A good friend just sent me Merrill Lynch’s latest market narrative. I’m thinking my reply can serve nicely as this evening’s note:

“Thanks… pretty thoughtful piece. Leans bullish of course.. Dangerously sanguine, under present circumstances, in my view. 

Not nearly enough (well, none, actually) attention given to insolvency risk right here. All of that Fed stimulus essentially addresses liquidity risk, but it doesn’t address the mass corporate insolvency issue, which is presently huge. 

Of course, we indeed could already be in the next bull market, but the thing is, if we’re not, it likely gets very ugly before we are. Bottom line, risk remains huge, and has to be hedged until it abates, substantially, in my view…

I’m not that sympathetic to the no-inflation argument, if only due to the fact that the published measures don’t actually catch what people spend their money on. Although, I totally agree with their longer-term weak dollar (which is of course inflationary) thesis. What works in either scenario — inflation or deflation (or stagflation) along with a continued zero interest rate policy — is commodities (gold in particular). Currently gold is our top holding… It’s up over 30% ytd…

Ironically, I’m looking for a potential (i.e., in no way certain) near-term dollar spike. It’s way “oversold” and the Euro is way “overbought”… Typically you’ll get a bounce off of such a setup… If it occurs soon we could see some aggressive short-covering in the dollar (short interest is presently high) and aggressive selling in the Euro (net long exposure is presently high). Eurozone authorities would love to see the Euro give some back right here. If they can manufacture it, it’ll be short-term bullish for the dollar. The next US stimulus package (it’ll come soon) could do the trick for both currencies… Although there’s also a case to be made (that is being made by some) that it’ll be immediately depressing for the dollar… We’ll know very soon…”