Gold breaks out to a new high up 2.4%, Silver up 4.36%, the equity markets are up over 1.5%, and the U.S.$ is down another .66%. The inflation trade is alive and well.

I would like to begin with a quick comment on Nouriel. I have reprinted the essence of his most recent comments for your perusal:

Nouriel Roubini appears on CNBC discussing his weekend comments about stocks rising “too much, too soon”
Says there are several reasons the recovery is going to be anemic: 1) the labor market is just awful; 2) the consumer is shopped out, saving more and consuming less; 3) there is a glut of capacity; 4) the financial system is damaged with limited credit growth; 5) fiscal stimulus will become a drag by next year; and finally, overspending countries like the U.S. are spending less while spending in oversaving countries is not picking up.

While I agree with his thoughts on the economy, I feel we should avoid placing any weight behind his stock market call for three reasons:

1. The media loves to cheer Nouriel for his historic bear call on the markets last year. But you see, that’s the problem, the call is history. Now, every time the markets fall for a week or two the media trouts out Roubini for another “Dr. Doom” market call. What they don’t tell you is that he has felt the same way all year and yet the market has rallied. Point being, how helpful has his market opinion been this year?
   
2. I fear Roubini may join a long list of pundits who get it right once and make a career out of the call but they don’t help your investment career going forward. Anyone remember Elaine Garzarelli? She called the 1987 crash right and nothing else since. Or, how about Ralph Acampora and Abby Cohen? They called the bull market right at the turn of the century and had every financial network scrambling for a sound bite right at the top. Where are they now? The markets collapsed and they missed the call so Ralph loses his job and Abby gets shuffled. You see, inherent in every right market call are the seeds for failure on the next call. Successful tools that help during one market environment may not necessarily help when the environment changes and the hubris that inevitably infiltrates the minds of these “correct” pundits clouds their ability to spot the change. It is only human nature and happens to the best of us. I’m simply saying beware.
   
3. The driving force behind the equity market rally may, in fact, be something other than the economic turn around and if so then Roubini’s call will be based on the wrong issues. As I have stated many times over the last few months, we believe this market rally is building momentum because of the inflation trade (please see the Sept. 7th post for details). Roubini’s call for economic trouble plays right into our inflation trade theory and is the impetus for higher, not lower, equity prices. Those of you who are subscribers to this blog know the familiar refrain: Inflation is a currency event not an economic event. The more negative economic numbers come out, the longer easy credit will flow, the more the Fed will monetize U.S. debt and the U.S. $ will continue to weaken. This progression leads to an ever increasing exodus out of the U.S.$ into hard assets and equities that benefit from inflation or have a growth rate much greater than inflation.

Since, inflation is a currency event not an economic event, it behooves us to keep our collective eyes on the greenback. By closely monitoring the developments involving the U.S.$ we may glean some valuable insight into the direction of both the commodity and equity markets….

UUP U.S. Dollar loses ground to Euro – WSJ WSJ reports the 16-nation euro rose Monday against the U.S. dollar despite attempts over the weekend to boost the strength of the American currency. The euro bought $1.4648 in morning European trading, up from $1.4588 late Friday in New York. The British pound rose to $1.6010 from $1.5919 in New York, while the dollar rose slightly to purchase 89.77 Japanese yen from 89.63 late Friday.

The dollar weakness came even after finance ministers from the Group of Seven wealthy nations talked up the currency amid fears it could fall farther and disrupt the global economy. U.S. Treasury Secretary Timothy Geithner and France’s Christine Lagarde stressed the need for a strong dollar. Mr. Geithner said it’s “very important for the U.S. that we continue to have a strong dollar,” while Ms. Lagarde said “we need to have a strong dollar .. volatility is not welcome.”

…When world leaders assemble to talk about supporting a currency and the currency breaks down anyway often an inflection point is rapidly approaching. During the collapse of the British Pound in 1992, British central bankers repeatedly stressed the desire for a strong currency much like “Pinocchio”, I mean Geithner, has over these many months.

Norman Lamont was the British “Pinocchio” from 1990 -93. He famously announced he would borrow $15 billion to defend Sterling right before the ultimate devaluation of the currency. At the time George Soros was short $11 billion worth of the Pound sterling and pocketed a cool $1 billion on the day of the devaluation. I only wonder what Geithner will say right before the ultimate fall? (Click for Soros‘ opinion on the U.S.$ today)

I love the smell of fresh denial in the morning….

Saudi central bank says report on replacing dollar is wrong – Reuters Reuters reports newspaper report that Gulf Arab states are in secret talks to replace the U.S. dollar in the trading of oil is wrong, Saudi Arabia’s central bank chief said on Tuesday. Asked by reporters about the story in Britain’s The Independent, Muhammad al–Jasser said: “Absolutely incorrect.” Asked whether Saudi Arabia was in such talks, he replied: “Absolutely not.” The Independent quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.