Consumer confidence, of course.

We recently vowed to stop calling our national brethren “consumers” in favor of less degrading words — like Americans, citizens or just plain-old people. Thus, we report the Conference Board printed a surprisingly optimistic gauge of American consumption attitudes (doesn’t that sound better?) yesterday. After two months of decline, the index kicked back up to 54.1, just shy of a 2009 high.

Coupled with the latest printing of the home price index, that was enough to keep this mega-bounce alive and kicking. The news shot the S&P 500 to a 1% gain within moments of yesterday’s opening bell, which eventually faded into a 0.25% advance. The index is up almost 4% in the last five trading days. The Dow hasn’t fallen for six days in a row.

We accept that improving consumption attitudes could bump stocks higher, especially retail. But we wonder… do consumption attitudes lead markets, or the other way around?

Seems like Joe Six-pack is routinely late to the party, no? We blew the post Lehman crash, stayed gloomy during the best of the stock rebound, got bullish in June when stocks went nowhere and lost confidence last month when the market shot up again.

So what does a big improvement in consumption attitudes tell us now? If anything, that the stock rally is about to cool off.

“Retail is a terrible business to be in during a recession,” says Dan Denning, belaboring an obvious idea that seems lost on the world right now. “Don’t forget the primary economic and social trend right now: People are reducing their debts. They are cutting back, becoming more frugal and learning to live within their means.

“Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks.”

Source: Can Consumers Lead the Market?

Generally, we like it like that. It makes us feel special. Instead of pulling up our knee socks and getting out our pompoms along with the mainstream media hacks, we remain ever sceptical about tales of recovery… of so-called “green shoots”… and, above all, of Washington’s empty promises and various boondoggles.

But once in a while, it’s nice to know you have friends… that people far smarter than you share the same opinions as you do.

So it was with much delight that we opened up the latest King Report from honorary underground investor Bill King – a Wall Street veteran of 30 years.

King, an analyst with M Ramsey King Securities, Inc, understands something we hold as a central tenet here at Notes: the inside world of Wall Street is far different that what is disseminated to the masses.

So how does King view the “green shoots” recovery and the recent rally in stocks? Well, some points will be familiar to Notes faithful. King says that:

1. “Green shoots” are just another Bernanke equivocation and Street yearning
2. “Insider” banks have fleeced patsies for necessary capital
3. The dollar, bonds and commodities keep checking the Fed across the big game board. And in order to avoid being checkmated, the Fed has been forced to sacrifice stocks
4. The current “second derivative” rally, which is the latest permabull/Street shill euphemism for “dead cat bounce,” is occurring on very poor technicals. As we pointed out yesterday, volume is contracting, which is contrary to the start of any bull market. And leadership is by the misfits, which is never good.

But King also brings a lot of new insider intelligence to the table. And, boy is he suspicious of the “green shoots”/V-shaped recovery story being churned out by the mainstream media.

King points out that the Prince of Darkness himself, Goldman Sachs boss Lloyd Blankfein, recently stated that this is not a recovery, that the recession will be “long and protracted” and that any recovery would be “shallow.”

As we’ve noted on numerous occasions, Blankfein is the insider’s insider – he certainly has the ear of Treasury Secretary Geithner and former Goldman alumnus Larry Summers, President Obama’s chief economic advisor.

What really caught our eye, however, was King’s assertion that the “deflation trade is back in vogue.” Short term, this means stocks and commodities should fall and bonds and the dollar should rally.

As we said before, the Fed can’t afford to let long-term bond yields to rise too much: this trend, if were it to continue, would push up mortgage rates and kill off even the remotest possibility of a housing market recovery. And with 30-year bond yields pushing 4% yields, it was clear that something had to give.

The problem for the Fed is that massive budget deficits mean a massive increase in supply of Treasurys and the threat of higher yields. And this puts further pressure on the Fed to monetize the debt by buying back bonds. As King puts it:

Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward… leading to a serious problem down the road.

The Fed, dear reader, is boxed in. If it doesn’t step in to monetize the debt (by buying bonds from the Treasury with freshly printed dollars) the excess of supply over demand in the US Treasury markets will push up yields… and therefore borrowing costs across the entire economy.

If it decides to monetize the debt, it will push up inflation expectations (the more money in the system the higher the likelihood that this will translate into higher inflation rates) – and yields will rise anyway.

The only real solution would be for Congress and the Obama administration to lower federal spending – and as this has a snowball’s chance in Hell of happening. Team Obama is on a spending binge that makes a recently dumped Valley Girl armed with her daddy’s platinum card look thrifty.

We’re sticking to our script – deflation now, (hyper)inflation later. There is simply too much pressure on the US economy to give the authorities – who are largely responsible for the current mess in the first place – room to wriggle.

Of course, the big market movements will happen on the back of the Fed’s upcoming (at the time of writing) policy decision today.

We note with interest that the Dow has risen by an average of 2.5% on each of the past four Fed decision days. Three of those four rallies were followed by sharp declines that erased the gains.

This should speak volumes to those of you who still think we have a free market.

This is important. Because investors who fail to grasp the government’s role in the market will sooner or later get seriously burnt. None of us live – or invest – in a vacuum. So the question is: how much do macroeconomic conditions determine the reward you earn from your efforts?

According to crisis investor James Dale Davidson, macro conditions determine more than you think. In the upcoming issue of James’s investment research service, Crisis Strategy Alert, he hones in on the implications of America’s ballooning unfunded liabilities – and what this means for your financial future.

James’s message is simple: get out now while you still can.

Clearly, US politicians were thinking ahead when they established the peculiar system of taxation that made income taxable by citizenship rather than residence. If the US taxed as almost every other country does, by domicile, the airports and ports would be crowded with people heading for the exits.Even so, I still think there may be a strong argument for getting out. Unless you are convinced that the fiscal and monetary framework, the tax regime and the prospect of monetary disruption are almost completely irrelevant to your prospect of success, you have to recognize that the United States faces dire straits in the years to come. Weimer Republic, the sequel, is almost a best case scenario.

The primary Social Security deficit has already kicked in. Already, less money is being taken in through payroll taxes than is being paid out to retirees. The forecast that the Trust Fund will be depleted in 2016 counts accrued “interest” owed by the Treasury to the Social Security account. This is a noble fiction, much like borrowing money from your left trouser pocket, placing it in your right pocket, and promising to pay interest to your left pocket on the money you proceed to spend.

Equally, almost $90 trillion of the unfunded entitlement debt is owed for medical entitlements to retirees. It is far from obvious that hyperinflation would obliterate these obligations, rather than raising them to a higher nominal value.

The real issue facing the US economy is that it is being bankrupt by the accumulation of social costs. In almost every field, costs in the US have hypertrophied – largely, I believe, as a negative consequence of long-term US stability.

James’s views are not for the fainthearted. And the recommendations in each monthly issue of Crisis Strategy Alert are nothing if not unconventional.

But if you’re interested in learning about profitable alternatives to the status quo and you want to make money from the continuing economic collapse, James’s investment research and macro reports are exactly what you’re looking for.

To take a 60-day risk-free trial of Crisis Strategy Alert, simply click here.

But today, I am writing to you about something that affects me on the most personal level (I’ll just bet it affects you the same way too), and I’m really ticked off about it.

Bandits in Academic Robes

I’ve got a statement in front of me right now by Gregory Mankiw and Kenneth Rogoff, baldly stating that they wish to take away a major portion of my hard-earned money (and yours) for years to come – and give it to idiots.

Rogoff and Mankiw are your classic ivory tower types who spend their adult lives hiding out in the nooks and crannies of our shadow government, pontificating on how the little people ought to live.

Mankiw has degrees from Harvard, Princeton and MIT, and did a stint as the Chairman of the Council of Economic Advisors. When he wasn’t busy demonstrating his skills as a chess prodigy, Rogoff managed to collect sheepskins from Harvard, MIT and Yale. Both get their schemes and rants published regularly in the top economic policy journals.

In Too Deep

Some say these are real smart guys. Certainly their word is trusted as cant in the highest circles of the land. They are exactly the kind of clowns who got us into the mess we’re in these days. So when they propose to rob us blind, I get worried – and I get mad.

These wise guys have looked around at all those poor folks who are drowning in debt: garden-variety rubes with insane mortgages no one could service… crooked corporations with loans they can’t pay off… banks that are (STILL!) sitting on toxic bonds – even Washington itself, which is now borrowing a dollar for every two dollars it spends.

The conclusion they have come to? None of these fools can possibly pay off this debt the way things are currently structured. Just can’t be done. The capital alone is mind blowing, and the daily accrual of interest is staggering.

Washington’s Secret Tax

So they have come up with a way to force you, me, and everyone we know to pay it off for them – in essence, by way of a massive secret tax that will never get voted on by Congress or be signed by any president.

Here’s how their scheme will work: They propose that Washington deliberately jack up the inflation rate three-fold. That way, all those folks who borrowed dollars of a certain size – that is to say, dollars that could purchase a certain amount of goods – could pay off those debts in dramatically smaller dollars that could buy a heck of a lot fewer goods.

Let me try and demonstrate in the simplest of terms why this is great for idiots and terrible news for regular, normal, virtuous folks like you and me.

The Wages of Sin

Let’s say you lent your ne’er-do-well nephew a hundred bucks when a strong dollar could buy a dozen eggs. Instead of investing that money in, oh I don’t know, chickens and feed, he spends that money on what he usually spends money on – horses and beer – with the usual results: a hangover and not much else.

Now his current paycheck is $10 a week, and he’s got to cover room and board with most all of it. (Yeah, I know, my wage figures are a century out of date, your nephew would never settle for a loan that small, and nobody buys chickens anymore. But they are nice round figures that are easy to understand, so let’s just go with them for now.)

It would take him a hundred years just to pay back the principal. As for interest? As they say in Jersey, “fergeddaboudit.” But what if he could earn $20 a week, without working any harder (which is good, because we all know that his allergy to working hard is what got him in trouble in the first place).

Now he can pay you back much faster, right?

Robbing Peter to Pay Paul

Yes and no. But mostly no.

That is to say, yes, your nephew could pay you back, but the only way to make double the paycheck without double the work is to halve the purchasing power of each dollar.

So while he suddenly can pay you back, each dollar he pays you can only buy six eggs. Oh and by the way, each dollar you work for at your decent job can only buy six eggs too. Also, all the money you have worked so hard to save? It just got cut in half too.

This is what Rogoff and Mankiw (and Bernanke, Geithner and Obama too, for that matter) are proposing. The only way we can avoid a massive tsunami of defaults that would make the current round of Wall Street failures and house foreclosures look like a frog hiccupping in a small pond, is to deliberately induce inflation rates between 6% and 12% for years to come.

That way, all those folks who are up to their neck in it can pay off in cheap, watered-down dollars. And all those folks like you and me, who work their rears off, save against the future, and pay off debt whenever possible? Our savings and paychecks, even our stock market gains – all denominated in dollars – get watered down too.

This Is Really Happening, and It’s Happening Right Now

Think this is just theoretical? That I am just another one of those cranky ivory tower types too?

I used eggs in my example on purpose. This week, the Labor Department announced that they have climbed 40% in the past month. Nor are eggs isolated in their increase. Also setting new multi-month highs this month are beef, cotton, coffee, vegetables, crude oil and gasoline.

View Larger Image Here

This is no theory. No sour griping. Anyone involved in dollar trading knows it’s happening already. Just take a look at the dollar index chart above and you can see that the wise guys are already bailing out.

They know the truth: Washington is looking to rob us blind. And this time, I am taking it personally.

Source: You Are Being Robbed!

Good day… And a Wonderful Wednesday to you! A total reversal of Friday’s risk assets sell off was the soup du jour for Tuesday… This is beginning to remind me of a Wayne and Garth street hockey game… Here comes a car… Game off… Game on…

So, as I just said, Tuesday saw the currencies trade right back to the levels they enjoyed VS the dollar last Thursday, before risk assets began to sell off on Friday. These are the types of trading patterns you normally see when the assets involved are getting ready for a break out… A jail break… Tonight there’s going to be a jail break!

OK, I’m not saying that the jail break takes place tonight, I just broke out in a song from the 70’s… That’s all… Seriously though, I hope we’re seeing a return to fundamentals.

Speaking of fundamentals… I guess yesterday just shows me that I shouldn’t (and neither should you!) pay attention to the cable news, eh? OK, remember yesterday, I said this: “I saw a news story on the TV yesterday that said “Home Builders were seeing a pick-up of new homes being built”… Well… That should be our indication that Housing Starts for April will be stronger! See how easy this stuff is? HAHAHAHAHA!”

And what happened? The government reported that construction on new housing projects slowed to a record-low pace in April. Don’t expect Housing to lead us out of this recession / depression folks!

Stocks rebounded too along with currencies yesterday… Long time readers will recall that I’ve pointed my finger at the PPT a few times in the past… Well, I’m pointing it again! Don’t know what I’m talking about here? Well, you see the PPT (Plunge Protection Team) was created by President Reagan after the stock market crash of 1987. It consists of major players (financial institutions) and their job, when called on, is to provide support for a falling stock market. And, what’s the reason for me thinking this has happened now? Well, Friday you would have thought the stock rally was over, but an “Indian election result pulls U.S. stocks out of the fire?” I’m not buying it! This rally has somebody’s finger prints all over it…

A news story at the top of the screen this morning says, “U.S. said to consider stripping SEC of power, shifting duties to the Fed.” Hmmm… Doesn’t that bother you? We had this independent regulator (yes they dropped the ball with Madoff, among other gaffes), and the Gov’t is thinking about shifting it to the Fed? Yes, I know the Fed is not a Government division… But… I don’t like a regulator being directed by the institutions that own the Fed… It’s like giving the fox the keys to the hen house!

OK… A week or so ago I talked to you about the 200-day moving average… Explained it all, and told you how the dollar index had fallen through its 200-day moving average, which would indicate further declines for the dollar index. On May 8th, the euro moved higher through its 200-day moving average and then went on to gain almost 2%… There’s another currency that’s moving stealth-like up to its 200-day moving average… The pound sterling! Here’s the skinny as I see it… Pound sterling’s 200-day moving average is 1.5554, the current level of pound sterling is 1.5480… Within spittin’ distance!

And while we’re following price charts… I see where a new “player” has jumped on the Chuck, Mogambo, Bill Bonner, and others Gold Bandwagon! Gold has gained 6.8% since the last low on April 17th, and an analyst at BNP Paribas believes this is an indication that Gold will trade to $1,096 in the coming months, as long as it does NOT fall below key support at $880…

Charts people are interesting, in that they can come up with things that you can’t see with the naked eye!

All I know is that the fundamentals point to a higher Gold price, and fundamentals are what cause trends to happen, and together they are the straw that stirs the drink… Everything else is just an explanation of what happened or what they “believe” will happen. But none of it takes place without the fundamentals creating a trend…

And speaking of Gold and fundamentals… Recall, that I’ve coined Gold the “uncertainty hedge”… And this morning we have more “uncertainty” in the world… According to the Washington Post, Iran has fired a test missile overnight that has a range of 1,200 miles, enough to reach Israel or Southern Europe…

The data cupboard is empty today, so we’ll have to depend on a testimony by Treasury Sec. Geithner to the Senate Banking Committee on TARP… Speaking of TARP, I read a story last night, in between innings of a 3-0 shut-out victory by my Cardinals over the Cubs, that detailed how some Major Banks are discussing the repayment of TARP with the Treasury Dept. I see the Treasury Dept balking at this… Why? Because, the Gov’t wants control of these institutions, folks… And they can’t have control over them if their tentacles aren’t all intertwined in the banks…

I know that this is a touchy subject… But here’s another example of the Gov’t taking over control… The Senate overwhelmingly passed a bill that would sharply curtail credit card issuers’ ability to raise interest rates and charge fees… Yes, these institutions took advantage of people for years… But! They also provided credit to people that “signed the papers agreeing to the terms” I’m NOT talking about whether its right or wrong to raise interest rates on credit cards to “stupid” levels… I AM talking about the Gov’t dictating to the bank that issued the credit, and is on the hook for the credit, just how and how much interest rates will be raised…

OK… Let’s talk about something else, that stuff gets my blood pressure rising! How about…. Oh, yeah, the Aussie dollar (A$) saw a bit of selling overnight after Australia printed a less than stellar consumer confidence report. I guess all the money the Gov’t of Australia had sent out to consumers is gone, spent, put in coffee cans and buried in the back yard, and now the consumers are sad… You give money to people for no reason, and it’s like a drug, they want more and more… I like the A$ for the prospects related to China’s economic recovery… But beyond that, Australia seems to be struggling, and it will take a Chinese recover to overcome this struggle…

And, in India… The rupee has not been able to add to its gains that followed the election results this weekend… But, I think it’s more a case of stopping to catch its breath, and not a road block.

Last week, we heard about how China had passed the U.S. as the number one trade partner of Brazil… Now, I’m hearing about how Brazil and China are in discussions to form a currency swap line, just like the one China signed with Argentina two weeks ago. These currency swap lines are HUGE folks. Because, it allows the two parties doing trade with one another to eliminate the use of dollars, and only use their own respective currencies. That means, China reduces its exposure to the dollars! And if China has less dollars to spend on U.S. Treasuries, that’s not a good thing! But, almost important as that, is the thought that China is spreading the use of their currency… This thought plays well with the idea that China proposed last month… That the U.S. dollar be replaced as the world’s reserve currency.

China has now signed currency swap agreements with: Indonesia, Malaysia, Hong Kong, South Korea, Belarus, and Argentina, with Brazil waiting in the wings…

And then there was the price of Oil… I filled up the Pfennig-mobile this morning, and noticed gas prices had gone up… Well… When I came in and checked the screens, I saw the price of Oil had reached $60 again! Oil prices have been rising very slowly in recent weeks, and long side of those rising Oil prices, we have rising Canadian loonie prices! I’ve said this more than once over the years… The Canadian dollar / loonie is so energy driven, and recent moves are a prime example!

Currencies today 5/20/09: A$ .7720, kiwi .6035, C$ .8670, euro 1.3665, sterling 1.5480, Swiss .9040, rand 8.4350, krone 6.45, SEK 7.6775, forint 203.40, zloty 3.20, koruna 19.52, yen 95.70, sing 1.4610, HKD 7.7525, INR 47.48, China 6.8250, pesos 12.95, BRL 2.04, dollar index 81.91, Oil $60.69, Silver $14.34, and Gold… $932.40

Source: Game On!

But, NOOOOOOOOO! Let me tell you all about it now… First, we had what I called the potential White Knight for risk assets yesterday, the Indian election results, which pushed the Indian stock market to levels it hadn’t seen in some time. That carried over to the Japanese stocks, which carried over to Europe and finally the U.S. It took most of the day to really get things going, but by the time I was packing up to head home, the move was on… And risk assets all around, save for the safe haven Gold, kicked into gear, and were off to the races. And Currencies were in the pole position of this rally!

I just can’t get my arms around this stock rally folks… What are they rallying for? Corporate earnings are awful… And the prospects of future earnings are awful… Why do I say that? Well… Have you seen the rot on the labor market’s vine lately? “Real” unemployment is north of 16%… And with announcements like the one last night from American Express, where they say they will layoff 4,000 employees, hitting the news wires each day… There’s just no way that consumers are going to have the “juice” to support corporate earnings… Those that do have the “juice” will probably squirrel it away, and those that don’t, well… They don’t have any to squirrel away or spend!

But… I always think of things logically, right? This is logical that stocks would suffer going forward… But will it play out this way? Who knows? I’m certainly not even your last choice for a stock jockey! But… It just seems to me that this is just the way it is… Some things will never change… It’s just the way it is…

OK… The “other” news this morning that’s fueling a huge currency move overnight… German Investor Confidence, as measured by the think tank ZEW, rose more than the “experts” were forecasting, and reached a 3-year high this month! WOW! OK, I hate to throw cold water on this, but this “investor confidence” is all tied to the rally in stocks… And what’s good for the goose (the U.S.) in stocks, is good for the gander (EUROPE) in stocks…

But hey! Why step in front of this bus? If the stock jockeys want to take their assets higher, then I’m not going to throw myself under their bus! The ZEW report is “supposed” to predict economic developments 6 months ahead… Well… By the time we sit down to eat our Turkey on Thanksgiving, I’ll look back and see if the ZEW think tank predicted correctly!

The Huge currency rally is across the board, including the once beaten and battered pound sterling, which has really mounted a strong performance in recent weeks… Yes, things in the U.K. are still teetering… But the pound sterling has seemed to have weathered the storm… At least for now!

Of course, in this crazy mixed up world we live in with currencies, a Huge rally currently means that Japanese yen is back on the selling blocks. And… The high yielders are soaring…

The Aussie dollar (A$) seemed to ignore the news from China overnight that the Chinese had ordered an immediate 30% Steel production cut by all mills to address 25-30% over-capacity. Then it seemed for certain the A$ would back off when Reserve Bank of Australia (RBA) Gov. Stevens’ gave a speech and revealed his bias toward easing rates further. Watch… At some point in the near future, there will a story that hits the news wires that claims traders are selling the A$ because they believe the RBA will lower rates further… And they will all act as though they “just found this fact out!” But for now… The A$ is kicking tail and taking names later!

I keep seeing one story after another these days from people that claim they “know” the Bank Stress Tests were a “sham”… Well? Didn’t I tell you that first? Didn’t I tell you the Gov’t would not tell us the “real facts” because if they did, they would spook the markets, and even more important spook our foreign buyers of U.S. debt! And we can’t afford for that to happen!

But just for kicks… Here’s a sample of the stories I’m talking about… Put away the sharp objects before reading, we don’t want any injuries…. This is… Howard Davidowitz, Chairman of Davidowitz & Associates, talking… (NOT ME!) “The stress tests were a sham and part of a “con game to get private money to finance these institutions because [Treasury] can’t get more money from Congress. It’s the ‘greater fool’ theory. We’re now in Barack Obama’s world where money goes to those that should never receive a penny….we’re bailing everyone out. The bailout money is in the sewer and gone.”

OK… That’s just a sample of the things I read each day and night… Of course last night I didn’t do any reading, as I was glued to my TV for the final 2 hours of my fave show, 24!

And in a story that makes you wonder what the heck these people are thinking… Two economists, Gregory Mankiw, former White House advisor, and Ken Rogoff, former Chief Economist at the IMF, believe that the U.S. economy is in need of a dose of good old-fashioned inflation! WHAT? They believe the Fed should have a looser rein on inflation, to help debt-strapped consumers and governments to meet their obligations… Again… WHAT? I have to wonder just what else the Fed can do to create an inflationary environment! Come on! They’ve cut rates to near zero… The implemented Quantitative Easing… They’ve pushed Trillions into the system… And these two dunderheads want more? Did they stop, in the name of love, and think about what they were saying before they said it?

And… I can’t understand why they believe that running 6% inflation for “at least a couple of years” is a good thing! Talk about “spooking our foreign investors”! And talk about sending the dollar to the woodshed! Let’s hope these two go away… Don’t go away mad, just go away…

And then… It sure looks like the Bank of Canada (BOC) is doing everything they can to put a 100 miles of desert between them and Quantitative Easing… There will be a speech today by BOC Gov. Murray titled: “Unconventional Monetary Policy Measures and the Zero-Bound, Differing International Approaches and Critical Considerations”… Now, that looks like a speech title that his marketing team came up with… Why not say… “the rest of the world is doing Quantitative Easing, and we’re not!”

Of course… Should this be the “real” gist of his speech, the Canadian dollar / loonie should look to continue its recent strong performance!

The Swiss franc is nearing 90-cents again… Every time it gets to this level, the Swiss National Bank (SNB) makes a statement that “they are watching the currency gains closely” This is supposed to scare traders to not take the franc higher… Who’s afraid of the SNB? Of course “real traders” like the ones that were around when I began to deal in currencies, would take this message as a challenge, and push the franc to the point that the SNB had to intervene or lose credibility… And then they would attempt to push the franc higher! But today’s traders, are not your “father’s traders”… They are wimps! Every time a Central Bank jawbones their currency lower, traders just put their tails between their legs and go home… Give up, quit… Hey! Quitters don’t win, and winners don’t quit! You can’t quit here! When the Germans bombed Peal Harbor, did we quit? NO! (ok that’s a line from Animal House, I don’t want 100 emails telling me that the Germans didn’t bomb Pearl Harbor! HA!)

Today, the data cupboard yields Housing Starts for April… I saw a news story on the TV yesterday that said “Home Builders were seeing a pick-up of new homes being built”… Well… That should be our indication that Housing Starts for April will be stronger! See how easy this stuff is? HAHAHAHAHA!

I always get a kick out of my friend, The Mogambo Guru, and the ending each week of his newsletter… Each week he ends his letter with some message about buying Gold and Silver… And then this line… “Whee! This investing stuff is easy!”

The Mogambo always puts a smile on my face!

Currencies today 5/19/09: A$ .7760, kiwi .6050, C$ .8640, euro 1.3635, sterling 1.5480, Swiss .8990, rand 8.4620, krone 6.42, SEK 7.6675, forint 203.85, zloty 3.20, koruna 19.5660, yen 96.20, sing 1.4610, HKD 7.7510, INR 47.79, China 6.846, pesos 12.91, BRL 2.07, dollar index 82.12, Oil $59.89, Silver $13.94, and Gold…. $922.80

Source: Currencies Bounce Back!

Well… As much as I dislike having to say so, because I told you this might happen… The currencies have given back some major ground VS the dollar since Friday morning. It’s all tied to the fact that the euphoria going around the markets the previous week regarding stocks and the U.S. economy, came to a screeching halt last week. I pleaded and begged for the currencies to break this link to stocks, but it wouldn’t / didn’t happen and voila! What we have here is a failure to break the link, and now that there’s a falling demand for stocks, currencies have tanked too… UGH!

Not that I’m cheering for currencies to go one way or the other, what I’m rooting for is a return to fundamentals… And apparently, that did not happen!

The proverbial straw to break the stock rally’s back was the color of Industrial Production on Friday… Not that Industrial Production is that Big of a piece of data… It just got added on to all the other bad data that acted like a shot of Round-Up on all those so-called Green Shoots! For the record, Industrial Production decline .5% in April, and March’s already bad figure was revised downward to -1.7%… So… The “glass is half full crowd, would say, “Hey!, the pace of decline has slowed, this is an indication of a bottom!” Unfortunately, that’s not how the market participants saw it… You have to think outside the box here, and recall all of the announced shutdowns that will be coming down the pike… I fully expect this data to reverse itself and go deeper into the tank.

We also saw the “stupid” CPI (inflation) number on Friday… CPI fell .7% VS a year earlier, which on the outside screams “deflation”! But… That’s not what I see… I see a CPI that’s dominated by food and energy, and we all know that energy prices have plummeted from last year… So, to me, this is strictly price deflation of energy, and not overall deflation that would include a contraction of money supply. (Like that’s going to happen any time soon!) No… And I’m sure there are few readers that will beg to differ with me on this, as they already do every time I mention inflation, but… This data continues to suggest the risk of deflation remains remote, since the drops are still mostly centered in energy and energy-related products.

So… If we’ve gone back to the black cloud over risk assets that existed July 08 through February 09, that means you can see Japanese yen as the lone wolf rallying major currency… Recall what I told you on Friday about the opposition party in Japan, calling for a boycott of U.S. Treasuries denominated in dollars… Imagine there’s no rift between the two, It isn’t hard to do, China and Japan getting together for currency cooperation… Hmmm… Makes you shiver, eh? Any way… The yen, is back on the rally tracks and trading this morning with a 95 handle…

But wait! What’s that I see? Is it a White Knight for risk assets?

Another Asian currency that I talk about occasionally, the Indian rupee, has been through the spin cycle a few times in the past year… Just when the rupee looks like its on a run, it gets sent back to the spin cycle and comes out looking quite wrinkled… But… We might be seeing a change… This past weekend, India held an election, and the Congress Party – led alliance chalked up a decisive victory… This is the party, led by Prime Minister Singh, that is pro-growth, pro-economic reform. And the news of the decisive victory sent the Indian stocks soaring… Along with the rupee, that’s now trading with a 47 handle for the first time in 5 months! So… The rupee has it all going on today, eh?

This news from India, helped turn the stocks around in Japan overnight, and that’s a good thing! If stocks can maintain this momentum, that’s a good thing for risk assets… But… I’m being pessimistic here… I just don’t see how the Indian stock market euphoria can outweigh the bad data here in the U.S. But… I guess we’ll have to wait-n-see, eh?

I was reading an article in the Wall Street Journal this weekend, and saw this, that caught my eye… “Economists Say Full Recovery to Take at Least 3 Years”… I bet they didn’t make Mssrs Obama and Bernanke happy with that call! Here’s snippet of the story from the Wall Street Journal… “Economists in the latest Wall Street Journal survey see an end to the recession by August, but say it will take years to eat up the slack created by the downturn. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months.”

Don’t know if you remember or not… But some time ago, I told you that I believed the Chinese were stockpiling commodities… They knew they would need them, and it sure seemed like a better investment than buying more dollar denominated assets… Well, the Royal Bank of Canada (RBC) just issued a report that agrees with my earlier statement! Let’s see what RBC had to say… “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline. It’s part of an overall desire to decrease its exposure to dollar assets.”

That’s been a reoccurring theme here lately hasn’t it? I’ve spent a ton of time writing about China and their new found diversification bone… I’ve told you about all this here, in and if you are a subscriber to my monthly “paid” subscriber newsletter, The Currency Capitalist, well, you’re probably growing tired of hearing about China… You see I really have to tell you, that it all gets so intense, from my experience… This is BIG NEWS! Oh, and if you want to see what the Currency Capitalist is all about.

We have a holiday in Canada today… Victoria Day… I had a reader question why I talked about Australia more than Canada… Hmmm, I said… I did talk about Canada twice last week! But he’s right, I do talk about Australia more, and that’s because the story right now is China coming out of the economic doldrums before any other country, and demanding more raw materials from Australia… Now, if the price of Oil were to soar to $75 or higher, than I’d be talking about the “juiced” Canadian economy more and more once again…

Before I left for Viva Las Vegas (admit it, you were doing your Elvis voice there!) I had talked about the “rift” going on in the European Central Bank (ECB) well, ECB President, Trichet hasn’t done anything on the outside to calm the waters there. Bundesbank (Germany’s Central Bank) President, Axel Weber, a very outspoken voice against Quantitative Easing probably stirred up the hot blood again overnight… Let’s listen in on Mr. Weber… “the ECB has done enough to help the economy and shouldn’t consider further measures unless things get a lot worse.” He went on to say a bit more… “the ECB doesn’t see the risk of a broad credit crunch or deflation in the euro area.”

I’m sure his opposition in Italy, Spain, Ireland, to name a few, will take offense to those statements, and we’ll get the “rift” going again, which won’t be a good thing for the euro to have to deal with.

The data cupboard is fairly empty this week, and for sure void of any major data until Thursday, when the Weekly Initial Jobless Claims, Leading Indicators, and Philly Fed Index all print… So… Not too much to deal with every day, which can lead to some strange currency moves. It just depends on the overall bias of whether to sell dollars or buy them. We’ll get a feeling for that today…

Well… If stocks are going back into the sell gear, then look for Gold to push higher… Which is what it’s doing right now, at $930… Speaking of Gold, my webcast Gold presentation last week wasn’t much a draw… We had less than 100 people watch it on their computers… Hmmm… Don’t know if we’ll go that route any more. At least the room was packed!

So… On that note… I’ll head to the Big Finish… This is a bit earlier than usual this morning, as I woke up long before my alarm was to go off, and decided to just go ahead and get up.

Currencies today 5/18/09: A$ .7580, kiwi .5895, C$ .8550, euro 1.3475, sterling 1.5240, Swiss .8910, rand 8.6440, krone 6.5025, SEK 7.8630, forint 212.50, zloty 3.3260, koruna 20, yen 95.60, sing 1.4680, HKD 7.7515, INR 47.90, China 6.8269, pesos 13.26, BRL 2.1150, dollar index 82.97, Oil $57.10, Silver $13.98, and Gold… $930.75

Source: Spraying Round-up

In an interview on Fox Business News last Monday, I pointed out the same three levels of resistance to Fox viewers that I pointed out to IDE readers earlier that morning (it pays to subscribe).  One thing I did on Fox that I didn’t do in IDE was make a recommendation, so I feel like I owe readers something.  My recommendation on Fox was to buy the ProShares UltraShort S&P 500 ETF (SDS).  I still think this is a good pick and I think it could jump 30-40% over the coming weeks.  As a bonus pick, I think you can make every bit as much with the QID, which is the ProShares UltraShort QQQ ETF.

After looking even closer at the charts, I noticed what appears to be a very well defined inverse head and shoulders pattern.  Look at the weekly chart below to see the different parts of the formation.

One thing that strikes me about this chart so far is the symmetry of the move from the neckline to the head and from the head back to the neckline.  Each of these moves lasted nine weeks.  It doesn’t have to be that well defined to fit as an inverse head and shoulders pattern, but it struck me as interesting.

So where does this leave us?  It looks to me like the S&P will decline over the next 7-8 weeks and then should start to find support near the 750 level.  If the 750 level holds as support and we start heading higher again, you could play the up move for about six weeks or so and then see what happens after it reaches the 950 level again.

If all of this pans out the way I think it will, the end of this year could see an explosive move to the upside as it breaks above the neckline.

The thing about head and shoulders patterns is that you typically want to wait and play the break above (on an inverse) or below (on a regular H&S).  The big move comes after the pattern is complete.

In the interim, you can play the short side as I think the three resistance levels I talked about last week will be too much to overcome when the S&P is as overbought as it is on the daily and weekly charts.  We move down again, the moving averages have time to catch up, and we won’t be as far below the 52-week (360-day) moving average as we are now.

We saw a similar pattern develop in the 2000-2002 bear market.  It wasn’t as clearly defined as the one we are seeing develop now, but it was there never the less.

Be patient, the biggest gains are yet to come.  The rally from the March low was very enticing, but there is even more money to be made if this plays out as I think it will.

Source: Classic Chart Pattern Predicts Bad News Followed By Good News

But maybe things are better on the other side of the planet. How’s China doing? Analysts are “cautiously optimistic,” says a New York Times report.

Retail spending in China is said to be up 15%.

Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.

Hmmm… Why would China be doing that? The official response to that question is that U.S. Treasury debt is not only the most abundant credit in the world; it is also the most reliable.

As to the first point, no one would quibble. As to the second, only a fool wouldn’t.

The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion. The United States is setting records, of course. The biggest budgets ever. The biggest budget deficits ever. The biggest bailouts.

The U.S. budget deficit is about 13%. It was a budget deficit of not even half that amount that pushed Argentina over the brink in 2001. What are we supposed to believe…that there is no brink waiting for the United States?

Even more curious…what do the Chinese believe?

“It’s all very strange,” said a new friend who came into our Buenos Aires office today. “Americans are clearly cutting back. Their credit cards are maxed out. Their houses are going down in price…”

On this last point, we provide a quick update. Bloomberg reports that the average house price actually went up by 0.7% from January to February. But before you begin to think that the housing slump is over, another Bloomberg report tells us that house prices resumed their slide in February – down 6.5%.

Charles Hugh Smith argues that not only are house prices still going down – they’ll never recover. He gives five reasons, which we’ve paraphrased below:

1. Bubbles never re-inflate; instead, they go to a new sector
2. Even if nominal prices go up, they will be undercut by inflation
3. More likely, deflation will continue to drive down prices for a long time (Consumer price inflation just came in at a negative number for the first time since the ’50s.)
4. The low-interest rate, low-inflation world that permitted high property prices is finished
5. There is no demographic pressure on housing prices; the current stock is sufficient for years.

Low housing prices force Americans to cut their spending.

“But if Americans don’t buy, China will no longer have so much money to recycle into U.S. Treasury bonds. So who will buy all those Treasury bonds?”

Bond issuance is running as high and as fast as a 100-year flood. In Britain, recently, a bond auction found itself with more bonds than buyers. Could the same thing happen for the United States?

“Well,” our friend continued, “I have a darker scenario in mind. What if China had a different game plan? What if she intends to continue buying U.S. bonds as long as she can…leaving the United States completely dependent on Chinese lending? And what if she then suddenly dumps all her bonds and U.S. dollar assets? She would lose a lot of money. But the U.S. economy would suffer far more. The dollar would collapse…so would the US economy…completely. “

Now, we turn to Addison, who points out some telling trends now underway:

“The credit crisis has stymied a unique feature of American society,” writes Addison in today’s issue of The 5 Min. Forecast.

“According to the Census bureau, 35.2 million people changed their residence from March 2008 to March 2009 – the lowest number since 1962. And back then, there were 120 million fewer Americans.”

“The New York Times does a rather unremarkable job analyzing the trend underway, but they do point to a couple of interesting changes in American society since the 1960s: Home ownership rates have risen and owners are typically less likely to move than renters. The median age of the country has edged up…old people move less often than the young do.

But probably the most telling trend underway: two-income families have become more common and increasingly necessary to maintain a middleclass lifestyle. “Finding employment for both spouses in a new location can be challenging,” says the NY Times.

“And in this environment, it’s getting more challenging all the time. The line of American’s seeking jobless benefits grew even longer last week, the Labor Department says today. Their gauge of continuing claims – that’s people seeking unemployment benefits for more than a week – rose to a new record 6.13 million. New claims inched up 27,000 to 640,000 last week – not a record, but close.

“While these numbers look awful – and they are – they’ll be a non-event in trading today… this latest report was right in line with Wall Street expectations.”

Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill, with more thoughts:

We’re continuing our report on our trip to the ranch. This has no particular financial implication; we just want to tell you what happened.

Compuel is what we’d call the ‘back 40’ in America. Except it’s about 10,000 acres…and it’s a 4-hour trip on horseback. Still, the cattle have to be rounded up from Compuel annually. Then, they are driven down to the main part of the ranch …where they are vaccinated against brucellosis and other diseases and parasites…culled…castrated…and generally treated roughly. It takes about 7 hours to drive the herd up over the pass and down to the corrals near the ranch house.

The following day, we got up before dawn…by the time we got to the corral, the sky in the East was pink. It was still cold, but warming up fast.

Jorge gave the orders.

“Javier…you and Cosimir separate out the ‘terneros’ (young animals)… Pedro and Gustavo, get on the sluices… Senior Bonner, would you like to operate the gate?”

Javier is a young man who looks a little like Robert Mitchum, if you can imagine Robert Mitchum as an Incan with a huge wad of coca leaves in his jaw. Javier wore leather chaps and a flat, broad-brimmed Peruvian cowboy hat. He and Cosimir worked fast. They yelled. They whipped. A huge cloud of dust swirled up as they got the whole herd moving in a circle…and then forced the young animals into a second pen…generally by waving their hats at them. Occasionally, the cattle would panic and the two would run for cover. And occasionally, a cow…or a bull…would get annoyed and charge. Javier, particularly, was amazingly fast on his feet. He jumped onto the stone walls of the corral a couple of times.

The last calves were lassoed…and dragged them away from their mothers, into the holding pen. Then, they were pushed through a maze of stone walls, where the passage became narrower and narrower, until they finally came to the wooden sluice. It is tight turnstile with a gate on one end and a “sepa” on the other (we couldn’t find the word in the dictionary). This sepa is rather ingenious. It is two large pieces of solid wood that open up into a V-shaped passage and then come together – suddenly – like the jaws of a clamp. The cows come through the sluice one at a time. As they come through, the rear gate closes behind them. Then, the sepa at the other end begins to close. As it closes, the cow makes a dash for freedom. But Pedro was working the sepa lever and he rarely missed. As the cow started through the sepa opening, he leaned down hard on the lever and grabbed it by the neck.

Then, the hatches on each side of the sluice opened…and the needles came toward the struggling beast.

“Mr. Bonner…you’re going to have to operate that gate a little faster,” said Jorge. “We only want one cow at a time.”

More tomorrow…we’re out of time for today.

Source: What’s China’s Gameplan?

This week’s movement is Part 1 of the Elliott Wave Theory.

When the Wave 2 pullback begins, it should trade below its recent high for nine trading hours or more before Wave 3 takes it up to new recovery highs. The daily chart is also set up to give buy signals, but that could not occur until today (Monday) at the earliest.

For more, take a look at the chart below…

As you can see, the 50-day moving average happens to coincide with the top of a trading channel drawn from a high point last September. Both these technical tools currently show the $9.05 area as a significant level.

If XLF undergoes a decent pullback, short-term traders could try the long side with an upside target of $8.60 or better.

However, if the stock can manage to close above the $9.05 level a couple of times, there’s a good chance that the daily chart will trigger buy signals and we could see additional movement to the upside.

Source: Ticker Of The Week: Financial Select Sector SPDR (NYSE: XLF)

1.87 billion shares of Citigroup exchanged hands on Friday. That’s easily a record, not just for Citi, but for any stock in the history of the New York Stock Exchange. Shares in the company dropped almost 40%, to $1.40.

The former record holder WorldCom traded 1.5 billion shares on July 1, 2002. The S&P 500 set a bottom three months later.

But on this snowy Monday, during the winter of our discontent, a bottom seems unlikely anytime soon. The Dow opened down 100 points today, breaching the 7,000 level for the first time since 1996. On this leg down, if the Dow goes back to Greenspan’s original proclamation of “irrational exuberance,” it will hit 6,500. He first said those words on Dec. 5, 1996.

If the Dow continues to follow the Japanese example, a 27-year low would bring it all the way back to 1,000 during the life of this bear market.

“I don’t think the market appreciates,” says Dan Amoss, “how much the TALF could help restart lending.

“Last fall’s screeching halt in bank lending was greatly exacerbated by the crisis of confidence in securitization. Prior to the crisis, many of the consumer, business and mortgage loans originated by banks were sold into asset-backed securities and mortgage-backed securities.

“Securitization was abused to the point that it exacerbated the lending bubble; banks quickly reopened the lending capacity of their balance sheets as soon as they securitized loans and sold them to investors.

“Securitization lies at the root of the collapse in lending standards, but that’s another story for another time. Longtime Strategic Investment readers will recall my view, starting over two years ago, that reckless securitization would lead to major problems once investors noticed the toxicity of the asset-backed securities they were buying. It was the primary reason I recommended the UltraShort Financials ETF in July 2007.

“The comparison is not perfect, but depending on its success, the TALF could provide stability to the securitization market, or “shadow banking system,” much in the way that the FDIC guarantees stabilized the banking system during the Great Depression. This could lead to a rally in economically sensitive stocks that have been sold down to distressed levels.”

Considering Friday’s debacle for Citigroup, we’re not surprised to hear Abu Dhabi is “carefully assessing” its $7.5 billion investment in the bank.

The wealthiest of the UAE’s emirates, Abu Dhabi’s got a bit of a dilemma on its hands: Its billions in convertible bonds will convert to shares this time next year. Once the date comes, the bonds will convert between $31-37 a share… just a bit higher than Citi’s current $1.50 bid. That’s assuming, of course, that the U.S. government won’t wipe out all the shares by then via sudden nationalization. Either way, should add an interesting twist for the world’s largest sovereign wealth fund… and fifth largest petroleum exporter.

The mood in the market is as grim as our most famous investor. When he participated in the panel following the premiere of I.O.U.S.A., Warren Buffett shocked many of the film’s makers by playing the token Pollyanna. He all but dismissed the possibility that the U.S. faces a crisis of any kind.

Today, a scant six months later, Mr. Pollyanna is singing a different tune:

“The economy will be in shambles throughout 2009,” Buffett wrote in his annual letter to shareholders over the weekend, “and, for that matter, probably well beyond.”

The above is certainly the most headline worthy quote of his latest missive, and the one that’s got most Buffett disciples running for cover. But of course, there were plenty of little nuggets of wisdom in his yearly letter. Here are a few:

– “In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”

– “Our long-avowed goal is to be the ‘buyer of choice’ for businesses –  particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).”

– “Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.

“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”

– “The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms.”

– “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

“Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.”

Yet the U.S. government pumped $30 billion more taxpayer dollars into AIG this morning. The injection came as the doomed insurer announced a $61.7 billion quarterly loss.

That’s a record for any publicly traded American company and even bigger than the group anticipated a few weeks ago.

Last year, AIG lost just under $100 billion. That’s around $3,200 for every second of the year. We’re impressed. Losing that much money that fast takes talent.

Today’s injection brings Uncle Sam’s AIG tab up to $180 billion. In exchange, you own almost 80% of the company… that you’ll never see.

Two more banks failed over the weekend. The 15th and 16th failure of 2009 will nick another $100 million notch in the FDIC’s belt.

Consumer spending in the U.S. registered a surprise gain in January, the Commerce Dept. said today. After falling a record six months in a row, spending popped up 0.6% during the month.

At the same time, personal savings in the U.S. has shot up to 5%. That’s the highest level since 1995.

Hmmn….

The climbing savings rate explains this phenomenon too. The dollar index, still the ultimate flight to “safety” (sic) is just below 89 — its highest level since April 2006.

Investors are showing commodities no mercy during today’s sell-off. Oil is down $4 a barrel, now just clinging to $40. Even gold can’t withstand the pressure… it’s down almost $30, to $933.

“The U.S. had better start looking for someplace else to store its high-level nuclear waste,” declares Byron King, with today’s energy opportunity. “Because they won’t be storing the waste at Yucca Mountain, Nev. This week, the Obama administration announced that it will not support the 20-year-long, $10 billion project to store waste at Yucca Mountain, located about 100 miles northwest of Las Vegas.

“The new administration had better start an alternative soon, and move fast. Almost every one of 104 operating U.S. nuclear power plants are either out of room for on-site storage or nearly so. And then we have to deal with the many forms of nuclear waste generated in government labs and everyday nongovernment industry.

“This ranges from the U.S. nuclear weapons complex to the medical arena and things like metallurgical testing and oil well logging. The nuclear waste that comes from these activities presents a serious problem, with no solution in sight. Lack of storage is a key roadblock to the expanded use of nuclear power in the U.S. Every nuclear-related project needs to show how it will handle nuclear waste from cradle to grave. So what happens when there’s no grave?

“Canceling the Yucca Mountain project may feel good to longtime critics. Indeed, canceling Yucca Mountain may even be the right thing to do. We’ll find out over the next century or so. But right now, we have a problem. Where else to store large volumes of high-level nuclear waste? Any volunteers? No, I didn’t think so. All the wise heads at DOE and in the U.S. nuclear industry had better get their thinking caps on. And whoever figures it out will probably make some serious money.”

For more from Byron, be sure to check out his latest special report: How to Buy Gold for a Penny per Ounce.

“Your reader complains ,” writes a reader, “that letting the big banks fail will be more than ugly, that it will be Armageddon. I have spent hours a day online reading about this crisis, and have found not a single article explaining in any significant detail how this conclusion is reached. The Fed and Treasury refuse to disclose the extent of the problem for two reasons: 1) fear of spreading panic, and 2) fear of disclosing the banks’ ‘trade secrets.’ We’re even denied the knowledge of how our money has already been spent. Bloomberg and Fox News have both filed FOIA lawsuits that the Fed is fighting.

“It’s not enough to describe the situation as a ‘house of cards.’ Let’s open the process to daylight, bring in outside persons who are likely to question our existing authorities (I’d nominate Buffett, Roubini, Taleb and Santelli to start). Have this group perform the ‘stress test,’ not the idiots who couldn’t and didn’t see this coming. An audit by the people who are to blame for the problem is NOT going to restore public confidence, any more than would a urine test by Barry Bonds’ trainer.

“Indeed, when I saw the stress test parameters issued yesterday by the Fed, I concluded that Geithner has already peed in Citigroup’s cup.”

The 5: Charming.

At least we’re not in Europe, eh? This miniature Hooverville is parked outside the capital in Kiev.

We saw what happened to the rest of Europe last month when Russia and Ukraine had their little pipeline tiff… hard to imagine the energy crisis that would result from total economic failure.

“Central Europe’s refinancing needs in 2009 could total 300 billion euro, 30% of the region’s GDP,” declared Hungarian Prime Minister Ferenc Gyurcsany. He said over the weekend that the richer EU members should set up a $200 billion fund to help keep union alive. Germany has already rejected the bailout… France and Italy will likely follow.

“A significant crisis in Eastern Europe would trigger political tensions and immigration pressures. With a Central and Eastern European population of 350 million, of which 100 million are in the EU, a 10% increase in unemployment would lead to at least 5 million unemployed people within the EU…

“We should not allow that a new Iron Curtain should be set up and divide Europe.”

Across the English Channel, Europe’s biggest bank is in dire straits too. HSBC was forced to raise over $17 billion today after announcing its 2008 income crashed 68%. The bank will issue over 5 billion new shares, Britain’s biggest ever rights issue. The mega bank also announced a 29% dividend cut.

Source: A Bottom in Sight? Buffett Wisdom, Energy Crisis, Eastern Europe and More!