Phoenix Capital Research's blog

The REAL Crisis (of which 2008 was the warm-up) is fast approaching. When I say REAL Crisis I mean full-scale systemic meltdown, a situation in which the market accomplishes what the Fed, regulators, and US Government at large have failed to do: clean house. The plain facts are right in front of us. The US is broke on every level: Federal, State, Local, and individual/ consumer. We all know this, but we don’t want to admit it because doing so would likely mean wiping out at minimum 30% of what we have today.

For well over two years now we’ve been told that the US was in recovery and that as most the biggest risk was a potential double dip. The reality however was that the US never experienced a real recovery (unless you work at one of the “chosen” firms on Wall Street).

Going forward, we’re going to see economic data become even MORE divorced from reality, assertions that the economy is back on track, and that at worst there is the specter of a “double-dip” recession looming. Heck, even these fears are sugar-coated… literally (making an economic nightmare sound like an ice-cream sundae is a GENIUS marketing move).

The truth is that that the market’s moves are in fact controlled by just three factors:

1) The Fed’s money pumps
2) High Frequency Trading Programs
3) The suspension of accounting standards and permission of endless fraud in the financial system

The mainstream financial media always tries to offer fundamental reasons for why stocks do what they do. If stocks rally it’s because on good earnings or improved consumer confidence or some other development. So don’t expect to ever hear any of these folks tell the truth, which is that that the market’s moves are in fact controlled by just three factors:

1) The Fed’s money pumps
2) High Frequency Trading Programs
3) The suspension of accounting standards and permission of endless fraud in the financial system

I was recently on a trip to South America looking at real estate. While there I was told repeatedly by developers that they didn’t want to sign a contract in US Dollars. Instead they wanted to do it in the local currency. This has NEVER happened before during my trips abroad (even as recently as 2009). When I pushed for having contracts based in Dollars, the price went up EVERY week. The reason? The US Dollar is falling in relation to the local currency on a daily basis.

So why is Bill Gross, the Bond King, dumping US Treasuries? The 30-Year Treasury only has one support line left before it gets to the line that has supported it throughout its bull market of the last 28 years. When we take out that line, the US Debt Crisis will hit in full force, as our overleveraged financial system breaks down once again.

Bill Gross, with the possible exception of Goldman Sachs, has the best access to the US Federal Reserve and US Treasury Department of any investor on the planet. During the 2008 Crisis it was rumored the Treasury had him on “speed dial.” So for Gross to be dumping ALL of his US Treasury holdings means that the US debt Crisis is coming and coming fast.

Thus, to say that the US Dollar and debt system are broken would be the understatement of the century… However, the US Dollar has become a massively lopsided trade with investors betting heavily on its demise. When you consider its position relative to the Euro (another doomed currency), it is clear that the US Dollar could bounce just based on the lopsidedness of this situation.

The Financial World has entered a period that is strikingly similar to that of 2008, at least regarding three key issues. They are:

1) The Oil/ USD correlation (as noted recently on ZeroHedge)
2) Bearish bets against the US Dollar
3) “In the Know” investors getting out of the market

Remember, the interest-rate based derivatives market in the US is $196 TRILLION. If the Fed lets interest rates get out of hand, then the entire system breaks down even worse than it did in 2008: 2008’s crisis was triggered by the credit defaults swap market which was just $50-60 trillion in size (less than 1/3 of the interest rate based derivatives market).

This is a chart of the US monetary base. In simple terms, it charts how much money the Fed has pumped into the system (at least that it admits). So it’s a kind of visual of the Fed hitting the PANIC button: when the monetary base explodes higher, the Fed is FREAKING out. You'll note that during the Financial Crisis the Fed didn't do much until the autumn of 2008 when it pumped nearly $1 trillion into the system. Think about that, the Fed didn’t go nuts pumping money until the stuff REALLY hit the fan.

I know that many deflationists believe that we cannot experience hyperinflation in the US due to our obscene debt levels. The belief here is that all the money thrown into the US financial system will be swallowed by another round of debt deflation. The problem with this belief is that it doesn’t understand how currency crises work. Inflation occurs when a currency falls in value relative to other currencies. And as noted by other astute commentators, hyperinflation occurs when a currency is abandoned all together.

The US Dollar's inflationary death spiral continues. We've now taken out the 2010 low leaving only two more lines of support before we're in completely uncharted territory. At its current rate of collapse, the US Dollar will do this within the next 3-4 months. This means the greenback will break into a new all-time lows by 2H11, which will precipitate the coming inflationary collapse.

The Euro just eeked out a new high, invalidating the Head and Shoulders pattern and setting the stage for additional upside gains to 145 or even 150 if things really take off. It’s extraordinary given that the European Union continues to collapse (Portugal is next up on the block).This rally in the Euro has coincided with further weakness in the US Dollar, which has now taken out its 2010 low, leaving the 2009 low and 2008 lows as the final lines of support before we enter uncharted territory.