From Dan Denning in St Kilda:

The cleverest Bear you'll ever meet...a very angry Dragon...the golden backdoor...and more!

--What could it mean that Bank of America was down 5.2% in U.S. trading overnight? Or that Wells Fargo fell 4.2%? Or Citigroup fell 4.5%? Or that JP Morgan fell 2.8%?

--Well, it could mean nothing.

--Or it could be the leading edge of a financial merde-storm that is about to hit the U.S. market and reverse the global risk trade that's propelled the Aussie dollar to within a husky whisper of parity. If and when that storm hits, you can expect to see a correction in gold and big falls in base metals prices and across the whole commodity complex.

--But it's tricky, isn't it? Signs of hyper-inflation or "elevated" inflation are commodity bullish. Besides, how is it possible that a major mortgage crisis in the U.S. could lead to a stronger U.S. dollar? How does evidence of massive financial weakness at the heart of the American financial system translate into a reversal of the dollar's relentless slide against everything else?

-- If it's a repeat of 2008, then suddenly-terrified investors who've been borrowing in Ben Bernanke's cheap currency unit to buy real things and higher yields will take their post-2009 low profits and cash in. Then they will head for their heavily fortified silk-lined and fuel-cell powered bunkers, with canned foods, gold coins, and bottled water, and commence the vigil/death watch on America's incredibly complex, fragile, and fraudulent financial system.

--You may think we're exaggerating today. We're not. Of course we're trying to avoid over reacting as well. When retail investors abandon stocks in droves, it's almost always a good time to buy. And lately, U.S. investors have been exiting equity mutual funds in favour of bond funds, exchange traded funds, and emerging market funds. The herd has a habit of buying high and selling low. Is now one of those times?

--The shift in capital flows does not exactly show a general risk aversion to stocks; it's just an aversion to U.S. common stocks. This leads us to believe this is one of the cleverest Bears you'll ever meet. Maybe one of the cleverest, most gluttonous bears ever. He can hardly believe his luck, if bears believe in things, that is.

--Since the March lows on major indexes in 2009, the Bear has retreated to his cave to munch on the dollar carcass as it steadily declined. Meanwhile, investors, believing the picnic ground is clear, have busted open the Chardonnay and begun buying bonds, commodities, and emerging markets with glee.

--Meanwhile, the Bear in his lair lays low and keeps quiet. He's probably busy reading (with growing hunger)

--But wait!

--There is always the possibility that this really IS the big one for the US dollar and that's what bad for the greenback is good for Australia and the things in mines. That is, this is the moment when global investors turn against the greenback as a reserve currency. If that were the case, the Aussie would smash through parity and break out of its old relationship with the U.S. dollar. Come to think of it, a lot of things would break, and probably be beyond fixing, including the current uneasy, co-dependent, increasingly antagonistic relationship between America and China.

--You have to wonder if U.S. monetary authorities are capable of reversing the dollar's slide at this point, even if it's an outcome they desire. For what it's worth, we think the authorities want a weak dollar, but not for the reasons they say. A weak dollar should improve U.S. exports. Yet America had a $43 billion trade deficit in August. And its bi-lateral deficit with China was at an all-time high.

--Of course you can't improve your exports to a market when your currency doesn't get cheaper because its value is pegged to that market. When the dollar slides, the Yuan stays in a fixed relationship to it with a fixed exchange rate (or a managed floating rate). China has not suffered a competitive blow to its exports from the dollar slide. But that doesn't mean the Chinese are happy about the weaker dollar.

--They realise that a deliberately weaker dollar is a kind of strategic default or depreciation on long-term U.S. liabilities. "The dollar's depreciation may appear to be market-driven. In reality, it is a depreciation coloured by very strong, deliberate actions,"

--People fight over these kinds of things, historically.

--But for now, the opening battle in the currency wars is all financial. And your editor is admittedly fascinated/obsessed with the idea that from out of the blue, this mortgage fraud situation has the potential to tip the American (and global) financial systems right back into an acute capital crisis.

--Those trillions in bad U.S. housing loans have not ever been written down or purged from the system. And now they appear to be going sour/blowing up well ahead of schedule. Everyone thought the foreclosure problem wouldn't hit until rates went higher or interest only and ARM mortgages adjusted.

--Scratch that. The endemic fraud in the U.S. mortgage system is quickly becoming an existential threat to big U.S. banks, you know, the ones that are too big to fail. If these banks face losses or non-payment on large chunks of their loan portfolios, they will require huge capital injections, reorganisation, or outright nationalisation by the U.S. government (which is currently on the road to bankruptcy).

--And thus you will finally have the nationalisation of American finance, where the bankrupt State and the amoral corporate financial sector finally merge into one entity with complete mastery over the little guy. The merger of the State with Corporations is also called Fascism. It's the sort of threat that, once realised, should make well-armed Americans very angry with their incompetent government.

--But will the bone-deep dread that's setting in with your editor cause investors to sell everything ahead of the coming elections? Or will they keep buying gold, the financial back door to this whole coming barroom brawl between the Banks and the People? Or will this be another orderly retreat from the systemic precipice and from risk, leading to a handy little U.S. dollar rally and more gains in the Aussie gold price? Stay tuned...