What concerns me and why I am ultra bearish with bull jacket is that there is a disconnect.  Disconnects is when you see one thing, and experience another. Let me illustrate some disconnects:

Paulson and strong dollar: Paulson made the following comment.

“The dollar has been the world’s reserve currency since World War II and it’s been that for a reason. We are the biggest economy in the world, we are as open as any economy to investment, to trade, and we’ve had stable economic policies … we’ve had good productivity,” Paulson told reporters at an impromptu news briefing on Friday.

Well, yeah, nice bit of history here Paulson. As one CNBC commentator said, “imagine what would happen to the USD if they did not say that they believed in a strong dollar policy.”

The reality is different and it is something that Paulson does not seem want to say. The reality is that the USD is in the process of being pegged down from world reserve currency.

Using traditional thinking you would say, “oh wait its the EURO that will be the world’s currency.” I think the world has changed and that you need to think out of the box. I think in the future there will be no “one” currency. In the future it will be a basket of currencies. Somebody at a conference from a very big German corporation told me that they already do that.

A basket of currencies puts all currencies in one basket and then determines a price based on that mix of currencies. This is why I think that oil is doing what it is because of the currencies being put into a basket. Let’s put this into another perspective. If I was producing oil, and the USD were dropping then I am missing out on profits from other markets.

Pricing using a basket approach has the advantage in that you can predict and stabilize your earnings. Countries that have strong currencies get overall stable prices even though exports to some countries might hurt.

So the disconnect here is that Paulson and Bernanke better start acting like they believe in a strong currency. I believe Bernanke did not think the USD would drop as hard as it did. Remember a strong currency implies a believe in the capabilities of the currency to do sound fiscal management.

Basing Earnings on Future Performance: I can’t seem to get over this one. When I look at a company I look at its past performance and current PE ratio. I look at revenue, I look at profit and I look at debt. Though these days investors look at future performance, future PE ratios, and how well a stock has done to indicate health of a company.

Wow I never thought traders would be buying the skin before owning the bear. After all buying into future performance is buying a skin before actually seeing it.

I am not saying that you should ignore future performance. On the contrary you should look closely at the future performance. But you should just as importantly look at what a company has done in the past. As I have talked about in past blog entries how people can think to invest in companies that have current PE ratios of 50+, but yet LOW future PE is beyond me.

And I never thought investors would become lemmings. After all following the trend of stock price independent of its underlying’s is nuts and doing group think. Group think is ok if you think a trend will commence. But group think is just as likely to drive you off the cliff.

The disconnect here is that people are buying and inflating on information that has no actual relation to the company. You might just as well start buying bridges in New York. After all maybe in the future New York will sell that bridge and had you invested way back when you would be an umpteen millionaire.

Toggle Bonds: Wow I never thought people would stop using their brain. Toggle bonds are bonds where the interest of the bond can be paid in cash or more debt.

At first when I heard about this I thought, you can’t be serious? Here is the deal. You issue debt by selling bonds. Then when you need to repay you don’t repay the interest, but issue more debt. Wow, where do I sign up? (NOT!) This is a scheme that works because people think you will always pay up. But what if you don’t? Think hard about this. If a company can’t repay its debt and needs to issue more debt, should that not be an indicator that there is a problem?

The disconnect here is that people are investor in junk bond grade toggle bonds because they are desperate for returns. Toggle bonds are just the tip of the iceberg when it comes to seeking returns. This returns driven world with analysts recommending new “growth” stories reminds me of eight year old’s playing soccer. When eight year old’s play soccer they don’t play strategically. Everybody on both sides chases the ball from one corner of the playing field to the other. This is what I think is happening in the markets.

Put all of these disconnects together and I get very concerned! I am concerned that we are beyond recession, and heading towards a depression. I have no idea when, but with every passing day and people yelling, “Hey this is a buying opportunity”, and “buy on the dips” I cringe!

Many in power believe they have stopped business cycles, recessions and the likes. I believe they are wrong! Sorry.. read too many history books to believe it.