Friday, March 20, 2009

Market Sells The Sticksave

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.

Bottom Line:

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.

Stay Tuned!


Anonymous said...

Where is Ms Cleo when we really need her prediction badly? There is too much uncertainty. Holding cash gets you no where given the low interest rate. Investing the money in the stock market is like a crap shoot. You don't know what stunt the Fed will pull next.

Then again, if the dollar collapses, does it matter whether you hide it under the mattress, leave it in the bank or in the stock market?

Jeff said...



I hear ya. It appears nowhere is safe right now.

One thing I do know is I plan on staying out of the stock market. Earnings will continue to drop, and I don't see this changing anytime soon.

At least in fixed income your investmnets go up!

Raising cash for the time being still is the best option because it will take time for the dollar to fall.

Something tells me it won't take long for these treasury auctions to start struggling. Once this happens stocks are going to go boom.

The next major wave down in the stock market is going to take your breath away.

I am hoping a safe viable option to holding something other than US dollars is developed over the course of the year.

Anonymous said...

Gold has held its value through thick and thin. To cite an oft-used example: since the invention of the pistol, you could buy one for an ounce of gold. You ask who can afford gold at $5k/oz. The answer is "not dollar holders," but I don't see this as any indictment of the yellow metal. If the dollar is going to crap, how is measuring gold in dollars worth a peck at the keyboard? You quote that "trading gold always end in tears" so I won't be trading it, I'll be holding it.

Jeff said...
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Jeff said...


Hopefully the government doesn't take it from u while you hold it! I am not against gold.good point on the dolla holder
Would own coins over bars. More practical to use as a currency.

Food guns and ammo will all have value in a mad max scenario.

Jeff said...
This comment has been removed by the author.
john said...

Great blog. I've enjoyed your posts. I've also wondered where we can hide if things really get as bad as you mention. One thing to consider....if it gets as bad as you suggest it may, what's to keep the government from forcing all pensions, IRAs, 401ks, or even personal accounts to be invested solely in treasuries? It sounds wild, but it could be "justified" by the government as necessary to preserve our society. In that event, the best investment won't be cash or will be a nice piece of land with a good well and a long growing season!

Jeff said...



Great points. Liquidating your 401k may be a good idea if things really get
bad. Who knows what the gov will do! It scares me to even think about it.

I think your farm idea is a great one!

johndaniels said...

dunno jeff. disagree with alot of what you say. its not appropriate to compare the US with Japan; they had savings and their senario is much better than ours. we are pressing our entitlements to the max with the international community.. gold is an internationally aknowledged type of money.. you can bag gold all you like but its outperforming everything. you suggest we play etf's and stocks? i cant take that advice whatsoever. in fact degenerate traders should just go to vegas and get their free drinks; because thats all thewy do: hit soft 17 or play red or black. its bullshit. the dollar is a debt instrument; it's only value is its circulation. if that ever changes.... bye bye.

Michael J. Bernard said...

Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.


Jeff said...


I always appreciate your thoughts.

I appreciate your thoughts on gold but I have a question for you. IF gold has always held its value then why was it under $300 during the last recession?

Why has it risen 3+ fold in value if its "always" valueable? Also, why has it consistently failed once the value reached $1000?

I am not saying you are wrong but its just something to think about.

The only way I see gold being a long time winner is via a total economic collapse.

The problem is there is no guarentee that gold will be the winner if this occurs because there may be alternatives that develop.

BTW my post did not say you should buy any ETF's or stocks tonight. I have in the past but at these levels I simply have no opinion based on the interventions by the gov.

Jeff said...


Great article.

Thanks for sharing. The Chinese are not stupid. Ironically, they are probably better capitalists than we are at this point.

THe real socialism is in the US not China.

Anonymous said...

Hi Jeff,

"THe real socialism is in the US not China..."

The big difference: In socialism you used to nationalize companies before they went bankrupt. Nowadays we nationalize them after they go bust.

The massive subsidies that went into the banking system all over the world have proofen one thing to me:
A lot of the banking sector is actually a so called "Services of General Interest". Otherwise nobody would pump billions into it. They would just let them fail.

As a consequence "Services of General Interest" must also be supplied by the state itself: If a whole nation/system depends on such a service it is just foolish to completely rely on private companies, let them earn trillions and then take over their losses if they mismanaged the business. All because their services are suddenly "relevant to the system".

Called what ever you like. It's just a matter of "definiton".

All the banks that got a "bailout" have been defacto "socialist/nationalized" banks all the time anyway because all their business was based on this "they won't let us fail" ideology.

"Oh, we will definitely pay back the taxpayers bailout money." Sorry, under "normal" conditions the defacto owner (taxpayer in this case) has the right to claim all the future profit as well. But of course you cannot handle it that way because that would be "communism".

profit = private
losses and risk=taxpayer

profit,losses and risk = taxpayer

Funny, isn't it...


Jeff said...


That's a great way to look at it. It is funny.

Perhaps pure socialism is the way to go. It sure is better than our new form of "capitalism".

Its so frustrating watching all of this go down.