Sometimes I feel so low-down and disgusted
Can't help but wonder what's happenin' to my companions,
Are they lost or are they found, have they counted the cost it'll take to bring down
All their earthly principles they're gonna have to abandon?
There's a slow, slow train comin' up around the bend.

- Bob Dylan

The question before the jury is a simple one, but the answer is complex. Is the US in a "V"-shaped recovery? Are we returning to the old normal? A great deal hinges on the answer, and this week we look at some of the evidence before us.

But first, a follow-up thought to last week's letter. I wrote about why countries can reduce their private debt, reduce their public debt, or run a trade deficit, but not all three at the same time. If a country wants to see its government run a fiscal surplus (or small deficit) and at the same time its private citizens want to reduce their leverage (common desires throughout the developed world), it must run a trade surplus. That's a simple accounting statement. If you did not read last week's letter, you can get to it by going here.

That brings up the deepwater gusher in the Gulf. That it is an unmitigated disaster is an understatement. There is the possibility of the oil getting into the Gulf Stream and going around Florida and landing upon the Atlantic coast. We will be cleaning this up for years.

I am at the moment on a plane to Italy, but if memory serves me right, we run about a $300-billion-dollar trade deficit just in energy purchases. Our trade deficit has been coming down in most other categories but is fairly steady with respect to oil. And as noted above, if we want to get to a place where we are in control of our government deficit, we must reduce that trade deficit.

Bluntly, we cannot hope to balance the fiscal budget without getting a handle on our energy policy (unless consumers and business elect to go into more debt against the current trend - there must be an accounting balance!)

If the Chinese allowed the renminbi to rise, would that make the USA better off? That is the contention of a cabal of critics from Senators to Nobel laureates. Paul Krugman wants to see a 25% tariff on Chinese goods. Today we examine that idea, and look at the real problems that we face. If only it were so easy. The numbers just don't add up. The fault, dear Brutus...

But first, and quickly, and in keeping with the spirit of the recent Olympics in Canada, I want to let my Canadian readers know that I am excited to announce a new Canadian partner, Nicola Wealth Management, based in Vancouver. Why Nicola Wealth Management? I have spent some time getting to know them and have come to have a great deal of trust in and respect for John Nicola (President) and his team. In my opinion, they are one of the premier wealth management firms in Canada. Further, they are as committed to helping you find high-quality investments, including absolute-return strategies, as I am.

If you are from Canada, get started now by going to www.accreditedinvestor.ws and signing up, and I will make sure one of the team at Nicola Wealth Management will call and qualify you to receive our Accredited Investor Communications.

And of course, if you are in the US, Latin America, Europe, or South Africa, and if you are an accredited investor (basically a net worth of $1 million or more), you can go to that link and I will have one of my partners in those areas contact you about the various absolute-return strategy funds that are available to you. (In this regard, I am president of and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

From ghoulies and ghosties

And long-leggedy beasties

And things that go bump in the night,
Good Lord, deliver us!

--Old Scottish Prayer

There is something that is bumping around in my worry closet. The bond market is not behaving as if there is deflation in our future, and the dollar is getting weaker. Unemployment keeps rising, but most of all, the US government deficit looks to be spinning out of control. This week we look at all of this and take a tour around the world to see what is happening. There is a lot of interesting material to cover.

But first, I am proud to announce that thanks to your donations the net proceeds from the Richard Russell Tribute Dinner totaled $17,000 ! A donation was made in that amount to the Autism Society of America, San Diego County Chapter, in Richard Russell's name.

The evening was captured in both video and photographs, and we would like to share those with you. We have put together a DVD that captures all the wonderful moments, including tributes from Richard's longtime friends and family, an entertaining skit by Richard's daughter Daria, and another touching tribute by Richard's daughter Betsy. Perhaps the best speech, however, came from Richard himself -- which is of course included on the video. For those who could not attend in person, we have already made copies of the video and will mail it to you as soon as you order it. The cost is $29.95, and that includes shipping. You may order as many copies as you like.

"The stock market is a voting machine in the short run and a weighing machine in the long run." - Benjamin Graham

The voting part of the equation is tempered by fear and greed. It is largely emotional, although investors like to think of themselves as rational players. That emotion is driven by views of the future. If you can be confident of large and growing returns, you are less likely to be swayed by the erratic movements of a stock. But as confidence wanes? Well, that is the stuff that bear markets are made of.

Because at the end of the day, what the market weighs is earnings and the ability of a company to reliably produce them. This week we look at what earnings are likely to be over the next year and see if we can discern what that suggests for the markets. We also take a look at the energy markets, the possibility of a further drop in the price of oil, and muse on what a sane energy policy for the world would look like. There is a lot to cover, but it should make for an interesting letter.

In the past week, I have been in the car coming home late from work, with the presidential debates are on the radio. It is very discouraging to listen to what passes for economic literacy among the candidates. In reality, many candidates are espousing policies that are quite dangerous at worst, or simply misleading at best. Far too many in both parties tell a frustrated America what it wants to hear, rather than the economic reality. The Republicans have some of the worst offenders.

So, today we will look at some economic reality. We tackle trade deficits, the dollar, taxes (the "Fair Tax"), how should we stimulate the economy as we slip into recession, and global trade. I think we will cover enough that I can just about guarantee to offend most of my readers at some point. But the main point I want you to take away from all this is that the simple one-line answers given at these debates might work to fool most of the voters and tell them what they want to hear, but they are not based in economic reality. While this is of more interest to US citizens, the principles apply across borders. So, let's jump right in.

This week we look at the links between the US trade deficit, the low savings rate in the US, home prices, and interest rates, all in an effort to answer the question: "Do trade deficits matter?" I think I will offer a few practical, if simple, insights to the matter.

At the end of last year, I did a series of e-letters on the debate over dinner in London between Bill Bonner and Charles and Louis-Vincent Gave. Both had just published a book. Bill's book, Empire of Debt (which is still doing well) states that the US trade deficit, coupled with massive government and consumer debt, is going to drive the dollar to its knees and end up with the US in a soft depression. You can chalk it safely in the doom and gloom column.

This week we look into my worry closet and ponder whether the Dubai port debacle is a one-off thing or does it signal a rise in protectionism. The recent polls suggest I will upset about 90% of you, but I look at the deal from the very negative economic impact it could have on this country. We then briefly look at the potential for more Fed rate increases and at a disturbing Federal Reserve Bank report on US wealth.

But first, a brief paragraph on a new feature of the letter. We have added a new link at the top of this letter which allows you to easily send Thoughts from the Frontline to a friend with a comment by you. You can use it every week, but there is also a link where they can subscribe directly should you suggest that to them. Thank you in advance for helping this letter continue to grow. It is hard to believe that just over five years ago we started with only a few thousand names and now send the letter out to over 1.5 million names each week. To those who have recommended the letter to friends over the years, I do appreciate your support.

"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand now, it is more likely than not that it will be a financial crisis rather than a policy foresight that will force change." - Paul Volker

How long can the United States continue with an ever rising trade deficit? How far can debt rise? Will it end, as Paul Volker, former Chairman of the Fed stated above, in a financial crisis? Will it end as a soft depression as Bill Bonner suggests or is it different this time as the team at GaveKal project.

This week we finish with our series on the US trade deficit. When will we see a real problem? What are the likely results from a balancing of global trade? Where are the investment opportunities, and where are the pitfalls? It should make for an interesting conclusion and hopefully an interesting letter.

Let's start this letter by noting that this week is the anniversary of the all- time high of the NASDAQ. Five years ago this week the NASDAQ topped at 5,048. It eventually dropped to around 1100 before "recovering" to today's close at 2,041.

I remember writing in the fall of 1998 that the NASDAQ was overpriced. Eventually, time has shown that view to be correct. But in 1999, I looked like I didn't have a clue. And I confess at the time, I didn't have a clue. I couldn't figure out what was making the market go up. To me it was clearly a bubble. As a value investor, I couldn't bring myself to participate, other than through money managers who were market timers.

We have been looking at the US trade deficit and the global trade imbalance for the past two weeks. It is currently an unsustainable trend, and thus will stop at some point. The questions are when and how? We will conclude this series today, looking at several ways the trade deficit could come back into line.

First, a very quick review. For those who remember, you can skip to the next heading. (And for those who would like to read the previous letters, you can go to www.2000wave.com and look in the archives.)

The first Bretton Woods system came about when representatives of most of the world's leading nations met at Bretton Woods, New Hampshire, in 1944 to create a new international monetary system.