For most of us living in the US, the stock market looks like it’s been on an absolute tear. After all, the S&P 500 is up over 50% while the Nasdaq is up 70%.

• Starting in the futures market during the wee hours of the morning before the stock market even opened
• Occurring on extremely light volume
• Charging higher within the first hour of trading and then doing next to nothing for the remainder of the day
• Occurring thanks to a significant drop in the US Dollar courtesy of various anti-Dollar comments made by government officials over the weekend

I’ve pointed out countless times how much this rally is based on a US Dollar carry trade. The below chart is yet another example (the millionth) of this with the Dollar plunging over the weekend pushing stocks to new highs.

Let’s break it down.

Given how mortgage-backed securities turned out (and those securities were regulated, unlike derivatives), I believe that most, if not all major banks in this country are insolvent or would be recognized as such if you marked the assets on their balance sheets at anything resembling market values.

Despite several attempts, the S&P 500 failed to close above the all-important 1,100 level. It has since fallen back to the 1,090 pivot. This does not bode well for stocks and suggests that the bounce started seven trading days ago is likely over.

I don’t disagree with these gentlemen in the long-term. In fact, I forecast that Gold would erupt higher in September-October, and I believe we could very well see Gold hit unbelievable levels at some point in the future.

Virtually every day I receive emails from people asking me about the coming massive US Dollar devaluation or when the Zimbabwe-esque hyperinflation will hit. What’s striking about this is that I receive more of these sorts of emails today (when the Dollar’s at 76 or so) than I did last summer when the Dollar hit a 30-year low of 72.

The only problem is that the above chart is priced in US Dollars: a currency that has lost 15% of its value this year. Remember, investing is all about relative value: assets do not rise in value in a universal sense. Instead they rise relative to other assets.

For starters, we’ve pointed out that real US incomes have declined roughly 40% since their peak in the early ‘70s (which is why it now takes two working parents to make ends meet).

However, on the other hand, to make money investing you have to be willing to go against the crowd. And, with less than 3% of investors currently bullish on the US Dollar, the contrarian in me can’t help but wonder if we have the makings of a serious Dollar rally similar to the one that kicked off the 2008 crash in stocks.

1. The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion.
2. 97% of these ($196 trillion) sit on FIVE banks’ balance sheets (more on this shortly)
3. If even 1% of this $203 trillion is “at risk” … you’re talking about $2 TRILLION in at risk bets made in the derivatives market
4. If 10% of that 1% end badly, you’re talking about $200 billion in losses

Total equity at the five banks is $737 billion. So, if you assume that only 1% of derivatives are “at risk” (odds are it’s more) and 10% of that at risk money is lost, you’ve wiped out nearly 1/3 of the banks’ equity.

You can see this in the below chart. As soon as the financial crisis began in earnest with the credit market lockup in July 2007, 30-Year Treasuries broke above 112, a point of historical resistance. This told us two things:

Long-time readers know that I’m no fan of Ben Bernanke. But Bailout Ben is in no way unique in his thinking (though he has managed to spend more money than WWI, WWII, and the New Deal combined).

As I’ve noted in previous essays, monthly options expiration usually results in major 1-2 day rallies as traders push the market higher to close their options positions in the black. Typically, the largest pre-expiration moves occur the day before expiration, but in general the week of options expiration has become a week for outright manipulation in the markets.

As you know, two weeks ago stocks were beginning to collapse in a very significant way. By the time Friday rolled around, the S&P 500 looked to have broken the bearish rising wedge pattern that I’ve been tracking for the past few weeks.

That’s the current P/E for the S&P 500 based on reported earnings (earnings that include write-downs). According to David Rosenberg of Gluskin Shef (and former Chief Economist of Merrill Lynch), no US market has ever been this expensive in history. The Tech Bubble, which by all accounts was an extraordinarily overpriced market traded around a P/E of 40 during its peak.