Proof of Economic Recovery

I have worked in IT for over 20 years, and I have seen my fair share of economic downturns. Technology tends to be hot during economic upswings, and a wasteland during an economic downturn. Most companies can "get by" without significant upgrades to technology.

Recently, I have noticed in my travels a few things. First, my own work is at it's busiest since 2006. There are some factors that include my specific specialization and lack of cross training. But in general, I do view it as a sign that maybe the economy is getting better.

In the last few weeks I have been traveling for work, to Washington DC and Minneapolis. Last week in DC hotels where completely booked. This week Minneapolis hotels where close to fully booked.

So it will be interesting to me how the markets and the economic indicators play out over the next few months. From my "on the ground" observations, business is doing OK. Booked hotels for entire areas and technology consulting work picking up.

Granted, I am discounting the close to 17% unemployed directly or by becoming a discouraged worker.

Just wanted to share a bit of observation, markets should keep bopping around through August.

good luck.

Blog hooky

For the last few weeks, I have been traveling for work. Ontop of that, I am in a wedding parties and traveling to a third destination wedding this summer.

Wife is back to school full-time, my son is getting bigger by the day.

Plus summer is here. What I am leading up to is I expect to be a little spotty on my posting the next few weeks, as it has been the last two weeks.

I am simply waiting for Gary of the Smart Money tracker to signal time to move into gold miners. And that may or may not be when the Federal Reserve Bank announces a twisted form of QE3.

The Federal Reserve Banks Qe2 ends this week, so expect the next month to be dicey. Maybe a down turn in-spite of my slant of a final upturn.

Please keep on checking back, I'll try to make time during my travels.

Greece Deal saves it from default

On Tuesday I posted Greece not likely to default, and the market will rally from the news. So I dumped many shorts, and places stop limits on other positions.
And now it is Thursday....and Greece has financial support to prevent a collapse. And of course, the market started immediately to recover.
The internet is fantastic, I got to read a hedge fund managers well thought out analysis that Greece won't default now....and here the news comes to prove Mr. Hussman right.

Now the question is, will the US market rally. I still think yes, although on the open this morning I must admit I was a bit shaky on my conviction.
The futures are up as a write this. and I think the near term the markets are safe from significant decline. For now, I'll keep some of my core longs, rest in cash, couple of shorts, and as always my core gold miners from 2008.

Time to take the summer off and come back in mid August to see the next phase of this bear market resume.

Market Comments

Ben Bernanke talked yesterday, and he did not instill any confidence anywhere.

It is amazing how a single person can change the mood by an interview.

I refuse to flip-flop on my shorts, and I'll see how this plays out.

You can read some funny commentary from Karl of the Market ticker on Mr. Bernanke here.

As always I do have some shorts, and always core gold miner longs.

Greece Default not likely

Last night I posted on how the market is poised for a potential summary rally. I read this morning Hussman's assessment of Greek default, he places it in the 2012-2013 timeframe.

I encourage you to read the analysis, as John Hussman is a hedgefund manager, and a smart one at that. It is great to have free insight into very significant economic developments. Mr. Hussman's hedge fund is also in precious metals to the tune of 20%.

Assuming Mr. Hussman is correct, and I no reason to think otherwise. there is a very likely possibility of Greece reaching some sort of restructuring deal in the days or weeks ahead. When that comes to pass, I can see pent up demand held back by fear released. This could be the catalyst for the summer rally described by yesterday's post.

Of course, all of this is maybe, probably, and not exacting. The world of investing is probabilities, not guarantees. And my view has shifted from possible pending market collapse to a couple of month rally before the downturn begins in earnest. That downturn will likely reverse with political monkeying for the 2012 election. The money boost the government issues unfortunately will not last 2 years like it did in 2009-2011, we will be lucky to get 1 next time.

For most of my shorts, I put limits in to cover, and hope to get a good price to get out.

Good luck.

Major Rally ahead?

For all the doom and gloom over the last few weeks, it now looks like the market may be in for a nice summary rally. If this transpires, here is what I expect.

1 USD falls, not sure if it breaks recent bottom and forms a new bottom.
2 Stock have a nice rally, but don't get too attached, the fall brings change.
3 The stock rally, if it transpires I predict will NOT eclipse recent high.
4 The downswing thereafter is when fireworks can begin.

Who knows, maybe it is down from here. But the market does feel like to me its gaining a base, so I won't be adding to DXD right now. I do think this market is putting in one hell of a major top. If it is, I don't expect it to play nice and roll over. The market right now reminds me back in 2009 when I realized I was in a trap.

That feeling is back, and this time I'll listen.

For some posts by others, click here and here and here from some slope of hope postings.

This Week in Charts

Generally speaking the market is looking very weak. The market seems like it is about to roll over in quite a few places. See this post on Slope here.

For the most part, my plan is to play with a few shorts, but to flip into gold when the moment is right and never look back. I am hoping for gold to break downwards and hit 200 DMA.

For now the SPX looks downward trending, Interest rates looks depressed, and I am posting a chart on AAPL, since it has been the jewel of this bull run.

To the charts!

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Adding back shorts

I am hoping that Friday yields a nice market rally, if it does at End of day I'll buy some DXD. (inverse double short etf)

However, if the market continues to be weak, I am not sure what I'll do, probably sit on my hands.

Otherwise trying to wait for Gary to give the green light for gold and gold miner purchases.

Good luck

Congress are a bunch of ineffective wimps

This is a political post, feel free to ignore if not interested.

When President Obama started Military action in Libya, that was a legal act. However, according the the US constitution, he must seek congressional approval after 90 days. This Friday apparently marks 90 days.

So what does some of the congressional members intend to do to enforce the US constitution? Why sue of course!

Sue? Are you kidding me? Really? Congress will "sue" the US president for not OBEYING the US Constitution. Really? This is how we enforces laws?

To me its pretty simple, the constitution has checks and balances. And the check here is only ONE entity has the right to approve spending US taxpayer dollars, congress. Quote "No money shall be drawn from the treasury, but in consequence of appropriations made by law"

The right action isn't to get lawyers and take this to court, and try to resolve this before January 21st, 2013. The right thing is to DO YOUR JOB! Cut off funding. By not cutting off funding Congress is supporting the action.

This is NOT a question if I am for or against Libya action, it is immaterial. This is about our leaders lacking the willpower, the strength, the character to do their job.

Get lawyers and sue....really? I wonder how they handle their kids spending their allowance to buy drugs. Shake their finger and say "bad" while giving them more money?

What a joke, and anyone believes this congress is capable of getting the US fiscal situation in order is delusional. There is only one way the financial situation ends, in total crisis due to lack of leadership.

There is NO LAW if there is no law ENFORCEMENT.

Congress...grow up, do your job, be adults and leaders.

Three strikes, time for global economic implosion

The global financial companies are brittle, trying to keep anything and everything from triggering a massive deflationary event. This would not be a problem if the banks and other financial institutions where sitting on solid assets and cash. Instead the financial companies are WORSE off than in 2008, since there has been refusal by governments to address the core problem, excessive leverage and bad loans.

Instead the US government has rolled back (and the world followed) Great Depression era accounting practices such as mark to market accounting to value assets. Instead we now have fantasy asset valuations. Combine that with a Credit Default Swap market that to this day remains unregulated, and the liabilities exceed global GDP by many times.

This concoction has created not a financial system, but rather a debt pretend and extend system, that one day, cannot be extended. Its like a huge Jenga game waiting for a collapse.

And here we are, with the stock markets rallied up over 100% from the 2009 lows, USD near its low, commodities over-valued. But real unemployment is over 17%, companies are not hiring, unemployment benefits are expiring after 2 years of payments.

When the US financial system deflated in September 2008-march 2009, the US was quick to re-inflate through accounting fraud and Federal Reserve Bank money games.

This time, it is looking like the next punch for the financial system will not come from the USA (initially) but it's a race between Europe and China. It doesn't matter which wins, for the other will quickly follow the leader, with the US taking 3rd place in the next collapse.

As such, the USD ironically will once again become the shining gold standard of investments, as the Euro shows to be fatally flawed, and China may experience a full blown revolution. It's obvious to everyone that the Arab nations are not safe havens, and the rest of the countries are either too small, too immature, or too corrupt to matter to the global financial community.

Lets take a look at the world's leading regions to lead the world into the Greatest Depression.

Europe - Greece leads the pack, as it defaults it will trigger a cascading failure among it to other nations, it may be a slow fuse, but it will be lit. To Germany's credit, they are lighting the fuse by taking a stand on the extend and pretend global mantra. Kudos to Germany, the only adult standing in the global financial system. How Ironic that after WW1 Germany's monetary games triggered hyperinflation, leading that country directly into WWII. Here we are Germany by refusing monetary games, may be triggering something akin to WWIII. While hopefully not an all out war, you can be sure that countries relationships will become frosty once the global credit collapse begins in earnest.

China - The grand plan that by awaking the Chinese economy, they can lead the world into an extended growth period is in trouble. I believe Ronald Reagan saw the demographic wall approaching the west, and that is one of the reasons why he opened relations with China. (aside from corporate obscene profits and ability to gut middle class america) But the Chinese demographic is a lure and a curse. For China has over 1 billion people, and if even 10% of the people become violently unhappy, that's over 100 million people to stir revolution. China has shown America how to exceed in extend and pretend games, and has built the worlds largest ponzi scheme, putting america to shame. Now, their country faces on multiple fronts pressures, initially stemming from natural resource prices rising. China is starting to have government protests in urban areas (historically in rural areas). Violent protests, bombings, and uncovering of international fraud is beginning.

USA - While the USA's problems by now are well known, top banks are insolvent but exist with extend and pretend, the newly issued liabilities are not known. If these banks were allowed to go bankrupt, they would have not had the ability to "double down" by taking even RISKIER liabilities. It just goes to show how far a junkie will go to continue a high. Amazingly, now these risks are indirectly the US governments liabilities. So while I place the US in 3rd place for the next implosion, the US does have the ability to race past others during the next downturn to take first place. This will be determined by political choices made with the private debt. For now, it is apparent that the recovery, or lack there of, is now on the downswing. Small businesses outlook dims combines with starlings of resource cost issues. The US economy is going "no were" fast.

Timing WildCard

The Federal Reserve Bank or IMF may announce a new extend and pretend game. It may buy time, but it will only make the eventual downturn worse.

Closing

So there you have it. I may actually already start buying DXD again, since the fuse for the next downturn is lit. It could be tomorrow, or 3 months from now when things start to accelerate. One thing I have learned since 2008, that people will do anything, ANYTHING, and EVERYTHING to avoid doing the right thing. Extend and pretend will always be chosen until that choice is removed by force.

This Week in Charts

Finally, a market rebound. This week is options expiration week, so once again some games will be played. The market was extremely oversold, and a bounce was expected.

The question is, does the downturn resume immediately? Or is there some legs left in this rally?

I am playing it cautious, i got burned so many times trying to pick tops before, I want gifts.

First chart is S&P 500, and today we hit 10 EMA, but not yet 20 or 50. I think the 20 is in order (and so does happy john) before the decline resumes in earnest.

But who knows, the market could be so weak the market could waterfall decline.

Next chart is Gold, still no gift there, hoping gold hits bull trend to buy in.

Then we have DXD, double inverse short fund,....notice a change? the value is going up.

Throw in DECK and CMG for a couple of shorts to watch or join. To the charts!

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

This Week with no charts

I may do a chart post tomorrow, I'd like to see some action for Monday.

First, I highly recommend reading John Hussman's post about the US financial situation, a great read.

I read a very disturbing blog post by Gary of the smart money tracker, as part of his paid service.

It's disturbing because he reads this on a larger trend as I read it, and it isn't fun.

I'll paraphrase Gary, and leave out details (pay for his service), but the overall sentiment as me is spot on. It is very disturbing to read something he posts and it aligns so well with my own worst expectations.

It's no secrete that bloggers such as Mish, Karl Denninger, Slope of Hope, Zero Hedge, and many others found on the right of my blog all see doom and bad outcomes for the US economy. And many of the bloggers have been saying this market rally cannot last. And it looks like finally, the market back has been broken to the down side.

But how this unfolds really needs to be seen. Here is what I expect (and is echoed by Gary, 95%)

• Market will decline from here, with some nice counter rallies, but none will break the high made of S&P 500 of 1370 (or if it does, very short lived).
• The market at some point will decline enough, and create panic enough to ease the political environment for the Federal Reserve Bank to do a QE3, or something akin to that.
• The markets will rally....HARD. So hard, it is apparent that the market will break the old highs (or if it does, short lived), but then the markets will fail.
• Net result will be a stock market that implodes, down to 2009 lows (or somewhere near it). Real unemployment shoot higher, and commodity prices surge.
• It will be a one two punch, that will cause great strain on everyone in the USA.
• QE4, Qe5, or ANYTHING other than what I have been saying since 2008 will result in economic disaster. The laws must be enforced, the criminals put into jail, the losses taken by private sector, and the government must get its fiscal house in order.
• US Dollar for near term (until QE3) will rally

Now, it is key to understand I DO NOT believe in fate or destiny, just probability. And I see the probability that the western countries are lead by immature people, over an immature populous, not willing to take on hard work to address core issues. As such, the wrong choices will be done, until the easier choice is the right one. And what I have been posting about is the right one, and it will not be done until there is nothing else to lose.

Key points to take are:

1) The stock market will continue to be depressed (With nice rallies)

2) Natural resources will rise in price out of the next deflationary collapse, at accelerated rates. Gold will do very very well.

3) Federal reserve will do a booster shot, it will look great for a while, but it will fail

4) End game is market collapse, high unemployment, resource costs skyrocketing, housing prices collapsing, interest rates sky rocketing OR credit is just hard to get.

5) The outcome is not determined, and could change if USA gets serious about cleaning house.

Fun

Jim Rogers

I listened to this interview on Financial Sense News Hour yesterday, it was pretty good and inline with most of my views.

You can listen to the podcast by clicking the link above, or listen using this youtube version.

And although Mr. Rogers is has a poor view for the USD, he is bullish for now, as I am.

Market Commentary and blog template update

The market has fallen about 6.5% since May 2nd, when the market hit the top of S & P 500 at 1370, now at 1280.

I went back and looked on the blog my thoughts that day. One of the great aspects of a blog, its a journal to see how you react as events unfold.

On that day, it was the day I panicked and hit out of all silver miners, most gold miners (non-core) and in general the market. I do remember how I hit the bids on the market open, only to be a little pissed the market did bounce during the day.

Looking back, being off by "hours" from the high of the day was meaningless as compared to the market trend in the weeks to come.

So for readers that followed me, it was a good decision, that granted, I did out of shock and awe of the silver collapse. But that collapse seems to have been the catalyst for an overall market trend change. They key item to look for a new "lower low", meaning the market trend breaks the last meaningful low at SPX 1250. Once that level is convincingly broken, it will show market chart watchers the market has changed in direction.

That coupled with my post on Monday, it doesn't bode well to be long.

The blog has been updated to have "prettier" view for phone. Blogger updated the site to detect phones and make the formats easier on the eyes.

Good luck, and its cash cash cash, or for those more daring, shorts!

US 30 year bond rate trend

Recently, the 30 year bond rates did break above the downtrend starting in 1987 to today. The rates are now falling. The key trend line now to watch is to see if the uptrend from 2008 can be reversed.

If rates do not resume downtrend, dare I say, inflation is here. So far, I can't make that call, and deflation is the word to use since 2008 primarily.

From WebSufinMurfs FinancialBlog2

Former Reagan assistant Treasury Secretary Paul Craig Roberts

Max Kaiser tends to be a bit flamboyant, and over-the-top with his comments.

But it is interesting to hear Dr. Paul Craig Roberts, former assistant US treasury secretary under Reagan talk.

This Week in fortune telling charts

What is the point of looking at stock charts?

There are some charting religions out there including Elliot Wave Theory, Cycle Theory, and I am sure a dozen more. I have come to realize I don't believe in Elliot for fortune telling, and Cycle works, mostly, and nothing works all the time.

What I try to look for is a large running trend, and form a trend line to use as a "signal" that the trend is probably changing. This of course, does not always work, but you need an indicator to keep you focused on what side of the market seems best.

So today I investigated the S & P 500 (SPX) market trend from 1994-2003, 2001-2009, 2009 to t0day. I went back and drew trend lines to see how accurate this fortune telling method is.

In addition, I created two types of charts for each period in time, one is linear, meaning normal charts you always see. Each value is equally positioned to the next value, like graph paper.

The problem with this type of charting is it doesn't indicate PERCENTAGE relativity to each value. For example, 500 to 600 is a 20% gain, but 2000 to 2100 is 5% gain. The lower the value, the more each change is a greater percent of overall value change.

To graph this, you use Logarithmic graphing, where the distance between values on the low end are farther apart, but as the values go up, the distance between lines is closer.

This shows the MAGNITUDE of change relative to value, a much better indicator of percentage change.

The goal of this exercise was two fold for myself.

1) Does large scale trend charting indicate anything worth while?

2) What methodology historically has been best indicator when a trend has changed?

In the charts below, the green line is the overall long term trend line.

The blue line is a secondary trend line that can be drawn in a shorter timeframe, typically as a bubble accelerates before bursting.

Short summary for each group, then at bottom a summary.

1994-2003 - Log then linear

Logarithmic clearly gave better warning than linear for long trend, basically a tie for shorter trend line (blue line).

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

2001-2009 , log then linear

The logarithmic clearly gave better warnings in the long term trend (green line) and about same as linear for shorter term trend (blue line).

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

2008 - 6-5-2011 - log then linear

The jury is out of course where the market heads from here. I couldn't find a decent "short trend line", which is disturbing, maybe a bubble acceleration is yet to come?

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Conclusion

In the long term trend line perspective, the last 20 years, with the last two major market bubble bursting, the logarithmic chart was a much better warning to sell out of the markets ASAP then linear. Unfortunately, two data points does not prove much. And I don't have the time and energy to go back to the last 8 market declines to get a better trend pattern.

But one thing IS for certain, this past week, using logarithmic charting, we have a warning shot, the trend may be changing. And when a trend changes, it tends to lead to significant declines by recent market standards (1994-today).

One other indicator is the long term trend signal that has been extremely accurate for long term investing for the last 50 years. You can read more about this method here. Although this indicator hasn't tripped yet, it does seem to be starting to curl into that direction. (click here for latest chart)

UPDATE 8-10-11: Fortune Telling Stocks, Revisited

Can taxing the rich solve US financial problems?

I have gotten into quite a few debates on how taxing the top income CANNOT alone solve US debt problems.

At a high level, this much I do know, about US budget in 2011. The budget is projected to be at 3.8 Trillion, with 1.5 trillion in DEBT spending. So how to close this gap?

The topic has been brought up "tax the top 1%"......so how much does the top 1% earn per year? In 2008, the top 1% eared 1.6 trillion. Now here is the trick...how much to tax the top 1%? First lets talk about the capabilities of this demographic. The richer you are, the more likely that person is a globe trotter. Such wealthy may have houses in multiple countries, and may even have ability to move to those countries (dual citizenship).

At top 1% of US earnings, it is safe to say, that the people are mobile and could just leave if pressed. So lets pick a nice, hard, percent that is draconian, but not unpayable.....say 50%.

Think about that, for every dollar they earn, take 50 cents. Thats pretty heavy handed. And lets suppose these people are nice, and stay in the USA and don't leave. Further, they take their savings and continue to re-invest with such stiff taxes.

I think these assumptions are ridiculous...but lets go with it.

So now the government is collecting 800 Billion from top 1%. Now the Budget deficit is 700 billion.

What to do now? I know, lets go after the entire top 5%. Lets have same assumptions, no body leaves, everyone continues to invest, and pay their taxes, and business level remains same. I don't believe, but lets run with that.

Top 5% total income in 2008 was 2.9 trillion. Of that take in taxes 1.45 trillion. Now we are talking! But wait, those people do pay taxes today....so how much is that? 605 million. OK, so take away 605 million from 1.45 trillion. and thats about 845 billion.

HMM, this isn't working out...we still can't close the budget deficit. I know, lets go to top 10%!

Their earnings total 3.8 trillion, 50% income, 1.9 trillion, minus taxes currently paid of 721 million, leaves about 1.2 trillion new money to cover US government budget. ugh! We still aren't over the line for paying US Debt for one year!

Lets go for it, top 25%, total 5.6 trillion, 50% taxed, 2.8 trillion, minus taxes currently paid of 890 billion equals 1.9 trillion! Woot! deficit covered.

So we can tweak the tax rate from 50%, to 45% to just cover the US budget deficit. Now those people can pay for state taxes, sales tax, etc. Not sure what the total tax rate then is, but I hazard to guess closer to 60%.

So lets see who these top 25% people are? Why they are people earning more than 67,000 dollars!

NOTE, none of this took into account increasing taxes on businesses. This was targeting individuals. I am sure between taxing the companies and people more, less draconian percentages than 45% can be done. But the purpose of this post is to put PERSPECTIVE on the numbers, and the more realistic solutions. America is already among highest tax rate for corporations, and they are mobile, and will leave.

So are you in favor of raising the taxes to pay for US annual deficit? If so, I encourage you to look at the numbers here and here, figure out what works. Also put your assumptions on how people will not alter their behavour and the tax rate can be maintained.

Then look at it, ask others, how realistic is it? Dare I say you will come to one conclusion.

The US MUST CUT BACK ON SPENDING! Period. End of story.

Now, lets go to crime scene number two. The banking industry. The US government has taken on Freddie Mac, Fannie Mae, and the Federal Reserve bank has been buying bad loans at face value. Throw onto the pile AIG, GM, Citibank, Bank of America, and others that have either taken huge money from US government or have been taken over.

Freddie Mac debt it holds is about 2.6 trillion. Fannie Mae has about 869 billion. The Federal Reserve Bank has purchased 917 trillion of what is likely, the worst debt available (pennies on the dollar).

Those three alone total 4.3 trillion. Throw on the government backing of debt from Citibank, AIG, Bank of America, and others, dare I say, its fair to guess 5.5 trillion (if not much more) is involved. Now this debt isn't worth zero, but I say its not accurate at fair value. If it was, the government could return to mark to market accounting practice as was in place from the Great Depression through 2008. So what is its true value? No one knows.

But lets assume that its worth 33% less than face, and eventually the US government will pay for it. Mind you, I think reality if 50% or more loss, but lets be nice, and say 33%. 5.5 Trillion = 1.8 trillion more debt.

And NONE of this includes the cost of future Medicare and social security payments.

Taxation will not, and cannot be the only solution, we must cut spending across the board, and stop playing pile on with private debt on the backs of taxpayers.

Taxing Irish citizens for 20 years for bank losses

Interesting video about Ireland Banking failure, and resulting debt placed on Irish Citizens.

Ireland is bankrupt, its only a matter of time that they will return to economic wasteland once again.

It is very unfortunate, the answer was simple. Let the banks that gambled take the losses and free Ireland from gambling debts of banks.

That of course is not what has happened.

Also the bankruptcy laws in Ireland are draconian. That country needs same laws as America, if underwater, opt to give the house back to the banks. Instead citizens can be put into jail.

Inflation, Deflation, and global currency wars

America is involved in many wars right now, lets list them shall we?

1. Iraq
2. Afghanistan
3. Libya (See War Powers Resolution, and how law is ignored. )
4. War on terrorism (Bin-laden...recent military action)
5. War on drugs ( Mexico's border is flaring up badly )
6. Currency War
7. Arguably, a global simmering trade war

Wow, thats quite a bit of wars! The first three are relatively easy to grasp by most people. The countries involved are "over there" and we send military to change a political situation.

The next two are a bit more complex, as it is arguably everywhere in the world. The shape and form however to bubble to the forefront when clashes occur. It could be in the form of the bad guys killing people, or a counter attack by the good guys (USA). Again, within reason, graspable.

The last two are very subtle wars, Currency and Trade wars. Each take their own form and shape of political maneuvering, like a very big chess game. Spectators watching may not easily grasp all the various possible moves and 10 moves ahead the players are planning for.

The USA made some very shrewed policy changes in it's day, one of the least recognized is what Nixon was able to do. At that time, the US dollar was the defacto standard for currencies. However, the US dollar was convertible to gold. America had started accelerating it's budget imbalances, and other countries were asking the US for larger and larger gold conversions.

Nixon's administration assessed the situation and realized the world would have no choice, but to support the dollar even if it became a pure fiat currency. At that time, America was a manufacturing and military powerhouse. The shackles of money tied to shiny rocks was eliminated, and America could do what it wishes with it's currency.

The chess play here is simply this. Say, other countries want to trade with America. And lets say that America gives US dollars in exchange for goods at a rate that is "unfair" to the other country. Let's assume America isn't providing valuable goods back to the same country and the deficit is basically IOU's in the form of dollars.

Countries COULD turn around and dump the US dollars, in exchange for other goods and services from other countries. It could even invest that money back into the USA by purchasing assets. But if they did so, that would apply pressure on THEIR FIAT currencies to rise, as their currency would gain strength relative to the over-printing of US dollars.

This you would think is a good thing, and in many ways it is. But the net effect would be that countries exports would go up in cost relative to any other country that is prices relative to US dollars. Over time, as the US deficits spends more, their currency would rise high enough to cripple exports.

What to do? Simple, keep US Treasuries or cash and sit on it. Each year allow your holdings of US dollars to build. Since the global currency system is based on fiat currencies, each currency floats RELATIVE to each other. And since historically (since WW2) the trading patterns have been dependent on US dollars, the world has been forced, and WILL CONTINUE to be forced to finance the US over-consumption and lack of production.

Fast forward to today, and the US is deficit spending 1.5 trillion per year in ADDITION to the revolving bond debt that matures on the outstanding 14 trillion of debt.

Now, lets turn to China!

China's currency does not float, and China aggressively locks their currency to a very specific level to US dollars. So while other countries may somewhat try to keep their currency stable to US dollar trade, they do allow a bit of flexing to help ease economic imbalances. (think Euro hitting all time highs against USD).

China however does not. So what possible effect could this have? China's command economy dictates that politicians set policy to maintain the currency imbalance with respect to the USA. This has the unfortunate side effect of excessive credit and currency in their own country, resulting in inflation.

Inflation in China is high right now, and China has been fighting hard to keep prices stable for it's exports, including to the USA. This relationship has been maintained since Reagan, and is partially responsible for the US corporation exodus to China.

Well today, I see a crack in this relationship. China is allowing electric costs to rise. That will in turn force manufactures to charge more. That will result in prices from China to rise. (think Walmart, or Apple) Apple btw, to their credit is heading this off by diversifying suppliers. And despite the US economy being in a fragile state, we may see prices rise in stores, beyond the recent food and gas price surges.

The situation is of course, unsustainable. But that won't stop everyone from keep on doing what they are doing know. The US will continue to deficit spend high amounts. China will continue to try to keep it's currency stable vs the USA. But once rising prices start snowballing out of china, this game will change in shape, form, size, and velocity.

The global economy will take a turn for the worse as China tries to redirect rising prices back out to America and the world.

We live in interesting times.

Japanese Nuclear Reactor update via CNN

Click on link below to watch a video well worth watching to see how close Japan was to losing a large part of the nation.

Japan was very close to 3 Chernobyls.

Quote "Japanese children will be exposed to 20 times radiation than typical nuclear workers are exposed to."

Japanese PM's Assistant Quit Because He Didn't Want His Children Exposed To More Radiation

And worse yet, the reaction can re-escalate at any time!

This is a GREAT example of how the media hypes up news not worth the hype, and plays down news that deserve's higher critique and hype.

Thanks to Ryan for link.