Just 10 months ago, many banks were on the verge of collapse. In the second quarter of this year, banks have managed to produce healthy profits, as The Associated Press reports:

My, how investors love derivatives. At first it was short ETFs, and then it was double long ETFs and double short ETFs. Recently, they have introduced triple long and triple short ETFs.

Counter-Party Risk

A derivative is a contract with another party that causes money to change hands depending on the future value of some asset such as interest rates, stock prices, or currency values. A futures contract is a derivative.

In Friday’s Yahoo! Finance column, Jeremy Siegel hold forth his views on the U.S. Treasury’s recommendations to reform the U.S. financial system. Siegel's full article is here.

Referring to Treasury's release of a 89 page report titled Financial Regulatory Reform: A New Foundation, Siegel feels that Treasury’s recommendations range from the good, to the bad to the ugly.

Despite the nationalization of a huge chunk of the American banking system and the backstopping of the remaining banks, the problems of bad debt and excessive leverage continue to plague us as recent announcements proclaim:

The primary reason investors purchase precious metals (PM) is: PMs hold their value, while fiat currencies do not. This article will study the long term returns of the most widely traded precious metals: gold, aluminum, platinum and silver.

In the latest issue of Forbes, a cover story recommends shunning stocks and buying corporate bonds. In The Case for Bonds, author Bernard Condon writes:

Want to avoid getting burned buying into the latest asset bubble? History suggests shunning stocks and buying corporate bonds.

The Current Employment Situation Is Bleak

• Housing starts are at multi-decade low. Housing is overbuilt. Many job losses in the sector will be permanent.
• The deleveraging consumer has hammered the retail and service sectors. If the trend continues, expect some of the job losses to be permanent.
• Business investment is down significantly.
• A large number of jobs in the finance sector have been permanently lost.
• The current 15% vacancy rate in Commercial Real Estate means jobs won’t be coming from this sector anytime soon.

More Headwinds

Businesses not only face diminished sales, soon they will be even more discouraged from hiring because employment costs will increase. This article discusses the headwinds that employers face.

According to Bloomberg, as of July 5, 2009, the real, inflation-adjusted yield on Treasury Inflation Protected Securities (TIPS) is as follows:

Investing Superstar:

David Swensen wrote Unconventional Success: A Fundamental Approach to Personal Investment, one of the best-selling investment books of 2005. Since then, Swensen, who has a phenomenal track record running the $22.5 billion endowment at Yale has become an Investing Superstar. In his book, Swensen recommended a portfolio allocation for the individual investor who wants a well-diversified, equity-oriented portfolio. I highly recommend his book.

The dollar bears are having a field day with the fall of the dollar. I'm also a dollar bear, having written articles with such titles as: The Dollar Is Doomed and Will The U.S. Dollar Crash?

It Ain't Easy Being a Dollar Bear

Over the past century (1900-2000), the dollar has kept its value far better than fourteen of the fifteen hard currencies of the world. The dollar has been stronger than the German mark, Japanese yen, British pound sterling, Australian dollar (formerly pound), French franc, and other hard currencies. The dollar has held its value better than any other major currency except for the Swiss franc. {Source: "Triumph of The Optimists}

I'm a big fan of emerging market equities. Naturally, I have studied China because China puts the “C” in BRIC.

What's Not to Like About China?

Question 1: U.S. Treasuries are widely acknowledged to be in a bubble. Since TIPS are technically considered Treasuries, are TIPS caught up in the same bubble?

Question 2: How strongly correlated have TIPS been with ordinary (nominal) Treasuries?

The Only Valid Reasons to Buy Gold

If you feel that Financial Armageddon is coming or they just delivered crates of automatic weapons to your town, and none of the crates is addressed to you, then by all means, buy gold. If owning a significant amount of gold is the only way you can sleep at night, then buy gold. But don't expect gold to be a terrific long-term investment.

Fellow Seeking Alpha author Vitaliy Katsenelson recently wrote a hilarious article titled Five Reasons to Avoid the Gold Rush. There are many valid concerns about the future of the dollar, the economy and all global currencies. As I have written previously, I share many of those concerns. To give equal time to the gold bugs, the following is a list of commonly-used rationales for owning gold.

The US Treasury bond has earned the reputation of the safest asset by being the most liquid, and issued by the most politically stable country, with the largest economy and strongest military. When the wonks perform long term studies of asset class returns, they typically call the US Treasury the "Risk-Free Asset." While this may be an academic term, this "Risk-Free Asset" is not risk free.

There is no such thing as a "Risk-Free Asset". All bonds, whether sovereign or corporate have many risks: risk of default (issuer risk), liquidity risk, currency devaluation, inflation, call risk, term risk and rising interest rates. Sovereign Debt is issued by governments, therefore US Treasuries are considered Sovereign Debt.

What Is Money?

Money, as economists define it, is a means of exchange, a store of value, and a unit of account. As a store of value, each unit of money should have the same value in the future as we assign to it today. In days of old, money used to be in the form of Gold or Silver. These metals had universal value among the various peoples of the world and rarely changed in purchasing power over the centuries.

Using the Government's own audited financial statements, the Peterson Foundation calculated the Federal Government’s total accumulated liabilities for Medicare and Social Security. As of the third quarter of 2008, the Federal Government had $56.4 trillion in total liabilities and unfunded promises. The future liabilities of the two progams equate to $184,000 per capita.

Social Security
The Social Security nightmare is the most often mentioned as the biggest problem facing the Government. The Old-Age, Survivors, and Disability Insurance program (Social Security) is actuarily unsound. A better fix would be to replace Social Security with an actuarily sound program. That's a topic for another article.

The tide has turned against the U.S. Dollar. The dollar rose during the crisis as it became a refuge for investors seeking safety. Now, investors are worried that their life raft is springing leaks. And rightly so, for in Thursday’s article titled “Is the Almighty Dollar Dead?” Columnist Dan Burrows says:

It's an axiom of economics that debtors love inflation. The flip side, or course, is that creditors despise it. Why lend money today only to get paid back in devalued bucks tomorrow? That spells trouble for the almighty dollar -- and puts pressure on investors to hedge against it’s almost certain further decline, market professionals say.

Are There Any Deflationistas Left?

As I have said and written over the past year: Deflation is not a threat, rather inflation is the greater threat. Significant and sustained Price Deflation is not a threat under a Fiat Currency and a profligate free spending Congress.

Months ago rating agency Moody’s warned that the U.S. Government was at risk of losing its prized AAA credit rating. In May, Bill Gross, head of PIMCO, the world's biggest bond shop, warned that the United States will eventually lose its top AAA credit rating. Also in late May, Moody's said it is comfortable with the current AAA rating on the United States, but it is not guaranteed forever. Steven Hess, lead analyst for Moody's:

There are longer-term pressures on the rating, that's very clear.

Higher Oil Prices Are Caused By:

• A Weaker U.S. Dollar
• Competition from Alternative Transportation Fuels
• Supply: Opec's Production Quotas and the Inventory of Crude Oil
• Demand: The Pace of the Global Recovery
• Speculation and Hoarding

What Is a Realistic Price of a Barrel of Oil?