World Markets Down as Commodities Threaten Profits

By: Gary Tanashian | Fri, Apr 15, 2011
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The AP title says it all this morning. The recovery was produced by will of man (and woman, as Janet Yellen continues to work the 'good cop' side of the street with Ben Bernanke, opposite those thugs Plosser and Bullard on the other side, talking about withdrawing policy accommodation), allowing Wall Street and the greater financial services industry to calculate PE ratios, growth extrapolations and the like. The conventional machine is back to business as usual, working up projections and giving advice to the masses as if this is a normal economy, whatever that means anymore.

In the US, the recovery was willed into existence through inflationary policy which, in creating so many USD through debt monetization, brings forth the laws of supply and demand; seemingly unlimited supply of currency created out of nothing but debt and confidence in policy makers, chasing very real and ultimately vital assets and services. Yet still, some of the things that the inflation is aimed at (the jobs market, housing, etc.) remain in the tank. That is the funny thing about inflation produced by powerful governmental clerks, they cannot choose where it flows after it is created.

Hence, asset owners tend to become enriched and the public tends to become relatively poor, and in need of future inflationary policy. The funny thing is that, rising austerity movement (Tea Party and associated representatives) aside, a huge segment of the public will actually demand, once again, the very poison that nearly killed them the first time, and the second time; they will demand that our policy heroes spring into action and our gods of all things policy, will likely oblige once again.

Ah, but there is a chink in our heroes' armor; inflationary policy is only palatable when the public is allowed to maintain the fantasy that inflation is under control. Enter the 'long bond' that we review so often here in biiwii land.

30-Year US Treasury

I realize that I beat you about the head with variations of this chart nearly every week, but that is only because it is one of the keys to remaining on the right side of things through the cycles of chicanery and misperception that make up our modern financial markets.

If commodities continue higher, they will go higher in concert with a major breakdown in confidence in the Wizard's ability to keep the economic construct intact. There is a reason that voices are rising against the continued policy of debt monetization, and that reason is that the majority do not benefit from the crippling compromise of the currency, unlike asset speculators, investors and corporations. Instead, the majority see their dollars - which they depend on to make ends meet - rapidly devaluing vs. all the things in life they need; food, energy, healthcare...

Ah but now, what could possibly stop the great recovery and fantastic bull (though illusory, see Dow-Gold ratio) market in stocks? Commodity prices will start to erode bottom line profits, conventional stock analysts will eventually begin to extrapolate this cost drag and voila, market correction; possibly a significant one. The weekly chart of the S&P 500 tells a story.

S&P500

And the story remains one of potential imminent correction, but as usual it is not as easy as saying that's it, fold up the fantasy factory and prepare for Prechter. I remain of the opinion that SPX found little real support post-Japan and the current rebound to a 'lower high' has been the stuff of short term sentiment adjustments.

Yet the target off of the structure noted above is in the mid 1400's at what would be dense and possibly terminal resistance. But that may be for much later in the year. So, if the broad market is going to act rational (fat chance?), how about this rough game plan?...

Correction to noted support, rebound in Treasury bonds as the herd comes to Papa (the Wizard, or whatever may be your preferred imagery), hard correction in commodities (which are helping put the lie to the pretense that the economy is anything organic, real or healthy) and yes, even a hit to my preferred precious metals. It would be best for short term stability if confidence remains intact and Treasury bonds do not break the major supports we have noted month after tedious month here on the blog and in the newsletter.

Right now, the Wizard needs to reload the policy gun. Deal with it, and do not be surprised if the USD finds support (we have been tracking its breakdowns in NFTRH, but USD is not terminal - not yet - and has support just below current levels.

US Dollar Index

Every wise guy asset advisor and his brother has already written Uncle Buck off for dead, yet the chart - while not bullish by any means (MACD is bearish below zero, but hinting bullish divergence by the histogram) - shows support just below current levels.

So we must ask ourselves 'is the dollar to be sacrificed?', 'are Treasury bonds going to do something they have not done in decades and break the long term down trend in yields?', 'are the manifestations of inflationary policy, including rapidly rising commodity prices, going to croak the recovery?'.

We are in the knee jerk era of economics and market management. It takes seemingly forever for perceptions to become cemented to the point where the herd is confident in its position, but then when the turn comes, it can be violent.

In summary, it is difficult to get behind the long bond and the US dollar, due to their intrinsic worthlessness. But all I am asking is that people be aware that they are at a point where reversal can happen. This reversal would send throngs into Treasury bonds, drop stock markets and hammer commodities, including my personal top investment theme, the gold sector, to some degree.

Gold is a subject for a different discussion, but suffice it to say for now that the gold sector would move front and center in the 'opportunities through misperceptions' sweepstakes. In NFTRH, we have our parameters and they have not been broken. If they are, risk management would be instituted in anticipation of coming opportunity.

Meanwhile, we may yet get a dose of deflationary counter activity. Be ready to play the misperceptions game as a grounded player with a good b/s detector. Because the b/s is going to fly fast and furious if Treasuries and USD do reverse.

 


 

Gary Tanashian

Author: Gary Tanashian

Gary Tanashian
http://www.biiwii.com/

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