From Dan Denning in St. Kilda:

--Paul Volcker is fronting the U.S. Congress to push for restrictions on the proprietary trading desks of U.S. banks. The RBA stunned economists yesterday who had unanimously predicted the central bank would raise the cash rate to 4%. It did no such thing. Stock indexes in the U.S. rallied over one percent, but jobless figures come out later this week. And that makes everyone nervous that despite the nice recovery narrative, the economy still sucks for real people.

--So we'll see how it goes in Australia today. Our general survival strategy at the moment is to gradually reduce exposure to all but a select portfolio of stocks that are leveraged for big returns. As to the first issue - reducing exposure to stocks - now might be a good time, according to Morgan Stanley economist Gerard Minack.

--Minack reckons we're in for a correction after this 9-month "relief rally." In a note to clients Minack wrote, "We see the rise from March 2009 as a typical relief rally that follows major bear markets. Those relief rallies can occur regardless of underlying macro conditions, regardless of liquidity conditions and - most importantly - regardless of what happens next....The fundamentals did improve this time - systemic financial crisis ended - but we think risk assets have swung to pricing a better outlook than is likely."

--Minack says that while the rally could take developed market equities up to 75% or so from their March lows last year, a 25% correction is now in order. To be fair though, he doesn't think the market will make new lows after that - only that it's gotten way ahead of itself at these levels.

--The Grand Old Man of Dow Theory, Richard Russell, is even more direct. He's predicting a "second round of pain" for stock markets. He wrote, "I note that most analysts are now bullish, and that they are recommending stocks for the 'continuing advance.' At the same time, most economists are optimistic, arguing that the 'longest recession since World War II has ended.'"

--"Typical, last March everyone was bearish and the market was establishing a temporary bottom. Now that everyone is optimistic, the stock market is topping out and the public (the amateurs) are about to receive their second round of pain," he wrote. Ouch.

--To protect investors from this pain, the editors of our three financial newsletters have been using trailing stops and stop-losses on open positions (as rough guides). They are not always popular with readers. But they do save you from having your capital destroyed in bear market moves. If you're not using them, now would be a good time to seriously reconsider it.

--With the Boomers now heading slowly for the exits of the share market (converting their portfolios into income they can consume) the 'weight of money' argument for owning a basket of blue chip Australian stocks has never looked so light.

--We could be utterly wrong, of course. But why not own a handful of smaller miners and small caps where business growth leads to real earnings growth and higher share prices? Surely this is a better bet that buying and holding for the next ten years, isn't it?

--The best financial survival strategy of the coming years begins with not expecting the share market to be a retirement machine. True, the compulsory super tribute will probably be raised and this should bring more liquidity to stocks (and government bonds). But what you're looking for are good businesses, not just a good stock market.

--Did you know that Australia has the highest household debt to disposable income ratio in the world? It's even higher than America's. Bigger homes. Bigger waistlines. Bigger debts. Australia is in the middle of its own credit boom, complete with all the social consequences. And the financial consequences.

--The chart above doesn't have the most recent data. It appears to show a gentle decline in the household debt-to-disposable income ratio. Since then, though, due to higher debts and income growth that's not quite kept up, the ratio has turned up again. It's around 156% today, largely thanks to the mini-boom in mortgage lending spawned by the diabolical first home owner's grants.

--Speaking of which, Fitch Ratings chimed in with a gloomy forecast for Australians overnight. It said that rising interest rates in 2010 would trigger more home loan and commercial mortgage defaults. It said this would cause some "deterioration" in the quality of assets that underpin mortgage-backed bonds. Hmm. That sounds soooo familiar.

--Even though Aussie rates did not rise yesterday, they are at the low end of their historical cycle. You'd expect them to go up more this year. And Fitch says that's bad. "The improvement in Australia's structured finance asset performance, which was experienced during 2009 thanks to historically low interest rates and a resilient economy, is unlikely to continue during 2010," said David Carroll, the director of Fitch's Australian structured finance team.

--Fitch is talking about bonds and structured products made up of mortgages and commercial real estate leases. That's an interesting story and will affect the quality of bank assets (and perhaps mortgage funds and listed property investments). But the real story, politically, is whether all those first home buyers who encounter mortgage stress will want to vote for Kevin Rudd again.

--By the way, we copped it big time from dozens of readers for dipping our toe into the climate change debate a few weeks ago. We were told - sometimes not so politely - to stick to our knitting (even though the topic has clear implications for the economy and financial markets). By bar the most often repeated objection to our "infantile" thinking was that the science behind climate change is not disputed and that it's all peer reviewed in a process that's non-political, objective, and thorough.

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--The law is obviously going to have a chilling effect on political speech. True, there is an argument to be made that if you want to have a health democracy, people ought to put a name on the ideas they espouse and be willing to articulate and defend them openly. But there is a long tradition of anonymous political commentary, and for equally democratic reasons.

--For example the writers of the Federalist Papers (which were essays and pamphlets on why the separate States should ratify the U.S. Constitution) wrote under the pseudonym "Publius." Obviously John Jay, Alexander Hamilton, and James Madison weren't afraid of the rough and tumble of public life. So why write under a pen name?

--The State, or its agents, can exercise all kinds of retribution on those who challenge it. It could be political. It could be economic. Or it could be using the tax collectors to chase down your favourite political enemies. In the hands of the vindictive or the malicious, the tools of State power can be brought to bear on vocal critics.

--That's also why whistleblowers are protected. But really, it shouldn't matter why someone chooses to remain private when making a public comment. If their argument is about an idea, then the person making the argument doesn't matter. It's not an argument made "from authority," where the force of the person making it carries the day. It's an argument about an idea.

--The fact that South Australia is stifling political speech ought to be embarrassing for Australians. Of course we say that as an American. As a colleague tut-tutted last night, "You Americans get so wound up about freedom of speech. This is just a sensible law that improves the quality of the political discourse in Australia."

--He's right about one thing. Freedom of speech is not a protected right anywhere in Australia's constitution. We read up on the matter

--The problem with an "implied freedom of political communication" is that it is not a positive right above the tampering of the legislature or judiciary. Statutory protections for free speech can be changed by statute (once you get a bunch of legislators riled up). If, however, freedom of speech were part of an Australian Bill of Rights, it would be constitutionally protected and above the tinkering of morons in all branches of government.

--We know from experience that many Aussies oppose a bill of rights because they believe it gives the courts and judges more power to determine what "rights" actually are. But the whole point of a bill of rights is that it's mostly based on "negative" rights, or those things which the government cannot or must not do to you (in most circumstances).

--To the extent that rights are positive in a bill of rights, they are things the government MUST do to protect you, like offer you a trial by jury of your peers, or not hold you in jail for too long without charging you for a crime. To be fair, having a bill of rights doesn't insure the government won't violate these rights. But at least you can take it to court and win.

--And yes, taking the government to court to protect your rights probably does promote a more litigious society. But so what? That's not the sort of objection that invalidates the idea of bill of rights. Liberty is worth defending, isn't it? C'mon Australia. Stand up for yourself!

--It's better to have the rule of law operating to protect speech and to have way to hold the government accountable for its infringements on your liberties than to have your speech shut down by politicians who want to bully their opposition into silence through coercion.

--Intellectual coercion is a second cousin of physical coercion. Once you concede the principle that the government can censor what you say...well...you've conceded an awful lot. What do we know though? We're neither a lawyer nor a climatologist. Just a "carpetbagger with a modem," as one reader wrote. Until tomorrow.