Trending the Crash of 2011

 |  Includes: BOM, CAT, EUO, FXI, IYG, IYJ, RJZ, UUP, VXX
by: Glen Bradford

The crash I've been calling for is just getting kicked off. Let's throw a kickoff celebration party.

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Well, unsustainably high profit margins subsidized by unsustainable fiscal spending is finally catching up. There are two potential outcomes. If governments start cutting spending, we would be on the verge of the largest deflationary collapse in the world's history. That would be exciting for anyone hoarding piles of cash. Put it to work? Not yet.

Calling Market Bottoms:

Call them late. Base your call on price. Base your call on fundamentals improving in 6 months. Use the ECRI. That said, am I calling this a bottom? No way. Things continue to deteriorate. Fundamentals are compounding and getting worse. Banks are cheating their books worse than they were 3 years ago. Dear China, good luck pulling the world out of this one, cause you're stuck in it deeper than we are... with all of your overvalued industrial metals. The eurozone still is structured in such a way that it has to continue crashing. That's great for me because it is predictable. Predictable = Profitable.

Look to the Fed:

And, while you're at it, laugh out loud. QE2 didn't work. That said, if the Fed and China get together and sponsor the largest, dumbest bailout the world has ever seen, we might be able to push this a little bit further. Faced with the choice between debt monetization and default -- currency issuers like the United States favor monetization. Countries like Greece and the rest of the currency users over in Europe don't have a choice and get stuck with larger bills and larger interest rates until those bills aren't serviceable. The good news is that Europe is finally hitting the point of no return and we are entering into the danger zone of "Too-Big-To-Save" with Italy leading the charge.

Key Actions:

For starters, nothing is safe. If we are going to get hit with global governments trying to be fiscally responsible, you want to be short industrial commodities. What's ironic about this is that if they decide to spend their way out of this by continuing to run increasingly larger deficits (only a luxury available to currency issuers), then you'll want to own those same industrial commodities as a hedge against inflation. We are entering a period of currency wars, whereby the countries with "safer" currencies have their currencies bid up in price and see a direct loss of monetary activity and respond by selling more of their currency. China's been doing this to subsidize their economic activity against the USA for years. Germany has been subsidized at the expense of the EU. Now, it's the "cool" thing to do and everyone wants to play. The question, will the political system governing that country let them? I think most will.

So, if you ask me, the crash probably hasn't even started yet. No problems have been solved. Until that changes, it appears that current market prices are still too high, especially with the global industrials like Caterpillar (NYSE:CAT).

Disclosure: I am long BOM, EUO.