The Fed’s FOMC announcement came out…

We got exactly what I expected, a kind of wishy-washy, “hedging our bets” statement from the Fed. You have to remember that Bernanke was Greenspan’s right hand man for much of the bubble days of the ‘90s and early ‘00s, so the guy is an expert at walking both sides of the line when it comes to policy and public statements.

For instance, the Fed announced it would keep interest rates between 0% and 0.25% for an “extended period.” No surprise there. As I’ve noted previously, 80%+ of the $200+ trillion in derivatives sitting on US commercial banks’ balance sheets are related to interest rates.

For the Fed to hint at raising rates (let alone raise them) would kick off a systemic implosion that would wipe out the very guys the Fed has been bailing out. Suffice to say the Fed won’t be raising interest rates …

In case you have not heard the news, China has announced that it will be instructing its state-owned enterprises to potentially default on their derivatives contracts. As I have written extensively in the past, the derivatives market is a massive time bomb just waiting to go off. China’s latest move may be the match that lights the fuse.

All told, US Commercial banks own $202 trillion in derivatives in notional value. To put that number into perspective, it’s roughly four times the global GDP. And 96% of this exposure sits on five banks’ balance sheets. I’ve shown the below chart before, but it’s worth re-visiting (chart is denominated in TRILLIONS).

Of course, not ALL of the $202 trillion these guys own is “at risk.” As their name implies, derivatives are “derived” from underlying assets (homes, debt, etc). The actual “at risk” money can be far FAR smaller than the “notional” …

[Editorial Note - Jim Musselwhite, Publisher

What follows is a perspective of our nation's financial mess that EVERY American (OK, not the fat cats on Wall Street or the idiots running the Fed and Treasury Department) can understand and appreciate. The system is broken, has been broken for decades, and there is no real sign of a turnaround. What's worse, the American people have all but let Wall Street and the Fed off the hook since we have allowed them (thanks to all those in Congress who have been praising Bernanke as a hero) to get away with the most scandalous affair in U.S. financial history.

Graham Summers says it plain and simple. What's outrageous and sad is that our chance to throw the bums out has all but passed.

But we can do something about it for ourselves. Take precautions and get a free copy of www.gainspainscapital.com/roundtwo.html. I know …

Earnings season has always been a crapshoot largely because of the nature of our financial system. To whit, we have accountants whose jobs consist entirely of finding ways to minimize taxes and eek out profits from even the flimsiest of circumstances (financial firms have become masters of this).

Indeed, it’s common practice for companies to prepare TWO tax statements, one that is released to the public and another that goes to the IRS. The IRS version usually features numerous tax dodges such as shifting revenues to tax havens/ off shore subsidiaries, as well as phony accounting charges and the like. Consider the below chart comparing individual income tax receipts (blue line) and corporate tax receipts (red line) for the last 50 years and tell me which group has an accounting department devoted to finding every tax loophole possible.

After the accountants get through with “cooking the books,” corporate earnings are then supposed …

Roughly 30% of US household wealth was destroyed by the collapse in housing and the 2008 Crash. Currently it stands at about $15 trillion, down % from $22 trillion at the 2007 peak. For simplicity’s sake, we’ll call this “assets.”

Now, consider that total US household debt stands at $13 trillion ($2.5 trillion in credit and $10.4 trillion in mortgage). As we noted in previous issues, consumers have only paid off about $50 billion in credit (about 2% of this).

Thus we have US household equity at about $2 trillion.

Because consumers can no longer use their homes as ATMs (the home equity line of credit era is over), if we’re going to track how much US household money has flowed into the stock market, we need to focus on money market funds: the proverbial “sidelines” of the stock market.

Well, since March 2009, only $400 billion has flowed out of money market funds. …

Ok, now I’m starting to get spooked.

Long-time readers know that I’ve frequently commented on the eerie similarities between how the financial markets behaved in 2008 and 2009. However, at this point, things are beginning to border on “conspiracy theorist.”

In both years, commodities bottomed first (Jan 23, 2008 vs. Feb 23 2009). In both years, the Feds stepped in with a major intervention in Feb/ March (Bear Stearns ’08 vs. Obama Stimulus ’09). This in turn kicked off a major rally in which both stocks and commodities soared higher together.

Both asset classes began to lose momentum in the early summer with the Baltic Dry Index peaking in late May ’08 vs early June ’09. Stocks and the Baltic then rolled over, falling into July:

June 1-August 5, 2008: Baltic collapses 28%

June 1-August 5, 2009: Baltic collapses 25%

Stocks first followed the Baltic, but then staged a massive reversal due to interventions/ short squeezes. …

Stocks are overbought.

And by overbought, I mean WAY overbought.

The relative strength index (RSI) is a metric used to measure the velocity and momentum of a given investment by comparing its upward and downward moves from close-to-close. If an investment is moving up strongly, its RSI is higher. Similarly, if an RSI is low, it means the investment is performing weakly.

Historically, RSI’s of 70 or higher mean an investment is overbought while an RSI of 30 means an investment is oversold. In these situations the market is primed for a “revert to the mean” trade, meaning you could see a quick correction or turnaround rally as the market snaps back to a more reasonably RSI.

Well, have a look at the NASDAQ today.

As you can see, the NASDAQ recently hit an RSI of 75. This is the highest reading we’ve seen in nearly two years. In fact, the last time the NASDAQ …

A lot of commentators have begun heralding a new bull market in stocks. Day after day, I hear that March was THE bottom, that the next bull market has begun, and that anyone betting on another collapse is a moron.

These claims are not only wrong, they are completely misleading and should be depicted for what they are: nonsensical hype from sources with conflicted interests: folks whose jobs and income stem largely from people remaining bullish.

More often than not, these are the same guys who claimed that Bear Stearns marked the end of the Financial Crisis (how’d that work out?) and that the Federal Reserve can pump our way back into a bull market (how’s that working out?).

The reason this is entirely wrong is because this recession is not your average run of the mill excess inventory recession: the kind of economic contraction we’ve experienced post-WWII.

No, this is a DE-flationary debt …