Issue forth and spay them. Let none go unpunished. Into the close, their cheerful demands of sugar will be met on the receiving end of a sharp instrument, piercing their naked breast.

ERY going green for the day.

Commodities and idiot, untalented hedge fund managers over allotted to them being pushed to the point of desperation.

Kill them all, until Bernanke is forced to intervene in two weeks.

Two…LONG…weeks…

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I’m standing hunched over the desk in my 9th floor office, chewing lightly on a light Mediterranean salad, which is giving off slight aromatic aromas mingled with the sharp hint of vinegar, and a side of tender chicken while I work. In between taking bites, I can’t help but feel my lips purse into smirks.

Looking over my shoulder; WTI is now toppling into the $82-83 range. Yet, SCO is also falling, as is ERY, and reliably, TVIX is inside of $10 again (that product is useless).

What funniness!

I can’t say I blame anyone because the horizon is murky. So all products are being sold off together. Only cash is king today.

My expectation is that by the POMO meeting towards the end of June, policy makers will have already yielded some form of accommodative support to markets. However, it could come later. This is a big gamble, so having plenty of cash and feeling secure and confident about one’s book is critically important.

I was somewhat suspect of holding products like ETFs into today, because I figured they could sell off, much like last Friday. Being wary of the potential for intervention over the weekend, I sold SCO yesterday; missing out on big gains this morning.

However, that is the price of safety sometimes.

I’ve decided to hold ERY through the weekend – I’m going to trust that, if something big is announced this weekend, I’ll be able to get out with the herd on Monday. It’s a risk, but worst case, ERY opens down ~10% and it does 2-3% of damage to my portfolio.

At that point, I would theoretically deploy some of my – by then larger – cash position.

I yearn to buy more silver; but I cannot do so here. Lower; I need lower prices.

I’ll be preoccupied with some work for the remainder of the day. It’s my intention to stop back periodically and to finalize my strategy before the closing bell. If I do not get the chance, let me take this moment to wish you a fine weekend.

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The second mouse gets the cheese.

All that I warned you about is steadily coming to pass – it’s last year, all over again. Europe is cratering, and the result has been carnage to the euro. This in turn is propping the dollar, pushing it towards a breakout.

It has been a little over one year since I first came out, suggesting that cash was a strong position; coincidentally nailing the bottom of the channel, almost perfectly.

Manufacturing in Europe continues to crack and their economies (sans Germany) are folding left and right. The latest US numbers were horrible, as all benefits from the Capital Goods Tax Deduction and cyclical winter activity have now fully worn off, revealing a country (ironically) increasingly at the mercy of exports.

Commodities continue to be brutalized, as the fluidness provided by dollars overtakes any advantage of trying to hold oil, gas, or rocks. For the second time in two years, it looks like the crude oil markets will implode on themselves.

And, of course, debt and derivatives standing with notional values in the trillions of dollars must be serviced, putting a massive bid under the USD…

But despite appearing on the cusp of victory, once again, I am aware of my vulnerabilities.

I have been mercilessly taunting QE3 speculators, especially when the ever elusive “next round” failed to materialize, time after time after time. However, this is difficult to juggle, because I really do believe that there will be more quantitative easing, ultimately. My mocking QE3 hounds isn’t about QE3, so match as timing and responsive policy – I think this is a big Catch 22.

I don’t know if Bernanke will announce more loose policy when the FOMC meets on June 19-20 or not. I suppose that ultimately depends on how much damage those of you who were counting on free money sustain over the next several weeks.

But, whether or not QE3 is announced, I will be prepared for it.

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I want to point out to everyone a phenomenon I personally first noticed around the middle of 2011. A hat tip to you, if you’ve noticed it also.

It was probably the Fall, right around the time when I was getting my face clobbered by the energy-short-gone-wrong that I pulled into a gas station and realized, “holy shit, there are two prices listed on the sign for the same octane.”

And indeed, there were.

One of those prices was for cash, and one of those prices was for credit.

This is a fantastic experience, which is crowded out by the seeming innocuousness of the observation. In the age of credit and computerized transactions, the good, old fashioned ledger book and under the table trade is winning out.

And why shouldn’t it? Cash transactions are excellent, in their ability to afford the cashier certain “leeway” in interpreting just how, when, and under what conditions said transaction took place.

Did that gasoline get sold when the price was $3.99 a gallon, or $3.88? If both prices were witnessed between refilling of the tanks, who’s to say? Plus, those convenience fees that are allocated to the extenders of the credit, those nickels and dimes, are wiped out, buffering the salespersons bottom line.

I want everyone to recognize how important this is. The single greatest outcome from digitalized transactions was the transparency of auditing. With all cash transactions, auditing begins to become, not opaque, but certainly more translucent.

It’s no wonder that the FBI put out a warning not long ago on the “terrorist nature” of all cash spending. Cash transactions will hit local, state, and federal budgets, while taking huge sums of money into black markets and out of the controlled circulation of bank transactions and financial circles. It undermines economic policy from the Federal Reserve. It strengthens the dollar, while causing the potential to impair debtors and their delicately balanced loan maturities.

In that sense, all cash transactions are a key sign of economic degradation, like carrion birds marking a carcass.

It will be interesting to see whether this phenomenon continues for long, or if at some point incentives or underhanded government strong arming attempts to force these transactions back into electronic form.

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Contrary to what you delusional psychopaths prefer to pretend, John Maynard Keynes only ever advocated mass printing of fiat currency such as we have witnessed over the last 4-5 years under one situation; the singularity where price contraction leads to demand destruction.  This development is inherently dangerous as it destabilizes trade and makes it virtually impossible for debt, the lifeblood of modern capitalism, to be serviced.  (Keynes did suggest that printing could be used to work around the need for salary cuts without creating social uprising, but this suggestion in todays environment is impractical; everybody knows what money printing is and how it affects them.  Thus the suggestion is moot.)

In 2009, we witnessed exactly such an environment.  Global trade froze.  Factory utilization idled.  Transactions melted to a crawl.  And things looked pretty bleak.

But the beauty of this singularity, where demand completely collapses, is that it is EASY AS HELL TO SPOT.

The first signal is PANIC.  The second signal is mass unemployment, production collapsing to near zero, and basically life halting to a stand still.

Does this sound like where we are now?

There are two reasons why I detest Keynes and Keynesians.  The first is that, besides being able to identify some very extreme solutions to a complex network which generally hold true (such as the Liquidity Trap), Keynes’ notion of solvable macroeconomics and the offshoot of those concepts, econometrics, have been shot in the face so many times to be laughable.

Keynes’ models were basically differential equations.  Differential equations are linear.  Linear behavior governs things like physics; your car, your computer, your house, … anywhere normal statistics can be substituted and provide reasonable outcomes consistently, or where you can whip out a ruler or thermometer, take some measurements, and start predicting outcomes to within .01% error.

Markets are not linear systems.

Markets are non-linear, like Lotka-Volterra predator-prey systems, or the competition of two species for a finite resource.  They are defined by interactions, which are so random as to be almost truly indescribable, and with very radical, polar outcomes from seemingly tiny, innocuous decisions made.

Interestingly, when extreme circumstances like those Keynes wrote about; demand destruction and liquidity traps and all that fun; when those things occur, non-linear systems get reduced to linear systems.  So Keynes looks like he was a master of the economy, rather than the servant to people and their whims that he most certainly was.

Keynes’ models, outside of extrema, predict ABSOLUTELY NOTHING.

Which brings me to the second reason I hate Keynes and Keynesians.  Keynes, being a smart guy, probably knew that his models were worthless 99% of the time.  But by being so God-damned popular, he unintentionally created a following of rejects who don’t understand half of what he was talking about, and who are inherently zealots hell bent on punching their way through brick walls, AT ANY COST.  Now, these zealots have popularized Keynes to the extent that economics doesn’t even present the mathematical models that Keynes originally formulated, because math is, quote, “hard”.  And so the assumptions and limitations of Keynes and what he taught have been lost, for worse.

Printing more money right now is a terrible idea.  Demand is stable, and production is humming along.  Yet we’ll probably do so anyway.  And what we will experience for this is further manufacturing contraction, destabilizing price swings, dangerous overpricing of a dwindling pool of resources, and yes, the periodic market crash coupled with unsubstantiated rebound. 

All this suffering, because we cannot accept that those bad investments are not going to magically correct themselves.  Well, that’s life, isn’t it?

But this system is non-linear.  And that’s why claims that the Fed is going to somehow “target” 2% inflation for nominal GDP growth and all that nonsense is so pathetic to be hysterical.  You do not target anything in a non-linear system.  A non-linear system does pretty much whatever it wants.

You can influence.  You can affect.  You can encourage.  But you do not “target”.  You don’t aim.  You correct, and you hope.  Because tiny adjustments on your part are totally unpredictable when applied.  Hence, even inaction on the Fed’s part have led to, until recently, a monumental commodity cycle.  And at the first sign of more easing, you can bet that super cycle would return, with added intensity, as the market first reacts and then eventually overcompensates for the action, easily offsetting any benefit that would be expected by linear modeling.

It’s only when things get very extreme that you move big.  But they have to be allowed to get extreme.

Based on market expectations right now, you’d think we’re counting a monetary policy to make precision cuts in a stain glass window, when the only tool central bankers are holding is a stick of dynamite.  That’s why I’m betting more QE isn’t come.  That’s why I think we’re going to get a big sell off.  And that’s why if I’m wrong and we do get more printing, I’m going to be much more concerned for what’s coming than if I’m right…

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That debt crisis which had been solved by gargantuan monetary policy backstops in the EU seems to be back, as unfathomable as that must seem to you who were mouthing off last September through December that any further concern about a financial shock from Europe had been “taken off the table.”

“Smoothing out the tail events” is a bumper sticker, not an analysis.  You don’t just smooth over several trillion in short term obligations.

See, the consequence of flinging EFSF/ESF/LTRO money at the bonds is obviously, sharp inflation.  And that’s exactly what the whole of the EU has right now; prices spiking higher on their citizens.  In a place like Spain, that means the 20% of population that is out of work also gets to contend with €8 gasoline.

Joy…

And when your twenty year olds are pushing 50% unemployment, well,…recall that old adage about idle hands.

So the EU is trying to build another €1 trillion backstop?  So what?

It’s not like they can use it.

The price the EU pays by monetizing their debt is enormous.  Look back on all the economic indicators coming out of the EU for the last 3-6 quarters.  Watch in awe as their economies slowly get pulled into recession REGARDLESS of whether or not they print money.

This matters, folks.  Take a good look at the most recent reports of China trade data.  There’s a reason even the Chinese are admitting that European problems are affecting them.  There’s no way they can lie about something that big.  The EU is China’s economy.  Without EU demand, China would have to rely entirely on domestic consumption and growth to spur their economies and organize their labor.

Now if the EU cannot afford to print any more money, how are they in any position to suppress their bond yields?

That seems to be the gist of the yield spike across European countries.  It’s not that the ECB couldn’t just buy up all the bonds and force losses on a few traders.  It’s that they can’t do it without forcing the Greek, Irish, Spanish, Portuguese, and Italian economies into deeper, more painful recessions.

And back home in the USoA, they are getting no support.  Recent reports are that Bernanke met with Republicans about undisclosed conversations.  Is that the kind of behavior one engages in when one is confident they are an autonomous body?

I’ve been saying for a few years now that Bernanke is going to be very aware of Congressional perception to his actions.  He cannot afford the ire of Republicans; even as the minority party, there is a great deal of damage they can do – if not to his actual policy decisions, then to his public relations campaign.

Bernanke has spent the last six months talking down the market, rather than acting.  Having an heavily financed, ideological political party viewing him as the enemy is not a position he wants to be in, because that’s a position where he needs to act rather than speak.

And as Europe has shown us, acting is expensive and riddled with bad tradeoffs.

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