QE2 Goes Out With a Whimper....Get Ready for Deflation

I'm baaaaackkk:)

I had to chuckle to myself as I watched CNBS ignore QE2 today.  Any rational objective financial news organization would have designated several hours to discuss the ending of the greatest monetary printing stimulus ever seen. 

In typical bulltard fashion hardly a word was said about it on this ridiculous network.  I finally turned it off after hearing 3 shills call our current slowdown a "soft patch".  HA!  What a joke.  It reminded me of "the green shoots" crap from 2009.

"Soft Patch" my ass is my retort.

You would think that the immenent ending of QE2 would have been discussed on as stocks puked for a 3rd day in a row.   Why anyone still watches the buffoons on this network is beyond me.

Folks, the most concerning thing that I see right now is the bond market.

The 10 year bond soared once again today as the smart money piled into treasuries as they prepare for the shitstorm that is about to strike the Western World:

This chart should keep you up at night.
I mean think about it:  Bond traders are piling into bonds despite the end of QE2 which is supposed to be horribly bearish for bonds.  What this tells you is the big money would rather sit in bonds that yield nothing and may end up being worthless instead of sitting in the stock market.

Ummmm Hellooooo...RED FLAG ANYONE?????  Could there be any larger red frickin flag than this????

Here is some more data on our little soft patch/speed bump:

The Bottom Line

As you can see above folks the unemployment situation is getting worse and more hopeless by the year.  It's flat out dire at this point.

Without a huge influx of jobs our economy is only going to get worse. 

The stock market now realizes that at least for the time being the Fed does not have their back.  This makes them extremely scared and they have every right to be.

They are afraid for many reasons:

Will Greece unravel?
Could they take the rest of the PIIGS down with them? 
Could the US get sucked right down with them?

There are many unanswered questions.  One thing is for sure:  The bailouts in Europe are not working and the situation continues to worsen.  Papering over losses is not the answer because the problems are still there. 

So what should we do as investors?

For now you need to play the market for deflation until the Fed steps back in and blows up the dollar with QE3.

IMO(let me reiterate this) IMO that means shorting stocks and going long the US Dollar.  I have done both and it's been working well.  I actually went short the Euro versus the USD via EUO as my dollar play and its been paying off recently although it's been a very volatile trade.

Holding cash here is also a good idea until we see what the markets look like without the Fed throwing money into the market via POMO injections.

I don't like the metals here because I think the USD is going to rise although I still hold onto some gold as a hedge.  I am compeltely out of silver at this point.

The bottom line here folks is the time to be long stocks has passed us.  At the very least I see no problem sitting in cash and waiting for much cheaper buying opportunities.

Technically we are sitting right on the 200 moving day average so don't be surprised if the bulls defend vigorously here.  If the market closes below 1250 on the S&P the bulls are in deep trouble and they know it.

Hold on tight folks.  Expect lots of volatility as the market digests the huge slowdown in the economy combined without the help of the Fed.

I don't see how this doesn't all end in tears. I wouldn't be surprised to see us back in a recession within the next 4 quarters.

Without QE3 this market is toast and I fully expect that the Fed will come back with it after we suffer for awhile.  Once they do the inflation trade will then again have to be turned back on because it's going to put massive strains on the USD.

For now expect Deflation which means lower stocks, lower bond yields, and a soaring USD.

Be careful out there and enjoy the show.  It's going to be quite a spectacle.

Is the Bear Back?

I know I know, it's been awhile. 

I like to hop on here during periods of crisis and share my thoughts.  Overall, things are playing out just like I thought they would.  In the early part of this year I was warning that the markets would begin to roll over in April/May as the ending of QE2 arrived. 

Ironically it was the worsening economic data not QE that finally grabbed the market's attention.  Over the last month things have deteriorated significantly when it comes to the economy. 

What cracks me up here is how Wall St is "shocked" at how the economy has come to a screeching halt.  I sit here and ask myself why are they chocked???? How these idiots didn't see it coming????

Once gas hit $4 a gallon it was pretty much over for the consumer.  We've seen this story before.  Back in 2008 it took about 6 months for the economy to roll over when gas hit $4.   I assumed that the economy would stop a lot sooner this time because unemployment is double what it was back then.

Making matters worse this go around is the fact that the consumers balance sheet is also considerably worse in 2011 vs 2008 asAmericans struggle through the worst economic period since the Great Depression.   The ones that own homes are even more distressed as housing prices continue to drop in most parts of the country on a monthly basis.

When you consider these facts I must ask the question again.....Why is Wall St "SHOCKED" that the economy has stopped???

Ive said it before and I'll say it again:   CNBC and the rest of the pundits fail to understand that we never got out of the recession back in 2009.  The pump monkeys all dove in once the recession was officially "over" according to the BS economic statistics thinking that we will recover like we always have. 

If you timed it right and bought in March of 2009you made a lot of money on this play.  This was a great trade.  Let me emphasize and repeat that: Trade not investment.  The problem is most of the bulls won't treat it as such.  They will overstay there welcome like they always do and give most of it all back as they ignorantly believe that happy days are right around the corner.

What the bulls fail to realize over the longer term is this isn't your typical recession where you stimulate the economy and then recover.  This is a Great depression.....It may be our greatest depression when it's all said and done.  The only way we recovered in any way is because the government SPENT their way out of it. 

They handed out checks like candy to the unemployed and dropped money out of helicopters and into the banks coffers in the form of QE and QE2.

What we witnessed the past 2 years was the largest government financial drug binge the world has ever seen.  In the end they fixed nothing.  Strucurally the economy is a mess.  The losses haven't been taken, and the insolvent banks only remain solvent thanks to fraudelent accounting

The Bottom Line

The recovery is a sham and it's time to be very careful as we near the ending of QE2 on june 30th. 

The drug binge is over folks, at least for awhile.  If you are curious to see what the world might look like without QE2 all you need to do is look at what happened during the summer of 2010 when the first QE ended:

As you can see above stocks dropped 15% after the first QE drug binge ended.  Why anyone would think it would be different this time is beyond me. 

History often doesn't always repeat itself but it often rhymes.  What's absolutely frighting to me this go around is QE2 is ending at a time where the economy is in shambles versus last year where things were relatively stable.

I am sure this keeps Bernanke up at night which is why I think we will see a QE3 in the not too distant future.

Many of the hedge funds are betting that the stimulus will continue beyond June in some form of a QE3 that might not be called QE.  If you look at the bond market that idea makes some sense. 

I say this because the big money wouldn't be diving into treasuries unless they either thought the Fed had their back OR they were scared to death of a deflationary collapse.  I wouldn't be surprised to see the Fed do something like reinvest the money from maturing short term treasuries back into the bond market.

I guess we will know the real reason why we saw a flight to safety into bonds in the next few months. 

So where do we go from here?  Too be honest folks it scares the living daylights out of me.  Without QE the market is going to roll over like a cheap suit which is why I don't think the Fed can stop supporting the economy.

The problem is if the Fed stays in the game it's going to have a very negative effect on our currency which will then create even worse inflation.  $6 gas anyone??

The Fed has a brutala choice to make and I have talked about this for the past couple years:

Option 1

End QE and try to manage a deflationary death spiral.

Option 2

Continue QE'ing and try to manage an inflationary disaster that could potentially collapse the dollar.

Nice choices eh??

Personally, I would go with option 1 and just let it go and get it over with.  As I have said before, lower prices from deflation can be a good thing.  It makes things affordable.  The Fed and the banks are the only ones that want to keep prices propped up because both of their balance sheets are littered with toxic overpriced assets.

I suppose the homeowners would hate deflation as well but I say why do they care?  Most of them are already likely underwater anyway.

As for my investments I remain cautious.  I am hedged short with some high beta names as hedges.  I am also getting a little speculative and shorting the Euro versus the USD via EUO(Warning: VERY risky). 

I remain mainly in cash for the most part even though it may be worthless one day soon.  I continue to choose cash  because I think stocks will get a lot cheaper in the future and you need to have some powder dry in order to take advantage of it.

Bonds look awful here and I would avoid them like the plague.  I own some PIMCO which is out of treasuries which is where I wanna be as this plays out.  Remember folks:  If Bill Gross is running away from treasuries you should too.  He may look wrong now after the recent rally but he will be right in the longer run because this country is bankrupt.

I can't see anything but soaring bond yields in our longer term future.  The Fed may be able to keep the music going a little while longer with more QE in the short term.  However,  longer term time is running out and smartest guys on Wall St know it.  Go read Bill Gross and BlackRock's Larry Fink's latest pieces.  They see the writing on the wall. 

Longer term we are abviously in deep trouble.  Moody's warned theUSA again today that they will look to lower our credit rating if we don't get our fiscal house in order.

The questions to ask now are these:  Is this even possible?  Do we have the political will to pull it off?

I lean towards the answer "no" on both questions.  I hope for the sake of this country I am wrong.

Be safe.

$100 Oil Fears Threatens Economic Recovery

This isn't good:

My Take:

So much for that "relief" at the pump that CNBC loved to crow about last week. "Bubblevisions" calls of $3.50 gas by the summer look like a pipedream as the commodity speculators once again turned bullish. Silver and gold also surged as traders shook off last week's historic commodity sell off.

I am continually amazed at the risk taking that we continue to see in the markets. You would think after a 30% sell off that the commodity speculators would want to take a breather in order to lick their wounds after last week's slaughter.

This idea turned out to be a foolish theory. It's becoming icreasingly clear that the market continues to resemble something from "The Wild West". There are no "rules of thumb" anymore when it comes to the price action on Wall St.

The robots that dominate the trading on Wall St decide what the rules are on any given day. Wounds no longer need to be healed because robots have no emotions.

Wall St has become an increasingly dangerous place to play because the trends now change faster than Lady Gaga's costumes during a 3 hour concert. Trends that lasted weeks during the '70's and '80's now potentially last for only a few hours or days. Should we expect anything different when stocks are held for seconds today instead of years like they were in the '70's?

It's becoming more clear that speed rules Wall St at this point. Fundementals and historical trading patterns are increasingly becoming irrelevant. As a result, the markets are basically been morphed into a giant casino at this point.

There is no "fundemental" reason why oil is up 6% today. Demand did not pickup. Inventories remain high because the economy continues to show no signs of life.

The Bottom Line

Keep a close eye on oil prices and understand that gas prices never had a chance to drop because there is a lag time before you see a drop in oil prices show up at the pump. If anything gas has continued to rise in most staes in order to reflect the $113 oil we saw just 2 weeks ago.

This means that the consumer will continue to be restrained as a result of higher energy costs. This will also continue to pressure companies because input costs will remeain high.

PIIGS

Let me refocus here for a second and remind everyone to keep their eyes on Greece and the PIIGS debt crisis. Greece apparently is threatening to leave the Euro. This will be a disaster for the banks if this becomes a reality. All you need to do is look at the chart below to see how catastrophic this would be for the Eurozone and it's banks:

Bottom Line Continued:

The crippled banks of Europe cannot afford to take tens of billions of dollars in losses if Greece decides to bail on the Euro and walk away from it's debt obligations. What's even more concerning here is the rippling effect that a Greece departure could have on the rest of the PIIGS.

Perhaps the rest of the PIIGS might all come to the same conclusion as Greece? I mean when you boil it right down the various "PIIGS" rescue packages bailout the banks instead the country and it's people. If anything, these are bailouts of the banks at the EXPENSE of the people.

I mean let's get real here. Who ends up paying these ECB loans back? Why the taxpayers of course. The politicians of these countries are slwoly starting starting to realize is it's the people(not the bankers) that get them re-elected.

Iceland's politicians came to this conclusion a long time ago, and their economy is starting to rebound after telling the bankers to take a hike.

The European debt crisis is a very unstable situation that needs to be monitored closely.

As for today, stocks finished slightly higher for the day. We have some huge bond auctions coming up here in the US this week so don't forget to keep an eye on treasuries. I took no new positions in the markets.

I continue to believe that sitting in large amounts of cash works for the shorter term because the US dollar is going to rise as the European debt crisis countinues to take it's toll on the Euro.