Rule #1

Rule #1: Know what kind of market you're in. Are you in a bull market, a bear market, a value market, a market based on fundamentals, or a market built on credit?

We're in a credit market. Or as BMO puts it more poetically here, we're in a levered market. (Sorry that I'm just getting around to commenting on this fine report by our Canadian friends, but I'm packing for a month long boots-on-the-ground tour of the Pacific Northwest. Look for more updates and commentary from the road. By the way, I recently shot footage of the neutron bomb-like effects of the real estate implosion here in sunny Scottsdale, Arizona, that is still being edited, but it is quite powerful. I'll post it here soon.)

In a levered market, throw out the fundamentals. They don't matter. If you want to keep your bearings and stay true, watch the sovereign credit markets. It is not a pretty picture. It is going to get much worse, as you'll discover in the latest BMO report.

What this report makes crystal clear is that the world may be awash in credit, but it's starving for dollars. I discussed this back in March; BMO is kindly providing the proof. Check out these key phrases: dollar imbalance...dollar squeeze...dollars are sought...emergency dollar funding...central bank dollar deficiency...banks hoarding safe haven treasuries . . . Do you see what's happening here? There is a shortage of the real to hold up the unreal. There aren't enough dollars to support credits denominated in dollars. The remedy for this imbalance is brought about by debt liquidation. Try as they might to avoid this natural cleansing process, governments will go broke trying to fill the ocean of credit with their garden hoses. Look for them to gradually come to their senses only after it's too late. The central message from BMO is raise cash. I concur.

I'll leave you with two last comments: one, the rise from the 5/25/2010 lows is sloppy and will be completely retraced. Two, China is screwed.