Wednesday, February 23, 2011


Bear markets begin when something fundamental breaks. Usually the sector initially affected will roll over before the general market and tends to be a warning sign of what lies ahead.

The last bear market was triggered when the credit bubble created by Greenspan's foolish monetary policy burst. It was exacerbated by Bernanke's foolish attempt to debase the currency and reflate the bubble. All he succeeded in doing was to inflate oil to $147, which put the finishing touches on an already crumbling economy.

The market gave us a warning when the financials began to diverge from the rest of the market. Considering that the banks were one of the leading sectors during the `02-`07 bull the fact that they couldn't follow the rest of the market to new highs after the February `07 correction was a big red flag that the bull was on its last legs.

I've been saying for more than a year now that the unintended consequences of QE would be to spike inflation, which in turn would poison the global economy. I knew all along that Ben was never going to create any jobs by printing money and of course he hasn't.

So if
inflation is going to sink the economy and kill the stock market we should see warning signs from the sectors most affected by rising inflationary pressures, just like the banks warned us in `07 that the fundamentals were broken.

Sure enough I think we are starting to see those warning signs. 

Emerging markets have been the hit hard by food inflation. We are now seeing food riots in many third world countries. Emerging markets just like financials during the last bull were one of the leading sectors.
EEM is now starting to diverge from the rest of the global stock markets. It's now on the verge of breaking back below the November cycle low.

The other sector that is extremely sensitive to inflation is the transports. When energy costs spike shipping companies profit margins are squeezed. The last two days have seen the Dow Transports fold under the pressure of surging oil prices. Keep in mind oil is only on the 17th day of its intermediate cycle. That cycle lasts on average 50-70 days. I think we are going to see $5.00 gasoline by the time the dollar collapses into its three year cycle low later this spring.

If the market can recover from the recent correction and make new highs I don't expect the transports will be able to follow. That will set up a Dow Theory non-confirmation and most bear markets begin with a Dow Theory non-confirmation.

China is already in a bear market. I think most emerging markets have probably topped and I doubt the rest of the global markets have more than 2 or 3 months left before the next leg down in the secular bear market begins.

I think the brief party created by Bernanke's printing press is about to come to an end. 


  1. Toby
    Luv your work and follow your blogs with regularity.
    One thing that is apparent to me (and I'm no conspiracy theorist here either) that all this insanity with which Bernanke is displaying (as you repeatedly suggest)...perhaps there are intended consequences which we overlook. Other than the obvious USD debasement and lack of employment generation (with a myriad of other consequences), wouldn't it be feasible that he is hell bent on creating inflation intentionally. Surely he knew that pushing fiat money through the banking system would create side effects via risk assets. Maybe the side-effects are just collateral damage (read ..acceptable in his eyes). In turn inflating away the massive debt that exists. IMHO ...I dont believe the USD is doomed nor do I believe that it will be backed by gold in the future. All governments/CB's know that fiat money systems will ensure that they retain their power and control.
    Bernanke displays all the qualities of a school kid with no sound understanding of economics. AND yet he just may be the MASTER!! Food for thought.
    Liquid Motion.

  2. btw...with stock markets about to rollover....I couldn't help but to observe the lack of buying interest in the USD of late. With all the geopolitical events occuring around the globe the BIG RED FLAG is the USD. Lack of "flight to safety" to me is the precursor to the rolling over of the very same in the near term(which you have consistently been calling for some time). Really a time for concern when there is a culmination of events such as these. Thanks again for the great heads up.

  3. the big question then is:
    will gold stocks follow all the other stocks downward, as they often do?

  4. The gold stocks follow gold. Sometimes at the final selling climax the selling pressure coming off the stock market will drag the miners down briefly. They always pop right back up was the selling pressure is released though.

  5. Great. 2007 all over again. A big spike in Oil and commodities, followed by a crash. Not unexpected (not by a longshot), but it makes me angry to see crude already topping $119 a barrel TODAY. This could make 2007 look like a cakewalk before it crashes and burns again.

  6. I've done well with my Brazil Exchange Traded Fund EWZ for the last 2 years. It got hit in the January 2011 correction but it has bounced off its 200 DMA and is now just under its 50 DMA. Brazil's economy is heavily involved in oil and food and lumber commodities and commodities are supposed to do well in an inflationary scenario. So I was thinking Brazil might do ok even if the other emerging markets continue to sink. Any comments from other posters are welcome.

    Lewis Forro
    Virginia Beach, VA

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