We received a letter snooty letter recently accusing us of confirmation bias. Maybe we are only capable of seeing the bearish side of the story?

According to good old Wikipedia, confirmation bias is “an irrational tendency to search for, interpret or remember information in a way that confirms one’s preconceptions or working hypotheses.” Put simply, it means you look for information that agrees with your own perspective.

In our case, we guess that means ignoring idiots like Paul Krugman, who tells us that we can spend our way out of a depression and the do-gooders in the Obama administration, who tell us that everything will be okay and that we’re about to witness a miraculous V-shape recovery. (Just like when President Hoover told Americans in 1932 that “prosperity was just around the corner.”)

And we guess it means paying attention to those who called this crisis ahead of time… guys like Will’s father,

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Say goodbye to the US dollar as the world’s reserve currency. Writing in the Washington Post, Nobel Prize-winning economist Joseph Stiglitz says America’s massive deficit means a new global reserve system is approaching.

The domino effect is straightforward: Higher deficits spark market concerns over future inflation; concerns of inflation contribute to a weaker dollar; and both come together to undermine the greenback’s role as a reliable store of value around the world. Right now, with so much unused capacity in the American economy and so much unemployment – likely to persist for at least another year or two – the more pressing worry is deflation (a general decrease in prices), not inflation. But as the economy eventually recovers, the possibility of inflation will loom, and with forward-looking markets, worries about the future often play out in the present. Anxieties about future inflation can lead to a weaker dollar today.

Of course, a new

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Where are we now? It’s a question we’ve been grappling with here at Notes since the bizarre events of March 9, when equities took off on a wild run. They haven’t stopped since.

The bull run/bear market rally has had three major phases. This from our favorite underground analyst, David Rosenberg:

1. March 9 to May 6 when financials led the way

2. May 6 to July 10 when it was all about defensive growth and strong balance sheets (tech and health care leading the way)

3. Since July 10 it’s all been about basic materials and consumer discretionary stocks.

Whatever way you look at it, however, it’s clear that we underestimated the level of euphoria backing this rally.

The recent run-up in stocks has been closely linked with the “green shoots” hypothesis, as we pointed out in yesterday’s Notes. We’re deeply suspicious of this hypothesis, however.

First, the data points don’t support a V-shaped recovery, something the green

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Another underground investor mowing down the green shoots is Doug Casey of Casey Research. We know Doug well. He owns land in Argentina’s Salta province. And he’s a frequent visitor of Notes HQ. 

Last time he was down, we went out for a big steak dinner in the Palermo district of Buenos Aires, where our offices are. After dinner, Doug regaled us with stories of his near death experiences in Third World countries. Doug has made fortunes in countries that most people couldn’t pronounce!

Doug is very contrarian, and he “lets the bastards have it” like no one else we know. It used to be that even in front of an audience full of anarcho-capitalists Doug would clear out a few seats.

But times they are a changin’. At this year’s Agora Financial Symposium in Vancouver hardly anyone left their seats during Doug’s speech. Like James Dale Davidson, he believes that

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Green shoots are okay if you’re a gardener. But what if you’re an investor? Here  at Notes believe investors must realists about the markets. As we like to say: “Hope for the best, but prepare for the worst.”

So today, we want to give you the other side of the green shoots story as told by underground investor James Dale Davidson. James is a good friend and one of the most farseeing investors we know – he’s been making money from economic collapse for over three decades. And he was one of the first to predict the current meltdown in his 1994 book,The Great Reckoning: Protecting Yourself in the Coming Depression.

We’re lucky enough to have James work with us on two paid-for investment research services, Strategic Investment and Crisis Strategy Alert. This means we’re one of the first to read James’s monthly reports on profiting in the downturn.

James has been dead

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Long-suffering readers will be aware of our low opinion here at Notes of government economic statistics. The truth of the matter is that many of them are fudged. Don’t just take our word for it. According to Kevin Philips, former Republican Party strategist and author of Bad Money, “Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the muscle and vitality of the American economy are measured.”

Take the Consumer Price Index, a widely used measure of inflation. It tracks inflation in part by comparing a basket of commonly consumed goods over the years.

Governments don’t like inflation. So they simply pull a fast one on Joe Public and swap the goods in the basket as it suits them. This from TradeSystemGuru.com’s Matt Blackman:

In an effort to keep inflation down and accentuate growth, statisticians shamelessly distort and manipulate the data. For example, the Consumer ...

It’s always a pleasant surprise to find yourself in good company. As loyal readers already know, here at Notes HQ we’re not exactly part of the “in crowd.” Whether we’re writing about the trillion dollar deficits, banks’ phony earnings, government bamboozles or the sucker’s rally in stocks, you’re unlikely to find the official spin in our daily missives.

Generally, we like it like that. It makes us feel special. Instead of pulling up our knee socks and getting out our pompoms along with the mainstream media hacks, we remain ever sceptical about tales of recovery… of so-called “green shoots”… and, above all, of Washington’s empty promises and various boondoggles.

But once in a while, it’s nice to know you have friends… that people far smarter than you share the same opinions as you do.

So it was with much delight that we opened up the latest King Report from honorary underground investor Bill King –

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Stocks surged yesterday. Gold sold off. And more “green shoots” appeared in the form of better than expected consumer confidence figures.  Crisis Strategy Alert editor James Dale Davidson reckons the “green shoots” of recovery proposition are overbought. He also reckons gold is still the asset of choice to hold as the great deleveraging continues.

James emailed Notes with his thoughts on gold and stocks yesterday. We think he’s bang on the money with his forecast.

I had expected a sucker’s rally into May. In the last two epic credit cycle deleveraging events – in 1873 and 1929 – both experienced a reflex rally after the autumn crash that lasted through the 20th month after the peak, which is to say, through May. If you check the calendar, we could be following the same pattern. The question, of course, is whether we continue to follow past patterns, or whether the massive

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Notes from the Investment Underground Friday, April 17, 2009 Palermo Viejo, Buenos Aires, Argentina

Here comes subprime II… 3 toxic time bombs to come… The Richebächer legacy lives on… “Scamonomics” explored… Goldman bites the hand that feeds it… TARP loses 75% of taxpayers’ money… How to get $4,201 in your pocket by June 4… Banks’ top 4 accounting gimmicks… Short squeeze pushes market higher… John O’Neill on government’s deceit… James Dale Davidson: How to grab 19% yields on Treasurys (if you’ve got government connections)…  And more!

*** Rob Parenteau, the editor of the reincarnated Richebächer Letter, warns that we are in for the second wave of these toxic mortgages ahead. The first time subprime mortgages reset at a higher rate was in 2008 and the subsequent flurry of defaults sent banks into a tailspin.

Well, get ready, warns Rob. We still have “Option ARM” and “Alt-A” loan resets

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Notes from the Investment Underground

April 14, 2009

Palermo Viejo, Buenos Aires, Argentina

Richard Russell: Why this is a bear market correction… That latest outbreak of investor credulity… 25 biggest earnings-per-share movers and shakers heading into earnings season… Banks to be allowed to screw up indefinitely… The great “too big to fail” fraud… Bailouts costing $42,105 for each U.S. citizen… Bush-Obama tag team piles on debt at the rate of $60,000 a second… Bob Higgs on C-SPAN… China wises up… And more!

*** This Richard Russell quote is a must-read for investors thinking about buying back into stocks. Russell, now in his 50th year of publishing the excellent Dow Theory Letter, believes we are now witnessing a bear market correction.

The essence of Dow Theory has to do with VALUES. At the March low the price/earnings ratio for the Dow was 25.79 and the dividend ...