See Why I Am So Reluctant to Short?

Every time the Dow breaks 8,000 points, the US Government transfers a couple $100 billion from taxpayer to shareholder and we get a 1,000 point rally. I saw this coming and positioned some money for the inevitable rally. I will soon reposition money for inevitable crash.

Today Was No Different
The markets are rallying on the belief that the US Government is going to buy up to a Trillion Dollars of toxic mortgages from banks. The issue is that the Government will overpay for these assets. They could end up paying 50% to 70% too much for these holdings, thus losing the taxpayer $500 to $700 Billion, thereby giving the shareholders and bondholders of banks a gift of the same amount.

Financials stocks rallied, because if the Fed does over-pay for assets, then the banks will be able to realize “gains” on these transactions and “beat earnings”. The accounting games are never-ending.

A History Lesson
In 1933, the US was in the depths of The Great Depression. The economy was broken and getting worse by the day. Citizens were rioting and there was a real possibility of a populist revolt that would have meant the end to the US Government as we now know it.

So what did FDR do to “save” the Republic?
He stole everybody’s Gold and used the funds to finance The New Deal. That is what is happening today. But today’s politicians are far too crafty to overtly steal money from some to finance the expenses of the many. I do not think an outright confiscation of Gold (ala FDR) or Land (ala Zimbabwe) would be acceptable in today’s America.

http://en.wikipedia.org/wiki/Executive_Order_6102

Instead, they game the numbers
Clinton did it when he altered the Cost of Living Adjustments (COLA) formula for Entitlement Programs. Have you ever noticed how the Government Consumer Price Index (CPI) statistics always seem to trail the reality of the actual increase in prices that you see in your everyday purchases? Clinton altered CPI by removing the cost of Fuel and Real Estate from the formula. That has effectively knocked 5% per year off of COLA. So retirees getting hosed, but the taxpayer is getting a break.

Here is what Bernanke said about the FDR Gold Confiscation of 1993 –

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.”

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

The definition of Confiscation for Bernanke is “a program of gold purchases”. That is what he thinks of the property rights of citizens.

Did you notice this line at the end “and by the way, 1934 was one of the best years of the century for the stock market.” So in his mind, the end justifies the means. Again, Asset Price Appreciation has become a policy tool to mask the damage done to the economy as the corporations have gutted the Middle Class and driven the jobs off shore to India and China.

http://nbcharts.blogspot.com/2008/11/asset-price-appreciation-as-policy-tool.html

Bernanke wants to “Increase Aggregate Demand” at all costs. He is willing to let the criminals go unpunished and willing to throw away the Constitution in order to “save the free markets”. What a d*ck (my editorial opinion).

All that is going on now is the politicians are robbing future taxpayers to buy the bad debt out of the banks. It is theft from those who have no say.

I think the Government is now focusing on creating a new Asset Bubble. I think the Bubble will be in Stocks. Stocks are marginable, easy to trade (liquid), easy to manipulate and you can gin up a lot of greed as you ramp the prices into the stratosphere. Moreover, you have this amazing propaganda machine already in place (CNBC, Barron’s, magazines…) to drive prices higher.

Before the financial crisis is over, the Government will most likely own shares of stock of Banks, Insurance Companies, Homebuilders, Commercial Real Estate Owners, Automakers, Credit Card Companies and whoever else they can bail out. They will then have a vested interest in ramping up the stock prices.

Money = Power
Increasing Stock Prices = Money
Therefore, Increasing Stock Prices = Increasing Power.

The politicians will not be able to help themselves.

Many speculate that the Bubble will be in Commodities, Gold and US Treasuries. That may be the case, but you will be fighting the Fed in Commodities and Gold and with rates near all-time lows, there will be little upside in Bonds.

I’m going to state this as simply as I can
You will need to participate in the Great Stock Market Bubble. It will be your only real hedge against Inflation and a falling Dollar. You will also need to get out before it all crashes down, because the aftermath of that crash will be truly devastating.

Sorry to ruin your evening. I think this plays out over the next 5 to 7 years.

If the markets change, then I will change. But that is my operating thesis going forward.