The following is part of Pivotal Events that was published for our subscribers June 3, 2010.
SIGNS OF THE TIMES:
"Most indications are that the credit market tide has turned on the back of the massive reflation orchestrated by central banks worldwide."
- Plexus Asset Management, May 27, 2009
Our view continues that the rebound was natural following the crash and that the "stimulus" exaggerated the action. This may have added some 1000 points on to what the Dow would have accomplished without official assistance.
As it turned out the January slump set up a sharp rally - vigorous enough to definitely conclude the big rebound. The four-week slump recorded the biggest drop in the month of May since 1940. This is trying to tell us something and beyond this, the government "gratuity" has since been wiped out.
"Financial crisis hit commodities, otherwise the uptrend would have continued."
- Donald Coxe, BNN, June 3, 2009
"I'm afraid they're [the US] printing so much money that stocks [Dow] could go to 20,000 or 30,000. Of course it would be in worthless money."
- Jimmy Rogers, CNBC, June 4, 2009
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"We went through a massive liquidation trade in Europe and risk-taking positions were wiped out across the board."
- Bloomberg, May 16, 2010
"Consumer Confidence Jumps by Most in Six Years"
"American spirits are lifting."
- Bloomberg, May 26, 2010
"European debt crisis probably won't derail the U.S. or global economic recoveries."
"We have a sustained rebound in growth."
- Chief Canadian Economist, Merrill Lynch, June 1, 2010
Our old observation has been "Every bull market climbs a wall of worry and with a rush, leaps over only to find 'Murphy' waiting." Of course Murphy's Law states "Anything that can go wrong, will go wrong."
In this example it has ostensibly been sovereign debt; more particularly Greece. Greece is just the leader of what has been a global mania of reckless lending and borrowing. The consequence has always been financial distress, a business contraction and increasing unemployment. As with previous examples, the mania was global and the contraction is global.
Our February 23 study Sovereign Debt Follies observed that all participants were not without judgment during the frenzy. In 1872 the Economist advised:
"Avoid states which are constantly borrowing, which must therefore be paying off the interest on their old debt with the fresh loans."
Greece now, or Bolivia in 1873, or Peru in 1825 are merely names associated with post-bubble manias. In each case, money was created out of thin air and then the credit contraction began and eventually became cataclysmic.
Now, what has this to do with equities?
Eventually, each post-bubble contraction has overwhelmed the senior central bank's intentions to supply sufficient funds to make each liquidity crisis the last one. In the face of pervasive contraction even the best-managed companies in industry, commerce, agriculture and finance become vulnerable.
In which case the long-term course of global stock markets is best determined by monitoring changes in credit markets, particularly as the Fed has little or no influence upon credit spreads and the yield curve.
In the meantime, with orthodox approaches again becoming uncertain it is time to look at the charts. And as Ross points out the "lines" are setting up for a rebound out to around 1130 on the S&P.
Following that bright possibility, the downtrend would resume.
Outside of this, we are looking for a typical summer with Wall Street pundits calling each rebound a "Typical Summer Rally" and each decline will be described as "Typical Summer Doldrums".
A couple of weeks ago the action in the DX registered an Upside Exhaustion on the daily reading. This was an alert to the trend running out of momentum, which could be enough to end the mini panic, and it was.
Now the weekly reading has registered, which could be enough to set up a more significant change in the currency markets: Dollar down and euro up.
Furthermore, in euro terms gold is establishing a significant overbought.
The Canadian dollar was expected to decline to support at 93 and the low close was 92.8 on May 24. The rebound was targeted to 97 and with the "currency change" it could run somewhat further.
Link to Friday, June 4 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1673