Elvis Has Left The Building
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, December 15th, 2009.
In his most recent work, Martin Armstrong postulates that because of accelerating inflation, possibly leading to hyperinflation, a falling dollar ($), cycles associated with his Economic Confidence Model (ECM), and a move away from immovable assets by the investing public, stocks are destined to hit new highs as measured by the various indices around the world, and that such a move could begin in earnest at any time. And while he does allow for an alternative scenario, one where stocks could most pessimistically test the March lows in 2011 (an ECM low), using the Dow for discussion purposes, according to Martin a more likely scenario is that allowing for volatility, 2010 should be characterize by a trading range between 12,500 and 8,800, with new highs possible as early as 2011, the inverse of the possible low discussed above. Such an outcome would be predicated on 2009 finishing above 10,800 (1140 on the S&P 500[SPX]), and 12,000 next year. Without a doubt, if such an outcome were to unfold, I would also have few reservations about probabilities in this regard, this, and the likelihood of continued $ weakness.
The question then arises, which Martin addresses as well, 'allowing for other possible reasons such as a loss of reserve currency status to spur a $ collapse, what exactly could cause the greenback to fall like this?' And as you know if one has read Martin's essay attached above, he attributes such a development to accelerating currency debasement associated with a Y2K like scare as 2012 approaches (i.e. the Mayan calendar scare), this, and the speculation that would accompany a highly inflationary period. He doesn't discuss lags associated with money printing, or how credit contraction associate with an apparently collapsing real estate market figures into the larger formula to my satisfaction, however this is his thinking never the less. And of course there is more detail to his ideas on the subject, which I encourage you to study at the link provided above, however for the most part, the summary provided here today captures the crux of his argument concerning a bullish outcome for stocks moving forward, hopefully brought down to a level more easily understood by most.
This is not the only reason for performing this exercise however, not with all the other reasons to be concerned about equities moving forward, 'reasons' that can be lumped into the fundamentals category. Here, we are talking about reasons for stocks to remain weak ranging from increasing taxes to increased regulation in the economy much akin to the socialistic nightmare academics have feared so long. And of course there's also what can be characterized as technical reasons that fly in the face of logic suggestive talk of higher equity prices is ridiculous, such as a rising yield curve, the steepest since 1980, along with sentiment readings apparently as complacent as they have ever been. To be fare, Martin also covers this point by lumping all such factors under 'fundamentals', and suggesting they don't matter in extreme circumstances, where he could be right if enough new currency is being printed. This is where we get back to the fate of the almighty $. Again however, I still have a problem with how deleveraging and collapsing real estate values allow for a simultaneous bull market in 'moveable assets' other than in gold because it's a store of wealth in such circumstances, but perhaps this is because all boats will continue to rise as long as the $ is falling, even if such strength is corrective in the case of real estate.
One could take this vein of thinking further in that the debt market can be viewed as a source of liquidity to fuel such an advance in stocks with retail investors and their brokers opting for perceived safety this past year, after the drubbing in stocks into the March lows, helping to pushing bond prices to undeserved levels. Again however, for me such thinking is troublesome in that the so called recovery in the economy is statistical in nature rather than in substance, and the increasing numbers of people who are facing unemployment will be slow to change in risk taking. So, while the $ may continue to fall next year after a correction, it should be noted this would be out of necessity, and more likely to support prices from lower trajectories in that when the deleveraging begins again, which could involve sovereign debt this time around, the money will be used to pay down debt not rotate into stocks.
And the study below supports this thinking in that not only have high risk corporate bonds (see Figure 1), which are positively correlated to stocks, risen back to the extremes witnessed at the equity highs in 2007, they have done so set against higher quality debt lagging (see Figure 2), evidence that just as with debt, equity investor complacency is as extreme as it's ever been for the participating population. So in terms of the average investor - Elvis has left the building - and is not coming back anytime soon if the 'big message' in the charts below holds any value. Therein, if the recovery in the economy has been a statistical one, then it's also important to note the recovery in stocks has been sponsored by professional traders, with even these numbers dwindling of late as they attempt to retain profits derived from the bounce off the March lows. (See Figure 1)
This hypothesis is also supported in distributions of open interest put / call ratios on the major US indices throughout this period in that for example, ratios for still active contract series utilized by professional traders (SPY, OEX, DJX, NDX) have tended to remain elevated as these larger speculators have attempted to pick a top in stocks. Of late then, you should understand it's been the pros who have been getting squeezed, not the smaller retail traders / speculators, who again, like Elvis, have left the building. What's more, it's important to understand once the public has been burned in something like stocks, which occurred in the tech wreck of 2000, and in real estate more recently, they will generally not return to these markets within their lifetimes if history is a good guide; so again, I just don't know how stock indices are suppose to go to new highs given this constraint. (See Figure 2)
The lower $ can fix some things, and between this and the present bond bubble bursting, again, it's not difficult envisioning precious metals benefiting from such a paradigm shift. However the stock market, this is a bird of a different color until the public is in a position to participate again, which as mentioned could be a generation if history is a good guide. The double top argument for the SPX offered by Martin does not hold water if it is measured in equal weightings, or broken up into its component parts. (i.e. the Dow went to new highs in 2007.) And if a broader measure of stocks is considered, like the capitalization weighted New York Average (NYA) to compare apples to apples, then again we see a distinct top in 2007 set against a heavily manipulated S&P 500 that is promoted to attract half-witted traders to support the faulty market mechanism. (i.e. short sellers and hedgers are regularly squeezed to support stocks.)
So you see, this is why I cannot agree with Martin in terms of the broad measures of stocks going to new highs, however I wholeheartedly agree with him on the $ (lower) and gold (higher). And in turning to the short-term because it looks like a Fed meeting related takedown is being orchestrated this morning, although Dave might be right about the fact it could take some time for a correction in gold to work its way through, it should be remembered that another push towards the $1300 mark should take place before a more lengthily pause is experienced if this count is correct, and a more serious rally in the $ is not in the cards. Whether this transpires or not is another question of course, however anybody who thinks the reprobates at the Fed are going to be talking hawkish this week just plain doesn't get it, and did not hear Bernanke telegraphing this in his speech last week.
In an update on the propaganda put out by the Fed just today, it should be remembered that this is in fact propaganda aimed squarely at holding gold down while the bureaucracy cranks the printing presses up in unprecedented giveaways and bailouts. Such a statement coming out of the Fed is actually laughable, and should not be taken seriously with all the Option ARM's Mortgages coming up in just a few months.
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