Trade tensions are brewing once again between the United States and China -- the largest holder of U.S. Treasury securities.

The United States continues to apply pressure on China to revalue its currency, the renminbi. China allowed its currency to trade within a defined band starting in July 2005 but progress on revaluation has been too slow for her largest trading partners in the West. Over the last 12 months the renminbi has gained 5% versus the dollar -- impressive considering most currencies have tumbled, except the yen.

Since November I've been allocating fresh funds into distressed investment-grade corporate bonds in the United States. Along with gold and TIPs (Treasury Inflation Protected Securities) that's about all I've been buying over the last three months.

In Europe, the investment-grade corporate bond market has not bottomed. The European economic cycle in many ways is deeper entrenched in this crisis that the United States with bond yields remaining under pressure. The U.S. debt market offers a better risk-adjusted return. 

An important market indicator breached important support levels on Tuesday suggesting stocks might be about to plunge to new lows.

With the financial sector literally collapsing over the last several trading sessions it seems quite plausible that we will retest those lows, unless the government announces a quick remedy to alleviate the ongoing panic. U.S. financial sector stocks have already tanked 43% this month with the largest banks basically insolvent and awaiting some sort of government rescue or nationalization.

The United Kingdom's financial system is effectively bust. And other countries, including the United States, Ireland, Greece, Iceland and a dozen or more other nations are also basically bankrupt as their financial services infrastructure clings to life support, courtesy of national governments.

Though it’s still too early to tell how 2009 will play out, convertible bonds have outpaced common stocks thus far in January. That’s a bullish development considering the massacre stocks witnessed last week following more news affecting the distressed financial sector.

To be sure, convertibles did pull back last week as stocks declined. But they’re still winning the race in early 2009.

It should be obvious to most investors that until the financial sector stabilizes and starts to post a meaningful rally, stocks will not bottom and remain hostage to an ongoing bear market.

Already this month the banking sector has tanked more than 15% weighed down by another wave of losses in Q4 and yet fresh announcements of government bailouts, including a whopping $138 billion dollars for Bank of America.

About 12 months ago at a Sovereign Society conference in St. Kitts, I asked the audience if they were bullish or bearish about the U.S. dollar's prospects. Not surprisingly, the majority of respondents were extremely negative on the dollar and wanted to increase their exposure to other currencies like the euro and gold.

That sentiment was also echoed at other seminars since 2002 as most investors don't trust the dollar's long-term prospects and naturally, I could not agree more. I think you have to have your head examined to be a long-term dollar bull.