What are the investment implications of all of this? Get your money out of America, Europe, and Japan, and pour it into China, India, Brazil, Mongolia, Indonesia, Mexico, Malaysia and other emerging markets with healthy population pyramids. You want the wind behind your investment sails, not in your face with hurricane category five violence. Use any serious dip to load the boat with the emerging market ETF (EEM) and individual emerging market ETF's.

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The 'Graying' of America Bodes Ill for Investors

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Since January, the Euro has been beating the daylights out of Uncle Buck, as European interest rates have been rising, while those for Uncle Buck have been falling. Trading 101 dictates that widening spreads produce strong currencies.

Never mind that the European Central Bank has been raising rates for all the wrong reasons. President Jean Claude Trichet kept an incredibly narrow focus on the rising price of oil, commodities, gold, and food, while ignoring the other gale force deflationary headwinds facing the global economy. This astigmatism delivered two 25 basis point interest rate hikes, while the economy was clearly heading into the dump.

You can blame the conflicting mandates of the two central banks. The Federal Reserve is required to simultaneously fight inflation and maintain full employment. The ECB need only worry about inflation. This is partially rooted in the German influence over the ECB, where memories off Weimar style hyperinflation during the 1920's is still strong. This can lead to sharply diverging policies between the two central banks that can create great opportunities for traders.

Now commodities prices are in free fall, and these decisions to tighten are not looking like such a great idea. In the meantime, interest rates for the greenback have been pegged at zero for two years as a result of the Federal Reserve's latest emergency moves. They can go no lower. Therefore, the spread is about to move in favor of the dollar, possibly dramatically so. This is dollar bullish and Euro bearish.

Take a look at the charts for Euro/dollar and it's clear that they have been hinting as much. There are four undeniable declining peaks from $1.49 trending downward, suggesting that worse is to come. We are already through the 50 day moving average. The no brainer target here is the 200 day moving average at $1.38.

If you get another pop up to the $1.44 handle on a wave of 'RISK ON' buying, it might be worth strapping on short Euro bets like the (EUO), a 2X leveraged ETF that profits from a falling Euro. Buying puts on the (FXE) would also work. You might be in for quite a rise.

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Is Uncle Buck Ready for a Comeback?

Featured Trades: (TREASURY 30 YEAR AUCTION BOMBS)

3) Treasury 30 Year Auction Bombs. If you want to see what a failed Treasury bond auction looks like, take a look at the intraday chart for Thursday's sale of 30 year paper, which was a miserable failure. Prices dove and yields soared, from a near 40 low at 3.57% all the way back up to 3.81%.

It looks like investors are unwilling to accept an inflation adjusted real yield of near zero for 30 years. Big surprise. They are already taking a negative real yield of -1.5% for 10 year bonds. In fact, real yields have disappeared around the world, from here to Germany to Japan. Fixed income investment is now globally a mug's game.

This will give hope to beleaguered investors in the (TBT), the leveraged ETF that profits from falling long bond prices and rising yields. My idea here did not exactly turn out to be the rose garden that I expected. After nibbling at $31 a few weeks ago, the (TBT) swan dived all the way down to $24 and change, a loss of 22%. Thank goodness I never doubled up on the way down. Yes, hedge funds can lose money.

I am afraid that the medium term outlook for the (TBT) is not great. By taking the unprecedented action of pegging interest rates at zero for two years, the Federal Reserve has created an indirect bid all the way down the yield curve which will be supportive of bond prices. Also, if the economy remains feeble, the next round of emergency, last resort Fed measures could include buying longer dated paper, like 10 year and 30 year Treasury bonds. At this point, I am just looking to get out at cost.

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Featured Trades: (THE TRUE COST OF OIL)

2) The True Cost of Oil. I received some questions last week on my recent solar pieces as to whether I minded paying more money for 'green' power. My answer is 'hell no,' and I'll tell you why. My annual electric bill comes to $1,500 a year. Since the California power authorities have set a goal of 33% alternative energy sources by 2020, PG&E (PGE) has the most aggressive green energy program in the country (click here for 'The Solar Boom in California'). More expensive solar, wind, geothermal, and biodiesel power sources mean that my electric bill may rise by $150-$300 a year.

Now let's combine my electricity and gasoline bills. Driving 15,000 miles a year, my current gasoline engine powered car uses 750 gallons a year, which at $3/gallon for gas costs me $2,250/year. So my annual power/gasoline bill is $3,750. My new Nissan Leaf (NSANY) will cost me $180/year to cover the same distance (click here for 'Getting Something for Nothing'). Even if my power bill goes up 20%, as it eventually will, thanks to the Leaf, my power/gasoline bill plunges to $1,980, down 47%.

There is an additional sweetener which I'm not even counting. I also spend $1,000/year on maintenance on my old car, including tune ups and oil changes. The Nissan Leaf will cost me next to nothing, as there are no oil changes or tune ups, and my engine drops from using 250 parts to just five. We're basically talking brake pads and tires for the first 100,000 miles.

There is a further enormous pay off down the road. We are currently spending $100 billion a year in cash up front fighting our wars in the Middle East, or $273 million a day! Add to that another $200 billion in back end costs, including wear and tear on capital equipment, and lifetime medical care for 3 million veterans, some of whom are severely messed up.

We import 9.1 million barrels of oil each day, or 3.3 billion barrels a year, worth $270 billion at $82/barrel. Some 2 million b/d, or 730 million barrels/year worth $60 billion comes from the Middle East. That means we are paying a de facto tax which amounts to $136/barrel, taking the true price for Saudi crude up to a staggering $219/barrel!

We are literally spending $100 billion extra to buy $60 billion worth of oil, and that's not counting the lives lost. Even worse, all of the new growth in Middle Eastern oil exports is to China, so we are now spending this money to assure their supplies more than ours. Only a government could come up with such an idiotic plan.

There is another factor to count in. Anyone in the oil industry will tell you that, of the current $82 price for crude, $30 is a risk premium driven by fears of instability in the Middle East. The Strategic Petroleum Reserve, every available tanker, and thousands of rail cars are all chocked full with unwanted oil. This is why prices remain high.

The International Energy Agency says the world is now using 87 million b/d, or 32 billion barrels a year worth $2.6 trillion. This means that the risk premium is costing global consumers $950 billion/year. If we abandon that oil source, the risk premium should fall substantially, or disappear completely. What instability there is becomes China's headache, not ours.

If enough of the country converts to alternatives and adopts major conservation measures, then we can quit importing oil from that violent part of the world. No more sending our president to bow and shake hands with King Abdullah. Oil prices would fall, our military budget would drop, the federal budget deficit would shrink, and our taxes would likely get cut.

One Leaf shrinks demand for 750 gallons of gasoline, or 1,500 gallons of oil per year. That means that we need 20.4 million Leafs on the road to eliminate the need for the 2 million barrels/day we are importing from the Middle East. The Department of Energy has provided a $1.6 billion loan to build a Nissan plant in Smyrna, Tennessee that will pump out 150,000 Leafs a year by end 2012. Add that to the million Volts, Tesla S-1's, is Mitsubishi iMiEV's hitting the market in the next few years. Also taking a bite out of our oil consumption are the 1 million hybrids now on the road to be joined by a second million in the next two years. That goal is not so far off.

Yes, these are simplistic, back of the envelop calculations that don't take into account other national security considerations, or our presence on the global stage. But these numbers show that even a modest conversion to alternatives can have an outsized impact on the bigger picture.

By the way, please don't tell ExxonMobile (XOM) or BP (BP) I told you this. They get 80% of their earnings from importing oil to the US. I don't want to get a knock on the door in the middle of the night.

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Is $219 Oil Worth This?

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Or This?

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Will it Be a Nissan Leaf?

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A Volt?

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A Tesla S-2?

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Or a Mitsubishi iMiEV?

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Featured Trades: (IS QE3 BACK FROM THE DEAD?)

 

2) Is QE3 Back From the Dead? When I went to bed late last night, the (SPX) was trading down 30 points, and I was thinking 'here we go again'. When I woke up, the market was up 30 points, and I had to blink hard. The overnight range was an unprecedented 60 points, or 560 Dow points. From the July high to the Asian low, the (SPX) has fallen 23% in 12 trading days.

When QE2 ended on June 30th, I argued that there was zero chance of Ben Bernanke moving straight into another quantitative easing program. But as my recent performance has convincingly testified, I can be wrong. Will the market swan dive cause the Federal Reserve to change its mind? Will QE3 come back from the dead?

I still think it unlikely. Remember that a substantial number of Fed hawks, like Richard Fisher, were opposed to QE2, and are even less likely to vote for a QE3. All of the $2.8 trillion in QE1 and QE2 is still out there. The problem is that it is not being used at all. So there is no point in pumping more liquidity into an economy that clearly doesn't want it.

The Fed has a few other tools on its belt that can be put to work. The most obvious one is keep rolling over the existing quantitative easing by taking the proceeds from maturing Treasury bonds and using them to buy new ones. That postpones any Fed tightening. Call this QE2.1.

The Fed can also cut the interest rate that the Fed pays banks for reserve deposits from the current 25 basis points to zero. I am surprised that the Fed hasn't done this already. Of course, this would take away the free lunch that the banks have been feasting on for the last three years.

This is one of the reasons why I recommended that readers short Bank of America (BAC) at $12.31 in my April 22 Fox Business Interview (click here for the link). Yesterday, it hit $6.40. By the way, in that interview, I predict a four month sell off in all risk assets that bottoms in August.

Next, the Fed can massage the language in its statements to indicate that it will maintain its accommodative policy for an extended period of time. This could deliver a zero cost confidence boost the markets need. This could happen as early as today.

More extreme measures are unlikely. It could announce that it was buying $1 trillion in mortgage securities to boost the housing market. It could peg the yield for five and ten year Treasury bonds a low level. This is what the ten year Treasury yield at 2.30% is hinting at.

The Fed could also buy equities. I convinced the Hong Kong monetary authorities to do this during the Asian financial crisis in 1998, back when the Hang Seng was trading at 4,000. It was hugely successful, and the government ended up making a huge killing in the market. A similar effort in Japan, which I had nothing to do with, failed.

But the political firestorm this would ignite makes this an outlier. I can already hear the 'government picking winners and losers' arguments. In fact, there is a risk that extreme measures of any kind would signal to the markets that the economy is far worse than it actually is, sending the markets back into free fall.

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Is QE3 Back from the Dead?