Sunday, February 14, 2010

How are Markets, the Economy, and Your Dollars Doing?

On January 24th, Clive Maund warned of a potentially "Black Monday" type drop looming in the S&500 Index after the failure of its abortive run up to 115. More interesting perhaps, depending on how much cash you hold, was his second chart showing the S&P500 denominated in Euros instead of dollars. For those unaccustomed to thinking in terms of foreign currencies, a chart of US stock prices denominated in Euros will have the same shape as a chart denominated in US dollars, provided that the dollar/Euro exchange rate does not change. But, if the dollar falls in price versus the Euro, the dollar will buy fewer Euros, meaning a US stock will also buy fewer Euros, and a US stock prices chart denominated in Euros will have smaller rises and larger drops in comparison with a chart denominated in dollars. Accordingly, as the S&P500 recovered from its recent March low, its gain seemed remarkable in terms of US dollars. Over the same time, however, the US dollar was falling against the Euro, making the gain not so remarkable after all when viewed in terms of Euros.

Note, the entire rise shown in the first chart is reflected in the last 1/12th of the second chart, from March, 2009 to date. Not as impressive as a stock chart denominated in dollars. But, there is a nice little run-up at the very end of the chart from 7 to 8 on the y-axis. The very recent sharp reversal and run-up in the dollar against the Euro during as the S&P500 fell sharply from 115 would seem to explain that.

Clive's third and fourth charts show Goldman Sachs and JPMorgan falling sharply at the same time as the S&P500 on high volume.

On February 1, Clive repeated his warning in a longer piece with updated S&P500 and Goldman Sachs charts and more charts, including the: $Gold Index, $HUI Index, USD Index, $Copper Index, and $WTIC (Light Crude Oil) Index charts. Markets could be on the verge of repeating last year's crash or worse.

On February 15th, Clive posted a "Gold Market Update" on the 321Gold Website (one of my favorites). The articles Clive publishes publicly come out a few days after he publishes them for his paid subscribers. This article was originally dated February 13th. His latest opinion is that the recent corrective phase in gold is over, and we are on the verge of another big run-up in gold. He might be right, however, I would still advise caution. Clive tends to get over-optimistic and over-enthusiastic about gold sometimes. Also, he is a practitioner of "technical-analysis", the method of divining the future from the stock chart itself. While the stock chart itself can provide useful information about timing short-term and sometimes intermediate-term buys and sells, it cannot reliably predict more than that. If the Dow, S&P500, and NASDAQ head south, they will drag precious metals stocks and the metals prices themselves with them, no matter what the precious metals technical analysis says. One way to play this is to buy several gold and silver stocks, and hedge them all by also buying SPY (S&P500) put options.

On February 7th, Bob Chapman touched on a wide variety of issues pertinent to Gold, Silver, the Econonmy, and More, including: the upcoming second wave of mortgage defaults, the real unemployment rate, foreign buying of US Treasuries and Agency bonds, a hint that the Government is planning for some kind of forced retirement plan where citizens would be required to exchange some part of their retirement savings for a Government guaranteed annuity, the role Paul Volcker might play in helping return the financial sector to some semblance of former normalcy, financial industry front running, the increases in the national and Federal Reserve debts, and on the "bright side", mention of an uptick in mortgage applications and a slowdown in job losses.

Recently, Daniel Amerman, addressed the issue of inflation versus deflation in this article, "Containing Inflation Via Unlimited Money Creation: The Fed's Strategy". Currently and for quite some time, two camps have been debating this issue of whether the current monetary system will suffer a deflationary depression or a hyperinflationary depression.

In a deflationary depression, debt is repaid or defaulted upon resulting in wave after wave of bank failures and a contracting money supply but the currency does not fail; the dollar becomes more valuable. In a hyperinflationary depression, expansion of the money supply and leads to runaway inflation and failure of the currency, because the dollar eventually loses all value.

The reason people are arguing about which way the monetary system and economy will go - deflation or inflation - is that the Government and the Fed have propped up the financial sector by exchanging Government and Fed debt instruments for bad assets belonging to the big banks, Government Sponsored Enterprises (GSEs - think Fannie Mae, Freddie Mac, etc) and Wall Street firms. On paper, these exchanges led to large increases in the money supply leading many people to think that high inflation is right around the corner. At the same time, banks have been reluctant to lend, and borrowers have been reluctant to borrow and spend, meaning the new money has not found its way into the general economy in a big way ... yet. While this money sits in the coffers of the big banks, businesses and people are trying to pay off existing debt, that extinguishes money, and is deflationary. So, at the same time inflationary forces are at work, deflationary forces are also at work and opinions vary as to which forces will predominate and when.

Daniel explains how the Fed and Ben Bernanke are handling their part in this story. In short, Ben Bernanke thinks he has a strategy that will allow him to control the vasts sums of money created by the Fed, prevent its escape into the general economy, and thereby prevent hyperinflation. Daniel explains the risks of Ben's plan and begs to differ. In my opinion, this is an area where I don't think the future is ordained yet, and future decisions that will be made by the Fed and our Government might well determine the outcome. I think the best plan is to hedge your bets no matter which way you think the dollar is going, but you should read the article to understand the economic and political issues better.

While obviously not a total secret, the opening of this article, Secret Summit of Top Bankers, by George Lekakis and Fleur Leyden from the Herald Sun, February 06, 2010, pretty much explains its importance:

"The world's top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets. Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports. Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies. The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India. The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt."

The significance of this meeting in light of recent news, the apparent topping behavior of stock markets, and the recent sharp drops should be obvious. The banking elite are very concerned about how to manage the looming crisis should markets take a another dive like they did last year. If all was well in the financial world, a meeting such as this would not be taking place.

My favorite quote concerning "secret meetings" like this goes, "If you are trying to find a cure for cancer, you do it with the lights on." In other words, if you are truly engaged in activities that will benefit all of society, wouldn't you want everyone to be aware of your good deeds? Call me a cynic, but in my opinion the central banking elite are meeting to figure out how to save their bacon, not mine or yours.

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