It is certainly feels like the panic selling typical of capitulation at this point, at least for the financial industry. However, I foresee more pain in the horizon. When you have financial institutions using so much leverage to support depreciating and overvalued assets, it is difficult to see the light at the end of the tunnel. This is especially true when you know that some of them are just now being forced to liquidate these assets in distressed sales which will force more asset writedowns at “healthier” financial institutions.

Everyone is looking to the government for the solution. Although the government let the bears devour Lehman Brothers, I do not expect them to be relatively hands off for much longer. I could easily envision the federal funds rate eventually getting close zero and other “creative” assistance offered to the likes of Citigroup. I do not see how AIG will survive or even Washington Mutual without intensive government assistance but I am not so sure that they will get what they need in time to avoid bankruptcy. Even though Washington Mutual says it has “easy access” to over $50 billion in liquidity, I don’t think it is wise to underestimate how close it is to a classic “run on the bank” or how much they will have to discount their $270 billion in mortgage assets.

Unless there is a concerted international effort to support the dollar, I expect at some point it will resume its decline against most commodities and most Asian currencies. Even though it is not unlikely, currency intervention should not be relied upon because, ultimately, the market forces are much stronger.

The FDIC is going to need a couple hundred billion to make depositors whole as hundreds if not a thousand banks fail. Fannie Mae and Freddie Mac are also going to need a couple hundred billion in cash over the next couple of years to keep up with bond payments. The auto industry is expected to get about $50 billion in new loans. The Fed and the Treasury will have to repossess some of the collateral pledged by financial companies for unpaid loans which will likely result in billions of losses for the government. Neither presidential candidate has outlined concrete proposals that will shrink the size of government or reduce military expenditures, only enlarge it substantially. None of them are addressing the impending tsunami of debt to be incurred from unfunded entitlement obligations Medicare, Medicaid, and Social Security. Considering all of this, why should any sane person NOT have any serious concern over the long-term purchasing power of the dollar? For this reason, I would stay away from any government bonds with maturities longer two years.

Agricultural commodities still have a lot of appeal to me and I view the recent selloff as a technical consolidation as all commodities are being sold to raise cash anyway possible and margin calls put pressure on leveraged positions. At less than $800 per ounce, I even like gold again. Industrial and energy related commodities may continue to face pressure as the outlook for global growth deteriorates. China has signaled it is easing up on monetary policy which could spur more demand for essential commodities.