I feel kind of losing my own convictions on the market these days. The main question is that has the impact of stimulus and liquidity pumping into the econ system already wore off?
Look at the choppy path developed post 1929 crash

---

But investors should be careful, says Gary Dorsch, editor of the Global Money Trends Newsletter. Dorsch, a former transactional broker for Charles Schwab and nine-year veteran of the Chicago Mercantile Exchange's trading floor, now runs the site Sir Charts A Lot, where he often writes about China and other emerging markets from a technical perspective.

Dorsch recently shared his thoughts on emerging markets with HAI associate editor Lara Crigger, including what's really driving the recovery, using Canada to "ride the coattails" of emerging markets, and whether the yuan could displace the dollar as the world's reserve currency anytime soon.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): We've seen a frenzy of investment in emerging markets lately. What's so attractive about these countries?

Gary Dorsch, editor of Global Money Trends (Dorsch): When we speak about emerging markets, we're talking about half a dozen or so countries that have some of the best growth prospects in the world: China, India, Russia, South Korea and satellite countries like Taiwan, maybe some of those in the Middle East, and of course, Brazil.

These countries have some shared characteristics, such as large build-ups of foreign currency reserves, and debt outstanding that's less than the money held by the central bank. Their banking systems tend to be in better shape than those in the U.S. or Western Europe; they're more likely to lend out to the private sector. And it's the loans to the private sector that really greases the wheels of the economy. China's a good example: Bank loans have mushroomed to unprecedented levels, whereas here in the U.S. and in Europe, bank loans aren't growing much at all.

But Europe and the U.S. still represent nearly half the world's economic output, and right now they're a big drag on the global economy. So those who are hopeful for some kind of global recovery are putting their hopes on the emerging markets.

Crigger: Is there too much money going in right now? Are we setting up for a correction?

Dorsch: Well, the central banks have pumped in trillions of dollars into the world's money markets, either from open market operations or quantitative easing. And then there are the government stimulus programs, almost $2 trillion worth. There's just an awful lot of money out there.

I've been telling people to just take a magic marker and scribble the word "liquidity" on their foreheads, so when you look in the mirror in the morning, you'll remember why these markets are going up. It's not really because the economy is doing all that well. If you look at the chart patterns, you'd think we're going into some sort of V-shaped recovery, but it's not the case at all: It simply represents the ocean of liquidity out there buoying the market and pushing it higher.

So to answer your question: Yes. Bubbles are inflated through massive money printing and in situations just like this, where the valuations of stocks will get far ahead of the fundamentals of what the economy can provide.

Trading the bubble, that's a perfectly sound way to operate in the current market. But just keep in mind that someday the bubble will reach an extreme level of valuation, and when it does correct, it will be violent and vicious. You really need to maintain constant vigilance and know just when to get out. And that's a very difficult thing to do.

Crigger: China's been the driver of a lot of this economic recovery. Can they keep it up?

Dorsch: China's unique, in that many banks are state-owned, or the state is able to order its banks to make loans. Banks lent out about 7.7 trillion yuan in new loans in the first seven months of this year, equal to about 27% of the entire Chinese economy. That is massive monetary stimulus, and it comes on top of another 4 trillion yuan of spending by the central government on infrastructure projects.

So as a result of all this bank lending, the Chinese money supply is growing at a 28% annualized rate. I think you're likely to see some inflationary pressures develop toward the end of this year, or early next year. And that will become more evident as commodity prices start to move even higher from where they are today.

China has successfully doubled the value of its stock market from the 1700 level to the 3500 level in the course of seven months. But at some point, there was a recognition that a bubble was being created, and they wanted to knock some of that speculative froth off the top of the market. So they've begun issuing reports to the media that they'll begin to slow down lending and force banks to be more careful to who they're lending out to, and maybe put some possible quotas on the loans. When the market heard that, it led to a 20% correction in the course of two weeks.

But the central government probably doesn't want to initiate the beginning of a bear market. So at some point, they'll begin to make statements to the market that they're satisfied with the correction.

Crigger: Inflationary pressures in China - sounds like that would be good for the gold market.

Dorsch: It should be. Well, in theory, you'd think traders in Shanghai would be attracted to commodities that can stay ahead of inflationary pressures. Really, there's limited choices for investors when there's that much money floating around. They can either go into commodities or stocks that may benefit from this monetary inflation-and they've primarily been going into the stock market. Nearly 20% of the loans extended by the Chinese banks were in fact identified as having gone into speculative trades in the stock market. And so there is a perception that stocks are a hedge against inflation; that competes with the gold market.

But gold is an international commodity and an international currency. Whereas the Chinese money supply is growing very rapidly, the money supply in other countries is growing anemically. In Europe, the money supply is only up 3% from a year ago, down from a rate of 12% two years ago. So it depends on what part of the world you're looking at, and the European economy is still much larger than the Chinese economy.

Gold has been somewhat of an anomaly. Lots of money and liquidity normally tends to push it higher, but perhaps gold's just consolidating its gains over the past few years. But when it does break out of a long-term cycle, this consolidation pattern, the move will tend to be explosive. So perhaps patience is just the word: We have to wait a few more months before it begins to make its move.

Crigger: You've called Canada a good "middle of the road" option between the volatile BRIC markets and the sluggish American and European markets. What makes Canada so attractive?

Dorsch: Canada has a lot of what the world needs. There's oil in the Alberta oil sands, although it's much more expensive to extract than, say, the stuff in the sands of Saudi Arabia. Canada also has a lot of iron ore and copper. It's the world's third-largest miner of copper, the world's largest miner of nickel. It also has deposits of zinc. Teck Cominco, the world's largest zinc miner, is based in Canada. So when we see rallies in the base metals and the oils, it tends to be a bullish indication for Canada.

Emerging markets, such as China, desperately need these metals and oil in order to fuel their economies. So when a country like China is growing very fast, it puts upward pressure on commodities, which in turn helps to push up the Canadian market.

Of course, on the other hand, it's also weighed down by the U.S., as three-fourths of its exports are earmarked for the U.S. With the U.S. in recession, exports are down about 36% from a year ago overall.

So imbalances exist. But if you're an investor and you want to participate in the global recovery, buying Canada is a good approach. It can ride the coattails of the emerging markets, but it doesn't have the same extremely volatile swings. It's less likely to develop a bubble. Should there be a correction, you won't get nearly as hurt in Canada as you would in, say, China, where we've seen a 20% correction in two weeks.

Crigger: Speaking of which, Canada's really been reaching out to China lately, hasn't it?

Dorsch: The Canadian government sent its finance minister and trade delegations to China, with the goal to start improving relations between the two countries. And China is interested in buying out a lot of Canadian companies to control the resources directly.

So there's an effort to bring the two countries closer together in trade. Canada is beginning to diversify away from the American market and become more in tune with the emerging markets, which I think is a healthier balance for their overall economy. But that process is just in its infancy; it will take more time to develop. At least for investors for the next year or two, it's still the American stock market that will be the key influence over the Canadian stock market.

Crigger: Many emerging markets are starting to question the usefulness of the U.S. dollar as a reserve currency: China's now allowing international trades in yuan [as we talked about in our recent podcast, "A Dying Dollar?"]; Russia's repeatedly said we need to dump the dollar. What's your take? Can the dollar maintain reserve currency status? Or will it be replaced soon?

Dorsch: More and more, the dollar will be phased out, as far as global trade is concerned. China, for example, is now initiating swap agreements with other central banks, where if China wants to buy, say, wheat in Argentina, that transaction does not have to be conducted in U.S. dollars.

But for China to have a currency that will ultimately rival the U.S. dollar as the premier currency, it would have to be more interchangeable, more convertible. The Chinese government hasn't taken that fateful step yet. They still want to have too much control over the supply of its currency and who owns it. So until they make their currency fully convertible, the dollar will by default remain the reserve currency. But within five or 10 years, China could be ready to take that step; at that point, the yuan could displace the U.S. dollar as the world's premier currency.

But the U.S. still has a lot of advantages over China in other respects. Dealing in China has certain risks that go beyond monetary ideas, as far as open and free markets, and the U.S. has a long history of respecting intellectual property and other types of properties.

So while I do think we'll eventually get to the point where central banks around the world will begin to lighten up on their U.S. currency reserves and go to other currencies, I think it will be not just the yuan, but other currencies as well. It will be the resource-based countries: Australia, Canada, Brazil; they'd be the top favorites.

Ultimately, I think commodities will be a great place to be over the long term, due to all this massive money creation. These producing countries will be at the forefront, and their currencies will reflect it. Some of them are part of the emerging market, such as Brazil, and others ride on the coattails of the emerging world, such as Australia and Canada.
source:http://seekingalpha.com/article/158824-gary-dorsch-skimming-the-froth-off-of-emerging-markets?source=yahoo

the dollar will collapse under the weight of the ever-increasing debt balance. The tough question is when?  "You can pick the direction or you can pick the timing but you rarely nail both," he admits.
Eventually, the government's efforts to inflate our way out of the crisis will come back to haunt us, Harrison says. "The credit market shows another debt bubble is forming." Still, Harrison thinks there are actually legitimate reasons for the dollar to rally in the near term:

• The creation of all this debt, creates demand for dollars.
• "The dollar is the best house in a bad neighborhood."  Meaning, as bad as things are in the U.S. other economies around the globe aren't faring any better.