Wednesday, August 3, 2011

IS THE FED ABOUT TO MAKE THE MISTAKE OF THE DECADE?

Just as I expected, when the market failed to rally on the debt ceiling resolution, panic set in. As I have been telling people the stock market is not dropping because politicians are debating whether or not to spend more money. They have a long record of raising the debt ceiling whenever it threatened to interfere with their spending spree. So the resolution to the debt ceiling was never in question. We knew from day one that Washington would add another trillion or so to the deficit without any real attempt to cut spending. The market has been in trouble since May because it is starting to price in the next recession.


The S&P has now breached the March intermediate cycle low. In a mature bull market that is almost always a signal that a new cyclical bear market has begun.


I've been warning investors since late April that this was coming. Many were fooled by the phony manufactured rally at the end of June. I knew at the time that the Fed's pitiful attempt to manufacture a momentum move as QE2 came to an end would fail.


All that being said, the market is now moving into the timing band for a major intermediate cycle bottom. My best guess is that the reversal today will probably trigger a weak bounce up to the 200 day moving average, followed by one more leg down. That should mark a more lasting bottom and trigger a 6 to 8 week bear market rally. That rally is going to look very convincing and I'll tell you why in just a second. But just like the rally in June it is going to fail.
Folks, a recession is unavoidable at this point. The piper is going to have to be paid for printing trillions of dollars and bailing out the financial system. Unfortunately there's no way around that. The question is will Bernanke make the ultimate blunder and initiate QE3? I'll explain in a second.


Next we need to take a look at the dollar chart. It's not a pretty picture. With the market in free fall the dollar should be rallying violently. If May marked the three year cycle low like I originally thought then the dollar should be rising rapidly by now.The fact that it's not is a very ominous sign.


I'm starting to worry that Bernanke is going to initiate QE3 and he's going to add a currency crisis on top of the economy sliding back into recession.The combination of both of these at the same time will trigger a collapse much worse than what we went through in 2008.

If the market decides that QE3 is in the cards that would be the trigger for our bear market rally. Unfortunately it would also be the trigger for another spike in commodity prices at the very time that the consumer is least able to withstand them.

What Washington and the Fed don't seem to realize is that the problem isn't the size of the dose, it's that we are using the wrong medicine. We've already spent trillions to save the economy and it failed. Let's pray that the powers that be have enough sense to recognize that more trillions are not going to cure the problem, they are going to exacerbate it.

Unfortunately what no one wants to admit is that there is no cure for our problem. We can't stop it. It can't be "fixed". All we can do is make it worse. We desperately need to face reality and initiate the painful policies that are required to halt the car before it drives off the cliff. Failure to do that will mean that the market will force reality upon us as a major global economic collapse.


Before this is all over and done I fully expect the Keynesian economic model will get tossed into the trash heap where it belongs. If it wasn't for politicians desire to spend more than they can afford Keynesian policies would have been discarded decades ago.


For the next week I'm going to reopen the 15 month special to the Smart Money Tracker premium newsletter. For the normal yearly price I'm going to throw in three free months. The premium newsletter is published nightly along with a more detailed weekend report. I cover the stock market, dollar index, and commodity markets with special emphasis on the gold and silver market.


I've done my best over the last several months to get investors out of the stock market, and those that listened to me have avoided this market swoon. If you would like help navigating the volatile times ahead I strongly suggest you consider a subscription to the premium newsletter. Here is the link to the premium website. Click on the subscribe link on the right-hand side of the homepage to get started reading the nightly and weekend reports.

33 comments:

  1. Toby / Gary,

    This is a real good article and I totally agreed with your expected movement of the stock market for the rest of the year. The last nail in the coffin eventually seen.

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  2. I agree with everything you said Toby. Only, QE3 may be given another name like job starter, just to fool people. The debt will go on and on until the whole system crashes down. That is why Gold and Silver looks so good. I'm waiting for a down turn in gold to buy more.

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  3. I agree with everything you said Toby. Only, QE3 may be given another name like job starter, just to fool people. The debt will go on and on until the whole system crashes down. That is why Gold and Silver look so good. I'm waiting for a down turn in gold to buy more.

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  4. Gary,

    Good analysis and commentary on the stock market. I concur with your assessment. My technical indicators flashed a "SELL" signal on July 27, and what I've seen from the market so far is pretty ominous.

    I'm using leveraged ETF's to take advantage of the market's fall, but I'm afraid most people are going to lose a lot of money in this next downleg.

    Not sure if the Fed is making a "mistake of a decade" as you call it. Some believe that the Fed is purposely railroading the economy off the cliff in order to gain complete control over the country.

    Your thoughts anyone?

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  5. another great article. interesting that TLT to $USD ratio made a 3 year high. the most important chart now though is the italian to german bond spread, which is soaring. tomorrow is the big italian auction. of course it will 'succeed' due to ecb QE.

    boss, you are correct. the fed is the anti-constitution: 'of the banks, by the banks, for the banks'. QE to infinity. but eventually their system will collapse.

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  6. I think the USD weakness is due to perception of QE3. In My opinion further QE will not weaken the USD anymore. This is an maverick view, but I believe that it was the Huge Stimulus package which caused the economy to recover, encouraged risk taking and lowered the USD. Swissie, Aussie EURO and JPY are so overvalued on PPP now that I doubt the USD can weaken much more. I think a 2 year Bull is USD is about to begin.

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  7. I do not presume to know whether more govt stimulus is in the cards (it wouldn't surprise me) but I would question the outcome that seems have become accepted religion these days among the mainstream speculative classes. I just would not be betting the farm on more of the up in everything thesis. And if the markets are there to fool most of the people most of the time what better way to do so than an inexplicable (to most) US Dollar rally?

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  8. Well, everybody and their brother now expects dollar rally, and that is the problem with your assumption.
    "Swiss franc is THE MOST OVERVALUED CURRENCY in the world" and "Dollar is due for a powerfull bounce", are mainstrem media headlines.
    Forget it, dollar is going down the drain.
    Deflation will not be allowed, or you people didn't listen to what Obama and Bernanke had to say for the last couple of years

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  9. ERI, expectations do not make for surprises, one sided bets do. Check out the CFTC reports for one sided positions on the Aussie. I think the AUssie RBA rate in 1 .5 years will be under 3% as their housing market implodes and right now Speculators are long 9:1 on the currency. Going to be fun.

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  10. Oh well, good luck with betting on dollar, you gonna need it.

    In the meantime i give you 1680$ gold.

    Gold couldn't care less about the dollar, nor could i.

    Gold will correct at some point but certainly not because of the dollar, it will correct because of being overbought, that's all.

    Dollar will have bounce but it's just a dead cat bounce, nobody's taking dollar or America seriously any longer.

    Talk is cheap

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  11. Do you really think the market will crash much worse than in 2008? I dont think the stock market is a safe place these days, especially compared to the gold and silver dollar values, but I wasnt expecting that much of a crash neither.

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  12. John Maynard Keynes had attended the Paris Peace Conference in 1919 as a technical adviser to Prime Minister Lloyd George, but resigned his post in protest of what he regarded as outrageous demands being made upon a prostrate Germany for reparations. His book (it is available on the internet) deals with the economic condition of Europe prior to the war, the Conference itself, with interesting portraits of the attendees, the Treaty which resulted, and reparations. Keynes saw no ready solution, which “leads me to a necessary digression on the currency situation of Europe.” What a digression!

    His book on the subject, The Economic Consequences of the Peace, begins:

    “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

    “Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

    Amazing words, predicting with great accuracy what would happen in Germany just a few years thereafter, as prices were raised weekly, then daily, then hourly, and “money” was printed so rapidly that it was actually blank on one side.
    In that the US dollar has lost over 95% of its purchasing power since the creation of the Federal Reserve System in 1913, has the “existing basis of society” not likewise already been overturned in America by inflation?

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  13. I just have one simple question that should be asked of any government "economist": What is so wrong about falling prices?

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  14. I can't say everything I would like to on here.

    How does anyone think the market will do good when everything is so bad? Watch Europe, when their euro goes down, you better get your money out the bank. Leave only what you need to cover checks.
    As I write, market is down over 400. What will they do next? Start another war? Dollar going up so gold and silver goes down. That won't last long. Manipulation has been going on but they can't keep that up for long.

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  15. If this next crisis will be just as bad or worse than 2008, then the author is definitely off to a great start, seeing as it is now 4:25pm EST and the DOW has plunged, closing down 512 points! Gold and the silver dollar value dropped bigtime after a runup to $1683. Can anyone say "volatile"?

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  16. I think the market will tick up and down for about a week then the fed will raise the interest rate.
    We will see a global meltdown after that. Maybe 1300 points to bring in the New World Order.
    Happy days are not here. Could have big problems here as people panic. Gold and Silver are coming back. Rising as I write.

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  17. It looks like Glenn Beck called it right again. He's sitting on a large reserve of gold himself because he saw this coming. As he said , He's already got his Arc built

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  18. Did not need any luck today ERI.
    Don't get me wrong, I am bullish on Commodities in the long run, but I think during the next few months the USD will be king.

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  19. Saif,

    I think you are right. I think there will be a multi-week bull market in the dollar and stocks before the next leg down.

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  20. Interested in subscribing but need a question answered. Why does the site say Gold Scents by Toby Connor, but when you select the subscribe link it comes up SMART MONEY TRACKER PREMIUM Gary Savage? this is confusing. Please explain...

    Thanks

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  21. It seems your $SPX forecast is being born out except that the actual performance is time-compressed compared to your forecast. Your forecast shows it taking more than a week to get down to the 1200 area before rebounding In reality it appears to have taken only one day (August 4th, right after you published this article). It reminds me, somewhere, months ago, I read about this phenomenon in the markets where stuff happens quicker than it used to (probably now that everyone is internet enabled) and with higher volatility/wider swings. This second characteristic of wider swings was attributed largely to markets being less stable in the past ten or twenty years due to the ever-increasing intervention in the markets and the bubbles that were created. What your chart does not show, is the 50 DMA has turned down and is close to the 200 DMA, only approx one percent apart, so unless we get a very powerful rally from here, the death cross is nigh. The charts are reminded me of 2008.

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  22. Hey Guys,

    You have half the story right. Let me correct your false assumptions. First, the Keynesian System works in a free market economny, Not the police state we are currently in! Remember "Reganomics"? It actually stimulated the economy. Why? Because he wanted smaller government every where he turned .... not interference. My God! Today's lawyers can't even read! As a business man and consumer I'm scared to death with worry about the next set of "controls" coming out of Washington.They have trampled the Constitution time after time and made our lives hell with current economic conditions .... and that's just starting. Those boneheads are lawyers that have no morals. That's the definition of a lawyer! It does not matter if your right when you go to court, it's who has the biggest pile of paper and in the past that paper had all the I's dotted and T crossed. Today who knows what we have except "our lawyers" pass legislation without even reading it. Shouldn't that be considered an act of treason and of course punishable by death?? Take for instance Social Security. Instead of being placed in a locked box with a reputable insurance company that would take the form of a variable annuity for each participant, the money ($1.7 Trillion) was stolen and replaced with now worthless pieces of paper that proclaim the full faith and credit of the UNited Staes Government. So our hard earned benefits will eventually be nothing. What a joke! And what an expensive one! I for one would love to see restitution and I think it ought to come from those who squandered it! RESTITUTION? WHAT A WONDERFUL IDEA! Because our "legislators" consider themselves above the law and presumably a higher class of people, I say it's time for the peaceful revolution to bring the them down, strip them of any "rights" and that includes their one term pension, make them equivalent to everyone else and vote new hardworking blood in!

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  23. Amen, Richard.

    Now that we have been downgraded to AA+, WE WILL BE WORST OFF, unless they change it. Interest rates, we can't afford to shell out more money to banks and other money hungry people.
    Clean Washington!!
    They all need to go NOW.

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  24. Saif, what do you think about US credit downgrade?
    DO you still think USD will be king in coming weeks?

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  25. Yes ERI! There may not have been a downgrade, but what are the alternatives?
    Germany and France have pegged too much support to bail out the BBB countries, their real debt value is surely lower than the US ( on current ratios...not future). Canada and Norway look good but they are too small to have that kind of accommodation of capital.
    Medium term that is a huge negative and a positive of Precious metals.
    I am long USD and I also went long ENI (E) Total (TOT) Newmont (nem) and a few others.

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  26. Oh I forgot, I think China will be imploding in short order adding to demand for USD.
    I am short the base metals as I think they will under perform energy and Gold.

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  27. Richard, very good essay. I agree; restitution. To anyone including Toby and Gary: What are your thoughts about the $USD now after the downgrade to the US credit rating ?

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  28. Saif, i really don't get your tactics.
    You are betting on dollar and oil companies?
    Aren't they, like, in inverse relationship?

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  29. Yes they are ERI. How can you be bullish on both?
    The simple answer is I am bullish on Oil in Euro terms.
    The more complicated one is that we have severe resource limitations that will become apparent at some point, just not yet. For now the USD is king and the crisis in Europe has pushed down some stocks to great values.So I am making a somewhat hedged bet.
    Take a look athe price of good oil company like Nexen or Total in Aussie dollars over the last 2 years. Nexen is the lowest price since the 2008 crisis low point and Total is 40% below it! So my bet is simple. Nexen, Total and many other such stocks will rise in Aussie and Europe currencies. Does that make sense?

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  30. Gold 1696$
    USD Index 74,34

    Does that make any sense, saif?
    Oh well.

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  31. Gold 1780$
    USD 74,43
    Oil 78$

    Who is the King?
    Oh well

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  32. There are always rallies in everything at least short term. Nothing goes straight down as it is tanking, as well as nothing goes straight up as its rising. The trick is to be able to move quickly in whatever it is you are trying to do.

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