Financial Sense Blog

Last week, the Financial Crisis Inquiry Commission (FCIC) presented its results to the Financial Services Committee. As with most other politically-appointed commissions, the results of the FCIC's investigation were easy to predict. Established by the same congress that gave us national healthcare and with a majority of its members appointed by those who seek to solve every problem with more government intervention, it was no surprise that the commission's findings would favor increased government intervention in the economy.

Bernanke is playing a dangerous game of dominoes.

The following is commentary that originally appeared at treasurechests.info for the benefit of subscribers on Tuesday, February 8th, 2011.

Factors that should contribute to this outperformance include (1) an accommodative monetary and fiscal policy, (2) investors returning to the equity market (see note below on the ‘torrent’ of funds returning to the equities market), (3) reasonable valuations of stocks in the sector, (4) a positive and improving business outlook, (5) price momentum/persistence/relative strength in the equity markets, and (6) merger, acquisition and deal making activity.

In the long term, QE2 is obviously not a sustainable course. Nonetheless, QE2 can continue as long as (1) the United States remains politically stable, (2) the U.S. dollar remains the world reserve currency and (3) the value of the U.S. dollar strengthens, remains flat or decays in a controlled manner, i.e., at a relatively stable, gradual rate. Although Bernanke clearly believes that the risks are contained, the Federal Reserve’s policies are, in fact, debasing the U.S. dollar and have already guaranteed the end of the U.S. dollar as the world reserve currency.

I predicted this just four weeks ago in TH*NK*NG (PENSIONS). I just didn't see the first salvos coming from Madison, Wisconsin.

Today we're seeing the correct reaction from markets in the face of such widespread insurgency. Oil, gold and silver are exploding to the upside, while stocks are plummeting as investors seek real safety in those commodities, and abandon the U.S. dollar for the beat up piece of spent jet trash that it is. But not all stocks are plummeting.

We have not completed two months of 2011 and in the year so far we have seen attempted revolutions in Middle Eastern countries, with so far two of them successful. All of them have been unexpected and have caught the world by surprise. We are on the brink of the next successful revolution [Libya] disrupting the oil market and taking prices so high that we are likely to see them negatively impact on growth in the developed world.

We as a nation need to understand that the problems we face are not ones that can be dealt with by business as usual. Keynesian stimulus is precisely the wrong medicine. The problem is one of too much debt. We were promised by Bernanke in 2002 that if the Fed moved out the yield curve, long rates would come down. The opposite has happened. Since the beginning of QE2 mortgage rates have risen by 1%. The yield on the ten-year bond is up over 1% since the announcement of QE2.

The SPX very long term monthly exponential moving averages will be in full bull market alignment as soon as the 20 moves above the 50, which appears to be imminent.