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From Dan Denning at the Old Hat Factory:

--If you were expecting the week to begin with a new age of thrift, prudence, and frugality, too bad! Australians opened their wallets and shelled out nearly $20 billion in retail spending in May. It was a one percent increase over the month before. It is also a testament to the power of government to distort reality by giving away other people's money.

--This denial of reality should be interesting to watch. When a credit bubble deflates and an economy breaks its addiction to reckless debt, the sensible thing to do (since you're repairing your balance sheet) is dial things back a bit. Save. Cut back on the gadgets. Eat more staples. Wear a sack cloth.

--But if you still believe that you can get something for nothing-well then yes-you'd continue to borrow and spend like a madman.

--Speaking of borrowing, we'll have an idea tomorrow of whether borrowing costs are headed up, down, or nowhere. The Reserve Bank of Australia meets to determine the price of money (in whatever mysterious way it manages to do this).

--It will have to consider another piece of data from last week: a 12.5% seasonally adjusted decline in building approval for new homes. This is a provocative little nugget, isn't it? That's a steep month-over-month drop. Year-over-year, total approvals for new homes fell 22.4%. But wait...there's more!

--Approvals for multi-unit "other" dwellings fell 43.6% month-over-month and 57.5% year-over year. We assume this means multi-room apartments and not houses. But either way, that kind of one-month decline looks an awful lot like hitting a brick wall. The Australian Bureau of Statistics says that's the lowest level of approvals since 1987.

--What could it mean? There may be a perfectly reasonable explanation for such an ugly number. One that comes to mind immediately is that developers think there is plenty of existing inventories already (much of it unoccupied). With a large supply on hand, why build more?

--Another reason is that developers don't expect prices to rise higher. Why add more new housing stock if you conclude that A.) the housing market is adequately supplied (not short, as is so often claimed) and B) the demand for new mortgages (new housing finance) is also going to fall off a cliff when the first home buyer's grant expires or interest rates begin rising (whichever comes first).

--While housing bulls gnash their teeth over that one, what about shares? They were down again Friday in New York. The Dow Jones Industrials fell another 2.7%. All those green shoots are getting eaten by the Black Swan of deleveraging.

--Here is a more worrisome note, though: you can't beat the market. Or at least, your actively managed superannuation fund cannot beat the market. That is the conclusion of two researchers from the Australian Prudential Regulation Authority (APRA). This is probably unwelcome news from those in the actively-managed superannuation funds business.

--"On average," researchers Wilson Sy and Kevin Liu conclude," value adding from active management appears statistically to be unable to overcome higher costs associated with attempts to exploit market inefficiencies...Higher management expenses leads to poorer net investment performance of the firms."

--There are at least two points worth noting in this survey, three actually. First, actively managed funds, on average, don't beat the market. Unless you know a genius manager, paying for results doesn't deliver them. Second, the underperformance (by about 0.9%) is directly attributed to the fees you pay. If you invested in a passively-managed index tracking fund, you would do just as well as the market, and not pay a cent.

--But the most incriminating finding from the study is that active managers do worse in a bear market! That shouldn't be too surprising, really. Fund managers are paid to be in the market, not to be in cash. This is true even when you are better switching to a super option more heavily weighted in cash. Cash does not generation commissions!

--To be fair, the study showed that half of the 115 superannuation funds beat the benchmark index (with the best fund doing 18% better). But the big question this study prompts is whether-by correctly making a few key decisions-self-managed super investors can regularly do better than actively managed funds AND benchmark indices.

--Beating most actively managed funds shouldn't be hard, we'd humbly suggest. They outperformance the index anyway, when you figure in management fees. And because the funds show a bias to shares, (these funds allocate 50% of assets to Aussie and international shares), they are likely to get clobbered when asset allocation models suggest you ought to shift to cash, fixed income, or (ahem), property.

--Of course the truth of the matter is that being in the right asset class at the right time is the single-biggest determinant to how well you do as an investor. That is, you don't have to be Warren Buffet to beat the market. You just have to be in the right market at the right time. Stock selection, as much as it is touted by value investors, is simply less important than whether or not stocks as an asset class are rising.

--You don't have to be a highly paid fund manager to know whether stocks are in a primary bull market. In fact, the fund managers are likely to get it wrong because they would prefer stocks to be in a bull market. It makes the job of index tracking and fee collection much easier. But the real challenge is correctly interpreting those inflection points in the market where one asset class falls out of favor (peaks out) and another, previously ignored or cheap asset (kudos to the value crew) enters into a bull market.

--Those are the tough spots to pick. But we wonder why a professional fund manager is any better equipped to call those market tipping points than a well-informed self-managed super investor who cares more about his money than generating fee income. In fact, a well-informed investor who accumulates a variety of different perspectives and then reconciles that information with his own preferences, risk appetite, and judgment is just as likely to get the big calls right as anyone else. Probably more likely, considering he doesn't have any bias toward a particular asset class.

--If you want to read the whole study, go

--"It is seen that 38.5% to 66.7% of the cross-sectional annual returns of our dataset are explained by their benchmark asset allocations, depending on the period and depending on whether the comparison is gross or net of costs. Over the whole five-period, the cancellation of short-term noise leads to an R-squared of more than 95%. Our results are consistent with expectations from earlier research (Brinson et al., 1986, 1991; Ibbotson and Kaplan, 2000).

--You read that right. Your super returns are determined by being in the right place at the right time. This is the quiet little secret of great investment returns. Getting them may be hard. But it's not impossible. But why is it true?

--"These results have very simple explanations. It is clear that the greater are the differences in returns to different asset classes, the more asset allocation explains performance. Over the short-term, the asset return differences may be insignificant and may be swamped by other short-term effects of active management; asset return differences explain less of the cross-sectional variability. Asset allocation explains more of time variability because over time the differences in returns of different asset classes become more statistically significant."

--Over the short-term, property and fixed income may look safer and better than precious metals and cash. But if bonds are in long-term bear market, if we are in a Credit Depression, and if fiat money is entering a permanent period of decline, then getting your asset allocation right now has never been more important. Perhaps, according to the reader below, you should consider cattle.

--Hi folks - enjoy the DR. Current topic is moot ... what is real wealth? Just one version of the answer - the age-old definition - comes from no other authority than the Bible:

"LANDS AND CATTLE"

No desire to get into religion in any form - please - but this is an interesting concept of what real wealth is n'est Ce pas?

Kind regards

Ivan B.

And now over to Bill Bonner in London, England:
Big news yesterday:

"Jobs report dashes hopes on recovery," says the International Herald Tribune this morning.

Oh?

Yes, dear reader...once again, we're right and they're wrong!

You'll recall from yesterday, the feds said that their monster stimulus program would hold unemployment below 8% in 2009. The year's not half over and the rate is already 9.5%.

Then, they said the numbers were getting better each month - inevitably leading to a recovery by the end of the year. They predicted a loss of 365,000 jobs in June - considerably fewer than in May. Instead, the figures - even after they had beaten them up - said 467,000 jobs had gone, which was considerably more than May's figure. The important thing is that the trend that economists thought they were watching - which was leading to a recovery - has been broken. Instead of fewer job losses, we have more.

Ha ha...we laugh at them. We mock them. We turn up our noses to show our contempt. We turn our backs and point to our...oh, never mind...

But wait a minute. What are we saying? Hold the self-satisfied congratulations, please.

Yes, we were right: there ain't any green shoots. But we're not vain and stupid enough to think we know what is actually going on. Only morons think they know what is going on. And the more sure they are - the bigger dopes they are.

Where, exactly, is this economy headed? How is it going to get there? When?

Damned if we know. (And damned if we don't!)

Okay, now...shush...now that we've thrown the jealous gods off our case...we whisper to you: well, we actually DO have an idea of where this economy is going...which we will reveal to you, dear reader, in hushed tones, little by little. For starters, you have to realize: this is a depression. It is not a recession. In a recession, an economy gets a cold and has to take a little bed-rest. In a depression, an economy drops dead. Businesses go broke. The whole structure of the economy changes as the corpses are dragged away and new enterprises take their places.

Economists were 100,000 off on their jobless predictions because they still don't really understand what is going on. We knew the predictions of a recovery were dumb. This is a depression - meaning, it is a major change of direction...not merely a pause in an otherwise healthy economy. After more than half a century of debt expansion, debt is contracting. Businesses, households, investors and the government need to adjust. And that takes time - a lot more than the 20 months of recession we've had so far.

It would happen a lot faster of course, if the feds weren't fighting it every step of the way.

"Rise of the Zombies," is a headline in today's Financial Times. It tells a familiar and predictable story: the feds have propped up businesses coast-to-coast. Instead of being allowed to fail, they are kept alive by the government...and continue to take resources that could be redirected to more promising competitors.

But don't bother telling the feds that. They don't care. The old, worn out zombie businesses still make campaign contributions and employ voters. The businesses of tomorrow don't. The present votes. The future does not.

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More news:

We turn to our intrepid correspondent Byron King for insights into the world market.

"What's going on in Iran? When the old guard starts shooting the young people, that's not a favorable sign for the long term," says Byron.

"Last time Iran had a revolution, in 1979; it ushered in turmoil in the oil (and gold) markets for several years. Of course, the invasion by Iraq in 1980, and subsequent war, had something to do with it as well.

"After 30 years, the Iranian theocracy - and well-connected family and friends - has pretty much taken over that nation's economy. Most everything that's worth owning - oil facilities, banks, industrial facilities, etc. - has some 'revolutionary' connection. And these folks are not going to walk away from it without a fight.

"There are clearly a series of major disconnects within Iranian society. Young versus old, middle-class versus theocrat, reformer versus revolutionary. And then there's the oil problem. Mr. Depletion and Ms. Rust.

"Iran is suffering from its own version of Peak Oil. Iranian net exports of oil are falling. Iran's oil infrastructure is aging. According to the U.S. National Academy of Sciences, the trend is that Iran will be exporting ZERO oil by 2014, which is a mere five years from now. That means almost no serious money will be coming in for the Iranian leadership and government.

"So if you think that they're rioting in the streets of Iran now, just wait awhile. Iran is headed for national insolvency and penury. It'll get even more exciting. Then again, the Iranians may have nuclear weapons. Pretty depressing, huh? Better buy that gold while you can."

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Investors are wondering if the forecasters know what they are talking about.

"Stock markets disoriented by the uncertainties of the recovery..." says an awkward headline in today's French financial news.

The Dow itself lost 212 points yesterday. Oil fell to $66. Even gold dropped $10 as people fled back to the only asset they know they can count on - the U.S. dollar. Or more precisely, U.S. debt denominated in U.S. dollars.

Come Hell or high water, the Treasury will come through. When it's time to pay the coupons, they'll have the cash. You can count on it.

But what you can't count on is how much that cash will really be worth. And there lies the great trap for the lumpen investoriat. The lumpen, as you know, get their investment ideas from TV and the newspapers. The poor rubes are the last to buy in a boom and the last to sell in a bust. A day late and a dollar short, they always get the worst deals. When the papers tell them there's a recovery - they believe it. When the Fed chief tells them to use adjustable rate mortgages...the silly clumps do it. When a governor of a Federal Reserve banks urges them to "go out and buy an SUV" they head for the dealers.

But thank God for these patsies. Without them, where would we get candy? And where would the U.S. government get its trillions?

The lumpen - along with the sophisticated fund managers who pretend to know what they are doing - are financing the biggest government- borrowing spree in the history of mankind. You don't have to dig too deeply to figure out why that won't work. Financing a little spree of borrowing may turn out well; financing a big one is asking for trouble. Each dollar you lend weakens the borrower's balance sheet. By the time he has gotten to the 12 trillionth dollars...you might as well be throwing the money down a well.

And thank God for Arnold Schwarzenegger. What an entertainer! He had it all. Money. A good wife from a bad family. A nice hairdo. And what did he do? He gave up a promising career in the motion picture business to launch himself into the slimy world of politics.

And now the poor man is groveling. Begging. Imploring the banks to take his state's IOUs. He says they are "rock solid." California is the world's 6th largest economy. But it was a world-beater when it came to debt-based bubble illusions. And now its economy is falling apart. Economists can lie about the inflation rate. They can fudge the GDP. They can torture the unemployment numbers. But when the revenues come in, all they can do is count them up. And revenues are falling. Especially tax revenues.

The feds and the states are losing income. When businesses lose revenue they cut back expenses. But governments - at least those that are modern popular democracies - find that they need to increase spending. They have more people asking for help. And they have programs that become automatically more expensive - such as unemployment benefits - when the economy softens.

Let's see. Expenses down, income up = happiness.

Expenses up, income down = misery.

See how simple it is?

Until tomorrow,

Bill Bonner