“I’ve been thinking, the people at the Fed may be deceivers and even liars, but they are not stupid. They know that the current system depends on constant, never-ending growth. But they also know that “no tree grows to the sky.” So what are they really thinking? The people at the Fed realize that they have good jobs and that they have prestige.
They also know that they will continue their Keynesian policies for as long as they are employed by the Fed. And then when the system breaks down, which it must some day, they will be retired and the next Fed employees will take over. So enjoy it while it lasts and let the next guy deal with the ugly consequences. The Fed members may be deceitful and given to lies — but they are not stupid.
I guess the worst offender was Alan Greenspan, who while younger wrote a classic piece on the value of the gold standard. Later as Fed head, Greenspan turned his back on gold in favor of Fed-created fiat currency. Talk the truth when you’re young and idealistic. But when it comes to money and prestige, do whatever the circumstances call for. Is honesty and truthfulness just a matter of convenience?
Friday saw the Dow close below the lower band of its trading range. I accepted this as a bearish indication. When an item closes below a major big number such as 17000, it is usual for the item to decline to test the next big number. The next lower big number on the Dow is 16000. I don’t expect the Dow to collapse or crash down to 16000. In fact, I think we could see the Dow fluctuate around for a time before making its way down to 16000. My brilliant friend, Gary Shilling, believes we are in a period of ten years during which the world will deleverage and deflate. Gary believes that we have passed through six of the ten years, and that we have another four years of deflation and deleveraging to go.
I just received The Campbell Real Estate Timing Letter. This is a unique advisory service that treats the real estate industry with a technical approach. Campbell uses a series of six studies to deliver buy (bull) signals for real estate and sell (bear) signals for real estate. At present Campbell is on a bull signal. But he warns, “GAINS IN US HOME PRICES TO LOSE MOMENTUM.” In other words, Campbell’s studies suggest that we are sliding towards a sell signal.
As an indicator of current sentiment, I often use what I call the real estate indicator for NYC real estate. Prices for choice apartments or condos in NYC are in the tens of millions of dollars. The winner is an article in the New York Times stating that garage space for single cars is going for one million dollars in various choice buildings with waiting lines in some cases for space. Many foreigners (Chinese, Russian) have purchased space in NYC “just in case.” A lot of these apartments are unoccupied but are held for “emergency purposes.”
I suspect that a lot of big money is exiting the stock market in this area. And of course it’s doing it quietly and subtly. Distribution days are a good way to track the path of large investors. A distribution day occurs when an average or an index declines on volume above the preceding day’s volume. There are now two distribution days in the S&P and also in the NASDAQ. A collection of four or five distribution days within a two week period can usually halt any rally.
Investor’s sentiment in this area is “beyond white hot,” and every dip in the averages of a few points or more is seen as an opportune “buy spot.”
My old friend, Bob Prechter, of Elliot Wave fame believes that the great super-cycle bull market may now be close to topping out. His studies suggest that the coming super-cycle decline may take the Dow below 4000 near its final conclusion. Bob suggests that the dividend yield at the bear market bottom may be zero, because dividends on all stocks will be omitted. Gad, how bearish is that. But Prechter isn’t kidding, he’s serious!
October is the time when the Fed states that it will halt its quantitative easing. The Fed believes that by that time the US economy will be strong enough to get by on its own without QE. And I wonder whether the Fed actually believes that and whether the Fed will actually jettison QE. Of course, the Fed’s monthly bond-buying has helped to keep bonds higher and interest rates low. Previously when the Fed threatened to cut QE the stock market fainted, but the Fed believes this time it will be different.
Different? Below we see the widely followed 30 year T-bond. It appears to be crashing ahead of the Fed’s action. Of course, as the bond declines, interest rates go up. The US has been managing its huge deficits with the help of zero interest rates. If rates increase (as they are now doing) the management of the US debt becomes a nightmare. So will the Yellen Fed actually eliminate QE? That’s the question of the hour, the day, and the month. My thinking is that they won’t have the nerve to remove QE. And if they continue QE, the markets will take that as a sign that the Fed doesn’t believe the US economy is strong enough to survive without its beloved QE.
I couldn’t resist including this P&F chart of the Dow. Here we see this horrendous break down to the 16350 box. I expect a period of zig-zags and meaningless fluctuation. After a break like this, it’s normal to see some mixed action and an attempt at recovery. Have you ever seen a boxer get knocked to the canvas? He summons all his strength and staggers unsteadily to his feet – and then weaves around until his head clears.
Late Notes – As I suspected, after breaking under 17,000, the Dow is now recovering from that shock, and is bouncing around aimlessly.
Let me make one thing clear: I sincerely hope that the bull market will be reconfirmed and that my weary bones will have a vacation from anxiety. The Fed with its Keynesian vision believes it can hold off a correction forever. In the history of the stock market, that’s never been done.
Confidence and complacency are more acute now than anytime I’ve seen before. All expressions of overvaluation are at historical extremes. Despite this, most money managers remain in the market. The thesis is “if it’s going up, regardless of anything else, I want to be in it.” Perhaps the best indicator of complacency is the VIX which at its current level of 13 tells us that investors see no reason to protect their positions. Every minor decline is seen as a buying opportunity. The rationale is that the Fed would not allow anything worse than a 10% decline. If the stock market starts sinking between now and October 1st, I will be most interested to see if the Fed eliminates QE.
Despite the surging dollar, gold today is well over $1200, suggesting internal strength of the yellow metal. …Thus I think that the gold universe is strong and that we are building a massive base in gold. By the way, the chatter against gold has been almost deafening of late — no doubt inspired by the Fed’s denigration of gold.
Over the next few months, I expect a resumption of the gold bull market that started in the early 1930s. From a price of $20/ounce in 1930, gold has constructed an enormous bull market that has taken the yellow metal, despite a three year long correction, to a price above $1200 today. Remember, every currency that has sent gold packing has either lost its purchasing power or has disappeared. Thus it is only a matter of time before the US dollar meets its demise. RIP.”
The 90 year old Richard Russell still writes market advice daily. Contact his service at Dow Theory Letters HERE
