Connections and Directions

Well, the Fed is now all in. This is it, there is no more. The Fed is going to buy 40 billion dollars of mortgage backed securities every month in addition to the 45 billion dollars a month of US Treasuries they are currently buying for a total of 85 billion dollars a month of newly created out of thin air money till the end of the year and 40 billion a month after that. I won't get into the rights or wrongs of this or bore you with economic theory but I will tell you where this all leading. First this cannot continue indefinitely and if something can't go on forever it must stop at some point in time. When that occurs will be when we have inflation kicking in at unacceptable levels. Now comes the hard part. In order to slow down the rate of inflation the Fed will have to start selling into the market all these Treasuries and Mortgage backed Securities they are holding. This will trigger a total collapse of the bond market as everyone on the planet holding US paper will head for the exit at the same time. Interest rates will skyrocket which will trigger a massive depression and the collapse of the whole rotten system. That is the longer term prospect, say 3-5 years out. What we are interested in right now is the next 2 years. That picture is fairly clear now. QEIII will drive down the US dollar. As the dollar goes down all commodities such as oil, gas, wheat and gold will go up. Following is a 5 year chart of the US dollar index with a 30 week moving average showing that it tends to go up and down in cycles that last a minimum of 6 months and a maximum of 12 months. As you can see we have just started a down cycle so I expect this to continue for at least another 6 months.

The effect of a weaker dollar will be to drive up the price of Oil and Gold. Charts of Dig and GDX below. As you can see they are in a nice uptrend.

The next chart is DDM which is the proxy for the Dow. As you can see Bernanke's theory about creating employment is working. The problem is the jobs are being created on Wall Street and not Main Street.

Now we get to the model portfolio. Last Monday I place another bet on TBT as it crossed over the moving average line to the upside again. I hope I don't get whipsawed out of my position again.  I am interpreting the movement in TBT which moves inverse to the price of US Treasuries to be an early warning sign the party is over in the bond market. If bond prices are falling long term interest rates are rising. It will be interesting to see who wins this battle, the Fed or the Bond Vigilantes.

Last, but not least comes the chart of the Model Portfolio. It should be self explanatory.  The model portfolio is up 19.08% so far. Oil and Gold are each up over 20%.

Symbol/Name	Price*	Change	Last Trade	Gain/Loss (USD)	Shares	Price Paid	Purchase Date	Gain/Loss (USD)	% Change	% Port	Value (USD)
DDM:US ($) ProShares Ultra Dow30	75.50	+0.56	09/14	+56.00	100	66.00	07/07/2012	+950.00	+14.39	37.90	7,550.00
DIG:US ($) ProShares Ultra Oil & Gas	52.63	+1.53	09/14	+153.00	100	41.00	07/07/2012	+1,163.00	+28.37	26.42	5,263.00
GDX:US ($) Market Vectors Gold Miners ETF	53.86	+1.34	09/14	+134.00	100	44.50	07/27/2012	+936.00	+21.03	27.04	5,386.00
TBT:US ($) ProShares UltraShort 20+ Year Treasury	17.20	+0.90	09/14	+90.00	100	15.78	07/10/2012	+142.00	+9.00	8.63	1,720.00
Totals				+433.00				+3,191.00	+19.08		19,919.00