Tuesday, June 15, 2010

The Honeymoon Is Over

As the public's sentiment for the self anointed messianic leader of the free world turns to crucifixion over the Gulf Oil Spill, the "green shoots of growth" whither in the heat of the summer sun and expose the economic recovery as pure fraud. "Signs" of a recovery now appear empty except to those still dreaming up claims to the contrary on financial bubble vision.

The 14 month Bear Market Rally in stocks is now OVER. In just eight days last month, 6 months of market gains were wiped out as investors exited stocks faster than oil from a broken pipe at the bottom of the Gulf of Mexico. Not that stock prices are an accurate representation of economic virility, but the recent plunge in stock prices certainly will have a negative effect on consumer confidence. It is interesting to note that the "green shoots" theory surfaced in the financial media at about the same time the equities markets bottomed in March of 2009. The only "recovery" we have witnessed the past 14 months has been a recovery in stock prices. On Main Street, there has been NO RECOVERY.

Phase two of a huge secular bear market has now begun. The past 14 months have allowed investors a "second chance" to exit the markets before the bottom falls out. Few will take advantage of the opportunity believing that the next bull market began in March 2009. Many will use the recent fall in equity prices as an "opportunity" to buy at a discount in this new bull market. These investors will be known as those "left holding the bag" as the markets plunge below the previous March 2009 lows.

Statistics are indicating that leverage in the markets today is actually higher than at the bull market peak in equities in 2007. Panic selling induced by margin calls could make the next leg down in stocks fast and furious.

And what has been done to reduce the markets exposure to derivatives? Absolutely NOTHING.

A story on housing last week from the Wall Street Journal said, “Bank repossessions hit a record monthly high for the second month in a row, totaling 93,777–up 1% from April and 44% from last year.” Do record home foreclosures sound like a recovery "gaining traction" as Federal Reserve Chairman Bumbling Ben Bernanke is proclaiming?

Commercial real estate prices continue to decline and are now over 40% BELOW peak values three years ago. Median sales prices of homes have fallen 9.5% further in just the past year to $198,400. Do falling real estate prices add momentum to an economic recovery?

Back in 2009, the White House insisted that the $800 billion government "stimulus" plan, otherwise known as "The American Recovery and Reinvestment Act" (ARRA), was desperately needed to "save" our economy. President Obama promised that the money would go out the door "immediately" and "go directly to job creation, generating or saving 3-4 million new jobs." He claimed that without such massive government spending the US unemployment rate would rise above 8%; implying, that with the ARRA, unemployment would be maintained at or below the 8% rate. Unfortunately, none of the claims Obama and the Democrats made were accurate.

Following the passage of the "stimulus" spending bill the country's unemployment situation got progressively worse. In August 2009 it reached 9.7% and by October 2009 it skyrocketed to 10.1%, the highest number in 27 years. By January 2010, almost a year after the passage of the ARRA, the national unemployment settled around 9.7%. As of April of this year, the rate climbed back up to 9.9%, even with the tens of thousands of temporary workers, 66,000 of them, hired by the government Census Bureau.

An $800 BILLION stimulus, a stimulus as big as a war, and what does America have to show for it? More debt, more empty homes, fewer jobs, and more fear about America's economic future.

And if $800 billion dollars didn't cause enough economic damage, how about several hundred billion dollars more:

Amid Unemployment Crisis, Senate Gridlock Leaves Jobs Bill in Limbo
This week, Senate Democrats will attempt to push through a jobs bill that has stalled in the chamber for seven weeks. Majority Leader Harry Reid (D-Nev.) filed for cloture on Monday afternoon, leaving just days before a vote on the American Jobs and Closing Tax Loopholes Act, or House Resolution 4213, a $23 billion bill to extend federal unemployment benefits and other emergency stimulus measures. The cloture motion signals that Reid believes he has the votes to pass the long-mired legislation. But there are still signs that the contentious, job-saving bill might not pass — leaving people on unemployment benefits, doctors and states in financial limbo.

What is at stake? If Congress does not pass the bill, hundreds of thousands will lose their federally extended unemployment insurance. Doctors will take a 21 percent cut in Medicare reimbursement rates, possibly causing them to drop needy patients. Starting in December, the federal government will provide less backing to the Federal Medical Assistance Percentages program, or FMAP, which provides states with money for Medicaid so that the “poorest of the poor,” in Reid’s words, can see doctors.

Obama pleads for $50 billion in state, local aid
President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery.

In a letter to congressional leaders, Obama defended last year's huge economic stimulus package, saying it helped break the economy's free fall, but argued that more spending is urgent and unavoidable. "We must take these emergency measures," he wrote in an appeal aimed primarily at members of his own party.

US money supply plunges at 1930s pace as Obama eyes fresh stimulus
By Ambrose Evans-Pritchard
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

$273 BILLION more on "stimulus spending"? Isn't the definition of insanity doing the same thing over and over and expecting a different result?

$800 Billion Dollars was supposed to "create or save 3-4 million jobs and KEEP unemployment below 8%". How is $200 BILLION more going to resolve 8 MILLION job losses?

The Obama administration is now proving beyond a shadow of a doubt that not only do they lack the experience in dealing with an economic crisis, but they have no clue how to solve an economic crisis caused in large part by the administrations very own economic advisers, Federal Reserve Chairman, and Treasury Secretary.

The private sector and Main Street are the engine of the economy. Unless, and until, the Obama administration wakes up to this fact and ceases their drive towards a socialist state here in America, we are doomed to follow Europe down the drain towards national bankruptcy.

Isn't it a bit disingenuous for the US Treasury Secretary to run around Europe espousing fiscal restraint and austerity while his own government at home prints money as fast as it can and distributes it freely not only at home, but around the World?

With the honeymoon beginning to wane, bullish sentiment for the US Dollar appears to be peaking as the TRUTH about America's own fiscal problems begin to fill the headlines. The pending bankruptcies of 33 states will make the European Union's woes look like child's play. The rush to the perceived safety of the US Dollar and US Treasury Debt will begin to be called into question shortly by investors seeking refuge from the global financial storm. With the US recognized as a more severe soverign debt risk than Europe, the Euro will catch a bid as Euro shorts cover and turn their sights on the shortcomings of the US Dollar. The race to the bottom of the fiat money barrel will slow for the Euro and accelerate for the US Dollar in the second half of 2010. Should the Chinese choose to revalue their currency higher later this year, the Dollar's woes will become exponentially worse heading into 2011.

As Gold bottomed in yet another bear raid Thursday morning at 10AM, an interesting turn in the recent Dollar/Gold relationship appeared to be reverting back to it's "normal" inverse relationship. For many weeks now, Gold has moved higher in price with a rising Dollar as the Euro's debt woes demolished it in the currency markets. Should currency traders do a 180 on the Euro here, the Dollar could be in for some magnificent weakness as the second half of 2010 approaches. This would be extremely positive for Gold and in particular Silver.

Silvers recent realtive strength versus Gold was very evident last week. Several weeks ago I suggested that it would be Silver that lead the next leg higher in Gold. We may be seeing the beginning of just such a reaction in the Precious Metals now. It is noteworthy that the Gold/Silver ratio peaked at 70 on June 4th, and has been falling since, as the price of Silver has steadied and begun to rise again relative to Gold. Just last week, Silver was up 5% to Gold's 1%.

The Dollar is testing key support at the 40 day moving average at 85.95. Should support give way here, a quick move to the 50% retracement of the mid-April to June leg up in the Dollar would be almost certain. Price support at 85.13 would lie below there as the last defense of the Dollar falling all the way back to it's May breakout at 82.22. I would consider a bounce in the Dollar near 85.13 likely, and a quick run back up to the 40 day moving average where the Dollar will be stopped cold and begin a decent that could last the remainder of 2010.

This scenario in the Dollar will prove critical if the men behind the curtain hope to maintain the illusion of a recovery going into the mid-term elections in November. A weaker Dollar is the only hope for these Money Masters to keep the equity markets afloat thru the Summer and into Fall.


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