Dow(n) Jones?

By: Alex Wallenwein | Sun, Aug 28, 2005
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So many investors' hopes and dreams ride on the Dow, who would want to let them fall by the wayside?

Well, there's old "Mr. Market," for one.

The old man of the trading world just never quite seems to want to die. He never quite does what traders, investors, or market regulators want him to do, either - try as they might.

So, how's it shakin' for his offspring, Mr. Dow, then? He stands first in line to inherit - if and when Mr. Market folds his hands for the last time.

Well, if Mr. Market was a human being capable of speech, he would have to quote Mark Twain, as he once remarked: "All recent reports of my death are false and greatly exaggerated." It's like Nietzsche declaring that "God is dead."

I saw a T-Shirt once with that slogan emblazoned on the front. It said: "God is dead - Nietzsche." On the back of the T-Shirt it said: "Nietzsche is dead - God."

Mr. Market ain't dyin'. And he's not to be tamed, either. He is just patient. He has time. Men don't. Even generations of men that have the same mind set cannot outlast Mr. Market.

And that is beginning to show itself once more, all over again.

Dow-boy is living on borrowed time, as he has since his moment of glory in late 1999.

He was resuscitated by his witch doctor handlers - sort of. Problem is, he just hasn't been the same since he paid a visit to the land of the dead, back in 2002. Sure, he "came back" - but the question remains whether that was a true revival or the result a Voodoo-style seance.

As the following chart shows, for all intents and purposes, Dow-boy has been wandering the high plains as a Zombie ever since:

Normal market segment-tops don't happen that way. Look at what happened to the Dow back in 1929. Look at the Nasdog, Dow-boy's little pooch, in 2000. Looks like somebody's been lending Dow-boy a hand or two over the last five years.

Guess who?

The Fed's been priding itself over having gotten "so much better" over the past decades. It learned its little Voodoo lessons well, it seems.

- Better at what, is the question, though.

Better at "managing" the economy, of course, duh!

That's newspeak for plain old market manipulation. Market manipulation has Congress' stamp of approval now, since 1913, so such obvious badges of fraud are no longer tolerated in our common vocabulary. It's called "managing" now! Got it? Geez-wiz. What's taking you so long? Get with the times, will you?

So, we all have seen the light. The wonders of the market managers never cease. These days, Zombies can indeed walk the plains of market activity - but are they truly alive?

If you've ever watched a horror movie with zombies in it, you know the answer. Those buggers just keep on decaying after they are revived, until they finally fall apart.

But anyone they bite becomes a zombie himself.

Looks like a lot of investors are sporting the zombie-bite these days. They are brain-dead already, but they just keep on "investing" - in a walking corpse.

China , meanwhile, humanity's greatest threat to international security and human freedom, a country whose leaders have not forgotten that victory requires absolute, unquestioning, even shocking ruthlessness, is amassing the gold that Europeans keep selling under their WA accord.

Right along European gold, China has also been buying the gold the US Treasury/Fed contingent has quietly "liberated" from its underground prisons in order to keep the dollar in the reserve currency drivers seat for just a little while longer.

So, what's gnawing on Dow-boy's zombie-flesh, other than the inevitable tooth of time? It's


for one.

Oil and paper don't mix too well. You can dry a wet piece of paper, but once you got oil on it, might just as well toss it out and get a new one. Stock certificates traded on the Dow are getting oil poured all over them, lately. Sure makes them burn better, but it detracts from their usefulness, somewhat.

It's also

Rising Interest Rates.

Rising rates make companies pay more to borrow - and you already know how everything in this "new economy" is hocked up to the hilt. Heck, even the very currency we buy things with is based on nothing but debt.

So, now it costs more debt to get into debt deeper. Great ...

Bottom line: That makes it harder to get into debt to expand and make more "debt-with-which-to-pay-for-things," so profit outlook and therefore stock valuations suffer. Darn! How about



Since nobody can afford to remember publicly what inflation really is (an increase in the stock of currency beyond what the economy can accommodate), policy makers and market shakers are fighting the wrong thing with the wrong tool. It's like fighting fire with gasoline. Not very effective.

They say that higher oil causes inflation (they mean price inflation, normally the result of monetary inflation), so they need to raise interest rates to "nip it in the bud." But oil keeps rising for reasons that are external to the US, and therefore not subject to control by higher rates. Darn, again!

What they are really doing is to fight inflationary expectations by raising rates. That can be effective, up to a point, because the public has been successfully re-educated to believe such nonsense.

Conundrum? No: Policy!

It's especially effective in fighting higher long term interest rates - the exact opposite of conventional wisdom that holds long rates will have to follow short rates up. And that exposes Greenspan's so-called "conundrum" as what it really is: A policy-goal

The truth is that long rates traditionally rise first, to which policy makers then respond with short rate-hikes - which then results in long rates finally topping and turning south.

Why does this happen? Rising short rates contain inflationary expectations, and that keeps investors piling into bonds, thus depressing long rates which are inverse to bond prices. Just take a look at this chart:

Apparently, lower long rates have been a major policy goal for the last fifteen years at least.

What does that tell us about current short rate hikes? Greenie wants the housing bubble to stay intact for just a bit longer.

Damage control... Management ...

Manipulation? Nah! Come on, stop it already.

Question: Can rising short rates keep inflationary expectations down forever?

No. They can't.

Since oil is the avowed target, and foreign oil won't budge to domestic interest rate policy, as oil (and therefore raw materials and so eventually products prices) keep on rising right alongside the rate hikes, even brain-dead zombie investors/traders will see the writing on the wall and start getting out of bonds - and that will drop their price and raise their yields, and therefore long rates - eventually.

But when?

Could be very soon. Treasury prices have turned down just after touching their 200 day MA from below:

That's not a good sign. That, and the fact that it follows a classical double-top in July, combined with the amount of attention recently given the topping real estate bubble makes a near-term treasury rout quite possible.

How About Gold?

Gold has been flat-lined since late least year. Its effective trading range was $420 to $440.

But it's now consolidating just under the $40 line while it remains above both its 50 day and 200 day MA. The Washington Agreement gold sales limits cat is now out of the bag. The WA-CBs have already exceeded their gold-sales quota for the year, and there's four months left to the year - months that are traditionally already very good for gold due to the Indian wedding season, etc.!)

Plus, mine production in South Africa is dropping like a rock, demand is up generally, and - well, you get the picture.

So, how about the Dow, then? Will it be up - or Dow(n)?

Well, rising oil, rising rates, stable gold ready to take off - heck, you tell me.

Only a resumption of the dollar's fall can save the Dow for a while longer. Since 2003, that has never failed, so far. Will it happen again?

Possibly, because a lower dollar improves foreign demand for US goods (and God only knows we can't afford to buy our own products anymore!)

But rising oil can and will still bring any Dow-positive effects of a falling dollar to a screeching halt.

NY crude has risen about 50% since January (from about 42 to 66 a barrel) despite a rising dollar. Once the dollar starts falling again, adding it's negative effect to the oil price, watch US companies' energy and raw material costs go up!

So, the only thing that can now save the Dow can't really save it, either.

Naturally, the final turning point need not be right here, on Monday morning - but all the indicators point to it being very close.

Got gold?


Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

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