Just some commentary today folks.
Well here we are day 2 after the Fed's spending binge. The market sold off for a second day in a row as the markets continue to digest Ben's shocking announcement this week.
I think you may be seeing here is a little buyers remorse from the bulls. The reason I say this is there is only one way to interpret the Fed's actions on Wednesday: Things are bad and getting much worse. There is no other reason for them to take such drastic actions.
I think many of the bulls are deciding to take profits now after a 20% bounce. The rally that began a few weeks ago was based on the premise that we should be coming out of the recession later this year or in early 2010. The rally really got its legs when the pigmen from Citi, BofA, and JPM all started glowing about how profitable things were since the beginning of the year. Yeah right! If things are so great then lets see a balance sheet!
The timing of all this was always very suspicious to me. I have no doubt that this was an orchestrated move that was probably instigated by the Fed. Seeing Ben Bernanke on 60 Minutes chirping about our remarkable "recovering" economy only confirmed it for me. This was nothing but a sham to increase confidence in our collapsing banking system. Gee what a surprise eh? NOT.... I stopped trusting these scumbags a long time ago.
Nonetheless, the market loved the news and was oversold so it resulted in a large bounce. If there is one thing I have learned: Never underestimate the optimism from the bulls no matter how bad things are. Their buying sprees can occur on the flip of a dime. Any small piece of news or intervention can spark these bear market rallies. Remember, this country basically had a 25 year run where stocks always went up. Habits are tough to break and the bullish sentiment among most investors will take time to change after such a long run.
Its going to take time for them to accept the new world in which we invest in. Stocks aren't going to double every 10 years like they used to.
I think the reality of this new world hit a lot of bulls this week. Ben's action's really pulled the rug out from under the bull case that we will see a late second half recovery. The Fed doesn't take such policy actions unless the economy is on the verge of a collapse and even the bulls understand this.
Despite the recent pullback, I still think you are going to see another push from the bulls before the market really breaks down. The reflation trade will be pumped and pumped everyday by CNBC. I am pretty sure this will result in further moves in the commodity and energy stocks. They have already soared since the Fed's actions. Oil now sits comfortably over $50 a barrel.
This reflation trade is a foolish bet in my opinion: The question you need to ask yourself when you think about reflation/inflation is this: Where will the demand for commodities come from if incomes are flat or declining and unemployment continues to rise? No jobs=less consumption. Less consumption results in less demand for resources.
This being said, I can see why many of the pundits are extremely concerned about inflation. There are many reasons to be fearful of this threat. We will have to create trillions of dollars as we try and fail to bailout America. The drop in the dollar alone will push dollar denominated commodities higher which will result in some inflation. The inflation trade short term is not a bad strategy because that's how the market will play it.
However, long term I still can't see how inflation takes hold. The deflationary death spiral aka Japan is still the most likely scenario in my view. I say this because inflation can only take hold when wages are increasing and people have jobs. We are seeing nothing of the sort during this downturn.
Wages are flat or decreasing and unemployment is soaring as our economy continues to shrivel. This big move in commidites will be a nice short but its too early in the cycle to go there at this point.
Is the dollar safe?
The one large risk that I see from a inflationary standpoint is the collapse of the US dollar. I could never have previously imagined this folks, but I think we now have to put it on the table.
The G-20 summit is going to be very interesting. I think the sentiment towards the US and our approach to our economic crisis is really beginning to worry the rest of the world. I expect us to take a lot of heat in London next week.
Their concern is warranted. Right now the whole world pretty much has all of their eggs in one basket economically. Decoupling turned out to be a joke. Most of worlds reserves sits in the US treasury market. China has already came out and stated that they are worried about their treasury holdings.
We better take these concerns seriously. For us to think that the world will continue to keep their assets in the US if we continue to spend and act irresponsibily would be a foolish conclusion. There have already been rumblings around China and Russia meeting to discuss some type of world currency alternative. This would have been considered tinfoil a few years ago. Nowadays I view it as a serious potential threat.
Whats scary here is the actions taken by the Fed this week make me think that we actually are arrogant enough to asssume that the world is going to sit there and take it as we continue and spend like drunken sailors. You know what happens when you ASSuME. Good luck with that approach Ben!
We need to start asking ourselves if the US dollar is actually safe? If it isn't then whats the alternative? What do we all do if the world decides to walk away from the US dollar and our treasuries?
I wish I had the answer for you folks. Buying gold is an alternative but I can't promise you that it will hold its value. Think about it: If the crap hits the fan, who can really afford to buy gold at $5,000 an ounce? The goldbugs all love to tell you that this will be the conclusion but how can you be so sure? This is why gold has always considered to be just a hedge: Its basically a wildcard. Many traders will tell you that "trading gold always end in tears". Could gold be worth 5k an ounce if Mad Max occurs? Sure, but at the same time it might only be worth using as a doorstop if some alternative currency is developed.
I think its time for all of us to start thinking outside the box. If the Fed and Treasury are hell bent on spending us into oblivion then we must begin to prepare for a possible collapse in the US dollar.
This is a serious risk in my view, and I plan on focusing more time on how we can all protect ourselves. Trading this market really doesn't matter if the dollar becomes worthless. On top of that, all of the interventions have made the market almost impossible to trade anyway. Word on the street is there were many professional bond traders that were completely wiped out in Chicago after the Fed announced their quantitative easing. A half a point move in treasuries is all it takes to wipeout someone completely out.
The Fed and the Treasury are hurting every investor with their constant meddling in the markets. The bulls and the bears are both taking it on the chin. If this crap continues investors are going to start walking away. I know I have for the most part. 85% of my assets are in cash. Anything that I own long is hedged with short positions.
Think about it: Without actual price discovery how do you trade? I mean how can any bond trader in Chicago feel confident in any trading positions when there is the constant risk that the Fed could step in and change the game at anytime? How will a stock trader be able to trade stocks if the mark to market accounting rules are changed and no one knows what any companies balance sheet really looks like?
The markets will eventually find themselves without buyers if the fraud and manipulation continue.
Transparency must come back or we are in deep trouble folks. The world will not continue to support our markets if we continue to run them like like a bunch of mobsters.
I will stay in cash for now but stay tuned for future posts around some alternatives because I am not sure cash is the place to be anymore. The government must ringfence our losses RIGHT NOW and immediately stop any future bailouts if it wishes to continue in its current form.
Anything less then this will result in social chaos by the end of the year.