I could not post the link, so here is the entire blog for anyone that wants to read it (sorry about the long post...)

Sunday, June 21, 2009.

Hmmm, first day of summer - when the markets are supposed to be somewhat subdued and investors are more indifferent, perhaps relaxing at the cottage... What kind of summer do we have in store this year?

First off, my personal opinion is unchanged regarding the legitimacy of the strong rally off the lows that the major markets have enjoyed since March. Its crap, an engineered scam accompanied by hype and bluster from all the usual suspects who should know better. Just because a handfull of idiots choose to tarnish their reputations on national TV does not a recovery make. Do not believe the hype! I think we have lower lows yet ahead before all of the rot from the crisis has been purged.

I remain short the financials through the SKF Ultrashort ETF. I should be buying more here, but its hard to buck a trend when the FED has obviously backstopped the financial sector. That does not mean that the sector will not fail, it just means it will take a bit longer to come unglued. Just look at the long bond for instruction on how even a huge cash injection by the government will only buy time if the longterm fundamentals stink.

The thing that is different this time is that more middle class people own credit cards today than at any other time in history, and the net credit card debt is also higher today than any other time in history. Why is this important? Well, when times get tough, and people get laid off, or cannot make their income last, they turn to credit for additonal cash. This can go on for a while, until the card limits run out. Some poor bozo lost his job at the plant and then he hangs around hitting his cards for cash advances to pay other cards... like a mini-ponzi scheme.

In the end, all of this exposure to debt is going to make the real crisis worse, and will hit the banks even harder. It will blow massive holes in the balance sheets of banks that are already listing and going down by the stern. But it does buy time. So while the cheerleaders are lying like hell on TV about a recovery, things are getting worse behind the scenes. It just takes a while to show up.

There is a shelf-life for this recovery, and my guess is that is about done. That putrid stench that is drifting in the air lately is the giant heap of toxic credit card debt that is about to be disclosed. Unlike mortgage debt, which was offloaded into securitized vehicles for other suckers to lose on, much of the credit card debt outstanding is held right on the books for the big banks. You cannot hide it as easily, or invent mark-to-fantasy numbers to make it look like a loss is not really a loss.

So keeping in mind that we have this lag while credit cards continue to be used as an ATM before the deadbeat clients finally run the cards up to their limits, lets consider how bad the unemployment situation is. If we assume that it takes about 6 months to run out of all access to money, then we just roll back through the last 6 months of data to find out how many people have lost their jobs and we can expect a tsunami of writeoffs coming to a bank near you.

Lets also keep in mind that economic recovery is supposedly based on the fraction of people who have re-entered the workforce. Are the quality of jobs the same as the jobs that disappeared? I think not. Many high paying jobs are lost forever, replaced by McJobs that pay less and have trapped the working poor in a situation where they cannot repay debts racked up in the good years.

There will be more bank failures as a consequence. And the FDIC is already stretched thin on just the handfull of failures so far. A huge cash injection (in the hundreds of billions of dollars) will have to be made to keep this fund solvent. Then there is the outstanding liability from the bankruptcy of GM, and the CDS toxic waste on the books for AIG that is related to that mess. Count on another bailout in the hundreds of billions of dollars. And the FED wants to continue pumping in cash to support and bailout every failed corporation that meets its policy objectives, so add trillions of more dollars.

Now with so many people and corporations insolvent, there will be far less tax revenue coming in at exactly the same time as a tidal wave of money is going out. Wholesale monetisation is the only option left. Rampant printing of money, and runnaway inflation is coming. Does this sound like the framework to support a continued broad market rally?

Look at the price levels that many blue chip stocks currently trade at, and compare that to where they were about 4 months ago. Would you buy them here?

Considering all of the above, gold and PM mining stocks are still the place to be. I think they are trading at very reasonable levels now after the selling cycle that has been in effect throughout June. So as the summer winds along, we may not get a big fireworks display in the market, but I will be quietly adding to my top picks and patiently waiting for the rest of the market to figure out that the system is in serious trouble. The credit card debt levels will create the next financial crisis and take the market down by the knees before the end of this year. There is no financial alchemy that can prevent that. Do not fall for the nonsense that the system has been fixed.

Cheers!

mike