Bernanke: I Can't Quit You, QE

It might be time to just put all of your money into a pile in the front yard and burn it. There is nothing in the economic data this month to suggest that the economy is turning around. Unemployment sucks. Manufacturing sucks. Housing sucks. The Republicans just — quite successfully — held the country hostage to get some policy concessions passed. Doesn't it seem like President Obama is two more stupid decisions and a bad mustache away from watching the United States become a third-world hellhole? It was only two years ago that economists declared the end of the recession. Jobs were to come next, right? And yet, here we are, millions still unemployed with no relief in sight. Unemployment benefits have long since run out for many Americans and the jobs are still not there. Wages for the jobs that do exist are not rising, and that has left America's economy needing one thing: consumer demand. This is one thing that Main Street has known for two years and Wall Street seems to be coming around to understand: the so-called recovery never happened. It just didn't happen. Zeus knows we tried to fix it. We had a stimulus bill to try and jump start the economy. What happened? Republicans doomed it by insisting it be too small to work. Democrats tucked their tails in and went along with the Terrorist Tea Party precursors and passed a too-small stimulus package. End result? It didn't work, because it was too small. Good luck getting another one passed... Over in Federal Reserve land, Ben Bernanke has been playing a fun little shell game called "Quantitative Easing". Economists used to call this sort of nonsense "printing money faster than it could be spent", at least before the United States embraced itself as a banana republic. The idea behind QE is simple: prop up asset prices and prevent deflation. Does it work? Well, maybe. It depends on what you're looking to do. If the goal is temporary spikes in commodity prices and instability in the commodity markets, then yes. If the goal is a permanent reset of the economy so that things become manageable and growth can begin, then no. And yet, here we are, sitting on the edge of a third round of QE, just whistling at the debt piling up while waiting for Bernanke to get the call from Hell to go ahead and unleash a third round of cheap dollars on the world. For his part, Bernanke insists that QE3 isn't coming. He is, as usual, full of it. The economy is in dire straights. Manufacturing fell again, and barely registers as growing. And while that is all awful and points toward some sort of intervention, there is one word that people are tossing around that scares the bejesus out of Bernanke: Deflation. Yes, that's right. Deflation. We live in a world where the price of everything important goes up and up, and yet, deflation is here. (It's a bit like thunder snow in June, I suppose.) Look at the facts. Facts That Make Bernanke Cry

• The Consumer Price Index has gone from 0.5 (March 2011) to 0.4 (April) to 0.2 (May) all the way to -0.2 (June).
• The Producer Price Index has gone from 0.9 (March 2011) to 0.8 (April) to 0.2 (May) all the way to -0.4 (June).
• The U.S. Import Price Index has gone from 3.0 (March 2011) to 2.5 (April) to 0.1 (May) all the way to -0.5 (June).

In other words, deflation isn't a future threat; deflation is happening right now. Deflation plus a crappy economy means, sooner or later, Bernanke is going to bust out his QE3 stick and start smacking skulls around. ACTION ITEMS:

Bullish:
QE3 is going to happen. The economy looks to be falling off a cliff. This is no soft patch. Deflation might already be here. Investors should pile into gold GLD, silver SLV, oil USO, and agricultural stocks such as Potash POT, Monsanto MOS, Agrium AGU, as well as miners such as FCX.

Bearish:
QE3 will be the death knell for the U.S. Dollar. It will be lights out. Investors could buy the PowerShares DB US Dollar Index Bearish ETF UDN. You can reach the author by email john@benzinga.com or on twitter @johndthorpe.