The Fed is an SUV
The following is part of Pivotal Events that was published for our subscribers March 3, 2011.
Signs Of The Times
"Fed's Lacker says oil prices 'manageable'"
"Oil price changes could have the potential, if they were very large, for slowing the economy, but we have a lot of experience and a lot of data on past instances, and I think it is a manageable risk."
~ Reuters, February 27, 2011
This reminds of the assurances that the problem in sub-prime mortgages was "isolated". Then when it became more noticed, the establishment boasted that it could be "contained". The worst financial calamity since the 1930s followed.
Beyond "whistling in the dark", there is an error in this thinking. Rising oil prices, as with all strong commodities, do not "cause" a business expansion to end. More correctly, sharply rising prices are part of the end of a business cycle.
"China Gets Tough on Property Speculators" ~ The Globe And Mail, February 28, 2011
The Nikkei Bubble completed at the end of 1979. Going into the top policymakers were trying to talk the mania down - gently. It did not work.
"Get Ready for a Growth Supercycle" ~ Wall Street Journal, March 2, 2011
The article reviewed a study by Standard Chartered bank. This included a critique that similar conclusions about Russia could have been made in 1990.
A 1989 edition of the National Review pointed out that best-selling economics textbooks in 1989 praised the wonders of central planning in the about to collapse Soviet Union.
Our view is that the main conditioner of the future of the economy continues to be radical financial speculation - by both private and public participants. Sadly, policymakers have become financial adventures.
The Big Party Continues
The surge to a speculative blow-off sometime around March continues. When our Momentum Peak Forecaster turned straight up in November it indicated a huge speculative market. The count to the end begins when the Forecaster stops going up. That was at the end of December and the climax typically occurs one to three months later. There was only one example of the one-month lead, and that was in the US housing index in 2006 when the signal occurred in May and the index peaked in that June-July.
The ChartWorks has a couple of independent technical tools that suggest an important reversal sometime around March.
We have been repeating this theme since November and we will stay with it until the surge concludes.
Some participants have faltered with interesting setbacks to cotton and the S&P. The possibility of not all items peaking at the same time was introduced in our February 17 edition.
However, the Chartworks has crude oil on a seasonal rally that could run into April. With the Middle East rebellion this can be volatile, and it seems that on strong days for crude, stocks will sell off. And as with today - quite the opposite.
Beyond crude, gold and silver are back into the Construction Zone and the ChartWorks has had a target of 40 plus for silver. This page's conservative nature has the target at 39 and until the move completes silver will outperform gold.
The latter as plotted by the silver/gold ratio will be one near-term indicator on the end of the game. It continues to make new highs for the move, which is constructive. The recent surge in momentum took the RSI to 80, and up to the mid-eighties would be a warning.
Should chief investment officers be looking at something as weird as the silver/gold ratio?
Why not - it's been a reliable guide to booms and busts for more than 400 years, which predates the Leading Indicators or the Philly Fed Survey.
Keep in mind that the party is still dancing on a snow cornice.
The establishment has been suffering from the SUV complex. The acronym for Sports Utility Vehicle represents an unsupportable conviction that nothing can go wrong.
SUVs are heavy vehicles with a high center of gravity intended for off-road use. For some strange reason they have become popular for urban use. They first appeared on the road to Whistler Mountain or many other ski areas around thirty years ago.
The four-wheel drive feature provided a sense of security that proves hazardous. On any bad snow day most of the cars in the ditch were SUVs - unintended off-road excursions.
This is still the case as too many drivers continue to believe that four-wheel-drives are invincible - until they have to call a tow-truck.
With the crash, startled policymakers immediately called for a tow-truck in the form of a super agency with more omnipotence and omniscience than the old ones.
With the first business expansion out of a classic post-bubble crash the financial establishment has regained full confidence in policymaking.
Since the advent of the Fed, each generation of investors has increased its confidence in policymakers. This became even more so on each great bull market. In 1929 investors were convinced that the "new" Federal Reserve System would be better than the old Treasury System against any contraction. Nothing could go wrong.
This was the conviction on the next great financial bubble as it completed in 2007. That December, the establishment boasted that there was a "dream team" of economists at the Fed and nothing could go wrong.
As mentioned, the 2008 Crash was a classic in demonstrating that even under the Fed things can go very wrong. In so many words, the Fed is an SUV that provides false confidence.
There is another nuance - many portfolio managers still consider that with timely interest rate cuts the Fed can prevent bad things from happening. And yet they believe that no one can "time" the market.
The stock market can remain in the play for some weeks yet. It may not be the strongest participant.
Having accomplished outstanding momentum and bullish sentiment, global stock markets are becoming vulnerable to the end of this magnificent speculative surge.
Link to March 4, 2011 'Bob and Phil Show' on Howestreet.com: http://www.talkdigitalnetwork.com/2011/03/dancing-snow-cornice