“The bond market is the backbone of the US Ponzi Finance system. When it goes – and the day is not far in my opinion – the whole enchilada will come crashing down. Any type of financial asset that has a counterparty – which is pretty much all the paper assets in the world – bonds, futures, any and all derivatives and yes, even the paper currency – will crash. What will they crash against? Yes, that’s right – Gold.

All the world’s capital – trillions, perhaps quadrillions of it – will come rushing into the very tiny physical (NOT paper) Gold market. Remember, the world’s real physical capital – real assets such as land, oil-refineries, mines, infrastructure, etc. will not vanish, only it will be re-priced in terms of Gold and its ownership transferred to those who hold it. Since everything stays on this planet, it is a zero-sum game and the winner will be Gold. In other words, an ounce of physical Gold will command a lot more in real purchasing power than it does today. Just like a national currency is a claim on goods and assets within that country, Gold will be a claim on global goods and assets worldwide.”

Double our Treasury Holdings?! LOL!

“The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”

From Shanghai Daily

I almost choked on my drink when I read this. I could not believe that this guy is out there pulling the same stunt in front of the same people yet again. Honestly, how dumb do these bankers have to be to believe this guy?

If I were Japan or China I’d be clamoring to get out of my dollar holdings as quickly as possible. This charade has been going on long enough, but I guess the Japanese and the Chinese take Tim Geithner’s words at face value:

TOKYO — U.S. Treasury Secretary Timothy Geithner said Wednesday that maintaining a strong dollar is “very important” for the country’s economy, sticking to his mantra on foreign-exchange policy as the U.S. currency continues its broad downtrend.

“I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar,” he said at a roundtable discussion with Japanese reporters. “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and .. savers but investors around the world” that the U.S. will fix its budgetary problems as its economy improves.

One word for you: BULLSHIT!

Take a look at this point and figure chart of the US Dollar Index. I have annotated it so that the Japanese and Chinese bankers can better understand the meaning of Mr. Geithner’s rhetoric:

Strong Dollar Policy

As you can plainly see, it’s backwards day at the treasury…every single day. It’s no wonder there is so much chatter about creating a new reserve currency. On top of that, it’s no wonder gold is currently trading at $1,121.00 Just take a look at this annotated gold chart as well:

2009 Gold Price Chart

It’s also no surprise that countries such as India and China are buying gold like it’s going out of style. I think India’s reasons for buying gold have more to do with the fact that the India SBI Prime (Prime lending rate of the State Bank of India) is up around 11.750% and less about diversifying reserves, however, this is merely conjecture.

I have written about our now infamous “Strong Dollar Policy” before. Additionally, I have written about the Global Experiment in Zero Interest Rate Policy that we are currently living through. Not only that, but I have also written about the Death of The Dollar. All of these pieces of the puzzle are intertwined.

If things keep up the way they are going, our dollar may look something like this:

Zimbabwe $100 Trillion Note

Lucky for you, I have saved the best for last: Tim Geithner’s comments are quite hilarious towards the end of the WSJ article. I will first present you with the his quote, and then I will translate it so the Chinese and Japanese bankers can understand it:

“I don’t want to say more than what I’ve said in the past, which is that China has laid out this very broad direction of reforms’ to invigorate domestic demand, Mr. Geithner said. “It’s a very complicated mix of policy changes. As part of that, they’ve recognized that it’s in their interest over time to move to a move flexible .. exchange rate.”

Those reforms being undertaken by China “take time,” he said.

What Tim Geithner is really saying goes something like this:

“I’m going to keep my mouth shut about how screwed the US Dollar happens to be. If anyone asks I’ll just reply with ‘strong dollar policy’. If I say it enough maybe they will believe me. On top of that, China has been kind enough to tell us that they are going to systematically destroy our economy. Since the Chinese have agreed to do this slowly, this gives us the opportunity to feel the pain over what could possibly amount to many long years.”

The American economy is in the deepest economic depression since man started keeping track of artificially created economic events. I am pretty sure that I am not the first to tell you that the economy is not getting any better for your average person. Consequently, there are not enough retail investors who are both ready and able to prop up the markets. These same retail investors are the ones who took a hit in their retirement accounts on the way down to the print-of-the-beast: 666 on the SP500. So where is the money Lebowski?

One word, seven letters, two syllables: Bailout

I am a strong believer in the notion that the bailout money has been put to good use by propping up the markets since early March. The sad fact is that the bailout money is our money, yet it has gone to the banksters. It’s a pretty simple racket if you ask me. A bank such as Goldman Sachs, JP Morgan, Bank of America, or Wells Fargo goes to The Fed, trades some worthless collateral (mortgages, toxic assets, business cards, legal pads, office supplies) for dollars to shore up their reserves, and also uses the money to invest directly into the stock market. First they dial in some leverage at some ridiculous level…maybe 30:1 or higher like Lehman or Bear? Next, they buy low, tell all their analysts to lower their estimates, create a blitz of earnings that outperform said estimates, and then they sell high. The same stocks. Again and again. Maybe they use vector-vest for their investment advice, but I doubt it. So who are they selling the stocks to? Gullible retail investors who finally feel like the market is safe again, that’s who, and maybe some lucky foreigners too, although I think the world is waking up to the charade.

Well folks, this trend is unsustainable. In an era of throwing around buzzwords like “sustainability,” the financial industry knows not the definition of such a word. Let’s examine our trusty long-term chart of the Spider ETF (SPY) and see exactly why we’re in for some puzzling times. Ladies and Gentlemen, may I present to you: “Bernanke’s Conundrum”

Bernanke's Conundrum

We begin our charting adventure in 1994. Something happened and the market took off. They call this something “the tech bubble,” and what a bubble it was. The Spider (SPY) went from roughly 50 points to 150 points in the span of six years. Not bad, eh? A meager 200% gain in under a decade. A glance at the chart below will show you a clear picture of the tech bubble, AKA the first economic top.

SPY 1993-2009 First Top

If you will also notice, I have drawn a line from the start of the bubble to the top. The cool thing about my charting application is that it will draw these really neat little “fibonacci fans,” and sometimes they can be downright scary.

You can see that the second uptrend, which began in 2003 and topped out in 2007, coincided perfectly with the 61.8% fibonacci fan-line. It’s not really much of anything in retrospect, but it is pretty uncanny how the market oscillates along very natural and predictable patterns.

SPY 1993-2009 Second Top

We all know and love this second bubble. We love it the same way we love redheaded stepchildren. Apparently the dotcom crash was too much for The Fed to deal with and they decided it would be best to peddle adjustable-rate-mortgages to people with no prospects of ever repaying the banks who originated these loans. What a great idea that happened to be. Housing Crrrrrrrrrrash!

So here we are. We have come full circle, so let’s talk about what has happened in the last three years and try to understand what lies in store for the future. Have a gander at the chart below:

SPY 1993-2009 Support and Resistance

This final chart is Bernanke’s Conundrum. Interest rates are Bernanke’s conundrum. Inflation, Stagflation, and Deflation are Bernanke’s conundrum. This man is between a rock and a hard place that can be summed up with a Sheakspearian question that I have translated into financial-speak:

To inflate, or not to inflate: that is the question.
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous inflation,
Or to take arms against a sea of deflation,
And by opposing end them? To go into bernankruptcy.

Based on history, The Fed has let the dollar weaken for something along the lines of 97 years. To no surprise, this also happens to be the entire history of The Fed’s existence. That’s not a bad track record for an organization whose mandate is to control inflation and maintain price stability. In essence, they are doing a wonderful job. Inflation is always there, but it’s a controlled incline, so all is well. Additionally, prices are quite stable too. As long as stable means constantly increasing over time, then yeah, The Fed is a winner. They have always chosen inflation. They live, eat, sleep, and breathe inflation. Inflation is the lifeblood of the Federal Reserve.

With that being said, if you have been reading my blog for any amount of time, you will know that I absolutely love support and resistance studies. As I have mentioned before, you do not really need much more than a good support and resistance study to come to any kind of conclusion about the state of a given security and/or market. The beauty of support and resistance is that it tells the entire story in a few simple lines on a chart, so let’s examine Bernanke’s Conundrum via the SPY ETF:

I have chosen the SP500 for this study because it is a fantastic representation of the American economy. First look at the red line. That is a visual representation of the upper limit of the American economy over the last 15+ years. We hit a peak in 2000 and we crashed to the green line (around 800 on the SP500). In 2007 we hit the economic top yet again, and we collapsed to the previously established major support zone, albeit with a tiny (and scary) breakdown to 666.

Between the red and the green lies an orange line of uncertainty. This line is the neckline of the greatest double-top the world has ever seen, and it is the defining line in Bernanke’s conundrum with regards to inflation. If Bernanke decides to continue to inflate our way out of this, and the economy picks up, we will see the SPY go up-to, and possibly past this resistance line as the market breaks out above the 200 day moving average (the wide gray channel in the chart). I personally believe that if we see the kind of inflation that pushes the market higher than the orange line, it will be hyperinflation, and nobody likes that. There is no way that the Dollar can get stronger and the market go any higher. They are inversely correlated at this point in time, and when one gets weaker, the other gets stronger, and vice versa.

On the other hand, if Bernanke decides to land his helicopter and casually deflate this mess, look to the green line for support. Should he choose the deflationary route, the market will collapse to the lows at the $80.00 price level. Should the $80.00 level break down, you better put your head in the sand because the next major support level is slightly under $50.00

In addition to the inflation and deflation outcomes, Ben Bernanke can also keep the markets deadlocked between the green and orange zone ($80-110). This could happen considering he has only one real weapon left in his inflation-assisted-arsenal: rate hikes. I would venture to guess that he will not hike rates until the market surpasses the neckline in the chart.

In conclusion, the key issue here is not if we will test these support/resistance levels, but rather, when we will test them. It’s all a matter of time. I personally believe that this scenario will pan out at some point in the next 3 years. With a long-term strategy in mind, I prefer to simply pick a side and hedge it with an inverse ETF. I generally like to hedge 50% of my investment at the bare minimum. As the market changes, I can dynamically add-to or subtract-from either side of the trade and skew my bias towards one trend or another and take advantage of profit-generating opportunities as I see fit. How would you trade this? What do you think is going to happen? Leave a comment.

Ladies and Gentlemen, please make sure you are seated and in a well ventilated area! This article may be hazardous to those suffering from heart problems, the elderly, or those who are easily angered by irresponsibility.

Let me show you some wonderful charts I found yesterday while tinkering around on economagic.com:

The first chart should be titled “the giant sucking sound…” as in: the giant sucking of our hard-earned tax dollars swirling down the financial drainpipe into the reserves of the very criminal organizations which created this mess. As you can see in the picture, quite a bit of money has gone into the reserves at these banks. Of course, if you were a criminal banker, you too would shore up your reserves considering that you’re on the brink of insolvency.

Our Tax Dollars Hard At Work

This next chart is entitled “Hit em where it hurts.” The chart really needs no further explanation and will most likely be the only chart to make you feel quite good about seeing the banksters suffer:

Hit 'em Where It Hurts

Here’s a little lead-in for the final series (Quoted from Fed Governor Mishkin, Apr. 2007):

In a democratic society like our own, the ultimate purpose of the central bank is to promote the public good by pursuing a course of monetary policy that fosters economic prosperity and social welfare. In the United States, as in virtually every other country, the central bank has a more specific set of objectives that have been established by the government. This mandate was originally specified by the Federal Reserve Act of 1913 and was most recently clarified by an amendment to the Federal Reserve Act in 1977.

According to this legislation, the Federal Reserve’s mandate is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Because long-term interest rates can remain low only in a stable macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal Reserve seeks to promote the two coequal objectives of maximum employment and price stability.

Last, but not least, are my favorite two charts in the series. I call this series “End The Fed” for reasons which are pretty damn obvious:

End The Fed

In this first chart you can plainly see that the Federal Reserve has failed at the first part of their “dual mandate” of price stability. Although, some would argue that they have succeeded in maintaining a stable increase in prices over the last 60 years. Who are we kidding here? These guys are a criminal enterprise and should be abolished.

END THE FED

In the last chart you can plainly see that the fed royally screwed the pooch this time. Interest rates can’t save the unemployment situation now. Welcome to a decade or three of lost productivity. Don’t listen to me. Listen to the good people at CNBS who tell you that we’re in for a “jobless recovery.”

Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth, banks are going bust, shopkeepers keep a gun under the counter. Punks are running wild in the street and there’s nobody anywhere who seems to know what to do, and there’s no end to it. We know the air is unfit to breathe and our food is unfit to eat, and we sit watching our TV’s while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that’s the way it’s supposed to be.

We know things are bad – worse than bad. They’re crazy. It’s like everything everywhere is going crazy, so we don’t go out anymore. We sit in the house, and slowly the world we are living in is getting smaller, and all we say is, “Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials and I won’t say anything. Just leave us alone.”

Well, I’m not gonna leave you alone. I want you to get mad! I don’t want you to protest. I don’t want you to riot – I don’t want you to write to your congressman because I wouldn’t know what to tell you to write. I don’t know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first you’ve got to get mad.

You’ve got to say, “I’m a HUMAN BEING, Goddamnit! My life has VALUE!”

So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, “I’M AS MAD AS HELL, AND I’M NOT GOING TO TAKE THIS ANYMORE!”

I want you to get up right now, sit up, go to your windows, open them and stick your head out and yell – “I’m as mad as hell and I’m not going to take this anymore!”

Things have got to change. But first, you’ve gotta get mad!… You’ve got to say, “I’m as mad as hell, and I’m not going to take this anymore!”

…

Then we’ll figure out what to do about the depression and the inflation and the oil crisis. But first get up out of your chairs, open the window, stick your head out, and yell, and say it:

“I’M AS MAD AS HELL, AND I’M NOT GOING TO TAKE THIS ANYMORE!”.

…quoted from “Network” (1976)