Professor Elam

wed Sept 7, 2011

While we can debate the best calls here or what is truly useful, the clear winner in the worst call so far was my suggestion last year to purchase UUP, a bet on the US Dollar. The same bet on TLT paid off very well this year and we hope that you banked those profits this past month. 

Indeed I am still the battered but unrepentant owner of 200 shares of UUP at 22.51. But the last few days amid all the red flashing prices on computer screens, one green beacon stood out, the world stampeded into the US Dollar. The Swiss finally intervened to bring down their Franc against the Euro which also helped boost the Dollar. Greek debt is not long for this world sporting a  one year yield of 70%.While the Dollar trend is still down, it is surely significant that this currency alone rallied world wide. 

Charles Smith has a new book out on the failure of conventional economics.  I will be reading and studying and reporting to you. But he makes an excellent case that the modern state (government) depends on people earning high taxable incomes that it can tax to expand its role. This is precisely what we are seeing in the current administration which wants to raise taxes everywhere, and the Bush administration that announced the high rate would 'only' be 35%. 

Smith suggests that a lower grade lifestyle, more independence from the state, will eventually starve the government of the tax revenue it needs to survive. 

The continued march to higher unemployment will certainly do that. The whole point of my theme of The New Civil War is in fact to ask, how long will the producers, ie the right to work states, support the failed business models of the union shop states and their permanent high unemployment?  Indeed it looks like the next election will give us an opportunity to find out. 

We have been tracking these developments for you. Recall that

Emerging Markets topped November 2010

The US Markets topped internally February 2011

More to the point, silver and oil both topped about May 1, 2011

Since then oil has stair stepped down in convincing fashion. Recall that the Arab Spring, no matter who wins, can only result in increased oil production. 

Please re visit our post this weekend on how 

Energy Service

Banking

Summation index of stocks

are all repeating their Summer of 2008 patterns. 

Smith's thesis makes sense, as does Mish at Global Economic Analysis. All the world is trying to succeed by exporting goods to other countries. They all produce more than their own populations can absorb, so the markets must expand, hence we hear the mantra of globalization.But everyone cannot have a positive balance of trade, someone has to import That someone has been the US with a negative balance of trade. The world has grudgingly taken our lower priced dollars in exchange for its goods to keep their economies alive. Now with backs against the wall, a torrent of cheap goods amid rising world wide unemployment has brought the specter of deflation stalking the world markets. Real estate in the US collapsed first, but the limited experience with real estate in other countries simply exported the speculative real estate boom elsewhere. And so Canadian and Australian real estate has soared to unsustainable levels. 

Think about it, high unemployment is the market saying that wages are too high, there are alternatives. And so law school grads work by the hour like so many pineapple sorters in the field. College grades find themselves in permanent 'temp' jobs. Indeed why would an employer move from an easily dismissed temp employee (no unemployment benefit liability) to all the woes and uncertainty of a full time employee? Jack Welch outsourced GE's work to China to keep costs low, his successor has run out of the same options. As the WSJ detailed yesterday, GE has underperformed the SPX since Welch's exit.

The one growth area has been government where the union shop lives on. But now the cost of government has risen to near half the GDP, or have we exceeded it already?  No matter with more calls for higher taxes it is just matter of time when not whether we get there. Greece is the poster child of where that takes an economy.

Okay enough economic theory for now. The strong dollar overhangs stock market speculation. Stock prices are the counter party to currency values.  We already have that handy Dollar Proxy, oil, in free fall. As the Dollar advanced, world stock prices fell. Recall our recommendation to use the rally that has apparently started today to exit existing stock positions.

Dollar UUP versus Stocks

Stocks are the black bars, UUP is the red green line which is the US Dollar. Despite all the negative news that the dollar is trash, it has been exhibiting a potential bottom at 21 on UUP while the SPX traced out its final highs from February to July. And then, collapse. The overvaluation of stocks has folks exchanging stocks for Dollars, something the currency markets have denied could happen. But here we are. 21.80 to 22 remains big resistance for UUP. 

But the puzzle pieces are falling into place. Emerging markets falling, silver and oil falling, now stocks which are valued in Dollars. The rush to the exits is underway. 

Thanks for reading our blog.