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Ben Bernanke and world leaders keep telling us that “we’re seeing the return of the American consumer” and that a recovery is well underway. The facts however point to a very different reality.

The markets had a nice rally yesterday, yet are to struggling for direction again this morning. Last months consumer spending numbers were well below expectations. Best Buy came in below earnings estimates and FedEx and Nokia also delivered disappointing earnings.

U.S. housing starts fell 10 percent, the biggest decline since March 2009. Building permits, a sign of future construction, unexpectedly fell to a one-year low. Single-family starts suffered the largest drop since 1991.
Does this all sound like an improving economy to you? Regardless, I think the markets still have a few more short term bear market rallies before they ultimately sell off again as the economic data becomes glaringly obvious as to the reality of our economic health.

The US Dollar is likely to see another drop down as there are far more dollar bulls and Euro bears. I think this will be the start of a long term downtrend for the US dollar and would advise people to get out of dollar denominated assets over the next 12 months.

Greece has recently had their credit rating reduced to “Junk” status. As bond investors around the world begin to realize that Government spending isn’t improving conditions and is just mounting debts to unsustainable levels, I also expect to see many other countries have their ratings reduced, starting with Spain and Portugal and then eventually Britain and the United States.

Oil prices continue to rise (we’re at around $77/Bbl as I write) and I believe they will continue to go higher, albeit with some resistance along the way, perhaps reaching over $100.00/Bbl before the end of the year. This is no doubt in part due to the BP oil spill, but also due to the continued strength in the Asian economies and downward pressure on the dollar. Higher oil prices will hurt the consumer as they pay more at the pump and further reduce growth in the US economy.

Gold continues to move higher and has decoupled from other commodity classes and is acting like a currency unto itself. As countries continue to inflate away the value of their currency, investors around the world are seeking a flight to safety in Gold. As the US dollar confidence erodes, as I believe it will significantly over the next 6 months, we will likely see a major spike in Gold prices.

In conclusion, I’m personally increasing my positions in Gold and Oil, especially the Canadian Oil Sands through my favourite pick, Penn West Energy Trust which currently pays an 8.5% yield. I also remain around 60% in Canadian dollars as I believe that they will continue to appreciate in value being so closely tied to oil and commodities.