It's pretty simple folks. We are approaching the moment of truth.
The government is slowly getting backed into a corner. The more pressure we see on the currency, the tougher it becomes for the Fed to continue and play their borrowing games.
I believe moving forward, successful treasury sales may be viewed as a negative versus a positive if the dollar continues to sell off. Currency traders are beginning to realize that we are risking our currency as we continue to dig ourselves into unthinkable debt.
Today was the first day the market didn't zoom higher as the dollar sold off. As we broke the USD trading range and broke to the doenside, I think some of the currency traders got spooked and bailed.
Treasuries rose as the move in the dollar put the fear of god into some investors. Other smart money ran into gold which also soared today. The VIX spiked sharply at one point during the day.
The volatility and action was quite remarkable today considering the small move that we saw in the market. Things appear to be quite unstable as we head into next week.
The Fed has a choice to make
Its inflate or die(deflation). We have hit the fork in the road. The government either has to slam on the brakes and stop spending which will lead to deflation, or continue to monetize the debt and inflate. This of course leads to us selling treasuries out the ying yang.
The big question here is does the government have the balls to walk away and let a lot of the economy die via deflation? Considering they can't even let a bank die, I am leaning towards further monetization for now. This should put serious pressure on the dollar.
The question down the road will be this: Does the Fed blow their head off and destroy our economy as they try to save everyone or will they decide to let the deflationary forces prevail which then leads to a deflationary collapse? I remain on the fence on this one.
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For those of you who think that housing is recovering take a look at this video. This is a sobering reminder of how out of control the real estate bubble was. The most recent Case Shiller Index improved but still was down 17% seasonally adjusted. This means housing prices continue to plummet.
Note to potential home buyers: Never try and catch a falling knife! There will be plenty of time to buy when housing bottoms. There is usually a period of years where housing prices stay flat after real estate bubbles collapse.
Don't be a victim like the family below!