This Week in Finance: Templeton's Final Memo; Why Richard Russell's Worried About Bonds; QE Ends; and More!

Quantitative Easing Ends (At Least For Now)

April 1st marked the end of the Fed's renowned money printing program, also known as "Quantitative Easing" for those who prefer to stick their heads in the sand and ignore what's actually happening.

From The Daily Reckoning:

Under the (QE) program, the Federal Reserve graciously bought $1.25 trillion of mortgage-backed securities from panicky banks and hedge funds over the last 12 months. But now, it’s over. Today, the stock market lost an important undergarment… and we suspect it will begin sagging dramatically, soon.

In more direct terms, the Fed has stopped “funneling new fiat money into the mortgage-backed security market,” explains short side strategist Dan Amoss, “which, in turn, freed up extra cash for portfolio managers to recycle into bonds and stocks. This fiat money is the illusion of real savings. It goes a long way toward explaining how a country deficient in savings can fund massive government deficits at low rates and aggressively bid up the prices of stocks.”

So what happens now?

“We’ll see a more natural relationship between savings, money flows and stock and bond prices,” says Dan. “It probably won’t be good for bulls.”

We've had one day of trading since QE ended, and so far, so good. But it's early yet, and it will be interesting to see how long the markets can continue to seemingly levitate in thin air.

Of course, there's nothing to say the government will not reinstate QE the moment things head south again. In fact, gurus like Marc Faber assure this is a "sure thing" - that when the stock market turns south again, Bernanke will print and print and print until the markets turn around.

Ed. note: Big thank you to Agora Financial, publisher of The Daily Reckoning, for sponsoring the blog! Agora has a lot of great paid and free resources, and I'd encourage you to check them out. Please do me a favor and click on an ad or two of theirs - thanks!

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Sir John Templeton’s Final Words: We're Screwed

Legendary investor John Templeton, who passed away in 2008, penned a final memorandum a few years before his passing entitled "Financial Chaos", in which he predicted bad things ahead for us.

A very sharp final call from a guy renowned for them throughout his career. Here are the prescient comments that Sir John left us with:

John M. Templeton
Lyford Cay, Nassau, Bahamas

June 15, 2005

MEMORANDUM

Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.

Increasingly often, people ask my opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my lifetime. Quite likely, in the early months of 2005, the peak of prosperity is behind us.

In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great that most currencies and bonds are likely to continue losing their purchasing power.

Mortgages and other forms of debts are over tenfold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.

Surplus capacity, which leads to intense competition, has already shown devastating effects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages almost to zero when adjusted for higher cost of living. Clearly, major corrections are likely in the next few years.

Read the rest of Sir John Templeton's memo at Newsmax.

The Amount of Managed Money Currently Invested in Gold

Now that gold is rangebound, how do you make money trading it? That's easy - treat it like a wooden pony and straddle that thing.

For the details on this trade, in more professional terms as well, check out Brad Zigler's article for Hard Assets Investor:

So what's an investor to do? Well, you can certainly sit tight and wait. But if you do, you'd be passing up an opportunity the market doesn't hand out every day—cheap volatility premiums.

Option traders know all about volatility: It's one of the primary drivers of option costs. When volatility contracts, as tends to happen in range-bound markets, option prices soften. So much so, in fact, that the purchase of option straddles and strangles becomes attractive.

A straddle is a combination of a put and a call on the same asset, each sharing the same expiration date and exercise price. A strangle is similar, but the options' strike prices are different.

You can read Brad's full piece here.

The potential risk here, at least IMHO, is if the next potential wave of deflation finally comes to fruition, taking down everything, gold included.

But if you believe that gold will be rangebound for a bit here, straddles are definitely an interesting potential play.

And here's a VERY interesting chart that Brad posted in his piece - it shows another reason some smart money is wary of gold at these prices - because managed money is heavily in gold right now, which often indicates a shorter term top in price:

Chart courtesy of Hard Assets Investor.

Gold has had a heckuva run, it could easily trade sideways, or even pull back sharply, and still be within the confines of a larger bull market. Nothing goes straight up or down - trade accordingly!

Why Richard Russell is Very Worried About the Bond Market

Richard Russell thinks the bond market may be saying ENOUGH with the quantitative easing, reports The Daily Crux.

From his Dow Theory Letters:

The bond market is now very close to saying, "We've had enough."

... Many older subscribers probably remember my lifelong emphasis on the POWER of COMPOUNDING. But what of the power of negative compounding on debt? I think we are about to find out.

The power of negative compounding will be brutal. The cost of carrying the world's debt (including the US national debt) will be devastating. It will be highly deflationary and it will crush everything in its path.

You can read Russell's full commentary here.

I don't subscribe to Russell, but I do try to follow his writings and thinking as best I can from the outside, and this is the first I've heard him mention deflation. Very interesting!

Here's what Russell had to say in early December about gold, the dollar, and the Fed's effort to re-inflate.

An Ominous Short-Term Chart

Anytime in history that the 12-month rate of change in the Dow Jones Industrial Average has topped 40%, there's generally been trouble ahead.

Guess what? The DJIA's 12-month ROC is above 40% right now!

Here's a great chart from Michael Panzner that you should check out:

http://www.financialarmageddon.com/2010/03/time-for-the-bulls-to-reconsider.html

The Magic of Obama's Healthcare Plan

Looks like I've got to eat some crow here - I'm on record as suggesting that Obama's Healthcare Plan would expedite the insolvency of the Federal Government.

Boy was I ever wrong!

Check out this hilarious video of Obama's magic healthcare math, where he rocks the stage in Ohio by speculating that insurance premiums could fall by up to - get this - 3,000%!

A Few More Links, In Case You Missed Them

• Too Drunk to Fail - A market-driven NYC bar

• Why the Bond Market Trusts Buffett More Than Obama

• Doug Casey on Anarchy - Why no government is the ideal form of gov't

• And a great read from Clay Shirky on the Collapse of Complex Business Models

My Current Positions and Market Outlook

The trend of all markets still appears to be up, but the risk appears to be predominantly to the downside. The only trend that appears to have changed for certain is that of the dollar, which is currently taking a breather after a multi-month rally.

The US dollar's trend is officially UP. It's well above it's 200-day moving average.

(Chart courtesy of StockCharts.com)

If the dollar is indeed the linchpin of the financial equation, then we'd expect the other markets to roll over one-by-one in turn here. We shall see if things play out this way.

(PS - Here's why I concur with folks who believe the dollar is the linchpin of the global financial markets).

Currently I am in wait and see mode, with no long or short futures positions.

Have a great week in the markets!

Why The Market's Trend Hasn't Changed - It's Still Down (Probably)

A few weeks ago I glowingly declared that the bear was back in charge, and that the new trend was down.

Channeling Lee Corso - not so fast, my friend!

It's been a strong retracement of the Jan-Feb decline:

Markets have rebounded - from oversold in Feb, to overbought in March!

(Source: Yahoo finance)

BUT - until we see a poke above the 1150 mark, we can't say for sure that the uptrend in back in place.

So we're kind of in a state of limbo right now. The rally appears tired, and I'd say it's on it's last hurrah, but we've been seeing last hurrahs for the last 6 months. So anything is possible.

The bearish publications I follow have conceded that an upcoming decline must be swift and decisive to confirm that the downtrend is in place. So we'll see where the week takes us from here.

While Stocks Climb, The Dollar Rests

The dollar, which we believe continues to be the linchpin of the financial markets, is taking a breather from its recent assent, as stocks climb. So the formula that has been in place since roughly 2004 remains in place, and that formula is the inverse relationship between the dollar and stocks - dollar up, stocks down - stocks up, dollar down.

The dollar takes a breather - but it's still in an uptrend.

(Source: Yahoo Finance)

With the dollar still in an uptrend, and well north of it's December lows, I'm more inclined to think of this stock market rally as a correction in a downtrend, rather than vice versa.

If the dollar were to take out it's previous lows, I'd be nervous about this hypothesis. But the reality is that not only has the dollar rallied quite a bit since December - AND it also sits well north of its 2007 lows.

The dollar may be doomed in the long run, but it's running a helluva sprint right now.

Did We Mention This Stock Market Rally is Tired? Really Tired?

With the exception of last Friday (which throws a little bit of a curveball into the equation), this rally has largely taken place on declining volume, while the drops have occurred with on expanding volume - and hence more conviction.

Brian Hunt writes that the professionals aren't buying this rally...

I have a chart for you showing why many of the smartest traders I know are asking themselves this question... and why they expect the market to head lower, at least in the short term.

Below is a chart that displays how some professional traders view the market. It shows the past nine months of trading in the big S&P 500 fund (SPY). Many days, this is the most frequently traded security on the market. It moves in lockstep with the benchmark S&P 500 index.

You'll notice this chart has more to it than the simple "line charts" you often see on television or in the newspaper. This chart contains much more information, which you can use to make smarter trades.

You can read the rest of Brian's piece - and check out his price/volume chart - here.

But Don't Tell This to Mutual Funds - They're "All In"!

Bloomberg reports:

Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.

Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.

Oh my.

(Hat tip to frequent guest author David Galland for finding this piece!)

Stephen Colbert Explores Credit for Kids: Kid-Owe!

One of our favorite financial analysts, Stephen Colbert, is back on the beat with his excellent coverage.

You may recall Colbert's astute recommendation to load your portfolio with gold, women, and sheep. (And I hope you heeded his advice!)

The new word on Stephen's mind is Kid-Owe - enjoy!

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
The Word - Kid-Owe
www.colbertnation.com
Colbert Report Full Episodes Political Humor Skate Expectations

Save a Buck - By Not Saving???

Nevada Federal Credit Union is turning the business model of banking upside down - by paying customers to close their accounts! Mike "Mish" Shedlock reports on his excellent blog:

Nevada Federal Credit Union has too much money and does not know what to do with it. Worse yet, sitting in cash is costing the credit union money.

Insurance premiums are the culprit. On top of any deposit premium paid to customers, insurance runs .4%. Yet short term treasuries yield .25%.

Nevada Federal sees no good lending opportunities so it is paying customers to close accounts.

Sounds like a healthy economic system to me! Hat tip to friends/readers JL and Carson for the link tip on this beauty.

Another Good Way to Make Money - Sell Your Home at a Loss!

In case you weren't already in awe of the brilliance of our economic system, here's another great way for entrepreneurial-minded homeowners to make money - The New York Times reports:

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

Hat tip again to friend and noted guest author Jonathan Lederer, who was ironically reading this piece when I forwarded him the following email...

Foreclosure Home Tour This Saturday!

To reserve YOUR spot, please click here - hilariously, this is not a joke - this email actually showed up in my inbox today:

Elk Grove, CA - Real Estate Broker David Jurewicz of HomeRocketRealEstate.com will be giving a tour of five high value foreclosure properties in the Elk Grove, CA area. The tour begins at a meeting place near Highway 99 and Laguna Blvd. Saturday March 13, 2010 beginning at 10:00 a.m. and lasting until 12:00 noon.

There are only 10 spots available for the tour which will keep it small and manageable. To reserve a spot on the tour, call David at (916) 682-6454. Those who call will be provided with information about where the meeting will take place as well as answer any questions. Attendees will receive a free 100-page e-book "Foreclosure Secrets," with a value of $19.95. David has also arranged well-priced financing with a local lender who can quickly pre-qualify potential foreclosure home buyers. "Most bank sellers won't even look at your offer unless you've been pre-qualified," says Jurewicz.

"This is a no-obligation opportunity for anyone seriously interested in buying a home to see what's available for their real estate dollar," says Jurewicz. "I'll choose the homes for the tour just before the tour begins to make sure the properties I show are a great value and are still for sale," he said.

I'll let you insert the punchline.

My Trading Activity - Still Short the S&P (Twice)

Ouch - it all looks obvious in the rear view mirror, so it's no use kicking myself. These shorts both looked great and perfectly timed for a little while.

I didn't want to cover them in a bear market, instead electing to "hold" all the way to the bottom. Well I may have declared the bear in control too soon...though we can't say for sure just yet.

I'm still hanging on because this rally appears quite tired, and I believe the risk from here is to the downside. We'll see!

Still double short the S&P...though these positions used to look much sexier!

The S&P has - almost - retraced it's swift decline. A poke above the 1150 mark would indicate it's still a bull market...for now at least.

(Source: Yahoo finance)

Have a great rest of the week in the markets! Comments are always welcome and very much appreciated.

Portions of this article (or the whole thing if you can't get enough) may be republished on your website, blog, or email newsletter - all we ask for is proper attribution, and a backlink to our site with the original article!

Mortgage Lenders Aren't Gonna Take It...Anymore!

Channeling Dee Snyder - Mortgage lenders say they're not gonna take it...anymore.



Here in Northern California, we've been housing outcasts for awhile. We were weirdos for renting throughout the housing boom. Now, we're weirdos for a different reason - we're not walking away from our mortgage.

It's the latest trend, and it's getting hotter. Why make mortgage payments when you're down a cool few hundred grand on your digs?

But now, mortgage lenders are fighting back! From CNNMoney:

As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?

Wrong.

Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

I read today, I believe in the Daily Reckoning, that two-thirds of homes in Nevada are underwater. Two-thirds!

This is not going to end well. Get yourself some gold, sheep, guns - and of course US dollars - and get ready for the next shoe to drop.

Ed. Note: Why US dollars? Because the dollar's fate is driven by global liquidity flows, which are starting to dry up once again.

Inflation and Deflation - What to Consider, and What Indicates We're Wrong?

Stumped about the inflation/deflation debate? Good news - you're not alone!

Hard Asset Investor's Brad Zigler is also somewhat undecided on the subject. Though he leans toward inflation, he acknowledges that very strong deflationary forces are also in play.

Though you know that I'm one of the lonely souls in the deflationary camp (along with many readers!), I also am not 100% sure of which way things are going to unfold.

But that's OK - that's why we follow the trend! Ultimately, the market will be the final arbiter of this debate, and there's nothing we can argue today that will change what the market is going to do.

So, grab your position, but by all means, be flexible and ready to change if we're proven wrong. Personally, I'm watching the stock market, and the dollar...especially the dollar. If it takes out it's old lows, that would indicate a serious flaw in our dollar rally/stock tanking scenario.

That looks unlikely right now, though, as the dollar looks to be at the start of a major rally.

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View the full UUP chart at Wikinvest

The Top Three Investment Themes to Watch in 2010

Happy New Year...and New Decade! Let's dive into some of the top investment themes to keep an eye on in 2010...but first, a haiku:

09 Reflation

Can it continue for long?

Dollar may foil!

1. The US Dollar: The Linchpin

The dollar, which topped out in early March roughly around the time the stock market bottomed, has been looking frisky of late. It's not above it's 200-day moving average yet, so there is some potential resistance in the short-term, but it's looking stronger by the day.

Can the re-flation trade continue to motor along if the dollar mounts a sustained rally? If the first wave of the global meltdown was any indication, then probably not. We haven't yet seen any evidence to invalidate the "all the same markets" hypothesis.

Is the dollar's recent upturn tipping off an impending markets downturn? In my opinion, this is THE theme to keep an eye on in the first quarter of 2010.

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View the full NYSE:UUP chart at Wikinvest

I do get a kick out of the financial media's explanations for the dollar's recent strength - leave it to them to justify the charts with "news"!

2. China: The Global Economic Savior

China has been billed as the posterchild of the global economic bounceback. Which seems appropriate, as it was also the star of the 2003-2007 credit fueled equity liftoff globally.

"China is fine," pundits say. Well, perhaps. But rather than rely on various analysis and opinions on China, I'll stick with the lazy man's approach - watching the stock market itself.

In late November, we pointed to a potential downturn in Chinese equities as some dark clouds on the financial horizon.

How's China done since then? While still perched above it's 200-day SMA, the Shanghai Composite appears to be embarking upon a third attempt to take out its early August highs.

China's rally stalls.

(Source: Yahoo Finance)

A third failure would increase the likelihood of a Chinese breakdown, and a breach of the 200-day SMA (red line above) definitely would. And if that happens, look out! I'm not sure the re-flation trade could withstand this.

3. The Banks: Still Not Lending, and Breaking Down Too

I was tempted to stop the list at #2, because we know that all the markets are still correlated...but then I pulled up this foreboding chart of the bank stocks:

Bank stocks breaking down.

(Source: Yahoo Finance)

The bank stocks are trading right around their 200-day moving average, since making their rally highs in October. So while the blue chip indices have continued to rally and make new highs, many secondary indices have failed to confirm, especially "crap" like the banks.

Summing It Up: Deflation Likely to Return (Again)

To sum it up, it looks like the re-flation trade may be running out of gas...in which case, it would be time for the dollar to rally, and for deflation to once again take the upper hand.

A couple of months ago, I reviewed my favorite inflation and deflation arguments. Since then, I don't think anything has changed. We remain at a key inflection point in the inflation/deflation battle, at least as far as 2010 is concerned.

I personally think the odds favor the scales tipping once again in the favor of deflation. Then it will get really interesting, as we'll see our heroes at the Fed again swing into action. I'm skeptical they'll be able to do much of anything useful, as I don't think they "saved" us from anything the first time around either. The markets were oversold, and set for a huge rally - and rally they did. Where they go from here will be the true litmus test.

My 2009 Trading Review: Ouch, I Suck

Usually at the end of each year, I pat myself on the back for a year well done. Well this year, unfortunately, I got rocked. So rather than dwell on it too much, I'd rather focus on learning something from my mistakes - and hopefully you can too!

In no particular order, I made a few key ones:

1. Taking position sizes that are too large. You really shouldn't risk more than 2% of your overall capital on any given trade. Because, if the trade goes against you, the most important thing is to live to see another day.

This is the top way that traders go "bust" and lose all of their capital. Something I'll try to (finally) accept in 2010!

2. Not catching market turns properly. Since 2007 or 2008 I've predominantly traded with the trend, which I believe is the right thing to do. BUT, I've gotten burned on trends switching on me. My solution? Use a more robust system for catching turns, including investor sentiment that may indicate when a move is close to bottoming, or topping.

3. Lacking a set plan for exiting a trade - whether a winner, or a loser. Stops are life savers - it's important to honor them, and again, live to see another trade!

Overall no complaints, investing and trading is often an expensive tuition, and the only way to learn it is to do it. So I'm grateful to still have a fair amount of capital intact (off of a small initial stake), and look forward to continuing to improve in 2010!

Thanks for reading!

US Dollar Approaches 200-Day Moving Average

Trading is, as you know, an inexact science. So while we *think* it's likely that the dollar has put in a major bottom, a cross above its 200-day moving average would significantly reinforce this hypothesis.

The dollar tests it's 200 day MA. (Source: WSJ.com)

We're not there yet, but we're getting close. A push above 79.5 would indicate that you should, at the least, not be short the dollar.

Being long an asset that's trading above it's 200 day MA, and short one that's trading below, is usually advisable. And ironically, this rule is so simple and reliable that many traders usually ignore it - myself included!

Jim Rogers is Buying...US Dollars???

On Sunday, I mused that one of my deepest concerns about being bullish on the US Dollar is that I'm on the opposite side of the trade from Jim Rogers, who thinks the buck is doomed.

Not so, pointed out astute reader Sibbie via email, citing a recent Rogers interview in BusinessWeek:

Q: How much of the runup is being driven by U.S. deficits and the weakening dollar?

Jim Rogers: A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.

Nice find, Sibbie, thank you!

You can read the rest of Jim Rogers' interview with Maria "Money Honey 1.0" Bartiromo here.

Just to clarify my position - I also believe we're heading for higher inflation...just a little later than many pundits think, because we have some massive deflationary forces to work through in the short term. Here's my take on inflation/deflation in the near term.

Related reading: Jim Rogers' latest thoughts on Commodities, Treasuries, and the Economy

Gold CAN Still Go Down; Trading Against Jim Rogers and Richard Russell; Worst Case Scenarios Already "Priced In"

So Gold CAN Still Go Down, After All

Last week was shaping up to be another banner one for gold, as the old relic kept on climbing, day after day...that is, until it stopped.

Gold's one-way rise experienced a sharp setback on Friday, dropping nearly $50 on the day, and over $60 in intraday measures.

Friday was the biggest down day for gold in some time.

(Source: Barchart.com)

Perhaps related, perhaps not, The Financial Times reported on Wednesday that China is wary of the danger of a gold "bubble" (hat tip to my good friend and regular reader Super Joe for sending this link along).

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

China's ever-increasing interest has spawned the popular gold bull theory that the Chinese have established a "$1,000 floor" price for the metal. In other words, with the Chinese buying up more gold on the dips, one needn't worry about the possibility of gold ever dipping down to triple-digit territory ever again.

The only problem with theories like this is that, however sound they may appear, they are usually wrong. The market takes great delight in squashing "absolute" myths and theories, and I suspect this one will be no different.

But - you may interject - with the government printing money like it's going out of style, won't that result in rising price inflation, and rising gold prices? It sure may - I just suspect that it will take longer than most investors anticipate, thanks to the massive amounts of credit that will be written off in the coming years, resulting in some wicked near-term debt deflation.

Trading Against Our Hero, Jim Rogers

Anytime you find yourself on the other side of the trade from Jim Rogers, you probably want to seriously reconsider your position.

That's where we find ourselves now, though, with Rogers continuing to reiterate his distaste for the dollar. To be honest, I don't like the dollar fundamentally either, but believe that paradoxically, it's due to rise in the near term because of its inherent flaws.

In other words, I agree with everything Rogers says, except for his timing. We'll see who's right - I wouldn't blame you one bit for siding with Rogers - but I'm sticking to my guns on this one...at least for now.

And...Richard Russell, While We're At It

The Great Richard Russell believes that gold is going to move higher, no matter what happens, according to The Daily Crux.

Question -- What would it mean if Industrials and Transports broke out to joint new highs?

Answer -- I think it would mean that the Bernanke Fed was beginning to win the war against deflation, and assets were once more beginning to inflate. In that case, gold should move higher.

Question -- What would it mean if this advance topped out, and the bear market was taking over again?

Answer -- I think it would mean that the Fed had lost its battle against inflation. If that was the case, I believe the Fed would spend even more, there would be even more stimulus programs and interest rates would remain at zero "for the duration." In that case, gold should move higher.

(Source: The Daily Crux)

Well I hate to trade against Russell too - a true legend. But, the dollar bull/gold bear camp is so deserted, that I guess it just comes with the territory that our favorite investors will be on the other side of the trade...because there are so few on our side!

Why Worst Case Scenarios are Already "Priced Into" These Markets

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

Positions Update - Still Really Short the S&P, Long the Dollar

Nothing's changed here - still waiting for the dollar to bottom, and the S&P to top. It's been a maddening wait.

We think the dollar is the lynchpin to the whole equation, and that a dollar bottoming should roughly coincide with a top in the other markets. Friday was an encouraging sign, as the dollar rallied sharply. Has it finally put in a low? We shall see!

The dollar rallied sharply on Friday to end the week - did this mark the start of a mega-rally?

(Source: Barchart.com)

Though this rally appears to be running on fumes, it's still running...at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $17,217.50

Cashed out: $20,000.00
Total value: $37,217.50
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Why the Worst Case Conclusions are Already "Priced Into" the Market

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

So enjoy Tom's bet with his boss (who's another great investor BTW). And if you're interested in subscribing to Tom Dyson's premium service, The 12% Letter, we've arranged for readers here to receive a 6-Month Risk-Free Trial (click here to learn more).

***

Porter Stansberry Is My Patsy
By Tom Dyson

On Friday, I made a bet with my boss...

Porter Stansberry is my boss and a good friend. He's one of my favorite investment analysts in the world. An investor who is not reading his monthly newsletter is flying blind in a rainstorm.

But I have a disagreement with him right now. Porter says the United States government is broke. He says there's no way it'll be able to borrow enough money over the next 12 months to cover its obligations. There's going to be an enormous government cash crunch unless it "prints" the money.

By printing this money, the government is forcing our foreign creditors to make an impossible choice: Stay with the dollar and see 50% or more of your intrinsic value wiped out... or abandon the dollar completely and risk a global crisis.

Whatever happens, Porter says, gold soars hundreds of percent, the dollar spirals toward zero, and the price of government debt erodes.

Last week, I bet Porter he's wrong.

Specifically, I bet him the interest rate on the 10-year Treasury note would be below 4% at this time next year. The interest rate on the 10-year Treasury note is the price the United States government must pay to borrow money over 10 years. If the market thinks the government is broke and can't afford its debt, this interest rate will rise. Porter bet it'll rise above 4% in the next 12 months. I bet it will not.

Look at this chart of the dollar in terms of the Swiss franc. The Swiss franc is the most stable paper currency in the world. As you can see, the dollar has been falling against the Swiss franc for more than 40 years. That's Porter's big trend... and it's down.

But notice the long periods where the dollar rises... despite the big trend. There was a huge bull market from 1979 to 1985, for example, and another one from 1995 to 2001.

That's the thing about markets. They never move in straight lines. They overshoot in one direction and then overshoot on the way back. And the funny thing is, just at the moment when they are most stretched in one direction, investors feel the strongest desire to join the crowd.

Take 1979 as an example. It seemed as if the dollar was about to plummet. There were incredibly compelling arguments for selling the dollar and buying hard assets... as there are today. It just wasn't a good time for selling the dollar.

I actually agree with Porter's conclusions. I just think much of the worst-case conclusions have been "priced into" the market. The financial headlines are full of stories about gold and the dollar... billionaire John Paulson buying gold... the great money manager David Einhorn buying gold... India buying gold... Chinese housewives buying gold... Warren Buffett protecting himself against inflation.

It's a popular thing to do nowadays... nothing like in the early stages of the gold bull market in 2002.

The dollar's already been in a bear market for almost 10 years, and Porter's theory has as much traction as it did in 1979. It's an incredibly compelling argument... but my gut tells me if you bet on inflation now, you're walking into an ambush.

Now just isn't the right time to be placing bets on the end of the dollar. It's the easy trade that feels right. Any great trader will tell you the "hard trade" is always the right trade.

Unless you're a short-term trader or you still don't own any gold bullion, I recommend you avoid making any new investments based on inflation or the dollar's destruction. You'll make far more money on this sort of investment when the dollar is nearing the end of a multiyear bull market... like it was in 2000.

Again... this is a matter of timing. I'm still a gold bull. I still think people should keep 5%-10% of their assets in gold, for wealth insurance... for a way to own "real money."

But I'm making the "hard bet" that interest rates will not soar in the next year. I'm making the hard bet that the dollar with strengthen. And I'm not afraid to hold cash. It's going to grow in value over the next year. And I'm going to enjoy collecting more of it from my patsy, Porter Stansberry.

Ed. Note: Tom Dyson is the author of The 12% Letter, one of my top 5 favorite investment newsletters. To sign up for a risk-free trial, click here.