I had made a prediction last year, found HERE, that US Treasuries would be put on negative watch by Fitch and downgraded to junk by China. Well, I was wrong as it was S&P who made the call and actually did downgrade the US to AA+ which is still a joke as the government will never be able to actually repay much of the $14T it has outstanding without just printing money, which IS a form of default. China is now saber rattling about the US dollar again, but this time they are serious, I think at least, asking for a new reserve currency and I think they will get what they want as other countries have raised the same concerns.

The US deserved to be downgraded and we should be downgraded much further than AA+ as we will not get serious about debt reduction. To prove my point all we have to do is look at how the debate is structured. The politicians are all talking about annual deficits and NOT the outstanding debt load. They do all sorts of double talk to make sure the average person only believes we have a trillion or o in outstanding debt, but that trillion is just the annual deficit and no one talks about the big number of $14T in outstanding current liabilities. S&P gets it and that is why they are the first one to downgrade the US.

When the downgrade happened the Treasury Department acted quickly calling the move unjustified, political, terrible lapse of judgment, S&P made a mistake, and these are the same people who rated junk bonds AAA to begin with. While it is easy to criticize S&P for their prior actions, but relative to its sovereign debt ratings those arguments hold no water and anyone with a stitch of unbiased rationale realizes that the US is indeed in big trouble and we do not deserve a AAA rating. The worst part about this downgrade is the fact that the government is now baring down on S&P about this downgrade.

It was just announced that the Senate Banking Committee will be looking into the downgrade. While we do not know if hearings will happen or not the person close to the matter did say all options are on the table. I was under the impression that Congress wanted independent ratings agencies along with an independent Federal Reserve. Silly me I guess as the minute a ratings agency does the right thing they try to crush it with Senate investigations, but the Federal Reserve can monetize trillions in US debt without Congress blinking an eye, unreal.

What Congress is saying is be independent as long as you do what we say and want and if you decide to think for yourself, well, we will hunt you down and skin you alive. The government is acting very much like the old Soviet Union and is sending a message, not matter what we do keep us rated AAA. How can a ratings agency offer an independent review of a security if the government demands that it gets what it wants regardless of what the facts are? It is insane to think that the ratings agencies will remain independent if Congress has investigations if the US is downgraded. Frankly, this is extortion, blackmail or a combination of the two since the government is the one who issues S&P with its ratings license. Will S&P lose its license over this? I do not know, but it is possible and shameful if that is what happens.

As an American you should be angry over the downgrade, but not at S&P. You should be angry at the people who rubberstamps every bill that comes along wasting billions of dollars. You should be angry at their inability to work with each other and address the seriously obvious structural issues that will consume immense amounts of capital in the coming years. You should be angry that the Senate wants to investigate S&P while saying other quasi government agencies are left alone even though they are part of the problem. You should be angry that Alan Greenspan, Mishkin, Bernanke and every other clown out there says the US will never default because we can print our own money to pay the debt, devaluation IS a default.

You should NOT be mad at S&P and you should demand that Congress work on real problems because their lack of dealing with those problems is exactly why S&P downgraded them to begin with. We are not showing the world that we are capable of fixing any real problems. What we are showing the world is that if we do not get our way we will simply create problems were none exists and threaten the “trouble maker” with depriving them of their livelihood or by throwing them in jail. Way to go America.

Insider trading is profiting from the buying and selling of a security based upon information that is nonpublic. Trading on nonpublic information is illegal and if the SEC catches you be prepared to cough up your gains, fines, being barred from the business and possibly going to prison. Well, that is if you are just the average Joe of course because the SEC views Congressional members who trade on nonpublic information as completely legal.

John Edwards said in 2008 that we live in a 2 society system, the haves and the have not’s. He was partially correct as we do live in a 2 tiered society but it is the average person and the political elite. Being an average Joe is no fun since all laws and rules apply to us and if we break them we go to jail. However, being in the political elite class is the best thing that can happen to you as you can write the laws, exclude yourself from those laws or even break those laws and all that happens is you get some bad press a censure from Congress and then reelected again. There is a 97% reelection rate for politicians in America even those who are found guilty of crimes, Charles Rangel is a great example, so getting elected is much like the Soviet system of appointment for life.

The issue of Congressional insider trading first crossed my mind in 2008 when I pulled Mel Watts financial records and saw he was trading leveraged ETF’s during the market crisis that year. The country was on the brink of disaster and Congress was pressed to pass TARP and Mel Watts, who hails from North Carolina surprisingly from Bank of Americas home office, was trading leveraged ETF’s. Did Mr. Watts know that TARP was not going to pass the first time around? Did he know it was going to pass the second time around? When did he know, he is on the Financial Services Subcommittee, that mark-to-market restrictions were going to be gone for banks? Did Mr. Watts profit at all from this information? I do not know and no one will answer the questions. Even more surprising is the SEC does not even care as they do not consider any of that insider information.

That’s right, a sitting member of Congress can know a bill that will benefit a certain company will be passed or failed and buy or short the stock on that information and the SEC says that is fine. I wish I was making this up, but I am not as this CNBC article points out. Even worse is that our elected officials, who are mostly lawyers, outperform the market regularly based on a study by some heavy weight academics. The odds of the best mutual fund manager outperforming the market over the long-term is against them, 95% of fund managers fail to outperform the S&P 500 on the 10 year benchmark, but our Congressional members can do what these professional money managers cannot do… amazing, right?

The funniest part of this is the simple fact that these people can make a killing for themselves but cannot get the country’s finances in order. Perhaps if they wasted less time making money for themselves with, apparently, questionable information we would not have this debt ceiling issue. Apparently I am not the only person who is worried that the political elites are helping themselves to illicit gains as, for the second time, a bill is being introduced that would make it illegal for Congressional members, their staff or their family members from disclosing and profiting from nonpublic information. Good luck with that, who would give up that gravy train.

I think it is pretty clear that we do indeed live in a culture of complete corruption were it really does pay to be the elite. There is also a striking resemblance to the U.S. and the Roman Empire or any other Empire that has failed in the past. As this type of corruption becomes commonplace and the citizens tend to not care or pay attention the Barbarians tend to storm the gates and the bloodbath ensues. Insider trading is terrible whether it is Goldman Sachs doing it or my elected Congressional member, actually it is worse if my Congressman was doing this as they are breaking the law and betraying my trust. It is time we ask for some accountability and stop this king of behavior from our public servants.

For the record, the Democrats tend to have better performing investment portfolios than Republicans so this is not a partisan issue, based on the study.

As many know I have had a bad fight on my hands over the past few years and while the prognosis is now good the war has taken its toll on my body. I have severe chronic pain which makes even this tough guy come to tears every once in awhile and this pain has prevented me from regular work of any kind anymore. Of course with my extensive insurance background I was prepared with disability riders on my life insurance policies and a top of the line disability insurance policy.

Everyone knows that insurance carriers do not make money by paying out claims but some claims are so obvious they have no choice, such as mine. I have medical files thicker than the Holy Bible written in brail so proving my disability was easy, at first. I breezed through the short-term policy of 12 weeks rather easily, which pays you nothing I might add, and hit my long-term policy back in November of 2010. At first there were no problems as the first 3 checks went out on time with no further information needed. However, that changed when I called in to verify my 4th months check and it was not approved.

I had read the prospectus and understood it and by their definitions I could not perform, at a minimum, my job that I was trained for which triggered a benefit payout. Well, I told the nice service person that I wanted to talk with a supervisor for the real reason why my benefit was not being paid, OK, I was yelling at her, but she got me through to a manager. After I politely explained to him that I understand how the denial system worked as I was, at one point, a Director of Insurance Markets and that according to this policy there was no reason for a denial of benefits and my attorney agreed with me the manager said he was just going to approve the claim and more paperwork will be on the way. That was an honest to God true story that I would swear my good leg on and that should tell you something, if you don’t know anything they will deny you right off the bat. Read the prospectus or get a lawyer to read it for you and be prepared.

Now, I got my benefit and the work is all over with, right? Wrong. All long-term disability insurers want you to apply for social security disability because if you win whatever the government sends you will be deducted from the benefit the insurance company sends you. The disability insurance company will provide you with an attorney to help you win, do not take that attorney, go get your own so they are not collecting evidence to deny you benefits either now or at the 24 month review period. There will be a fee for hiring a private lawyer, but so what better safe than sorry. You are also better off going with a local guy who talks to you versus a national firm where you will never see an attorney until your hearing date some 18 to 24 months away.

The social security offset is what really angered me today because I learned that my private insurance carrier will offset any benefit my wife and kids will receive from social security, which they do receive, typically. I was thinking why would the benefit my kids get offset the benefit I get from my insurance company? The check from social security comes in their name and I will need the money to live on so the insurance company is forcing me to break the custodian law by cashing it to by food for the family. I paid premiums based on my income, not my wife’s or my children’s so why would their benefit be reduced from my disability insurance checks? I asked the insurance company that question and their answer was that since my family was pushing my income over 60%, what my disability benefit was, of my previous income it is considered my additional income because they are getting because of my disability.

That is simply outrageous considering that SSDI, social security disability income, family payments were designed to make sure your kids can go to college and have savings not so insurance companies can offset benefit payments. Well, maybe I am wrong since insurance companies contribute more money to Congress than disability recipients, who knows.

I am upset over this because it reduces the value of the policy I paid good money for throughout all those years. I am mad because people who are in a worse position than me will have to deal with the same thing and not have the knowledge, resources or desire to fight the system and it will hurt them. I do and plan on fighting this; I will let you know how I make out I am confident I can win 2 years worth of exemptions, but after that I do not know.

Why do you need to know any of this? Because like me you have a greater chance of becoming disabled at a younger age than dying, look at me, and you might have to go through this mess. I can assure you that I am giving you the very abridged version of everything, but all the information I have given is 100% accurate. Oh, the insurance company I use… Lincoln Financial Group who had no problem taking TARP Funds while it scrambled to dump its toxic assets and was, shall we say, encouraged to sell Delaware Investments among other things because they run such a great operation.

I have stated that you have to be long this market until the Fed pulls the ample liquidity it has been pumping into the markets for the few months now. Before the Fed announced QE2 I was right to be bearish as the indices were heading lower under numerous stresses from both domestic and foreign sources. It was in August when Ben gave his speech about asset purchases and then the next meeting which started them that caused the markets to take off. Up until that point there was no real reason to be bullish.

Frankly, outside of the excess liquidity, there is still little reason to be bullish. Just because stocks move higher it does not mean that the economy is all better, sorry, but it does not work that way. I believe that the economic data we are seeing is heavily distorted and if we are in fact having 3-4% GDP growth, like several Fed officials claim, where are the jobs? That is a huge jump in GDP growth and that would certainly create jobs, but here we are witnessing the greatest exodus from the job market since the data has been tracked. The U-6 data is way up over 17% and Shadow Stats says we are saddled with 20%+ of unemployed/underemployed.

If we are experiencing 3-4% GDP growth why in the world are we still experiencing ZIRP and QE of any kind? It makes no sense at all. I know, because “inflation is too low.” Inflation as defined by Ben Bernanke and not by people who have to buy food and energy every day. The fact that we are arguing over the definition of inflation is asinine. Normal, sane people, would define inflation as the normal cost of living items, but the insane people say that inflation should be measured by the cost of computers and flat screen TV’s, that makes sense. The bottom line is Ben is distorting everything with this insane monetary policy and is causing food prices to rise around the world, including right here in the USA.

The economy is better, I have admitted this for some time now, but it is still sick and not functioning correctly. What we are seeing now with runaway government spending and excess Fed easing is a serious risk to the US dollar. I realize that every country wants a weaker currency so they can export their way to prosperity or so they can grow their way out of their debt problems, but this will not work for the US. The US debt issues are so large and the trade imbalances are so out of balance that it is impossible for the US to grow its way out of its debt problems.

While Ben tells Congress that the US must get the deficits under control immediately, a first I might add, it is impossible to do so. Have you ever wondered why the US cannot cut annual spending? They tell you it is because of entitlement programs, right? They also say these entitlement programs are solvent, at the moment at least, right? Wrong. The proof of this is in the annual deficits. When you received your paycheck there were federal income taxes withheld and FICA taxes withheld, for Social Security and Medicare. Supposedly the FICA taxes went into separate accounts to be used at a later date but our leaders used that surplus money to plug holes in previous deficits and gave the SSA and Medicare IOU’s instead. Now the SSA and Medicare are cashing in those IOU’s which is why the government cannot cut the annual deficit and it proves that the programs are insolvent.

All of this is evidence that the economy and economic health of the US is not good. We are still in trouble and all we did in 2008-2009 was transfer the bad debts from the banks to the US government, kicking the can down the road, and the banks are still in bad shape. The economy is not replacing lost jobs and probably never will replace all those jobs lost in the last few years. The only way the unemployment numbers will get better is because of how the BLS calculates the unemployed, i.e. not counting the ones that fall off the rolls.

The bulls need to make the case that the economy has really recovered. I am a bear and I said to own stocks, and commodities, and I was right too, but I am under no illusion that things are that much better. A stock market going up doesn’t really mean anything especially when the Fed is giving primary dealers billions of dollars every week to do something with. Not to mention that rising stock prices only help the investing class anyhow which is a shrinking portion of America nowadays.

I believe what the Federal Reserve has begun was completely idiotic and unnecessary which will ultimately hurt the majority of the American people. However, many economists disagree with what I just said. I guess you can fool the people sometimes, but economists can be fooled all of the time. Part of economist’s problem, and why they are so horrible at predicting things, is because they live inside of models and rarely look up. They are also way overpaid for what they do which adds more of a problem with their theories since higher prices do not impact them as fast as it impacts 80% of Americans who live paycheck to paycheck.

Paul Krugman is one of those people who has been far more wrong than right, but for some reason people still listen to him, odd, really, really odd. Mr. Krugman has taken aim at Jim Rogers recently claiming that inflationist’s have gotten the last few cycles’ dead wrong. Really? So, oil going from $50 to $147 never happened. Gold rising to new highs isn’t happening. Food prices going ballistic did not happen then and is not happening now, sure, whatever. The fact is that prices, including food and energy, have moved higher this year and before the collapse of 2008, but Krugman says that did not matter… why do people read him?

It is my opinion that higher food and energy prices helped collapse the system in 2008. As prices rose people diverted more money to the things they needed the most, food and heat which took away from our consumption oriented GDP. After the collapse began we saw these prices ease, a lot, and GDP did pick up after the crossing point was reached. Of course, government intervention helped and many people simply stopped paying much of their debt which has helped GDP since now one cannot pay their bills, not lose their home and now needed a new Kindle or iPad. Now we have rising commodity prices again, but no one seems to think this is bad news. Well, it is.

While mainstream economists talk about “sticky” CPI, excluding food and energy while concentrating on wage inflation as the sole indicator of inflation proves that most economists have lost their minds. Wage inflation does not have to come before food and energy inflation, I am not sure why anyone thinks this is always the case, and if we look back at 2008 we see a similar situation, rising commodities and flat to lower wages. This is a major red flag, but most mainstream economists don’t care. These economists look at me or a Jim Rogers and assume we do not have a clue about what we are talking about. The do not seem to understand that an economy can go from deflation/disinflation to inflation overnight, it happened in Germany. Maybe they are right, but at the same time they are so devoid of reality it is not even funny.

To think food and energy prices do not matter to people is idiotic. It is the same as saying fish can live fine out of water as long as they can hold their breath long enough. With money being diverted to $4 gas or $5 loaves of bread it is clear that we will continue to have deflation in color TV’s which means economists will not see any inflation, anywhere. This is a common sense issue which might fool Wall Street people into believing everything is fine, but Main Street, well, Main Street is not quite that stupid. They know $4 a gallon gas and $5 loaves of bread is bad news. They know that those iPads will be out of reach when a greater portion of their incomes are moving towards those unimportant things… like eating. This is bad news for the economy.

I have no illusions, the market will go up and economists will demand more QE because it is “working”, but this policy is not benefiting Main Street, it is killing it. More and more investors are moving out of stocks which negates the “wealth effect” of magical 9% S&P gains which are based on pure liquidity and not fundamentals. While stocks will move higher I am betting silver and gold will continue to outperform, along with other commodities. This is a catch 22 to the Fed because higher commodity prices is bad for the people, but good for GDP growth, even though it is imaginary growth, but that doesn’t seem to matter as long as the politicians are happy. So much for an independent Fed.

I think the recent views and writings of major economists have proven that they are completely worthless. To think intentionally driving the prices up for the basic essentials in life with high unemployment and flat incomes is barbaric. The worst part is economists all say this is a good thing, what world do they live in? We might get wage inflation out of this at some point, but it will be after price inflation is in full swing and major damage is done to the consumer. I also have no idea how the Fed can reverse this latest policy decision without blowing itself up, I actually believe this is now a permanent policy the Fed is following, just like Zimbabwe.
The biggest question is will Tim Geithner and Ben Bernanke be impeached for lying to Congress when they said they would not monetize the national debt? They should be, the last I checked lying to Congress was frowned upon, but we do now live in bizzaro world.

The Fed is doing everything I feared it would do and they are inflating the country out of its debt, they say they are not, but what credibility can they possibly carry with the people now? On top of that, their actions speak louder than words. When you are intentionally trying to create inflation and write an op-ed about it that makes it harder to say we are not trying to inflate our way out of our trillion’s in debt. Everyone can see what is happening and when Brazil is giving you a smack down, as well as Russia, man, you got problems.

As far as economists, perhaps they should be put on a salary that mirrors the national average in their respective areas so they can understand how higher commodity prices really impact the people. It is easy to say higher prices don’t natter when you make high 6 or 7 figure salaries for playing with computer models, but on a modest 5 figure salary I bet they will see things differently. I am not one of those ‘social justice’ people, but in this case I might make an exception since they are all being complacent in one of the greatest snow jobs ever given to the people. This will do nothing for the people other than create misery and it certainly will not improve the image of Wall Street. We are not a banana republic because we voted in Republican. We are a banana republic because we have idiots in charge of our monetary policy. Stay long commodities.

The long awaited decision was announced today by the Fed, $600B in fresh money printing followed by continued reinvestment of proceeds from its first round of easing. This equals about $900B in total QE by our monetary masters. Speculation is rampant in the media about its success or how it will be an epic failure. The funny thing is, no one really knows what will actually happen. Personally, I am still perplexed as to why they are doing it at all, it is stupid.

The Fed is also completely out of ammo which many have stated, myself included, and all they have is the printing press. I want to stress something here and you should pay attention, this whole QE thing is experimental and no country that has ever tried has succeeded. Therefore, I have a predetermined outcome, but at the end of the day you or I have zero idea if it will work. I will lay out a case for its failure based on what I know. I am sure many will disagree and that is fine, but in time one of us will be right.

The economy has a demand problem, not a liquidity problem. Over 2 years ago we had a massive liquidity problem which is why Lehman failed, but now the Fed has dumped trillions into the system along with the federal government. All of that money dumping ended the liquidity crisis and now banks, supposedly, have excess reserves just sitting at the Fed waiting to be loaned out to that sucker who wants to pay 15% interest on money the bank got for free in order to buy that new LED flat screen TV that is just calling his or her name. The problem is the sucker doesn’t want to buy that TV because he doesn’t know if he will have a job next week or is worried about retirement, etc.

We have a demand problem, not a money shortage. I say that with a grain of salt because money velocity is dropping which technically means there are dollar shortages. However, I contend that that dollar shortage is because people are paying off debt to simply saving their money somewhere 9under the mattress??). Regardless of the reason no one wants to buy big ticket items and I do not blame them. After all we got here because of excess debt and no one wants to leverage up to buy senseless items. No amount of QE will change this, sorry, but it won’t. Job security and rising wages will create demand, but that is not happening either. Demand is stuck where it is, weak.

The Fed knows this and they know QE will not change this so why did they do it? I really do not know. Sure, everyone has their own reasons for it, but at the end of the day it is all speculation. I know what they are trying to do, create wage inflation and inflation in general, which they will do eventually, but by their chosen path, QE, they are creating the worst possible outcome, inflation without wage inflation. Stop laughing, it can happen. How you may ask, simple dollar devaluation is inflation, but dollar devaluation does not guarantee wage growth. The only way to get wage growth is through demand with inflation, what the Fed did will not do this. Frankly, everyone should be terrified of Mr. Bernanke and he should be punished for lying to Congress when he said he would not monetize the debt, he is.

I can rattle off all sorts of conspiracy theories as to why the Fed is doing QE, but they are too laughable to mention. I do think one thing makes sense, it is a back door bailout of the banking system, again. There is a little issue I am sure you are familiar with, the foreclosure crisis, and this crisis is a huge, enormous, problem. If you are a bondholder it is one thing to have a borrower default on the debt, the cash flow ends and you get to take the collateral, a home in this case, to recover your capital. However, this whole chain of custody issue, there is no legal remedy for it and all those pundits who claim that this is no big deal are either stupid or scared to admit the truth, means that there is no collateral to collect now. Essentially the borrower can keep the house and screw the lender if the paperwork is messed up, how would you like to own a MBS now? Your bonds are worthless… or are they?

If there was fraud in the loan, as we are now seeing, the bondholder can put back the bond and be repaid their original capital. This is the problem that is starting to rear its ugly head, the put back, and it could be huge. Think about all the paper the banks would have to buy back and now think of all the synthetic derivatives that were written against that bond. What a mess. A big costly web of a mess. I do not know how big the problem can be, but I think part of the QE might help these banks by either allowing the bank to front run the bonds the Fed is buying or by infusing the bank with capital.

It doesn’t matter really, but I think that was one of the reasons for QE2. We have been told for over a year now how great things are now and we are in a recovery so why do QE at all? We have inflation, it is not sky high, but it is there in the PPI and the CPI is still positive. If the CPI were negative I would say we have deflation, but it isn’t and at best we had disinflation which does not justify such a crazy move as monetizing almost a trillion dollars in paper. The Fed sees that no real recovery has happened and maybe that is the reason for the latest round of easing. Regardless, the banks are going to benefit from this, remember the Fed asked them how much they should buy from them.

I stated about a year ago that we can have inflation without wage inflation. We are about to see if that once crazy theory of mine is right. The Fed has now monetized trillion’s in debt and I can say, with history on my side, this has never ended well for any country who has ventured down this path. America is a special place because of our freedoms, but we are not so special that math and history doesn’t pertain to us. All of the people warning about the Fed’s insane moves might be right and the sky very well might be falling. Heck, if things were as great as we have been told over the past few months by the talking heads and our politicians, who no one believes, why are we even having this conversation? Things are not well and I fear we may be in the calm before a very bad storm like we have never seen before.

The President, Nancy Pelosi, Harry Reid and only God knows how many politicians have all said that the Fin Reg bill ends all taxpayer assisted bailouts for Wall Street. Well, the news lately will put that phrase to the test. To think that all of these foreclosures are not an issue was crazy to begin with, but throw in a little foreclosure fraud and overnight you get a $47B putback from BlackRock and the Fed… go figure.

I believe the putback situation we saw yesterday was merely the beginning and there are many more tens, if not hundreds, of billions of dollars to follow. The banking system cannot handle that type of volume, remember in 2008 it was MBS and derivatives of MBS securities that caused our little problem. There is no easy remedy for this problem, regardless of what JPM or BoA says, since we are talking basic contract law here. Now, Congress did try to sneak through a bill that would have solved the industries problem, H.R. 3808 which would make courts accept all sorts of junk affidavits, but Obama ‘pocket’ vetoed the bill. Do not think that bill went away because it can come back and probably will under a new name, but it will fail in the courts, in my opinion, remember Obama said Congress needed to fix some issues with the bill, a telling statement on his opinion.

Not only does he want Congress to merely make some cosmetic changes to it, but Obama also said that this is just a “minor paperwork snafu.” Oh, how I wish that were true, but it is not a minor snafu. I do not support homeowners who took on irresponsible loans, I have long said they should lose their homes, but I dislike actual fraud even more than irresponsible borrowers. Let’s also not forget that these same lenders often did not verify the borrower’s income either which makes this whole problem a bit ironic as lenders cut corners to give the loan and now they cut corners to foreclose on the collateral. There is a remedy to all of this, as written on Zero Hedge previously, which is a borrower accepts a loan modification which clears the title, guess how successful the HAMP will be now.

If Congress doesn’t create a fix, which they should not, banks will lose foreclosure proceedings to those defendants who decide to fight it. I do not believe anyone really knows how big this problem really is and, frankly, I would not trust anyone who attaches a number to it. After all, these will be the same people who said sub-prime loans were a nonissue a few years ago, the missed that one by a mile, obviously, so they will miss this one as well. Not to mention that this issue will once again be a global issue. Who knows how many of these bonds are sitting on the balance sheet of banks all around the world. Hell, we do not even know what outstanding derivatives are still in play with this paper.

To assume that this will pass with no real material issue to the banks is idiotic. The risk is real and the system is still very, very weak. Perhaps now we know why bank reserves are still so high, did they know this might be an issue? Probably as we know banks do not like to fess up to mistakes until, well, the global financial system is about to implode. The credibility of banks and government has probably never been so low in all of history and that is a problem especially if they need help again. I fully believe another bailout will be needed over this and that means the issues of 2008 will return in 2010 with a vengeance.

Remember, in 2008 it was really the CDO’s and CDS’s on tranches of MBS products that were the problem. We all remember senior and junior tranches that were in the headlines, but back then at least you could get the collateral back to try and sell, albeit at a much lower price. Today if these things are still blowing up and you cannot even get the collateral back that would be a total loss for the investor or bank if it got putback to them. See the problem now? It is just not the banks that have this problem, but the GSE’s as well who may be guaranteeing a lot of this junk now. The GSE’s have $5T in outstanding mortgage guarantees and some say that mortgages as far back as the late 1990’s might not have proper chain of title.

The math is enormous and this should scare people to death. Perhaps it will all go away. Perhaps judges will ignore the 200 year precedents of contract law, they did it with the auto makers, so why not now. However, if this doesn’t go away we are definitely in for a rerun of 2008 again on a much larger scale since even the government is reaching the end of their credit line. Maybe QE2 will buy these securities and that is how the problem will disappear, but if nothing is done the entire mortgage market and perhaps some well known banks are done… again, unless all our politicians lied to us.

Here we are some 81 years after the Great Crash of 1929 and what turned out to be the beginning of the Great Depression which ushered in unusual monetary policy and solidified Keynesian economics. Part of the reason for the Depression was probably the best intentioned, yet most ridiculous, legislation which placed tariffs on imported goods, Smoot-Hawley. The idea was to protect America and to bring us economic riches, but the exact opposite happened. While not all of the Depression can be blamed on that legislation pretty much everyone agreed that it was a major contributing factor as it triggered trade wars. 81 years later and we are repeating the same mistake, politicians never, ever, learn.

I was shocked when the bill passed committee, well, not shocked, but surprised, but I am dumbstruck by the fact that it went to the House for a vote… and passed! I am referring to the brain child of Lindsey Graham and one Mr. Charles Schumer, 2 peas definitely not alike with the exception of being idiots. The bill I am referring to is Schumer-Graham, the new Smoot-Hawley, which will force Treasury to impose tariffs on countries they feel are manipulating their currency lower, in this case against China. One wonders if the U.S. will feel the wrath of the bill since we are sinking our own currency, but we would never manipulate our dollar lower, yeah, right.

I had spoke about a brewing trade war with China about a year ago as we leveled tariffs on some steel imports and tires. China responded with claims of dumping cars and chicken products and we retaliated, etc., etc. The politicians will not feel, yet, the fallout of this idiotic move, but the people who are struggling sure will. This will essentially guarantee that we will place tariffs on cheap products made in China, I wonder if the iPhone will fall in this category, which impacts the shoppers of Walmart the most, or Target or insert your favorite low cost store here.

I wonder, why does Washington hate the poor? Because that is exactly who they are punishing with this legislation, the poor. They will have to pay higher prices for what used to be low cost goods, money they do not have I might add. While the guise of this bill is to protect American jobs, read protectionism, it will likely do the opposite as China will retaliate in some fashion, I am sure of it. It also makes little sense to give your largest creditor a hard time and to alienate the fastest growing, or one of the fastest growing, economies in the world. Well, Washington is brain dead and probably never thought this far ahead, but still, how could they not?

China already made claims about other chicken products, this is a new claim a couple days ago, which shows that they are willing to do something to return the favor. What that is, who knows, but perhaps they will void more financial contracts with U.S. banks or ban some products. What I am sure of is this will pave the way for more protectionism worldwide and that is not good. You cannot legislate your way to prosperity and punishing a country for keeping their currency cheap is just wrong. I have stated many times before that a major revaluation of the yuan will lead to mass bankruptcies in China, but this is what the U.S. wants, not a strong dollar, but a strong yuan, who cares about the dollar anyhow.

It will not create jobs domestically for one simple reason, Vietnam has favorable currency rates, so does Indian, Indonesia, Peru, Mexico, Malaysia and many other countries. What are we going to do when our corporations move to these other countries? Are we going to tax them or simply place general tariffs on the products manufacturer there? Are you getting the point yet? Capital will flow to the next easier place to do business and Congress can continue to throw up road blocks, but they will fail. Not to mention that we want to double our exports in 5 years, according to Obama, and if we slap China do you really think they will let us have free reign or trade with them? Nope.

This is a job killer and will turn the troubled economy into deeper mud, there is simply no way to deny this. I just cannot believe Congress passed this bill this far, it makes zero sense. I know the Democrats are desperate for votes and this is a populous bill, but most people will see it, if they at least paid attention in high school history class, as a major problem for us. Especially since most Americans know China is our largest lender. Worse is that only 70 or so in the House voted against it… how can there be that many stupid people in Congress?

The bottom line is that our sugar daddy is going to be upset and probably cut us off because of this. We will now have fewer jobs and little financing of our massive deficits. Nice job guys, perhaps you would like to come to each Americans home and kick them in the shin as a follow-up because I do not see how they can top this idiotic move.

I have previously laid out my thoughts as to what will eventually happen with the whole inflation-deflation debate, but the issue is still raging full speed ahead. It is interesting that it is hard to find 2 experts that actually agree on what will happen or is happening, deflation or inflation. I think it is obvious that we have disinflationary forces here as producers cannot pass along higher prices or they will lose business. In fact, only food, a basic necessity, has any real pricing power right now.

While I am comfortable claiming we have disinflation right now I do not think it will last for a very long period of time. I believe we will see more easing by the Fed via asset purchases, but that will not create immediate inflation. However, over a longer period of time we will see that inflation pick up and not because of money velocity, but because of straight out dollar devaluation. Let me explain.

We did not experience inflation in the 1930’s because no one spent large sums of money on a regular basis. People actually were starving even as food prices declined, sad really. The thing is that since we were on the gold standard, or a form thereof, it was impossible to have true inflation even though FDR was spending like a madman. The Fed was also not in the practice of buying assets because, well, they followed the rules. Because of the gold standard and there were no asset purchases, government bonds or otherwise, inflation remained tame, deflationary in fact. This is a very 30,000 foot view of the situation, but I think you get the gist of what I am saying.

Now we do not have the gold standard, I am not preaching for a gold standard either, just pointing out the obvious, and we have a completely fiat money supply. The Fed has used its “emergency powers” to do what it would not do in the 1930’s, buy assets. It is clear that the asset purchases are doing nothing for the economy other than keeping rates low on loans, which no one wants or are really willing to make unless you have a perfect credit score. It is not even kicking up much inflation, at all, which is because there is simply zero money velocity. Since there is no money velocity the typical economist will say that inflation is impossible and it can never happen, never say never.

What the heads buried in the sand do not realize, because they are using the Depression as their road map (they always do this at the wrong time I might add), is that the dollar is floating now with nothing backing it. That in itself is not bad, as a matter of general opinion, as long as the printing press is used sparingly and every country prints money at relatively the same pace. The problem is that now, after the crisis supposedly ended, countries are printing money at a slower pace or they stopped printing altogether. Many are certainly not doing asset purchases.

Forgetting the fact that QE will do nothing to ease the pain of the economy being bad, sorry, but it will do nothing whatsoever, what it will do is wreak havoc on the dollar. Since the currency is floating more printing and asset purchases will diminish the value of the currency. This has been Ben’s and Obama’s plan all along since Obama wanted to double exports within 5 years, something that can never be accomplished. We are seeing the impact of what more printing will do to the dollar now, unless you think 1.5 cent moves in the Euro/USD pair is normal, as investors move to a currency that is somewhat more sound, not that the Euro is sound, but perception is half the game.

The citizens, us, will not feel the devaluation right off the bat because we consume 87% of what we produce domestically. However, imported products will cost more and we do import a lot of goods, obviously. As domestic supplies are sucked up by foreign countries, as our dollar is worth less thanks to Ben, we will have to import more from elsewhere. This is how our next bout of inflation will begin, dollar devaluation without an increase of money velocity. If you think about it it will make sense, capital flows to the land with the cheapest goods and a weak dollar means China, Europe or whoever, will find more value, cheaper products, from America.

That actually sounds good, more purchases of American goods means higher production as we have to replace what others are buying, but that may not be the case. Why? Simple, prices domestically will be rising and our government, always trying to do the right thing will institute some sort of protectionist legislation to stop prices from rising as incomes are stagnant. It would be a form of capital controls of sorts, but in reverse. Can’t you see it now? Prices are rising and people are not able to get those big screen TV’s or something less important, food, so the government tries to stop it through making new laws. It sounds counterintuitive, but it would happen, look at what Congress wants to do to China in order to get the yuan to appreciate in value? Actually, if we do more QE Congress will not want that to happen because China will literally own us if or when the dollar is devaluated.

While all of this is happening the treasury market, after an initial huge ramp up in prices, this is what the Fed will be buying, will be in freefall as no one will want to be repaid, without a substantial risk premium, in devalued dollars. This will lead the Fed into more massive buying because even at this stage Americans will not even want to buy our own debt. Also, China will have no need to hold their massive treasury holds so they will be selling like mad. All of this is happening without money velocity picking up. Even if you think I am wrong about the previous paragraph think of it this way, if our production did pick up because of foreign country buying sprees that means we will have the money to buy things, but it will only increase the inflation rate… damned if it does, damned if it doesn’t.

It has nothing to do with actual money velocity anymore, we even have mild inflation with dwindling velocity now, and has everything to do with confidence in the system. More QE will be bad news for global confidence in the USD, it is on shaky ground as is. If we look at today’s market action it proves how the market will react, lower dollar, higher commodity prices and equities stuck because it is good news on one hand and bad news on the other hand. Longer term high inflation is bad news for stocks, in my opinion, and bullish for commodities, obviously. Stocks are horrible inflation hedging instruments, look at the last 10 years for proof, while silver (by far my favorite investment right now), gold and other metals should do very well. Of course, precious metals are not really an inflation hedge, but a currency hedge instead. Since we are looking at a currency issue rather than straight out inflation it makes bullion of any flavor very attractive.

Could anything change my mind about what I think will happen? Sure. If no QE happens it will be great news, but the likelihood of no QE ever happening again are about as long of a shot as you can get. While I am using QE for my defense of my position in this article I believe we can safely assume that budget deficits will not get better so even if no QE happens our spending will accomplish the same thing. I say that knowing that if the deficit does not resolve itself the Fed, to save the US, will still have to do QE eventually on a massive scale no matter what, to keep rates low so the interest doesn’t bust us. However, the Fed cannot suck in all that paper and treasuries will fail eventually.

Outside of no QE I think there is not much that can change my mind about what I think will happen. It is pretty much in stone and will happen either as I laid it out or in a somewhat similar fashion. In the near-term I am still bullish on treasuries, now that we sold off, and on silver, gold too, but I am more partial to silver right now. I am not crazy about stocks and would be very hesitant about committing major capital to any position right now, the market is trading odd to say the least. At this point bullion is your best play, silver looks very promising and a recent Scientific American article points out that there is only 19 years left of easily mined silver, a no brainer to me, buy it.

People always wait to buy metals to “see how it does” and while they are waiting the price goes nuts and then they buy it and wonder why they lost money. Don’t be one of those people, but buy it smart, some every month. Because even if you think the bulk of my argument is wrong, or all of it, we have disinflation and higher bullion prices, what do you think will happen when we do have inflation? Not to mention silver is not only a precious metal, but an industrial metal. So, if you think the world is going to end, buy silver. If you think we are in a real recovery, buy silver.

When I wrote last week that the Fed would do QE 2 and the trade of the century, granted that was over the top, was leveraged bull 20+ year ETF’s I received some flack, a lot actually. First, let’s talk about the economy and what is going on there. Second, let’s talk about the treasury, gold barbell trade that seems wild and crazy. To clarify something, no, I am not drunk as one commenter asked.

The economy, oh, how this recovery summer is not such a recovery after all. Perhaps Geithner’s op-ed in the Times should have read, “Sorry, we screwed up any chances of a recovery” instead of “Welcome to The Recovery.” Any improvement we have seen within the economy has been purely statistical or for the very wealthy, period. Yes, Saks and Macy’s are indeed having good years, but look at Walmart, not such a blockbuster year. If you strip away the stimulus spending and government transfers you have poor GDP readings, period. I cannot see how anyone would or could really dispute that, but I am sure there are some that will try.

The truest test of any economy is unemployment and I was saying, before it was popular by a certain ‘New Normal’ guy, that unemployment was a leading indicator, not a lagging indicator. Our employment situation is poor at best considering that we are having more and more people leaving the workforce because they are giving up. Imagine just giving up all hope of finding work, not that you don’t want a job, but you just can’t find one, but since you have given up our government says you do not count anymore, nice. Anyhow, if we include all those people who dropped out of the workforce we are up to 10.2-10.5% official unemployment. As far as the U-6 we are still around the 17% area, but I am willing to bet it is much, much higher and who knows, exactly, how many people simple have been unemployed so long they just don’t count anywhere anymore. Regardless, our unemployment issue is the truest test of our economic situation and has indicated for well over a year that the economy is in poor condition.

As far as the other economic data points and indicators, well, show me one that points to an actual positive improvement please. Hint, there is not one that points to a significant improvement in the economic condition in recent months. In fact it is so bad that the Fed is turning to a form of QE which they know will do nothing to boost the economy, but it will look like they are doing something. It is so bad you had Ben Bernanke testify in front of Congress and say; “I don’t know what is going to happen,” basically when he said ‘unusual uncertainty.’ You have the Fed Presidents talking about recessions, QE, Japan scenarios and a host of other issues, but don’t worry because CNBC says no double dip. You know what, they are right. There will not be a double dip because we never made it out of the first depression.

We got the Fed doing this reinvesting of interest and repayment of principal now, to the tune of about $300B or so, into treasuries. What is that going to do for the economy? Nothing. Ben is trying to force banks to lend by doing a bull flattener to the yield curve, good luck Ben. What he doesn’t realize yet is people do not want to borrow. In fact, people want to pay off their debts instead, go figure. Ben cannot boost demand and QE will not do anything at all besides make bond investors very happy. It is a dog and pony show to make everyone feel good and like the Fed has some ammo left, they don’t and the game is over for them. All more QE will do is damage the dollar at some point in the future, that is a certainty. Consumer demand will return only after the deleveraging period is done and that could take 10 more years, who knows. It will be a tough ride, that is for sure.

Now, for those who thought I was nuts for going long a leveraged 20+ treasury ETF and gold, well, you don’t have to say, my account says it for me. UBT was about $85 a share when the article came out and it closed today at about $90.50 and gold was at about $116.50 and it is at $117.73 (I am using GLD as a proxy). I do not believe the trade is done, I wouldn’t enter it here, but I am not exiting it either, especially after CSCO missed their revenue estimates tonight. This was not a crazy trade, it was the most obvious trade in the world. Easy money like this does not happen very often so I am not sure why anyone would think this was ‘high risk’ or abnormal. You can hold leveraged ETF’s, if they go in your favor, over a period of days, just not long-term.

Everyone knew the Fed was going to do something, anything, because the Fed is staunchly independent and not influenced by politics, yeah right. Come on, the Fed knew it had to do something to show it was helping the economy, but not too much because we have an election coming up. What could be safer than maintaining the balance sheet, but reinvesting loose change into treasuries to bring down long-term treasury rates? It does not raise any eyebrows, everyone knew they would do this and it does help borrowers, but it doesn’t help the real economy. Regardless, this was telegraphed and sets up the Fed for real money printing and QE after November.

In the meantime, I plan on locking in profits on my UBT soon and rolling into TLT on weakness. I fully expect that we see the 30 treasury move towards the 3% area, maybe 2.5% as Ben wrote about in the past. That makes longer duration treasuries very attractive still and inflation is not an issue now. However, inflation will be at some time in the future and QE will damage the dollar, hence the gold hedge. I think gold goes back to its high and make a run towards $1,300 an ounce, maybe higher is full blown QE kicks in this fall. Equities are not attractive, in my view, unless they pay an outsized dividend and have a strong balance sheet. Stocks like AAPL, no thanks, they do not work in this environment unless they pull a new killer product out of their back pocket every other month. Good luck.