WooHoo! Get the Champagne!

But I wouldn't be popping that cork quite yet. While the market threw a wild party on the news that the Fed only raised the overnight rate by a quarter point, the hint that they may be able to "pause" really lit the fuse. Of course, the small fact that the Fed and every tout and con artist on Wall Street has been saying this for a year seems to have escaped notice. Hmmm.

What's really going on, and it has become grossly obvious lately is the global stock markets are running purely on artificial liquidity supplied constantly, but unevenly by the Central Banks. When there's an injection of cash, the markets rally. when the magic spigot is closed and the liquidity dries up, the markets drop. Most recently the cash injection from the Bank of Japan (BOJ), Japan's Central Bank has been calling the shots. Its no coincidence that when the BOJ announced in the middle of May that the they would begin raising rates the markets tanked. As long as the cash injections keep coming from one central bank or another this addict will keep stumbling along, but when the dope runs out, its going to be a painful withdrawal.

US no longer calling the shots
With so many creditor nations around the world catching on to the the reality that the US is hopelessly overextended, and the dollar is loosing value again, is it a surprise that they are shifting their reserves out of dollars and into gold, silver and better currencies like the euro and the Canadian dollar? Not that the euro is any great shakes, in many ways its a worse fiat currency than the dollar, but at least lately it has been stronger. Its like comparing one turd to another, they're still both turds. The Canadian dollar has been the shining star, approaching 9/10ths of a USD. For most of my life its been around 7/10ths. Canada has, and exports a lot of gas, oil, timber, and valuable metals. A commodity mother lode, and the two thirds of the world that is really growing, China and India, need a lot of commodities. In contrast, the US is an exporter of dollars, a game that is getting pretty old.

The GDP Myth
The Gross Domestic Product numbers were reported the other day and for the past 3 years have averaged 3.5%. Of course we know that the numbers are juiced up to make the economy look better for whatever idiots are in charge at the moment. Even if we fell off the turnip truck yesterday and accept the official numbers, the problem is that GDP is figured in dollars. Now we know the dollar has lost around 20% to currency inflation alone in the last three years, uh... real GDP is negative. In other words, the USA is loosing ground while the government is telling us its "strong" and "growing". Now, subtract the real CPI, Consumer price Index, which is running around 6-8% and as the startled George Kastanza on Seinfeld once blurted, Shrinkage! The US economy is shrinking at a terrifying rate while the population is growing and has now almost 300 million people.

The Economy Doesn't Have Anti-Lock Brakes
If Big Ben Bernanke sees inflation, which is impossible not to see, and the gentle quarter point tap tap tap, 17 taps even, clearly hasn't worked, like most inexperienced drivers he's likely to stomp the pedal to the floor and throw us off the cliff, or into the mountainside. And soon Hank Paulson also will be jigging the markets. Will it matter? As my friend Chris says, "You can't polish a turd". The Fed will continue to raise rates to stay ahead of the other central banks. Somebody is going to be sacrificed. The dollar and the massive forign debt holders or US adjustable rate mortgagees, the old and the poor, Just like always.

Russians Make Good on their Promise

As I mentioned in a previous article, Russia began selling oil, oil products and gold on their stock market Thursday. There's nothing unusual about that except the sales are in Rubles, not the US Dollar (USD). While it won't turn the world upside down overnight, it adds to the significant shift away from the USD happening all around the world. Simply put, this reduces the demand for, and therefore the value of the Dollar.

Boing
The Dollar has had a bit of a bounce in the last few weeks after a serious dive that was probably overdone. The bounce back is typical of overdone moves in all the markets and I suspect the downward trend will resume once currency traders get their heads wrapped around the flurry of events we have seen in the last month. Every industry has its own lingo and finance is no exception. The snap back at the end of a big down move is called a "dead cat bounce" because even a dead cat will bounce if thrown down onto the pavement hard enough. Don't be fooled by these bounces, there's more pain ahead. Looking at a chart, these bounces look like a fish hook, and they catch a lot of unwise buyers who jump in too soon.

Late to the Party
When it comes to investing or trading in the markets, I believe in taking a queue from the hip and fashionable. Arrive late to the party and leave early. Leave the risky discomfort of showing up before anything is really happening and the direction of the party can be ascertained. If you pull up in front of the house and there a row of rusty beaters along the curb, keep moving. Leave before the fights and puking starts, and avoid the ugly scene and last minute lurch. Get in when things are going well, make your bets and get out before things start falling apart. Easier said than done, I know.

Baaaaa

There has been so many excellent commentaries regarding the market action since the May 10 Fed rate hike, I find myself coming up with an idea for an article, only to read that someone else has already written about it. Today, Instead I will point to an amazing article written two years ago by Richard Benson and posted on the Free Market News Network site. Here's a short quote from the article-

"mass retail stock investors act just like sheep. Indeed, for the major market participants, retail investors are there to get “sheared at market tops”. Somebody has to buy when the smart money wants to sell. Moreover, to keep the herd of retail investing sheep grazing on financial investments, there has to be a steady stream of “feel good” press. Therefore, the market is always fed happy stories by the Federal Reserve Governors, the Secretary of the Treasury, and, of course, stock analysts, telling the sheep all kinds of “horse hockey” that everything is all right with the markets and there has never been a better time to invest!"

I highly recommend reading this article because of its raw truth, plain English and insight into mass market behavior. You won't be disappointed. Please read THE FED AND PAVLOV’S SHEEP.

Get the Plungers!

One positive thing you can say about John Snow is that he had absolutely no effect on US treasury policy. That's a good thing. Neither did his predecessor, Paul O'Neill. It seems when the powers that be want just a neutered mouthpiece to go around making speeches they appoint a former industry leader like Alcoa's O'Neill or CSX's Snow.

In the other case when manipulation of markets are required, like now, A Wall St. master is drafted. Take for instance Bob Rubin. Rubin was a Wall street guy (still is) that understood bonds in ways no mere mortal could. During the Clinton years he bought back government debt with one hand and reissued it at lower rates with the other. This created the illusion of a "surplus" still boasted about by the Dems. It made us feel better and in a confidence game, confidence is the main ingredient. We were in deep debt then, but Rubin's genius made it look like we were paying it off. We weren't really, and that debt has ballooned during the current administration. Without a Wall St. svengali around to cover it up it shows.

Enter the new Wall St. genius;
And I don't mean that facetiously. Is it really a coincidence that the day after the drafted Hank Paulson burst onto the scene the dollar made a leg up, precious metals and commodities are diving and there are unexplained movements in the physical and financial markets? Me thinks the plunge protection team is firing on all cylinders. In order to save the dollar they have to drive the prices of commodities and precious metals (real money) down, and make the stock market rally to create the illusion that worthless paper money has value. As powerful as they are, their effect is limited and the trend will resume. We'll see how it plays out.