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Wednesday, October 6, 2010

Pay No Attention To The Man Behind The Curtain....

It feels a bit like we are living in a bizarre world modeled after the Wizard of Oz. The media is blaring on every outlet (with the exception of Fox Business…surprised?) that the recovery is on, President Obama declared the recovery summer, and they now they all seem like the great OZ, “don’t pay attention to the man behind the curtain”. This all comes at the same time that proclamations from the FED are coming fast and furious that inflation is coming in to low to foster growth so they stand ready to perform the QE2 miracle. Additionally, in a break with the past the FED proclamations are coming not just from the FED Chairman himself, but a variety of levels of FED members are telegraphing the policy message even before the chairman; which is something that was not done as far as I can remember.

Yesterday the Bank of Japan came out and started to sell Yen in to the market to weaken their currency against the Dollar, in order to support their export driven economy.  The Bank of Japan publicly stated that they were going to adopt policies aimed at stimulating their economy, which is BOJ speak for Quantativie easing. Since Japan’s economy is so export dependent and the Yen has been rising they needed to act to weaken their currency to keep their products affordable for any people left in the world that can afford to spend money.

Then this morning Timmy “Turbo Tax” Geithner,  is calling for opening the debate on further stimulus as well as other countries allowing their exchange rates to rise faster. Timmy is towing the party line and telegraphing the same message that his boss Mr. Obama was pushing at the G20 meeting earlier. The message is that we need more stimulus and not austerity as the EU nations have been trying to implement with mixed results.

At the same time the IMF(International Monetary Fund) was issuing a report called the ,”Global Stability Report”,  that asserts that the banking system will require another $4 Trillion to recapitalize and stave off growing problems;  this would allow continued emergency support of the banks in the next 24 months. This is not exactly a rosy assessment if the economy is truly recovering as we are lead to believe.

I believe that all this talk about Quantative easing, which is a fancy name for money printing,  is partially due to the onset of Son of Subprime, known as the Alt-A mortgage resets which are starting now and will get in to high gear in 2011. You can see a great chart visually representing the mortgage resets in this attached blog post.

Related to sub-prime and Alt-A mortgages is the whole Collateralized Debt Obligation(CDO) market which took the aforementioned financial junk instruments and marketed them. The CDO’s ended up in portfolios of banks, insurance companies and pensions because of the yield they offered. Flash forward to today and these CDOs are toxic and plentiful. The companies that were depending on both the income and the fact that there was a market to sell the CDOs have discovered that both are tenuous. The problem with the CDOs will get worse and worse and it will become necessary for the FED to absorb these so called assets to keep the various entities holding them from imploding. This situation will lead to further debasement of the currency.

So while on the one hand we are being told that everything is recovering and the market is “Rocking” therefore everything must be better; upon closer inspection the cracks in the economy appear and various statements and actions by government officials are telegraphing the future. There are still significant problems and imbalances in the economies and banking systems of the world. The bottom line is every country is looking out for their self interests, which is what they are supposed to do, but this sentiment pits every country against each other economically.

At present the flavor of the day is QE and debasement of currency also known as the race to the bottom. It is because of the examples above that all currencies are debasing relative to precious metals. Once the public really catches on and all the QE comes home to roost destroying the value of the Dollar and other currencies of the world the real inflation fireworks will begin. I would offer that the markets are currently sniffing out the inflation that is coming via currency debasement and it is a vicious cycle that will send precious metals, commodities and stocks higher, while squeezing the consumer with rising prices almost as if the Dollars are shrinking before their eyes. Eventually, there should be wage push inflation too and if it does not occur then the stocks of most companies will fall as they will become less profitable and subject to multiple contraction; because there will be fewer people with funds to buy goods and services beyond everyday needs and the companies can't pass along the input price increases they are facing. Of course if things play out like Zimbabwe then all Americans will be billionaires like in the this article.



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