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What happened to the stock rally? Why is Ben Bernanke unable to sleep? Well, Ben understands the only way he can re-inflate stock prices, commodity prices, maybe housing prices, is to undermine the US Dollar. And it almost worked -- well, sort of. He got stocks and commodity prices to inflate with QE1. There was a negative inflation side to all of this -- remember food-price riots in the Middle East, Asia, Europe? But QE1 and QE2 did drive the Dollar down; and it lifted stocks and commodities higher. It lifted the Euro higher also -- in fact all currencies prices against the US Dollar. In truth, it didn't do much at all for the econimies of the world -- Ben said the governments needed to fix the Depression through fiscal policy. His job was to funnel taxpayer money to the banks so the banks would not fail.

Then the EU crisis struck, and the Euro, which was supposed to be the 'winner' in this fight against the US Dollar (which Ben was guaranteeing with QE) suddenly fell apart on its own. The Dollar rose; and stocks and especially commodities tanked.

What about our 'relief rally' -- spurred by the 'game-changing' events in Europe last week -- and easing of the way in which European banks can get bailed-out -- as if bailing out banks was the answer to our crisis, rather than merely a band-aid put on a gaping wound.

Everyone is smiling, right, stocks are starting to rally -- Europe is fixed -- and then the US Dollar comes back. Yes, Mabel: there seems, at this moment in time, to be a very strong negative correlation between the US Dollar and stocks and commodities.

The Euro may be dead in the water, as there is no way for a single currency to serve 19 diverse economies and nations except through an imbalance in debt which works during expansions but kills during contractions. This contraction won't end until around 2019. So there is a LOT more trouble for the Euro coming.

Let's overlay the US Dollar and the price of Oil -- using UUP, the US Dollar Bullish ETF and OIL, the Oil ETF. Not a pretty sight for Oil bugs -- especially note the last trading day on the chart. When the Dollar soars, Oil falters. Which one would think is what we want: don't our leaders want lower prices so consumers can find relief? NO THEY DON"T. OUR LEADERS ARE ON THE SIDE OF THE RICH! They want consumers to take on more debt and make the rich richer!

Ok; so what has this to do with the stock rally. Let's look at a series of charts: (1) a longer view of the UUP (US DOllar ETF) overlying the GSPC (S&P 500 Index) where we see a strong, if imperfect, negative correlation between the US Dollar and the GSPC; (2) a shorter term view of the same; (3) the GSPC by itself; (4) the UUP by itself. Which chart of the two seems more bullish? Well, the UUP is making new highs; and the GSPC is faltering.

Ok, so apparently the only thing that can drive the US Dollar down is Ben Bernanke. Europe can no longer do it. China's economy is sinking; India's economy is sinking. In fact, the global economy is sinking. Even Ben Bernanke knows we are going down again. The Fed's own projections are for another recession. He ordered new bank 'stress tests' to see how US bank could handle the expected disorder. Here's is what housing prices look like under the 'Next Recession' scenario of the Fed:

What does that kind of price decline in US Housing do to already underwater mortgages, defaults, bankruptcies -- what does it do to bank mortgage and Fed balance sheets? Clearly, it doesn't 'fix' anything -- but could make banks more insolvent, and could make the Fed also insolvent.

Back to our point: only the Fed can save us (i.e., save 'investors) by slamming the US Dollar down through another round of QE, right? There are problems with that scenario. A lower US Dollar also equates to BAD INFLAITON for the rest of the world, some of them our allies. Prices of food go through the roof, leading to revolutions (Middle East) and general political crisis. People starve. Prices of basic materials go up, threatening to suffocate the fragile economies all around the world. Not only that, Ben has already built a huge bubble in his own (the Fed's) balance sheet (and off-balance sheet).

Ben has the potential problem of having too few buyers of his junk (some of it is junk) when he begins unwinding such that he will have to raise interest rates to get rid of it. Taking on more debt -- building bubbles -- is risky. Many analysts believe US TBonds are a huge bubble already -- what happens to interest rates when the Fed becomes a net seller instead of a net buyer. The Fed has, for the last helf-decade, been in a position to swallow any unbought TBonds in order to ensure low rates. If rates begin to rise the cost of government debty refinancing goes up exponentially. Ben is in a bind. Several members of his Fed Board have indicated there will be no more QE without a fight. The Fed CANNOT save the day. They can only increase the stall capacity -- and delay the crisis by pushing it down the road a bit.

No easy way out of this mess we have all made for ourselves by treating debt like it was cash.

Feb Balance Sheet:

Fed Off-Balance Sheet Debt:

Our own market internals are still bullish, although our short-term indicator ChartMeter ASP did drop from 57.03% to 50.2%. This is clearly a warning. The premise of this article is that a stronger US Dollar means a decline in stocks has begun.

ChartMeter ASP 512      
Date PLUS Zero Minus % Long
2-Jul 284 51 177 55.47%
3-Jul 290 52 170 56.64%
5-Jul 292 47 173 57.03%
6-Jul 257 77 178 50.20%
T11 SUNMARRY 513      
Date PLUS Moving Minus % Long
2-Jul 255 41 216 49.80%
3-Jul 256 39 217 50.00%
5-Jul 278 44 190 54.30%
6-Jul 282 44 186 55.17%

Michael J. Clark

Hanoi, Vietnam

7 July 2012