Can you name a non-commodity investment that has DOMINATED the S&P 500 over the past 12 years?

Today I'd like to show you a chart which should explain everything you need to know about inflation, commodities and why prices for just about everything are rising today and are likely to rise still further tomorrow.

There's been lots of chatter about a gold bubble. But I think you can make a much stronger argument that Treasuries are in the midst of history's biggest bubble right now.

Let me back up, because I know I'm making some short-cut assumptions that you might not make for yourself.

1. I'm assuming that gold IS money. That is, it's a store of value and a medium of exchange.
   
   
2. I'm assuming that the definition of a bubble describes when an asset is overbought to the point that its price is much, much higher than it should be.
   
   
3. If I can safely make these assumptions, then I think it's fair to compare gold to another form of money: the dollar, and by proxy U.S. Treasuries.

The market had a productive day on Friday. Although the indices declined, many rebounded from over 2% down during the afternoon and closed near even. Volume was jacked during Friday's day of indecision, and it appeared as though the bulls had stolen some of the bears momentum.

Then, after the market closed on Friday, the analysts at S&P dropped a nuclear bomb on the market. Late Friday night, S&P lowered the U.S. credit rating from AAA.

Any stability the market achieved on Friday is gone. The downgrade of U.S. debt is an event many market participants were unprepared for.

Another day, and still no agreement on a 2011 budget in Congress. Surprisingly though, the stock market is not really being affected by the impasse. Sure, the major indices are down slightly again today, but I think we can all imagine that it could be much worse.

Treasury bond prices have been choppy, with big $3 price swings on the chart of the iShares Barclays 20+ Year Treasury Bond ETF (TLT) in July. But overall, bonds are holding up well, and this tells us clearly that no one expects the U.S. government to default on its bond payments.

The market weakened a little on Monday. Fears spread that the U.S. government would default on its debt obligations, which spurred a big sell-off in China and impaired the U.S. indices for most of the session. Treasuries fell substantially as bond traders demanded higher rates after law makers in the U.S. failed to produce a 2011 budget.

Despite a mild price decline, the indices experienced heavy volume selling. All sectors fell and only utilities and big cap technology stocks held value.

Amid the modest decline the TradeMaster portfolio added two new positions.

Over the past week or so, United States Treasury Bonds put in a major reversal. I've been waiting for this type of movement in Treasuries for the last few years. I've recommended shorting Treasury Bonds several times over the last year. And I believe this one single trade could be one of the most profitable investments you can make over the next 5 years or longer.

It's one of the most important trends in the market, and like all big trends, it should be obvious and clear to anyone paying attention: the US Treasury market is in one of the biggest bubbles in the history of the world.

Waiting for Treasury bonds to crash has been like waiting for the world's largest ship to come into port. Even when you can see it getting close, it could still be very far away.

So even though five year Treasury yields just experienced their biggest gains in over 20 years, it could still be some time before our ship truly comes in.

Any first year economics student will be able to slowly and cogently explain the theory of maximum employment, or even give you a run-down on modern monetary theory.

Certainly, most hobbyist economists will be able to fumble their way through an explanation of Keynesian stimulus theory.

But where their book learning and theories and financial models break apart is during a crisis.

Why?

Because: you can’t model a currency crisis. You can’t say when one will occur. You can’t say how bad it will be once it starts.

A currency crisis occurs outside the realm of even the best mathematically correct theories. Such a crisis results from a massive, widespread loss of faith in a given currency. It doesn’t happen in textbooks or in charts, models or in Paul Krugman’s daily hack-job column.

It happens in the minds of men.

That’s why I’m forced, against my will to write about the dollar. Like it or not, the Federal Reserve Note (FRN) is still the world’s reserve currency. So if we don’t understand what’s going on with the FRNs, then we’ll be handicapped in our ability to surmise what’s going on with commodities.

So when the Federal Reserve Chairman speaks, we must listen.

I picked a few choice quotes from Ben Bernanke’s press conference yesterday. The most notable one:

“The United States has a very serious, long term fiscal problem.”

The emphasis on “fiscal” is mine. That admission might seem like a huge one, but for Bernanke, it came off like he was talking about ancient history or some foreign country.

That’s because he’s hanging his hat on the fallacy that fiscal deficits have nothing to do with the Federal Reserve’s monetary plans.

PIMCO’s Bill Gross is sometimes called the “Bond King” because his investment skill has made his investment funds the biggest and most successful bond funds in the world, and rewarded him with a personal fortune of $1.8 billion.

30 years of consistent returns have made Gross a top choice for pension funds that depend on virtually guaranteed returns. And that investors are paying close attention to the fact that only has Gross sold all U.S. Treasury bonds from his investment funds, he’s also actively selling Treasuries short, in order to profit from falling prices.

For over a year now, I’ve casually mentioned that the leadership in the West, including the United States and Europe is not just unwilling to take the steps needed to nurse the economy back to health, but that they’re increasingly incapable of understanding what needs to be done.

Case in point: you can’t turn on your TV, open your email or look at a newspaper today without seeing headlines about the impending United States Federal Government shutdown.

But as I’ve noted, the amounts of money being quibbled over are pretty insignificant.

You can do the math for yourself. The total outstanding Federal deficit is now over $14 trillion.

Divide $33 billion or $40 billion by $14 trillion and you get 0.0023 or 0.0028. Multiply those decimals by 100 to get the percentage.

So, $33 billion and $40 billion amounts to 0.23% and 0.28% of the total Federal deficit. Even with these cuts, the deficit will grow because they’re not even close to the amount of spending reduction we need to actually put the Feds back in the black.

It’s well known that Japan is among the largest holders of US Treasuries. According to the US Treasury website, the Japanese only come second to China in terms of Treasury ownership, with $885 billion in Treasury holdings as of January 2011.

And almost on cue, my favorite contra-indicator proclaimed to the world just days after the earthquake that the Japanese will be forced to sell Treasury holdings.

You might be familiar with my contra-indicator. I’ve called it many things, but it comes down to this: when Tim Geithner, the Treasury Secretary goes on the record to say one thing, you can be almost guaranteed that the opposite will happen.

And on March 15^th, Geithner gave me my answer when he said he didn’t believe the Japanese would sell Treasuries.

I don’t know for sure if Japan is selling Treasuries at this point. But somebody is, and that’s the opposite of what you’d expect, and what historically happens, after a significant crisis.

Usually, capital flies to Treasuries in these circumstances. But today, people are selling dollars and flooding into gold and alternative currencies like the yen.

To QE or to not QE? That is the question.

Whether ‘tis nobler in the markets to suffer

The slings and arrows of outrageous inflation,

Or to take arms against a sea of deficits,

And through austerity, end them.

Yesterday, I sat in on a meeting with the top researchers, analysts and investment gurus here at Wyatt Investment Research. In one room sat many decades of investment experience, two MBAs in Finance, and each person with a specific skill-set that’s unmatched anywhere outside of a multi-billion dollar i-bank or fund.

They also don’t believe in the possibility of the dollar losing its reserve currency status, a trend that’s compounded by the fact that most people probably don’t know the meaning of the phrase “reserve currency.”

If people did believe in the likelihood of these very real threats, than it’s likely that they would prepare for them, and in preparing for these crises, they would not come to pass.

Voters would demand the abolition of the Federal Reserve, and they’d only vote fiscally conservative candidates into office. They wouldn’t demand endless regulation and “benefits” from their government. They would buy gold and silver, not US Treasuries. They’d save excess capital, not spend themselves into debt.

The likelihood of crisis is increased, in part, because of people’s inability to imagine that it will come to pass, and so prepare for it.

Why prepare for a flood if you don’t think it will rain?

Energy analysts like the well-respected Charles T. Maxwell of Weeden & Co. rightly issue dour warnings about our inability to maintain and/or increase oil production:

“Currently, we are utilizing about 98% of our world crude oil-producing capacity. The system should be considered stressed at a 95% utilization rate. We are no longer investing enough to lift capacity additions above the level of future demand growth on a consistent basis.”

That’s a big problem, because as he says, the demand for oil doesn’t stay still. Each year, oil demand from the developing world increases total demand by 2%. We don’t have very many months left of that kind of oil demand growth.

So, that’s bad.

Don't Short 10 Year Treasuries, Buy Gold & Silver. For instance, if you had bought gold every year between 1965 and sold it in 1981 (when interest rates peaked) you would have doubled your money nearly every year.

You could have done so without opening up a special trading account (as you would need to do if you wanted to short Treasuries) and you could have bought and sold the gold in small increments. 

Right now, we’re in the eye of the hurricane of the bond yield news cycle, and it’s a potentially dangerous place.

I know: it’s exciting that bond yields are frantically rising. The as-seen-on-TV inflationary event is starting to unwind, right?

Well...not entirely.

Sure, it’s a small validation for people who have been trading in dollars for gold and silver. It’s even a bigger coup for people who sold bonds to buy commodity stocks.

But bond yields could fall tomorrow. In fact, I’d argue that they’ve risen so far, so fast, that they’re probably due to fall tomorrow.

My point is, there’s no reason to become “extra-bullish” on gold just because of a bond-yield spike. My investment thesis for owning gold is a long-term one. It’s largely predicated on ignoring short term moves in bonds, the dollar - even gold!

As a result of our Federal Government’s inability to cut spending while at the same time extending Bush era tax cuts, our country’s debt is in danger of being downgraded from its triple-A rating.

What it means: future bond rates will necessarily have to go higher. You don’t get to keep selling low-yield debt when your ability to pay it back is universally recognized as not-quite-prime.

Don’t get me wrong: I’m not saying that we should raise taxes. But I am saying that you can’t cut taxes unless you’re prepared to cut expenses. If it seems like an extreme position, then I take that as good news for my gold and silver holdings.

It’s disturbing to think that this country has come so far, to the point that our Secretary of State recognizes that our diplomatic efforts are SEVERELY hampered by our sovereign debt levels. If that’s not a signal to ditch the dollar for commodities, then I don’t know what would be.

However, this China problem is something that I think needs to be addressed publicly by our leaders - in an honest and straightforward fashion. I don’t want to hear anymore weak-sister threats, limp-wristed non-statements and dim-witted denials from Timmy Geithner or Ben Bernanke.

Ireland will never be able to afford to pay back the debt it owes. Its debt problems are but a microcosm of much of the rest of the western world. What is playing out in Ireland today will one day soon play out here across the pond in the United States.

So we should pay close attention, because for reasons I will reveal below, the scenario is hugely bullish for commodities of nearly every stripe.

To sum up Ireland’s problems, it recently received a bailout from its chums in the European Union so that the country would avoid default on the many and sundry debt obligations already under its belt.

The recent bailout adds another $115 billion to the already $867 billion they owe, bringing the grand total to $982 billion.

Here in the land of $13 trillion debt loads, anything without a T in front of it starts to sound pretty insignificant.

Yesterday I urged you to sell Treasuries. And my timing couldn't have been better. Just hours after I made my announcement, a Bloomberg story shed more light on the Treasury market.

"Treasuries gained as the government's $35 billion sale of five-year notes drew the lowest yield since the government began quarterly offerings of the securities in 1976."

I've bolded the above statement because what it means is that five year Treasury note prices are at historic, all time highs. For those readers unfamiliar with Treasuries: when the yield is low, the price is high.

The U.S. Treasury sells these securities at or very close to par - that is, for 100 cents on the dollar. For the sake of this example, let's assume they're selling at par.

Today you can buy a 10-year Treasury bond and get a 3.11% yield - but wouldn't you rather own shares in a company that pays a better yield, and has the potential to increase in share price?

I usually try to find companies that benefit directly from higher commodity prices, but in this case, I've found a company that could benefit despite higher commodity prices...

This company pays a 3.4% dividend - and better yet it has the ability to raise or lower prices at will. That's because it takes one of the cheapest commodities on the planet (corn) and turns it into an easily consumable good - with a price markup in the triple digits. Whether you believe we're headed into deflation or inflation, pricing control is hugely important.

More on this pricing control in a minute...

Most people buy Treasuries precisely because they want safety.

If you're worried about safety, I'd make the argument that buying shares of

Ireland recently joined Greece, Portugal and Spain to round out the PIGS acronym of debt-downgraded European nations.

It's a legacy Europe won't soon escape for a variety of reasons. But I'm not going to talk about the largely boring reasons why Europe has no chance of escaping massive debt obligations - I'm more concerned with the immediate investment implications of such a downgrade.

To help predict what might come next, it's sometimes helpful to look back. Over the last eight months, buying silver after a Euro nation had its debt downgraded gave you an average one month gain of 2.6%.

There's been lots of chatter about a gold bubble. But I think you can make a much stronger argument that Treasuries are in the midst of history's biggest bubble right now.

Let me back up, because I know I'm making some short-cut assumptions that you might not make for yourself.

1) I'm assuming that gold IS money. That is, it's a store of value and a medium of exchange.

2) I'm assuming that the definition of a bubble describes when an asset is overbought to the point that its price is much, much higher than it should be.

3) If I can safely make these assumptions, then I think it's fair to compare gold to another form of money: the dollar, and by proxy U.S. Treasuries.

If we can agree that U.S. Treasuries are a fair proxy for the dollar, and that gold is money - then I truly struggle to see how ANYONE can come to the conclusion that gold is in a bubble, while simultaneously seeing Treasuries as not being in a bubble.

Here's why:

Well, Friday's Daily Profit was certainly timely. In case you missed the piece titled Is China an Afterthought?, I said "I won’t be surprised to see China do both – raise rates and incrementally revalue the yuan."

Just two days later, China announced that it will completely remove the yuan from its dollar peg. That news sparked a global rally for stocks last night, and Chinese stocks in the U.S. are moving higher as well.

Even though China has dropped its U.S. dollar peg, which meant that one dollar was worth 6.83 yuan, China will now peg the yuan to a basket of currencies that includes the dollar.

So far this year, the S&P 500 has dropped 3% or more in one session 3 different times. The two previous times, it clawed back some of the losses over the following week. We’ll have to wait and see of there is any upside after yesterday’s big drop.   

 

The S&P 500 is now testing the lows from the “flash crash” on May 6. This is interesting because it was assumed that trading that day was something of a fluke as computer trading programs went haywire. But now that stocks are back to those levels, we must consider that the drop may not have been a fluke.  

 

The question now is: can stocks find some strength? Or perhaps a better way to ask the question is: are the sellers done?   

Just yesterday, we discussed how stock market plunges can be set off by what amounts to a “global margin call.” And that’s exactly what yesterday’s decline felt like, as the selling was relentless.  

 

There were no bounces, no dead-cat rallies as the selling built pressure built until it reached its crescendo.   

 

That crescendo, a 998-point spike lower on the Dow Industrials, was caused directly by some computer-based trading programs gone haywire. (There’s no other way to explain how Accenture (NYSE:ANC) could drop from $40 a share to a penny.)