Lordrobot (89.80)

Is anybody else worried about a CRASH?

October 09, 2010 – Comments (3) | RELATED TICKERS: C , GS , BAC

August and September have been brutal months for fundamental investors. August every bit of good news tanked the markets. Cisco earnings, their best in history was met by tearing the stock down 15%! For the mom and pops that had not pulled out their cash following the Flash Crash left in August and have not come back to the markets.

September became the month of QE II drug induced euphoria. In this instance the hedges met all bad news with euphoria based on the Tepper idea that either the country improves on it own or gets worse and the Fed pours on the gasoline in the form of QE II. Of course the theory behind this is that somehow QE I which failed to create any jobs will suddenly bloom into a job creator. We know this isn't true. We also know who stands to benefit and who stands to lose.

Taxpayers will lose again and Buffett, other billionaires, and investment bankers will benefit. Hedge funds will pump up commodities and the markets and try to get the scared money to dump the bonds and come into the markets where they will be happy to sell the euphoria to the unsuspecting.

Then you have Cramer, that loud noise. The same voice that told viewers that Lehman was safe just three days before it went under. Cramer's recent proclamation include that you have nothing to fear from housing and Gold is better than any stock and to buy oil.

Never mind the history of how commodity speculation bubbles destroy economies, Cramer shouts with bipolar hypomania that this is where you want to be, ridding atop the inevitable QE II flash flood.

Each and every recession has been triggered by high priced oil. High priced oil acts as a tax on every business and every consumer. It reduces expendable income, it slows economic activity. And this is not about demand. We have a glut of oil and the highest inventories in 15 years. It is a hedge fund caused bubble based on the notion that if the Fed continues to pump the system full of printed money, inflation will stir and investors will look for hard assets to protect themselves against inflation. Hedge funds will be there first eager to sell t the mom and pops. 

When you borrow and play this game, the gov tells you that GPD or Country income improves. But think about it. If you make 50K a year and borrow 25K, you don't have income of 75K. Yet this is the exact math used by the Fed. They claim that as long as the money is not lent by banks, it never reaches the M1 money supply and can't inflate. This is silly, it is coming into the Bond market which is a form of lending to the gov. It most certainly increases the M1 supply.

But worse is the daily injections of capital into the equity markets on days when the market looks to make a correction. So we are now heading toward the second week of October and the euphoria continues unabated all based on QE II. 

The Fed originally was charted to on rare occasions such as war to create increased liquidity. But now, it has become the replacement for capitalism itself. Fundamentals now mean nothing. All that matters is the IV full of Ben Bernanke's QE II euphoria drug. The Fed has intervened in equities, bonds, and lent billions but won't disclose where, but the stench leads to Goldman and others of that ilk. The Fed is holding mortgages now, a piece of GM and AIG and other bailouts. This appears to me to be a conflict of interest. Capitalism and free markets do not exist anymore. 

You could own samurai bonds for safety only to watch Japan fumble with currency devaluations because China is beating them to death in the world of exports. So rather than fix the 25 year nightmare of zombi banks, Japan take the Geitner method to hear and tried to lower the value of the yen to feed their exports. This triggers a drop in the dollar and Brazil's intervention. Soon we have a full blown currency war.

But the US dollar is the reserve currency. It is supposed to have protected value not be running to bottom like a third world currency looking for exports. We don't make anything anymore. We are a consumer nation. The worst thing you can do to a consumer nation is inflate their currency to the point that it buys nothing.

The relationship of the US currency to gold traditionally was set by law. This is how dollars had value but pay close attention, Gold had set value not intrinsic value. Americans were not allowed to own it. I explain this because the Gold bugs wrongly call gold the solid currency but it is merely a substance that has intrinsic value which is meaningless. This is why Soros calls it the bubble of the century.

Originally gold was set at $35 and ounce and dollars were pegged to it. In 1971, Nixon defaulted on the gold standard and declared "Today we are all Keynesians." Gold then went its separate way and never had a dollar basis but was set by mark to market or intrinsic value unattached to anything real. It also had very little commercial use. So it is not a solid currency except amongst collectors of the stuff. I would never buy gold for its utility. The only reason to own it, is that you might think that speculators may run it up based on some odd intrinsics and you could dump it before the bubble broke. 

Oil unlike gold is very useful and has a far broader commercial market. Yet we have a glut of oil but we now have a glut of speculators completely unconcerned with the supply and demand. In short, they are trading oil as if it is a hedge against inflation. The trouble is that it is so widely used that raising the markets slows the global economies. Raise it high enough and you trigger recessions because emerging markets must use credit to buy oil and this kills liquidity and caused recessions.

You will never trigger a recession by buying a commodity as useless as gold. You will only trigger a speculative bubble and speculative collapse. Gold backs no currency. Soros is dead on the money. 

You saw Alcoa earnings. They were terrible but he icing on the cake is that they will lose money on the currency exchanges. They will raise prices and demand will fall.

Look at Japan. They are the worst trading partner in the world. They always have an excuse why they won't buy US Beef, or US Apples, the best in the world. It is always something. And because of this, they are hooked on exports and have no functional domestic markets for imports. So without exports, Japan dies.  

So far it is estimated that the bond market and stock market has anticipated 700 billion dollars of injection. But to date the Fed has not injected this money which would be part of QE II. Thus markets are moving up on the same kind of speculation as the dot coms, the anticipation of things to come. And what if it doesn't come. What if the public revolts. Or what if the markets Crash like they did in 1987, ignoring the float and the opinions of the smartest guys on the street. 

I am very concerned about this debt driven accounting system that treats debt like assets and income. This is Enron accounting and the entire US government has bought into this insanity. In fact, Keynesian float is the only school of economic thought coming from the Fed. It is a theory that called for a pay down of debt during good times and some float but not unlimited in bad times. We now have a system that builds debt in good times and builds more debt in bad.

My opinion is that this is a house of cards. Since the Flash Crash which we all know is a computer program flaw is not about to be fixed because the problem can't even be reproduced in the models thus, I know it is an inborn error in the software. So any investor that isn't a gambler, that has significant assets in markets must hedge for their own protection. You can't make as much money when you hedge but you don't get totally destroyed in a crash. But we have no real clarity as to how leveraged ETFs will preform in a crash but suspect they will function as designed.

I have moved 60% to cash with no inclination to deploy any of it. My hedges are straddled to the downside so I take a hit in the euphoria markets offset by individual stock and smaller long leveraged ETFs. So I have been getting hit a bit but can adjust those variables as needed.

I just can't buy into the idea that fundamentals don't mean anything yet I have had two an one half months where I have been proven wrong. I am a tough all weather investor and I have to tell you, they are wearing me down. The euphoria sounds like poison to my ears. The news is a breach of common sense and Bernanke and the Government seems to have lost its mind.

I know I am not alone. Germany has rebuffed the Bernanke idiocy and Germans are very intelligent. China is rebuffing Bernanke and Australia. China and Australia have no debt. Unemployment is low in Australia and they have avoided the entire global crisis.

In America the greatest debtor nation has 50% of all homes underwater, 42 million people on food stamps, 10.1% unemployment, and 15.8% underemployed. Commodities are going skyward not on demand but on speculation alone threatening the recovery. Business taxes are going sky high in January. The Taxpayer who didn't cause any of this has been given all the debt while billionaires, hedge funds and Goldman worry about their massive bonuses because they have had a truly wonderful economic crisis that is only going to get better with QE II.

I truly hope that the markets have the wisdom to Crash as they did in 1987 to let the world know that Capitalism is and always will be King of the Jungle even when the smartest guys in town tell you otherwise.