Where are we?

Posted by Ray on May 12, 2011 under Main | Be the First to Comment

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.

You can fool some people some of the time

Posted by Ray on November 8, 2010 under Main | Be the First to Comment

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.

457,000, Again

Posted by Ray on June 24, 2010 under Main | Be the First to Comment

Initial claims came in at -457K this morning, this is not good, and last week’s figures were revised from -472K to 476K, really not good. This has little to do with the oil leak in the Gulf and anyone making that claim disqualifies themselves from the conversation. This has to do with a weak economy, pure and simple. We are entering a double dip recession and as the stimulus is pulled back it is going to get worse, much worse.

Your first warnings came from Best Buy and Fedex, but no one listened to what they had to say. Frankly, the real warnings were always in the weekly claims reports, but everyone dismissed them as a “lagging indicator” which is simply not true in a post credit collapse economy. If we were in a normal inventory recession I would agree that employment is a lagging indicator, but when the economy blows up because people cannot pay their bills, well, employment is a leading indicator. That is where economists missed the mark and failed to adjust their models, those that fail to change will go the way of the dinosaur, it is inevitable that natural selection weeds out the weak and that is what is happening now.

To top off the situation we did the worst thing possible, we tried to cure a debt problem with more debt. You cannot do that, it just doesn’t work. Take a look at Greek bonds, the 10 year is over 10% again, why? They have austerity measures in place. They have access to special funding, etc. yet their bonds are yielding over 10%. That is telling you there is no fix for the problem as the smart money is always, I cannot stress this enough, always in the credit markets. We have treasuries climbing with 2 year yields pushing .64%! Are you kidding me? This is not normal and while I bought when yields hit 1.10% on the 2 year, taking much flak from friends and family I might add, I figured the yield would drop to .77% or so, within the trading range, but they broke out. This is a sign that things are not as they seem and extreme caution is merited. Where treasury yields can go is the big question, certainly zero is not out of the question and negative yields have happened before, watch the credit markets.

Europe is a problem and will continue to be a problem, remember that the EU is China’s biggest market and the EU is responsible for 30% of the S&P 500’s earnings, not an issue for 2Q, but 3Q I would not be long in 3Q. Unemployment in the U.S. will climb higher, I am sad to report, especially as Europe deteriorates and much to Mr. Krugman’s chagrin forcing the EU members to increase their deficits is not a good idea. Their deficits are the problem and making them bigger will not solve their problems. Europe could lead to much higher unemployment in the U.S. and one has to remember that Europe did make the Depression much worse in America in the 1930’s as well, history does repeat itself.

To top it all off we do have the moratorium for drilling in the Gulf, it may get overturned again, but assume it will not. What does that mean? That means at least 10,000 jobs will be lost within the first few weeks. After that it could get worse as it creates a negative feed loop and the loss of one job means others will lose their jobs over time. From my lens the moratorium is insane. The leak is horrible, we all know that, but this is the first oil leak we have had in the region, ever, out of how many wells? Perhaps if the government puts a safety inspector on each rig that may solve the safety concerns, but that idea was rejected. Instead, let’s halt the entire industry and watch them all go to Mexico or Brazil instead so we can lose those jobs for years to come in the best case scenario or forever in the worst case scenario.

Employment is indicating things are mildly better, but merely stabilized at “less bad” which is not good overall. Housing, the release yesterday, solidified that we will have a double dip as housing is about 21% of GDP and we just saw the worst housing data since they started recording the data series. How much more evidence do we need to have? We also created false demand which means we had distorted housing data for the past year. How in the world are we supposed to know how far forward we pulled demand? Months? Years? This is the problem with Keynesian economics especially when it is used wrong, which we certainly did.

The bottom line is this, unemployment is going to grow outside of government rolls, period. Housing is going to go lower meaning GDP is going to be bad in the second half of this year, if not negative. The employment report, due out soon, will show more government jobs which will not be positive for the markets. The ISM surveys are rolling over. The leading indicators are pointing down, hard. Inflation is nil right now. Treasuries are telling you something big is going to happen. Europe is in major trouble. How you can believe the long only permabulls being paraded on the TV is beyond me. They get paid to have your money in their funds whether it goes up or down. I get nothing whether you invest or not. Frankly, the facts at this point are irrefutable.

Deflation, Inflation and Housing

Posted by Ray on June 22, 2010 under Main | Be the First to Comment

There is an interesting story from CNBC.com that illustrates that a bond trader is concerned that the bond market will collapse. It is not the fear that the bond market will collapse that caught my eye, it is the fact that he thinks deflation will fuel the collapse. I do not see that happening, exactly, yet at least. Clearly housing is still seeing deflation and we are not at the bottom yet either.

Logic dictates that we should all be gearing up for inflation, now, but the data does not lie and I can pull the most aggressive data I want and it shows ultra low inflation rates which is scary, frankly. With the massive printing and monetization of debt that we have seen over the past 2 years we should see some inflationary pressure, somewhere, but nothing. Not only has the Fed’s balance sheet grown, but it is growing and so is the national debt, at a record breaking rate. Still, inflation is nonexistent which is puzzling to all economists and policy makers, even housing that is given the most generous tax breaks and, recently, a huge tax credit to buy is showing that prices are falling, not rising. This is a severe problem and it is going to get worse.

Deflation will continue to rip through the economy as the deleveraging continues which could be for another 3-4 years, but there are always caveats which I will go over. The primary reason there is no inflation, this isn’t rocket science unless you are an economist, but credit is contracting and people are saving more which means less money is in circulation. Bank balance sheets are enormous right now, but the irony is they are still largely insolvent and even if they could lend why would they with 10% unemployment and initial claims coming in at 470K a week? All of this means prices will drop lower across all categories, except for food which I admit has me perplexed as well.

The primary reason is the fact that everyone is deleveraging and paying down debt. We live in a society that was driven by consumption, but that consumption was not organic, i.e. actual income driven, it was credit driven. Once that credit is gone, and it is long gone, consumption ends as we once knew it. Sure, we will have hot products like the iPad, why, I do not know, but that is not for me to decide and even those products have a certain shelf life meaning their appeal will eventually wear off. Especially when we have initial claims, on a monthly basis, at 1.8M which is twice the population of Montana and the target market, 18-30, is experiencing a high rate of unemployment.

This lack of inflation is not lost on the Federal Reserve and believe me they are worried about it. Tomorrow you will not see any drastic change in their language or actions. They will likely get rid of paying interest on bank deposits, what’s the point if inflation is nil. In fact, I am willing to bet, this will not be in the announcement, that the Fed’s balance sheet will get even bigger and what should concern you is the amount of currency swaps that appear on their balance sheet. Those swaps are for Europe’s banks that “are just fine” so they can settle their trades in the relatively safe reserve currency, the USD. If that number keeps growing the problems in Europe are much larger than we are being told. Europe will also weigh heavily on tomorrow’s decision and that will be a reason that no major action will be taken as well.

It is clear that deflation or disinflation is here at the moment and I am sure it will get worse, but it will also be somewhat quick. As many of you know the U.S. has decided to not pass an official budget this year. This is the first time this has happened in almost 40 years and there is only one reason I can speculate this is not happening, the $1.6T estimated by the President was a little too conservative and the actual number is probably much higher. Why debate that before the midterm elections? It would also bring the U.S. front and center in the whole sovereign debt fiasco that Europe is going through at the moment. Frankly, our balance sheet is much, much worse than what we are so critical about over in Europe and we haven’t even instituted socialized medicine, yet.

Deflation is great for U.S. treasury debt as investors can capture greater real returns and the treasury pays out little interest, but this is not going to last long. Our deficits and our tinkering in China’s affairs is about to bite us in the rear end in a big way. First, we owe too much and can never, ever repay it, there is just no way out of it and we cannot “grow our way out” and the people suggesting that are loony tunes. Second, I suspect the RMB, Yuan, China’s currency, will eventually weaken, I am very sure of it, but it may also strengthen in the meantime which would be humorous only because China would then be running big trade deficits, not surpluses, and would not have to buy our debt. I wonder how well our $40B daily auctions would go then.

I also wonder if Congress will actually pass the much dreaded Currency Manipulator Bill they are threatening China with, I think that is Smoot-Hawley on steroids. If both these things happen, China lets the currency strengthen to get the U.S. off their back, right before they drop it to new lows, and Congress passes their tariff act, that is essentially what it is, what would that do? It would force Americans to pay much more for goods, that is inflationary, and it would force China to either not buy more U.S. debt because there is nothing to hedge against and in all likelihood China would end up being net sellers of treasuries because all of their bubbles would have popped and they would need to get liquid. All thanks to politicians who have no clue how capital works. That would lead to inflation in a big way because all that inflation we exported over the years would wind up right back home where it belongs.  This, of course, is a worst case scenario.

What is more than likely to happen is the fact that the U.S. simply continues to spend and the bond market slowly begins to demand a higher risk premiums. Eventually it will end up like Greece where the U.S. cannot borrow at reasonable rates, but long before that the Fed will take matters into its own hands and begin to buy treasuries through quantitative easing programs, they did it once, they can do it again, right? Except this time it will be inflationary, but not from a money velocity point of view, from a dollar depreciation point of view. That is much worse because you actually do not have to increase money velocity to destroy the currency which will crush savers and the middle class.

The beauty of this is it doesn’t happen all at once, it happens over a period of months and the government will tell you this is a good thing. How you say? Oh, it is a perfect plan. Because we consume about 80% of what we produce domestically so we won’t see it right away, but what we will see is our exports increase dramatically, because the dollar is falling on the international markets. More people will become employed, sounds good right? Well, I am not done yet. As people become employed they spend more and prices rise and as prices rise wages will need to increase, but no one is buying our debt still, except the Fed. The money supply will have to keep growing to keep up with inflation so they print, monetize and send out more money to banks to get into circulation. Wages will increase at exponential rates, but it won’t mean anything.

You see, it is all fake, driven by the monetization of our debt and eventually the dollar will simply be worth nothing and no one will want to trade with us or at least do business in our currency which means production stops because you cannot exchange our currency for anything else, it is Zimbabwe. The printing of money is a dangerous thing and the economists who insist that what separates us from Greece is that we do have a printing press are right, but for the wrong reasons. It is much more dangerous that we have a printing press because we can do terrible things to ourselves and what I just laid out above it could happen. It might happen because there is historical precedence. There are 2 well documented cases, the Weimar Republic and Zimbabwe.

It happened, in both cases, quickly, very quickly and in Germany’s case they started out with deflation, much like what we have now. As the government repaid debt and tried to keep the economy going they printed money and they went from deflation to inflation in the blink of an eye. They were so efficient at printing money they eventually only printed money on one side of the paper, to speed up the process. They even used wood tokens so people could at least burn them for some value. It doesn’t take much to start down the path of inflationary cycles because neither the Germans or Zimbabwe wanted to be the poster child for hyperinflation, quite the contrary in fact, they, like Ben, think they can control events, capital. That is where they went wrong, capital has a mind of its own and once a path is determined it is tough to change course or stop it altogether. Some very smart men were in both countries and they failed at stopping the inflationary onslaught. I highly doubt our Fed can stop it since they admit they cannot see things coming anyhow.

As far as the folks who say these things cannot happen here, well, they can and they will. It is inevitable at some point and there is no way a deficit reduction committee can stop it or implement a plan to reduce our debt before it happens. There is no political will left in Washington to stop their spending ways. Especially with some 78M Baby Boomers about to receive the mother of all socialized benefits, how do you say no to the largest voting bloc in history? You don’t.  I believe that the whole deflation/inflation debate is irrelevant as we will have both. Plus, investing for deflation is really no different than normal investing, some bonds and strong dividend paying stocks which should be your core holdings anyhow. Inflationary investing, well, that is a different story and while I prefer toilet paper and gold you may prefer tobacco and food, either way. The point is, it is coming and you will not see it happening until it is here.

Bring on the European Stress Test

Posted by Ray on June 7, 2010 under Main | Be the First to Comment

Look, things in the U.S. are certainly better, even though I am bearish on the economy, but they are just a “less worse” type of better rather than a true recovery or whatever you want to call it. Someone once commented that I would not know a V shaped recovery if it sat on my face, or something to that, as the recession in the early 1980’s saw a lag in initial claims of some 6 months before the recovery in employment happened. Boy, I hope that person is reading this because that comment was made in august or September of last year, almost a full year ago, and initial claims barely broke the 500K mark as we speak, is that the ”V” we are looking for? The fact is in a post credit collapse employment is a leading indicator, I said it a year ago and I am saying it now and the only difference is the unemployment rate is HIGHER today than a year ago.

What changed over the last 12 months?

Nothing. Wait, I take that back, a lot. The U.S. is now $3T more in debt, we performed a “stress test,” which we are telling the ECB to do, more on that in a minute, and the Fed expanded its balance sheet by how much? What did we get for all of that? A 5.2% GDP print based on inventory a rebuild that was probably premature, if we take away the stimulus would firms have rebuilt their inventories so much? I think not. Unemployment is slightly better thanks to temporary jobs and government hiring, not exactly what I would call “robust” at all. The bottom line is all my criticism of the stimulus was right, it failed.

The banks are better you say, right? Are they? If you think that, well, I just don’t know what to tell you. Did the banks get rid of the “toxic assets?” Did they write all their bad debts off? Did real estate values increase? How about commercial real estate, is that sector flying strong again? No. Are banks loaning money again? Sure, if you have a credit score of 850 or better and don’t need the money they will gladly make a loan to you. However, if you need to refinance your home you better hope you qualify for a government program or you are out of luck. The “stress test” was a joke and meant nothing because we are at the outer limits of the stress test, remember, 10% unemployment, etc., etc.? What saved the banks was one thing and one thing only, the repeal of mark-to-market account, period, end of story.

If we brought back mark-to-market accounting today we would have a handful of big institutions left, I guarantee it. Just look at Wells Fargo’s balance sheet with the “Pick-A-Pay Loans” they inherited, worse, they bought, from Wachovia, the LTV’s, except for Texas, God Bless Texas, are all horrible. I am not saying WFC would fail, I am just saying they would have to realize pretty significant losses is all. It is no coincidence that right after, literally right after, the repeal of mark-to-market accounting rules by the FASB, by Congressional pressure I might add, bank earnings went through the roof. What replaced mark-to-market accounting? Mark-to-model accounting, do you know who made that model famous? Enron, need I say more?

Europe

Now, Timmy Geithner is over in Europe telling the Europeans to do a “stress test” to let the world know all is well. Sorry Tim, I do not think this will work since it is technically not the banks in question, but rather the sovereign debt that they are holding. Why not do a stress test on governments instead, maybe that will solve the problem. This is a banking problem, again, that was brought on by huge deficit spending and countries inability to service their debt loads, this is big, huge actually. While this will impact banks it is not really banks that caused it, but politicians who decided to bribe the people with their own money.

It is likely that one of the PIGS, or whatever we are calling them now, will default given the issues they have and the inability of politicians to say no to spending. It is just odd, it always has been, that the people demand all this gravy from the government in the form of give a ways, tax credits or straight cash in some form. Don’t these people realize that they are only getting back their own money? Actually, if governments spent less and had lower debts that means they would have lower overall taxes which means the people would have more money on their own… they would be better off! However, the people insist on being bribed with their own money and politicians are only too happy to oblige.

The point is that this bigger than the banks as we are talking about the solvency of countries now. Bailouts are much more difficult to do for countries and the implications of a default by any country has widespread ripples that most people have no idea can or would occur. Even if Hungary or Greece defaults it is a huge deal and will impact governments and banks all over the world. I have been saying this for months now, Greece is a big deal and all those people saying it is not are, well, disqualified to render their opinions anymore as the markets have spoken and they have sided with me.

Run a stress test, it doesn’t matter because it really doesn’t matter Tim. The problem is with government spending this time and I do not think mark-to-model accounting can fix this problem.

The real problem

The real problem is I do not know where the sovereign debt problems will end, I know it will get worse. I know that more European countries will succumb to this very same issue as most European countries are socialist by their very nature and their debt levels are very high. As the weaker countries fall they will drag the stronger countries down with them, it is just how it works. I made a call that the Euro will fall to 1.18, we are about there. Do I think it will go lower? Yes, to parity in the near future. I think 1.16 is the next level, but the ECB will have to intervene and China has to intervene as a weak Euro is a major problem, it is, another story for another time. The currency will not survive without a mechanism to eject the weak states, period.

After the carnage in Europe is done, I do not have a timetable for that, it could be tomorrow or 10 years from now, but more than likely it will be sooner rather than later, the debt problems will spread, to the U.S. We have $13T in debt and an economy that is not recovering, I am not happy about that, but those are the facts. We are spending $4.9B a day, 3 times the amount George Bush, not exactly the face of fiscal conservatism I might add, was spending. We are in major trouble and what are our politicians doing? Trying to figure out how to get stimulus 3 out the door, that’s what.

I have been saying for months that our debt to GDP level is almost at parity, but it takes the Drudge Report for people to start listening? OK, at least people are listening now. The problem is we have no politicians willing to take the steps to fix out problems. Go ahead, elect the Republicans, look what they did from 2000-2006, they really helped to speed the process up, in my opinion. Of course, out current President and Congress has surely kicked what the Republicans did into hyper drive as they added 30% to our debt load in less than 2 years, that is $3T, an astounding figure. Neither of these parties really want to fix the problems, in my opinion, because they have a vested interest in perpetuating the problems so they can stay in power, it is just how it works.

What this means is we are all in very big trouble. I am not talking about, oh, gee, go buy an ounce of gold and protect yourself from inflation, I am talking about the Weimar Republic, hyperinflation, type of trouble. I see no way out besides inflation and in a big way. As Paul Krugman points out, there is a big difference between Greece and the U.S., we can print our own money. We also know Ben Bernanke has no problem with hitting that print money either. I am also confident that the Fed is, basically, completely incompetent.

If we cannot go to the market to finance our debt, which we have trillions of dollars of that most of it matures in under 10 years, the Fed will monetize it. That is how we will deal with our sovereign debt crisis, we will print our way out of it and it will be the very worst thing we can do. Instead of cutting our government, spending or doing anything else that is logical, because politicians want to get reelected, they will choose to inflate their way out. Will gold protect you? Yes, but so will food and any other useful commodity including toilet paper. It disturbs me to no end that we are where we are and that the President is listening to the likes of Mr. Krugman who thinks deficits don’t matter, they do, and that since we can print money it is OK, printing money is not OK.

In the meantime I am still short the market. We will have a bounce I am sure and I almost took a nice broad long position today, but I passed. While I am sure we will have that bounce I did not think the risk reward was worth it. My target is still 900 on the S&P 500.