Bailout Bubble Growing Ever Larger

The weak dollar carry trade has finally made its way to the mainstream financial media in recent weeks as the plunging dollar continues to drive equities higher. Commentators have finally eluded to this relationship absent any other explanations for the market's continued run-up. In a strange twist of fate, Wall Street continues to cheer adverse economic data as the weak economy keeps the Fed from raising interest rates. So the toxic brew of low rates and cheap money that led to the first collapse will somehow cure all of the structural deficiencies currently plaguing our economy.

It's no accident that the S&P hit its year high on the same day the dollar index hit a 15 month low on the back of bearish comments coming out of the G20 meeting this weekend. Apparently, the G20 has concluded that the US dollar is still overvalued and will most likely post further declines in the coming months. These comments coupled with the group's stance to keep economic stimulus measures in place helped drive the S&P up 2.2% today on top of the 3% gain sported last week. Oil and gasoline prices also rose over 2% alone today as a barrel of oil straddles the $80 mark. Gold also hit a new nominal high at over $1,100/oz. As much as I like gold as a long term investment, I would not touch it at these levels. It has benefited from the excess liquidity and leverage in the system. Once interest rates increase and the aforementioned carry trade reverses, gold will post precipitous declines. The gold trade is crowded and once the retail investor decides that they want to own some gold, it's probably a good idea to go ahead and unload it on to them.

The truest measure of unemployment as measured by the Bureau of Labor Statistics has risen to 17.5%. Contrary to what Keynsian economists may lead you to believe, unemployment statistics are not a lagging indicator. The jobs lost today will not be coming back, they have permanently disappeared.

The unemployment rate has more than doubled since the start of the recession in December 2007, yet US equities have only dropped 26% over their record close in October 2007. Although the weak dollar helps explain part of this discrepancy, low interest rates can only take stocks so far. Incidentally, equities peaked two months before the official onset of the recession, directly challenging market forecasters who claim that the market always prices assets out six to nine months into the future.

Both commodities and equities are in bubble territory. Specifically, oil and gasoline are grossly overvalued based on fundamentals. Eventually, not even the weak dollar will serve as support because the coming collapse in demand will result in a severe and sharp price drop. Oil is at least 50% overvalued at these levels.

On the equities side, technology, retail, and financial stocks are just ridiculously overvalued. I made the same call in June and it's obvious that I was early in my call to short these stocks, but I'm confident that when the bubble bursts, and it will burst, these stocks will see 50%+ haircuts. My top equity shorts based on valuation are 1)Baidu, Inc (BIDU, $425.87) 2)Amazon (AMZN, $126.67), 3) Sears Holdings (SHLD $70.51). Additionally, tech bell weathers such as Google ($562.51) and Apple ($201.46) have approached or eclipsed their all time highs. Although these valuations are more reasonable, consumer and advertising spending will not support these share prices over the next several years. I have put my money where my mouth is with respect to my short positions, but I am prepared to wait until 2010 to see any significant pullback in equities.

The current administration continues to pursue easy money policies favorable to financial markets but detrimental to the country's long term economic health. The average American's standard of living along with saving rates declined during the 20 year stock market bull run from 1987-2007. These measures will result in extreme economic turmoil and the emergence of legitimate political third parties to offset the disastrous policies enacted by both Democrats and Republicans over the past five decades.