- Technical, Editorial Market Commentary -

October 13, 2010 (FinancialWire) (By Dr. Joe Duarte) (Entire article at http://www.investrendsyndications.net/12-content/manl/duarte/2010/10/php/13.php) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries) — The PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) is due for a big bounce at some point.

The market has been pricing in a huge Federal Reserve quantitative easing push. And the dollar has taken the brunt of the hit. To be sure, that makes sense as quantitative easing means that the Fed will buy bonds and flood the financial system with newly printed cash. That means that the money supply will swell and that the dollar will be worth less.

But the size of the decline in the dollar may be disproportionate to the amount of quantitative easing. The Dollar Bull fund is down some 13% from its June high, closely mirroring the fall in the U.S. Dollar Index. That explains the rally in gold and other commodities.

Our point is that the decline in the dollar may be overdone, at least temporarily. This is because the Fed has not given any indication as to how much quantitative easing it will do. One estimate is that it would take a trillion dollars' worth of quantitative easing to improve GDP by 0.5%. That means that ideally, the Fed would print several trillion dollars.

That's not a very likely scenario, given the way the Federal Reserve works, in small increments. In other words, the market seems to have overshot the decline in the dollar, which is why UUP may be making a temporary bottom.

And if you look beyond the markets, there are plenty of issues that go beyond structural and head into the realm of questionably repairable.

The world is at the breaking point as special interests, including individual populations are focusing on self interest while the limited amounts of resources limit the amount of gain potential for anyone particular group.

In the 1970s, this scribe, wistfully remembers listening to the radio. This was just your basic small transistor with what is now a rudimentary, non digital, monophone earphone. Then, the simple pleasure was the expectation of wondering what song would come next. And what made it more magical was the variety of the fare on any Top 40 station at the time.

But as things got more sophisticated, FM came along. And with it came the consultants, and the specialized playlists. As radio stations became focused on making more money, so did the playlists become narrow, both in the genre, and in the number of artists and the songs by each artist that would be played. What was once an advance, the cleaner, stereophonic sound of FM, became a hindrance.

While "Classic Rock" was once an exciting novelty, it's now become a bother. How many times can we listen to the same five tunes by The Doobie Brothers, or Deep Purple? How many more spins can "Sweet Home Alabama" get? And how many local disc jockeys have disappeared forever as the syndicated morning shows have taken over the airwaves?

So satellite radio came along. Hundreds of channels, each one customized, and surgically fragmented to cater to each special niche of listener. Now we have "Watercolors" for contemporary Jazz. And we have "Hair Nation" for melodic heavy metal, while "The Boneyard" spins "classic" metal, and "Real Jazz" for the true Jazz buff. But, after a few months, each station seems to have succumbed to the same malady that the local FM stations fell prey to, the consultants, the playlists, and the ensuing boredom for the listener. And all of the plugs for each station's "Facebook" pages don't do anything to ameliorate the obvious. If we don't like what they're playing, why do we want to go to their web page and waste time there getting a different angle from the consultants? Satellite radio is heading down the same path as AM and FM traveled, listener boredom.

What does this have to do with politics and money, the elixir from which these pages extract their daily nourishments? Think about it. In the old days, candidates stood for something; low taxes, high taxes, national defense, aiding the poor, and so on. You didn't have to agree with them, but you knew where they stood on things. Now, the consultants have taken over, and all the candidates want is to win, to get into office, and to plug into the never ending cycle of being in office, staying in office, or the equally attractive alternative if they lose, get a job as a big lobbyist and cash in on their time in office. So they're coached about what to say, how to dress, and how to portray themselves during their public moments. And at the end of the day, the voter doesn't really know what they're getting, except, the same five sound bytes from any of the candidates, just like the same five FM "Classic Rock" tunes.

And how has this brought us to the brink? Well, it's the, to borrow Muhammad El-Erian's latest word, "contaminated" status of the whole process in Washington, and its interactions with the rest of the equally "contaminated" global governments that has brought the world to its current status.

How have we arrived at the current moment? The long answer is that today's disputes are just the continuation of the disputes that have been progressing over the last several thousand years, as people fight for power, money, and glory. But for now let's keep it contemporary, so we'll just focus on the last century or so.

World War I begot World War II, which got us Korea, Vietnam, and the cold war. Russia went into Afghanistan, and the CIA spawned Al-Qaeda. Al-Qaeda felt betrayed when the CIA left them stranded in Afghanistan, and we got 9/11. After that, things accelerated. Somewhere in between we got two Gulf Wars, lots of people got older, started sucking up Medicare resources, and deficits got bigger.

So called "smart guys" on Wall Street and their cronies at the mortgage companies decided that they could sell expensive houses to people with no money, who were foolish enough to believe the tripe that they were peddled, and we got a housing bubble. Some really smart guys figured out the game and shorted the B.S. backed paper that was known as a C.D.O., and when enough of the faux mortgages that were peddled as real mortgages went officially bust, they collected their winnings.

Real money evaporated from circulation and went into the pockets of the smart guys who shorted the air mortgages housed in the B.S. paper structures known as C.D.O.s, and the fools on the wrong side of the trade had to sell real assets to pay the smart guys who shorted the greatest scam of all time.

What's left is that the U.S. government now has all, or much of the B.S. C.D.O.'s, and they're housing them at Fannie Mae, and Freddie Mac, where they are now worth less than the nothing that they were worth when they were created and peddled on the morons that bought them. Except now, they are being financed by taxpayer money, with no hope of ever being worth anything. And the government, nor anyone else seems to be telling the public that this is what a "toxic asset" is, or where these pieces of fiction are sitting, collecting dust, and sucking up taxpayer money.

Now that we know how we got here, what does this have to do with the fragmentation of the world's political and financial system?

First, the U.S. was seen as a place where this kind of stuff couldn't go on, or maybe as a place where if it went on, and you were closely associated with the right group, the bad things wouldn't happen to you. Yet, as it turned out, the hoax was perpetrated on the Swiss, the Germans, the French, the British, and the Chinese, as well as many others who have not been named, at least as of yet.

The repercussions of the world’s greatest hoax, the subprime mortgage, and the subsequent bust, have in fact become the tipping point of modern history. The U.S. is now persona non grata. Not only did we invade foreign lands and cause wars, the U.S. actually hurt people's pocket books by perpetrating a great hoax that made trillions of dollars in Yen, Yuan, and Euros in value evaporate along with dollars.

To some people, losing money is worse than the horrors of war. And those are the guys that got hurt the worse by the subprime mortgage bust, the people who hate nothing more than losing money. That the average Joe's 401-k got decimated when the big money guys had to sell real stocks and real houses to pay the smart guys who bet correctly, isn't the issue to the big money guys, although it's this collateral damage that is being felt the most by average people.

So the big money, private and governmental, via sovereign funds, is starting to come up with a coordinated, either by intent or default, strategy, the simultaneous devaluation of multiple global currencies, specifically, the Yuan, the Yen, and by the effect of the market responding to the notion of the Fed's qualitative easing, the dollar.

In other words, currencies are the new weapons. By devaluing their currencies, countries are hoping to export their way out of their current problems. Except, there is one problem with that strategy. Eventually, it will cause friction. And that's when the stuff will hit the fan. The Great Depression, the precursor to World War II was preceded by the Smoot-Hawley tariff, and the ensuing trade war. That's where the current signs are pointing, another set of tariffs, and trade wars that may lead to something worse.

The fragmentation of radio in the 1970s led to the awfully boring radio of today. The awful radio of today has made it impossible record companies to be patient, and to allow enough time for artists to develop their talents to their fullest. Thus, we get manufactured music and stars like Lady Gaga, with drum machines, canned keyboards and recycled lyrics passing as music.

That's why record companies are going bust on a regular basis, and why only a few artists can fill large halls in this day and age. The music business is a bust. Just like the relationships between governments and their constituents, and the relationships between countries in the world are going bust. Fragmentation is nothing more than the symptom of a broader disease, in the music business and in the world.

And the disease is self-interest, at the cost of everything else. That's why people cheat on a regular basis, and why the culture of "if I tell you a lie and you believe it, it's true" is flourishing, much to the chagrin of the rest of us who are living with the consequences.

What does this have to do with your pocketbook and your investments? Everything, especially as the election season heats up and the claims of one side versus the other become more strident and the discord rises to a fever pitch. For those on the outside, especially those who are waging currencies as a weapon, as the U.S. nears its election point, so could the rest of the world go beyond its inflection point.

(Go to http://www.financialwire.net/?s=drtjby to see more commentaries by Dr. Joe Duarte, and go to http://www.financialwire.net/2010/05/01/about-duarte/ for more about Dr. Duarte.)

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