HERE'S MY FORECAST

Here's what I see coming for the economy, and followers of my blogs will note that I am smack on in forecasting. The timing for things to happen gets extended depending on the stubbornness or delusion of the investing community. But here's what I believe strongly is going to happen in 2011-12:

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Inflation - and why

1. The US Fed just started QE2. This completely baffles the world, (me included) as the first round was barely excusable because there was a liquidity/credit crisis. If you look at my post history, you'll see what I thought of QE1, what I thought was going to happen as a result (which it did).
2. Now QE2 is being used as not a lifesaver, but as a booster. The US FED is getting addicted, as if cash infusion was heroin.
3. We all thought QE1 was so bold, it wouldn't happen again. Then I realized - wait a minute, QE is really great for a country that is:
4. Deeply in Debt - If inflation takes off, as you know, loan principals are NOT indexed to inflation. So you will be paying with tomorrow's worth-less-than-today's dollars with future cheaper dollars. In this way, it actually reduces the debt burden.
5. A cheaper USD comes as the siamese twin of inflation. A cheaper USD makes our exports cheaper to the world (same with our labor costs) and this would then give us more jobs. Think about it - more jobs, a forgiveness in debt - why WOULDN'T the US want inflation?

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The only fly in the ointment is the current currency war, and the anger that is directed towards the US completely irresponsible handling of things. The world is mad that the US is flooding dollars, which is a form of currency manipulation (tons of funny money tends to make each dollar worth that much less), and the world (especially China) are stinking hotter than Kimchee that we are accusing the Chinese of manipulating the yuan when we are absolutely doing that with QE2.

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The world is not going to allow the US to be the guardian of world currency anymore as the reserve currency. USDX is measured against a basket of currencies, and as the floor is dropping off (it passed .75 which is hilarious) and the Canadian dollar just went PAST par. This is before the second wave of quantitative easing actually has hit. People say, oh the market is pricing in QE2, but this is different. This is a loss of credibility.

BANK OF AMERICA RE-REMICS

This makes me mad. The banks have invented a new thing called a "re-remic". This is yet ANOTHER mortgage back security - repackaged into AAA bonds!!! D&B are rating these things at AAA even though they are TOXIC mortgages. They simply repackage junk bonds and "christen" them as AAA. Don't believe me? click here

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The banks like B of A and JPM are doing this because 1) they can and 2) they need to. After the mortgage meltdown global regulators required that the banks keep a certain amount of healthy capital vs. their toxic assets. So what did they do? Simply take the bad stock, repackage, and call it good stock! AND FUNDS ARE BUYING IT.

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The US keeps doing the craziest things. The US Federal Reserve is now saying they want inflation. The fed doesn't want inflation, you do. In a way. If inflation spikes, then the loan you have now for $100 will go down by the rate of inflation because your debt is fixed, but the future dollars will be worth less. This is great for a country in a 15 trillion dollar deficit (pay back the world with cheaper dollars) and with not many jobs (because we can export our stuff for cheaper, leveling the playing field with labor costs). However, just know that this will cause 1) interest rates to rise and 2) your retirement funds, assets in USD will get really low. So the bottom line is, this would be a good time to have debt (as an F.U. to the banks) and a BAD time to have US Dollars or USD backed assets.