In This Issue:

Many Americans Are In A Funk
If Everything Is So Bad, Where's The Recession?
The Fed's Rescues Come With A Price
A Lending Conflict Is In The Making
And A Weaker Dollar May Be On The Way
DNA Checks Are Not Just For Crooks
The Bottom Line This Week

The bear picked himself up off the mat last week after having been knocked flat by the bull a few days earlier.

As it turned out, the nasty fellow should have taken the full count to get back more of his strength. The best he could do with his rebound was push the Dow back a miniscule 1.1%. Nasdaq actually rose 1.2%.

When the market reopened this week, we got a dramatic demonstration about how important oil prices have become on Wall Street. On Monday oil ticked up fractionally, and the Dow dropped 240 points. Then on Tuesday, oil dropped back down and the Dow shot up 267 points. The uptrend continued the next day with a 186 point gain.

Many Americans Are In A Funk

Americans are in a gloomy mood. That's not surprising since they have been told since childhood that their homes would be their greatest, and best performing, asset. Now that house prices have tanked in most regions, a lot of people are feeling poor, and they don't like it. They are especially upset to learn that the price slide may not be over.

It isn't helping that many financial service firms are also falling on their faces. Next to houses, banks have always been the bedrocks of a community. Many people think if the banks are in trouble, the nation must be in bad shape.

At the same time, gas prices have been raking household budgets over the coals. In truth, most people can pay the extra dollar a gallon or so without needing to totally rearrange their budgets. What bothers people the most is the possibility that prices may go much higher. If that happens, lifestyles will need to change, a prospect too terrible to contemplate.

If Everything Is So Bad, Where's The Recession?

Fortunately, a broader view of the economy reveals that the U.S is holding up a lot better than the public believes. Growth is still in the 1.5% - 2.1% range, which is a lot better than the negative numbers that had been predicted.

Most individual economic measures are also doing fairly well. Unemployment, for example, is hovering at about 5.5%. That's below the 5.8% average of the past 45 years.

Inflation is also livable, although it is several points above Uncle Sam's official 5% rate. Nevertheless, inflation has been higher in the past for long periods of time when the economy got along quite well.

Economist Robert Samuelson summed the situation up best in his recent column, "The Depression Specter." He pointed out that after all the shocks the economy has absorbed this year, it hasn't collapsed. That suggests that the U.S. is a lot stronger than it appears to be.

The Fed's Rescues Come With A Price

One of the reasons the sharp housing downturn and the bank failures have not torpedoed the economy is the Fed has been fighting them tooth and nail. The agency's bailouts and other monetary measures kept Fannie Mae, Freddie Mac, and dozens of other firms from stumbling over a cliff.

The Fed also engineered several mergers and buyouts that matched strong banks with those that were about to fold. The best known deal was the 11^th hour rescue of Bear Stearns by JP Morgan Chase that Ben the matchmaker helped put together. There have been many other shotgun marriages that didn't make the front pages.

Although the Fed acted as it should to keep the economy afloat, it could lead to the U.S. having a worse downturn in the future. That's because the Fed is keeping many practices alive that should be allowed to fail.

For example, many businesses with mounting losses are being propped up with public money. Ditto for contractors who built far too many houses, and banks that loaned millions of dollars to people with bad credit records. In a normal economic downturn, the malefactors would be stricken from the rolls and the books would be balanced again.

To make matters worse, many of the worst offenders are being rewarded by the Fed's bailouts. When they make money, they get to keep it. When they fail, taxpayers get the bill. No one should be surprised when the scoundrels keep up the bad work. 

The bottom line is that many of America's financial problems will be transferred to the next economic cycle. At some point, the troubles they cause may be beyond repair.

A Lending Conflict Is In The Making

There is another problem being created by Mr. Bernanke's agency. On October 1, borrowers will be required to prove they have an income. What an imposition! It's positively un-American. A person should just be able to sign a paper and get a house, a car, or a Hawaiian vacation.

The new lending standards, of course, are designed to keep the banks from running amuck again. However, the battered housing industry is unlikely to recover anytime soon if it becomes hard to get a mortgage. Without some loosey-goosey lending, the huge inventory of unsold homes will remain huge for years.

The slow-moving inventory of homes will be trouble enough by itself. To make matters worse, the market will compensate by slashing prices. It's Economics 101: unwanted stuff goes on sale. As we said a minute ago, the public is already unnerved by the housing plunge and won't like lower prices one little bit.

And A Weaker Dollar May Be On The Way

Lastly, because each financial bailout increases the money supply the dollar is also coming under pressure and seems likely to decline quite a bit more over the next several months.

In recent issues we discussed using foreign currency accounts and ETFs to help protect your assets from the weak dollar. Swiss francs have the best track record in that role. Many commercial banks and EverBank World Markets (www.everbank.com) have deposit accounts and CDs in the gnomes' currency. Alternately, you can hedge the dollar with the CurrencyShares Swiss Franc Trust (FXF). http://finance.yahoo.com/q/pr?s=FXF

Another way to protect yourself from a further decline in the dollar is to invest in a good international bond fund. Besides being good dollar hedges, the funds pay regular income, and they can also deliver attractive capital gains.

The income from an international bond fund can be especially sweet. Before the checks are cut, they are adjusted to compensate for any decline in the dollar that may have occurred. As a result, investors maintain their purchasing power.

We think the T. Rowe Price International Bond Fund (RPIBX) is the best in its group for most investors. http://finance.yahoo.com/q/pr?s=RPIBX The no-load fund seeks to provide high current income and capital appreciation by investing in bonds from France, Japan, the United Kingdom, and Austria – to name only a few. The fund is up 3.85% so far this year, vs a 4.3% decline for those that invest in long term U.S. Treasury bonds.

There is always a risk with any international bond fund that the dollar will rise and reduce your returns. As a result, you should diversify your bond investments just as carefully as you do the stocks you buy.

DNA Checks Are Not Just For Crooks

Several companies have come along that will trace your genealogy by comparing your DNA sequence with others in its database. You can find out where your ancestors came from and how they scattered throughout the world. In addition, tests can determine whether you originated from the same ancestors as others who share your last name. You can also find out if your pappy is who you think he is, but we will leave that one alone.

One of the leading providers of DNA tracing is Genebase Systems. www.dnaancestryproject.com Prices range from $119 to $318 depending on the number of traces requested. Check the company's website for details.

The Bottom Line This Week

Americans are feeling a bit blue about house prices, expensive energy, shaky banks, and other problems. However, the economy isn't doing nearly as badly as most citizens believe. There is still every reason to think the future will be better than it is today.

Until Next Week

The AIA "Advocate For Absolute Returns", a weekly publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next Thursday...