Meridith Whitney Interview/Bernanke's Blunder

Good Evening Folks!

This is a must watch video from Meridith. Like me and many others that visit here, she has no clue why the market is trading where it is.

She also sees the same MBS nightmare that I have discussed recently. The Fed's MBS purchasing program is about to run dry and rates are going to soar when they do.

Like Meridith said: Who on earth is going to replace the Fed when it comes to buying these loans that are based on reckless lending standards?

FHA has learned nothing from Fannie and Freddie's bad lending practices that created the housing bubble. They continue to lend out money like a Ponzi machine. The only way this debt ever gets sold to the private sector is at distressed asset prices. This will then cause another cataclysmic round of losses for the banks.

The parabolic move in gold was also worth noting today. The world is continuing to lose confidence in the dollar. Bernanke MUST come out with an exit strategy or the dollar is going to continue to get slaughtered.

Gold soared after his speech because he spoke of no exit strategy. He continued to talk about cheap money and low interest rates.

His explanation as to why the dollar is selling off was ridiculous. He stated in his speech that he believes(and I don't really believe he thinks this) that the dollar moved higher late last year during the crash because the world ran to the US dollar with their assets in a flight to safety move. He then explained that once the crisis was over, the world moved out of the dollar and back into their normal asset classes. The dollar then sold off as a result.

HA! Yeah OK. Was that the real reason Ben? Or is the world starting to get spooked that the US is now carrying $12 trillion in bad assets and liabilities via various lending programs?

After Ben spoke about the dollar, the currency and the gold market chose option B from above and proceeded to shove Ben's "dollar talk"up his behind by selling of the dollar and pushing gold up to $1140. The market has a brutal way of calling all bluffs.

Despite the concerns around the US dollar, the markets continued to rise the "wall of worry" as Wall St bets on an economic recovery.

Meredith explains eloquently why this ain't gonna happen. The risk of a double dip recession is much higher.

Meridith's worries are right on target: Consumer credit continues to vanish almost as fast as the jobs in this country

MAking matters worse: The banks have realized that borrowing money from the Fed at zero rates and then buying longer term treasuries and pocketing the spread is very profitable and carries much less risk versus lending it out to the tapped out US consumer.

Can you really blame them? Who on earth wants to lend to J6P as they continue to lose their jobs and and sit in debt up to their eyeballs.

Enjoy Meridith. Double dip recession here we come!




Disclosure: Long gold via GLD and short treasuries via TBT.

Zero Interest Rates Can't Last Forever

Hi All!

I apologize for being so quiet this week. I am exremely busy recently so please forgive me!

Alrighty, let's get to these wacky markets.

I wanted to share some thoughts with all of you around the US dollar and the current "easy money" interest rate policy of the Fed.

Before I get into this, let me start by saying the market makes no sense right now when it comes to fundamentals(Surprise! Not!). A strong dollar is usually associated with a strong economy in most countries.

Our stock market is doing the exact opposite right now as the banks continue to buy the S&P using US taxpayer dollars.

The trend that's been working recently is short the dollar/long equities trade. Whenever the dollar strengthens(like today) the trade reverses and the market tends to fall apart.

This of course makes no sense. However, Should this really be a surprise when it comes to the crazy price action in our market lately?

The way I see it, the market is basically caught between a rock and a hard place as the economy continues to suffer. The only way for the banks to make money right now is in a zero interest rate environment.

This allows for them to borrow from the Fed at practically zero and then buy things like longer term treasuries that yield 3-4%. This is a sweet spread for the pigmen.

Ironically, the pigs on Wall St have no desire too see a recovery in the short term because the profitability of the trades like the one I explained above are beautiful in their eyes. This low rate environment basically enables the banks to make sweet profits with very little risk compared to lending out money to J6P.

The current scenario described above is also having an effect on how the stock market trades:

Stocks today tend to rise as the economy continues to suffer because Wall St understands that the Fed cannot take away the punch bowl and raise interest rates as Rome burns.

As a result, traders and investors buy equities and gold based on the idea that the dollar will fall. This is the "reflation trade" that you hear about on CNBC all day.

This trade has been extremely successful recently as gold and equities have soared. Gold now sits near an all time high of over $1100(this must make the Fed nervous). The Dow has flattened out a tad recently but still sits over 10K.

However, when the dollar reverses and rises, equities begin to sell off as the world begins to fear deflation. We saw this type of price action today as the dollar stabilized. This stabilization often occurs as a result of countries buying our dollars in an attempt to stabilize the buck in order to keep their own exports attractive.

A weaker market as a result of a stronger currency is the exact opposite of what should happen. A strong national currency usually is representative of a country that has a strong economy. This should be a boost for stocks during normal times.

As we all know, these are not normal times.

So what do you do when the market is zigging when it should be zagging after a 50+% bounce? Stay away IMO. I am tempted to short at these levels. In fact, I bought a few short contracts two days ago for **its and giggles.

For the most part as you all know, I continue to sit in cash and go long metals as the dollar continues to depreciate as a result of endless bailouts.

The risk of buying stocks with PE ratio's of over 100 is simply too risky for my taste.

So where are we headed?

IMO, I don't see why the dollar will strengthen anytime soon. As long as the fraud on Wall St continues and real price discovery continues to be ignored, the dollar is going to continue to get crushed.

The economy will not recover in such a scenario because the prices have not been allowed to "revert to the mean".

This forces buyers to sit on the sidelines thinking that prices are still too high which then kills the economy. Rising unemployment only exacerbates this problem. We now sit at a staggering 17.5% U-6 unemployment rate.

Don't forget: The real economy is dead folks. The government stimulus is the only thing keeping things afloat. Remember, the Feds would never spend like this and risk inflation/hyperinflation if they believed the economy could sustain itself.

As a result, the Fed's continued massive spending binge will dig us even deeper into trillion dollar debts. The US dollar will continue and take a beat down as a result..

Eventually this game will end because there will be no one left to borrow money from in order to keep the game going. Also keep in mind that the quantitative easing by the Fed is about to come to an end.

The Fed's treasury purchases are just about done, and the MBS QE purchases should be completed by March in my estimate. When this buying binge ends in the spring the market is in for a VERY rude awakening.

I predict interest rates are going to soar as the world's appetite for treasuries disappears once they realize the Fed is no longer a buyer!

Take a look at Japan if you want a preview of what happens to rates when a central bank stops QE'ing:

The Bottom Line:

As you can see above, once Japan's QE spending binge ended, rates began to rise. Are they still ridiculously low? Yes. However, Japan's famed deflation was not nearly as serious as it is usually depicted.

I expect a violent rise in interest rates next year when our QE ends. I also predict that the short dollar/long equities trade will fall apart once the dollar gets below the 72 area.

When the dollar falls to a certian level, it will be hard for the pump monkeys to continue and smoke the bull crack pipe when oil goes back up to $150 as a result of our collapsing currency.

The Fed is on a bridge to nowhere. They can't raise rates because the economy is too fragile, and the dollar will continue to fall the longer rates stay at zero. This will of course will create tremendous inflationary pressures on the economy.

Heading into early next spring I believe higher interest rates are inevitable as the various QE programs come to an end.

If the Fed ignorantly decides to extend these programs in an attempt to continue and bailout America, you better go out and a skateboard because it will be the only way you will be able to afford to commute to work.

Disclosure: Short a couple contracts via SPY for fun. Long Gold.