It is official, we live in Bizzaro World for sure. In this new normal there is no such thing as efficient markets, price discovery or any rational reason for the erratic movements in the markets from day-to-day. Just a couple days ago Europe was falling apart causing the markets to selloff hard, but today all is good again and the markets are up a couple hundred points. Bad news is now good news while horrible news is temporary, literally.

As for valuations of equities, who knows anymore, but one thing is for sure, price to earnings ratios are under attack, for the second time in a decade. I have read several stories talking about why P/E ratios are so passé and you need to measure a stock via the PEG or some other nonsense. We had this argument in 2000 and the traditional fundamental investors won that argument and I assume we will win it again. The P/E ratios are under attack because, drum roll please, earnings estimates are coming down. So much for the $90+ earnings estimates for the S&P 500 which, if those earnings per share were met, priced the forward P/E ratios, which is an absurd notion to begin with, at an attractive 12 or so right now. However, lower estimates means a higher forward P/E of say 16 or so, that is less attractive.

Fundamental analysis or value investing is about finding cheap stocks and those are getting tougher to find in today’s market. Not only that, but investors are leaving stocks, how many weeks or net outflows have we had? The outflow from equities is, I am afraid to tell you, permanent. Why? The Baby Boomers, it is that simple. They are retiring and making a fundamental, permanent, shift in their portfolios which involve less risk. That means fewer stocks for this group of investors which are the wealthiest generation, dare I say, in the history of America. I always wondered what would happen when the Boomers all started to retire, I always thought that systematic withdrawals would simply lead to wild swings in the market, never did I believe that they would just pack up and leave the market. Well, they are leaving the market after investing through 2 major crashes, plus worthless property now, in the markets they simply want much less risk. I do not blame them.

The big question is, with all this money leaving equities who is buying and why are we still at the current levels? It makes little sense, if you ditch the permabull thought process for a minute and use logic. More sellers than buyers means lower equity prices, that is always the way it worked until now. Today we have more sellers than buyers, based on net fund flows, and the averages are holding their own. We certainly have a ton of volatility, which makes the VIX seem really cheap at this level, but no real movement in the markets, either way. It simply makes no sense whatsoever and I am positioned neutral in the market right now so I have no vested interest in anything that might happen.

If we look at today’s data, for example, it was not good, mixed with the Beige Book it was horrible, we had a huge trade deficit, certainly smaller than last months, but wow, and we had 451,000 initial jobless claims. In what world were that data is good? Obviously in today’s world it is for some reason, but the facts remain that we are losing 1.85M jobs a month, through firings, almost 3 years into this mess. That is unreal. As Rosenberg points out these are the numbers we saw right after Lehman collapsed, so how is this good news? I can hear some people saying, well it is getting better or it could have been worse. Sure, but you have been saying that for a year now and it is the same, bad. At some point you have to realize that it is not going to get better anytime soon and the faster you realize it the sooner you can exit your positions, hopefully at a profit. The retail investor already figured all of this out, hence the wholesale selling of their funds.

That is what it comes down to, who is going to be able to get out before it is too late? I still find it hilarious that market pundits still preach the bull market is here and the sky is the limit for equities. These are the same people who never saw the tech bubble or the housing bubble, both times saying ‘this time is different,’ but now they claim they can see bubbles and everything is now a bubble, gold, bubble, treasuries, bubble, stocks, undervalued. Have you ever noticed that stocks are ALWAYS undervalued? Sorry, but we played this game before and the only one that loses are the investors while the pundits are still on TV making huge money while, clearly, being subpar at their chosen profession.

The bottom line is that computers are running the markets now. This explains the huge outflows from funds and the sideways movements of the markets as computers get the advantage of liquidity rebates and sub-penny pricing. In this environment I cannot explain bad news sending stocks higher other than computers taking over. I have nothing against them, I think they are a problem, but at the same time what kind of advantage does the ordinary investor have competing against algorithms that react in milliseconds. Yes, one can make money, but this action really screws up price discovery and creates a false sense of confidence because we could have another flash crash when the computers decide to back away, again. This is also, in my opinion, another reason why investors are moving away from stocks and heading to bonds, precious metals and dividend yielding stocks.

Based on what I have seen I am not interested in trading right now. I have a select few investments, precious metals and that is it. I had some nice trades, leveraged treasuries and more gold from the beginning of August, but have moved out of those positions. I see no value in this market and think it is merely a matter of time before we see a major move lower, but who knows when that will be. When we have that move lower I believe that will be the time to buy and only then might we see the retail investor come back to stocks. However, they will not be chasing growth stocks rather stocks that pay dividends. I do believe that when the selling subsides we will see a crackdown on HFT, but it will have been too late, as always. Boring is back and that is a good thing, but until we get true price discovery there is little sense to chase this market and those that do will get hurt.

I was wrong on the numbers on the employment report, kind of, take out the temporary hires and birth/death adjustments and I was very much right. Contrary to popular belief, the birth/death adjustments do matter as those adjustments are responsible for underestimating unemployment by 880,000 people last year and, in my opinion, that rate is probably way underestimated at that. Even Dave Rosenberg lambasted the birth/death adjustment as “fantasy” which means I am not alone in my thinking. Regardless, that employment report was clearly not priced into the market and was very bad news.

We had wages drop and the work week shrink which is very deflationary to say the least. I also believe that the full impact of the Gulf oil leak has not made the rolls either yet which means more bad news ahead. There is also the ban on offshore drilling making its way through the court system which could have some profound implications in the Gulf region adding thousands to the if not temporary unemployed at least the medium term unemployed area of the report. The icing on the cake was the initial claims report of Thursday which came in much higher than anticipated at 472,000 which is not good at all.

Mix that in with the ECRI slipping further and I am comfortable with the double dip scenario, if we were ever really out of the recession to begin with. I am hard pressed to believe any of this is priced into the market even after this massive slide we have seen in equity prices. From my point of view the equity markets had some 4% GDP priced in and flawless earnings with endless positive guidance. So far we have seen some firms pre-warn about a slowdown in the economy and their earnings. This means some of this is priced into equities, but not a 1% GDP print or a negative print which is possible at this rate. Housing is telling us that we have serious problems and the slide in all the housing data means that a full fifth of the economy is in negative territory. We also see that hiring in the manufacturing area, which was giving economists a sense of comfort, is slowing down dramatically. Can we all say this together please, inventory rebuild, but that is now over.

There is simply no end demand for products at this point which is not good. I had called this a depression last fall and received tremendous heat for using that term, but make no mistake about it, this is a depression. Unemployment is telling us that it is a depression and we are, as history seems to be repeating itself, looking at acts that mimic what we did pre-1929 crash, Smoot-Hawley, now called Schumer-Graham for the currency manipulator tariff act. None of this is priced into the equity markets which mean we will have much to worry about on the downside. Be sure, there will be sharp rallies, but you should not buy the dips on this one. I sold everything except for biotech, high yielding stocks with strong balance sheets, high grade bonds, treasuries and I own a tiny position in high yield bonds, I sold 80% at the end of 1Q after the stellar performance. I hold large short positions, which is relatively unchanged from the end of 1Q except I rolled put options out until September and began building a position in some leveraged and unleveraged short ETF’s, TZA, SH, SDS, BGZ to name a few, some I will hold and some I trade.

I expect a rally up to the 104-105 area in the SPY which should prove to be a nice entry point into a short position, if you are aggressive and believe growth will be weak as I do. However, I believe tomorrow we open lower since we could not hold $102.50 on Friday in the SPY, but we should reverse up since everyone is so negative. Depending on what happens, everything always depends, I will more than likely cover my shorts tomorrow and play the long side for that rally and reenter my short positions at higher levels. Volatility is your friend, but we are dominated by certain carry trades, news events and other macro items that one needs to monitor so be careful and don’t just trust the charts, look at everything to make your decisions. My target for the S&P is still at least 900, but it can go as low as 860 and retest the March 2009 lows without any problem whatsoever. I am not even sure quantitative easing can fix this problem since treasury yields are heading lower already. We are in a very bad position and there are no more bullets left from the government. This could get very, very bad.

The past 2 weeks we have seen the markets do things that simply do not seem natural from freefall flash crashes to intraday 300 point turn around rallies. However, there is one thing that is pretty clear, I would not buy this pull back. As David Rosenberg points out and a few other non-perma bull market strategists, not that there are many left, point out is that these wild swings are not normal in a bull market.

Think back to the market of late 1999 to the early 2000 and you will remember such swings, but do you remember how it ended? If you bought on those dips you never made your money back, ever if you bought the NASDAQ and you would have barely broke even in the S&P 500 if you sold at the peak in 2007. I think it is safe to assume that this market action is a sign of a sick overbought market trying to lure you in to buy one more time before it robs you blind, don’t do it. To be clear, I believe the broad market will move lower, I think 900 to 950 is not an unreasonable target, but we could move much lower than that. Before you say it, no the fundamentals are not so strong that we could not see the lows of last March, more on that in a minute.

I am not saying do not buy great individual companies, not at all, I am bearish on the market, but I like some individual names. I am bullish in the biotech area as there are tons of patents expiring in the next few years and you will see big pharma buy many of these names, but I also like big pharma too. Look at the yields and the rock bottom P/E’s, they are dirt cheap and you should look at some of these names, but biotech is not a prisoner to the business cycle, as long as it is well funded and near approval for a drug. I also like consumer staples that pay dividends, boring names, but they pay you to hold them and no matter what the economy is doing you will always need toilet paper and a toothbrush, I hope at least. I also still like high quality bonds and can make a case for treasuries right now, but use your own discretion, I would stay away from high yield, I sold mine a couple months ago.

Why do I think boring and income is the best model right now? Well, the market is going to correct even more than it already has, kind of a simple explanation. Income strategies, which I have been on the record for supporting since last year, makes sense because we are living in disinflationary, possibly deflationary, times where real yields are much higher than what we think. I am a long-term inflationist, come on look at all the money being printed and Obama wants to double exports in 5 years, you cannot do that with a strong dollar, but right now deflation is the name of the game and income makes sense. Deflation also means stocks need to be trading at much lower multiples than most people think and that is why I think this correction will potentially be much deeper than most people believe. Time will tell who is right about that.

The Fundamentals!

What about the fundamentals? Are they better than a year ago? Sure. Do they support a 20 P/E multiple on the S&P 500? Nope. Do you really think the housing data since the homeowner tax credit implementation was actually real data? No way. How about unemployment, do you believe temporary jobs are going to lead America to the next level of prosperity? Well, all the amazing job growth has been only in the temporary job area, let’s not forget that the actual employment report numbers are tinkered with via the birth/death model which added 188K jobs to last month’s employment report. For those of you who don’t know, the birth/death model are estimates the BLS uses to predict how many new business are started based on how many business died and population growth, it is fantasyland stuff basically.

What about corporate earnings? They have been good, but I do not believe they are sustainable. First, the stimulus is running out, that is a very important thing to remember moving forward. Second, a cool 30% of the S&P 500’s earnings come from Europe and up until lately U.S. companies enjoyed, globally, a weaker dollar which is over since the new sovereign debt issues are driving the value of the dollar higher. In technology a large percentage of earnings came from Asia and I do not believe that will continue much longer because of what is happening in Europe, Greece was a big deal indeed.

You see, Europe represents 20% of the worlds GDP and, believe it or not, China’s top importer is not the U.S. it is the EU. So, if the EU is going to have lower growth because of austerity measures, which they will, it will automatically be a drag on world GDP, but it will specifically hurt China. If China begins to slow down that is very bad news since China is “the recovery story of the world” or some other tag line the media gave it. In other words, China will be buying less from the U.S., exporting less to the EU and the EU will be buying less from the U.S. Also, China will be running, more than likely, trade deficits not surpluses which means they do not need to buy our debt. Can you see the problem now?

Greece is/was a big deal not on its own, but because it was locked in with the other PIIGS which were locked into the EU as a whole. It is all very bad news and no matter what CNBC says we are all still coupled with each other. It is the interlocking of the global economy, especially in the debt markets, that is the problem and there is no escaping it. I am afraid that even when governments guarantee debts that may not be enough anymore because, as the price of gold is proving, people are losing faith in money. Our whole system is based on faith and when that faith is damaged that is when problems get out of control and I believe we are just about at that point. The rumor yesterday was a .50% rate cut, how is that good for the Euro? If anything that would have brought it closer to parity to the USD. Printing another trillion just won’t calm markets because it means nothing. At this point I cannot see much of anything from Europe that will calm the markets.

The only things they can do is let the PIIGS default on their debt and kick them out of the EU, not necessarily in that order. Anything else will just prolong the problem and the printing press is the cause of the problem, not the solution.

I was reading Zero Hedge yesterday, a post in regards to gold where Peter Schiff was part of the topic, and there were some interesting comments. One caught my attention as being somewhat ludicrous which is not unusual, but is was because the author is a contributor to the site. Unfortunately the comment was flagged as junk, I hate it when that happens because counterpoints are always good things to have and I do not mean to rip him apart, but rather correct years of misinformation he probably picked up from school or TV armchair economists.

One comment he made was:
“On gold to the moon: Peter you’ve been talking up your gold positions for years, but once calm is restored, you’re going to take a major haircut on gold.”
Another was:
“On the US economy “not growing”: Has he looked at the ISM, employment (not just payrolls but household survey), industrial production, and the leading indicators over the last ten months?”
And the other one was referencing that as soon as the trillions in bailouts the banks received hits the economy it will calm the economies or something to that effect. He also indicated that as long as confidence remains in the system everything will be fine, which is true, but how much will it take to keep that confidence or instill that confidence? Also, the more money we inject to create confidence the more confidence it actually erodes, it is a zero sum game in the end. Part of the comment was that the EU was trying to avoid a “deflationary death spiral” or something similar, this is why people should not flag things as junk because they are not junk, which is what really bothered me.

People are thoroughly confused by deflation and deflationary death spirals and what that means. Deflation is a problem, we have deflation now, but it is not a huge problem. However, a deflationary death spiral is what we had in the 1930’s and is what keeps Ben Bernanke up at night. We will not, I do not think, have that deflationary death spiral and I think we need to understand what that death spiral was, what caused it and why we will not have it. After that I want to address the rest of the comments he made above.

What we suffered fro in the 1930’s was horrible and something I hope we never see again. To understand more about what it was like in the Depression please Read The Depression: A Diary by Benjamin Roth and stay away from the academic stuff. However, during the depression dollars were scarce because fo the massive bank failures and deposits were frozen or simply lost when the bank closed down. On top of that the stock market wiped out millions of peoples savings which had a domino effect into the real estate market which is what caused the banking crisis, somewhat reversed from today’s crisis I might add.

What this did was literally wipe dollars out of existence, they just disappeared and were not transferred to anyone else. Today one persons loss is likely another’s gain through derivatives or other hedging instruments known as bailouts, but that was not the case in the 1930’s. Since these dollars were gone or frozen and the U.S. was on the gold standard we did not have a Helicopter Ben to get dollars into the system, at first the Fed tightened credit, who knows why, but they later tried to reverse that decision, but it was too little too late. What we had was complete demand destruction and people saving whatever dollars they had, which was strange because people would rather starve than spend their money.

In fact, while people were starving crops were on or at a record pace, prior to the dust bowl fiasco of course. It was a simple fact that the U.S. was tied to the gold standard and could not put more dollars into the system and people just did not want to spend what they had saved because who knew what tomorrow would bring. We also had no safety systems in place such as unemployment insurance, welfare or Social Security, until FDR was elected a few years into the Depression. By not having those safety nets in place it made things much, much worse and that is why we had such massive deflation.

This was not the run of the mill demand deflation, which is what we have now, this was the death spiral lack of dollars in circulation plus no demand deflation. So for people to draw a comparison to 1930’s deflation to todays is a bit ridiculous to say the least. We have those safety programs now so people will not starve instead of spending money, ironically our poor actually have cable TV, go figure, and we have other safety nets in place. This is why we will not see 1930’s deflation and this is also why we can hide the evidence of our current Depression, if we do not have to see the soup lines they are not there, right? Never mind the fact that 1 in 8 Americans receives some form of Food Stamp assistance, if that is not a Depression statistic I am not sure what is.

The banking system is still suffering from after shocks much like we saw in the 1930’s, closures did not stop for years after the crash of 1929 as real estate continued to decline in value, sound familiar? We are still suffering from similar bouts of bank closures today because of declining real estate prices and that is unlikely to change. Many of these banks were bailed out, funny how some “too big too fail” are now failing after they were bailed out. How can, as his comment claimed, the markets be calmed because of trillions in bailouts will build confidence when those banks who were bailed out are still failing? This is very similar to the 1930’s when many banks who received aid under the first Hoover plan still failed. The point being is that it will take a long time for the system to heal itself and with the government propping it up it will take much longer. The Depression lasted some 10 years, 7 with major government help, our current problem got help on day 1, how long will our recovery really take?
With the massive stimulus and government spending in the banking system it is nothing more than inflationary measures. The comment that “when the trillions making it into the economy will only build confidence,” is a bit absurd, in my opinion, as it points out that the issues were very bad for a very longtime. Also, when the trillions, a bigger and more accurate statement would had been if the trillions, make it into the economy it will create inflation, period. There is really no doubt that the measures taken by all the central banks were to stem the tide of the aforementioned deflationary spiral and it did work, but the central banks cannot stem the tide of the inflation that they created. After all, central banker’s primary mandate is to inflate the currency at about a 3% annual rate to begin with so they have no real mechanism to dis-inflate a currency anyhow. Sure, they can raise rates and do reverse repos, but serious, that will do little.

In fact, for all the money spent on bailouts and stimulus measures I would argue we have received a very poor return on our investment. We had a sharp mini-V of a +5% GDP print, but that appears to be it. We had spend far less in the past and had averaged far higher GDP prints, about a 7% print after major interventions, so, sure, you got a V, but it is one side of a W, sorry Charlie. People had been bragging about the ISM Survey’s for some time until the Ism survey’s failed to support their claims, but they fail to support my claims as well. In fact, they are neutral, but well below what we would call normal expansion averages. Not to mention, these are survey’s and should be calculated as survey’s, as in this is how people feel at this point in time, not as this is what will happen in the future.

My main point is that we do have growth and things are better, but no where near where the bulls think they are and we are not heading to where they think we are going. The comment also pointed to the leading economic indicators as a “bright spot.” Funny, Kudlow and company have not brought up the LEI for sometime now because, well, the number rolled over a couple months ago now and has been heading lower, funny what happens when Uncle Sam cuts off the money. So, I am not sure what LEI the commenter is looking at, but the one everyone else is looking at is pointing to the South, not the North, good luck if you think down is up and up is down because you got Vertigo my friend.

The global economy is about to end its amazing recovery, sorry folks. Europe is 20% of the global economy and they are instituting massive austerity measures right now and these are only the start, more is needed. If 20% of the world’s buyers have less money you will see economists start lowering forecasts very soon, trust me on that one. You know how the U.S. is pestering China to revalue its RMB? Well, it is pegged to the U.S. dollar, right? Do you know who China’s largest trading partner is? Hint, it is not the U.S., it is the EU. That means Chinas products are now more expensive in the EU than they were just 2 months ago. Wasn’t China credited for the global recovery? Isn’t China in the middle of a liquidity bubble? Won’t not selling products hurt their exports causing an artificial popping of their bubble which could cause more problems for the world than originally thought? I think so, but we are still pressuring them to revalue and spreading the falsehood that we are their largest trading partners, what baloney.

It is kind of funny to see people dismiss all this information and keep economic events locally when this is a global economy, I mean, there is a reason why when the U.S. market tanks foreign markets go down as well and why when we go into a recession so do other countries. Decoupling will happen, but not until the rest of Asia emerges like China did, but until that happens China is dependent upon the U.S. and the EU. However, let us mak sure we are clear, the EU is, for sure, China’s biggest trading partner and a falling Euro is a big problem for China as well. Keep an eye on that, I am.

On to the topic of the day, gold. Peter Schiff has been bullish on gold since, well, forever now and has taken much heat for it since it climbed from $250 to $1,240, yes, taking heat for something that quadrupled. The commenter stated that gold will take a haircut, a major one, when markets calm down, maybe he is right, but let’s take a look so far. Trillions have been spent on the banks, that has not calmed the markets and now you have governments in trouble, what is going to calm the markets even if small governments start defaulting? Even beyond that, look at 2003, 2004, 2005, 2006, 2006, 2007, 2008, 2009, 2010. During most of those years the markets were considered “calm” and in a “goldilocks” period upon a new wave of global liquidity never before seen, what happened to the price of gold? Oh, yeah, it quadrupled.

The one big down year gold had was in 2008, when it first hit $1,000 I might add, when everything was in liquidation because of a global margin call. If the Fed did not start dropping money from helicopters we would have had our 1930’s deflationary spiral on our hands, but that is not what happened. What happened was things were supported by the government and long before the markets shot back up 70% gold was on its way back up to it’s previous $1,000 high. So, Peter Schiff can hold on to his gold trade all he wants, it worked for him as he lost little during the collapse by holding it and it returned more than the S&P, from January 1, 2009 to December 31st, 2009, than the S&P 500 did without the volatility. Comments like the ones made by the person in question show that they do not look at the facts and simply do not like the asset class, or do not understand it, and end up looking silly at the end of the day.

Do I think gold will go down? Yes. Why wouldn’t it? Everything rises and falls, but I think it will be much high 10 years from now than today. We know that central banks inflate the currency, that is a fact. We know, especially right now, that sovereign default risk is real and confidence in currencies is really a fleeting thing, we have merely been lucky for 38 years since the gold standard was eliminated, we know that turmoil will always exist and we know gold, silver or other commodities are a finite resource that has much higher demand that supply could ever meet. In my opinion, only a fool would not want to own gold, just look at APMEX.com, all their smaller American Eagle coins are sold out for crying out loud, is that the confidence in the global system we are looking for? Is that the sign of a growing global economy? Nope.

As I watch the pre-market activity and commentary from the airheads on CNBC it just boggles the mind. Last week these same people said the world is coming to an end, which meant buy to me, but today the “market is soaring.” Investors must get confused when they watch this porno for the mind as they flip-flop every day. Cramer says do not buy until Dow 9,000, but tonight he will say I told you to buy on Friday! He did not, he was a bear, which is why I thought I should buy. This market is bipolar and, to me, and the commentary you hear is insane. I am bearish on the market, but like individual companies.

We went from market crashing last week to the market is the place to be, today at least. I think this is a strong bounce rally before it declines more, I would not commit new money today or yet unless you are renting this market. The only reason we are getting a bounce today is because of a $1T bailout of Europe, ouch! I do not believe this is a real bounce and volume will be pitifully light, as all up days are, and this market is really just responding to short-term oversold conditions. This will be a good time to de-risk ones portfolio, IMHO.

The problem in Europe is not resolved, anyone who thinks it is needs to check their meds, as the funding package is merely treating the symptoms of the crisis not the source of the problem. Essentially, the bad behavior of the PIIGS is being rewarded, but they should be punished, and all the ECB is doing is taking the risk off of the speculators, rewarding their behavior as well, and giving that risk to the central bank. On top of that, the number should be shocking to the markets, $1T is a very large number and above where most people saw it. Not to mention, a good chunk of that is coming from the IMF, a.k.a. the U.S. which is the top funder of the IMF.

The U.S. is broke and borrows all of our capital, like most countries nowadays, so we are simply bailing out debt by issuing more debt. Who does that make sense? It does not. This bailout will not fix the problem long-term and merely kicks the can down the road for a little while. It will blow up at some point and now the bond vigilantes will look at other countries, i.e. the UK, U.S. or Japan, IMHO. They should have left the situation alone and let the PIIGS default to introduce a mechanism to kick them out of the EMU, but no, we are going down the bailout route, again! Not only that, but they are spreading the risk around to other countries now, unreal.

But the fundamentals of the U.S. economy are strong, say the bulls, which is why the market will scream today. Well, I will say things are much better, but not enough to justify the markets run-up and not strong enough to send the market up whatever percent today, this is a technical rally based on some, IMHO, troubling news. I look at the NFP figures from Friday, which I called a fraud and I stand by that comment since 188K were “made up estimates” from the BLS. When one subtracts out the 188K birth/death model figures, which NO commenter on the TV is talking about, except Rick Santelli, we have a figure of +102K. That is a great number right? Not really. Consider this, if we back out the 188K make believe BLS numbers, remember the birth/death model is responsible for the BLS revising unemployment up by 800K in February. We have a baseline number of 102K. If we subtract out government jobs, which are most temporary as well, think Census, we are down to about +48K. You could subtract out temporary hiring as well, but they are jobs, just not permanent, IMHO. No matter how one looks at it, except for CNBC, the ADP figure was accurate and the employment report was less robust than most think, but hey, let’s not let the facts get in the way of buy, buy, buy.

Overall, I fail to see how many classify this as a strong recovery after we spent trillions and 2 years later we are still at 10% unemployment and we have an anemic recovery at best. I am not saying things are not getting better, rather I am saying we have stabilized for really bad to just less bad. I believe a double dip is coming and this market is so not priced for a double dip. If we add in the Europe craziness the market is much less attractive, IMHO. The $1T, which should scare you in the U.S. as you are on the hook for a large portion of that because we are the top funders of the IMF, is a huge number and underscores how bad of shape the EU is really in. We have merely are fighting a debt crisis with more debt, sure there are austerity measures, but they are not going to fix the problem and the Greeks are apparently great at hiding assets.

Yet again, we are socializing the profits of speculators which were lambasted in the European media via the governments over the weekend, unreal. Instead of bailing out the PIIGS they should have instituted an ejection mechanism instead, that would save the Euro, but now they kicked the can down the road and are making other countries issue debt to fix the debt crisis, no sovereign country has cash on hand so they borrow it, see the problem? Austerity measures or not, it is a problem that will be with us for a long time. This is a reflexive rally built on a news event which was actually bad news. How does one support its currency by issuing a slush fund for bailouts? You can only defend a currency through higher rates or taxation, that really is not the case here as Greece will still have debt-to-GDP ratio of 150% by 2014, or there about.

This rally is somewhat justified, but I would be extremely careful with buying into this. Tonight Cramer will revise his call from Friday and Kudlow will continue with his “V” shaped recovery nonsense, but the problems are still there lurking in the background waiting to reappear. Buy gold because this is not over and what the EU did was inflationary, when that inflation will hit, I do not know, but it will in the EU and in the U.S. The other issue is, where will the vigilantes go next? The UK, U.S., Japan or will they stay in the EU? At the end of the day it was probably best to let the PIIGS default so the market can clear the bad debt, but let’s not have the market solve the problem, let’s tinker with it so another bomb can blow up somewhere else.

Oh, let’s not forget one of our GSE’s, which are “sound,” requested another $10B from the government. Yup, a sure sign of how strong things are.

Was it Greece? Was it a fat finger trade? Was it high frequency trading? Was it quant funds run amok? No one knows for sure, but it was ugly to say the least. I believe the selloff was very, very real and a matter of no one left to buy the dip. We fell within 1.5 points away from all trading being halted and we miraculously reversed course and rebounded some 700 points. Some think it was the Fed or the plunge protection team, I would say that is not farfetched either.

The one thing this was definitely not was a fat finger trade, like originally reported. When trades are entered for equity orders they only use numbers, not letters so the whole “B” versus “M” argument is a bit irrelevant and merely makes a good news story. I believe this whole thing was a perfect storm of a hugely overbought market, yes it is and was overbought, mixed with Greece contagion fears sprinkled with a bit of tight orders by HFT or quant funds and no one left to buy, anything. All liquidity was sucked out of the market and when that happens, well you saw what the results are.

I believe this is only the beginning and things will get much worse. It was also odd to see mining stocks remain in the green along with gold. If this was a trading error these stocks should have tanked as well, but they did not. This tells me that the selloff was more than a bad trade or order imbalance and any other ludicrous reason the media can come up with. It was selling, real live selling from people who know what it is like to lose 40-50% of their money and did not want to repeat that again. Watch fund flows to verify this, I bet we see more bond fund inflows in the very near future.

Even if you were short it was a tough market for you, especially option traders who saw the bid/ask spread widen to levels I have rarely seen before. I am long VIX August and September calls and it took an hour to get pricing back to normal and there was no premium being given for being in the money. It was amazing to see the selloff today as I jokingly went to my wife’s office and said the market is crashing, it was down only 280 at the time, and when I turned it to CNBC to show here it was down 400 and moving fast to the downside. It was breath taking and luckily I was hedged, but the talking heads on TV and perma bulls that you talk to probably told you that hedging was not important and the market now only moves up, it doesn’t, sorry to tell you.

I always find it odd that when the market tank there is talk of manipulation, but if the market goes up for 8 straight weeks that is normal, come on now. I do not believe anything about today was manipulated, except for the massive rebound that “just happened” all of a sudden. No one seems to be really looking for the cause of this, in a serious manner I mean, and are chalking the decline up to a fat finger event, etc. I am a bit more inquisitive though and while I do not have an answer, I have some theories.

I have heard rumors that the overnight repo market in Europe is frozen, I do not know if this is true yet, and if you notice the overnight LIBOR has been creeping up and is close to the 1 and 3 month rate, this might mean the rumor of the repo market is true. On top of that the risk of contagion is extremely real, I wrote about that a week ago in the “Greece Does Matter” post, and the next up is Portugal followed by Spain, Italy and France who owns tons of PIIGS debt, $781B to be exact. After that it is anyone’s guess to who is next, but it is more than likely going to be the UK. What is happening in Europe should be a lesson, in advance, for the US who, ever since Obama has come into office, seems to think the European way of doing things is better than our system, it is not.

The reason for the debt crisis is the massive debt these countries accumulated to give away free health care, massive pensions, paid vacations and other luxury things to their populations. Clearly following the European lead is not a wise move, but that will not stop our politicians who are immune to market downturns because, A) they are all wealthy and B) they are paid very well for what little work they do. We are the next Europe and we will suffer the same issues they have now if we do not get our act together. I am fairly certain that the funding crisis which is a rumor today will be public knowledge in a few days and is one of the main reasons for our selloff today.

If Europe cannot fund itself, other than through the printing press, today will seem like good times moving forward. This is bigger than Greece and it is 10 times bigger than Lehman, we are talking about countries now, not banks. Essentially, we decided to save the banks at our own peril and we are now seeing the results of this action. We should have let them fail, all of them, because we now run the risk of major countries failing. Was Goldman Sachs really worth it? I think not.

What really stood out today was gold, it went up and is on the verge of a tremendous break out. Are gold bugs really that creepy now or is it that we knew something in advance? For those of you wondering, it is the latter. Gold is now the new reserve currency, period. We may suffer from deflation when this funding crisis escalates, but that will quickly turn into inflation, very, very fast. When dollars come into high demand and they are not available we will see this deflation, but remember, we have Helicopter Ben at our disposal. He will literally get into his helicopter and drop dollars all over the country. This will seem like nothing as the dollar stays strong, but that will be very short lived.

After the dollars are dropped inflation will be swift and unlike anything we have seen before. You see, even though Ben flooded the banks with dollars over the last 3 years none of those dollars made it to us, the people who spend them. Instead the banks bought treasuries, also a good option for investors right now, and this time the dollars will bypass the banks and hit us directly, think Bush stimulus instead of green energy stimulus from Obama. Putting that money in our pockets will mean people will spend, that is what Americans do, don’t ask me why. There is where inflation begins and that is only the start. I am not sure what they will do after that, but I am confident it will involve more spending and giving us money, thanks china!

There is where the problems will really begin because there will be a global funding crisis at that point. This means that no one will buy our debt so we can buy iPods. Ben will have to print it, literally print it to get it into our hands. Inflation is a funny thing and very misunderstood, but I assure you that we will not enjoy it, we will at first though if we pay off our personal debts. In the end we will merely be left with tons of worthless paper and sky high prices. What happens next is a mystery to even me and I am a doom and gloom guy, but it is not going to end well. This is why you must own gold, in your possession, because it will get that bad. The worst case scenario is the value of said gold drops, but it will still be better than holding only USD’s. I think the biggest risk is not owning it versus owning it at this point.

Perhaps this was a one day event though, I doubt it, and everything will be fine. Tomorrow we will receive news that the government hired tons of people and private companies hired more temporary workers, we know the number will be good because Obama already scheduled an 11 AM press conference to go over the jobs report. However, those who continue to think temporary jobs and government jobs are a good thing will be very disappointed to learn it is not. I believe that we will open up much lower, working off unclosed sell orders, and we will rebound some tomorrow, who wants to be short into the weekend.

The real show might be next week, depending what happens over the weekend. I am not sure of the near-term outcome or what will happen, I am holding my shorts and VIX calls though, but we did get a glimpse of what will happen longer term today. I do not know about you, but I did not think it looked pretty. As far as believing some trader pushed the wrong button, come on we can do better with our excuses than that.

It only took 2 years for the SEC to get off their butt and do something, but these charges are not telling the whole story. The complaint alleges that Paulson & Co. constructed a synthetic CDO through Goldman, Paulson picked the worst mortgages to bet against. Goldman, in turn, sold them to investors, they need someone long to buy what Paulson was short, they apparently pitched them as good investment products that were handpicked by a independent third party. They lied to investors, shocking. Paulson did nothing wrong that I can see, but since he is a big bad hedge fund we will see what will happen.

What is interesting is that this should not be the only charge against the firm. After reading several books it was clear that Goldman was long sub-prime until June, or so, of 2007 when the market started to crash. They in turn went short the market, buying CDS’s on the synthetic CDO’s they helped create. They are hiding their culpability by claiming, “we were only marking a market and had nothing to do with creating this mess.” That is pure bull. It was clear that the firm worked with the first person who created the CDS on sub-prime, Mike Burry in California. While they only brokered the deal between AIG and the hedge fund, Scion, Goldman did know that this guy picked the worst sub-prime to bet against. They let him handpick the worst of the lot to short. They knew the synthetic CDO’s were garbage.

Clearly, I only have public information and this is a complicated mess, but from what I have read I believe Goldman had a much larger role in creating and facilitating the problem that nearly collapsed the financial system as we know it. At first they brokered the deals and then they bet with the hedge funds that the market would collapse. However, the real issue is that Goldman and other firms, Goldman is not alone in this, knew that these managers were hand picking the worst mortgages of the group, they sent these guys a list of junk to pick from. Goldman had to then broker the deal to some other party, AIG was the biggest, obviously, so what did they tell AIG? Did they tell them that this guy picked the worst mortgages to bet against and insuring them is risky to you? I doubt it. What they did was fool the ratings agencies to give them a AAA rating and then told AIG to insure them because it is a riskless proposition.

That is the problem with Goldman, they knew what they were creating was bad, kept that information to themselves and then passed the risk on to other parties telling them whatever they wanted to tell them. Other firms will be brought in on charges as well, perhaps Morgan Stanley, Deutsche Bank and who knows who else. Obviously I have simplified what they did and added what I think they did, I have no proof other than what I have read, but it makes sense based on the info we all have. What will come out of these charges? Nothing. The SEC will offer a settlement fine and Goldman will accept it and not admit or deny responsibility. The SEC is corrupt.

The privatization of any social program always brings a hot debate between conservatives, liberals and, well, anyone in the middle. Many free market minded individuals think Social Security should be privatized while liberals say no way. Who is right and is it even possible to privatize such a huge chunk of the Federal pie?

First, let’s answer whether or not Social Security could be privatized. The answer is simple, it cannot be and privatization will never, ever happen. Why? Anyone who has been alive for more than 15 years knows that the federal government takes a nice chunk of your paycheck for FICA, basically Social Security and Medicare/Medicaid, but what they do not know, usually, is that the Social Security portion does not go where you might think. There is no actual account for your Social Security benefits instead you build up credits and your payout is determined by what age you retire. The size of your check will vary some depending how long you have worked and who much you put into the system. This is a very 30,000 foot view.

You receive credits into your Social Security account and not a “cash balance” report because there is no cash actually in your account. Believe it or not the government borrows against Social Security assets all the time and gives you an I.O.U. instead – the Social Security Administration is now cashing in some of those I.O.U.’s because they are now broke. You should know this because it means that if the cash flow into Social Security was ever stopped the whole house of cards would come crashing down. In effect, your entitlement program is the largest Ponzi Scheme in the history of scams. It is for that very reason Social Security will never be privatized because all of the lies would be exposed. But, what if we could privatize it?

Is it a good idea to privatize Social Security? That is a complex question and I am inclined to say yes, but with severe limitations. I do not think it is a great idea to put it into an account with only equities because people do dumb things when equities are involved. In my opinion I believe that using a deferred income annuity product would be the best option or some other type of account that has guarantees attached to it. An income Annuity would give the investor much higher lifetime income than you might think. I am also inclined to believe that insurance companies would create a product that would create a greater stream of lifetime income than what Social Security could ever provide.

However, I think some products should never be considered as an investment option. On my list I believe products that involve higher fees should be excluded such as equity index annuities and variable annuities. I am a believer in Variable annuities, but I feel that the current product fees are too prohibitive to make them a suitable option, a new one would have to be created. I am not a believer in equity index annuities, call me crazy but monthly or daily averaging which intentionally lower the rate of return is not a good idea and then throw on caps, yields or spreads and you have a product that is just not good. I am sure someone will disagree with me about indexed annuities, but that is their opinion and I have not seen a product I actually like. Plus when you exclude the dividends for these products it will drastically underperform the market rate of return. In short, these types of insurance products, which I am sure are valuable, are just too complex for a self directed Social Security account and I do not have faith in the government to choose the best products if they were allowed.

I think a hybrid product with a living benefit, which would payout 5% for as long as the owner lives regardless of account value, might be a decent option. They have a lower cost compared to a variable annuity, but provide similar lifetime income guarantees. These accounts also would mandate an asset allocation model that would have to be adhered to or all guarantees are off. Contrary to belief, asset allocation did work throughout the market crisis. Yes, you took a loss even in a diversified portfolio, but a balanced fund only lost 19% and has a standard deviation of 12.7, not bad.

If this were to happen, privatization of Social Security, it would lead to bad products being created since the government has no sense of what is and what is not a good investment for people. It would also lead to great confusion by investors since many have no idea how any type of guaranteed products work or their drawbacks. There is also the possibility that if/when we have another meltdown in the markets the losses incurred by investors would bankrupt insurance companies or whoever is offering guarantees. It is clear that traditional pension funds have not worked, the taxpayer is already making good on those guarantees, which leads me to believe that any type of equity investment options are simply a bad idea.

The only feasible option for privatizing Social Security would be using a traditional income annuity. The risk is manageable and the returns are predictable as well. However, this is all a moot point because it will never, ever, happen simply because if the government did not receive that income from your paycheck they would fold. While I think some investors would benefit from this the larger population would not and the only real winner would be Wall Street, as usual.

Thanks to Bloomberg and Fox we might now find out who borrowed what and what was provided as collateral to the Fed during the crisis we may finally know thanks to a lengthy legal battle. The Fed might continue to fight, but it may not go much further, just show us already as this data is almost 2 years old, I am sure we can handle the truth.

However, you will see that the Fed took some very questionable items as collateral or so we think. Some bankruptcy documents do show that the Fed did take some stocks and other, well, crap for collateral during the height of the financial crisis. What many people do not know is that it is against the rules for the Fed to take credit risk since it is the U.S. governments bank. These documents will either confirm or deny those rumors, but I am betting on the former, if we ever really get to see them.

Could this be the end of the Fed as we know it? I hope so because since the Fed was enacted, in secret in 1913, we have witnessed the dollar lose 97% of its value, a depression in 1920-21, the crash of 1929 leading to the Great Depression (now known to be the Fed’s fault for tightening credit), more boom-bust cycles than any other time in history, the 1970’s (really, need I say more about the 70’s? I think they introduced bell bottoms too, but I cannot prove it), the 1980 near collapse of the U.S. treasury market, the first banking crisis, Long-Term Capital, the dotcom bubble, loose monetary policy for the last 30 years, the housing bubble, the complete meltdown of the financial system, and, for its final act, complicity to destroy the dollar’s value with its current balance sheet.

Really, I cannot think of any reason why we need to reform the Federal Reserve system.

A new report was released today showing significant improvement in the labor market today. As you know, there were 6 people unemployed for every 1 job opening not too long ago, but that has changed. Now there are only 5.5 people for every 1 job opening, let the good times roll! While this is good news it is not at all very promising considering the government is hiring thousands upon thousands for the census.

Does anyone even ask themselves if the recent positive data is only indicative of a low quality unsustainable recovery? From my point of view that is all it is, a low quality unsustainable growth spurt. How a negative 36K job report last week was considered good is beyond me as most bulls predicted positive job growth now. What I found very interesting is the fact that all the pundits were blaming bad weather for a bad jobs report when there were no or limited snow storms when the survey was conducted. Furthermore, snow really does not cause a huge decline in payrolls, a statistically significant impact anyhow, but let’s not let the facts get in the way of a recovery story.

There have also been many large firms still forewarning of layoffs coming in the near future. While this may make for higher profit margins it is not good news for a country that is over 2 year into a recession, or whatever we want to call it now, and we are still losing jobs, albeit at a lower rate. Less bad is not good, but that is how the data is being spun which is ridiculous. It is not that I want the market to crash or that I want things to get worse, quite the opposite in fact, I just want an honest take on what is happening out there. Telling people that they have lying eyes is just crazy, but that is what everyone is doing.

This is true of the government data which has conveniently reduced the workforce in order to reduce the unemployment number. I just saw a report which shows that if you add in all the people the government takes out, because they are discouraged, the unemployment rate jumps to 11-11.5%, but even that is low. If we go by the U-6, which we should, as that is the equivalent of what we used during the 1930’s, the rate is sky high. We just came off of a low quality recovery from the 2000-2003 recession which spurred the current recession and clearly the further we kick the can the worse the problem becomes. Stop kicking the can and let people know how bad it is, stop the government intervention (we are now paying people to short sell their homes!) and let the bad debt get cleaned away by the system.

If we do this the problem may not just get kicked down the road, but it might get fixed. Of course, health care is now taking the spot light so who cares about jobs or what is happening in the real world. While I do not favor political intervention in the economy I want Congress to really pass a jobs bill, i.e. a comprehensive bill that provides employers tax cuts, what can I say, I am optimistic.