Fed Policy is Killing Us

As the 10-year rates fall below 2.9% and the 2-year rate falls to around 0.5%, it's becoming obvious that the economy is not what is driving the bond market rally, it's the Fed creating still another BUBBLE!!!

When will they stop creating economic bubbles for the benefits of their cronies? While I have been in the Bearish Stock Market camp since 2005 and still expect a test of the lows, I have been encouraged by the corporate earnings that have been coming out in recent weeks. There is an underlying strength in the economy that can come out if we let it. Yet, interest rates continue to plummet. WHY?

It's becoming obvious, although I will check the data, that as the Fed continues to lend money to banks at nearly 0%, the prudent thing to do for them is, of course, buy the treasury market and it's guaranteed return. As long as the Fed continues to provide funds for free, why shouldn't we expect those, who can get free money, to go crazy buying everything in sight?

It's not going to change. While I think that the interest rates HAVE TO GO UP based on the amount of debt we have, the bond market keeps rallying, shaking out the shorts with dramatic moves.

The European crisis is over. I should have staked my dough in the Euro instead of screwing around with a manipulated US system. At first, it appeared that we were derivative trades of Europe. But with Europe doing fine (basis the Euro which is now 130+ versus the dollar), it appears that there is something VERY WRONG with the US stock market and bond market.

After the Flash Crash in May, I got ALL OF MY CLIENTS OUT of the stock market to as much extent as possible. In fact, I don't even want to advise on the stock market anymore as it is now nothing more than a casino with the billion dollar hedge funds, with their computer algorhythms moving the markets. There is no real investment here. It's all a game.

The interest rates, which one would believe was a true reflection of the economy, now also appear to be manipulated or really, out of the market's hand. It doesn't correlate with the economic reality. If it does, then WE ARE TRULY IN A DOUBLE DIP RECESSION and are headed for a depression.

I am really sad. As those who have followed me have noticed, I haven't been writing at all for the last few months. My despair continues and my faith in the US economy wanes. I am not a politician nor do I work for a government. This is where all the money is going.

I suppose that the long-term rates are going to go down very low. This effect WONT STOP UNTIL THE FED RAISES RATES. How sad that the Congress has given the Fed even more rights to screw up our economy. If you are not a banker or a politician, expect that the worst is still to come.

I'm going to start looking at markets away from the US. I just don't think that they are fair anymore. Perhaps no markets are. Unfortunately, the alternative is to start your own business. But you can only do this if you are cash-flushed or have some rich friends.

Good luck America.

Summation Index Fails to Confirm Highs

While the Dow Jones Industrial Average has made new yearly highs this week, other indicators have fallen short of confirming the breakout. One such indicator is the Summation Index. The index number is generated by adding the net gains or losses in advancing issues over declining issues. My index uses some 200+ stocks representing different industries in the US economy. The index may be a better indicator of market momentum. As advancing issues outpace declining issues, the resulting number can only increase each day. Even though the market advanced for six days in a row, ending today, one can see how the indicator failed to take out recent highs.

The topping process can be a long and drawn out affair. Observing high and low points in the chart over the last few months, we see that the chart pattern rose gradually over time, setting higher highs and lower lows. Should the market be rolling over, one might expect a mirror pattern of the trip up, with the index making moderate new lows but then rallying up, only to fall back to make new lows.

One can never predict a market collapse. After all, there is little good news in the economy. Sure companies are starting to make money but it's only a result of reduced labor costs as businesses continue to cut back on the workforce. Banks only need to borrow at the Fed window for 0% to 0.25% and buy treasuries at 3% to 4%. Sign me up for a $billion on this trade. But the trade COULD BACKFIRE, depending on the level of greed the banks choose. For example, if a bank borrows at the current low rate at near zero from the Fed and buys a 10 year note paying 3.5%, there is always the danger that the Fed could begin raising rates. This would be a double whammy for the banks and other organizations taking advantage of this trade. First of all, the Fed lends overnight, the shortest of terms, so financing would need to continue on a daily basis. The Fed has, in the past, raised interest rates swiftly in the past. In addition to their costs to carry the investment go up, the value of the 10 year treasury would fall as interest rates rise. It wouldn't take long before an institution, if they are required to mark-to-market their investments, would be underwater. The Fed's plan would fail and banks again would be going bankrupt.

Again, ANOTHER FEDERAL RESERVE CREATED BUBBLE COLLAPSES. The next time, there will be no options left. Start growing the bananas guys!

Geitner Assures Chinese on Dollar Safety

Treasury secretary Tim Geitner assured a Chinese audience that dollar investments are safe. No no, this wasn't the new Tonight Show but it could have been as his comments were met with loud laughter. Anyone holding US denominated investments has to be worried as the dollar has collapsed more than 12% since March. Yet government officials continue to tell us that we support a strong dollar policy. The laughter underscores the tremendous level of cynacism that many are starting to have towards the US and their policies. They simply are not believable.

The following chart shows the Commodity Research Bureau Index (CRB). While the Federal Reserve and Treasury are worried about deflation, the CRB chart shows a totally different picture. Since March, commodity prices have risen more than 18%. Keep in mind, oil prices, while rising, are not near levels we saw last year. Prices of everything, across the board, are soaring.

The New Bubble

Can we be seeing anything other than a bubble? Are we getting way ahead of ourselves here with the market? Is there there too much money out there looking for a home? President Obama told us that his administration is going to eliminate the "bubble" economy but again, all we see is boom and bust.

Again, I see prices rise at a dizzying pace and even though I have been on the right side of the market and have made profits in excess of 25% on oil and other investments, this isn't investing. I feel like I'm at Vegas. And you know how it is in Vegas, if you don't pick up your chips and walk away early, the house will take your money. I feel that we are in this kind of situation now.

With this in mind, I took profits on oil, gold, ag and my short bond position. I went long 10 year notes and am looking for a home for a ton of cash. But will the dollar keep going down forever? I expect some kind of bounce soon. My fear is that we are just seeing one-way markets. We don't see the pulses of a rhythmic market. We only see mass emotion piling in billions of dollars going one way and then when the plug is pulled, billions of dollars exit en masse. Higher prices beget even higher prices and lower prices beget lower prices.

Our philosophy here is to manage money by objective. If you need 10-12% a year to achieve your long-term goal, it is better to manage your portfolio using stocks and hedging instruments in such a manner that you can have a high degree of achieving your rate of return objective with minimal volatility. Slow and steady always wins the race. Those who want to constantly play this super-risky market hoping to get rich quick always find themselves busted. The house always will take your money.

Don't be afraid to take a profit. Know what your return parameters are, take your money and keep it safe. If you've got extra "house money" to play with, use that to "rock and roll." Use futures or options on futures to have fun. They are fast and tax-advantaged.