It's been yet another awful month for the financial markets, even though the stock markets continue to be blissfully impervious to the carnage that is taking place in the rest of the financial world. This is not to say that the stock markets are by any definition bullish. But they certainly aren't in the panic state that the credit markets are in at the moment. If they were then we'd be talking a full scale stock market crash, for that's what invariably happens when bidders cease to show up. This is the state of the bond and credit markets right now. For all intents and purposes, save for government bonds, there is no functioning bond market. The stock market seems to be playing to a different tune. So, for now, the prognosis is for a long and drawn out bear market that could last for years to come, for the authorities are loath to allow a quick resolution to the bursting of the credit bubble. In our minds it is difficult to rationally reconcile current equity valuations with the washout that is occurring in the credit and bond markets and the US recession that we believe is now in full swing. But as bad as things are in the financial world, they seem to keep getting worse because problems heretofore unanticipated are coming at us from unforeseen quarters, like Unidentified Flying Objects from Mars. Things we already knew, about the credit bubble and the risks that were being taken, tell us that the problems in the financial system are bad. Things we don't know, but that are only now coming to the fore, tell us that the situation could be unfathomably worse.

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We know from our own analysis of resource companies that the cost of building just about anything has at least doubled over the last few years. So much so that many projects are being canned in spite of high commodity prices. Oil is back up to $100 per barrel in spite of supposedly weakening global economic fundamentals, and gold is hitting new highs as we speak. Not only have energy prices been sustained, but food prices are now going through the roof everywhere. Those who believe we are still in a period of benign inflation are living in a dream world. Yet the Fed is promising further cuts from the current 3% level, assuaging equity markets but turning a blind eye to inflation, the plummeting value of the dollar, and moral hazard. Furthermore, the US government is planning a $168 billion helicopter drop of cash into consumers' pockets, resulting in a near-record budget deficit of $400 billion, give or take, for this fiscal year, and likely to swell well beyond that number during the next administration. It is little wonder, therefore, that the $9 billion 30-year Treasury auction earlier this month got hosed by the investment community, resulting in an almost unheard of 3% single-day drop in the value of the long term bond. Why would anybody want to own a 30-year bond at these yields at what will likely turn out to be a negative real interest rate? We believe it is only a matter of time before investors turn their back on the dollar and US government bonds, inevitably leading to rising long term rates regardless of, and probably even because of, what the Federal Reserve does with monetary policy.