Yves Says Destructive FreeFlation is Back!

Yves' Liquidity Index is on Sell again after an opportunistic Buy in August.  See chart.  He also had predicted a new Resolution Trust type of entity, and the takeover of Fannie and Freddie will lead to the Feds having to manage $250-500B of failing mortgages over the next two years.  He now expects that Helicopter Ben will dump liquidity mercilessly to stem the coming debacle. While everyone was looking for inflation, Yves was looking for deflation; and as now more people realize deflation could be true, Yves goes back to the inflation camp.

FreeFlation is Back - and Can Destroy Financial Assets

We have correctly been on the right side of falling oil gold and commodities for most  of the year. We had preferred the strength of the US dollar against the Canadian dollar since our appearance on Bloomberg TV in November of 2007 at 1.07.  We are very happy with the call but ready to revalue our position.  As we have hammered repeatedly the point home  "the battle with two forces inflation and deflation will be constant with few winners in between".

With the recent announcement of the takeover of both Freddie Mac and Fannie Mae such a time is perhaps upon us. If anything, the market is all about perception, and mine goes a long way into believing that printing presses are about to flood this market some more.

"Freeflation" for me is the willingness of increasing money supplies in the face of contracting monetary phenomenon.  See chart for the explosion in M3.  Freeflation is also free profits for speculators betting on the right side of the market. The green light surely is being given to speculators to drive down the greenback and rally the commodities complex again. 

I favor uranium over and above other commodities to play this upcoming move as it also has the favor of both presidential candidates. 

Our liquidity index goes to sell and the Baltic dry's freefall is partly to blame for this position.

Yves Lamoureux, Blackmont Capital Inc.
Montreal, 8 September 2008

Disclaimer: opinions and projections contained are of the guestblog author and may not represent the views of Yelnick, Blackmont Capital (BCI) or any other organization. The information contained herein is for information purposes only and this report is not to be construed as an offer to buy or sell any securities. Neither Yelnick, BCI nor the author accepts any liability whatsoever for any loss arising from use of this report or its content. The comments and opinions expressed in this letter are the result of work done by Yves Lamoureux. They may differ from the opinion of Blackmont Capital Inc. ("BCI") and should not be considered as representative of BCI, belief, opinion, or recommendations. The statements and statistics contained herein have been prepared by sources we believe to be reliable but we cannot represent that they are complete and accurate. This material is published for general information only. BCI assumes no liability for financial decisions based on this information. Readers should obtain professional advice before applying any ideas mentioned to their own personal situation to ensure their individual circumstances have been properly considered.  BCI is an independently owned subsidiary of CI Financial Income Fund. CI Financial is a Canadian owned diversified wealth management firm

Comments

[Sean]

hmm ... "Our liquidity index goes to sell".

Does this mean the stock market would range bound or move higher (due to lower dollar and inflation juiced corporate profits) while commodities take a leap? So it's better to long commodity compared to short stock market?

I would think gold would shine this round? Is there any ETF that track uranium? Thanks Yves!

[Yves]

Sean, I like the uranium participation ETF in Canada, symbol U. You play the physical and not the stocks.If I have learned about performance of real assets over stocks when the cycle turns is to definately go for the real stuff.

Yves

[min]

Long ½ position DJIA at close. Tight stop.

[Ham Actor]

Oh dear. That is a really ugly close on US equities. We are about to accelerate to the downside big time.

[Tom CZ]

hmhm - interesting point of view from Yves - I am closer to deflation in mid term view but now have to agree with Yves so revival of "inflation" talk short term in wave "B" of commodities rebound. There are also astro and cyclical turn dates for bonds around 11th of Sept. So may see equities and bonds lower with EURUSD spiking back to 1,50 and above and also commodities higher till November but then reversing all of that to the other side...
ps still hold short on the Dow against 11 850 for 10 000 - 10 500 area as the measured targets for the break out of the rising wedge corrective wave pattern

[Ham Actor]

Bradley model has two minor turns 9/9 and 9/20. Hard to determine what this means for the short term but next major turn is early Dec.

[Dutch]

Yves, what is your take on the Real Estate market in the US, inflation is good for Real Estate right ???
How long will this cycle last... Thanks

[MHD]

With the 3 month t-bill sitting at 1.66% and real inflation at 11-13% the markets are saying deflation is headed our way, and NOT inflation. Until rates start to rise rapidly, anyone who's betting on inflation down the road is betting against the bond market. Probably not a smart thing to do!!!

[Serg]

Yves,
what do you think about palladium? and what's you wavecount for it?

I'm serving "Total Marabuzo Sandwiches" with 2 hot dogs on a stick
Free refreshments at your house ;-))
http://forkoholic.com/images/marabuzosandwich.jpg

[yves]

Dutch, some of the markets I follow (UK real estate futures market) would point to 2011 for a bottom.Certain regional markets namely Miami are starting to look really good from a long term view but for personnal enjoyment.I doubt very much you see any upside for a while.What most people have trouble with the inflation cycle today is that they don't appreciate the amount of money sloshing around.Once a trend starts that money starts pouring in and it quickly turns into a bubble.Very often depending on the nature of the bubble , hot money will not return and most investors become sitting ducks like in real estate .The boom/bust cycle is the temporary result of restricted investment opportunities namely brought by low rates.The bigger picture is of deflation and possibly D-E-P-R-E-S-S-I-O-N. Anyone who follow my work knows that is my view and fully expect the FED to fight it out with explosive monetary aggregate.Take a good look at the chart provided .This is classic monetary economic response .
Or to put it differently : a long term deflation drop with inflationary counter trend rallies if that makes sense. Cheers

Yves

[yves]

Serg, if you are an early fan of my work you might have read how at the really early part of that inflation cycle I was recommending palladium at 200$.It always made sense to me at that price.I am always a bit nervous about the russians controlling the price as history shows if you studied the previous spike.The question becomes is it the best place for your money ? I think uranium has a more explosive (pun intended) proposition to offer.The latest india inclusion will start the dynamics.
We have a chronic 50 million ton annual deficit temporary covered by russian nuclear heads.Take this out and you will not care what wave you are in !Rare earth materials is also something I am working on and will become more valuable as time goes by.More on this latter.I hope this helps.Cheers

Yves

[cribrange]

Wave 3 of wave C on the Nasdaq 100 currently in progress --> target zone 1480-1490 for October 2008. Notice Apple is breaking down and breaking long term support and Google's configuration will soon become precarious. Keep it simple. Your's.

[david]

Hi Yves,

Thanks for posting your view...its excellent.

Assuming your scenerio plays out, what would happen to US$, Gold and Euro in coming months?

Your thought?

David

[Jim]

Yves, I always read your posts and always watch your show on lesaffaires.com. You are always right! Wow.

[VirginiaJim]

Yves is entirely correct IMO, **The boom/bust cycle is the temporary result of restricted investment opportunities namely brought by low rates.The bigger picture is of deflation and possibly D-E-P-R-E-S-S-I-O-N. Anyone who follow my work knows that is my view and fully expect the FED to fight it out with explosive monetary aggregate.**
In 2001 the Fed's first staff working paper posted visited the "Liquidity Trap" and posed the question whether Fed policy could have avoided the 1930s calamity. Of course, the Fed could was the answer had they acted correctly and early enough. But that's not the point. They were worried about the liquidity trap; the scenario that Fed liquidity infusion does not result in monetary growth or 'pushing the wet noodle.' They were so worried this staff working paper disappeared from their website and, last year, I had to search university archives to find it.
So, I fully agree with Yves except to the extent, the Fed's liquidity pumping won't work this time and deflation and depression is in the cards. The crux of the liquidity trap is that when the tipping point of consumer demand is reached, people start saving (paying off debt or liquidating debt via default and resolution). People stop buying (voluntarily or involuntarily) period. The Fed can't stop people from NOT buying with lower interest rates or more available cash. The US in the 1930s is a prime example (8 years of deflation) and Japan is the modern example (20 years of deflation).
Just one opinion, VJ

[Percy]

Yves is auditioning to be the French Canadian version of Jim Cramer. Only yesterday he was bullish, today he's bearish tomorrow...

Yesterday he said buy water companies and green power now he says buy uranium. Like Cramer he is preaching the gospel of whats working now and look look look at me. I remember Cramer selling the housing stocks at their peak as "Land Banks". How could you loose builder and natural resource asset play in one package. Stock market exhibitionists often make money for themselves by attracting a following ( like pied pipers ) but only sporadically for their followers.

[yves]

David , the next counter trend rally will tell us a great deal about the future picture of the deflation/inflation cycle.I do track the FED carefully and it is extraordinary to see them step in regularly to affect markets, more on this in future post with graphs.I have been looking at this market as a deflation bull.However if the next move of the greenback was to be severely up after a short term correction then it would be unmistakable the depression would be at our doorstep now and then .My sense is that will only happen around 2011 and not before.Short term expect a gold bounce.It could be a final 5th wave Like I said in the previous post; big deflation trend down with intermediary inflation bounces if that makes sense.Cheers

Yves

[min]

out of my long at open for a small but easy gain. looking for next setup, getting close to breakout or breakdown time

[yves]

Jim thanks for your kind word.It takes a gentleman to come out and say it.
Cheers

Yves

[yves]

Green themes and water are to be bot now .The accumulation period will be until year end.Really who cares about climate change ? I am recently interviewed on this topic in the famous Institutional Investor Magazine and the widely read newsletter of the Royal Bank of Scotland.
We held no energy for the whole year .Uranium now has a direct correlation to oil that I expect to bounce and is 100% green renewable energy that fits in my theme.I do not see any problem with this idea at this particular time "au contraire ".
My text was written(8 August) and sent BEFORE the 280 points decline.I would argue that I have saved people's money not what they wanted to hear.As I listened the so called expert that now things would be so much better with this.Lets stick to fact.

[Sean]

So Yves, I am confused about your market direction.

Correct me if I am wrong. Your long term view is Deflation, but with Inflation coming up soon. Timing of Deflation will depend on USD Cash index when it melt up relentlessly.

But at the same time you are buying water/Green, and commodities esp Uranium for the coming inflation hedge?

You are not sure about stock market, but you are most certain on commodities and physcial stuff going up soon. Thanks

[Yves]

Sean good question. Let me say that my liquidity index is one item I rely on but it does not give me where to invest.It mostly addreses the general market.As I previously said on my latest appearance on Bloomberg Television the market muddles until year end with possibly one more retest to complete the picture.I dont think we have done that yet but could be done very soon in one more last drop.Green stocks are by far outperforming on rallies and drop less.I strongly believe that the green/water theme will become the next bubble (inflationary)while we find ourselves in a greater deflation scheme.In fact inflation rarely shows up in the same place.As for uranium it is going to bounce with energies but as a better supply/demand picture.Any bounce of the energy complex should be just that a bounce and perhaps a violent bounce to trick people into believing that the trend is back up.The rate of FED pump is the determinant here .You can see M3 exploding here (see graph)and this is what the market has to decide in the future direction of the greenback.What force is stronger inflation or deflation.That is what we will find out next.Let me know if that clears up things for you. Cheers!

Yves

[Sean]

Yves, just a note. I have seen the M3 graphs before, and the most reputable dispute about its "validity" is from Mish. Google "Mish Economics" and try if you can find an archive there.

In simple terms, the jump in M3 was mostly due to credit crunch where businesses rushes to cach out their last credit line and put into CDs. I think I came across another article by different author arriving at the same conclusion. Cannot remember because it was few months back, but so far the facts support that deflation is coming as inflation had peaked with too much hot money driving the commodities.

Now, if Bernanke try to increase the Monetary Base or lower borrowing standards etc, that could be a different story.
Good luck!

[KRG]

Yves :

As usual, excellent post.

Your Liquidity index seems to throw consistently good results. Would you like to give some broad idea of the compenents and working of the index?

[yves]

KRG, thanks for the thumb up.
My liquidity index addresses behavioral monetary timing issues.It relates to the interaction between the primary dealers , the Fed and the treasury.It includes the baltic dry for a look at US global companies.Oil and leverage used also find their ways into the model.I dont use any of the technical models used in other models.I find technical signals too backward looking.I track hedge funds positions and behavior as well they have becomed a strong component of my timing model.
In fact all these players have real effect on monetary aggregates even for a short while .It does affect the market and this is what I aim for.There is clearly and disconnect between fundamental prospects and monetary prospects and this is what I try to separate from noise.My great difficulty coming up is assesing sovereign funds behavior.They are secretive and will act differently.One key issue of my timing model is to give you an hedge.When my model flashes a signal it is mean to prepare and act since it might show a lag of a few days.When we flashed a buy recently the market went up for a few days to get hammered several hundred points.Thats where you bot knowing you had a green light to do so and risk was lowered.It is also possible to get two signals that are similar back to back .We had 2 sells before the 14,000 top.It just re-inforce at that time to REALLY get the heck out .We might get the same type of signal next where two buys would really make this a gigantic BUY opportunity. I hope this helps without giving the secret ingredient away !Cheers

Yves

[min]

Will be closing NDX short position this morning and looking to go long when good set up confirms

[deacon]

mcclellan expects a full moon turn in gold:
(http://www.321gold.com/editorials/mcclellan/mcclellan091108.html)
..recall how the spring equinox combined with the full moon 3/20/08ish topped gold/silver and bottomed dollar...fall equinox 9/22/08

[Serg]

Yves,
have you backtested your Liquidity index on market crashes?

[min]

Closing NDX long position for a nice profit

[Yves]

Serg , in this current format I only go back to 2005. It is going to be difficult because its a moving target .

Yves

[Ham Actor]

9 weeks in a sideways trading range beneath the Jan/March lows. The structure - a series of overlapping three's. You wouldn't think it could get much better from an Elliot perspective. We await the turn (soonest)and the plunge lower.

[min]

Went long NDX a second time and closed at end of day. Altogether managed to husband 60 points today. Wish every day was like this. Went short NDX end of day and currently holding short overnight with a loose stop. I don't mind giving a little back if that is to be.

Who needs big nasty drops when you can make just as much trading the same territory multiple times. The key is taking what the market gives without preconceived prejudices.

It is the only way to go if you are doing this to make money.

[Ross]

Yves. Is your uranium suggestion a long term investment or short term?
thanks for any information.. -Ross

[yves]

Ross, my forecast of the uranium market is to bounce along with commodities in the next few months.If you look into waves it is clear we are completing an ABC pattern from the top with a final wedge C.The bottom should be getting at hand soon.Always spread out you purchases to maximise gains.What would follow is wave 1 of the next big wave.Obviously thats where one should sell and thats where you will expect a pullback in a wave 2 correction probably deep enough for a full retracement.I expect long term uranium will loose much correlation to oil since the supply/demand is so explosive(!).The interesting thing about the price of uranium is that it is negligible in relation to cost operating since most of the cost is upfront.That is to say that the price can explode upward and it will not be an issue to run the nuclear plant.Imagine the rise at hand.It will get interesting and it is not on most people 's radar.
cheers

Yves

[Serg]

Sept. 13 (Gloomberg) -- In a continuing saga of the US vs. China trade wars, the agenda of highly classified PPT meeting at The Federal Reserve over the Labor Day weekend has been revealed.

Anonymous source at The Fed confirmed to Gloomberg what the agenda was to devalue the rate of US-China candle exchange.

Now US candle worth 4:1 of Chinese candle vs. 2:1 before Labor Day.
More valuable Marabuzo candles exchange for 2:1 rate. With Chinese market falling off the cliff it looks like the PPT team tries hard to slow down the US market fall to the abyss before the US elections in November.

"It's a slow motion train wreck ,'' said Garry Epstin, senior trader at CBOE, describing US equities market action over the past two weeks.

http://forkoholic.com/images/fxispxsaga.jpg

[Serg]

Yves
do you think both equities and commodities bottom at the same time around December?

[Serg]

Steven Hochberg on FSN
http://www.netcastdaily.com/broadcast/fsn2008-0913-1.m3u

[yves]

Serg, I have played commodities as a way to avoid the stock market for some time.You can read on in past texts on Yelnick's blog how I kept recommending oil,gold and yen in 2007.It is very often a way for me to avoid just looking at stocks and dont forget to buy the real assets with ETF since you get the real non correlation to stocks.I have also used currency trading if neither stocks or "stuff" works.With this in mind I dont think stocks bottom at the same time in fact oil has been one of the problem in my equation.The energy complex should rebound sufficiently to be a drag on the market until year end.However at 3M /day spare capacity next spring paralleling the 90's oil will fall by next year to under 85$ giving way to better growth.I am back on Bloomberg TV next week or the week after.I will give one of my top pick 2009 don't miss it.Cheers

Yves

[Stan]

Why should I believe Hochberg now? He has no credibility. He's been shoveling the same horses**t since 1997.

These people are scumsucking leeches, preying on fear and selling mumbo jumbo. Ali Hakim was a saint compared to Hochberg.

[Upstart]

If we get one more plunge, the DOW could be interpreted as a big leading diagonal. Then a rally back to about 12600 in 2009 before it falls apart again.

[min]

Boy, Steve really sounded like he knows how to spot a bottom! Too bad he didn't know how to actually put his talk into practice in late 2002, he might not have missed and fought a 5 year uptrend.

For those of you that want to know how to consistently mis-use Elliott-Wave, incur devastating losses and get it wrong 9 out of 10 times, Steve is your best choice.

Did this joker just call a bottom or is this his 1 out of 10 miracles? I hope neither as I am having too much fun trading both sides right now.

As Stan said he's been shoveling this s**t since 1997...

[Upstart]

Now I'm sure there's one more leg down if Hochberg called the bottom.

[Serg]

For immediate release

The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include

Weimar Republic banknotes and Soviet Era Russian Roubles!

[Stephane]

Hi Yves,

You said "50 million ton annual deficit temporary covered by russian nuclear heads".

This 50 million is certainly 50 million pounds, not ton ?
Cameco produce about 20 million pounds annually.

About uranium, I'm sure you know the region at the north of Quebec where Areva is prospecting. I follow this since 2005. Who knows, maybe a new uranium district in the next decade !

Merci pour tes chroniques sur Les Affaires.

[Jim]

again... Sell signal at the right time. Too bad i dont play the stock market directly. Good job Yves. Jim.