The Dow continues its rise. Up another 114 points yesterday.

Gold dropped another -$18 an ounce… Mr. Market is working his devious magic… scaring away the Johnny-come-latelies… putting the fear of God into the rest of us.

Hazarding a guess, the price of gold has about another $100 to fall. Then it will probably rebound a bit, as the “strong hands” take advantage of the opportunity.

But the fireworks in the gold market are still, probably, far ahead. You’ll hear the explosions when consumer prices begin to rise. And that won’t happen for a while.

And here is where the story gets interesting… and hard to follow. The bond market has turned. This could push the economy into a deeper funk unless growth starts to pick up. But it could be years before the new trend is firmly established.

We remember the last turn… in the early 1980s. Paul Volcker announced it in 1979. But it was almost four years before investors fully absorbed the news.

In the meantime, there is no pressure on consumer prices… because there is no real recovery. The news media was confused on the subject yesterday. Some sources reported big improvements in consumer confidence, durable goods orders and house prices. Others focused on the downward revision to first-quarter GDP growth.

You can believe anything you want. But on this we are certain: There will be no real recovery.

We are unsure of practically everything. Ask us our phone number…we will hesitate and check twice. Ask us who won World War I… we will have a whole barge-load of equivocations. Ask us which way the stock market is going… we will chuckle.

But ask us about a recovery and we have a ready answer: There will be none.

Why? How can we be so sure?

A recovery needs something solid to recover from. And the period 2003-07 was just the opposite. It was the feverish end to a long ailment that has plagued the US economy since the early 1980s. That was when America’s economy shifted from real growth to phony, debt-driven pseudo growth.

Before then the ratio of total debt to GDP had been about 150% for decades. Americans went about their business – saving… borrowing… spending… creating… producing in a reasonable way. Growth came from where it was supposed to come from – increases in productivity which were shared between workers, lenders, investors and businesses.

Then the confluence of a number of strange things sent debt levels soaring…

America was lucky enough to have the world’s reserve currency in an age of paper money

…the Chinese produced things cheaper than Americans. Wal-Mart pushed prices down further

…the Reagan administration decided that “deficits don’t matter”

…and the financial industry found innovative ways to package and sell on debt.

As a result, total debt-to-GDP levels rose to 300% by the end of the century… and then to 360% by 2007.

This extra debt changed the NATURE of the economy. It was no longer an economy that grew by producing things; henceforth, it was an economy that required larger and larger injections of debt to get high.

In 2007-08 subprime lenders got the shakes and it was over. At least, for them. In a matter of hours, the feds appeared on the scene with stronger drugs. They’ve been trying to relive that glorious “first toke” experience ever since.

And they’re still at it. A headline from today’s Financial Times: “Fed big-hitters seek to quash QE fears.”

What?

Investors are afraid the Fed might stop delivering the drugs. They needn’t worry. Those fears are “out of sync” with Fed thinking said “two senior Federal Reserve officials.”

The drug addiction analogy has been widely used to describe the situation. Like any analogy, it has its limitations and its dangers. But there is one element of it that has been widely ignored.

We spent some time with a psychologist recently. We we’re at a closed-door meeting of members of our family wealth investment advisory, Bonner & Partners Family Office.

There’s as much voodoo in psychology as there is in economics. Still, there are things one trade can learn from the other.

 “Drug addicts rarely just decide to recover,” said our friend, a family therapist.

“They have to hit bottom first,” she replied. “And that can be a very long way down.”

The feds are not even trying to help the economy overcome its addiction to cheap credit. Instead, like a sleazy therapist, they want to keep it in expensive and ineffective therapy. Running a rehab clinic can be a good business, especially if the patients never recover. Patients are never allowed to hit bottom. And the quacks keep transferring more and more wealth and power to themselves and their friends.

But like drugs, you can’t increase the dosage forever. An economy that depends on ever-greater hits of credit is an economy destined to blow up.

Then, and only then, can a real “recovery” begin. But it will not be a recovery to the feverish credit bubble of the 2003-07 period. It will be something very different.

Stay tuned…

Regards,

Bill