It's Started - The Sun is Seeing Nothing New

The market seems once to again to be expecting Bernanke and Paulson and any one else who has power to waive the magic wand to fix things. This has been going on for months of course in which the various puppets at the Federal Reserve and the Treasury department have been dancing in tune with the market's orchestra leader. Actually it has not been "in tune" but has been off half a beat as everything has been reactionary after stating for months that everything was okay.

What has just recently started though is the that others throughout the world have started getting boxed in by Helicopter Ben tactics and being forced into policy decisions that would probably not have been been made if it was not for America leading the way. A couple of days ago Canada was forced into a position to cut interest rates and today the Bank of England did the same. With commodity prices sky high, Canada arguably has the strongest economy it has had in years, why are they cutting rates? Well of course the Loonie is wreaking havoc. Okay well the Loonie is strengthened of course because of the economy but the August to October moon shot was because of the U.S. Fed rate cuts. Also they know what the Fed is going to do in December and are probably getting all kinds of pressure to cut rates with us so not to further destroy our currency and risk even more inflation that oh yeah "really does not exist."

Anyway this will continue a chain reaction. Others will be forced into cutting rates as liquidity is once again pumped into the system in massive proportions.

All this with, let's see, yes, the greatest global boom in the last 50 if not 100 years. When else have we had global growth north of 5% and government cutting interest rates? Anyone? Now of course America is not growing at that rate, neither is England or Canada (Canada I think is close but not exactly sure what their growth rate is).

So great what does that mean. Well currently all the liquidity is going to treasuries and ultra safe areas. When things start to clear up though and money starts flowing, who knows exactly how every note ends up being played out, but in general the liquidity will flow into areas that investors "feel" good about. The areas where they have not been burned and returning to areas that pleasure spots in their brain associate with reward. Well this is not equities. The 2000 bubble is still to fresh on investors minds. Sure the markets may go up but I would be shocked to see massive multiple expansion in the developed markets. Now the newest pain has been felt in the mortgage market and asset back security market. Even with the flood of liquidity back into the market you will not see the spread anywhere near as tight as it was 12 months ago. You may not see that for 20 years plus until the memory fades. So what does that leave?

Commodities and emerging markets. I have made tons of money this year with bets in corn and soybeans. Since August both are strongly up. Emerging markets are the same way. Many up 30% or more higher ytd. You are already seeing the groundwork being laid for a massive bubble in this area with articles talking about a new era and growth that is indefinite with the potential of China and India. What a wise man starts a fool will finish. Famous quote by somebody is more than applicable here. Resources should be going to these area. Soft commodity inventory is the tightest it has been since the 70s. China has unknown potential. This was all true in the beginning and still so. Eventually though when people finally calm down and start selling treasuries to take on some additional risk you are going to have a massive amount of capital that needs to go somewhere. Some will go into equities, even a smaller amount will go back towards debt, the bulk I believe will go towards emerging market equity markets and commodities. You will way over shoot to the upside and eventually come crashing down. This all may happen in 2 years or 10 years but I would be willing to bet alot of money that it will happen.

This of course will cause far more reaching pain than if Bernanke would avoid the political pressures of an election year and not pump money into a system that really needs to go through a recession and really needs to clean out alot of junk. It will not happen of course and we will go through the follies of every generation before us. Like I said the pain (for everybody) will be multiples higher than if we took all the dosage now.

Oh yeah, one more thing. I truly believe this is going to cause massive inflation in the Untied States. Once the election is over all the cookie jar accounting will have to start slowly being reversed. Once the flow starts it will be very difficult to stop or even slow down (look at Greenspn's efforts to raise rates from 03 to 04, really did nothing to stop the excesses in the debt market).

Truly nothing is new under the sun.