Call it Gut

I rarely make videos anymore, it's just too time consuming, but I have had a bad feeling for several days and you probably have noticed it in the subjects I've been covering as well as the longer term 3C outlook published Tuesday about a reversal today. We pretty much got the reversal except for a Fed angel stepping in around the afternoon, better known as the Plunge Protection Team.

The bond market is acting exceptionally strange and Bernanke's testimony today contained little bits and pieces that didn't make a huge impression, but each one made me think, "hmmm".

There's no doubt liquidity is dry, the HFT's have destroyed the traditional buyer/seller of last resort market structure and the game is all about volume/volume rebates as these HFTs just pass shares back and forth, we see it in the intraday chart action in which the market effectively goes nowhere, a .25% gain is hardly worth mentioning-except it happens 8 days in a row, some of the bigger percentage moves have been to the downside-liquidity exacerbating the situation.

Imagine that we do get a sell-off on a black swan event, circuit breakers be damned, they'll only serve to panic the public more and all the traders who are in the market now on the "buy the dip" trade are doing so on huge leverage, like we haven't seen in years-this  always a red flag-GREED. When liquidity dries up and a market falls, it falls fast and hard, margin calls come in or positions are liquidated by the brokerage for you with or without your consent. Traders just don't see it or care about it. Even the VIX yesterday showed multi-year intraday lows=complacency=sell-offs (traditionally, and I have no reason to believe it's any different this time, no matter what the talking heads say).

As I also mentioned in the videos and here through numerous breadth analysis posts, you can see that bellwethers are sinking, the cats and dogs are rallying-not a good scenario for the bull move. If the recovery is here, where are the jobs? Why are the transports falling apart? After all they bring you the goods.

I showed in the first two videos the CRB index (commodities) , ISM reports also consistiently show what we already know, input costs are rising so they either get passed along to the consumer (inflation) or to try to maintain their margins, they have to lay-off more people (worse unemployment)-it's here now, this isn't Fed fantasy land.

Unless the Fed is a lot smarter then their past actions would imply, they have a HUGE problem brewing.  There's no way they can effectively say that they are politically independent from the government, they are -at least until today's 10-year auction, acting as the buyer of only resort as the government's deficit is spiraling out of control and the debt ceiling once again will likely be raised. You'd think they'd look at the micro problem of leveraged debt that got us here on an individual basis and think about the macro scheme of things and cut spending, initiate austerity measures and the like, but corporations run Capital Hill and these politicians can't see any further then the next election. Most people think about themselves first-after all, everyone else in Congress is doing it.

If the Fed discontinues buying up our debt (as the largest holder now-and when questioned today about that regarding China-a member of Congress actually schooled Bernanke who didn't have the answer as to how much China holds!)) as they will have to eventually do as rising inflation is evident in all forms of input costs, who will be the buyer? Or do we default on the debt? Maybe they are following the micro example?

In any case, $1.7 trillion didn't do much in QE 1, $600 billion of QE2 does what? Do you believe the unemployment data as they have adjusted it for everything and then revise it to the worse in following months-(GDP too)?

It all comes back to what I said in my 2007 5-part video series on bubbles, the only way we move toward normalcy is to bite the bullet and let some of the "too big to fails" -fail. We are simply kicking the can down the road and whistling past the graveyard and the problem gets bigger every day. From real estate, to MBS, to pensions and municipal defaults, we are in no better shape in practical terms $2+trillion dollars later. However the insider who have been selling as a fast clip certainly are. The truth is probably that 1 in 5 Americans are not making what they need to if they have a job at all and that is after the consumer has de-leveraged debt.

Our family Cafe sees a lot. We see businesses come and go in the plaza in 6 months. We see people who made $65,000 a year work for $7.25 an hour and part time at that! We see the rising costs of food and we have to go outside of the US and buy in bulk to get any kind of a normal price on dry goods. We get applicants every single day-and we aren't looking for them. We people transition from coming in 5-days a week for their lunch break to 1-day a week as the brown bag it the other 4 days. We see the rising and ridiculous city, county and state fees rising as well as the rent through all kinds of surcharges. And as far as employment goes, we streamlined and went from 5 people during a lunch rush to 3, we've managed to increase productivity and do more for less because even at minimum wage, there's a number of other costs that make a $7.25 an hour employee a $10 $11 an hour employee an I'm not just talking about taxes-there's so many ways in which they cost money and that's with no benefits.

I've reached out to many friends in the last month and I can't find one that is saying, "we're okay"; they are pursuing bankruptcy, home loan modifications, aren't paying their mortgages, and aren't answering the phone when an unidentified phone number shows up and I live in an affluent city, one of the most affluent cities in the U.S.

One friend owned one of the biggest road paving/underground utility construction firms in the U.S. They went from bidding 30 jobs a year to 1 (that was signed) in the last 3.5 years. He's had to shit down, liquidate, lay-off hundreds of employees and is facing lawsuits from every direction and this guy lives about as modestly as do I. Luckily for him, one of the banks that is going after them ISN'T LICENSED TO DO BUSINESS IN THE STATE OF FLORIDA!!! They even have offices here, how that happened? IDK.

Small businesses everywhere are shutting down after a few months or so, but the credit card apps are starting to come in the mail. Are banks understanding that their trading desks soon will no longer drive profits and looking to return to a more traditional banking business model? I don't know, but small businesses aren't getting the capital they need and they aren't getting payment on even net 90 day accounts.

Something big is going down and the wheels of it are in motion, it's a matter of finding where the opportunity in this scheme is and there is always opportunity. Just be prepared to take highly unconventional steps when the opportunity presents itself and above all, fine tune your risk management as I believe this market is about to entered rough, unchartered waters sooner then most people can imagine.

Feel free to email me your comments, stories and thoughts. The more minds we have looking at this, the better. And educate the people around you, you'll find one of the best ways to learn is to share and teach others.