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The dumb money is fairly easy to spot. It's the money that always shows up late to the party, wearing yesterday's fashions. It watches TV and thinks the reality shows show reality...it thinks Ben Bernanke is a great economist...that the SEC protects investors from fraud and misrepresentation...and that Tim Geithner makes sure the economy keeps running smoothly.
It's the dumb money that thinks you can correct a generation-long period of credit growth in 24 months...with less than 10% unemployment...
Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.
Yesterday, not much happened. Stocks held steady. Oil too. Gold fell $8...closing at $952. And the dollar rose to $1.39 per euro.
But while the dumb money has its eyes on the stock market, the smart money is watching the economy.
Unemployment has risen to 9.4 million in the United States. Experts think the rate of job losses is slowing. But month after month, more and more people are not collecting wages. Instead, they're coming to rely on handouts from the government. The press reports that one in every six Americans is now on some form of government life-support. (More on that...tomorrow...)
Same thing in the housing sector. Robert Shiller says the housing slump has already knocked prices down 32%...and has a long way to go. This alone guarantees a long period of adjustment. Bad decisions - usually those with huge debt bombs attached - will blow up...then they need to be cleaned up...and then, after the destruction, comes the constructive rebuilding. All that takes time...years.
People whose houses are going down in price...and whose incomes are falling...do not buy more stuff. Sales go down...profits go down...and dividends go down. Why would investors buy stocks when earnings and dividends are falling? Good question. Pull your shorts up, dear reader...pull your shorts up.
House prices are still going down - but not as fast. Still, big resets, defaults and foreclosures are still on the way - in prime and Alt-A mortgages.
Meanwhile, when companies don't sell...they don't ship either.
The trucking industry says traffic is off 13% from a year before - the biggest drop in 13 years.
Airplanes are carrying 21% less cargo. And the commercial airline industry says it is losing $9 billion this year.
As for shipping...well, don't even bring it up. Shipping has been in a catastrophic slump since last year - with cargo rates down 90%.
Obvious conclusion:
"Every smart trader I know is massively short the stock market," says Jeff Clark.
You should be short the stock market too...or look to the 'anti-stock market'. This market can never go bust...and it doesn't care about earnings reports, clever accounting, analysts' upgrades or downgrades. But the best part of this 'anti-stock market' is the virtually unlimited profits. In fact, the nastier the stock market gets, the more money readers have the chance to make in the Anti-Stock Market. Just ask the readers who've already seen 85%, 72%, 67%, 100% and 80% gains so far in 2009.
Bill Bonner