Market crash 2011... Don't say I didn't tell you so...

Well since the markets has recently confirmed my view in June and is heading to the Dow 10000 level that I predicted, Im going to post on this blog a part of my QE3 publication that I wrote at the end of June. Even though I was wrong on the treasury call, I was definitly good on the equity trade. Here it is:

So as we approach the end of June in a couple of days, the Fed’s QE2 600$ Billion purchase program is coming to the end but we just had the 10 year yields breaking below 3% again today with the help of a 1 trillion $ US equity market correction in the first 2 week of June. This begs the question, is Bill Gross right with his call to underweight US treasury?

Well for those of you that are unfamiliar with the bond market (which you really should be since the bond market basically tells you if the equity markets will head up or down), the king of PIMCO is arguing that US treasuries are overpriced, it is the wrong bet and that he is underweight in US sovereign for a few reasons (FYI, I completely agree with him even though the bet is wrong at the moment). First, we focus so much on the nation’s 14.3$USD trillion public debt that most of us are forgetting about the American Ponzi Scheme with Medicare, Medicaid and Social Security that is putting America on the tab for close to 100$USD Trillion in unfunded liability. Second, with the Fed’s expansion of balance sheet ending, who is going to continue with the treasury buying? This again leads us to the question of the extension of the debt limit and the possibility of QE3.

We all know QE2 completely bombed, everything the program was supposed to accomplish failed, money are moved from the FED into risky asset, equity markets gets inflated and huge pile of cash goes into speculation that leads to commodity inflation which in turns adds pressure and slows down the economy. While all the cash is getting piled in to give LinkedIn a ridiculous valuation of 10$ billion at the first day of trading (which sales is only at 250$M), none of the money moved into the economy and nothing work! Just look at all the economic numbers! By the way, and its not that banks are unwilling to lend out their reserve from QE2 to small businesses, far importantly, the problem is that they are unable to. You know why? Because all of the actual QE2’s liquidity went to the rescue of foreign banks! Ask big Ben Bernanke and he will explain that to you.

So, is Bill Gross right? I think so. And if we do see QE3, what will happen in my point of view? Stagflation. Let me remind you of the Japanese Economy after their failure of their QE in early 2000. Decades of deflation, 13$USD Trillion in debt, debt to GBP of 200%, 2 year yields at 0.1% and here is a Nikkei 225 historical chart to better paint your memory (chart below). You can't cover a huge wound with a band aid, all it does is it delays the problem. One band aid (QE) after another, eventually, if you don't stitch the wound ( increase taxes, increase saving, balancing budget) it will just get worst and infected as you keep covering it up with more band aid. Stiching the wound will be painful for the whole country, but its the right thing to do, or else, eventually, you will bleed to death. So US equity market and economy? Say goodbye to that…Remember, the lowest the Dow hit in the recent crisis was around the 7000 level, we have a long way down to go...