is not that commodity fundamentals are inherently stronger than those of other asset classes, but that their resurgence has more to do with the U.S. monetary policy than with factors such as supply and demand imbalances.

QE2 is what has everyone’s knickers in a knot as of late. The U.S. Federal Reserve is widely expected to unleash another round of quantitative easing (read, “buy more treasuries and print more money into the financial systems”), the purpose of which is to drive the greenback into the ground to make the U.S. exports more attractive in the international markets. In addition to the fact that, globally, commodities are priced in the U.S. dollar, there is also the perception that the financial market risk has eased somewhat. As a result, some economists are attributing these two factors as the main drivers of higher commodity prices at the moment, but are doubtful this will provide enough fuel for the current commodity rallies to continue for much longer.

This is fine reasoning, I agree. But it is also such a small part of the bigger picture that does not fundamentally skew the short- and medium-term prospects for commodities. What is omitted from this reasoning is the potential impact that excess money supply may end up creating—higher price levels or inflation. Additionally, the global economy is not recovering either as quickly as anticipated or as radically as many had hoped it would. The global economic output for 2011 is expected to be a very modest four percent, while in North America an utmost unimpressive 2.5%. As for Europe, let’s just say if they pull off 1.5%, they’ll be lucky.

The way I see it, the stampede into commodities is investors’ response to all this volatility and economic uncertainty. Investors no longer trust policy decisions. They cannot rely on the G-20 to find solutions that will benefit the greater good of the planet, not just their respective regions. They fear the decoupling of Wall Street from the rest of the economy, as well as newly coined terms like “currency wars,” or “haves and have not economies.” Nothing seems solid and reliable anymore. So, when they buy gold, they see something tangible in their hands, the value of which is not likely to evaporate like the value of paper money.

Those are the layers that are impacting commodity prices as of late and I don’t see them go away anytime soon. In my view, the mirage here is not soaring commodity prices; rather, the mirage is the global economic recovery. And as long as there is a need to seek safety in these tumultuous times, commodity prices will keep soaring.

In 1999, Asia’s IPOs represented only 12% of global IPO activity. Currently, Asia’s share is 66%. Leading the pack is China, which alone is expected to raise approximately $76.0 billion by end of this year. At the same time, U.S. IPO activity for 2010 is expected to decline 75%, accounting now for only 11% of total global IPO activity.

Without a doubt, Asia has opened itself up to the world as a place that is ready for major capital raising and ready for some serious investing. Of course, the assumption is that the region will continue to enjoy strong growth. There is plenty riding on this assumption, but many investors who may put their money into Asian IPOs this year must have been laughing all the way to the bank.

So far this year, Asian IPOs have on average gained an impressive 36%. Additionally, six out of 10 companies that comprise the best-performing IPOs on U.S. exchanges are either Chinese or Indian companies. At the same time, the S&P 500 Index and the MSCI Asia Pacific Index could only dream of such returns, both advancing less than seven percent this year.

The message is clear. The market wants more IPOs from Asia, because that is where the growth is. To illustrate, just three new deals, one in China, one in Malaysia and one in South Korea, will raise over $10.0 billion in new capital this month. Furthermore, the world’s largest IPO on record was closed last quarter by Agricultural Bank of China to the tune of $22.1 billion worth of shares. So far this year, six Chinese IPOs have raised $1.0 billion during the first three quarters of 2010.

In contrast, this year, not a single U.S. company has managed to raise more than 700 million dollars. To add insult to injury, 54 U.S. companies have either postponed their IPOs until the market conditions improve or completely backed off.

Now, investing in IPOs in emerging markets can be tricky. The market is not known for transparency, and regulatory oversight is, shall we say, finicky. However, the growth is just amazing and returns posted by some new issues are something we can only dream of in the case of domestic IPOs.

Risk is an inherent part of investing. It is up to you to decide how much of it you can tolerate. But if there is a chunk of money somewhere that you feel you can do without, check out Asian IPOs. If such companies are interlisted in North America and if, after doing your due diligence, you are still convinced that this might be a story worth pursuing, make a bet on it. You just might not regret it. Just look at George Soros’ investment in the SKS Microfinance IPO. The India-based lender ended up raising 353 million dollars in August and is expected to post 52% higher revenues. That is about a nine times’ faster growth rate than the average six-percent increase posted by U.S. companies so far in 2010.

Here are some statistics that should put things into perspective. According to Bloomberg, comparing the 50 stocks comprising the MSCI Emerging Markets Index that pay the highest dividends with 50 stocks in the same Index with the fastest growing earnings, the dividend-paying group advanced 26% so far in 2010, while the second group advanced 13%. That is a significant change from the past five or six years. But the world has also changed after the crash of 2008 and the recession of 2009, and yields in the emerging markets have become much more attractive than those in the developed markets. As usual, that is only one part of the story.

The stampede towards emerging market dividend-paying stocks has already begun, partly prompted by ultra-low yields on bonds, literally everywhere. In addition, in Brazil and Thailand, for example, the government has raised taxes to prevent currencies from surging too much, too fast. Such policy decisions have largely left stocks in those regions intact, but have eroded long-term bond yields; hence, the renewed interest in emerging markets equities. And to further reduce risk exposure, investors are now focusing on dividend stocks.

The emerging markets are most certainly changing, too. More and more companies are rewarding their shareholders with dividends. Out of the 754 stocks comprising the MSCI Emerging Markets Index, 634 have paid dividends at the end of the third quarter. Additionally, there were 52 stocks that have generated yields in excess of 5.64%, which is the average annual yield on corporate bonds issued by emerging markets companies.

I don’t usually recommend specific stocks in PROFIT CONFIDENTIAL articles, but I do have a couple of suggestions for investment ideas. If you looking for relatively safe, dividend-paying stocks, look in the emerging markets’ utility sector. There is nothing wrong with owning a defensive stock here and there that also gives you cash every quarter. Another excellent source of steady dividend-paying stocks is the so-called “sin sector,” such as companies operating casinos or selling alcohol.

Now, if I were truly to play the devil’s advocate, I could argue that this flight to dividend-paying stocks in the emerging markets could be a sign that the entire market has inflated and could burst at any time. At face value, there might be something to it. To illustrate, the MSCI Emerging Markets Index has advanced about 13% so far in 2010, while the S&P has gained about 6.4% at this point. But I don’t think equities in emerging markets are in danger of bursting, at least not just yet.

I’ve been writing about the tectonic shifts that are currently happening between emerging and developed economies. The fear of emerging markets I’m seeing has nothing to do with their expanding economies, trade and budget surpluses, or strong currencies. It is the old kind of fear rooted in the mistrust towards emerging markets in general. After all, past transgressions, such as lack of transparency and poor regulatory oversight, have left many early investors with a foul taste in their mouths.

Now, I’m not calling for another dip…yet. But it does seem that the lasting global recovery is not around the corner. It may not be even around the next block or even in the same city. What I’m trying to say is…it is most likely far off on the horizon, and here’s why I think that.

Two years ago, around this time, the leading world economies banded together and made a precedent by slashing interest rates in unison, and some into virtual non-existence. Today, however, central banks seem to have split along the lines of the haves and the have-nots. As a result, and depending on which side of the great divide they have ended up, the world economies are diverging further and further apart in terms of how they are responding to the stalled recovery through policy action, reaction or, in the case of some countries, neither.

It seems that major players also like to come up with catchy terms to describe various trends. I have already written about the term “currency war,” coined first by Brazil’s finance minister, which went viral in a matter of hours. Now, some watchers of central banks around the world are coming up with car-references when describing the latest trends, such as that the global economy has a two-speed transmission—one for the crawlers and one for the gallopers. As it so happens in this topsy-turvy world, the “crawlers” are developed economies and the “gallopers” are emerging economies.

Unlike two years ago, there is no unison now. The crawlers—particularly those saddled with current account deficits—promote monetary easing, seeking to depreciate their currencies to make their goods more attractive to their trading partners. The gallopers, on the other hand, seek tightening and/or stopping with the stimulus. What neither side seems able to agree on is whether to let their currencies appreciate or depreciate. Why? Well, everyone would like to export as much as possible and import as little as possible to fix their balance sheets. Of course, this standoff is not going to be easily resolved.

The dichotomy that has been growing for about a year now will take much longer to resolve. The global growth is in the process of rebalancing and it is still at a risky juncture. The recovery is a complex function of numerous interdependent factors that need to resolve themselves within one complex equation. But the trouble is that some variables of this equation are moving too fast, such as quantitative easing among the crawlers and stimulus withdrawal among the gallopers, while an equally critical element—the boosting of the domestic demand in Asian countries, such as China and India—is not filling the void. This is how the global imbalances persist and why the debate on the timing of policy decisions persists. Knowing how to balance macroeconomic short-term growth with long-term health is an art, just as it is an art knowing how to equate consumer spending with consumer deleveraging.

So, how are policy-makers expected to deal with this many conundrums? There are no easy answers, other than that, for this whole mess to play itself out, it will not take months or quarters. More likely, we are talking about years, perhaps even decades. So perhaps the best thing anyone can do, from policy-makers to politicians to ordinary people, is to be patient, to get used to the fact that the days of quick fixes are over and hope that policies put in place today will indeed bear fruit down the road.

What the Fed is trying to do, allegedly, is give the U.S. recovery a boost by keeping the interest rates low as an incentive to Americans to keep on spending. As a by-product, the equity and commodity markets are rallying, while the U.S. dollar is sinking along with U.S. government bond yields. At the same time, the rest of the world is barely containing the tensions around the foreign-exchange policies, which just may have reached the boiling point. In such an environment where almost every member of G-20 is working out its own currency policy, how on earth is the G-20 supposed to come up with a unified decision?

Emerging Asian markets, which have produced growth rates that the developed economies have not seen in decades, are calling for a coordinated response of all central banks in the region to take measures that will limit excess money supply from entering their capital flows. In addition, emerging markets appear to be done with the U.S. rhetoric, particularly China, which feels it has been chastised for not allowing its yuan to float freely one time too many.

China’s central bank is accusing the Fed of potentially unleashing another global crisis with its indiscriminate money printing. And, to counter that, China is likely to band together with other emerging markets’ governments to push for adoption of the yuan as the international currency instead of the dollar. I don’t think we’ll be seeing the yuan dethrone the greenback as the world’s reserve currency anytime soon, but what we may see is China using the U.S. QE2 as an excuse to keep its currency in check despite the development economies’ outcries to let it float, primarily up. Then again, why would China let the yuan rise and destroy its export-oriented economy when the U.S. doesn’t want to consider financial austerity and opts for more quantitative easing instead?

This “my-policy-is-better-than-your-policy” pissing contest is not only causing friction, but it has also degenerating fast into full-blown currency wars and international trade disputes. It also has it in its power to cripple the global recovery. Of course, no one is willing to budge, not even a bit. If the Fed believes that quantitative easing is what the U.S. economy needs, perhaps we should give it a go. The easiest thing to do is to stop pursuing a policy that doesn’t work. In addition, the U.S. shouldn’t put too much pressure on China’s currency policy. If the yuan starts rising too fast and this export giant stumbles, the entire global economy could be in much bigger doo-doo than the crash of 2008 and the recession of 2009.

There is something called the “Legatum Prosperity Index,” with its data collected and analyzed by the London-based Legatum Institute, which is argued to be the best gauge available today for assessing the world’s wealth and well-being. Apparently, the Index is a mesmerizing reader’s digest that blends macroeconomics with public opinion and paints in broad strokes the picture of national wellness and personal happiness around the world.

In earlier years, the Legatum Prosperity Index findings were that, as long as the economy keeps growing, people will remain happy. The relationship was positively correlated and it was the kind that creates the so-called “virtuous cycle” of increasing prosperity without being too vulnerable to the laws of diminishing returns. The category of prosperity is also approached in a holistic manner, gauging a wide range of thematic categories, ranging from the economy, to health care, to citizens’ freedoms.

Last week, the Legatum Institute released its 2010 report, finding Norway, Denmark and Finland to be the highest scorers and seeing the U.S. drop to 10th place overall. As the Institute approaches its Index holistically, it also provides for an interesting read on how, from one country to another, the public perceive its societies and themselves within them.

After the Tuesday elections, it is clear that President Obama did not bother with yet another Index measuring what people at home or half way around the world think. But, if he did, he may not have spent the first year of his presidency, and an enormous amount of his political capital, on overhauling the U.S. healthcare system, which the Legatum Prosperity Index had measured as number one in the world in 2009. Americans thought so, too, the concept of universal health care completely escaping them, and perhaps the country’s lawmakers, too. Instead, the end result was astounding anger at the Big Government that resulted in the loss of House of Representatives when President Obama may need it the most.

While the Legatum Prosperity Index is likely an excellent gauge of macroeconomic factors and the public mood, I’m not so sure that one of the variables in this equation—the U.S. public that is—got it right. Northern European countries have found a way to have their welfare states and prosperous economies, too. The way they managed to mesh it all so well is the fact that they are also the highest taxed countries in the world. But Northern Europeans do not complain about the Big Government or that huge chunks of their paychecks get sliced off every payday. So, what gives?

Take the number one country in the world—Norway. It has the highest GDP, which is not surprising considering the country’s fossil fuel resources. Norway’s unemployment rate is also something we can only dream of—2.6%. Norway ranks high in personal freedoms, too, holding the second place, after Canada. In comparison, the U.S. holds 14th place in per capita GDP, it is 25th when it comes to safety and security, and, as for personal freedoms, it holds 9th place. What perhaps keeps the illusion going in America is that over 90% of its citizens believe that, as long as they work hard, prosperity will come. Such notions of the times past are admirable, for sure, but mass delusion is never good, either in politics or in economics.

Americans and their politicians-elect must realize that national prosperity is as much tied to social welfare as it is to macroeconomic factors. Do you know how Scandinavian countries can have their cake and eat it, too? About 15 years ago, they have started reducing welfare spending, trimming services that cost too much, but without which the society as a whole could go on, keeping those that are building the country’s future and not just alleviating temporary hurts, and, finally, investing in children, their education and well-being. This is the kind of insightful and protective frugality that could have saved our society from so much hurt in the past two years. It is also something that takes more time to bear fruit than one President’s two years in Office.

Apparently, when Treasury Secretary Timothy Geithner attended the G-20 meeting in South Korea in late October, he came armed with a little-known mandate of the International Monetary Fund (IMF) that requires it to investigate the reasons behind certain countries’ trade surpluses and conjure up solutions for how to reduce them. With that in mind, Geithner lobbied the G-20 to adopt a four-percent limit on a country’s trade surplus when compared to its gross domestic product.

This same argument made another economist famous in the 1940s—John Maynard Keynes. Keynes promised, in his own eloquent, yet convoluted way, to “offset the contractionist pressure, which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world.” Geithner promoted the same thing, only in plain English, stating that nations with trade surpluses should depart “from export dependence and [shift] towards stronger domestic-demand-led growth.”

Just the mere thought that the U.S. Treasure Secretary has to seek obscure paragraphs in 70-year-old documents to push for today’s policy illustrates how dramatically the role of America has changed. Seventy years ago, the U.S. was the world’s largest creditor. Today, it is the world’s largest debtor and is reduced to the role of the war-impoverished Britain when it irrevocably lost its global supremacy. Incidentally, this paragraph on trade surpluses that Geithner is now invoking made it into the IMF founding documents at the request of deficit-plagued Britain.

Not surprisingly, the four-percent limit on trade surpluses proposal did not fly far in South Korea, shot down by China and Germany, the world’s current export powerhouses. In Geithner’s defense, the IMF is supposed to police things like trade imbalances and G-20 ministers have agreed to give it the role of chief policeman. But the thing is that no one has yet had the guts to say anything to China, which continues to wage the currency war by not allowing its own currency to float freely, or rather to rise freely.

The Keynesian ghosts are restless again, arguing that free trade is destroying American jobs and businesses. The Obama Administration has so far wisely stayed away from taking any open reprisal measures, which Congress is trying to shove down its throat. But the fact remains that, in terms of options, there are not many good ones out there. The U.S. is laboring under the burden of chronic trade imbalances, further exacerbated by the plummeting U.S. dollar, although there are a few optimists out there who believe the forces of the market will dissolve trade imbalances on their own.

Perhaps the optimists are right, if there were time to test their theory. But there isn’t. As Keynes put it long time ago, “The long run is a misleading guide to current affairs. In the long run, we are all dead.” I would say, probably so, everything else being equal. But nothing is “equal” these days. Old rules no longer apply. The balance of power is shifting and the global economy has become multi-polar and multifaceted, all of which points to one solution that is also 70 years old, but you will not find it in any of the IMF founding documents or on the G-20 meeting agendas.

It is simply a matter of economic evolution. It’s what happened to Britain after WWII, when the country was so impoverished due to war efforts that its currency could no longer be the world currency. At that time, the U.S. dollar took over that coveted role. And now, years later, it is time to realize that the global financial systems have become too dependent on the greenback and that the pressure has to come off. If and when it does, it will perhaps give the U.S. some breathing space to fix its chronic trade imbalance problem, among other things.

The main goal behind QE2 is maintaining interest rates that are low in order to incite organic growth. But how we are supposed to have organic growth at the expense of the world’s reserve currency remains a mystery. In recent trading sessions, gold responded to this conundrum by having both its futures and spot prices trading strongly above the old resistance level of $1,300 per ounce.

As the dollar weakness continues, so does the dip-buying. The latter is triggering surges in demand for precious metals, as investors, both large and small, continue to focus on protecting whatever wealth they have left after the crash of 2008 and the recession of 2009. So far this year, precious metals have posted significant gains due to most central banks around the world insisting on low costs of borrowing, so that consumer spending should receive the boost it has needed.

To illustrate, for the nine months of 2010, gold has gained 24%, while silver has advanced 48% and palladium even more, surging 60%, compared to their 2009 year-end levels. In addition, precious metals have outperformed global equities, treasuries and most base metals. As a by-product, exchange-traded funds where precious metals have been the underlying assets have also seen significant surges in investment.

Perhaps these statistics collected by Bloomberg will help in putting things into perspective. For 2009, the global aluminum industry had generated revenues of $50.2 billion, which represented a compounded annual growth rate (CAGR) of only 2.1% over the period from 2005 to 2009. In addition, the global base metals market’s aggregate revenues for 2009 were $172.5 billion, generating a CAGR of 5.1% for the same period from 2005 to 2009. Furthermore, the global material sector had total revenues of $6.87 trillion in 2009, which represents the same growth rate of 7.1% compounded over the same period. And, the global coal and consumable fuels market recorded total revenues of $367 billion in 2009, which represents a CAGR of 10.3% for the period from 2005 to 2009.

As for gold, the global gold market recorded total revenues of $73.5 billion during 2009, which represents a CAGR of 20.1% for the period from 2005 to 2009. And, although gold may be trailing behind silver and palladium so far in 2010, note that the global precious metals and minerals market, which excludes gold, has generated total revenues of $32.3 billion in 2009, representing a CAGR of a modest 4.4% over the period from 2005 to 2009.

Whichever way you look at it, the statistics don’t lie. Investors see gold as a safe haven, as a viable alternative to money and as a way of dealing with global volatilities that have certainly changed the game for many since the crash of 2008. True, gold will have short-term ups and downs; but, in the long term, the threat of inflation and more volatility is almost palpable and likely to keep the secular bull market in gold going for the foreseeable future.

Take for example Lockheed Martin Corporation (NYSE/LMT), the company whose main lifeline consists of defense contracts. During the third quarter, it has lost 5.9% of its market cap, while the S&P 500 has surged about 16% during the same period. (Notably, Lockheed Martin has bounced back during the month of October, but that is just speculators betting on Democrats, in our opinion.)

Something similar, albeit worse, has happened to Tenet Healthcare Corporation (NYSE/THC), which collects a third of its revenues from the government. It has shed 17% of its market cap during the third quarter.

In other words, if Republicans win the majority in Congress, their win could put health and defense stocks in a world of pain. Why? A Republican win could mean less government spending, and less government spending between now and 2012 will definitely mean lower revenues and weakened fundamentals.

On September 23 of this year, House Republicans announced their platform, which mainly revolves around spending cuts. If they take a 20-seat majority, which is one among very few predictions concerning November elections, made by New York Times blog FiveThirtyEight, a Republican win would translate into extending tax cuts and burying the health reform that President Obama just signed into law in March.

In other words, companies depending on government contracts will have to figure out some tough belt-tightening, because that money tap is not likely going to go their way at least for the next two years.

Of course, healthcare and defense companies are watching this power play intently. And they are bracing themselves for the worst-case scenario. Lockheed said they have already taken measures that would recognize the changing realities, which is a nice spin on something truly depressing, such as the fact that currently 58% of Lockheed’s revenues come from its defense segment.

As for Tenet, when universal health care was passed in March of this year, the stock got about $32.0 billion worth of wind under its wings in extended benefits slated for uninsured Americans until 2014. The company believes that the healthcare bill will not die, even with the Republican majority in Congress, and that, in the long term, it will deliver to the healthcare sector and Tenet’s own bottom line. Again, this is damage control, because the Republican agenda could really hurt such companies.

Now, speculation can go the other way, too, and one could easily say either that all the negativity has already been factored into defense and healthcare stocks’ performances, or that the threat of the Republican majority is exaggerated. I think that the November 2010 elections are going to set the course, so I would be prepared and would at least place defense and healthcare stocks on my radar. Don’t forget: money can be made in any kind of market. For example, if indeed there is a Republican electoral gain, shorting stocks in these two sectors could prove profitable in the short-term.

The problem is finding the right balance. What Chinese government wants is an economic output of about eight percent, instead of the current 10%, which would be somewhat slower, but surely of a much better quality than the one generating inflation of 3.6% as a byproduct. Classic economic theory requires increasing interest rates in response to out-of-control inflation. However, hitting high inflation with a massive interest rate hike cannot be an answer.

If China raises interest rates too much at once, it could smother prices, kill property values and make a serious dent in the country’s GDP. That is why the government has increased interest rates very timidly, from 5.31% to 5.56%. At the same time, interest rates on savings accounts have decreased from 2.5% to 2.25%. The reason for this policy decision is to give incentive to citizens to start spending, instead of hoarding cash. But saving money and living modestly is how the Chinese have been conditioned over the years, so I am not certain how that is going to change with mere policy.

However, where higher interest rates may have an impact is with banks, which may be a little less prone to lending. This is another problem in China. In September, new loans have reached 596 billion yuan, or about $89.0 billion, which is much higher than the banks’ self-imposed quota of 450 billion yuan. Obviously, whatever China’s government did earlier—and it did a lot, such as implementing higher mandatory down payments on homes and demanding more restrictions on loans—none of it worked.

Why is all this relevant to someone in the U.S.? Well, in case you haven’t noticed, China is a huge player on the international stage, both economically and politically. The “currency war” is raging and it has truly put our greenback through the ringer. At the moment, China is one of the major players holding most of the aces and it has the power to change the dollar’s fortune, both for the better and for the worse. This is why I’m watching policy decisions in China. As of late, they have quite a resonance throughout the world.

What has everyone in such an uproar? The Federal Reserve is likely to dump more money into the financial systems. As the world waits for that to happen, the U.S. dollar keeps on declining against other world currencies. Not even the weekend G-20 finance ministers’ meeting did much on the front of helping the greenback. It seems the U.S. dollar is the only currency in the history of currencies to be treated as both the world’s reserve currency and the global currency markets’ pariah.

Next week, the Federal Reserve Open Market Committee will meet, at which time it is expected that more QE will be approved, probably in the form of the Fed buying billions of dollars worth of government securities. What do Bernanke’s counterparts around the world think about this? If we ask Germany’s finance minister, Rainer Brüderle, his answer is, “An excessive, permanent increase in money is, in my view, an indirect manipulation.”

It seems the term “currency war” has gone viral. It has been adopted like the ugly puppy no one wants, but no one can turn out, from traders to politicians to currency analysts. The designated bogeyman of the day is China, which is keeping its yuan currency on a tight leash and causing all kinds of volatility in the global markets and on the international trade stage. You know it is bad news for the U.S. dollar when the only currency declining against it is Colombia’s peso, and not because of the greenback’s strength, but because Colombia wants to rein in its own peso’s wild upward momentum.

In Bernanke’s defense, it is not as if he can determine policy based solely on the greenback’s value or in response to the volatility in the global currency markets. To do that, Bernanke would have to defy Congress itself.

The Fed operates in a democracy and, in this context, the central bank has some leeway against political pressures, as long as it delivers on its mandate. This mandate involves two primary objectives: maintaining stable price levels; and reaching as high an employment rate as practicable. I don’t have to tell you that the Fed is failing miserably on both counts. Deflation remains a threat and the labor market in the U.S. is in a shambles. So, either Bernanke figures out how to stabilize prices and fix the labor market or he’ll have some tough explaining to do before Congress. And the only way Bernanke figures he will be able to deliver on his obligations is to unleash the QE2, albeit at the expense of the U.S. dollar.

The world’s reaction to this is expressly negative. Joseph Stiglitz, a Nobel Prize winner in economics and a professor at Columbia University, said, “The U.S. will always focus disproportionately on its own interests. In this case, what is a concern to me is that the U.S. is getting very little benefit out of this measure, but is imposing a really large cost on the rest of the world.” I would agree with Stiglitz, and add that this is what usually happens when you are caught between a rock and a hard place.

One such region nests in Ontario, Canada; the province’s northern gold belt, along which many long abandoned mines are going through a renaissance of epic proportions just because investors have finally come to their senses and realized that gold is the only true safe haven against global economic instabilities and the ever-weakening U.S. dollar.

According to Brock Greenwell, a statistical analyst with Ontario’s Ministry of Northern Development, Mines and Forestry, “I’ve been here a long time and 2010 is looking like a record year for gold exploration. It’s unprecedented.”

According to the latest mining statistics out of Ontario, there are 12 gold mines operating in the region, with four more ready to commence production in 2012. Considering that operating costs by mining companies for 2010 are likely to hit $620 million, compared to $389 million spent last year, it is more than likely that more new mines will come online in the near future. As Greenwell put it, “It’s an absolute boom. There are 40-plus companies here at any given time.”

So, who is there “at any given time?” Canada’s Red Lake gold belt, located about 500 kilometers northwest from Thunder Bay, is considered one of the world’s richest high-grade gold regions. For example, Goldcorp (NYSE/GG) has its blockbuster Red Lake mine there, which, along with adjacent complexes and exploration projects, employs close to 1,200 people. There is also Rubicon Minerals (AMEX/RBY), known for making significant capital investments in its Phoenix Gold Project — 60.0 million dollars at the last count — located in the Red Lake gold zone where the company owns about 65,000 acres of prime exploration property.

At the same time, small towns in and around the golden belt are barely keeping up with the demand, from housing to infrastructure to labor force. They are so unprepared for the boom that they don’t even have an adequate tax structure to fund everything that the Red Lake gold mining industry requires. Yet, regardless of the municipal growth woes, gold exploration and development is not abating. In addition to the already operating mines, new drilling technologies, capable of going deeper than ever before, are now unearthing new ore bodies on old and often abandoned gold properties.

Clearly, if there was a star on the dark sky after the crash of 2008, it was gold. In the short and medium terms, you would be hard-pressed to find an analyst who is not bullish on gold. But not many will commit to an opinion on gold in the long term.

Here is what I think. I don’t even have to wish for financial trouble to arise somewhere else in the world. The mess we have got ourselves into in the U.S. will take years to untangle. The financial and credit crisis has deep roots, the pulling of which could take a decade, if not longer. Adding fuel to the gold’s flaming fury is the fact that the U.S. must keep printing the money to keep its head above water. So, if anyone would ask me if I’m bullish on gold in the long term, I have two words: “You bet!”

The recession that hit after the crash of 2008 was not centered on any single country. The recession of 2009 was the first one since the Great Depression, when GDPs worldwide have declined. In addition, countries that are currently growing, like China, for example, are not in the mood to share the pain and boost their own imports so that other countries’ exports could grow. To make matters worse, China is keeping its currency artificially depressed, despite the insistence of the rest of the world to let it float freely. China simply has one goal in mind, considered by many to be rather selfish one, which is to keep or grab a better share of the weak global demand.

But the “currency war,” as Brazilian Finance Minister Guido Mantega has called it, is only a manifestation of the real problem. Simply, it is a mathematical improbability for the entire world’s exports to grow and imports to decline at the same time. I mean, who is going to import everyone else’s exports? Martians?

So, the $14.5-trillion question is: how is the U.S., as the world’s biggest economy, going to revitalize its economic output if it is not going to be through exports? Well, there is not much buzz out there in the form of optimistic, yet plausible answers. There is, however, plenty of very realistic pessimism, estimating that the U.S. economy could remain stuck in an L-shape “recovery” for years, or worse, revert into recession.

To make matters worse, the hole into which the U.S. has dug itself in is really a monster of a hole. The unemployment rate is still dismally high, remaining 5.6% lower in September compared to its December 2007 peak. To put things into perspective, since 1970, after four out of five recessions, the unemployment had hit new highs relatively quickly, and certainly much sooner than at the stage that we are at now. The only exception was the recession that hit after the tech bubble burst in 2001, when the unemployment remained below its pre-recession peak, albeit by a much narrower margin of 1.8%.

What is really keeping economists awake at night? This gnawing feeling that the U.S. economy could be stuck in neutral for a while. People are not back at work because the companies are not hiring. Companies are not hiring because the demand is very weak. The demand is weak because everyone is conserving cash and not spending. This is what the aftermath of a financial crisis looks like: it is as ugly as heck and it just doesn’t know when it has outstayed its welcome.

When wallowing in grim thoughts, Japan’s lost decade is often invoked. But, compared to the U.S., Japan was actually better off than the U.S. is now. What we are going through today is much worse: there is more unemployment, the demand is weaker, and the policy response appears to have done more damage in the long term when weighted against the short-term benefits.

But I’m describing the water to the drowning man. By now you may have gathered that I am not a fan of Alan Greenspan, but he may be onto something. At the recent Bloomberg FX10 Conference, he said, “It’s useless to try to stimulate business executives’ animal spirits as long as they’re still fearful of another financial calamity. What’s required is an extended period of calm — long enough for executives to regain their confidence and start thinking about new opportunities again.”

Sure, there are a few shy voices out there who believe this reduction is still too optimistic. To achieve a substantially better performance in 2011 versus 2010, the U.S. GDP would have to be pretty robust next year, they say. Having in mind that the recovery has effectively stalled, it does not make too much sense to see the S&P 500 pull another record year in 2011. Then again, considering that Wall Street has managed somehow to decouple itself from the rest of the economy, perhaps there is reason behind such madness, I really can’t tell anymore.

In any event, even the most optimistic among analysts had to acknowledge that, to realize an average price of $95.00 a share in earnings, the U.S. economy would have to pull – well — quite a rabbit out of the hat. Don’t know about you, but I have been disillusioned enough in the past two years to believe what approximately 8,500 analyst tracked by Bloomberg have to say. The optimism card has been played one time too many, despite the odds of 8,500 versus one.

What do I think about the third-quarter reporting season? I think that the stalled recovery in the U.S. will show up in Q3 corporate earnings big time and it will not grease the kind of liftoff that Wall Street analysts are predicting in 2011. Now analysts have estimated that the S&P 500 companies will report Q3 earnings 23% higher quarter-over-quarter. This is significantly lower from the 49% increase during the second quarter and the 52% increase for the first quarter of 2010. If this reduction in earnings actually pans out, it will be in stark contrast to the S&P 500 Index’s performance (in relative terms) during the month of September, an 8.8% increase — something not seen during any month of September since 1939.

The way I read this, it is just another example of the decoupling of Wall Street from Main Street. My only question is, then, how are the S&P 500 companies supposed to achieve $95.00 per share in 2011 when most of the engines are not online anymore?

Talking to a couple of my trader friends may provide some insight. First, they have long stopped relying on analysts’ forecasts. And, second, they believe the market has already priced the lower earnings forecasts. Currently, the S&P 500 is trading at 12 times its 2011 earnings, which, in their language, means that equities are cheap.

My trader friends worry about one thing, though. They know the market will be doing its thing as long as investors believe the economy is slowly, but surely recovering. But even stuck in their own little bubble, they are beginning to realize that may not be the message for very much longer.

Attorneys general in as many as 40 states so far have started investigations into home foreclosure procedures and many lenders seem to have been caught in the net of providing foreclosure documents that have not been properly validated. Executives appear to have signed hundreds of thousands of documents without actually checking any loan records or having even the basic knowledge about who owns specific mortgages.

The defense of some of the lenders is that, while there may have been some procedural errors, the underlying transactions have not been fraudulent. This is hard to believe; if the lenders are not familiar with the details of specific loans, how can they be sure such loans are not fraudulent? In the meantime, the pressure is mounting. As foreclosure levels have reached record highs in the U.S., the U.S. government has had to say something, pressuring the lenders to reduce their eviction rates. But lenders, many of them having benefited from the billions of dollars in bailout money, are quite adamant on getting their loans back, one way or another.

Regardless, suspicions are mounting that lenders facing an exorbitant number of foreclosures have taken one shortcut too many trying to collect as much money as they could before the lending market truly imploded. According to RealtyTrac, just in August, lenders have taken possession of 95,364 California homes and served eviction notices on 338,836 more.

The problem is if these deficiencies are as widespread as 40 attorneys general think they are, hundreds of thousands of foreclosures could be tied up in courts for years, including the evictions already executed as well. If that happens — and it seems right now that the problem might be turning into an avalanche — economic recovery in the U.S. could be further delayed. There is simply no way getting the economy to start moving again without resolving foreclosure issues first.

The foreclosures fraud highlights another problem — the “shadow inventory.” If the homes now in default flood the market, which is a distinct possibility, real estate prices could be further depressed. If potential buyers, who are already scarce, believe that prices have not yet hit rock bottom, the will keep on waiting to get into the market and the U.S. real estate market will continue being nothing more than barren wasteland.

As for the resale homes turnover rate, the data point to an even more dismal picture. Data collected from 23 states where faulty foreclosures are now flooding the courts indicates that the average time between borrowers defaulting on their loan payments and sales of their homes has widened to 25 months in August of this year from 18 months reported in August 2007, at the onset of the financial crisis that has led to the crash of 2008.

The widening of the turnaround time is not only having an adverse impact on resale prices, but it may also serve as a signal to other stressed borrowers that it may be okay to stop paying, because their cases could also end up in courts for years. Considering the number of foreclosures, lenders are very likely to deal with the worst-case scenarios first and leave delinquent homeowners of less valuable properties in their homes longer.

Even when defaulting borrowers are trying to find a resolution and renegotiate their loans, they are hitting six-foot-tall brick walls. In far too many cases, no one can tell them who owns their mortgages, let alone how to go about refinancing them.

Since then, things have changed dramatically. More specifically, the Internet has changed things dramatically. Suddenly, investors went from one outlier — information deprivation — to another — information overload. What is needed now is the way to process all that information, and, more importantly, the way to use that processed information to one’s advantage.

How troublesome are this new investing environment and the ever-changing rules of engagement to investors? Considerably. Some of the problems are the so-called fringe or peripheral views that can be found by simply googling something with your search engine (you see, we now even have the new verb, “to google”). Now, if these fringe views were to serve as premises for healthy debates, there would be no problem. But that is almost never the case. In fact, in most instances, a fringe view will be a vigorously defended opinion that joins hundreds of thousands of differing opinions on the same topic on the insane “information highway.” And driving on it has not only become perilous recently, but near darn impossible.

What are investors to do? Well, there is only thing left to do — and that is to pick sources they trust and stick by them. Otherwise, you will never invest a dime, yo-yoing from one source to another ad infinitum. Another important point is to choose a source that has no other agenda but to provide an honest, unbiased opinion. In that regard, information providers not paid by, for example, companies being analyzed, or not being invested in a stock promotion themselves, would be considered unbiased, potentially even solid sources of reliable information.

Furthermore, try to keep your own mind open and don’t look only for information you want to hear. That may involve finding a source that is providing you with honest information, even if it is not always to brag about a profit. In all likelihood, if your source of information is willing to tell you good news along with the bad, then it is the source worth holding onto. This is called removing oneself from the “confirmation bias” and getting a broader view on investment topics.

Finally, investors need to learn to develop a disciplined way of reviewing their portfolios in terms of how frequently they do so. Staring at stock prices every minute of every day is not a healthy way to lead a life. For example, research shows that investors feel about losses two times more intensely than they feel joy about gains. They often end up more deeply connected to their losses, which also makes them much more prone to stress and holding on to bad investments.

But detaching oneself from a loss in a cool and unemotional manner is anything but easy. For the most of last year, I have had to watch some of my favorite stories go down in flames just because I refused to admit that a company was going nowhere despite being a great story. If the crash of 2008 and the recession of 2009 have taught me anything, it was to stop obsessing about every single investment I have made, put my stop losses in place the minute I buy something, and let it ride its fortune in this unpredictable world.

What do we know so far? Not much. So far there were only hints and insinuations that the U.S. Federal Reserve Board could soon start buying more bonds, a decision that could be made around the time the Board next meets in early November. The idea is to flush more cash into financial systems, keep or even lower long-term interest rates, and make sure prices remain stable and do not veer off either up or down. In return, that should create an improved environment for more lending and for more spending by businesses and consumers.

Now, in theory, QE could work. It could indeed jumpstart the economy and it could prevent the recovery from deteriorating any further. How? More money in the system could serve as a catalyst for people to stop hoarding cash and start spending more. If people start spending more, the housing market could stabilize as well. And as long as interest rates remain low, more homeowners could stay in their homes and be able to refinance their loans.

There is another beneficial aspect of hinting at more economic stimulus, at least on the surface. Just talking about it appears to have boosted investor confidence. As a result, stock markets have rallied in recent trading sessions. Now, as far as I am concerned, this is a mirage. After the crash of 2008, Wall Street has somehow detached itself from the rest of the economy, and it should not be used as a gauge of economic activity anymore.

Admittedly, if anything is going to boost the global recovery, it will be concrete improvements in the U.S. economy; hence the anxiousness of the Fed and Washington to get this ball rolling. The only problem with QE is that it has been tried before and it didn’t work.

In the long term, if interest rates remain substantially suppressed and if the world financial systems remain substantially awash in money, at some point, these two variables will become untenable. What are likely to break the spell first are interest rates. If, after potentially years of interest rates being ultra-low, they start rising rapidly, the real shock to the economy could be immeasurable. As one economist put it, keeping interest rates artificially low has “…a rubber band effect. The more you pull it back, the worse snap you get.”

Excess money supply is already bringing as much harm as it is bringing good, if not more. It is clear that massive bailouts in the wake of the crash of 2008 have yielded some, albeit limited, benefit. But what the bailouts have surely brought is chaos to currency markets and a potential long-term demise to the U.S. dollar.

Enough money has been thrown into this mess and the laws of logic have been defied long enough, too. It is time to recognize that this recovery is not something that is going to happen either quickly or easily. It is also time to stop taking the path of least resistance. Case in point, more money in the system could force the economy to crash and burn, at which point perhaps there would be nothing anyone could do to help.

I know it sounds very militant, but perhaps the terminology accurately describes the tension building up almost to the boiling point, as world bankers and officials congregated in Washington this past weekend for the annual IMF and World Bank meeting. What is the fuss all about? Well, it is more than a fuss.

The volatility in the currency markets has been tremendous lately, as emerging markets, fast growing and tired of being apologetic, seek more control over their own currencies. In contrast, the developed world does not want to relinquish that control; instead, the developed world wants emerging markets’ currencies to float freely. This, at least in the case of China, means letting emerging markets’ currencies freely appreciate. If this is not done, the developed world is in a mood to retaliate, particularly against the U.S., starting trade wars, and who knows what else.

At this point, the reaching of a globally acceptable agreement that would calm the currency markets has been elusive. The Chinese are adamant that the appreciating yuan would create domestic factory closings and social instability. At the same time, the Fed appears to have let go of the idea of additional monetary stimulus, as that would have an adverse impact on the dollar. Reaching what appears to be an impasse, the world’s economic elite have reached out to the IMF, hoping it could bring some calm and reason to the playing field.

Canada’s Finance Minister, Jim Flaherty, commented, “We’re all agreed we need to move toward co-operation on exchange rates. The IMF has an important role. The IMF can encourage co-operation on that specific issue of exchange rates.”

What the world’s central bankers and economists are seeking from the IMF is to try to put in place some sort of “governable guidelines,” which would explain the rules of engagement for situations when government intervention in the currency markets is needed beyond merely subsidizing the exporters. But to figure out such guidelines in an impartial manner, the U.S. Treasury Department or the Chinese Finance Ministry would hardly do. That is why the world has called on the IMF.

What 24 countries comprising the IMF’s steering committee have asked of the fund’s management is to complete an in-depth analysis of the economic forces currently lashing the currency markets. Included are the record-high accumulations of foreign exchange reserves and the long-term impact, presumed dangerous, of exports on steroids from countries such as China, Japan and Germany, which are not focusing on ramping up their internal demand.

None of these concerns are anything new. And it is not as if the world’s central bankers have not asked the IMF to reconcile their differing views before. What is different this time around is that the IMF was given an actual green light and the necessary tools to create the bridges the currency markets need right now. This has now moved beyond a mere conversation among peers and certainly beyond the IMF’s role as a crisis lender.

That said, there are plenty of challenges that the IMF may face along the way. The institution is not a beloved one. In fact, because of its strict terms under which it issues the loans, the IMF is laboring under a legacy of distrust in most emerging markets. Additionally, there are legitimate questions about how much authority the IMF really has, considering that many countries have grown rich enough not to need its loans anymore. How much of a balanced solution the IMF can bring to the table remains to be seen, of course. However, in spite of its shortcomings, in all likelihood, the IMF remains the right institution to negotiate this particular conundrum developing in the currency markets.

One in five Americans owe more than their homes are worth. This creates an impossible situation in which the economy cannot move forward because its citizens cannot borrow and spend as they used to. There is one thing, however, that homeowners can do and that countries cannot. Homeowners can foreclose and walk away from their properties. Countries cannot. And there is another thing that both citizens and countries can do, which is to stay and take up an important battle with the lenders — one that would reduce the principals owed and lessen everyone’s debt burden.

In financial lingo, this is also called “taking a haircut.” And, apparently, Irish taxpayers really need to take quite a substantial one to reduce the debts that Ireland has assumed to save its irresponsible banks. While more economists are supporting this “let’s shred the debt” view, policymakers are not jumping on this particular bandwagon. Regardless, most developed economies need something drastic done with respect to debt. Otherwise, there will be more cement truck drivers ramming literal and proverbial gates of parliament in desperate attempts to tell their governments that they have had enough.

Perhaps Ireland is an excellent illustration of why governments need to put pressure on private creditors to start sharing in the global recovery pain. After real estate prices plunged as much as 70% in 2009, Anglo Irish Bank, neck-deep in real estate lending, needed a massive, taxpayer-funded bailout, eventually ending up nationalized. As the real estate bubble exploded in Ireland, the country ended up drowning in bad debts and forced the government to implement a strict austerity diet. While the European Union praised Ireland for taking the road many still refuse to travel on, little else has improved. Private lenders were left out of the equation, costs of borrowing have surged, and the country’s economy kept on shrinking. For the second quarter, Ireland’s GDP shrunk as much as five percent on the annual basis.

Much like Ireland, the U.S. has left its creditors out of the ugly picture marred by bad loans losses. That pattern is traced even further to 2008, when the U.S. government took over AIG — the world’s largest insurer at the time — and made sure AIG’s debt holders were protected. Since then, many more creditors, regardless of how reckless and stupid they may have been, still enjoy the government’s safety net.

Now, creditors argue that forgiving debt would be like flashing a neon sign that it is okay to behave badly. They argue that if people know they ultimately do not have to pay their debts, they will become even more reckless. Undoubtedly, that is a possibility and therefore a valid argument. However, the government has done exactly that with so many foolish lenders deemed too big to fall, so why did no one complain then? Who is indeed guilty of a double standard?

Whichever way we look at it, someone will have to pay all the debt that the world has accumulated over the years. It will likely be the savers and investors of the world, who else? But what matters more is how it will happen. Will it happen in a “rip-the-Band-Aid-off” manner of enduring the worst pain now and taking care of the rest later? Or, will be the “let’s-take-it-slow” approach with world governments throwing more good money after bad and creating inflation in the process?

I get it why policymakers don’t like the Band-Aid approach. If one person gets a mortgage reduction, why can’t another? And who will get to determine the reduction? And based on what criteria? For sure, that is uncharted territory and it scares both the government and creditors out of their wits. But looking at the situation in Ireland, what other choice is there?

There are hard feelings in Washington with respect to the whole yuan situation. One of the Senators sponsoring the bill, Charles E. Schumer of the New York Democrats, said that, “China’s currency manipulation is like a boot to the throat of our recovery.” It is also understandable why there’s so much emphasis on China’s currency. The yuan is a tangible and trackable indicator of the relationship between the two countries. If the yuan’s value were to increase, then the U.S. trade balance would shrink and make U.S. goods and services more competitive on international markets. As an added bonus, a higher yuan would also mean subduing China’s inflation, which is definitely rearing its ugly head.

And, while China may disagree that its own economic growth should suffer under a higher yuan, ultimately it would be a mistake to muscle China into revaluing its currency. Firstly, if the U.S. oversteps its authority and goes for measures that the World Trade Organization (WTO) would never allow, at the other side of that decision would likely be a trade war, loss of support on the world stage, and potentially permanent damage to the already fragile free-trade systems.

In addition, the U.S. is picking on the wrong fight. Inflation in China is rising, which is also pushing the yuan’s inflation-adjusted value higher, in a way fixing itself, and that is all that matters right now on the international trade stage. To illustrate, China’s current account surplus is expected to decrease from 10.7% of GDP reported in 2007 to a mere 2.7% in 2011. This is why it seems that narrowing the focus on the yuan’s value alone is misguided. Whoever is looking at the broader picture would be able to see that this is a simpleton approach.

As usual, China is playing a smart game. The country has dragged its feet when addressing the U.S. trade grievances. And it has not yet technically broken any WTO rules. So, if the U.S. retaliates against China by breaking the rules, it will be the U.S. labeled as the bad guy, not China.

What is the U.S. to do about this conundrum? One area of focus should be improving access for U.S. businesses in China. At the moment, China itself is running afoul of certain WTO rules, whereby it has implemented subsidies that discriminate against foreign companies, particularly if those engage in the high-tech industries. For example, on September 9 this year, the United Steelworkers Union instigated a trade complaint against China with the WTO regarding subsidies awarded to clean-energy technologies. That is the way to play the game.

Granted, dealing with China is not easy. Actually, it is quite the opposite of easy. But lashing out in anger or sheer frustration is a sure way to make things worse. So far, Beijing has played a smart and regimented game, and so should Washington.

Incidentally, the protest in Brussels took place in front of the EU Commission that, at the time, was trying to push through new penalties against member states that are drowning in deficits aimed at funding social programs such unemployment benefits. Not in the least bit surprisingly, it is the Germans who are asking for penalties, and, equally unsurprisingly, it is the French who don’t like to be told what price to pay, but rather want to make that determination themselves.

Why such strong opposition to austerity measures, knowing that the risks of leaving sovereign debt problem unresolved could not only drive EU countries back into the abyss, but also drag the rest of the world with them? Well, the European Trade Union Confederation finds the European Commissions’ regime of sanctions counterproductive and not something that will make things better, only worse. Unions fear that their membership will pay the highest price in the aftermath of the global economic crisis that was not set off by workers, but by bankers and traders, most of which had been the lucky winners of the global governments’ bailout lottery.

You know what? I’m not a fan of unions, but unions are right on this point. It is not right that people lower on the food chain, through taxation, end up financing economic stimuli around the globe. Workers of heavily indebted governments should not pay the price for the financial gamble that happened in financial markets. I agree that it should be the banks bearing most of the cost and responsibility for massive government interference with the global economy. Instead, unions and indebted governments are pleading to reschedule debt repayment, arguing that the burden would be too huge and potentially could trigger another plunge into recession. Not a peep is coming from the banks.

The only problem is that sovereign debt and the associated risks are not going anywhere. This much debt has to be paid and, if repayment is not enforced, impacted governments will have little incentive not to take the path of least resistance and simply ignore repayment.

Ours does not appear to be a fair world in the wake of the crash of 2008. It seems that those most responsible for the fiasco will be able to get away scot-free. Those who believed their bankers and governments that things were just peachy, who have borrowed money and thought they were wealthy, now are facing entirely different realities and are left picking up the tab. Whether EU taxpayers can or cannot pick up the tab is not something bothering government-propped-up bailout recipients — financial institutions — too much.

To add injury to insult, there is really no way around sovereign debt other than through adopting severe austerity measures. All the protesting in the world will not change that. That is why I find Basel III so disappointing (I wrote about it just last week). The Basel Committee had an opportunity to force banks to take responsibility and put their money where their mouth is. Instead, the double standard prevailed, hurting the most vulnerable and rewarding the guiltiest.

I don’t think that international regulation has ever attracted so much attention as did the struggle to piece together new rules of engagement for the global banking industry that has just wobbled its way out of the wreckage of 2008. Granted, the idea was a noble one; wanting to create rules that would prevent something like the crash of 2008 from happening ever again. Yet, what came out of Basel on September 12 appears to have missed the target by quite a margin.

The new capital and liquidity rules may have seemed difficult for most banks to meet; however, most banks ended up having eight years to comply with them, and some as many as 13 years. Within that timeframe, anything can happen, including one or two or three more crises. The way it looks to most economists, the opportunity to straighten the global banking sector has come and gone.

Sure, there was lot of pulling and tugging. Where the Basel Committee on Banking Supervision showed some backbone was on the banks’ minimum capital requirements, tripling those minimums in the form of equity and preferred shares. Where the Committee lost the game — and it is a crucial point — was in the implementation period. The banks have managed to secure this eight- to 13-year-long phase-in period, offering one strong argument: If you put too much pressure on us to build this huge cushion in too short a time, we won’t be able to lend. If we cannot lend, we cannot jumpstart the global economy. If we cannot jumpstart the economy, we’ll be back in a credit-induced recession in no time.

This was not just a potential scenario. It has actually already happened, which is why the Basel Committee couldn’t ignore the banks’ outcry. In 1988, the Basel Committee gave banks four years to get in line with the world’s first global capital standards. The banks couldn’t do it without reduced lending, which was the direct cause of the credit crunch of the early 1990s and the ensuing recession. This time around, obviously such a highly probable mistake could not have been repeated and the Basel Committee had to admit that consequences could be dire to the already fragile global
recovery.

How could have Basel helped turn around the global banking industry? Well, one place to start could have been limiting spending on executive compensation and dividends until the new capital requirements are met. Another means could have been higher capital ratios and shorter implementation of the new liquidity coverage ratio, the lack of which, for example, has finished off Lehman Brothers and Bear Stearns and ushered in the Great Recession. Incidentally, banks have put up the least fight on this liquidity coverage ratio. Still, the regulators have opted to give it a longer implementation period, hoping to avoid any unforeseen consequences. Like what? The next financial crisis?

As a side note, purely unintentionally, I somehow often end up traveling to countries going through elections or referendums. That was the case with Iceland in March of this year, and that was the case with Sweden in September, too. I mention Sweden’s elections only in the context of what the country’s current pro-business coalition government has done for its economy since 2006.

Before the ruling coalition led by Prime Minister Fredrik Reinfeldt and his Moderate Party came to power, businesses and individuals had been taxed so much that figuring how much is owed to the government required a degree in tax law. Payroll taxes, income taxes, corporate taxes, wealth taxes, etc. — most of which were introduced by Sweden’s Social Democrats — have not only created Sweden’s fabled welfare state, but also much of its economic deadweight.

Then, in 2006, the center-right coalition, The Alliance, came to power and made good on its election promises, most of which revolved around lowering income taxes and jobless benefits, among other things. The idea was that lower taxes would create jobs and actually boost tax revenues, thus removing the deadweight while keeping the welfare state intact.

During the Reinfeldt coalition’s first term, income taxes were reduced by about 70 billion Swedish kronor, or approximately 2.3% of the country’s GDP. But lower taxes meant that other measures also had to be taken, such as tightening the budget. The smart thing was that The Alliance worked at it gradually, not going wholesale against the welfare state. This way, Sweden managed to keep its welfare state and economy not only cooperating, but also working well together.

After Sweden’s economy contracted in 2009, as did the rest of the world, the country’s GDP this year will probably grow by about 4.5%. Sweden’s economic performance will likely be one of Europe’s best in 2010. Additionally, Sweden’s ruling coalition is likely to achieve Europe’s smallest budget deficit. At the same time, while jobless benefits have been trimmed to entice people to seek work instead of relying on the government dole, other social programs, such as free education, free childcare and a universal health system, have remained intact and well-funded.

Now we come to Sweden’s 2010 general election, held on September 19. The governing center-right coalition won a second term, something no ruling party or coalition has accomplished in almost a century. However, Sweden’s conservatives failed to win outright by two seats only, while the Social Democrats lost some seats.

The only dent in the win was the ultra-right party, the Sweden Democrats, which has broken the four-percent threshold to enter Riksdag, or Swedish parliament, for the first time ever after winning 20 seats. Perhaps this is not exactly something anyone would expect of Sweden, because the Swedish Democrats are openly against immigration and have been accused of advocating racism. Thankfully, entering the parliament is not the same as being able to impact policies. According to the re-elected Prime Minister Reinfeldt, The Alliance will not be playing with the hard right on any field. Instead, if they need help, they will turn to the Green Party.

Sweden is a large country with a population of only about 9.4 million. During the Great Recession, the Swedish economy has held its ground well and future prospects are looking good, too. Swedes obviously like where their country is going, but do not trust one party to handle it all, hence the need to form coalitions and the election of minority governments. As I walked on the streets of Stockholm’s Gamla stan and on the manicured-to-perfection grounds in front of the Riksdag, I saw not only one of the most beautiful
cities of Europe, but also a capital city of a country that has made it all work out: social policies and business demands; lower taxes and higher government revenues; political pluralism; and effective minority governments.

According to the U.S. Census Bureau, the U.S. poverty rate has increased to 14.3%; that is, it has impacted 43.6 million Americans in 2009. In 2008, this rate was 13.2%, impacting 39.8 million Americans. In other words, within a year, 3.8 million Americans have joined the ranks of the poor. What make this statistic scary are predictions that the upward poverty trend is nowhere near done increasing. Some are figuring that, in the next four years — marking 50 years since President Johnson’s declaration of war on poverty — the U.S. poverty rate will hit 16%, and potentially even 18%.

No president could stand idly by such devastating statistics. On his end, President Obama is doing what all his predecessors have done since 1964 — he is trying to buy his way out of poverty. To stop the surge in the poverty rate, President Obama is calling for more government spending; now seeking Congress approval for an additional $180 billion. I would say, “You go, Obama!” if only throwing money at poverty had worked in the past 46 years. It has not, despite the U.S. having in place about 122 different federal programs aimed at helping Americans at or below what is called the “poverty line” (i.e. family income of less than $22,000).

I would also say, “You go, Obama!” if government spending had not been one of the root causes as to why poverty rates have surged in the past two years. For example, the 2009 round of stimulus spending saw the creation of something called an “emergency fund.” That fund required the government to cover no more and no less than 80% of total costs of any new anti-poverty program introduced by any of the 50 states. In the end, that idea amounted to little more than the creation of an incentive for new welfare recipients. In the grander scheme of things, the emergency fund program effectively killed Clinton’s welfare reform of the 1990s.

It does seem odd, however, that the government of the world’s most powerful economy could not buy an end to poverty. It is even more curious that it did not even diminish it. Are the numbers the government is working with reliable? And, if not, why develop more programs to address something that potentially doesn’t exist? Questioning of the poverty rates seems apropos when you look at the 2008 numbers, for example, when the one-fifth of America’s poorest reported incomes of $10,000 per year only, yet somehow managed to spend about $22,000? The U.S. Labor Bureau of Statistics offers no explanation for this oddity, but common sense dictates that there must some income coming from somewhere that is not reported or not reportable, such as cash earned “under the table” or food stamps.

Government spending has its value and purpose. Social programs also have their value and purpose. The two should not be equated or taken lightly. At this point, the U.S. economy cannot absorb even the economic stimulus already in its systems, let alone stimulus proposed in the near term. Policies and legislations should be thought through and triage-type decisions will need to be made. That said, I believe that the 122 federal programs already in place to address poverty are sufficient. Instead, what the economy and American people need are systemic changes from the top down and then from the bottom up, not more debt and certainly not more deficit.

Gold bugs believe that there is plenty of upside momentum left and they are framing it in terms of years, not months. Their reasoning appears sound — there are so many factors driving the price of gold upward, such as volatile currency markets, über-sized government deficits, more economic stimulus potentially creating an inflationary wave, and the still weak global economy. Neither of these factors is likely to back down anytime soon and thus neither is the price of gold.

The good news this time is that not only gold bugs are preaching to the choir. It seems that quite a few respected gold analysts also believe gold is truly in a long-term bull market. Additionally, gold fundamentals support the argument that gold is not likely going to morph into an asset bubble.

As far as future gold price predictions go, some gold analysts are rooting for the gold price of $2,300. Why this price of $2,300 per ounce? Simply, the price of $2,300 per ounce of gold approximates the price that gold had reached in January 1980 after inflation is taken into the equation.

What analysts are also saying is that this price cannot be reached overnight. Investing in gold is like running a marathon. There will always be short sprints along the way, but the pace is usually steady and takes its time to reach the peak.

Of course, investors should not ignore other, more hesitant voices when it comes to the price of gold both short-term and long-term. The hesitancy, at least in the short term, comes from the fact that, in the past 30 days or so, gold has rallied almost $60.00. Not that gold usually follows the typical dynamic of a bull market, but still, most bull markets move in fits and starts. Additionally, most bull markets are known for sharp corrections after steep surges. I would agree with the fits and starts theory, but only to the extent that, if there is any short-term downturn in gold, it will be due to some profit-taking, and not due to bearish fundamentals.

Watching the volume of trading in gold stocks can tell volumes. I’m seeing sharp volume increases among large-cap gold stocks, which signals that institutions are flooding these names with capital. It seems that even portfolio managers who have never even considered gold before are now trying to get on the gravy train. Since they have liquidity obligations to the funds they manage, they need to buy mature issues that are trading at least two to three million shares daily.

Eventually, however, they will run out of large-caps in which to invest. Most prospectuses in the case of registered funds, or trust agreements and fund declarations in the case of non-registered funds, limit an individual fund’s exposure to gold. And, as the gold bull market matures, I expect to see more institutional money going into more speculative, junior mining companies.

What should you look for in gold juniors before institutions move in and take over the market in mid-sized and small-cap companies, too? I always examine a gold mining company’s exploration projects, their proven and probable reserves, prospects for mine building, local infrastructure and workforce, any issues with local environmental authorities, etc. Actually, the emphasis is on the reserves, because large-caps are literally running out of ounces to both mine and sell, while juniors are just starting to build theirs.

Furthermore, I like junior miners that are sticking to actual mining and selling of gold and not playing with hedge books. Finally, there is always profit to be hauled in when a junior gold miner becomes the object of a takeover. What should you look for there? Gold mining is an extremely capital-intensive industry. So, a good candidate for a takeover would be a company with strong exploration projects, but that’s short on cash to develop them.

But how does Alan Greenspan recommend the boost be given to equity markets? Well, he is advocating higher taxes, even when the U.S. economy is one gearshift away from going in reverse. According to Greenspan, “There are risks, but our choice is not between good and bad, it’s between terrible and worse.” And this from the “smartest man in the room,” who in no uncertain terms is responsible for making things not just worse, but absolutely terrible when, during his reign as the Fed chairman, he supported insane tax cuts peddled by the Bush Administration. Yet, he chose a fine hour three years later to say that tax cuts are no longer sustainable and that the U.S. economy needs tax increases, not more stimulus!

Then again, how can we blame Greenspan? In a way, we have all created him, praising him for his role in the booms of the 1990s and early 2000s and for telling us only what we wanted to hear, and then blaming him for all the evils unleashed when the smelly stuff hit the fan in 2007. If nothing else, Greenspan only stuck to the guns of any traditional economist, firmly believing that the market is inherently stable, that most of the time it behaves rationally and even more often that it operates efficiently, provided the market is left to its own devices.

On the other hand, how can we not but vilify Greenspan for believing what is now turning out to be nothing but a pretty myth, in which not even the theory of supply and demand can bear scientific scrutiny any longer? He was the guy who was supposed to know. He was the country’s central banker for years. He was the country’s lead economist. He should have known that the math would not hold because the world has changed irrevocably and that the market is not some mythical creature that exists in a vacuum. There is no invisible hand that will make the things work out in the end. He should have known the risks and incorporated them in his policies long before all hell broke loose. That was his job and his responsibility.

Perhaps this is why behavioral economics has gained momentum in the past two years, having long argued that the market is none of the things Greenspan had believed; i.e. stable and efficient. Instead, behavioral economists are viewing the market as a living organism of sorts, as a complex being, employing complex, non-linear relationships, and weaving large, complex networks. Some behavioral economists are comparing new economic models to defining a tumor through a mathematical proof.

In other words, economists today will have to re-learn everything. They will need new tools to deal with new realities and they will need to shed Economics 101 as a theory that has morphed over time into an ideology, rather than developed as a science. It is a dead myth, its theories largely dating from the 19th century, believed to be founded on a solid and unchanging structure. Well, the structure has collapsed and it has been shattered into millions of pieces that no one — including and particularly not someone like Alan Greenspan — can put back together again.

Now there is so much speculation. One theory is that the Federal Reserve is planning to pour additional economic stimulus into the U.S. financial system by the end of this year, which means that it might be buying millions of dollars in Treasuries, a move that could spark inflationary pressures. In that context, as a natural defense against inflation, buying gold makes perfect sense.

But how can the Fed justify a monetary policy move that could potentially lead to elevated price levels, digging the U.S. government’s budget deficit hole even deeper? Yet, last month, the Fed chairman Ben Bernanke said that he is open to the idea of additional monetary stimulus, “especially if the outlook were to deteriorate significantly.” In terms of guidance issued by a central bank, this is as specific as it will ever get. However, evidence of “significant deterioration” has not materialized, at least not yet.

The latest data coming out of the U.S. is that there are signs of some strengthening. In August, private employers added 67,000 new jobs. August new jobs numbers are far cry from employment numbers during boom years, although more jobs have been added than analysts have forecasted, and in the private sector at that. In addition, the U.S. Commerce Department reported that August retail sales increased 0.4%, which represented the second month of gains in the sector. Inventories also rose by a more significant one percent in July, which represented the largest gain in the retail sector in the last two years.

Yet, financial markets are not convinced that the Fed will leave the economy to its own devices. Judging by the recent performance of gold, it seems the market believes the Fed will indeed add more economic stimulus, whether there is strong evidence that it is needed or not. If more money goes into the financial systems, we could hit another six-foot brick wall — inflation — which explains why traders would be buying gold futures like there is no tomorrow.

Gold is the traditional hedge against inflation. Usually, gold bugs are the only ones screaming, “Inflation, inflation!” This time around, they are not the only ones in the choir. Speculation that the Fed will try quantitative easing has made currency traders particularly antsy. The speculative frenzy surrounding the Fed’s next monetary move has plunged the U.S. dollar against all the major world currencies, while Treasury bonds enjoyed a strong rally. Both markets are signaling that investors are betting that the Fed will lower yields on Treasuries issued in the future.

By the looks of it, it is not so much a case for the bull market in gold as it is for a bear market in currencies. Oh, yes, it is also about the market remaining unconvinced that the U.S. economy is recovering and fearing the worst — more economic stimulus, more debt, and inflation potentially rearing its ugly head at the most inopportune moment.

Today, he is a haunted man; haunted most likely by his unceremonious and irreparable fall from grace. As he testifies before the Congressional commission, his scorn for the proceedings is more pronounced on his face than in the words he says. But it is his words that need examining.

Predictably, Fuld does not think it was his or the firm’s fault that Lehman Brothers collapsed two years ago. Instead, it was the fault of the market that went insane in a short period of time; it was the vicious rumors that Lehman was essentially bankrupt that resulted in the firm being cut off from any credit lines; and it was the U.S. government’s fault for not lending Lehman the hand that it did later to, say, Goldman Sachs.

One Reuters commentator reporting from the Fuld hearing said it best: “Fuld is still hung over from his home-brewed Kool-Aid.”

On some level, it is understandable why Fuld would not feel inclined to own up to his mistakes. In front of him are possibly years of litigation, both in civil courts and before the industry regulators. But it is interesting from an anthropological level to analyze Fuld’s testimony, not looking for honesty per se, but for the spin in front of it. There is so much one can learn from the tangled web that people like Fuld can weave.

Fuld said that, “Lehman’s demise was caused by uncontrollable market forces, and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments. All of this resulted in a loss of confidence, which then undermined the firm’s strength and soundness.”

Sure, it is true that the summer of 2008 was insane and it is true that investors were so crazed with fear that they would have believed anyone and anything they heard about any financial firm, not just Lehman. What Fuld is omitting from his testimony is the fact that Lehman Brothers owed tens of billions of dollars in complex derivative instruments, of which most Wall Street players, including the ones working at Lehman, had no understanding. Had that not been the case, negative spin concerning Lehman would not be able to make a dent, let alone collapse the entire firm.

Fuld also mentioned that, during times of easy capital accumulation and easy money, the firm’s profitability and balance sheet prospered accordingly. Duh! No one had fiscal problems during the time of easy money. No one could resist the allure of doubling and tripling their balance sheets funded by thin air. But did anyone stop to think whether it all makes sense? No, not really, including Lehman Brothers and Richard Fuld.

I like this statement the best: “In 2007, when the U.S. housing market began to show signs of weakening, Lehman Brothers and many of its competitors had already accumulated large positions in what were considered less liquid assets. Many market observers, including government officials charged with oversight of the financial markets, believed that the problems in the subprime residential mortgage market were and would be contained.”

So, if observers and the government, which, incidentally, did not create dubious leverage-laden portfolios, hadn’t seen it coming, the same lack of foresight cannot be Fuld’s fault either right? Aside from the fact that Fuld is paid a pretty penny to have the aforementioned foresight, it seems to me that the “we-are-not-the-only-ones” defense is right up there with an eight-grader’s “dog-ate-my-homework” defense.

Of course, where would any Congressional hearing be without at least one conspiracy theory? Fuld said, “Lehman also proposed to government regulators certain measures that could have helped Lehman and bolstered confidence in the financial markets. Each of those requests was denied at the time. Tellingly, though, each measure was later implemented in some form for other investment banks during the days and weeks following Lehman’s bankruptcy filing.”

In other words, Fuld believes he was not only cheated out of a bailout, but also that his ideas were used to save Lehman’s rivals, such as Goldman Sachs, which was run at the time by Henry Paulson, who later served as the 74th U.S. Treasury Secretary. But is there some truth to it? Yes, but only to the extent that neither deserved help from hardworking Americans, whom they, along with the rest of Wall Street, have thrown into the depths of a recession not seen in a generation.

Although it appears Fuld would rather face a firing squad than admit failure, the fact remains that any financial institution is only as strong as is the confidence that its investors and depositors have in it.  Simply, without the public’s belief that a bank is solvent, there is no bank. When Lehman failed two years ago, it had forever lost that confidence. Clearly, that means Fuld is ultimately the one who has failed his investors, his customers, his employees and the American public. In my opinion, he fully deserves to be the poster boy of the crash of 2008 and to be chased through the courts until kingdom come.

Economic stimulus is nothing more than a government’s redistribution of money that was either borrowed through selling its debt or collected through taxation of its citizens. Accumulating more debt and the deadweight of heightened taxation are poor ways to create demand. According to some prominent economists, the entire concept is absurd, although I have to wonder where these voices of reason were when trillions of dollars in stimulus money flooded the global financial systems last year.

As it has been the case so many times before, the crash of 2008 and the ensuing credit and financial crisis have been more about politics than finding valid economic solutions. Whenever the global markets become anxious and whenever the policymakers jump into the melee with promises of long-term solutions and guarantees that nothing similar would happen again, politicians are typically the first to the gate with brave words and seemingly such deeds, too. History again demonstrated that politicians, bankers or regulators are always more reactionary than proactive when dealing with systemic economic issues.

On the other hand, no politician, regardless of how progressive they are, can win an election on a platform of doom. And this is exactly what the U.S. economic and social structures are facing — the platform of doom. It is possible that, for the next two decades, just like Japan, the U.S. could be stuck with no to minimal economic growth, with high unemployment, with deteriorating living standards, with worsening housing affordability, etc. While this is the likely ugly truth, no politician is so suicidal as to actually say it publically and/or try to run a successful political campaign on such a dark premise.

Of course, it is true that governments and central banks have certain tools in their arsenal that can help influence negative economic events. The only problem is that those tools are limited and their power is routinely overestimated. The deep-rooted and long-term systemic problems in the current economic models cannot be fixed with Keynesian economics, no matter how “revitalized” it might be. Fighting financial issues with government deficit is not the answer in the 21st century.

At this point, no one really knows if all this stimuli (read = excess money supply and financial maneuvering) are going to create long-term growth. Unfortunately, it is more likely that global government action has made things worse in the long term, despite providing some short-term relief. Our reality is troublesome, without a doubt. Poor regulation of the past cannot be solved with heightened reactive new regulation. More debt cannot solve entrenched debt problems. The creation of artificial demand through government measures cannot jumpstart economic growth on its own.

It is clear now that the end of financial crisis of 2008 did not yield sustainable economic recovery. Largely due to the steps taken to fight it, the global economy now faces drawn-out stagnation, demand and supply imbalances, deteriorating sovereign and other credit woes, as well as the potential for more asset bubbles. Governments’ answer continues to be throwing more debt at the problem. Does anyone really think this is actually working?

I was not the only one. Lawmakers in the U.S. were not impressed with Bernanke either. He was widely criticized for failing to identify the credit storm brewing in 2007. And, when the first signs of the subprime toxic volcano erupting started showing up, the Fed’s chairman was accused of failing to do anything about that, too. As a result, the negative sentiment towards the Fed was so strong earlier this year that there were open discussions about taking away its regulatory authority.

Now, with three-quarters of the year almost over, Bernanke is back and as strong as ever. On July 21, the Obama Administration successfully ran the financial regulation overhaul through the U.S. legislative gauntlet. The new law not only left the Fed’s monetary power untarnished, but it also gave it new powers over the U.S. banking system. These new powers are many and vast. To say that the Fed’s new mandate regulating Main Street is powerful and broad is an understatement.

I’d say change is good. However, it often comes with strings attached. In Bernanke’s case, his two mandates, regulating monetary policy and Main Street, are not only essentially different, but are also often in conflict.

On the one hand, as a monetary policy manager, Bernanke must fight like he’s never fought before to keep the fragile and anemic U.S. recovery going at whatever pace it can, as long as the recovery doesn’t stop or, worse, revert back into a recession. On the other hand, the Fed’s chairman, as America’s new regulator-in-chief, could be obligated to make certain difficult decisions.

For example, if there were a repeat of the crash of 2008, the Fed might be put in a position to force banks to preserve capital and tighten their lending. However, such Main Street policies would likely put a squeeze on liquidity again and asphyxiate economic growth, which, of course, is in direct opposition to the Fed’s original monetary policy mandate.

Is the Fed able to call both sides of the coin? I’m not so sure, having in mind the Fed’s track record in the past, when it had to cope with multiple roles. In addition, if the crash of 2008 has taught us anything, it is that monetary policy and bank regulation make for a very bad cocktail. So far, the only thing the regulators have made us swallow were taxpayer-backed bailouts, budget deficits, excess of money supply, interest rates being ultra-low, and the devastation of either deflation or inflation.

On the other hand, who, or what, is left out there to bring some order to the financial markets? It appears that Congress has looked and looked, and the only man they found still standing and fitting the bill is Bernanke. I may not agree with Congress that he is “the smartest guy in the room,” but I’ll contend that he is the only one willing to take the job.

But then came the crash of 2008, precipitated by the subprime mortgage and credit bubbles bursting in August 2007. What came out of it was the credit and financial crisis of 2008/2009, when the world economies were thrown into a whirlwind of recession that has forced governments around the globe to spend trillions of dollars trying to prevent a total meltdown of the global monetary systems. While the rescue operation may have been successful, it has only been successful to an extent. You see, in the end, someone, somehow, will have to pay for this monetary expansion.

At the same time, that also means that lean times are likely ahead, probably years. More than ever, it is of paramount importance to protect one’s wealth. The only way to do that today is to buy gold. Shape or form matters little; gold bars, jewelry, futures contracts, gold stocks, anything, as long as it is gold or gold’s proxy.

Some will argue that there is safety in government debt, too, particularly the U.S. Treasuries. On the face value, that is true, too; debt issued and guaranteed by U.S. government is indeed a safe place. However, most Treasury bonds today are issued in the environment of interest rates at record lows, which is pushing prices up and yields down. For example, the 30-year Treasury bond now has a yield of 3.77%, while the 10-year T-bond barely produces a yield of 2.63%.

At the same time, the U.S. national debt is closing in on $14.0 trillion, while government debt-to-GDP ratio is likely to pass the 100% mark. According to IMF, in 2009, gross U.S. government debt was at 85% of GDP. In 2014, it is expected to hit 108%. Things are not any better in the U.K. In 2009, the country’s gross government debt versus GDP was 69%, while it is expected to hit 98% by 2013.

U.S. GDP growth is bound to be slow in the next few years, while unemployment is likely to remain high. This will mean less money in tax revenues and, thus, less money to either maintain or pay off debt. As a consequence, the money supply will have to keep on increasing, debasing the value of fiat currencies even further, and causing the value of gold to rise. To put things into perspective, as already mentioned, since 2001, the U.S. dollar has lost over 30% of its value. During the same period, the price of gold futures has increased more than four times.

Global sovereign debt problems, little to no economic growth, stagnating corporate earnings, high unemployment rates, interest rates that are low, devaluation of major currencies, and less and less gold held in government treasuries could mean only one thing — another disaster of global proportions in the making.

While the total collapse of the U.S. dollar beyond salvation is not likely, the current economic landscape and the dollar’s role in it is truly frightening. I would not recommend ignoring it. The way I see it, the only way to protect your portfolios is to hold at least some real assets, including commodity monies, such as gold and silver.

In order to trade internationally, and pay for goods and services domestically, every country in the world has its own currency. However, when President Nixon stripped the gold standard in 1971, what was also stripped was any intrinsic value of the U.S. dollar. The International Monetary Fund (IMF) delivered the final blow to gold’s monetary status in 1973, permanently removing gold from the monetary system.

The primary reason for removing the gold standard is that, when a currency is backed by gold, it can expand only as much as the gold backing will allow it to expand. Consequently, the economic growth is inherently restricted, because the money supply is restricted to how much gold a country holds in its treasury.

On the other hand, when currencies are no longer constricted by gold or silver held in treasury vaults, what they morph into are fiat currencies. The simplest definition of a fiat currency is that it is a medium of exchange (for goods and services); only its intrinsic value is not determined by something tangible and valuable, such as gold, for example.

Instead, fiat currencies are based on something intangible and essentially valueless, because whoever has printed the money does not promise to either redeem it through a commodity or through any other fiduciary monetary form. As a result, since no fiat currency has any direct and/or legally binding connection to a tangible asset (the “commodity money” placed in the redemption context), no fiat currency has any real economic costs and, thus, there is no self-limit in terms of its supply.

How else can fiat currencies be valued? The only way fiat currencies can have value is when they are issued in a country that is economically healthy and politically stable. As these two major factors fluctuate, so does the value of fiat currencies. This why and how the value of currencies have such a huge impact on governments, businesses, financial systems and, ultimately, every man, woman and child on the planet.

Compared to stocks and bonds, which are typically traded in local markets during business hours in their respective time zones, currencies trade virtually around the clock, 24/7. It may sound as if global currency markets exist in their own world. On some level, that is true. But, in this day and age, no market is isolated from global financial systems. For example, U.S. Treasuries impact the value of the U.S. dollar, which in turn impacts trading in FX markets, which in turn impact the trading of stocks and commodities.

The U.S. dollar is still considered the world’s reserve currency. Therefore, if something is amiss with the dollar, it resonates deeply within the global monetary system. Of course, such interconnectedness cannot work in one direction only, as changes in the global monetary system also have significant impact on the dollar. In this loop are often factors such as changes in interest rates, corporate earnings, equity prices, currency prices, bond yields, inflationary pressures, deflationary pressures, unemployment, moneysupply, a credit crunch, debt levels, international trade…and the list goes on and on.

(To be continued in Friday’s issue)

What causes a depression? Typically, a depression happens after one or more asset bubble explodes, while the credit supply implodes and dries out. In contrast, most recessions are the result of heightened inflationary pressures and overstocked manufacturing inventories. So, what do you think: are we repressed in a recession or depressed in a depression?

Consider one more argument that it may be the latter. Central banks all over the world, not just in the U.S., have dumped trillions of dollars into the global economy. With that much money in the global financial systems, world economic output should be tremendous. Yet it is not, far from it, which only proves that this is not just another recession and that it resembles more and more a bona fide depression.

All that is growing these days are the unemployment lines. True, there are no soup kitchens for the poor yet, but I suspect there wouldn’t be any just yet, as long as the government is mailing the checks each week for 99 weeks to the currently estimated over 10 million unemployed Americans. Whichever way you look at it, there is nothing simple or ordinary about this economic downturn.

How do things look in a depression? Things change. People change. How they perceive debt changes. How they behave in malls changes. Depressions leave much deeper scars than recessions. They leave people traumatized and take years to recover from, to forget foreclosures on beloved homes, to forget collection agencies’ calls, to forget the humiliation of not being able to provide for one’s family.

Perhaps this is why we are seeing home sales sliding to 15-year lows. Perhaps this is why bond markets are sounding every warning bell they have in their arsenal. Perhaps this is why yields on U.S. Treasuries have gone Japanese on us.

Here are some disturbing facts. The 1930s depression did not create declining economic output every quarter. In fact, during the first impact from 1929 to 1933, no more and no less than six quarters had produced increasing GDP data. On average, during these upturn quarters, the economic output growth rates were known to achieve eight percent on an annualized basis. However, since any growth, let alone an eight-percent GDP, was virtually unsustainable, no one in their right mind could declare the recession as over. Incidentally, stock markets flew into the stratosphere in the early 1930s, gaining 50% in the aftermath of the Great Crash simply because the confusing GDP data had lulled everyone into a beautiful illusion that the worst was over.

I’m tired of this emotional rollercoaster, too, of all the ups and downs, hopes inflating, hopes deflating. But if emotions are taken out of the equation and the equation viewed realistically, some harsh truths are undeniable. The Federal Reserve has cut the funds rate to zero, like Japan, and its balance sheet is in tatters. The U.S. budget deficit has swelled to nearly 10% expressed in relation to GDP, which is actually double the deficit vs. GDP ratio created during the 1930s, when Franklyn Delano Roosevelt was running the show. Finally, decades of easy money have left U.S. households, businesses and the government with $6.0 trillion of debt that has to be retired one way or another.

I’m risking the dubious honor of being called a “permabear.” But it is not as if I want to be über-pessimistic. Actually, on my off days, I’m quite an optimist, as well as a realist. Instead of looking for someone else to tell me if it’s raining outside right now, I prefer to open the window and see for myself. And the view from the window is telling me that there is no quick and easy way out and that I should read the market better within the still dismal macroeconomic context, not while blinded by short-lived stock market rallies.

I don’t speak “car” well, but if I were to compare Japan, the world’s third largest economy, to a car, I would have to say that Japan’s economy has been driving in reverse for so long that it may have forgotten what it means to at least shift to “P.” And, as the fragile U.S. economy most likely is headed for the double-dip recession, dragging with it other world economies, kicking and screaming, things are not looking up for Japan. Quite the contrary.

Just like policymakers in the U.S. are contemplating adopting further stimulus measures, Japan went beyond the contemplation stage and went straight for expanding its $236-billion bank credit program by a third. And, as more money was pledged towards boosting the domestic demand, the currency markets had an unpleasant jolt when the yen started rising sharply against the U.S. dollar and euro. To illustrate, since April of this year, the yen has increased 12% against the U.S. dollar.

It is quite a paradox; Japan, with its red-hot, sky’s-the-limit currency and its sickly yellow, weak economy. Let’s just say there were quite a few FX traders and currency analysts scratching their heads recently. What most are also seeing is that the yen might be miles away from hitting the resistance level. At the same time, what the yen’s ascension leaves behind is a growing aversion to any risk-taking and further deterioration of trade imbalances.

What is the yen doing to Japan’s manufacturing sector? Well, it’s just killing it. According to a number of government-sponsored surveys, about 40% of Japanese manufacturers fear that, unless the yen stops rising, they might be forced to shift their production lines abroad where labor and facilities are cheaper at least.

Is there anything that can stop the yen? Not much, other than pulling together a massive government stimulus package together with similar in size and intention stimulus packages from other central banks. At the same time, I don’t see how that’s going to happen again!

What Japan has going for it? Luckily, the country has a few saving graces. For example, before the yen started its new rise to infamy, Japan had considerable trade surpluses and one of the highest domestic savings rates in the world. That made the country one of the few remaining providers of real capital in the world, not just printed paper money. As a result, during the recession of 2008/2009, Japan’s currency, along with the Swiss franc and the greenback, was considered a safe haven, to which many investors flocked. Even the Chinese have started diversifying away from U.S. bonds and have been stocking up on Japanese bonds.

What on earth is pushing the yen so high all of a sudden? Japan is getting older and fewer babies are born into that part of the world. At the same time, Japan is exporting more, because the domestic demand is shrinking. Adding to the pile is Japan’s hoarding of foreign assets, including bonds and equities, although recently Japan started repatriating some of the capital back into Japan.

What is causing all this nervousness? Among the indicators from last week are orders for durable goods that barely moved in July by 0.3%, new home buys that dropped by 12% to the slowest annualized growth rate since recording commenced in 1963, and sales of existing homes that plummeted off a cliff by 27.2% to the lowest rate since 1999. Even more frightening was the number of 500,000 Americans asking for unemployment benefits just last week, although that probably explains what is happening to the home buying.

Without a shred of doubt anymore, the U.S. economic recovery has hit a major roadblock, which has left many economists and policymakers wonder about its sustainability without additional stimulus. Making things worse is the frail psyche of American consumers and investors who are still very much shaken by the crash of 2008.

The U.S. unemployment rate sits stubbornly at 9.5%. No wonder consumer confidence is hitting new lows week after week. No wonder also that businesses have little to no motivation to start hiring again or investing in new projects. And those who still have their jobs are hoarding cash and trying to replenish their net worth lost during the credit and financial crises of 2008 and 2009. Adding to the problem are lenders that are facing tighter regulatory conditions and, having learned their lesson, are again reluctant to lend, thus impeding new spending and investment.

What are policymakers to do? How can they stimulate consumer confidence without resorting to further stimulus?

On August 10, during the Federal Reserve’s Open Market Committee meeting, Ben Bernanke said that the Fed would continue with the measured buying of Treasuries to ward off any interest rate pressures. This represents a departure from the Fed’s previous plan to exit the debt market and start working on resuscitating its balance sheet. In fact, the Fed is likely to take quite a detour from quantitative easing, if the disappointing data keep on coming, which is also very likely.

From what I can tell, while nearly everyone is afraid of the double-dip recession, no one is willing to come out flat and say, “Yes, it is coming.” What we are hearing, however, are probabilities. Goldman Sachs, for example, puts the odds at 50%, while Nouriel Roubini, one of a handful of economists who actually predicted the crash of 2008, puts them at over 40%.

I don’t want to call out probability percentages either, simply because I don’t think that’s what the current economic funk is about. When surviving a credit-induced recession, the recovery is never easy. There are ups and there are downs, some more pronounced than others are. We just have to get used to the idea that economic output is going to be sluggish and moving at a snail’s pace for the next couple of years, if not more.

Yet, one more piece of proof that the crash of 2008 has changed everything is that, almost two years later, with virtually no inflation in sight, investors’ infatuation with gold is returning. Even some of the world’s most famous hedge fund managers, such as George Soros and John Paulson, have fallen under gold’s spell. Judging by recent quarterly filings with the Securities and Exchange Commission (SEC), Soros Fund Management reportedly increased exposure to the SPDR Gold Shares exchange-traded fund (ETF) to nearly 13%, compared to a mere seven percent reported at the end of the first quarter.

Additionally, further rebalancing the hedge fund, Soros reduced the fund’s exposure to big names on the U.S. stock exchanges, such as Verizon, Pfizer and Wal-Mart Stores. In dollar terms, Soros Fund Management reduced exposure to North American equities by 42% quarter-over-quarter, from $8.8 billion to $5.1 million. As a result, the fund’s largest holding as of June 30, 2010, is the SPDR Gold ETF, with quarter-end market value of close to 600 million dollars.

Of course, there is speculation about why hedge fund managers all of a sudden would factor in gold and its related products. It always happens as hard cash is converted into gold bars. On one hand, the consequence is higher prices or the creation of an inflationary price environment. On the other hand, hedge funds are sounding the warning that a correction is on its way.

The fact that someone is investing in gold ETFs is not something that would raise a red flag. ETFs dedicated solely to bullion were introduced a few years back to make it easier for ordinary investors without adequate skills to invest in gold and diversify their portfolios. These days, regardless of whether you are an ordinary investor or a hedge fund, it is all about protecting your portfolio from sovereign debt explosions, volatile currencies, insanely huge budget deficits, etc. No wonder gold has again become the safe haven, even if there is no sign of inflation on anyone’s horizon yet.

True, jewelry demand is decreasing. But investment demand is picking up the pace, more than offsetting the shortfall from the decreasing demand for jewelry. This has prompted many analysts — and I have long agreed, too — to believe that gold’s upward price momentum is very likely to remain strong and trending upward for the next five years, if not more.

Note that, while the U.S. economy is currently operating under the dark cloud of deflation, the risk of higher inflation is also still very real. The amount of global government stimulus has reached gigantic proportions, which is very likely to start fuelling inflation, and sooner rather than later at that. Adding to the global fury hungry for more gold is the fact that the annual mine output has remained flat and/or trending lower for years now, signaling that the supply part of the equation is going to remain weak for years to come.

As a result, we are seeing gold price forecasts in the near term from $1,200 to $1,300 per ounce, almost without any effort. Note that, on Tuesday, gold futures for December delivery traded at $1,233.40 an ounce in New York. Perhaps even those optimistic forecasts are not optimistic enough and we could soon start seeing gold forecasts predicting prices of $1,500 to $2,000 an ounce again.

Last week, we learned about U.S. retail sales edging slightly higher in July, the first time in the past three months. The U.S. consumer confidence also rose somewhat, albeit beating analysts’ estimates by a narrow margin. After months of such lukewarm performance, most of the headlines celebrated little, except that the economic data published last week were not completely awful.

So, there is doom and gloom galore. As “The Wall Street Journal” survey of 53 economists summarized it, there are “too few jobs, too little wage income and too little consumer spending.” It seems we all have a good and realistic handle on the big picture, but little or no understanding of what is likely to happen next.

After the almost collapse of the global financial system less than two years ago, there have been many new “economic prophets,” forecasting everything and anything, from interest rates to equity prices to inflation to deflation. Their views are often as divergent as they could be. Yet, learning the hard way from recent history, a remarkable number of the prophets are likely to be wrong. I suppose having the information is not everything.

Perhaps it is time to acknowledge that the future cannot be predicted and that, these days, not even educated guesses are likely to cut it. Your throw of the dart at the board could be just as good as the throw of any of the smartest guys in the room.

If we were to give up on the economists, what about the politicians? It seems they are all talking the good talk. However, at some point, the survival instinct is going to kick in. Come election times, no one is going to preach absolute truth and nothing but the truth, because such truth is ugly and scary and can cost them votes. In the end, the government is more likely to succumb to the time-honored tradition when dealing with black holes on the balance sheet, which is to crank up the printing presses and inflate its way out of debt.

We have learned little from our history, it seems. Policy mistakes have happened, are happening, and will continue to happen. We’re reliving one of them right now, with world governments each going about spending reduction their own way, sometimes a misguided one. But that is the reality. If indeed the effort is there, as the need certainly is, to reduce government spending, then everyone, from consumers to investors to business, must understand that the recovery is likely to lose momentum, unemployment will remain high, and consumers will entrench themselves in the back rows.

At the same time, if governments plagued with sovereign debt continue straining their threadbare balance sheets with more spending, they are bound to get their rude awakening sooner rather than later. Just because the bond markets are keeping quiet about the budget deficits and ultra-low-interest-rate environments, it does not mean they will stay so indefinitely. Because, if and when the bond markets become unhappy, they will do so without a word of warning and will do so viciously. Just look what happened to the Greeks. They received no heads-up either.

Last week, a barrage of bad news hit the financial press. First came reports showing that more Americans have been laid off and were seeking unemployment benefits. Then came the news that mid-Atlantic states’ manufacturing had declined to the lowest levels this year. Finally, most North American markets took a beating. Adding to the general feeling of gloominess was the Congressional Budget Office (CBO), which came out to say that the recovery that allegedly started mid-2009 was wishy-washy at best.

CBO is non-partisan, so its predictions should have more credibility since it does not cater to anyone. Anyway, the CBO predicted that the U.S. economic output would grow only two percent between the fourth quarter of 2010 and the fourth quarter of 2011. As for the unemployment rate, it is expected to remain high at least until 2014, when it may drop to five percent, barring any serious withdrawals into a double-dip recession. Partisan or not, someone had to ring the wake up bell on the collective denial that government stimulus policies have worked and that private demand was gaining momentum.

Not too long ago, as the first quarter ended with a loud bang, the U.S. government and policymakers perceived such performance as proof that they had made the right moves in response to the crash of 2008. What happened in the months since unfortunately proved them wrong.

President Obama was the first to blink. Last week, he urged Republicans to stop blocking his bills just for the sake of blocking them. Currently on the electoral menu is the $30.0 billion that the Administration wants to give community banks and another $12.0 billion it wants to provide to small businesses in the form of tax cuts. But, with mid-term elections threatening to tilt the balance of power in Congress, Republicans have little incentive to work with the President. Why would they, when most Americans think it’s the President’s fault that the recovery is not going as well as everyone was hoping it would. Yet, what most seem to forget is that, without all levels of government working together, there will be no recovery.

“There will be plenty of time between now and November to play politics. But the small business owners I met this week, the ones that I’ve met with across the country this year, they don’t have time for political games. They’re not interested in what’s best for a political party,” said President Obama last week.

Republicans have ammunition in their own arsenal, too. Their main weapon is refusing measures that would further widen the budget deficit. And therein lies my own conundrum. I’m truly afraid of the budget deficit, predominantly its massive size. On the other hand, I understand that, once the road of aggressive economic stimulus was taken and both the old and new Administration, together with Congress, have agreed on it, I don’t see an easy way back or away from it. Still, what frightens me the most is the stalemate that leads to indecisiveness and ineffectiveness, the kind that is stalling things right now.

The vision involves underground, slow burning, oxygen-fuelled fires forced upon a mixture of oil, water and sand at a toasty 500-600 degrees Celsius. As counterintuitive as it sounds, these underground fires, notwithstanding the invoked images of hell, could be the cheapest way out of the conundrum that the meaningful and economically viable exploitation of oils sands represents.

I was curious about these fires burning the oil sands to produce crude oil. In the lab environment, huge test tubes are used to recreate the closest possible analogue to the oil sands of northeastern Alberta. Fuelled by air, these slow-burning fires slowly move down the tube, but burning only about 10% of oil, yet creating enough heat and pressure to free most of the crude trapped in the sand without using dangerous chemicals, loads of water, vast amounts of natural gas, or ugly open pits. The only thing needed is air that is forced into the oil sands at high pressure.

Such a virtually negligible environmental footprint that this new technology of exploiting oil sands would leave behind represents a dramatic departure from how oil sands are currently harvested. In contrast, now visualize open-pit drilling, steam-assisted gravity drainage (SAGD) and all the pollution that such technology creates. First, SAGD requires vast amounts of natural gas to boil water into steam, which is then used to heat the bitumen to separate the oil from the sand.

Of course, if it were easy, underground fires would have been a solution already in full implementation. The problem with underground combustion is not liberating oil from sand, but rather how to bring that oil to the surface. The SAGD technology creates enough pressure to propel the separated oil to the surface, much in the same way that traditional oil drilling does. With slow-burning fires deep beneath the surface, there is no such anti-gravity catalyst.

Additionally, although the combustion method is very efficient economically, there are other downsides, such as that it burns the well completely out. As the fires burn the bitumen, they leave nothing in their wake. They are also difficult to control and it seems that the extracted oil is not always completely free from sand, so further refining may be required.

The good news is that many global players have shown interest in developing this technology and making better use of their oil sands properties. The bad news is that even more have abandoned their “combustion pursuits,” too, particularly major energy companies in the U.S. and Canada. Those left in the playing field are limited largely to Romania and India, while the entire world’s in situ combustion-produced oil is about 30,000 barrels per day (or the utterly irrelevant 0.00035% of total global production of crude).

Where the picture of oil sands is changing and what is keeping me interested are smaller energy players in North America that are trying to return to the in situ combustion-produced oil. As the COO of mid-sized, Calgary-based Petrobank Energy and Resources Ltd. put it, “This can play a very big role in the oil sands. It has the potential to replace SAGD. I think that’s what people are looking for: a technology that will enable them to produce from these difficult resources with better efficiency and less environmental impact.”

Here is the catalyst that may propel large players’ return to the combustion method. The main issue with the SAGD is the enormous usage of water and natural gas. According to some estimates, companies currently exploiting oil sands could use four times more water and natural gas by 2030 than today. In other words, they might find themselves without both! Whereas air is not likely to be in short supply for the foreseeable future.

The in situ combustion method has many powerful arguments on the financial side of it, too. It has been estimated that a combustion project may require up to 26% less money than the SAGD, because it is much easier to compress air than it is to buy natural gas. With savings like those, profits from combustion-extracted oil could be massive.

To be fair and not to get carried away by exciting technologies, I should say that the oil sands are notorious for slow acceptance of different ways of thinking. The SAGD was invented over 30 years ago. Yet, it was not until early this year that one of the major SAGD projects has scored the first significant payout in the entire sector. Understandably, after billions of dollars have been poured into SAGD, switching now to something different is bound to meet resistance. On the other hand, it appears the SAGD technology has an expiration date of its own, which is why skeptical minds could be prevailed upon to come around to combustion.

History shows that balance sheet recessions are anything but your plain vanilla kind of recessions. Typically, it can take between five and 10 years to transition to the next sustainable expansion cycle and marked bull market. And, on the road to sustainable recovery, the journey is laden with numerous setbacks.

I know I sound like another Dr. Doom, but I’m sure I’m seeing the same things you are — we haven’t progressed that much compared to a year ago, have we? What may obscure the big picture for many are the government spending-induced rallies in the equity markets. But not much has changed on the unemployment front and the gigantic deficit front. I’m afraid that the illusion of recovery is nothing more than an illustration of a typical philosophical loop humans are so prone to: wanting to believe that the market knows best when it is those believers who are the market.

By all means, since the March 2009 lows, the market has bounced and rallied nicely. But similar bounces and rallies occurred off the Great Depression lows in the 1930s. In early 1930, the equity markets gained close to 50% following the crash of 1929. A huge part of the euphoria must have been rooted in people’s overwhelming desire for the worst to be over. Yet, when we think of the 1930s rallies, the images typically conjured up are not those of joy and of profit-making, but those of despair and loss.

I agree that, while there are certain similarities, the Great Depression and the Great Recession are not entirely alike. What we are dealing with is perhaps more understandable if we transplant it into the context of the post WWII era, for example. Unwinding of the excesses created during the credit cycle on steroids that last nearly a decade is like moving mountains — nearly darn impossible.

The first lineup of baby boomers is retiring, leaving behind a lesser pool of people capable of buying obscenely expensive homes. The Fed is realizing that the U.S. is on track to follow in Japan’s footsteps right into a decade or more of severe deflation. The U.S. balance sheet is triple its normal size and heavily weighted down with the budget deficit of $1.44 trillion, representing approximately 10% of GDP. The number of officially unemployed persons has exceeded over 14 million, or 9.5%, while the unofficial number is much higher at over 25 million unemployed.

I believe that money can be made in any market, but I believe more in recognizing when the game has changed. We are operating in an entirely new context and the old rules of thumb most likely no longer apply. The lows we are currently seeing in many market segments are not the same lows we are accustomed to seeing when the economy hits the bottom. These lows could be disguised black holes, because there is simply too much debt polluting individual, corporate and government balance sheets. Don’t forget the deleveraging that has happened so far has just touched the tip of the iceberg. We are still years away from truly repairing our balance sheets, if this is possible at all.

I think that the stages of emotional recovery almost perfectly apply to the stages of economic recovery from the crash of 2008. We have survived the stage of confusion and agitation and in my opinion are now deeply in denial. If and when we emerge from the denial stage, we will likely spend the next little while angry and depressed before we accept the new reality. Once we accept the new norm, it will still be a while longer before we adjust to it.

Alas, according to the recent official estimates, of which the world learned only last week, Greece’s recession deepened in the second quarter. At the same time, the country is struggling under the austerity measures that the government is ramming down its throat hard and without mercy. The methods may be questionable, but appear commensurate with the calamity that the country is facing.

Compared to the first quarter of this year, Greece’s GDP dropped 1.5%, largely due to the fact that the government has turned off all taps and reduced spending to what seems below even the bare minimum. Additionally, comparing the recent quarter to the same period the prior year, Greece’s GDP nosedived even further by 3.5%.
Even taking into account 2010 changes in methods of calculating Greece’s GDP, we are still talking about a dent in the country’s economic output the size of the Grand Canyon.

Meanwhile, the unemployment rate hit 12% in June, increasing from the über-marginally better May number of 11.9%. However, compared to the second quarter of 2009, the decline of the unemployment rate is more tangible. At the end of June 2009, Greece’s unemployment was bad, but bearable at 8.5%. At the end of June 2010, it was 10 basis points shy of the high 10-year unemployment rate of 12.1% reported in February of this year. The most affected were young people. Almost one in three Greeks between the ages of 15 and 24 is unemployed. That translates into an unemployment rate in that age group of 32.5%, compared to the 25% reported in May 2010.

What started the avalanche was the sovereign debt iceberg that revealed all its ugliness when the new Socialist government revised the inherited budget deficit. It did not help that the new government had little to do with expensing through taxpayers’ accounts. The gap of 13.6% of GDP was difficult to swallow, prompting the government to introduce austerity measures that are supposed to narrow it to 8.1% by the end of 2010.

The whole world knows how profoundly Greeks hate living with their belts tightened and cushy, publicly funded benefits taken away.
But they can protest, strike and vandalize public property all they want. The fact remains that, to avoid going bankrupt in May, the Greek government had to make tough promises to its EU partners and the International Monetary Fund. The biggest promise involved austerity measures and cutting the budget deficit to 8.1% at any cost, which shocked so many Greeks out of generous salaries and pensions, while hiking personal taxes.