From Dan Denning in St. Kilda:

--Welcome back ASX/200 at 5,000. You look a bit winded. But the extra points look good on you. Who says a plus size resource boom isn't as sexy as the housing market?

--Yes, for the first time in 19 months the benchmark index for Australian stocks is breathing rarefied air. But the question today is whether this is just a base camp for the 6,000 level (a kind of false summit), or the actual summit itself of the post-reflation stock market high.

--Commodities are certainly enjoying the view. Palladium made a two-year high at US$548/oz and gold was up. And to think that neither of those two precious metals are Dr. Alex Cowie's favourite metal of 2010. That honour is reserved for target="_blank">ZeroHedge, is that U.S. homeowners (perhaps encouraged by the government and NOT discouraged by the banks) are simply not paying their mortgages. This boosts consumer spending. And the banks participate in the fiction by pretending the payments are being made and not marking the loans to market.

--Not living in America anymore, it's hard to say what's really going in. But it sounds like the whole place has become a kind of Absurdistan where the government changes the rules of contract willy nilly and bank balance sheets can be whatever you want them to be, provided they are not accurate.

--Hey while we're thinking of it, good luck to Steve Keen and his crew on their way to Mt. Kosciuszko. We agree with Steve on the inevitable correction in house prices. But perhaps we both have underestimated the government's determination in supporting prices. Still, it would be nice to get some fresh air today. The walk can't be all that bad.

--Uh oh. Just when you thought it was safe to jump back into Greece again, news comes that Greek borrowing costs have soared above 7% interest. AFP reports that, "Taxi drivers and lawyers have begun strikes against planned budget cuts." Yet the important news here is that despite the assurances of loans from the EU, market investors are making the Greeks pay to borrow. Why?

--Let's turn the floor over to BIS Working Papers No 300, the future or public debt: prospects and implications, written last month Stephen Cecchetti, M S Mohanty, Fabrizio Zampolli. Hang on! Wake up! This is important.

--"So far, at least, investors have continued to view government bonds as relatively safe," the trio begins. "But bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decades." This, by the way, could also be a symptom of fiddling with interest rates. It incentives short term financial calculations at the expense of long-term capital allocation.

--"We take a longer and less benign view of current developments, arguing that the aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to boiling point. IN the face of rapidly ageing populations, for many countries the path of pre-crisis future revenues was insufficient to finance the promised expenditure."

--Australia, you might argue, would not fit into this dismal forecast for industrial economies. After all, Australia has rising real growth from its trade and commodity relationship with emerging markets in Asia. Even rising real interest rates won't cripple the government ability to borrow internationally, provided it can service that debt with income from the commodity trade.

--But what would happen if global investors started putting the question to governments more pointedly about how they intend to pay for future spending? "The question," the three amigos write, "is when markets will put pressure on governments, not if."

--"When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways?"

--If you're a prudent investor, the answer to that is: now!

--As we mentioned the other day, one way of explaining the new highs in the indexes is a rejection of government bonds in favour of stocks. Mind you, the conventional wisdom is that stocks are moving higher because investors are fleeing out of "safe assets" like bonds and back into "risk asset" like stocks or even emerging market bonds.

--But with valuations already stretched, you shouldn't be surprised to see stocks run out of momentum from here. What's the old expression...sell in May and go away! But go where?

--How about cash and tangible assets? This is what's driving, at least partly, higher precious metals prices. And we'd venture to guess that more people now prefer actual ownership of those metals to paper claims on them. In fact, we aim to prove next week that there is a shortage of precious metals relative to paper claims on them next week.

--For now, what should you expect? Well, unstable debt dynamics have a way of leading to unstable geopolitics too. You can never know what external event is going to trigger a loss of confidence by investors. But it will be a cold slap to the face when it comes.

--But in the meantime, our editors here (Kris, Alex, and Murray) are using the higher index levels to lift their trailing stops and lock in profits on open positions that have benefitted from the rally that began last March. You can make money. But at this point, it looks a lot like speculation and very little like investing.

--More on the BIS paper tomorrow...and on how to make it large in the second world.

And now over to Bill Bonner in Buenos Aires, Argentina:

"I came here because I felt that my children would have a better future here than in Britain," said a colleague at lunch yesterday.

"It's very hard to live well in Britain; the country is too crowded. And things are too expensive. If you want a decent house at a decent price, you have to go way out of London. Even then, they're not easy to find. And then, you spend half your life traveling back and forth to work.

"But there's something else. I think Britain's glory days are past. The economy might grow in absolute terms. I hope so. But it is unlikely to grow as fast as Argentina or Brazil or any one of dozens of overseas economies.

"That's true for America too. I don't think the US is finished, by any means. But if you want to give your children the best combination of lifestyle and economic opportunity, there are better places to live."

Few people would bet on Argentina's financial future. The country is a serial inflator...prone to self-inflicted financial wounds. It has shot itself in the foot so often, it hardly has any feet left!

Most people would say that investing in Argentina is 'too risky.'

But that just goes to show that people don't understand risk. They look at the past and use it to measure the future. What they don't realize is that risk in financial markets is not like rainfall or earthquakes.

Earthquakes are completely indifferent to what we think about them. But the financial markets are more sensitive than a poet. People who've lived through financial crises don't want to see another one. Or, to put it more specifically, if you've just been through a bear market you're not likely to pay too much for stocks. You'll think it's "too risky" to buy expensive stocks. So, stocks will not become expensive. The risk of another crash will be low.

Germans lived through a period of hyperinflation in the '20s. To this day, they are deathly afraid of rising consumer prices.

People who are accustomed to stable prices...and a rising stock market...have a different attitude. Analysts look at their history and pronounce the market "safe." But it's actually very risky...because prices are high and investors are complacent.

The riskiest markets are probably those judged safest by the analysts. The safest are those thought to be risky.

Bill Bonner
for The Daily Reckoning Australia