As I sit here and watch the dollar tank once again tonight overseas, I wonder if the market is slowly coming to the conclusion that the USA will never be able to pay back the trillions of dollars that they have borrowed.
I really thought about yesterday's Jim Rickards interview on bubblevision today. Folks, I don't see how we escape this crisis without a dollar devaluation of 50% or so. This is the only way we will ever be able to pay off the ugly debts that we have accumulated.
So what are the unintended consequences of such actions? I'll be damned if I know. Inflation is an obvious answer but the social consequences would not be known until such an event occurred.
We are in uncharted waters. I can't make any sense of the stock market or the bond market at this stage. The fraud and manipulation at this point is unprecedented.
What's amazing is the banks continue to take advantage of the destabilization of our economy. I am beginning to believe that Wall St doesn't want to see a recovery because the chaos is creating so many profitable opportunities.
If we see an economic recovery, interest rates must rise, and this would be catastrophic to housing(higher lending rates) and thus the banks balance sheets.
Here is a nice example of why chaos is good for Wall St:
There is another "old school" bond game that's going on right now. The banks are borrowing short from the Fed at next to nothing(2% or so) and then buying the long end of the yield curve(4% or so) and pocketing the spread. This is why you have seen the long end of the bond market collapse over the past several weeks.
This is a beautiful game for the street for now but things can change in a hurry according to the pros:
An old bond trader friend of mine explained to me that he watched the same thing in the late '70's. It was a beautiful game while it lasted. The problem is they all got caught with their pants down when Volcker took rates to 12%.
Those long end bonds with a 6 or 7% yield from the '70's don't look so hot when it costs 12% to borrow a few years later!
You see folks, these games can only go on for so long before drastic actions must be taken in order to prevent ourselves from blowing up. When the party is over and rates soar(which I believe is right around the corner), the primary dealers and others holding these bonds are going to get killed.
One potential Black Swan in the bond market is the "audit the Fed" bill that's flying through Congress right now. The Fed is already screaming fire as they try and prevent this bill from going through.
If this passes, the Fed will be exposed for what they are: A fraudulent bunch of broke gangsters that are holding a bunch of worthless paper in an attempt to bailout their banking buddies. The Fed is a sham and everyone knows it.
I expect the rhetoric out of the Fed to soar as this bill gets closer to passage. It's already started. You can almost guarantee that they will warn us that such a move would threaten the whole financial system if this bill passes. I say bull****. We have been through much tougher times before. No one is too big to fail!!!! We will survive this crisis and move on.
The Fed however wants you to think the world will end if their balance sheet gets exposed. My questionn here is if they were legit then why would they be so resistant to an audit? Companies are audited all of the time! Their resistance to this bill proves their guilt IMO.
The Bottom Line:
The games never seem to end. Many of my contacts on the street are extremely skeptical of what's going on in the markets. A few see no way out for the Fed and the economy. In fact, I have never seen people from Wall St so bearish. They are usually a jolly group.
Many of them are now beginning to focus on how to profit from the collapse that seems almost impossible to avoid at this point.
The bulls own the market for now. Fundamentals don't matter when you are betting on a recovery. If the analyst's revise earnings down from .20 a share down to .05 on a company before earnings season and they come in at .10 it's a huge beat! Yeah ok, go ahead and tug the other one.
The mirage of Wall St continues but you need to wonder if their run is about over. A collapsing dollar and the Fed's response are what I am focusing on right now. If I had to guess, the Fed will do nothing with interest rates unless inflation really runs wild.
As a result, the metals are still the place to be long term. The street is beginning to realize that the only way we pay back our trillions in debt is by devaluing the currency.
The IMF will pick up our slack with a new currency in order to stabilize world trade as we clean up our mess by taking down the dollar in order to pay off our debt.
This is going to be a very painful experience for America.