The Markets

Today the Dow confirmed the new market downtrend by falling to a new low (10926) with higher volume then previous days. The attempted rally that started on May 24 is now dead. The Dow hit bull market highs on May 10 (11709) and it's going to take some time before we are back at those highs again. It's the path of least resistance.

Why? you ask. Well, the Fed's new boss, Bernanke, has communicated that inflation is here and they will fight it at any cost. Investors that think that 25 basis points will be enough on June 28-29 lack the big picture. The Fed will keep raising the interest rates until we see a core inflation well below 2%. The inflation is now being driven by debt financed consumer spending and high energy prices. My guess is that we'll see a Fed rate of 6% within the next year.

Debt is now becoming expensive which will start to hit consumption and real estate valuation. All the 'creative' loans that has been offered over the past few years to lower the living cost short-term, such as only interest, and all the second morgages used to tap the paper growth, will be very expensive. Debt has actually paid for the current growth in consumer spending. I would not want to be a latecomer to a real estate market outside of the job growth areas.

The current, or should I say past, bull market was fueled by a) strong demand created by low interest rates and b) low inflation created by a huge supply of cheaper labor and goods. Simply put, the emerging markets paid for the US consumer spending. The low dollar confirms this.

High energy prices are here to stay and when you know that the Europeans are paying well over $7 for a gallon of gas you realize that $3 is nothing. The new emerging market needs energy and commodities to grow and are prepare to pay for it. The political blame-game is just for show, it's simply just about supply and demand at this point.

I know it's a rather dark picture but we have had a classic 3-4 year long bull market which is now taking a rest, at least in the US. Europe and Japan has taken the tough medicin and is now getting out of their funk. The emerging markets are still rockin and will be for the forseeable future, especially with the commodity prices coming back down a bit.

Conclusion: Cash is king. Don't use your home as a cash machine, don't bottom pick stocks. Hedge the dollar. Pay off loans. Cut the spending, lower your burn rate and stay on the sidelines until there is light in the tunnel. For the risk-taker I'd say short the QQQQ on any bounce.