Private Wealth Advisory A Phoenix Capital Research Publication June 30, 2011 OntheVergeofAnotherCrisisThefinancialworldseemstothinkthatbecauseGreeceacceptedanotherbailoutwe’llbeofftotheracesinthemarkets.Asidefromhowabsolutelymoronicthisviewis(how’dthefirstGreekbailoutworkout?Anditwaswhat12monthsago?),wehavetoconsiderthebackdropagainstwhichthisparticulartragic‐comedyisplayingout.Theconsensusviewfromthemainstreamfinancialmediaand99%offindmanagersisthatliquidityandaccesstoloosemoneyfromcentralbankswillkeepthingsafloat.However,realityshowsthisnottobethecase…atall.ConsiderforinstancetheimpactoftheFed’smoneypumps.Forstarters,asabackoftheenvelopeanalysis,considerthatin2007whenthecreditmarketsfirstjammedup,theFedresortedtoprovidingemergencymoneypumpsof$30billionorso.ByJune2008,theFedhaddonethis14timestothetuneof$200+billion.Thencamethe$700billionbailoutinNovember2008.Sobytheendof2008,theFedhadputinnearly$1trillionincapitaltothemarkets.Andthisdidabsolutelynothingtoavertthemarketcollapse.ThencameQE1,whichputanother$1.25trillionintothemarkets.AndevenafterQE1endedtheFedcontinuedsupplyingthejuicetothetuneof$30billionorsopermonthduringoptionsexpirationweeks.ThenwegetQElite,whichresultsinanother$300billionintothemarketsplusQE2whichaddsanother$600billion.Soallinall,theFed’ssuppliedaminimumof$4TRILLIONintothemarketssince2008(I’mnotaccountingforthetrillionsmorein

Short­TermTrends‐Greecepassessecondausteritymeasures‐FinalrallyinEuro‐2Q11performancegaminghasbegun‐EndofQE2IntermediateTrends

‐TheFedwillhavetostepinwithmoreliquiditylaterin2011.

‐Stagflationinfulleffect. ‐Secondsevere

economiccontractionunderway

Long­TermTrends

‐30YearBullMarketinBondsending

‐SystemicRiskfromDerivativesunresolved

‐BullmarketinCommodities,especiallyagriculturalcommoditiesandfarmland

‐BullmarketinAlternateEnergy

dealthathavenotbeenmadepublic).AndtheS&P500isatroughlythesamelevelasbeforetheBearStearnscollapse:

Soonthesurfaceofit,theFed’smoneyspendingappearstohaveaccomplishedsomethingpositive:theyspent$4trillionandthemarketsralliedbringinghouseholdnetworthup17%fromitslowin2009.However,whenyoudigdeeperintothespecificresultsoftheFed’sactionsitbecomesclearthatnotonlyistheFedcreatingagiantPonzischemeinthefinancialmarkets,butthatwe’regettingclosetoabreakingpoint.ConsiderthatQE1provided$1.25trillioninliquiditytothemarkets.Fromthedateofitsinceptionuntilitsend,theS&P500roughly540points.Putanotherway,each$10billionwasworth4.3pointsontheS&P500.Incomparison,QEliteandQE2putroughly$900billionintothemarket(roughly75%ofQE1)creatinga251‐pointrallyintheS&P500.Inthiscase,every$10billioninadditionalcapitalwasworth2.7pointsontheS&P500.So$10billionofFedmoneytodayisworthjustoverhalf(62%)themarketgainsof$10billioninFedmoneybackin2009.Putanotherway,everynewinjectionof$10billionfromtheFedisproducinglessandlessresults.Ifwestepbackandlookatthisplainly,wewillseethatrealitydoesnotinanywaymatchtheviewthattheFed’sliquiditywillsolvethefinancialworld’sproblems.Infact,weseethateachFedmoveishavingasmallerandsmallerimpactonthe

financialmarkets.ExtendthisideaoutabitfurtherandyoufindthatwewillreachapointatwhichtheFedwillnolongerhaveanycontroloverthefinancialmarkets.Ibelievethatwearerapidlyapproachingthatpoint.Indeed,asIamabouttoprove,thenegativeimpactoftheFed’smovesarealreadygreaterthananypositiveimpact.ConsiderthatQEliteandQE3,whichcombinedaccountedfor$900billioninliquidityhittingthemarkets,onlypushedstocksuproughly23%.

AsbearishasIam,Icanappreciatethefactthata23%gaininthemarketsdoeshaveapositiveimpactonUShouseholdwealth(atleastforthoseinthetop10%ofsocietywhoactuallyownstocks).However,QEliteandQE2alsosentOilandAgriculturalcommoditiesup24%and27%,respectively.

ThesocialimpactofthesedevelopmentswassevereasI’msureyou’reaware:Foodpriceshitnewrecordhighs,saysUNfoodagency

Globalfoodpriceshavehitrecordhighs,andcouldriseevenfurther,accordingtotheUnitedNations.TheUN'sFoodPriceIndexrose2.2%inFebruarytothehighestlevelsincetheUN'sFoodandAgricultureOrganization(FAO)beganmonitoringpricesin1990.Italsowarnedthatspikesintheoilpricecouldmakethe"alreadyprecarious"situationinthefoodmarketevenworse.

Wal­MartCEOBillSimonexpectsinflation

U.S.consumersface"serious"inflationinthemonthsaheadforclothing,foodandotherproducts,theheadofWal‐Mart'sU.S.operationswarnedWednesday.Thenation'slargestretailerneedstogetbacktoitsrootsasthelowestpricedone‐stopshopforconsumers,WalmartCEOBillSImonsaid.Thenation'slargestretailerneedstogetbacktoitsrootsasthelowestpricedone‐stopshopforconsumers,WalmartCEOBillSImonsaid.

Theworld'slargestretailerisworkingwithsupplierstominimizetheeffectofcostincreasesandbelievesitslow‐costbusinessmodelwillpositionitbetterthanitscompetitors.

ThusitisclearthatwhateverpositiveeffectsQEliteandQE2mighthave,theincreaseinthecostoflivingintheUSfaroutweighedthem.Thus,evennow,wealreadyseetheFed’simpactdiminishingintwoways:

1) EachnewDollaritspendsaccomplisheslessforthemarkets2) Thenegativeconsequencesofitspoliciesoutweighingthepositiveones

Regardingthatlastnote,thelargest,mostnegativeimpactoftheFed’smovesisthedamagetotheUSDollar.We’vealreadyhintedatthiswiththeinflationaryimplicationsofQEliteandQE2,however,thebelowchartreallyhitshomejusthowbadtheFed’sdecisionsarefortheUScurrency:

Thischartrevealsincleardetailthetwoprimaryforcesatworkinthefinancialmarkets:

1) AflighttotheUSDollarduringCrisis2) TheFed’sattemptstokeeptheUSDollarlow

Regarding#1,theonlytimestheUSDollarhasralliedinthelastthreeyearshavebeentheresultofaCrisishittingthemarkets(the2008Crashandthe2010EuroCrisis).

TheimportantitemtonotefromthisisthatwhenevertheFedlosescontrolofthemarkets,theensuingpanicresultsintheUSDollarexplodinghigher.However,theinterestingthingabouttheseUSDollarralliesisthatthey’reresultinginaseriesoflowerhighs:

ThereasonthismattersisbecausethisistellingusthatthemarketsdoNOTviewtheUSDollarhasthesafe‐havenitwas…eventhreeyearsago.Indeed,theBIGpicturefortheUSDollarshowsthatwe’vebeeninapersistentdowntrendforwelloveradecade(smallwonderasboththeTechbubbleandtheHousingbubblewerefueledbyloosemoneyfromtheFed)

Putanotherway,thenegativeimpactoftheFed’smovesisresultingintheworldviewingtheUSDollarasfarlessstableandattractive(evenduringCrisis)thanpreviously.Whichbringsmebacktomyfirstpoints:theFed’smovesarerequiringmoretoaccomplishless,whilethenegativeconsequencesofitsmovesarecreatinglong‐termdisastrousconsequences.Indeed,theFedKNOWSthis.BernankeduringarecentpressconferencethattheFedwasperplexedastowhytheeconomywassoslowtorecover.AndthisisAFTERhe’sspentwellover$4TRILLION!!!Inplainterms,theFedislosingcontrolofthesystem.WhichmeanswearerapidlyapproachingtheREALCrisisforthemarkets:theCrisisoffaithintheFedandthefinancialsystematlarge,whatIcallthe“EndGame:”thetimeatwhichallFedinterventionsaccomplishnilandthefinancialworldrealizestheFedhascompletelylostcontrol.Youcanseethisalreadyintermsoffinancialleverage:

Theabovechartshowsthelevelofleverageinthefinancialsystem:essentiallyhowmuchborrowedmoneyexistsrelativetoactualcapital.ThefirstlargepeakistheTechBubble.ThesecondlargepeakistheHousingBubble.Thethirdpeakistoday.

InsimpleEnglish,thischartshowsusthatthefinancialsystemcurrentlyhasevenMOREleveragethanduringtheTechbubble.Putanotherway,assetpricestodayarebeingheldupbyborrowedmoney.ThisisalsoknownasaBubble.Thelasttwotimeswewereattheselevelsorhigher,thefinancialsystemsufferedasevereCrash(theTechBustand2008).IfullbelievewearefastapproachinganotherCrisis…however,thisonewillbedifferentforonekeyreason:peoplewillfinallygiveuphopeintheFed’sabilitytomanagethefinancialsystem.Rememberthattheonlythingthatstalledthe2008CrisiswasthegeneralbeliefthattheFedcouldhandletheissuesthatcausedit.SowhathappenswhenanotherCrisishitsitbecomesclearthattheFedCANNOThandletheproblemsinthefinancialsystem?Whathappenswhenwegetanotherdeflationarycollapse,whichbringsaboutmargincallsonallthatleverage?THATwillbetheREALCrisis.Wealreadyseethemakingsofthisinmutualfundcashlevels:

source:http://home.comcast.net/~RoyAshworth/Mutual_Fund_Cash_Levels/Mutual_Fund_Cash_Levels.htm

Today,mutualfundcashlevelsarelowerthanthey’vebeenin40+years.LowerthantheywereduringtheTechbubbleandlowerthantheywerewhenthemarketputinanalltimetopatthepeakofthehousingbubble.Putanotherway,mutualfundsaremore“allin”thanthey’vebeenin40+years.TakeninthecontextoftheleveragechartIshowedbefore,thisindicatesthatnotonlyisthefinancialsystemmoreleveragedthanduringtheTechbubble,butmutualfundsaremoreheavilyinvestedthanatanytimeinthelast40+years.Tosaythatthepotentialforafull‐scalemarketcollapseishighwouldbeagrossunderstatement.Shouldthemarketbegintocrater,themargincalls(whenaninvestorhastoputupmorecapitaltocoveralosingpositionthatwasboughtusingborrowedmoney)couldbeabsolutelyenormous.Thisiswhathappenedin2008whenthemarketenteredafree‐fall:largeinstitutionalinvestorswhowereovercommittedtothemarkethadtosellpositionstomeetredemptions(wheninvestorspulltheirmoney).This,inturn,forcedotherlargeinvestors(especiallythosewhohadborrowedmoney)tosellpositionstocovertheirlossesandreturnthefundstheyborrowed.Andthusweenteredanegativefeedbackloopinthatthelowerthemarketfell,themoreinvestorshadtosell.ThisishowCrisestakeplace.AdthenextCrisisisnotfaraway.Indeed,Europeisalreadybeginningtoexperienceit.InterbanklendingratestherearenowonparwiththelevelsthatoccurredinthewakeofLehmanBrothers’collapse.Putanotherway,Europeanbanksnolongertrusteachotherenoughtolendtootherbanks.ThisispreciselywhathitintheUSin2008.Anditwillcometotheseshoresagaininthenearfuture.Theleveragelevelsandthemutualfundcashlevelsarealreadywarningusofthis.WealsoseesignsofthingsgoingseriouslyamissinChina,whichisbeginningtoexperienceitsownliquidityshortage.CombinethiswithcivilunrestfueledbyraginginflationandChinahaspotentialtokickoffanotherCrisisinofitself.So,overall,myforecastcontinuestobethesame:Veryshortterm(nextfewweeks):we’regoingtoseethemarketsholdupduetoendoftheQuarterperformancegamingandtheendofQE2.NextweekisaholidayweekandmanytradersarealreadyabsentontheStreetsovolumewillbelightandthemarketscaneasilymovedhigher(seetoday’saction).Short­IntermediateTerm(July­August):themarketswillseeasharpcorrectionastheEuroweakensandtheUSDollarstrengthens.Thiswillpullstocksdownina

bigway.CommoditieswillalsobeslammedwithGoldandSilverbeingthemostresilientintermsofholdingup.AtthattimeIwillunveilanewwaveofinflationhedges.I’vealreadygotaboutfivepicksI’minterestedin,butthetimingjustisn’trightyet(we’reearlywithIAGandCEE.TO).However,Iwillsaythatthepreciousmetalcomplex,particularlytheminersisshowingsomeextraordinaryvalueatthistime.Someofthesecompaniesaretradingatlevelsrelativetoproductionandcashthatwehaven’tseensincethe2008Collapse.SoIamVERYinterestedininflationhedgesrightnow.ButIwanttoseethepreciousmetalsbottombeforemovingusintothesesectormore.Speakingofwhich,ourtwocurrentminers(IamGoldandCentamin)continuetocomeunderpressure.TheseareholdingsthatIintendtohaveussitonforseveralmonths.Andweboughtthematpricesthatweresimplyridiculouslycheap.Oncetheybottomout,we’llbeaddingtoourpositions.Intermediate­term(August­yearend):themarketswillverylikelyexperienceanotherfull‐scaleCrisisthatwillresultinEXTREMEvolatilityandsystemicriskala2008.ThiscouldcomesoonerdependingonhowthingsplayoutinEurope.Butthesystemisvery,VERYfragilerightnow.Thisiswhywehavesomanyultrashortinvestmentsonourwatchlistandwhywe’refocusingsomuchonthelargerissuesplaguingthefinancialsystem:becauseoncethisCrisishits,thingswillmoveVERYquicklyandthedamagewillbeCATASTROPHICfortheunprepared.However,today,thereisverylittletodoasthemarketsarejustgoingtocontinuetogrindhigherasaresultof2Qperformancegaming.Oncethisendsnextweek,we’llseewhattheREALdealis.I’llpostanalertnextweekoncewe’rebacktonormalmarketconditions(WallStreetisbackatwork)andIhaveabettersenseofwhat’scomingdownthepike.Untilthen…GoodInvesting!GrahamSummers

PortfolioReview:UltraShortBrazil(BZQ):Brazilbouncedhardinadeadcatbouncetoworkoffsomeofitsoversoldstatus.However,it’snowcomingupagainstresistanceatthe200‐DMA.

WealsohaveMAJORresistanceat$74.

ThiscombinedwiththedeathcrossEWZposted(whenthe50‐DMAbreaksbelowthe200‐DMA)makestheoddsofagreatercollapsetothedownsidequitehigh.Indeed,oncewebreakbelow$70we’regoingto$60inshortorder.

Hanginthere,let2Qperformancegamingendandwe’llbeheadingsharplylower.

UltraShortAgriculturalCommodities(AGA):RJAbrokedowninabigwaytoday,justasI’vebeenwarningwouldhappen.Wetookoutkeysupportat$10.Thenextlineofsupportis$9.40.

Myultimatedownsidetargetforthiscollapseis$8.00.Sohanginthere.Ultimately,we’regoingmuch,MUCHlower.UltraShortMaterials(IYM)We’vehadthebounceandnowwe’retestingthe50‐DMA:

Thiscombinedwiththebandsofoverheadresistancefrom$79‐80andchange,willlikelyleadtoasharpreversalandcollapse.

Inclosing,manyofourpositionsarecurrentlyinthered.ThisistheresultofthemarketsstagingabounceduetotheGreekausterityvote.However,wesawtheEXACTsameactionfollowinglastyear’sGreekbailoutandthemarketsoonrolled

overinaBIGway.Ibelievethatasearlyasnextweekwe’llseedeflationtakethereinsagainandthemarketswillcorrectsharply.Atthattime,allofourUltraShortswillprofitbeautifully.Sohanginthere,letthehedgefundsplaytheirendofthequartergames,andhaveaHappy4rthofJuly!OPENPOSITIONSInflationPortfolio(OPENBUYSNOW)Company Symbol BuyDate BuyPrice Current

PriceGain/Loss

Goldbullion N/A 3/17/10 $1,120 $1,499.00 34%Silverbullion N/A 3/17/10 $17.50 $34.67 98%IamGold IAG 5/25/11 $20.95 $18.76 ‐10%CentaminMining CEE.TO 5/25/11 $2.01 $1.94 ‐3%DeflationPortfolio(OPENBUYSNOW)Company Symbol BuyDate BuyPrice Current

PriceGain/Loss

DollarETF UUP 5/23/11 $21.79 $21.23 ‐3%UltraShortMaterials SMN 5/23/11 $18.31 $16.92 ‐8%UltraShortBrazil BZQ 6/23/11 $17.05 $15.13 ‐11%UltraShortAgric. AGA 6/23/11 $18.88 $19.69 4%Watchlist(WaitingtoBuy)Company Symbol

UltraLongTreasuries UBTUltraShortRussell2000 TWMUltraShortEmergingMkts EEVUltraShortEuro EUO