Indian Summer Update

Last year I called this market the “HeyIdiot.com 2.0” market, because it so closely mirrored the 1996 -2000 parabolic ascent in technology stocks, where the market was driven by cheap money from the Fed being leveraged into stocks with horrible fundamentals and impossible-to-sustain valuations.

A couple weeks ago, Bernanke said that The Fed would do whatever it takes to make sure that economic weakness does not turn into full-blown deflation. He then told how things were simply slow in the economy and that there was no chance of a “Double Dip”. Yesterday The Fed said that they are now prepared to pull the trigger when needed on Quantitative Easing 2.0 (isn’t this the third time they have now said this?).

The Fed is already monetizing about $30 billion a month (printing money) to prop up the price of US Treasuries and hold Interest Rates down. So doesn’t that by definition mean that there is material weakness right now? Otherwise, why would the Fed be printing so much money? Did you see that they printed $5 billion an hour before Obama’s ridiculous “town hall meeting” on CNBC? Stocks ramped over 1% in about 8 minutes that morning.

$5 billion leveraged at 30 to 1 buys a hell of a lot of Apple stock. Which brings me to my next point –

80% of the volume in the US Stock markets is in 122 securities
60-70% of all trading volume is computerized

So the Stock Market is now basically a bunch of computers front running each other with Flash Trades and Quote Stuffing in 122 holdings…

For the last 20 consecutive weeks, money has flowed out of US Stock mutual funds –

YTD outflows from US Stock funds is -$68 billion
YTD outflows from US Stock ETFs is -$16.8 billion

Yet the markets are hanging in there. Do you wonder why 86% of investors think the markets are rigged? Stocks are dead. However, Gold will have a Bull Market this decade that will rival any stock market rally you have seen in your lifetime – mark my word.

Jefferies saw Principal trading volume fall by 80% from Q2 to Q3. The CEO called the trading “painfully slow”. Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS) and you can see that the market is not pricing in a rosy quarter.

Bank of America fired 5% of its Capital Markets group because people just aren’t investing like they used to.

The Fed is not alone in printing money and having it flow through its primary dealers into the stock market. Microsoft is selling bonds and using the proceeds to buy back stock. The 3-year bonds are supposed to issue yielding 0.875%! Borrow for free, buy company stock with the money, inflating your share price and use the inflated shares as currency to buy other companies and give your shareholders the appearance of “growth”.

This will be the game into 2011. Expect there then to be another massive round of layoffs as companies consolidate and move what is left our middle class to Asia…

The Fed is also not alone in printing money to hold down Interest Rates. The ECB and the IMF are regularly buying bonds of Ireland, Portugal and Greece to keep these countries from running out of cash. Microsoft is paying 0.875% to borrow and Ireland, Portugal and Greece are paying over 6% to borrow for ten years.

Brazil is now selling bonds and using the proceeds to weaken its currency versus the US Dollar. Japan intervened to weaken the Yen. Earlier in the year, Switzerland lost something like $20 billion trying to hold down the value of the Swiss Franc. We are now at the stage of overt currency manipulation to prop up exports.

BRETON WOODS IS DEAD! The political party that figures this out and tells the citizens that it will rebuild the middle class and stop those nasty foreigners from cheating us at every turn, will lead the country for a generation. The Democrats had it (and promised it) under Obama, but Barack proved to be just another greedy politician.

BREATON WOODS IS DEAD! All of this leads back to the one currency that can’t be created in a printing press – Gold. Gold stocks are on the verge of breaking out of a multi-year base. At some point, the markets will lose faith in paper money and Gold and Gold Stocks will go parabolic (like Tech from 1998 – 2000 and Gold in the last 1970’s). When it happens, the charts will look just like they do now and prices will break out on massive volume.

Is this the time? Maybe, maybe not. But it is coming and I am monitoring it closely.