60 minutes on oil

This is all over the Internet today and I'm going to throw my 2 cents in also.

The basis of the 60 minutes story was that the spike in oil last summer was caused by speculators. Duh ya think?

But there's so much more to the story than that. The beginning of the oil bull market was rooted in fundamentals just like any bull market. The end of a the bull market was carried on the back of speculation and greed again just like all bull markets.

However the ultimate blame has to fall squarely on the Fed. They are the ones that turned on the printing presses in the ill planned attempt to stop the recession. All of a sudden trading desks and big banks had billions of excess dollars to work with. Unfortunately there was only one thing going up at the time...oil. The logical choice was for all this excess money to flow into the one market that was resisting the bear, the energy markets.

I warned for months and months this was what was going to happen when I saw the dollar start to tank. I also warned for months that a spike of 100% or more within a year's time would lead to a recession.

Geez one has to wonder when the media will finally figure out that all our troubles are being caused by the idiots at the Fed that everyone seems so inclined to put their trust in. How far must they run us into the ground before we wake up.

Sell treasuries

I've been hearing, for some while as a matter of fact, that foreigners are going to bail on our debt. The reason given of course is that the dollar is collapsing.

I guess most of these people haven't looked at a chart recently. The dollar isn't collapsing, on the contrary it's soaring. Anyone who bought our debt back in July not only got a 3.5% coupon (give or take) but they enjoyed a 22% rise in the value of the dollar. Even recently as bond rates have collapsed buyers of US debt managed to score a 7.5% gain in the value of the dollar.

Since I think the dollar is destined to go much higher in this deflationary environment I don't see buyers of our debt bailing until the dollar tops out.

I don't see that happening as long as the powers that be refuse to let any broken companies go bankrupt and as long as unemployment continues to rise.

As long as the bailouts continue these zombie financial companies will continue to act as a huge drain on the money supply.

Economics 101: too little supply equals higher prices.

Unemployment is good

Counter intuitive isn't it? How can high unemployment be good? Actually I wouldn't say it's good, but it is inevitable.

I've been saying that 2008 was about the collapse of the financial system but 2009 is going to be about unemployment.

Here's the problem. Americans make too much money. Again sounds counter intuitive doesn't it. That is the problem though. We've had it too easy for too long. We want to get paid big salaries for doing the same job that a Chinese worker will do for 1/10th the cost.

As long as that imbalance is in place we are going to continue to lose jobs in the US. As long as this imbalance continues our companies (think autos here) are going to remain unprofitable.

We could start to cure the problem by willingly lowering wages. In a deflationary environment we are in the best possible scenario to weather a voluntary pay reduction. However that's not going to happen. It's very hard to take something away once it's been given.

So the market is going to take it away for us. It's going to take it away with high unemployment. People who don't have a job are more willing to accept a pay cut. Workers who can't or won't willingly work for lower salaries run the risk of losing their jobs to someone unemployed that is desperate and will work for less.

Ultimately if the US is going to bring back it's manufacturing base and if current businesses are going to survive and compete in this climate wages are going to have to come down.

So I guess in the long run unemployment is good for the long term business structure of the United States.

"Inflation is coming, inflation is coming"

That’s the cry from the inflationary camp. It’s obvious to any respectable gold bug that the incredible amount of liquidity the Fed is currently shoveling out is going to immediately lead to inflation and possibly hyper inflation.

I do agree that it will eventually take us in that direction I’m just not so sure about the timing.

This summer before the banking system started to collapse the Fed was also printing mountains of money. At the time that money had no where to go but into commodities, oil specifically. The situation has changed though. Now we have somewhere else for all this money to go. That somewhere else is the incredibly large holes in the financial sectors balance sheets.

I don’t see how much if any of this money is going to be poured into commodities at a time when every penny is being used to try and keep the financial system solvent. Of course now we’ve added another money pit to the equation in the form of the US auto makers. Every bailout, and keep in mind that all these bailouts are just the beginning, just add more holes to drain capital out of the system.

Until all the excess debt gets washed out of the system this demand on capital is going to continue. The quick way to end this is to let these companies go bankrupt. That would put an end to the vicious circle immediately. Of course that solution won’t even be considered because it’s too painful.

Unfortunately the market is going to enforce this final solution whether we like it or not. We can buck up and take our medicine now. Go thru some really painful withdrawal symptoms for a couple of years and be done with it or we can continue to try and fight a losing battle and turn this into a decade long nightmare.

That’s the cry from the inflationary camp. It’s obvious to any respectable gold bug that the incredible amount of liquidity the Fed is currently shoveling out is going to immediately lead to inflation and possibly hyper inflation.

I do agree that it will eventually take us in that direction I’m just not so sure about the timing.

This summer before the banking system started to collapse the Fed was also printing mountains of money. At the time that money had no where to go but into commodities, oil specifically. The situation has changed though. Now we have somewhere else for all this money to go. That somewhere else is the incredibly large holes in the financial sectors balance sheets.

I don’t see how much if any of this money is going to be poured into commodities at a time when every penny is being used to try and keep the financial system solvent. Of course no we’ve added another money pit to the equation in the form of the US auto makers. Every bailout, and keep in mind that all these bailouts are just the beginning, just add more holes to drain capital out of the system.

Until all the excess debt gets washed out of the system this demand on capital is going to continue. The quick way to end this is to let these companies go bankrupt. That would put an end to the vicious circle immediately. Of course that solution won’t even be considered because it’s too painful.

Unfortunately the market is going to enforce this final solution whether we like it or not. We can gsabuck up and take our medicine now. Go thru some really painful withdrawal symptoms for a couple of years and be done with it or we can continue to try and fight a loosing battle and turn this into a decade long nightmare.

Dollar weekly chart

One of the things I'm watching is if the dollar can close back above the 200 week moving average on a weekly basis. With the strong move up today it is again knocking on the door.

It's been over six long years since the dollar has been above this level. The fact that it has moved back above and is threatening to do so again would suggest that something different is going on.

Even though the Fed is printing money like it's going out of style the dollar is not responding like it has for the last half decade.

I think the difference is that we are now experiencing deflation. I've got to say that finding a dollar bull these days is like trying to find a needle in a haystack. Needless to say they are few and far between. That by itself makes me leery about being on the short side.

As long as the dollar holds above the 200 WMA then I'm going to assume that deflation is still in the drivers seat. As long as that's the case all other asset classes are probably going to struggle.

Rally is starting to get stretched

With Fridays move up to 931 the current rally is starting to get stretched. (More in the weekend and Sunday update for subscribers.)

Just looking at the point and figure chart we can see stiff resistance coming in at the 960/970 level. I have my doubts the market will be able to penetrate this resistance without first testing the lows.

Also take note that we now have 14 X's in a row. Anytime a market or stock can put in 20 X's or more without a pullback it is a sign of a severely overbought market. I'm not sure we will be able to tack on another 6 X's before a correction as many of the sentiment and breadth levels are already pushing into moderate to excessive overbought or bullish readings.

If we do manage to reach 960/970 without a pullback it would probably be a low risk short entry for any short term traders.