Basic materials have been the biggest loser of an asset class for 2012 as well as thus far in 2013. Everything tangible, from gold and copper to coal and steel, has acquired an ick factor that makes the asset class nearly uninvestable. Shares of companies in these categories are trading at values not seen since 2009 market lows. We are beginning to see some very important developments that might make the group more palatable. In fact, we believe that metals, mining and energy could again become Wall Street darlings.

Since Ben Bernankes comments seemed to unleash the bond vigilantes on June 19, we have seen a reversal in money flows that have used the U.S. Treasury market and the gold market as a flight to safety trade.

The past two week slide in asset prices has caused a resurgence of doomsday pundits warning of impending calamity. The negative interpretation of Fed Chairman Bernankes comments regarding the U.S.economys future upgraded prospects is simply not logical. A careful review of what Bernanke said at his press conference was entirely consistent with what the Fed has said and done in the past.

Napalm is a highly incendiary form of jellied fuel. It was used extensively in the Vietnam War to quickly ignite massive fires over large areas of land. In the world of financial incendiaries, the Feds overwhelming monetary stimulus has ignited asset prices in the United States with the force and effectiveness of napalm. Is the fire short lived? Are the gains in asset prices temporary or can they be believed? Are the housing and stock markets on fire just because of the Feds quantitative easing (QE) or could there be a much more fundamental reason?

This quote from Shakespeares Merchant of Venice is apropos given the nosedive in the gold markets today. In our 2013 Best Ideas piece we labeled gold a neutral as gold had not had a significant correction since 2008. Our research indicated a significant slowing of bullion purchases by gold Exchange Traded Funds (ETFs) in 2012 versus 2011. We looked for a correction and now need to contemplate whether we are in the end of the commodity bull market or merely a pause that refreshes.

After the recent announcement by the U.S. Federal Reserve (Fed) that they would begin to engage in what has been deemed "QE3," there has been a lot of skepticism that such a plan could actually work. The Fed is attempting to carry out their dual mandate of price stability and full employment by engaging in a new round of asset purchasing targeted at the mortgage market.

Yesterday, the Fed delivered the much anticipated dose of Quantitative Easing (QE) announcing that it would continue to buy U.S. Agency Mortgage Backed Securities (MBS) in an effort to further drive growth in the U.S. economy and decrease the ranks of the unemployed. The monthly purchase rate of $40 billion will be in addition to the already $10 billion that is being reinvested from QE 1&2 in mortgage-backed securities. This new money balance sheet expansion by the Fed accompanies additional guidance that the Fed would stay low on interest rates likely until mid-year 2015.

There are many indicators that we look for that tends to define cyclical market bottoms and give us signs of an upturn. Recent investor lack of volume and record high cash balances can also point to a change toward higher market valuations. Every day I hear about the relative cheap valuations of U.S. equities. We know that valuations can stay depressed for years, even decades. Why would we be thinking that a potential melt-up might be about ready to happen?

In the third quarter of 2011 the Economic Cycle Research Institute (ECRI) called for a 100% chance of a U.S. recession. They have a stellar track record of calling U.S. economic cycles. What we noted that the ECRI estimated the severity of any slowdown to be shallow and fairly short-lived. Most recessions in the U.S. are over even before they are positively identified.

Last week provided a very scary end to May in both the equity and bond markets. The 10-year Treasury set a new historic low yield and the equity markets ended the week giving back all of its year-to-date gains. European fiscal and banking issues continue to overshadow the slow recovery of the U.S. economy. Of current note, the EU and ECB are trying to successfully deal with the need to recapitalize the banks of Spain. On top of this rosy news, the U.S. economy continued to show a slowdown which was indicated by a much lower than expected job creation for May.

The long-time trends are firmly in support of consistent price inflation during the history of the US. Inflation is a natural inclination for people, businesses, politicians and central banks. Given the Feds ultra-easy monetary policy aimed at creating inflation, we will eventually see it. Higher inflation requires investors to rethink where they invest. Cash and fixed income do little to cope with inflation and actually can be losers if held at times of higher than normal inflation rates. We think investors should take advantage of current bargains in real estate and equity asset prices.

There is a potential danger out there lurking for bond investors who are anxious for interest rates to increase. That danger for these yield-seekers is getting stuck in a bond mutual fund that might never deliver an investor the opportunity to realize the return of their capital. Bond mutual funds have been the beneficiary of a huge outflow of funds from the equity markets in 2011. The trend continued through the first quarter of 2012 even as equity markets turned in one of the best quarterly performances in a decade.

Yesterday, the Fed was moved to release the latest round of stress test results for the largest 19 banks in the US one day early. Midday, JP Morgan announced a significant dividend increase which gave the appearance of jumping the gun so the Fed chose to make all of the results public late yesterday. The news caused prices of most U.S. banks to rise as the tests confirmed the continued progress being made towards strengthening their businesses. We believe that this is simply the beginning of a renaissance of the U.S. banks and their ability to grow earnings and dividends in the next few years.

U.S. Treasury securities could take their place alongside other bubble assets like tulip bulbs did in the 1630s. There are signs of a secular change afoot in the U.S. Treasury market as rates set historic lows. The U.S. Treasury market is indeed a crowded market as Euro-singed capital is being tucked behind the ultimate safety of the U.S. obligations. Add to that the Feds own record setting buying binge in these securities and you have an asset that may have well crossed the line of what its long-term value could possibly be.

2012 will likely be the tale of two bond markets. You have the high-grade debt market that has been the recipient of a huge flight to quality and fear trade. The prices of these obligations have skyrocketed and yields plummeted. Additionally, the Fed has turned out to be the biggest buyer of longer-dated Treasuries in the markets today. It is rumored that they might engage in a mortgage buying campaign later this year. That would have the effect of lowering mortgage rates further than the record lows where they are at. In short, the world has sought refuge in the U.S. bond high-grade market.

The market is trying to better understand the Feds announcement yesterday regarding seemingly new stress tests for U.S. banks. Many posit that the Fed is worried about the health of the U.S. banking system in light of the issues in Europe. Some feel that it is an attempt to show the market that the U.S. banks are actually healthy in light of the potential economic hazards. The truth here might be a bit more innocent than many think. The stress tests are actually part of the requirements of Dodd Frank. They are not new and this is actually the third set that will have been routinely done.

We have seen a violent reaction in the equity and bond markets globally over what seems to be a return to chaos in Europe. After seemingly removing the nuclear option by levering up the EFSF (European Financial Stability Facility) and the 50% voluntary haircut for holders of Greek debt the markets are once again headed south. Compounding the problem is the Monday morning bankruptcy of MF Global was not necessarily unexpected but the magnitude of the leverage embedded on the firms balance sheet is remarkable.

A few weeks ago, I had the pleasure of reading a White Paper by Cutwater Asset Management. The paper is titled, Inflation Protected Bonds How TIPS Can Drive You Tipsy and discusses the lack of correlation between the returns on Treasury Inflation Protected Securities (TIPS) and gusts of inflation. TIPS were created to give investors protection against the devastating effects that inflation can have on the loss of purchasing power. I consider it a very good idea that was executed in a very poor fashion.

Quality in bond land is expensive and promises little return for a fair amount of risk. The Fed is punishing Treasury investors with historically-low yields. We believe the only way to generate a return in these markets is by price appreciation because these notes have very little in the way of coupon income. This lack means that they will trade more like zero coupon bonds when, and if, the Fed ever removes the buying pressure on that market. History has shown us that the market will move before the Fed does. Our discipline has thus far beaten our benchmark.

This morning I read a Bloomberg article titled: Strategists See Biggest S&P 500 Gain Since 98. Could this be a misprint? We would tend to agree with the potential for an explosive Q4. The markets have traded down on the Euro scare which has spread to Ameri scare. The truth is that the U.S. is in a MUCH better place than Europe, in our opinion. Our banks are very well capitalized. Our consumer has much less debt and is actually holding up well. We believe markets often turn when sentiment is at its worst. Could it be time to be greedy in the midst of all of this fear? We think so.

There is certainly much greater economic risk out there than there was just a month or two ago. My sense is that any recession that the United States may experience would be associated with a slowing of U.S. GDP because of a fall of in Europe, and potentially China. I believe that China would act quickly to reverse their tightening bias to spur growth. Calling recessions is a dangerous game. We all try to make logical sense of markets and try to forecast the future. All I know is that folks that have done well decade over decade, like Buffet, are buying and not selling.

The question I am now most often asked is, Will the United States slip into a second economic recession this year? The risks have definitely risen such that the current soft patch in the U.S. economy may translate from slightly positive GDP to a negative reading. Investors are faced with a huge opportunity to buy risk assets at a great entry point. We believe that the probabilities are that the markets will be significantly higher in the future. Market participants are net short this market and cash on the sidelines is at record highs. That is a recipe for a rare opportunity.

Current headlines are suggesting that recent market hits have created a buying opportunity. Yesterday, Bloomberg reported that Insiders Buy Stocks at Highest Rate Since 2009. The scare this morning still surrounds the European banking system which is being tested, much like those in the US were tested in 2008. Back then, the U.S. instituted a number of actions to return confidence to our banking system. A combination of TARP and a guarantee by the FDIC of all bank obligations overcame the market attacks. The ECB does not have FDIC, so its looking on how to shore up confidence.

History is full examples of volatility in the markets and the affects of emotion on the creation and destruction of wealth. People have a false sense of faith in cash. Cash being made up of dollars tend to lose value over time. The loss is sometimes sneaky, but always in the form of lost purchasing power. The U.S. dollar as a fiat currency has for decades, provided a slow debasement of value for holders. At this time we see the largest hoard of cash on the balance sheets of corporations, banks and individuals in history. This seems worrisome at best and just plain stupid at worst.

Even though it feels uncomfortable, earnings growth is very healthy. The actions going on in Washington will likely result in a more balanced spending and debt management approach, in our opinion. Our advicepress on! We see this as a buying opportunity, as it is likely this cloud may soon dissipate. Remember, that buying low and selling high often requires you to make decisions that dont always feel great when you make them.

The markets are preoccupied with the potential of Greece defaulting on its debt. Just what are we worried about? Greece is unable to access the capital markets, which are necessary for them to continue funding their expenditures and roll their debt forward. The EU outlined an assistance package that is being handed out in pieces to Greece. The next piece is coming due and the EU is pushing Greece to raise taxes and cut expenditures. The Prime Minister is up for a confidence vote tomorrow and the world seems to be waiting to see if Greece has the political will to stand up to their debt.

This week we have seen a huge sell-off in commodity prices. Silver is leading the way down posting another steep loss today. Some think the smart money is getting out even as the commodity exchanges are raising margin requirements. Is this the end of the ?hard asset? commodity trade? I hardly think so. We believe that we are in a commodity ?super-cycle? that has its foundation not in speculation or weakening currencies, but in a sharp rise in global demand. The weak dollar has merely exacerbated the move over the past couple of years as the Fed has embarked on very loose monetary policy.

Everyone is concerned about what happens when QE2 ends. On one side believes that when QE2 ends, long term interest rates on Treasuries will spike as the largest buyer exits the market. They believe that the Fed may be tempted to generate QE3 in order to continue try to keep interest rates down and keep the fragile economic recovery going. On the other side of the aisle, there are folks arguing that the yields on the Treasury bonds will drop even as the Fed exits and despite the fact that they are the largest holder of U.S. debt following a slowing U.S. economy during the first quarter.

The U.S. appears to be at the crossroads of fiscal and monetary policy. Many are painting a very bleak picture of the future of the dollar, U.S. credit and the validity of the U.S. economy as the model for the world. Could the U.S. return to 1970s style of inflation? The answer is that, although the possibility is there, the probability that such a high level of inflation returning any time soon is actually very low. Is the Fed conducting monetary policy that is inflationary in nature? Yes they are, but let?s not forget why they are doing this. The Fed is engaged in the avoidance of deflation