I suppose it was back in the late fall and reiterated again in mid-winter that I believed the market would simply go up for no real reason until QE2 ended and then it would begin to decline as liquidity ended. It looks as though I was somewhat accurate in that prediction although you did not have to be a rocket scientist to figure that out unless you were a permabull with your blinders on and absolute faith in the government and the Fed in which case please move along.

The Fed knew the same thing I and many others did and that is why at the last meeting they emphasized that they would continue to reinvest maturing paper and interest from the existing portfolio, kind of a QE infinity if you will, but on a small scale. I do believe they will let QE2 go and not announce anything new until the fall when they see the economy really weaken. I think a couple months of sub 100K jobs reports, with a healthy BLS birth/death adjustment, along with softening other indicators such as the PMI and so forth the Fed will get the point and step in with $1T in QE since $600B did not work.

That is how it works as one QE is ineffective the next one gets bigger. The really unfortunate part is that Japan has done the same thing and it did not work but there is a big difference between the US and Japan, we are the reserve currency and they aren’t. In other words, Japan could print all they wanted because their citizens bought their own debt and the world settled trades in dollars. However, the US is limited in what they can really do in QE because as the value of the dollar sinks, and we really had a nice scare a week or so ago, the world will pick a new reserve currency on its own. You know how that story ends.

Ben knows this and he knows that his QE options are limited and he can probably only get away with 1 more so it will be big, it has to be. If that one does not work and spur growth, well, the Fed is done and completely out of bullets in a traditional sense. We would see some new things coming to the table like in 2008 with all the new facilities and such, but I have no idea what they will be or what they will look like since we do not know how things will play out.

What I do know is that we should get a nice bounce in the dollar here sending commodities lower for a bit. This will give Ben and Washington a little relief and you an opportunity to buy, buy, buy every commodity you like. I love silver, still, wheat, gold, palladium, soybeans and corn (unless the subsidy is pulled). If those go on sale buy them either directly or via the growers or agricultural ETF’s.

In the mean time enjoy watching Ben sweat it out as he will not have answers for the weakness in the economy or the weakness is ‘transitory’ which is the longest transitory period I have ever seen. Kind of like this recovery it is the longest start of a recovery ever as it gains steam and loses steam every other week. Good luck.

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.

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

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

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

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

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

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

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

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

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

I am watching the happenings in Venezuela carefully as this might be an indication of things to come in the US. While most people naively think that “it can never happen here” I would like to warn you that every country where these things have happened uttered that exact same phrase. Whether it happens because the Federal Reserve loses control over the devaluation of the USD or because foreign debt buyers just stop buying US debt the one thing I am sure of is that it can and will happen here at some point in the future.

What I am talking about is massive devaluation of the currency which leads to inflation or, in this case, hyperinflation. I have stated that for the moment we do not have to worry about inflation, and I stand by that prediction, for now, at some point we will have to cleanse our demons and massive balance sheet. The one and only thing that is saving us right now from inflation is our pitiful employment situation, which is not getting any better I might add. Without employment there will not be wage inflation and we will continue to have subdued demand for products with the exception of food and energy.

Even though I fully believe deflation is here for the near-term, reinforced by the Fed itself, there is one caveat to my prediction, the devaluation of the USD. I have made no secret that I believe that the Fed and the current administration, along with the former administration, have had an unofficial policy of maintaining a weak dollar. The reason for the weak dollar policy is simple, it boosts GDP and earnings in a globalized world along with a host of other seemingly positive economic stimulus. However, a weak dollar is not good long-term for a country and hurts the population as dollar sensitive products become very expensive, i.e. $140 a barrel oil marks the low point of the USD in 2008, and is inflationary without the benefit of actual inflation.

Let me explain, inflation created by excess money printing usually enters the banking system and is loaned out to the population. This is called money velocity and creates too many dollars chasing too few of goods. However, without money velocity traditional inflation cannot happen, but even if the excess money printing does not enter the economy it can still devalue the currency based on the future expectation of it entering the system. This is what was happening up until the last dollar rally and I would like to point out that the last dollar rally was because, depending on who you listen to, short covering, fear about sovereign default (i.e. people were afraid of another systemic meltdown which, in turn, initiated short covering. This is the scenario I favor), or people felt the Fed was actually going to raise interest rates which is absurd, in my opinion.

The dollar devaluation that we have seen explains why oil prices are on the rise as demand simply is not there. It also explains why metals have also climbed for most of 2009 as well. What is scary about both oil and metals going up, especially in 4Q09, are the fact that these prices increased in the face of a stronger dollar which is counterintuitive. Well, it is for gold at least as oil could increase with a strong dollar if there is sufficient demand, but, frankly, there is not as much demand as the price indicates. Regardless, rising energy prices when the economy is weak, to me, is a warning sign of a problem and should forewarn you of things to come, inflation.

If we continue with our insanity that Washington and the Fed is telling us we need it is inevitable that we will end up in a situation like Venezuela where we will either willingly or unwillingly have to devalue our currency. There are pluses to devaluation as your debt, assuming a fixed interest rate, will remain static and your earnings will eventually increase allowing you to pay off your debt faster. However, the negatives outweigh the positives by a long shot as your savings are worthless. This is why we saw the people of Venezuela go out and buy everything they could because goods will be worth more than the paper money.

What is disturbing though is the fact that even though devaluation creates higher prices the Venezuelan government shutdown some stores for “price gouging” which is humorous, in a sick way. The government intentionally creates inflation to make their balance sheet look better, but because new goods will cost more stores cannot compensate by charging more for products they currently have. How in the world are these stores supposed to stay in business or id the governments point to put them out of business? The next logical question to ask is how would this type of scenario play out in the US?

While we do not really have any past history to use as a bench market I think what we see happening in Venezuela is probably a very good example. Right down to the black markets that are more than likely popping up all over the place to provide goods and services the population cannot receive from the usual sources. What I would be interested in knowing is if these black markets are using another medium of exchange, i.e. US dollars, gold, silver, Euros, whatever it might be, to pay for these goods and services. I would be inclined to believe that is what is happening, but there is simply no proof and I am willing to bet no one wants to openly talk about such things for obvious reasons.

What is usually accompanied with this type of devaluation is the government imposing its will that its citizens continue to use its currency no matter what. We saw this happen in Zimbabwe, but just like in Zimbabwe the black market switched over to an alternative payment system, gold. It is important to note that gold is being used because dollars or other currencies simply are not plentiful in the country and gold can be mined, of course gold has also been used as currency for thousands of years as well and at current prices a little bit goes a long way. Basically, forced price controls and forced use of devalued, or worthless, currencies simply do not work, that type of system never has in 4,000 years.

I am not suggesting the US or Venezuela will turn into Zimbabwe, but I am saying that we are facing certain financial Armageddon at some point in the future. All the US has managed to do is kick the can further down the road for others to manage and we are running out of road, unfortunately. We will have only a few choices in the very near future and the most obvious, because it is politically easier, is to inflate our way out of our problems. While this seems like a good idea I am thinking that the 77 million soon to be retired Baby Boomers who are about to be living on a fixed income will like this strategy. However, it is unlikely that they will like the alternative either, much higher taxes, less Social Security and steep cuts in Medicare.

We live in unique times and the one certainty we have is that there is no certainty of anything. I do not believe that there is any question of whether or not we will follow Venezuela, in my mind it is only a matter of when it will happen, not if. However, before we go down that road you will be comforted in knowing that Japan or the UK will more than likely go down that path before us as they are in worse shape than the US. Regardless, watching what happens now will give you an idea of what could happen here and is also why I am a big proponent of investing in precious metals.

So far holding gold, silver, platinum or palladium has been a very sound move on my part, but I actually hope that these investments turn out to be horrible for me because that will mean I was wrong about the future of the US monetary system. While I might be wrong what concerns me is that there are many people who are a lot smarter than I who are sounding the same alarm I am. I would also like to not be naïve enough to believe that “it could never happen here” either because I am sure there are millions of people throughout history who would tell us that you should never, ever, utter those words because no person or country is special.

This stunning statement came across the close of CNBC from Tyler Methison who apparently quickly polled strategists after the close today for confirmation. How this is not the beginning of a correction is beyond me as this week’s trading has been nothing but negative, unless you are short the market of course, however this is the stance CNBC is taking. I am afraid much like 2007 and early 2008 it will take much more for the bulls to believe that the market is overheated and ready to come back to reality.

What is causing the pullback? Pick your poison. The technical’s, today the S&P smashed through its 50 day moving average, compliments of Mark, and the transports have been signaling trouble for about a week now. There is the weak consumer confidence which suddenly sank yesterday and, frankly, should have sent the market far into the red. Then there is the weak top line earnings which I have been warning about since the second quarter as the consumer is dead broke and credit is contracting at a 15% annual rate, you cannot have an economic expansion without credit creation. Finally, there is the dollar, my personal favorite indicator lately, which has gained some strength lately which is drawing money out of equities.

Goldman Sachs was also no help today as they announced they are trimming their 3Q09 GDP estimates from 3% to 2.7%, which is really not surprising given a weak consumer. This may have been the ultimate trigger considering stocks have priced in a V shaped recovery with a strong GDP number built in. As a matter of fact, not only did the market price in a +3% GDP for the third quarter, but I have a feeling it priced in a much stronger 4Q09 and 1Q10 GDP figure as well, which is kind of crazy since may retailers are starting to warn about weaker holiday sales. Wal-Mart now has some 100 toys priced at $10 or less compared to last year at only 10 or so toys prices at $10 or less, that is Wal-Mart entering a price war, but with who exactly, The Dollar Store?

Under Armour also, in a roundabout way, warned its 4Q numbers were going to be weaker than expected. This is the shopping season and these are popular products warning that sales are going to be weak during the holidays. If this doesn’t tip you off that the recession is not over I don’t know what will. I realize that employed economists who do not leave their ivory towers much and place way too much emphasis on government transfers think the recession is over, but if they talk to real people perhaps they would realize that data points are more than just data points, they are people and they are hurting.

Some 500K a week initial jobless claims is not good news, it is horrible news and bad for the economy. Cost cutting means nothing if you are firing the very people who you depend on to buy the products you sell. That is exactly what is going on and why unemployment is a leading indicator of our problems. As long as economists are unwilling to listen to that basic fact and try to get you to believe in a jobless recovery, which is a myth I might add, then nothing will get solved.

The markets could get much, much worse in the near future, especially if unemployment or GDP numbers are slightly worse than expected. If the numbers are better than expected we will have a bounce, but I would not expect it to last very long. Traders are getting tougher to please as they are expecting more because they were told everything is better and as they see things progress in the opposite direction they will take the market lower. Yes, I am a bear and I am short, but you already knew that or should have known that as I made no secret about it and I tried to give everyone fair warning.

Disclaimer: I currently hold SPY Jan 2010 100 puts, SPY March 2010 90 puts, SPY June 2010 89 puts, SDS, SKF

The market has not been able to hold a rally as the dollar strengthens which shows that the 60% rally we witnessed was purely liquidity driven. Essentially, the Fed, in their infinite wisdom, decided to drive investors out of less risky assets into high risk assets in order to re-inflate the asset bubble. While the Fed was busy pumping money into everyone’s pocket, except for the peoples, it has cost the dollar much of its value, or so you think.

Actually, the dollar is not near its lows of 2008 yet, but when the DXY was at 89 and it fell to 75 it felt like it plunged in value and had me concerned. I am still very concerned on a long-term basis, as I see a runaway government with deficits as far as the eye can see, but since everyone and their grandmother was short the USD, it was a given it was going to go up. Since this rally was a liquidity weak dollar rally a strong dollar will drive equities down along with commodities, which I wrote about on Sunday night I believe. As predicted, we had a super rally in the dollar and stocks got clobbered along with commodities and I suspect that will continue for a little while as the dollar rally will soon turn into a fear driven rally.

Whether I or you like the dollar long or short-term is irrelevant as the US government guarantees return of principal. This explains why at one point in time people were paying negative interest rates to the US government to buy short-term treasuries during the crisis. It was worth it for the comfort to know you were going to limit your losses because at that time you did not know if your bank was going to open its doors the next day. Do any of you remember that? Anyhow, this strength in the dollar will create selling in equities, just like a weak dollar drove the risk trade.

This explains why I stopped buying gold and this explains why I got short the market well over a week ago. It is not that I am perfect or a psychic it is just that things change, quickly. The dollar is not going to go in one direction forever and stocks do not always go up. It is also clear to anyone who is paying attention to fundamentals that the market is so far ahead of itself it is bordering on insanity. Valuations do matter and we are at a point where the valuations are just way out of whack with what is real and people are setting themselves up for real pain by not realizing this now.

If you do not pay attention to the things that are happening on the fringe of the markets, like the dollar, then you will miss the things that matter the most and impact your portfolios the most. Long-term the dollar will decline unless Washington gets their act together, but they won’t, so be bearish on the dollar long-term until proven differently, by the way that long-term bearish dollar outlook is also bearish on US equities as well. However, a short-term outlook is completely different and driven by the here and now so don’t confuse the two. I could be wrong about what I think is going to happen, but so far, I am right on the money and I think we are headed for more downside pain in the very near-term.

I am a gold bug, there is no question about that, and I am a long-term bear on the USD because I know that Washington will never reverse their ways of the last 30+ years of fiscal irresponsibility. However, I feel that gold has made a huge run in the recent months and the USD has made a big move to the downside as well. This will not continue as stocks are beginning to struggle and earnings are not as good as many have expected.

This means that the dollar will more than likely see some strength in the short run which will drive stocks and commodities lower. This will certainly drive gold below the $1,000 level which will bring about a much better buying opportunity for those looking to buy. Not to mention, other metals have largely been ignored in the recent run up in gold prices, i.e. silver, palladium and platinum are well below their 2008 highs.

Whether or not this equity rally was liquidity induced or not is really irrelevant as the one true correlation that we can draw is that the dollars losses were stocks and gold’s gains. This will stop as we see a reverse in this trend in the near-term. I see this happening based on the trading patterns over the last few days and the market rally losing its ability to sustain itself. It is really unreal that the market could simply continue to move higher without much skepticism from participants on this fantastic move, but it is what happened.

The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time while we shed jobs and credit continues to contract. Not to mention economic growth is anemic at best, subtract government activity and it is downright ugly, but buyers in the USD will come back as the bearish trend in the short-term is actually bullish. Also, its inability to maintain a new low makes me think a rally is in store in the next few days, which is bad for stocks and precious metals.

Because of this, I am not buying any metals right now with the exception of palladium, it is my favorite and, in my opinion, has the most to gain no matter what happens. My feelings on the USD in the short-term is also why I am short the market right now, a position I opened 10 days ago and added to on Monday, and will more than likely add to. No matter how I run the numbers I am coming up with a fair value of the S&P 500 of between 800-900, but that is my opinion and what makes a market. Eventually, valuations will have to matter in equities and a stronger dollar will force a revaluation quickly, on the flip side a major devaluation would do the same thing I might add.

On a long-term basis, until Washington changes its ways there is no way anyone can be bullish on the dollar. Therefore, I am a buyer of metals on a longer term basis, but I prefer to use my head and unless something happens over the next few days I see no reason to change my mind. An important note is I already have a healthy position in all metals and I am not a seller, I am just not committing new money at this time.

As stated several times in the past there is a breaking point between how low the dollar can go before it will negatively start impacting the market. As my kids ask all the time, are we there yet? I think we are close, very close. As the dollar closes in on that 75 handle and the EUR/USD crosses the 1.50 mark it is becoming a major problem.

Why? A cheap dollar is great, in the short run, for international earnings, i.e. see Intel and Google’s positive FX results. However, long-term it is horrible for the US because it boosts productivity on false pretenses. Sure, our trade deficit decreases, but did it really? No, it did not. It also increases energy costs which is a huge problem when we have wage deflation and 10% unemployment. I believe that the administration’s goal was to devalue the dollar to boost manufacturing, but like all plans there are unintended consequences and those consequences are real and devastating to the people.

In effect, the devaluation process will wipe out the middle class and the Fed will certainly lose control over the process. Also, what does it matter if companies have record profits if the value of the currency is worthless? That is the potential problem we are facing right now. If the USD breaks below the 71 handle there is no bottom, none. Computers will then take over and without severe intervention then we are in big trouble. Unfortunately intervention means the printing of more money which means a weaker currency, see the problem?

The Chinese would help because they hold dollars? Oh yeah, why? Their currency is pegged to the USD so if the USD is devalued then their currency is cheaper to making their products cheaper to their largest client, Europe. So, why would they intervene? They would not. Perhaps Japan might, but I would not hold my breath they got their own problems. Your only hope is Korea and other smaller Asian countries and they do not have the buying power to stop it, they already tried to intervene a week or so ago and it did nothing.  Getting back to China, they also hold large quantities of gold and other commodities, so they are hedged they really don’t care, I don’t think anyhow.

With that said, the Dow was up and then the dollar got pounded and we are seeing a down trend as that happened. We are at the point where the value of the dollar matters and that is a very good thing, finally. While I have done very well with gold and other metals, I care about the dollar’s value and so should you because a 60% rally means nothing if the value of those dollars is reduced by roughly the same real return. Right now I believe a move in either direction is bearish for stocks, but especially a lower dollar as it moves energy higher.

There is no question that the cheap dollar has had its benefits for the US in the short-term. It has propelled earnings higher for most firms who deal internationally, narrowed the trade deficit and pushed stocks higher at the expense of our buying power. It has also pushed oil and commodity prices, mainly gold and other metals higher, as well as the dollar continues to touch new 52 week lows.

There is a point where the cheap dollar begins to lose its appeal and begins to concern traders and we have to wonder if we are there yet. After we breached the 76 level on the DXY I actually expected to see a rebound in the greenback simply because it is such a crowded trade and other countries have also printed vast amounts of their currencies as well. However, this seems to not be happening and we are at the point where the 75 handle is in jeopardy of being breached.

Frankly, at this rate we are heading right to the 2008 lows of the 71-72 levels and there is not much there to stop it from going lower. All I have to say is if you thought $147 barrel oil was bad, try $200 or more a barrel. Yes, it could get that bad and food prices could go up as well, even though we technically have deflation energy prices would and could create inflation. This would be catastrophic considering we have massive wage deflation and a huge unemployment problem right now. I am inclined to believe that the treasury or the Fed would intervene if we breached those levels, but my faith is not strong and given the trading programs and deep pockets of the banks, ironically, because of the Fed it could become a crisis.

The odds are against this happening, but it does exist. If this does happen it would also not be good for stocks as there is a difference between cheap money and worthless money. It is not like I am the first to warn of such a problem, Jim Rodgers warned of this type of currency crisis in the recent past and thought it could be either the USD or the Sterling, since we both started down the same destructive paths. I will say that I believe the next 2 weeks will be critical for the greenback and everyone should keep an eye on it for an indication of its direction. A steep move in either direction would mean a selloff in equities.

I have been delinquent in really looking at some of the technicals, mostly because the economic data has just been so bad that I really never thought we would get to this level. Honestly, with the economy still shedding, depending on which numbers you want to look at I prefer the real numbers, but, 263K jobs a month and credit contracting at a record pace and a whole host of other nasty things I could rattle off who would have thought we would be sitting at Dow 10,000?

I think it is safe to assume no one thought we would be at this point, even just a few months ago very, very, few people thought we could see the market at this level. However, now we are right back at the levels where we were right before Hell was unleashed last year and the S&P 500 is about to hit major resistance right in this range and the Dow will have reached its 50% Fibonacci retracement at 10,300, or so. Therefore, we are right at the peak of where the technical equity rebound can take us on its own and the weak dollar is horrible for the US for anything longer than a short-term basis.

I would have to say that after the weak dollar rally and the retracement has hit its peak we will need real substance to sustain this rally and it is simply not there. Without government stimulus and government transfers we have horrible GDP growth. Intel, as I have repeatedly said, was a story about Asia and a weak dollar, not about a US recovery. This is confirmed by Dell saying the US PC demand is still weak, but the pundit dismissed Dell and refused to look under Dell’s press release, so you are left in the dark unless you are doing your own homework.

Clearly multinational firms are going to do well, but how well are they really going to do? Johnson and Johnson missed on the top line and they are a well diversified consumer defensive company. It is my belief that we will see more weak top line revenue growth, except from firms doing business in Asia or have international sales, thanks to Helicopter Ben. I firmly believe that Banks are still bad bets because of the lack of mark-to-market accounting rules. I know, JP Morgan had markup’s today, please, when you can mark securities to fantasy land of course you’re going to have markup’s. What surprised me is they only took $400M in markup’s and not $4B.

With real estate still in the tank, which is reflected in every piece of data shown by the government and even industry shill’s, there is no way banks are making money on their real estate holdings. With commercial real estate defaults up 7 fold YoY to $22B, from $7B last year (the really “bad” year), how in the world are things better? Not to mention junk bond defaults which are projected to hit 14% in the near-term. I simply do not buy a V shaped recovery or even a robust recovery for that matter and this is most evident in the employment numbers, which is a leading indicator for credit recessions.

Retail sales are a joke considering some 8,400 stores were closed over the past 12 months, many of which were the worst performing stores I might add. So, if you dump your losers and keep your winners do you think your sales comps will go up? Hmm, I am pretty sure they will. Of course, was this advertised on any of the media outlets this morning? Nope. Do you really think another 530-550K initial claims report tomorrow is going to be bullish? Either do I, but I am sure this cost cutting method will be embraced by CNBC as gross margins will improve.

As much as I want this to be over, believe me I do since I suffer as much as the next guy, there is no way that it is. Declining income, declining credit, increasing defaults, rising unemployment, declining spending and then throw in shrinking corporate revenue that pretty much proves there is not much of a recovery. I admit the data is getting better, but nowhere near where the talking heads claim we are at for a recovery.  Sometimes I sound like a broken record, but a rising stock market is not a reflection of a healthy economy. The other major misconception that needs to be never, ever, mentioned again is how great the market is at forecasting the economy, it is not and never has been, it’s a myth. Otherwise, in 2007 the Dow would have been at 7,000, not 14,000 and there are about 100 other examples.