The Long Sideways Slide...

The Dow dropped 104 points yesterday. The dollar rose. And gold fell off $20... to $1,143.

Gold is clearly correcting.

Whether or not it is the big correction we’ve been waiting for, we’ll have to wait to find out.

But we wouldn’t be surprised to see stocks joining in the correction... and then taking the lead; we’re still in ‘bounce mode’.

All bounces come to an unhappy end. This will be no exception.

If you step back a bit further, you could see it in a different light.

Ten years ago, we were warned of a long, Japan-like slump.

Then, the stock market fell and the economy went into a recession. But the downturn didn’t last long. And in the bubbly years that followed, our alert was quickly forgotten – especially by us!

But now, 10 years have gone by. The S&P 500 has lost 20% of its value during that period. Wages and income are static. And there is not one single more job in America than there was then.

It was a ‘Lost Decade’ for the American economy.

So get ready...

How about a depression that lasts for 20 years?

It could be on its way.

In December exactly 20 years ago, Japan’s stocks closed at an epic high – 38,957 for the Nikkei 25 index. Last week, that same index closed at 9,977.

The Japanese are idiots.

Why else would they allow a 20-year bear market?

Why else would they permit their economy to slide sideways for nearly an entire generation?

Where is the Japanese Bernanke?

This is almost the same question we posed readers 10 years go.

Except then, we asked: where is the Japanese Greenspan?

Greenspan... Bernanke... it didn’t seem to make any difference.

American central bankers seemed to have magical powers, at least compared with their Japanese counterparts.

They seemed able to succeed where the Japanese failed...

American economists mocked the Japanese 10 years ago. But what goes around, comes around...

Japanese and American economists go to the same schools.

They have the same silly ideas.

They are equally incompetent, as near as we can see.

And yet, the Japanese have suffered one ‘lost decade’... and then another... while Americans went from bubble to bubble... .

But, maybe our first idea was right after all.

After we were warned that the country could follow on Japan’s heels... entering a long, soft, slow depression... .the Greenspan Fed and the Bush federal government opened up with all cannons.

They blasted away on both fiscal and monetary fronts... ending up with the biggest barrage of stimulus the world had ever seen.

And what happened?

They inflated another bubble... bigger and more dangerous than any before it.

Now, that bubble too has blown up. And now we look around.

Once again, the Bernanke/Obama team is firing every gun, just as the Greenspan/Bush team did in the early 2000s... only more of it.

But this time, it’s not having the same effect.

Asset markets are bubbling up.

But the depression won’t go away.

Unemployment is over 10% and still increasing.

This is not another ‘jobless recovery’ like the one in 2002-2003.

This is no recovery at all.

Then, we look back at the last 10 years.

What do we see?

Instead of making economic progress, we see a nation making economic mistakes.

And, under the leadership of the Obama/Bernanke/Geithner team... they’re still making mistakes.

The same sort of mistakes. Only bigger ones. And so we have to wonder...

Maybe the next decade will be ‘lost’ too.

Stocks have gone nowhere for the last 10 years, but they are still expensive.

On average, they sell for 50% more than the long-term average P/E. Usually, when they are this high, the next generation produces piddly gains.

Could it be that, 10 years from now, we will look back without having added a single dollar of net return? Yes... it is quite possible. Likely even.

That will mean a total of 20 years with no profit for stock market investors.

Which would serve them right.

You’ll recall, perhaps, that at the end of the ‘90s it was widely advertised that the surest, simplest road to riches was the stock market.

The Dow was supposed to go to 36,000, according to one well-publicised forecast.

All you had to do was ‘buy and hold.’ You’d get rich for sure.

Of course, it doesn’t work that way. As soon as investors all come to think the same thing, the only sure thing is that what they all think is balderdash.

Well then... what do they think now?

Gold Correcting Itself, Will Stocks Soon Follow?

What's driving gold's fall?” asks Dominic Frisby in today’s Money Morning

“Surely everyone can see the fundamentals behind gold?

That may be, but short-term speculative capital does not care about long-term fundamentals. It is looking for quick gains and it appears to have driven gold into some kind of short-term, blow-off top.

“As we head into year end, there are a lot of fund managers who will want to lock in their profits for the year.

I’m afraid that means they will sell their gold – and anything else they own that has done well – at the slightest hint of a turn in the markets, because they will want to secure their gains (and their bonuses) on what will have been an excellent year.

That’s what we saw on Friday and why the market fell so hard, so fast.

“In the short term, this does not bode well for any market – except one.

It may be that we are finally seeing the end of the ’Great Reflation Trade’, this astonishing rally out of the crash.

For the large majority, locking in profits will mean locking in US dollars. And we have repeatedly said that it’s the US dollar vs everything else.

If it rises, stocks will fall, commodities will fall – even corporate bonds and UK house prices may start to fall.”

“Both Gold and Oil traded lower, although Gold was very resilient for most of the session, holding above $1150.

“However later in New York, as the Dow once again fell into triple digit loss territory, Gold finally triggered stops under $1145 and then $1135, trading quickly to $1125 by the end of the New York session.

“The price has steadied in Asia overnight but with little yet seen in terms of a bounce ahead of the European opening.

“There is no doubt this is capitulation of long positions perhaps more than short selling, although there will of course be an element of that involved.

“How far can we go down from here? Well a test of the neckline, around $1025-30 can’t be ruled out under the current market conditions. However if I see that level I might well be buying…”

“There is a darker reason which, if left unsolved, could see the Pound really smashed next year, especially if there is doubt surrounding the outcome of the upcoming general election.

“The evolving row between the chancellor and the board of the Royal Bank of Scotland regarding Bankers bonuses is a potential catalyst for the demise of the City of London as a leading financial centre.

“The prospect of French-led European authorities having jurisdiction over the City is also causing a degree of panic. This is not helped either by comments from French Prime Minister Sarkozy.

“The current stance by the UK government is also once again playing with fire in terms of the City. As usual the government is trying to appease European authorities by bashing the London bankers.

“The prospect of UK bankers leaving London in droves for the US is live and the government is seemingly bringing it on.

“With the City of London responsible for some 30% of our GDP this has potentially huge implications for the UK economy.

“This is a situation that has potentially massive implications for the Pound in the long term.”

What do investors all think now?

They believe two contradictory things.

On the one hand, everyone says the dollar is doomed.

On the other hand, they all seem to want dollar-denominated US Treasury bonds.

But actions speak louder than words.

They may talk about the end of the dollar; but that is what they still own.

And that is what they’re still buying – via US Treasuries.

So... we want to be short US Treasuries for the next 10 to 20 years.

But wait. Isn’t it too soon?

Ah, there’s the rub. Treasuries are approaching a major peak. Maybe they are there. Maybe they aren’t.

“What bothers me is that we still haven’t had that other major leg down,” told

“It’s not natural for a bear to take a chunk out of asset prices... and then just go away.

Typically, the assets bounce back... and then the bear takes another chunk out of them.

“Since we haven’t had that next leg down... we have to assume it’s still ahead. But investors seem totally unprepared for it.

“When it comes, they’re going to panic.

They’re going to sell shares all over the world.

And they’re going to seek safety... where?

They’re probably going to turn to US Treasury bonds. Treasuries will go up, not down...

“Now the funny thing is that moving to Treasury bonds will help the US government finance its deficits... and possibly stretch out the depression for years.

“As long as the dollar is in jeopardy, the feds are in danger.

They might not be able to finance their deficits. Which means foreigners... and investors generally... could walk away from the dollar at any time. That would cause a major crisis.

“If the feds couldn’t finance the deficit with borrowed money... they’d be forced to print it... causing hyperinflation.

“As long as they can finance it, on the other hand... .we could face a long depression.

“That’s the risk that no one is paying attention to... and no one is prepared for. That’s why it seems like the most likely outcome.

A long, slow, on-again, off-again depression... just like we forecast 10 years ago.”