The Fed Slipped Up Big Time: Deflation Coming

Ben Bernanke made a very revealing slip this week: he admitted he had refinanced his optionARM mortgage with a 30-yr fixed rate at 5%. He said he had to, as his loan had "exploded", but it appears he was engaged in FedSpeak obfuscation: an analysis of his ARM showed it would not have exploded, and that he just refied at a higher rate! So why refi? The implication is he knows higher mortgage rates are coming, and wants to lock the rate in.

The implication of this unintended admission is: deflation!

For those of you who believe that inflation, even hyperinflation, is ahead, and take confirmation in the recent blip up in PPI and CPI, this month's EWT is required reading. The deflationary forces are growing rapidly.

Normally higher rates presage either a recovery (demand for longer term loans) or inflation. We are not in normal times. Higher rates are the cost of financing huge US deficits. Bernanke is trying to exit QE, which was used to keep rates down, except he may be boxed in due to a deficit of foreign buyers. As this chart shows, foreign investment in long-term Treasuries is falling, as is the trade deficit.The trade deficit is the other side of a Dollar surplus (since the deficit results in Dollars flowing out). As the trade deficit shrinks, fewer Dollars are falling into foreign reserves, and hence they have less need to buy Treasuries to recycle them back. The Bank of China has admitted such. 

 

At the same time they are pulling back, we are seeing more and more short-term Treasuries being placed, which need to be constantly refinanced. Think we can keep pushing short-term T-Bills and rolling over prior issuances? This makes it extremely problematic to exit QE, since if short term rates rise, we have a serious problem with the cost of financing the deficit.

Bernanke has focused most of the Fed's activities in the past year on keeping mortgage rates low. He knows that the US won't come out of a recession without a rebirth of housing; and he is painfully aware that most of the toxic waste clogging bank balance sheets are based on mortgages. Hence both to restart the economy and repair bank balance sheets, he has tried to keep rates low and spur the housing sector. Now he refinances his cheaper ARM! The end is nigh to QE.

To date his QE has not been inflationary. He hasn't really created new money; he has swapped assets for reserves. He expected banks to then lend, because of reducing the uncertainty of those assets, but just as in the 1930s they have sat on those reserves. The excess liquidity has gone to Wall Street, not Main Street. This won't change as he swaps those bad assets for Treasuries. What will change as he exits QE is the unleashing of deflation.

Robert Pechter was one of the first to predict a crushing deflation is ahead. His case is summarized here. He is now being joined by others, including Gary Shilling (who has been on this for a while) and Harry Dent (who has called this decade really well). In this EWT, Prechter continues building a case he started last month of deflationary forces gathering before a storm that should hit in late 2010 or in 2011. His case has two primary arguments and a prediction:

The Fed May Have Made a Fatal Mistake

The EWT explains that the Fed first used TALF to back hedge funds and similar who invested in consumer debt, backed by collateral; but the collateral turned out to be bad. The Fed now owns a deserted shopping center in Oklahoma City as well as some bankrupt hotels. Thanks, Bear Stearns! So the Fed switched to directly buying mortgage-backed securities (MBS) in swaps with banks. It has since swapped (ie. bought) over $1T of MBS. See chart, from the EWT:

The purpose was to keep mortgage rates low, but "in buying up the mortgages, the Fed may have done something stupid." When shoring up the banks or hedge funds, the Fed could always refi those loans in such a way that would force the banking entity to sell the toxic assets to repay. Now it is stuck with the direct collateral, the very thing it was trying to avoid after TALF! If the Fed is stiffed with losses, the member banks will have to make good since banks are required to cover the Fed's losses. The banks will become more cautious, lending less, which is deflationary.

Congress is a Financial Weapon of Mass Destruction

Prechter lists a growing number of actions Congress is taking which all have the effect of reducing lending. If you read Karl Denninger, you know this is a good thing in general. History will look back and ask what sort of theoretical nonsense led us to try to borrow our way out of a credit bubble - are we that much in thrall to a long-dead economist?

Nonetheless, this good thing will be deflationary because it reduces debt. Let's step back. Many folk think that the Money Supply is the monetary base plus maybe a few other things like demand deposits and sweep accounts that can be rapidly turned into money via a check. The Austrian debate which money aggregate is real money, but this misses the larger problem: the inflationary or deflationary forces are based on the broadest view of money, which includes credit-money not just real-money. Credit can be turned into purchasing power, and because of fractional reserve banking, banks can lend well in excess of their reserves of real money. We have around $50T of credit on top of $2T of real money. It is the velocity of that $50T, and its rise and fall, that drives inflation or deflation. Hence anything which reduces the turnover or velocity of money, or reduces its stock, is deflationary.

Congress is finally facing up to fixing the financial crisis, not healthcare or global warming or other far off (or fake) crises. Their acts almost across the board will reduce lending and cause debt to be written off. The EWT has a long list which I won't repeat here. Suffice to say they deter the whole food chain of lending. The list shows how dysfunctional and ineffective Congressional acts have been so far. My favorite examples:

• The original $300B mortgage bailout, and the recent $75B Obama program, have only "helped" 1700 homeowners so far. To fix it, they want twice daily reports on progress from the banking workout teams! I am sure that will work ... the teams weren't that effective anyway dealing with  real problems, so why not pull them back to the office to fill out meaningless paperwork?
• The bailouts seemed destined to lose $30B on autos and another $30B on AIG. Such a deal!

The FHA Seems Doomed to Fail, Spectacularly

While attention has been focused on Fannie and Freddie, under Obama the FHA has become the lender of mass destruction last resort to housing. Even though 24% of its loans from 2007, and an astounding 20% of its loans from last year, are in default, the EWT notes with emphasis that it is "still writing mortgages at a frenetic pace", four times faster than in 2006 at the peak of the housing bubble! Down payments are as low as 3.5%, and the more distressed the area, the higher the FHA percent of the market. This is clearly madness. The FHA insures $675B of mortgages. These loans are packaged with others and run through Ginnie Mae.When this mess blows up, the taxpayer will be on the hook.  

Barney Frank justifies the horrifically high percent of bad loans as "policy" to keep housing from falling faster! Is he that big a fool? Maxine Waters recognizes that "without FHA, there would be no mortgage market right now."

Exactly right! So what to expect?

• Fed reduces QE, rates go up, housing goes back down, economy gets even more sluggish, FHA defaults get too high to bear, housing becomes a market of distressed sales and foreclosures.
• OptionARMs begin to "explode" and the second wave of defaults washes over the system.
• Congress passes even more frenetic acts to "fix" the problem. As history shows, when you regulate something, you get less of it. 
• As the mortgage problems accelerate, the Fed's balance sheet becomes suspect, and losses mount. It no longer can "save" the system.

Yikes! Then what do we do?

Maybe the demise in 2012 'predicted' by the Mayan calendar is of the Fed, not the Planet.

Comments

[Bob D.]

All of this Econ. 101A stuff and yet Prechter has been short since August 5th. Anyone that followed him and used put options to short the market since then has gone through 5 consecutive options expirations losing money. That's got to be a record!

[Captain Obvious]

Anyone that followed him and used put options to short the market since then has gone through 5 consecutive options expirations losing money. That's got to be a record!

Anyone putting all of their money into August put options lost all of their money in 1 month! Well, actually, they probably would have broken even on August puts, so if they'd put all their money into September puts, they would have lost all their money in 1 month! If you're going to use stupid extreme examples, why not go for the gusto?

Meanwhile, anyone with a clue that went short on August 5th using ETFs is down about 10%. If they hedged their short exposure once the August 7th high was exceeded, which, if they weren't going to just take the loss then, they should have, they're down a couple of % and they can ditch the hedge once the market goes through the early September lows.

Sometimes I think Prechter is as lucky in who his detractors (i.e. hyperventilating ankle-biters like yourself) are as he is unlucky in his market calls.

[joe]

"Maybe the demise in 2012 'predicted' by the Mayan calendar is of the Fed, not the Planet. "

You have a great sense of humor Yelnik.

Please tell me you are not becoming a believer in the grand super cycle event Prechter preaches.

I would observe - before we get this next leg down in single family, commercial will fail dramatically first - and nobody is going to try and save them; While there is NO DOUBT we are and will continue to deflate for some period, it is the treasury that can and will print the money to knock M3 out of the park, and when they do the fed will be a totally irrelevant body.

The is realistically only one way the government can get out of this hole they dug - and that is to inflate their way out - and some number of years from now that will almost certainly happen. But that is then - and this is now.

Facinating post Yelnik.

Joe

[rzero]

The word "deflation" in economics cannot be separated from labeling WHAT is deflating, despite what many people claim. Prechter and other "deflationists" claim that that we are going to see severe asset price deflation and CPI deflation. They plainly DO NOT understand the implications of running a trade deficit for 30 years paid for with a fiat currency created asset bubble.

No bear thinks we will not have price deflation in stocks and real estate, at least measured in inflation-adjusted dollars. The debate is whether we will have an environment of rising or falling consumer prices. The deflationists are wrong. They don't understand there is a dollar bubble that is going to pop. This means rising consumer prices unless the Fed raises interest rates by a significant, likely impossible amount.

[MI]

Prechter, Neely, Spiral Calenders et. al. have no credibility. It is just waste of time and money to fight the Fed (the greatest printer) and Obama (the greatest deficit spender). DOW is going to all-time new high. My guess is Prechter and co. will change thier wave count in 2011 and then predict a new bull market in stocks due to hyperinflation.

Prechter and all those following all kinds of waves have no credibility as stock market is going against them everyday.
My request to Prechter and Neely; enough is enough, no more special alerts about market tops or bear market crash.

[Roger D.]

Charts do not lie, even the fed can't repeal the natural law,especially gravity.

One of my many bearish exhibits at the moment.

Bears rejoyce your salvation is at hand.

Even though it is a sad time indeed.

Roger

The weekly chart of the global Dow:

http://www.screencast.com/users/fast996/folders/Default/media/0d52a1c5-e7d7-4f90-b823-0ea404b26a7a

[Roger D.]

Let's say equity values come down around the world and stay down for a significant time (3-5) years. That will wipe out how many trillion in wealth (5-10 T) would be a good start.

Now you have this massive bubble created in debt in the USA.

What happens when the upside down debt pyramid collapses, with less dollars available and the debtors have a choice between financial ruin or ? Do you think interest rates could rise substanially in real terms?

Deflation is going to happen, The only fix is governments, kicking and screaming abandon the floating rate system and form a new monetary system. It must happen, because the rest of the world will demand it.

Roger

[Roger D.]

Just to add to the delatio case:

http://www.screencast.com/users/fast996/folders/Default/media/4d452780-7475-4407-b2df-c3e53a86761d

http://content.screencast.com/users/fast996/folders/Default/media/80e8b005-bf11-4a9e-b9ca-96cd8055b5e7/2009-12-19_1845.png

http://content.screencast.com/users/fast996/folders/Default/media/a74d9173-dc89-4158-afdc-46aff179dd87/2009-12-19_1856.png

Roger

[yelnick]

Roger, great charts, thanks for sharing. What is your take on China? I focus my attention there next

[yelnick]

Joe, I appreciate all your comments. Keep it up! Regarding P3 down, I had written a fair amount about this earlier this year. I am not a P3er. Instead, I think we retest the Nov lows, and maybe Mar, then bounce; and then we break thru to perhaps Sp400/Dow4K. Timing on this is a first bottom in 2011 and then a major bottom in 2014-17. After that we have a wonderful 16-18 yr bull, which I would count as 49W5.

But I do think the US is heading for a serious day of reckoning. By 2020 I expect the world to force the US back onto some sort of gold standard, to take out profligate and Imperialistic ways off the table, at least for a while. I also think Obama is not the realization of the dreams of the Progressive Era, but the end of them; the end of an 100-year political trend in the US (and perhaps really a longer trend back to 1848 globally) that (a) put the US in a dreadfully wealth-draining position of trying to make the world safe for Democracy, and (b) put the Federal government into an eventual debacle of trying to backstop so many social and economic programs. The return to gold and the end of the Progressive Era are related events. The idea of Something for Nothing will end. This will all unfold slower than the uber-bears imagine, then hit harder and swifter when the end comes.

[Mark]

Yelnick please also focus on India as well because Ewi is bullish on India.

[DG]

Prechter and all those following all kinds of waves have no credibility as stock market is going against them everyday.

By "everyday" do you mean excluding the last two months, because I see Friday's S&P 500 high and the high from October 21st as being the exact same, almost to the penny. Two S&P points in two months means that we'll reach new highs in about 40 years. Woo-hoo, bust out the party hats!!

[Wave Rust]

I am fascinated with being one of the few bulls left on the Planet Yelnick. Like me, "MI" won't fight the Fed and doesn't like the wave predicters but I hope this view of current bullishness doesn't offend the masses here. I just think the Prechdicters are inverted bulls. :-) They give the masses what they want - negativity.

Here's my Merry Christmas chart of the Dow. A simple count from the July lows, that holds up until and if the Dow takes out 10,119 in the short term. If it does and then reverses up, the 1's and 2's start all over again - even more bullish!!

http://i478.photobucket.com/albums/rr146/Wave_Rust/MerryChristmas2009.png

Merry Christmas and Peace unto all.
wave rust

[Roger D.]

Hello Yelnick,

The biggest problem in china right now is a real estate bubble. The Chinese government I believe Thursday, required developers to pay back loans in 12 months and upped the required collateral to 50 pct.

As you know,to stop a bubble after it has formed,is to collapse it.

real estate bubbles did in Japan,the USA,parts of western Europe and soon China.

The press in Asia is downplaying the problem, but the Shanghai index thinks otherwise.

Btw, the MI multipler sank to a new historic low in the latest reporting period, to .811, which is highly deflationary.

I look for it to dive to below .500 when the market comes down.
By comparison in the 1930's the ratio fell from 4.50 to 3.00

But the bad banks were closed back then and healthy banks were reopened with good capital ratios and clean balance sheets. For all Bernanke's knowledge about the depression this fundamental fact was denied in favor of todays stakeholders.

That's why this market will crash out of this pattern. This I have no doubt.

Please look at a LT monthly chart of IBM. IBM just completed a supercycle wave E 5 wave thrust up in a large 10 year triangle.
I would like you to analyse the pattern because it creates a lot of EW questions in my mind about counting the 2002-2007 bull market as a 5 wave. By this chart IBM traced out a large 3 wave advance. Also the pattern tells a vivid history of government reflation effects on postponing the great bear market. I contend that this chart shows that the effects will be much worse than it should have been.

Cheers,
Roger

[Roger D.]

Yelnick, here is the IBM chart.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/41ad4e97-d79d-4209-a216-c67071a554a4

[Roger D.]

Oh well I might as well throw this one out there too. Here is the Global Dow.

It looks like the asian contagion will start in China and move westerly to Europe and the Americas,could start this week.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/0d52a1c5-e7d7-4f90-b823-0ea404b26a7a

[Hockthefarm]

Yelnick:

I think we would all have to admit that the news for the bulls has been fairly good lately. We may actually see some employment gains in the months ahead and some folks are really talking up S&P earnings for next year.

I remain a Dent/Prechter disciple mainly because of the massive consumer debt levels and government debt levels that have accrued since 1980. The ability of consumers to reason financially is also a cause for great concern.

It is really those debt levels and boomer demographics that give the Prechter/Dent view muscle imo.

The real question is how long can the fed keep the game going? My guess is a lot longer than people think and we should all make an allowance for that.

I have really enjoyed the content of your posts these last few weeks. Best stop on the highway!

Season's Greetings,
Hock

[Hockthefarm]

Mauldin on the deleveraging ahead:

http://www.safehaven.com/article-15306.htm

Hock

[vipul garg]

roger d.
lot of charts , but the counts are not workable.

its rather easy to stop listening to prechter or neely and the tops and bottoms,if one doesnt want to.
the way is 'skip'.

but , i think the desire to listen to prechter and neely and others is to either confirm own wave counts or critisize them when it doesnt.

btw i keep wondering where have all the good posters gone. all the good posts seem to be coming from 'yelnick'.

[yelnick]

Hock, thanks for the kind words. I think the Fed has at most until the summer of 2010. By their own statements they are easing out of QE by Q1, which could slop over into Q2.

I should have added a paragraph to my post: the difficulty in funding the deficit makes it inevitable that some sort of deficit reduction will be pushed in the next two years. The inadvertent admission of Bernanke has shown that his attempt to reflate has failed. When you put 2+2 together, the conclusion is private debt will fall faster than govt debt can make up the delta, which is deflationary.

[Roger D.]

Vipal it's the patterns here,that matter.Good ole supply and demand. The wave counts are just a label to explain why the patterns have taken that shape.

These same patterns form since the days of adam and eve. You can't repeal natural law.

Roger

[vipul garg]

technically speaking :'adam and eve' is not the right term to use since you need masses!

if it just the shape of patterns that you are looking at and the not the right wave count, why put a wave count.
the pattern would still be valid.

[Roger D.]

Vipal wrote,

"technically speaking :'adam and eve' is not the right term to use since you need masses!

if it just the shape of patterns that you are looking at and the not the right wave count, why put a wave count.
the pattern would still be valid."

I'm sure you could graph the tendencies of adam and eve and produce a pattern.

I'm glad you agree that patterns are valid. The wave count is a after the fact expression to identify the supply and demand within the pattern.

Roger

[DG]

btw i keep wondering where have all the good posters gone. all the good posts seem to be coming from 'yelnick'.

Without a real trend to argue over, people are probably just sitting back. A person can debate whether 1085 or 1120 will hold yet again only so many times! Once we get a trend, the people who believe in the trend will post their reasons why they do and the people who don't believe in the trend will post their reasons why they don't.

[Roger D.]

Case in point. In this pattern of the S&P,I knew the "p" rally would fail to exceed the old high because when the SPX closed below 1094 it validated the broadening top pattern, and indeed that is what has taken place.

The problem with EW is without a confirmed reversal pattern in place, you are subject to error in interpretation. In the broadening pattern once the cycle of higher highs is broken,the chances are excellant that a lower low will indeed take place.

There are instances where the pattern fails and proceeds to go on to make a higher high well above the previous high,but as you see that did not happen here.

The are instances where the pattern is broken on the upside as in the transport average recently. But that is usually the last rise and a sign the complete rise is at a ending point.

Real broadening tops are extremely rare in a large average, infact this is probably the only time,it has happened. They only occur after long fast rises where unintelltgent buying has taken place or rampid speculation. It is a high level distribution pattern. The most famous example was Air Research at the 1929 top. Air Research proceeded to crash out of this pattern and the company never survided the great depression.

Roger

http://content.screencast.com/users/fast996/folders/Default/media/2d8f5195-bd6f-4ecd-afcf-7bc84d84a583/2009-12-19_1005.png

[vipul garg]

roger,
i am glad you think i think that the patterns are valid, but i dont validate patterns visually.
so unless it can be explained as a wave pattern , it is not a valid pattern for me.
i clearly disagree on the wave counts,

DG,
but there people who have claimed expertise over 'trend'!

i was just seeing very few posters posting may be repeatedly.
( not that i have anything against those who have posted or the number of times.)
its just that on yelnick, because of the fundamental and technical outlook both , i look forward to a more diverse 'genetic pool' posting.

[Roger D.]

Vipul I understand.

Roger

[Richard]

Yelnick, I may have missed this in an earlier post, but what do you think the gloomy deflation outlook says about gold (or other commodities). Seems like, on the one hand, gold should go up if the dollar collapses. But if everything deflates, then gold should go down with it. On the other hand, if everyone abandons the dollar, then gold should go up. So if massive deflation happens, it seems like it could be a paradigm shift for gold. What's your take? (Get it right for me and you won't have to take me to lunch for the last 2 times I picked up the tab ;^)

[Roger D.]

Another bearish chart.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/b0a0da50-216d-494f-9ee6-35dbce6c1411

[DG]

DG,
but there people who have claimed expertise over 'trend'!

One of the most fascinating things reading the bulls' posts over the past two months is the fact that not one of them has ever seemed to ask themselves why the SPX has stalled here and why the Russell 2000 hasn't made a new high in almost three months.

I don't like to extrapolate from message boards to market forecasts, but the fact that even in the face of a stalled uptrend the bulls on this board are not even considering that the past two months could be distribution at a top makes me wonder if that isn't exactly what it is.

[Roger D.]

Here's a legitimate count 2 can disagree about. Well Point Inc.,Blue Cross and Blue Shield.

It will be interesting to see what happens if health care passes the senate tonight.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/6884019f-21c8-4cbe-b8de-6ef0eac8c3a8

[yelnick]

Richard, I have already lost a dinner bet on the top being in back in Aug .. sigh. Well, here goes again.

You may need to recalibrate your view of deflation as "gloomy." Central banks have gotten us to think of Deflation as bad, to be dreaded and avoided at all costs. Yet we delight in HDTVs or PCs getting cheaper each year. From 1873-1896 we had a general deflation, but during that time the US got stronger, as oil, steel and upstream products got cheaper each year. RR costs dropped, opening up new businesses like Sears. It was only when JP Morgan got the US government to allow the RRs to be consolidated & rates regulated did this stop. Ever since then (Warren Buffett's recent purchase of a RR nothwithstanding), RRs have been growing slower and been less important to the economy. Thanks, JP! It is a great example how whatever the government regulates we get less of, and it costs more.

Latter-day Keynesians (not the real thing) have also gotten us to decry deflation since in the '30s it depressed prices and wages. Yet that deflation ameliorated the worst parts of a Depression, because it makes lower or part-time wages go farther. Deflation bails out people, not businesses or bankers. Yet Hoover first and FDR later vigorously fought deflation, passing laws to raise prices and raise wages. This is likely the proximate cause of why the Depression got so deep and lasted so long. Only after WWII when the controls were lifted did we truly come out of it. I have written on this previously and won't repeat it here.

Suffice to say central banks have gotten us to fear deflation, since it hurts banks; and governments have gotten us to fear deflation, since it hurts special interests (banks, cartels and unions). Yet deflation helps people.

When deflation comes, the US Peso will become the US Sterling - a much stronger currency, at least relative to all those other currencies being debased as fast as possible. We will still have Swissies, NZDs and Norwegian Kroners as strong currencies as well, and they are likely to hold up well vs. the USD.

Gold should drop, since gold and the Dollar are somewhat inversely related, but the relationship is not precise in part because gold is a hedge not only against inflation but also against bad government policies, and they may continue even with deflation.

Hence I cannot predict gold during deflation given how reckless and feckless the US government has become. Historically it should drop. The gold story is much more complex since it appears to be hoarded right now, and is in demand by central banks. I believe this is because some of the powers that be expect they will soon be able to reimpose some sort of gold standard on the US. Others will fight this (especially the banking sector, as well as 'progressives" who yearn for ever more government spending).

This fight will wage on at least into the 2012 election. It is unclear what Obama will do, but his best political move to avoid becoming a failed President would be to triangulate back to the center and try to reduce the growth of deficits. This will further strengthen the USD and will result in government debt growing slower than private debt falls. A net fall of debt is deflationary. If Obama indeed does this, gold should drop. If instead Obama continues to try to realize Progressive Era policies, especially after the 2010 elections, gold may rise even as deflation rages since it is a vote against bad policies.

My investment advice: expect a stronger Dollar in 2010 into the elections, and weaker gold and commodities. After that it depends on how the politics shake out.

[JT]

"One of the most fascinating things reading the bulls' posts over the past two months is the fact that not one of them has ever seemed to ask themselves why the SPX has stalled here and why the Russell 2000 hasn't made a new high in almost three months.

I don't like to extrapolate from message boards to market forecasts, but the fact that even in the face of a stalled uptrend the bulls on this board are not even considering that the past two months could be distribution at a top makes me wonder if that isn't exactly what it is." - - - DG

As someone noted in a previous post under another one of Yelnick's articles, it is clear that you are not an ACTIVE TRADER given your continued "rationalizaiton" of where the market has been the last couple of months. Over the past several months, your posts have struck me as coming from someone that only wishes to "see what they WANT to see" from the market, instead of actually recognizing what is happening.

You continue to claim that the markets have "stalled" over the past two months of months, but you conveniently ignore the FACT that the most classic of all technical indicators ( the NYSE Advance/Decline Line ) shows quite the opposite.

http://stockcharts.com/charts/gallery.html?%24NYAD

In fact, the NYSE cumulative A/D line shows a DOUBLING of advancing stocks vs declining stocks just since November 1st. So once again, your claims are proven to be false, and erroneous.

But leave it to someone like yourself who is NOT A TRADER to continue basking in the luxury of denial and rationalization. I would suggest that if you actually TRADED for a living, you wouldn't last very long with that kind of "methodology".

[DG]

As someone noted in a previous post under another one of Yelnick's articles, it is clear that you are not an ACTIVE TRADER given your continued "rationalizaiton" of where the market has been the last couple of months.

Define "active trader", moron. I've made 43 trades in the past five months. Is that "active" enough for you?

You continue to claim that the markets have "stalled" over the past two months of months, but you conveniently ignore the FACT that the most classic of all technical indicators ( the NYSE Advance/Decline Line ) shows quite the opposite.

You don't get it, do you? I trade the indices and only the indices, not the advance/decline line and not individual stocks. PERIOD! The indices have gone nowhere, regardless of what the advance/decline line has or hasn't done. The SPX is two points above its October high and the Russell is more than 1% off its September high. I don't care if 99.9% of the stocks in those indices are higher than they were then, the indices themselves are not. Can you please confirm that this explanation has clarified my point in your pea-brain or do I need to put together a childrens' coloring book for you? If it has, do you think you can stop making this same irrelevant point over and over and over?

But leave it to someone like yourself who is NOT A TRADER to continue basking in the luxury of denial and rationalization. I would suggest that if you actually TRADED for a living, you wouldn't last very long with that kind of "methodology".

See my point above. There's no "magic number" of trades someone has to make to "trade for a living". In fact, and I've mentioned it about a dozen times, I'm happy to not trade if I don't see the right set-ups. A trader who feels a "need" to trade is a trader setting himself up to make hasty trading decisions leading to losses.

Are you ever going to make an intelligent response to one of my posts or is this as good as you've got? I'm guessing the latter.

[Anon]

Gold top is in? http://tinyurl.com/yd33lva

[cloudslicer]

There is one thing the government can do that it hasn't tried. The US Government owns over 1/3 of the land in the US. It should start to sell that land or use it as real collateral. It seams the only card left.

Kiss the national park system goodbye, sell Yosemite and the Grand Canyon to the highest bidder. Such is the fate habitual debtor countries.

[cloudslicer]

I just thought I'd throw this out here. I have been doing a long/short strategy using covered call funds on the long side and a position on SEF (short financial sector). I'll also be looking into EUM (inverse emerging markets). So far I've been 70% long and 30% short.

It has worked for me over the past 6 weeks. My premise is that we will go sideways and that I should focus on high yield. I am taking advantage of the fact that dividend schedule of several funds is staggered such that you can go into one, sell after the payout date and buy the next before the ex date.

If the market continues to go no where this strategy should outperform. If we break support I will sell the longs and let the hedges ride. If we break out then I will sell SEF and reload higher.

Has anybody tried a long/short strategy?

[yelnick]

Roger, I agree that EW needs to confirm a break (up or down) to confirm a wave pattern. Neely thinks he has done this in his neowave. Zoran was working on this in his approach. Prechter relies on the break of trendlines that doesn't fall back, but it gave a false signal in late Oct.

[joe]

Cloudslicer - It is very possible the market does drop over the next few days (I think it will fairly sharply), it is also likely to bounce immediately thereafter imo. If you are playing both sides be very careful about what hedge you pull out where or you will get whip sawed.

[Roger D.]

Yelnick,

I think Tony C. has done a great job,looking far foward at the 667 low and forcasting a move to 1121,the 50 pct level. I disagree now with him, I think the top is in. But then again I use a lot of other indicators also,not just EW.

I think you have to include sentiment,as well as EW and most important when major resistence levels are reached, you most be on the look out for reversal patterns. Major trendlines are also high on the list. A key part is also looking at the high flyers and market leaders.

Having a limited scope of actually what is going on in the market is vital. This is a rotational top that started in October. But actually all your leaders have made new highs since the November low and have risen in their final 5th waves here, and built tops at 1119 and 1116.

Roger
p.s. thanks for the response.

[Roger D.]

"Having a limited scope " should read "Having a broader scope"

Roger

[joe]

I would just point out - if my hypothesis about heavier than usual tax selling this year is true, then the heaviest selling days will be the 21st, 22nd and 23rd (and possibly the 24th - early). After that it is X-mas and the weekend. The last possible day to sell for tax losses this year is the following monday - 12/28 to allow for settlement.

Joe

[Edwardo]

Yelnick wrote:

"For those of you who believe that inflation, even hyperinflation, is ahead, and take confirmation in the recent blip up in PPI and CPI, this month's EWT is required reading. The deflationary forces are growing rapidly."

No one who understands what hyper-inflation is, or how it has come to pass at other times in other nations, cares a whit about a blip in PPI or the CPI, because hyper-inflation is a currency event not the result of an especially robust rebound in economic activity. A resumption of deflation will seal the deal on the onset of hyper-inflation as tax revenues, which are already, in the aggregate, plummeting, become non-existent. Who then will pay for all that the U.S. government needs paying for?

The deflationist argument is a non starter in a fiat currency regime because of the viable recourse to out right monetization. The centerpiece of the deflationist argument-at least the ones I have been privy to, has always centered on the idea that out right monetization would destroy the bond market, but no one will care about the bond market when sovereign debt buying dries up at even the shortest end of the curve. That will come after the next wave of deflation.

[joe]

This view that soverign debt buyers are drying up - it makes me laugh out loud. Where can they go?

When the equity markets start really dropping (and it won't be confined to US markets) that 3.625% 10 year yield is going to look very good indeed.

Capital finds its best rate of return - and this will be especially true if we continue to deflate - as we are now doing.

PS - I do agree with Yelnik's long term view.

[joe]

There is this strange story on Bloomberg now about Dubai - that they won't get the standstill agreement today. I pulled the following quote.

“This will certainly have a negative effect on markets,” said Fadi Al Said, head of equities at ING Investment Management (Dubai) Ltd. by telephone...

I must be missing something here - I don't see how this impacts that much.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDBDE61H8i4A&pos=4

[da bear]

I thought that Prechter should have talked about technicals instead
of fundamentals. I also wanted commentary on gold. Looks like gold
made an intermediate top. C of Cycle Wave II is in force even though gold could bounce here. Up next will be Cycle III of Super Cycle Wave V in gold. Should be marked by rising gold prices in a global deflationary (default?) backdrop.

Cycle V of this current Super Cycle V is where we get hyperinflationary potential. will coincide with wave IV counter trend bounce (after deflation low) of this current Grand Super Cycle C of IV.

da bear

[yelnick]

Edwardo, you framed an important question when you wrote "The deflationist argument is a non starter in a fiat currency regime because of the viable recourse to out right monetization." This is what Greenspan and Bernanke have believed. Greenspan successfully reflated in 2002-4 by massive dumps of liquidity. Bernanke is trying it now but without the same impact. What if their view is simply wrong? What if once the psychology changes, the reflation fails?

So far Bernanke has bet a lot on real estate, to no avail. He has banks leaving huge reserves in the Fed, and being paid interest, but just as in the late '30s, the banks aren't lending. So money is not being created. Now net debt may drop faster than the Fed can do anything about. Bernanke can buy Treasuries, which prints money, but even so he may not be able to keep up with debt write down.

[joe]

"Bernanke can buy Treasuries, which prints money, but even so he may not be able to keep up with debt write down."

Exactly.

And that should scare the living daylights out people.

Joe

[DG]

Yelnick,

It isn't just "psychology" that is failing, it's the ability of incremental debt to add to GDP that is failing as well.

http://www.financialsense.com/editorials/fekete/2009/0330.html

The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place...

Why is a negative marginal productivity of debt a sign of an imminent economic catastrophe? Because it indicates that any further increase in indebtedness would necessarily cause economic contraction. Capital is gone; further production is no longer supported by the prerequisite quantity and quality of tools and equipment. The economy is literally devouring itself through debt. The message, namely that unbridled breeding of debt through the serial cutting of the rate of interest to zero was destroying society’s capital, has been ignored. The budding financial crisis was explained away through ad hoc reasoning, such as blaming it on loose credit standards, subprime mortgages, and the like. Nothing was done to stop the real cause of the disaster, the fast-breeder of debt. On the contrary, debt-breeding was further accelerated through bailouts and stimulus packages...

Hyper-inflation or hyper-deflation?

Most critics the Obama plan suggest that the punishment for the bailouts and stimulus-packages will be a serious loss of purchasing power of the dollar and, ultimately, hyperinflation, as evidenced by the Quantity Theory of Money. However, the quantity theory is a linear model that may be valid as a first approximation, but fails in most cases as the real world is highly non-linear. My own theory, relying on the concept of marginal productivity of debt, predicts that it is not hyperinflation but a vicious deflation which is in store. Here is the argument.

While prices of primary products such as crude oil and foodstuffs may initially rise, there is no purchasing power in the hands of the consumers, nor can they borrow as they used to in order to pay the higher prices much as though they would have liked to do. The newly created money has gone into bailing out banks, and much of it was diverted to continue paying bloated bonuses to bankers. Very little, if any of it has “trickled down” to the ordinary consumers who are squeezed relentlessly on their debts contracted in the past.

It follows that price rises are unsustainable, as the consumer is unable to pay them. As a consequence the retail and wholesale merchants are also squeezed. They have to retrench. Pressure from vanishing demand is passed on further to the producers who have to retrench as well. All of them are experiencing an ebb in their operating cash flow. They lay off more people, aggravating the crisis further as cash in the hand of the consumers is diminished even more through increased unemployment. The vicious spiral is on.

[Roger D.]

I know Yelnick mentioned China. Well here is a major Hong Kong ETF, EWI, looks to be at key support and the Hang Seng is down tonight again.

Roger

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