It has been almost 3 years since the collapse of the banking sector and the governments of the world have spent trillions to not only save the banks, but to stimulate the economy as well. We have been told for the better part of 2 years that we are recovering, and we are to a certain extent, but the headlines remain exactly the same over the last few years. They say something similar to: the recovery is on the way, is the recovery in jeopardy, the recovery is in full swing and so forth. Well, we are either recovering or we are not and it is difficult to believe the news when the headlines and underlying story remains the same, a weak recovery.

I view the economic data as severely mixed 3 years into this thing that we are in. Some data is good, but it is largely inconsistent with one month being great and the next being so-so. What has remained constant is the employment situation which is a leading indicator for this recovery. The labor markets stink, to be blunt, and we have only a few good reports to talk about. Unfortunately even those good reports are not enough and do not even keep up with the population growth. We need some 350K jobs created every month to see a real impact on the employment situation. It is clear that we are far away from a number above 300K in the employment report given that we are still seeing initial claims coming in above 400K a week, a few sub-400K claims reports are not encouraging given we are 3 years along and in a “recovery” mode in the economy.

I fear that many companies have learned that you can grow a business with less people. This is apparent with many firms having stellar earnings along with sky high profit margins. If a company can make more or the same with less overhead they know that there is no point in hiring extra bodies until they absolutely have too. That is not good news for the employment situation by anyone’s model and it is unlikely to improve anytime soon.

On top of the unemployment headwind we are now back to $4 a gallon gas. Very few people realize the impact of high gas prices on the cost of living until they go shopping. We are still very much in an oil driven economy and as the cost of oil rises so do the prices on everything from toothpaste to ice cream since some products are made out of oil and all products are shipped by burning oil. This is not news, but it is important to emphasis the importance of energy in our economy since higher prices lead to lower consumption and creates a negative feed loop on everything from jobs to retail sales. Obviously other commodities also play a role and all commodity prices are very high which does not help anything.

So, where are we? I think stagflation is the word we should use. We have a stagnant economy with jobs but rising commodity prices, which is also considered inflation. We are 3 years into this thing and we have been getting beaten over the head with the term “recovery” so much that I believe we have forgotten what a recovery really looks like. I can assure you that this recovery is not normal and for many Americans there is no recovery at all. I remain convinced that we have largely been through a statistical recovery and there has been little improvement in the real, American, economy. Overseas or emerging market economies are booming and largely responsible for US company’s great earnings, but since most of our manufacturing was outsourced this boom is leaving many Americans out in the cold. This also explains why our manufacturing economy, 12% of our GDP, has been doing so well, growth is coming from abroad, not from inside the US economy.

I realize this may not be news for many people but it might be as the permabulls need to understand what is going on. Yes, there is a recovery, but not for most Americans. More importantly this bull market we have is not real. Sure, stocks have done extremely well, but this growth is coming from everywhere else but the US and all the growth is driven by very cheap money. Once external growth slows or the cheap money comes to an end there will be a price to pay when it ends. The question to ask is when will it all end? I do not know, no one knows, but my guess is the tightening in China is a clue that we are much closer to the end than the middle. In fact, even in the US the cheap money may stop in June, unlikely, but possible as QE2 ends.

I had turned bullish a few months ago and stated that once the liquidity from the Fed ends we will have to pay the piper in the form of a correction. I believe that statement to still be true, but I do not believe the Fed will stop its QE programs for very long. Nothing is normal in our economy when we have had the US government spend trillions and the Fed expanded its balance sheet the way it did plus do 2 rounds of QE… that is not normal. But this abnormal behavior saved stocks so keep the bet going until June, but I believe when the VIX is under 18 one should be a buyer and at 15 everyone needs to own the VIX in some way. Since everything remains abnormal be cautious, buy protection through the VIX, buy commodities on the dips and look for dividend yield in stocks.

We have witnessed the Middle East go up in flames and the troubles in Europe start to percolate again, but the dollar is not doing anything. I am only surprised that it is happening so soon, I thought there was more time. While I highly doubt that anyone will rush back into the greenback it could happen. The world’s faith in the US has been shaken by our inability to seriously discuss our deficit and debt problems. A perfect example is the latest round of talks encompasses cutting some tens of billions of dollars from a mere 12% of our total budget leaving the entitlements and military spending off the table, is it any wonder why no one trusts us to seriously address our debt issues?

If people are not buying dollars what are they buying? Gold and silver. The prices do not lie and both metals have moved significantly over the past few weeks as the Middle East began to demand regime changes. All the while the USD has basically treaded water or moved slightly down. Not only does the lack of interest coincide with the latest budget battle but it also coincides with the fact that we are right in the middle of QE2 which was frowned upon by most nations. The double whammy of our inability to seriously deal with our debt and our very own central bank monetizing large amounts of our debt, over mythical low inflation figures I might add, makes other countries stop and think about how to allocate their assets during times of uncertainty.

Overall the US total debt and monetary policy is also inflationary which makes an inflation protected asset more attractive than UST’s and dollars. Why would investors choose gold and silver over TIPS? Because no one trusts the government to actually track inflation honestly which is why you are seeing lower inflation expectations in TIP yields right now. Again, gold and silver fit the bill as an alternative as a flight to safety. Granted, gold is considered safer than silver, but lately silver has picked up more prestige and I believe silver will make some spectacular moves in the near future. In other words, gold has likely picked up more of the safe haven assets than silver but it is clear that both metals have outperformed the dollar and may be replacing the dollar until something else comes along.

So, is the dollar dead? I think it is one its way if we do not address our debt and annual deficits this year. The deficits are so bad, so outrageous and so dangerous that ignoring them for one more year may be devastating. Our total national debt, officially, if 100% of GDP and our unfunded liabilities is tens of trillions of dollars… we got serious problems. Adding insult to injury is the whole QE situation which is debt monetization no matter how you slice it. This shows weakness and is highly inflationary which will drive foreign investors away from the USD. Why would you buy an asset today that you know will be worth less in the future? You wouldn’t and either will other countries when it comes to USD’s.

The fact that we have had a few governments get toppled and a few more on the way in the most volatile region in the world and the dollar has not rallied is kind of scary. Instead we have seen commodities continue to rally, stocks (I guess the only source of our economic success) go straight up, and the dollar trend a bit lower. In the meantime gold and silver are being treated as currencies and when turmoil kicks up they go up in value. I have known for a long time that the dollar is in trouble and would blow up because we have a lack of leadership in Washington who do not want to make hard choices and the Federal Reserve who seemingly has lost its mind and has missed every major issue with our economy over the last 10 years who has decided to monetize our debt.

This will end with high inflation and the fact that the Fed disagrees is exactly why you should agree with me. Gold and silver make sense, own them physically, along with other soft commodities. I fear that the dollar has seen its best days and while I do not know exactly what will come in the longer term I do know it will not be pretty. I think you will know who to blame by then, I hope at least.

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.

The world is in a very tough spot right now and the word of the day is social unrest. On top of the news from the Middle East we got some, in my opinion, pretty bad jobs numbers on Friday. Of course if it was a good report it is because of the ‘economic recovery’ and when the report is bad it is because of snow, rain, wind, Earth or whatever else they want to say instead of the truth, the economy stinks.

There was not one good piece in the jobs report, not one. Sure, an unemployment rate of 9% was the headline given to us, but doesn’t this strike you as being odd since the BLS just added in some 300K under reported job losses from last year? On top of that we had, unadjusted, horrible initial claims reports for January and even the adjusted reports stunk. Even though the economy did add jobs governments are laying people off which is a problem as this will likely continue on into the future. Overall, there is still some 5 people for every open job right now, think about that and then think about how long it will take for unemployment to actually come down, especially with new workers coming into the work force through population growth.

We are not going anywhere in the near future and for proof of this look at Bernanke’s speech the other day when he basically guaranteed QE3. As an aside, I love how he said QE2 worked because asset prices, stocks, and bond yields were going up. Umm, wasn’t QE2 supposed to create negative real interest rates? And since when do we use the stock market as a barometer for economic growth? In fact, QE2 did work if you thought it would benefit stocks, but it has failed miserably for the other areas it was supposed to help, i.e. jobs, economic growth and negative real interest rates.

However, QE2 did have a successful side effect that only a few people have realized, it has overthrown a couple of governments and probably will topple a few more in short order. Remember how I said you can get inflation without money velocity? It is kind of happening and just imagine what will happen when banks actually lend again. Now, Ben says food prices are from emerging market demand which is true, but it is also because of bad harvests, which will continue, and the fact that commodities are valued in USD’s which have been sliding down in recent weeks.

This means food prices have risen for the poorest countries in the world to levels that are just unsustainable. When food prices rise in America we can weather the storm for a while, but in some countries food at lower prices consume 50%+ of the average families budget so they do not have the luxury of riding out the storm or cutting back they simply go without. They can only do this for a little while before something gives and we have witnessed what happens when that something gives way. I also believe we have only seen the beginning of the problem as no one has figured out that this year’s wheat harvest is likely to be very, very, bad and we will see much higher prices in a few months. The weather is whacky and I have a strong suspicion that the Midwest will not produce what we are used too this year. If that happens things could get very interesting and perhaps, just maybe, we will stop paying farmers to grow food in order to turn it into fuel, use sugar instead which we pay farmers to not grow… get the picture yet?

Things are getting interesting and I am trying to stick around to see how it all ends. In the meantime I believe that one must be long commodities, silver and softies for sure, and stocks until QE is over, which is likely to be never. I say that with a caveat as I believe if QE3 does happen stocks might get very choppy and at some point people will figure out that ZIRP + interest on excess reserves + QE = Really Bad News and is bad monetary policy. Then again, only a few have figured it out so far so maybe I am too optimistic.

Here we are in a New Year and as is tradition we see countless forecasts for what will transpire this year. My personal feeling is that they are all worthless since no one knows what the Fed is going to do and there is no denying that the Fed and the Fed alone has total control over the markets. Without the Fed we would not have seen positive returns in 2010, IMHO, and we only got those returns because the central bank flooded the market with extraordinary liquidity, again. The irony is that everyone knows something isn’t quite right, but they seemingly cannot put their finger on what is not normal.

As the weekly headlines come and go they are almost humorous now and completely contradict previous headlines. It is this that is contributing to that unsettling feeling most people have but cannot identify right now. Any given day you read about the recovery, often from a heavily seasonally adjusted figure, which signals a recovery in the economy, even though the unseasonal adjusted figure shows the data is not so hot, and everyone is bullish again. The next week we get a data point that is horrible and the world is coming to an end. Perhaps this is what many economists mean when they say this is a ‘muddle through economy.’ Regardless, things are better there is little question about that, but I would say we have stabilized ourselves in a less bad environment versus a real economic recovery.

I had previously said stocks would move higher and they did, but that is only because of the liquidity the Fed bestowed upon us and not because of truly better data points. We have seen unprecedented stimulus over the past 3 years from the federal government and the Federal Reserve which explains pretty much any positive data point. When you examine the real economy, i.e. Walmart, it is a different story. Frankly, when Walmart which has the largest customer base in the US is struggling when so many are preaching the resilient consumer something isn’t right. I know the high end retailers are doing OK and that proves my point which I made about a year ago that the recovery, thanks to the bailouts, and I use that term loosely, was lopsided to only the wealthy and not to Joe Six Pack.

This is also reflected in the unemployment figures and pretty much anywhere else you want to look. The rich are doing just fine thank you very much, but if you are in the middle class or poor the SNAP program is this way. While this is not fair it simply is what it is and is not going to change anytime soon, sorry. Perhaps that is what scares me the most right now, the inequality of wealth in America, don’t get me wrong I am a capitalist through and through, but it doesn’t take a rocket scientist to read history and what happens when the wealth gap gets this wide. On top of the middle class and poor becoming poorer we are now seeing what I thought was going to happen, inflation without an increase in money velocity.

Those who thought it was impossible for a country to experience inflation without money being in the hands of the people, well, you were wrong. When the central bank plays games, untested games, like QE it hurts the currency which drives up currency sensitive items, food and energy. When prices rise and wages stay the same it will more than likely exacerbate the underlying problems we are suffering from and may lead to civil unrest. We have food prices at the highest level ever and oil about to burst through $100/barrel, where is the outrage from the media on this, and people already feel poor, not a good combination. Again, all of that without an increase in money velocity, go figure.

Now, there are other reasons for the rise in commodities, but they are irrelevant in my opinion since Joe Blow could care less about why prices are rising he just cares about being able to feed his family. What is frustrating to Joe is that he is being told how great things are when he feels poor, is probably going to lose his house, can barely afford food, gas or his power bill. Joe is wondering what planet the commentators on CNBC are from when it is plain as day that things are not right in the real world. What Joe doesn’t understand is that the ivory tower announcers and the Fed are looking at the core CPI which says everything is hunky dory. The question is, do you think Joe cares that deflation is occurring in LED TV’s as much as Ben Bernanke does? Of course not because Joe looks at food and energy, but all economists look at is core CPI which excludes food and energy. That is where the disconnect is coming from, partly.

The public is slowly starting to not believe what they are being told anymore and that is a good thing. Remember how we were told that retail sales were going to be fantastic? They did not look so hot today, except for some high end retailers I might add. What I am getting at is simple, the real economy is catching up with the market. The really sick part is that when the economy does improve the Fed will have to kill the liquidity which will crush stocks. Those that preach stocks are a win-win because the Fed will pump money when the data is bad which is good for stocks or when the economy improves stocks should go higher are wrong, pure and simple.

This is the largest liquidity driven rally in the history of mankind or what TVland would call a bubble. Stocks are expensive and only going higher because of the Fed. However, when the Fed stops feeding free money to the banks it will end, badly. You can disagree with me all you want, that is what makes a market, but you know it is true. This is not a win-win situation for stocks. How can it be when just 6 months ago when liquidity was drying up the market tanked? We only saw a rebound when Ben spoke at Jackson Hole and said he would print and then he followed through, that is not the sign of a healthy market.

What we have is still a whole lot of uncertainty going on in the whole world. Nothing is certain except that central banks will merely print us into oblivion. Europe is a mess, we have some countries wishing to slow down fund flows to them, Korea’s on the brink of war, again, China is not buying UST’s like they once did, the US is awash in debt, which will not be solved by the Republicans, rising prices for food and oil about to go ballistic again. All that stuff is off the top of my head and I know I left a ton of stuff out, but this is enough, hopefully, to make one stop and think.

I said before that stocks will move higher and I continue that thought until one of two things happen, either the data really does improve or until QE2 ends in 2Q11. Both items are basically indications that the punch bowl or liquidity will dry up. I also believe stocks will underperform commodities, specifically silver and copper, in 2011 simply because the Fed will never stop the printing presses, they cannot. We are in a very odd period of time and, frankly, these are scary times with so many unknowns out there and a public slowly waking up to the fact that things are not as they seem, but that is a good thing, IMHO.

2011 will be a rollercoaster year with the schizophrenia kicking into high gear as far as the media is concerned, the world will be growing or coming to an end every other day, which should add more volatility to stocks. I also think we will see some things come to the forefront of discussion this year. How it ends is anyone’s guess and I will not even venture agues at the results. What I do know is that it probably will not be good. Here are my issues I think will be front page news this year:

-          Food prices continue to rise to scary levels

-          Treasuries begin to see a steep selloff

-          The US’s national debt will be a hot issue with China downgrading us, rightfully so, to junk level

-          The US is put on negative ratings watch by Fitch, but who cares about Fitch… right?

-          The tax cut extensions will prove to be a horrible idea, they really were to begin with

-          The Social Security tax break everyone gets moves up the date of depletion of the trust fund to, “officially,” the 2020 decade

-          Oil breaks through $100 probably eclipsing 2008 record price

-          The dollar will rally hard before it falls

-          Food shortages around the world will be a major problem

-          The Fed looses massive amounts of money on their treasury holdings

-          China openly sells US treasuries

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.

There have been lots of things happening in the silver market lately all of which reinforce my bull case for being long. Long time readers know I have been pounding the table of silver for the better part of 2 years now.  The one aspect of the market that I have concentrated on is the supply/demand side of the equation. It stands to reason that with some 2 billion souls entering the middle class they will all want cell phones and other modern toys. All of these toys involve silver to some extent in their production.

The supply of silver is not unlimited and very few miners solely look for the shiny metal, it is typically a byproduct of copper and gold mines. Silver is also not recycled the way many other metals are which means it is used once and never again and that is unlike many other metals that are usually recycled. I believe that the reason people believed silver had an unlimited supply is because it was so cheap, but now we find out, I have known for awhile, that the prices were manipulated by 2 big banks, HSBC and JPM. This is not conspiracy talk anymore as 2 lawsuits have been filed and Bart Chilton has admitted the manipulation.

Moving forward I believe we will continue to see higher prices as the shorts cover in the silver market. I also think that COMEX does not have enough supply to meet physical demand for the metal if investors want to take possession, which they will eventually. That means there may not be enough silver at any price to meet demand. It sounds unbelievable, but it could happen. I would not bet the farm on the COMEX thing being the driver, but I would bet the farm on Asia and India driving demand well into the future.

The other very obvious factor in the recent rise in silver prices is the dollar. In the US we have to ask if silver is really climbing or is the dollar just tanking so hard making it more expensive to us. Frankly, it is both things happening at once which should worry my fellow dollar bulls out there. I think the dollar will break its all-time low in the near future thanks to Mr. Bernanke. You cannot print as much money as you want without repercussions and the repercussions of massive printing are the dollar losing much of its value. Out of everything happening out there right now the dollar’s slide is what scares me the most and it should scare you too.

Silver is the barometer of inflation, in my book at least, and the rise in price is signaling trouble ahead. Everyone believes the dollar will always be there in its current form and nothing like Zimbabwe or Argentina can happen in the good ole US of A, but bad things can and do happen here all the time and with an obscene monetary policy that Brazil, Russia, China and now Germany are criticizing bad things are sure to happen here. I would be a buyer of silver not just to profit from it, but to hedge my wealth with it. That means owning it physically, not in a brokerage account or in storage somewhere, but where I can see it. If the dollar breaks its all-time low things may get ugly and as we buy up our locally produced products we will see what the inflationary pressure is like when we are forced to buy, suddenly, very expensive Chinese goods.

Doom and gloom you are thinking, maybe, but I prefer to say this is a realistic situation now. I know I would rather be prepared instead of just hoping things will work out. In my experience hope is a wonderful thing, but hope isn’t reality. Reality is that thing outside your window and our reality may just turn into a nightmare and suddenly moving from the city to the country, farmland specifically, with a shot gun and you silver and gold hoard may suddenly make sense. After all, this is the advice some hedge fund managers gave their wealthier clients in recent years.

Buy silver on any dip and I am sure that in 5 years, or much sooner, you will be extremely happy. As for equities, well, if you think these gains are real you are delusional. Ben is simply propping up prices to make people think they are wealthy, but if the dollar keeps falling at some point the rise in equity prices will not offset the loss of purchasing power of your dollars, just ask any Zimbabwean about that. They had the best performing market over the last 10 years, but would you be holding their currency? I think not. Silver, gold or other commodities are your hedge, not stocks and not TIPS.

I admit I have been delinquent on checking out the Euribor rates lately since the Federal Reserve has me scared to death about QE2, more on that later, but I do not think it will be what you believe it will be in November. However, the Euribor went ballistic thanks to the ‘perfectly safe’ Irish banks began to show that the ‘stress test’ were pure bull. How can a bank pass a stress test a couple of months ago and then do insolvent, basically? That doesn’t happen in a normal world and it proves that the ECB totally flubbed the stress test.

The fraud that the stress tests were showing up in the inter banking lending rates which went from benign to cancerous in a heartbeat.  While the Euribor first continued to climb after the stress tests it did level out later in the summer, but now it went vertical and it probably is not looking back. Considering that European banks are still holding only God knows how much US MBS’s, which our current foreclosure fraud situation may render those MBS’s worthless over time, along with how much Greek, Portugal, Italian and Spanish debt and you got serious problems. The media is not going to touch this, but the bank lending markets talks about it only if you look at them.

The 3 month Euribor rate was below .90% until a week ago when it jumped to about 1%, .993% as I write this, which isn’t much until you consider we are in a zero interest rate policy (ZIRP). Actually, we are in a negative interest rate policy right now if you count all the QE going on. When you factor that in it kind of brings to light that something is wrong in Europe, still. US treasuries for 3 months are yielding about .14% so clearly European banks are pricing in a risk premium. The question is, what is the risk premium for? Clearly default is part of it and I think you will see more issues with banks very soon.

It is impossible to have bank holdings that consist of sovereign debt that is in trouble plus MBS holdings and not have any problems. There certainly will be more insolvency issues, but even if a bank is not insolvent their balance sheets will be impaired further. It is a mess and the real problem is that it is just not European banks, but US banks as well. While US banks do not hold a lot of sovereign debt, they do own tons of MBS holdings, unless the Fed buys them from the banks, which foreclosuregate, I hate these names we have now, will make many of these securities worthless or at the very least impair them well below par.

I do not know what is going to happen, but I am convinced that the serious problems that many thought were behind us never really went away. All we ended up having done was the government and the Fed paper over the problems. This went on all over the world with the ECB following suit as well. The Eurubor is telling us something, are many listening? Nope. Stocks are moving higher on some idiotic belief that inflating our way out of this mess will work, it might in nominal terms, but not in real terms. Phony stress tests clearly are not the answer as the fraud gets uncovered when banks that passed suddenly need a bailout. How central banks and governments have any credibility is simply beyond me. When a fraud is uncovered people usually talk about it, but the news on some financial channels is mute on the issue. When lending costs climb rapidly it usually makes news, did you hear about it? Nope. It is all just one big farce out there. I personally believe that the only safe haven seems to be commodities and I believe stocks are not as safe as people believe.

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.

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.