Pontiac is going out of business after 82 years. And General Motors is being taken over by the government.

We are delighted. It's like being alive when extra-terrestrials finally come calling. Or when the Pope becomes a Mormon. We're getting to see things we never thought we'd see...amazing things.

It must have been about 1960. Our father traded in the old Chevy for a Pontiac. It was an old one - maybe it was a '54 or a '56. But it was heavier, more solidly built, and quieter than the Chevrolet.

A few years later, boys from better families bought muscled-up Pontiac GTOs and Grand Prix. We remember, when we graduated from high school, a friend bought a GTO. What a thrill it was just to go for a ride...and turn up the radio!

And then, it must have been in the early '70s, our old friend Doug Casey drove up in a shiny Pontiac Firebird. We still remember the sound of it...deep, resonant...a baritone of an automobile; it probably sucked an entire oil well dry each time it drove up to the pump. Global warming on wheels.

But now... Adieu, Pontiac...

And we can probably say goodbye to GM too.

"US to take majority GM stake in revamp," says the headline in today's Financial Times.

How about that? America's largest car company is going to be state- owned...nationalized...presided over by the federal bureaucrats.

It's just a part of the shift away from the free market and towards an un-free market. Free market capitalism has failed, say the pundits. Let's give the feds a chance.

Even Henry Kaufman, writing in today's Financial Times, says that the Fed's "libertarian dogma" prevented it from controlling the banks properly.

But the Fed is hardly a libertarian organization. It's a banking cartel. As a cartel, it looks out for its member banks - and doesn't hesitate to use state power to do so. There is nothing libertarian about it...and no dogma associated with it - except as Greenspan's eyewash - that is even vaguely libertarian.

The Fed colluded with member banks to fix interest rates. In so doing, it helped create the biggest bubble in credit the world had ever seen. It was a terrible thing for the average fellow - who was lured deep into debt by rising house prices and cheap credit. But it was a great thing for the members of the Federal Reserve cartel. Profits in the financial sector - notably, the big Wall Street investment banks - soared.

But bankers are vulnerable to too much of a good thing - just like everyone else. Soon, they made the classic Wall Street mistake - they came to believe their own hype. Not only did they gin up trillions of dollars' worth of preposterous financial instruments...they actually bought these debt bombs from each other.

This posed a grave danger to the nation's economy...and to the banking system. Henry Kaufman claims the regulators dropped the ball because believed they put too much faith in the free market. But the regulators were little more than front men for the banks themselves. After Alan Greenspan came Henry Paulson as Secretary of the Treasury. He was probably still replying to messages at his old address - HPaulson@goldman.com - when the crisis began. And the head of the New York Fed - now, U.S. Treasury Secretary Tim Geithner - was elected to his post by the very institutions he was supposed to be overseeing.

Neither of them was about to stop the party; they and their friends were having too much fun.

And now, the feds are taking over control of America's largest auto business...

"Consider the risk of General Motors" on the economy, says Strategic Short Report's Dan Amoss.

"If it goes into Chapter 11 bankruptcy, it has the potential to be very disruptive to the economy, despite administration plans for a 'surgical' bankruptcy. Bankruptcies are about as predictable as the weather on the Gulf of Mexico during hurricane season, especially in this type of economy."

As Dan points out below, the rally is "getting tired"...but that doesn't mean there aren't opportunities to make money. When stocks go down in a bear market, far too many people don't realize that there can be plenty of investing upsides as well. Be sure to read Dan's special report, which will show you how to make some major gains - even after the stock market crashes. Read it here.

Over to Addison, for news from the housing market:

"Only in America, only in 2009, can an annual 18.6% decline in home prices signal 'stabilization' in the housing market," writes Addison in today's issue of The 5 Min. Forecast.

"Just out this morning is the latest Case-Shiller index of housing prices in major U.S. metro areas. The annual 18.6% plunge in February is a teensy improvement from a record 19.0% drop the month before. It's the first time since the index started falling in early 2007 that it did not set a record year-over-year decline."

Americans cannot continue going further and further into debt in order to provide huge bonuses for Wall Street and employment for China.

It's over. Fini. Caput.

It will take time to destroy the industries, investments and lifestyles that depended on the old model. And it will take even more time to find new ones.

Corporate earnings this year are expected to come in 35% below last year.

The insiders seem to realize that the game is over. They're selling into this rally - the highest level of insider selling in two years.

As Strategic Short Report's Dan Amoss put it "the rally is getting tired."


Finally, we cast a nostalgic look backwards at Argentina, where we spent our recent vacation. Newsweek reports that Buenos Aires seems untouched by the global financial meltdown:

"Take the city of Buenos Aires, capital of an economy built on the export of food and leather, and acutely sensitive to downdrafts in global trade. The sprawling old neighborhood of Palermo and its subsections "Palermo Soho" and "Palermo Hollywood" see new clubs, bars and restaurants opening weekly. Hip spaces are filled nightly with the young and sleek, including young American and European expats with funds to spare."

And from Australia……….

In the markets, all the really interesting action is happening behind the scenes. On the surface, things appeared to get better on Friday. In the U.S., Ford told investors that it lost $1.4 billion in the first quarter. Apparently this was less than analysts expected. The Dow closed up 1.48% and climbed back over 8,000.

What a battler that Dow is. It's got nothing on the S&P 500 though. The S&P is up 28% in the last thirty-three trading days. It hasn't done anything like that since the 1930s. However the index did close down for the week. That broke a six-week run of gains.

One more note about that. Four-week winning streaks of ten percent are more are generally followed by much smaller gains or losses over the next four weeks, according to the analysts at Bespoke Investment Group. Their research shows that in the four weeks following a four-week rally of 10% or more on the S&P, the index followed up with average gains of 1.87%.

How about one more note about that. There were two four-week rallies of more than twenty percent, according to the same research. The S&P 500 surged 54.2% in just four weeks by early August of 1932. Over the next four weeks in went up another 30%. Then, in April of 1933, the index provided an encore to one four-week surge of 33.8% with another surge of 19.2%.

So there you go. What we do we make of all that? Well, it shows you that even in the middle of the Great Depression, the market was capable of staging mammoth rallies that would tempt investors back in. No doubt those were extremely tradable rallies. But they were followed by lower lows once the forces of economic and earnings reality reasserted themselves on the collective mind of the market.

This time will be different because it's always different. But if you're wondering if the stock market is flashing a recovery sign for the economy, you might want to take a look at insider selling. The insiders are selling this rally, according to Data by Maryland-based Washington Service. That outfit says the during the S&P's 28% climb from twelve-year lows on March 9th, CEOs, directors, and senior officers of U.S. corporations sold 8.3 times more stock than they bought.

Not that there won't be others. But behind the scenes, other things are happening which are going to drag on stocks.

One of those things is that many of the world's sovereign governments are in the process of going broke. Spain, Ireland, Greece, and Portugal have all had their sovereign credit ratings downgraded by the ratings agencies. These countries face different challenges like burst property bubbles, declining government tax revenues, and banking sectors hobbled by massive bad loans. But what they have in common is that their respective governments have responded to the crisis by ramping up borrowing to credit-rating ruinous levels.

The scale of global borrowing plans is pretty breathtaking. And what you begin to wonder is a simple question: where is all the money going to come from? Or, to quote David Gray in "Nightblindness", "What we gonna do when the money runs out?"

For example, the UK's Debt Management office, which issues bonds on behalf of the British government, says that British bond sales between now and 2013 will exceed £696 billion. The Guardian reports that it will be more like £815 billion, according to figures from Deutsche Bank.

Do you think private investors are super excited to loan the British government money when the British economy is expected to contract by 3.5% this year? Under the budget revealed last week by Chancellor of the Exchequer Alistair Darling, the UK will borrow £175 billion this year alone, or about 12.5% of British GDP. Over the next five years, public sector debt would rise to 76% of British GDP from its current level of 46%.

Gee. That is a lot of borrowing. Britain is a country drowning in debt. Adding more millstones around its neck would not seem to improve its chances of paying that debt down. You could pay it down by, say, generating national income from exports.

S&P's ratings agency keeps track of the sovereign debt to income ratio. If a country exports a lot of finished goods or raw materials, the government benefits from tax and royalty revenues. These monies are used to service the sovereign debt.

But if you're not generating large export revenues, then you find a big gaping hole in your budget where royalty and tax revenue should be. Maybe that's one reason Britain's new budget raises tax rates on high- income earnings from 40-50%. What you gonna do when the money runs out?

If Britain's government thinks it can make up for disastrous public finances by raising taxes, it's probably making another in a long line of stupid mistakes. The high-income earners who would face the big tax increase are exactly the same people getting fired from their jobs in the City. This shows, once again, that building an entire national economy around high finance puts you in all sorts of trouble.

But wait. Maybe the high-saving nations of the world will bridge the gap between British expectations and financial reality. We wouldn't count on it though. Remember the big hoopla from the G20 meeting in London when it was announced that the International Monetary Fund's funding would be tripled to $750 billion?

That funding is desperately needed. The IMF itself reckons it will have to dole out some $187 billion in new loans to national governments just to ride the current phase of the global financial crisis. But a key piece of information was left missing in London. How would the IMF be funded?

The G20 finance ministers met in Washington to sort that out. And the early indications are that the IMF will be funded by issuing bonds sold to high-saving nations. If this is true, it's a victory for the developing world and a defeat for the U.S. and Europe. The U.S. and Europe were both pushing for a direct cash injection funding method. In other words, they wanted China, Russia, Brazil, and India to use their foreign currency reserves to fund the IMF.

But the BRICs batted that proposal away. So now the IMF plans to sell around $500 billion in bonds. They will be denominated in the quasi- currency the fund uses internally (the special drawing rights, or SDR that both Russia and China have floated as a possible new global reserve currency).

How the bonds actually work still has to be sorted out. But the internal logic of the whole arrangement is now clear: creditors hold the whip hand. Debtors are going to get whipped. The balance of power in the global economy is clearly shifting from the borrowers and spenders towards the savers and producers. Advantage BRICs.

Disadvantage Gordon Brown and Barack Obama and probably Kevin Rudd too. With the existing debt-to-GDP ratios in Britain and the U.K., we reckon it is going to be impossible to fund further expansions of financial bailout programs and welfare state programs without much higher interest rates (borrowing costs).

You can avoid the borrowing problem for a while by soaking the rich with higher taxes. You might also use climate change hysteria to tax carbon (really an indirect tax on consumers). If both happen this year and the result will be even more rapid economic contraction. They will be this Depression's equivalent of Smoot-Hawley: exactly the wrong thing to do, done at the worst possible time.

Of course the easy out, we feel obliged to point out, is not to borrow the money at all or tax it from your citizens. You could just print it instead. But this tends to unleash hyperinflationary pressures which also tend to destabilize civil society. It's better to avoid this if you can.

Either way, there is no avoiding the reckoning. Right now, you could make a compelling argument that the value of credit-backed assets is falling so fast that government steps to prop them up simply won't (or can't) work. Credit deflation rules the day. The formidable fiscal and monetary stimulus measures are disappearing in the maw of asset deflation while the world goes broke trying to prevent it.

If this is right, and it's something investors take the time to notice, stocks are going to make lower lows again. A lot lower.

--Finally some good news. Consumer confidence in the States is at its highest level in a year. The Conference Board reported that its index rose from 26.9 to 39.2. We have no idea what those numbers actually mean. But hey, if households are feeling better about the economy, that's not a bad thing.

--Of course feelings aren't the most important thing in an economy. True, the "animal spirits" Keynes wrote about have to be out and about in an economy on the move. But facts matter too. And how you feel about the facts doesn't change what they are.

--Take the National Australia Bank. Yesterday the bank told investors its bad debt charges in the first half of the year had doubled to $1.8 billion. That bad debt charge was more than double the charge for the same period the year before. Your perception of the charge doesn't matter. It is what it is.

--The good news for NAB is that its Australian operations account for two-thirds of its profit. The bad news is that it may face more losses from its U.S. and European investments. It won't be alone if that happens, of course. But we're just saying that there are probably a lot more loan losses ahead for global banks this year and next.

--That said, at least NAB is not the Bank of America (NYSE:BOA). BOA may need as much as US$70 billion in capital to plug what regulators are calling its "capital hole." The results of the U.S. government's stress tests of 19 big banks aren't public yet. But the Wall Street Journal quoted "people close to the company" who said that the Feds have told BOA it needs a bigger cushion against future losses. Whether that means more asset sales or diluting existing shareholders with new equity we don't yet know.

--Where would the losses come from? Probably commercial real estate and, yet again, residential housing. We know you're probably sick of hearing about it. But we just want to remind you that neither the banks nor the financial system are done taking the losses on the great property and housing binge of the last decade. The binge was huge. But the purge is coming.

--Trying to prevent the economic gag reflex from kicking in is the U.S. Federal Reserve. The Fed meets on Wednesday and maybe they'll do something worthwhile. Or maybe not. The Fed will be paying attention to the yields on government bonds. It's been buying those bonds (or announcing its plans to do so) in an effort to bring down mortgage rates and other borrowing rates that are pegged to official yields.

--But the bond market is not cooperating perfectly. When it's cooperating at all, it's doing so with maximum resistance. Ten-year yields on U.S. notes were back up over 3% in New York trading yesterday. We'll see if the bond vigilantes have it in them to push the Fed on this. Rising ten-year yields will eventually push up mortgage rates, nullifying the Fed's efforts to boost the housing market.

--The trouble is, there's just so much debt out there with more coming each day. The Treasury announced yesterday it would borrow US$361 billion in the second quarter. That's double what it estimated it would need just three months ago. And usually the Treasury doesn't have to borrow much in the April quarter because that's when Americans pay taxes. For example, it borrowed just $15 billion the same time last year (did we just write 'just $15 billion'?).

--But the Fed needs $200 billion for its Supplementary Financing Program (to save the housing market). So the Treasury will be tapping the market for mo' money. The previous record for borrowing in the April quarter was $60 billion. Treasury borrowed $481 billion in the January quarter and expects to borrow $515 billion in the July quarter.

--One small piece of data worth watching is the quarterly refunding statement that the Treasury releases on Wednesday in the U.S. This refers to maturing debt which has to be refinanced, as opposed to the new debt issuance mentioned above. It matters because of the marketable U.S. debt outstanding, an increasing percentage of the total is composed of shorter-maturity bills and notes rather than 20-year or 30-year bonds. This is an example of the compression of time and expectations we wrote about yesterday, where inflation discourages long-term planning and investing).

--It also makes rolling over U.S. debt an extremely interest rate sensitive exercise, which is why the Fed will be watching bond yields like a hawk (pardon the pun). If you wanted a gratuitous prediction, we'd say the Fed is going to have to step up its buying of Treasuries in the open market (continue monetising the debt) in order to keep rates low. It also has to placate larger creditors to the U.S. who are eager to unload their large holdings of U.S. debt on the Fed before that debt is devalued by more money printing (China).

--What a weird status quo. On the one hand, it's obvious, based on the government's own stress tests (or at least the leaked results) that there are billions in loan losses ahead which must be offset by new capital raised from private investors. Private investors and sovereign wealth funds can choose to recapitalise banks...or loan money to cash-strapped governments in the U.K., the U.S. and elsewhere (there are big 'capital holes' in national government budgets as well). Or they can stockpile commodities and cash and gold.

--So which will come first, a huge new wave of deflating credit-backed assets, or a huge new surge in quantitative easing measures that keeps rates down and asset prices from crashing but drives up the price of real goods? It's pretty tough to say today.

--Before we move on, thanks to everyone who signed up for our Twitter feed. You can still do so at http://twitter.com/draus. As we suspected, it's about as superficial and meaningless as modern communication gets. But if you're one of those people who has always craved/begged/pleaded for a shorter version of the Daily Reckoning, this is it! Twitter updates can't be any longer than 150 characters. This is forcing us into a haiku-style of financial reporting.

--Or, if you prefer just a weekly summary of the week's biggest DR stories, keep an eye on your inbox this weekend. An Elwood-based DR reader with a Diploma in Applied Finance and Investment from the Financial Services Institute of Australia has volunteered to put together a weekly digest. He thought it would be just the sort of time-saving piece that would fit with his busy schedule. So for the last month we've been testing the publication in-house. We'll do it live this weekend on a trial basis and you can let us know what you think. It's designed for those readers who want an edited summary of the week's big stories all in one place.

--Did you see the note about Antarctica in today's Australian? In case you missed it, the sea ice around Antarctica is expanding, not contracting. "A study released last week by the British Antarctic Survey concluded that sea ice around Antarctica had been increasing at a rate of 100,000sqkm a decade since the 1970s. While the Antarctic Peninsula, which includes the Wilkins ice shelf and other parts of West Antarctica were experiencing warmer temperatures, ice had expanded in East Antarctica, which is four times the size of West Antarctica."

--Finally, check out the chart below from U.S. Goldcorp. Remember last week we mentioned that the world of government issued paper not backed by gold has been expanding in ever-widening circles for the last 100 years? The chart below shows just that, like a tide of paper money flowing into the world's real economy leading to bubbles. And then the tide turns, leading to asset price crashes and soaring prices for precious metals as the bad investments from the boom are liquidated.

--A chart (not shown re: Daily Reckoning)) specifically shows the Dow vs. Gold ratio going all the way back to the 19th century. What you can see is that large credit expansions lead to a high Dow/Gold ratio. The value of stocks relative to gold soars as all the funny money in the economy translates into new corporate earnings and inflated expectations of future corporate earnings (much higher P/E ratios).

--The disarming thing about this chart is that it doesn't look that far between a ratio of nine ounces to one and one to one. Oh, but it is. A one to one Dow/Gold ratio means Dow 5,000 and gold $5,000, or Dow 6,000 and gold $6,000. It's also worth thinking about the extremes. Dow 4,000 and gold $4,000 is huge move for gold and a crash in the Dow. You could see this happening with another capital crisis in the financial sector.

--But it's also possible that the Fed and other central banks can pursue unorthodox policy measures like purchasing stocks with freshly printed money. This would support stock markets nominally, although in inflation adjusted terms it would be a bogus number. But psychologically, gold $9,000 might not be as startling if the Dow were at say, 18,000.

--Yes yes. That sounds absurd. But we live in absurd world. People trade real goods which have tangible value for perfectly worthless pieces of paper. Anything is possible.

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