Back in October when that stimulus package was being discussed I wrote a couple of articles, which were posted here, stating that it "Ain't Gonna Work." This past Wednesday the Fed announced their latest intentions with a plan to buy $300 billion in long-term Treasuries and $750 billion of mortgage-backed securities. I'm now beginning to wonder if the powers that be are really in their minds trying to "fix" things or if they are actually trying to destroy the dollar, the free markets and perhaps even the nation. To be honest, the latter is starting to make more sense to me because surely there is enough intelligence in Washington to understand the potential consequences of these actions. In any event, in the wake of this news the equity markets surged, the dollar sold off and commodities rallied. Hip, Hip, Hurray. Hip, Hip, Hurray. It's 2007 all over again, or is it?
In my opinion, this re-inflation effort is ultimately not going to work any better than any of the previous efforts. The technical damage that has been done over the last couple of years is not something that can be fixed by some stimulus package. The equity markets are still operating within the context of a massive secular bear market and the bounce that is currently underway is nothing more than a bear market rally. The commodity bubble is a thing of the past, even though this counter trend bounce still likely has further to run and the decline in the dollar was totally expected based on my cycles work. So, at this time I'm not seeing anything out of the ordinary or that wasn't expected based on my cyclical work.
Also, with the average American consumer tapped out, ask yourself a common sense question. How, are these bailout plans going to stimulate aggregate demand? Did the balance in your checking account increase because of any of these efforts? Did the liability side of your balance sheet change? Do you suddenly feel the urge to go borrow more money or to make a major purchase? As I see it, these efforts are not reaching the consumer and therefore, this is not going to stimulate demand. What it is doing is saving the financial institutions that made the bad loans. I feel that not only should the over-indebted consumer pay the price, but so should the responsible institution for making the bad loans. Printing money out of thin air and/or using tax payer dollars to bail out financial institutions that made poor business decisions to make loans to high risk consumers is wrong and will not ultimately fix the problem. At best, this may temporarily re-inflate equities and commodities.
As for commodities, we saw last year what $4 a gallon gasoline will do to the economy. So, why would we expect the outcome this time around to be any different. As I see it, high commodity prices have an automatic relief valve built in because once prices reach a certain level, the consumer automatically pulls back. When this happens, demand drops and prices follow. With the average consumer still feeling the economic pressures from round one of the on going economic disaster, I have to ask the common sense question, How would more inflationary pressure on the consumer stimulate the economy? It won't and for this reason I do not see these reinflation efforts working. The built in check valve of rising commodity prices will prevent any such efforts from working.
Of late I have received a few e-mails asking me if because of these reinflation efforts whether or not the technicals still matter. The answer is without a doubt, "Yes!" Reason being, it does not matter what drives price. Price can be driven by sound fundamentals or by bogus manipulation. From a technical perspective, we are still looking at price on a chart. In other words, everything is discounted into price, be it good or bad, fact or fiction, reality or hype. The only thing that may change is the interpretation of that chart. If these manipulative efforts are going to matter, then that will be reflected in price in a way that will turn the technical and statistical picture bullish. If these efforts are going to fail, then that too will appropriately be reflected in price. As technicians, all we have to do is interpret the price action as ultimately it all boils down to price and knowing the meaning of that price action is what technical analysis is all about.
Another reason I say these manipulative efforts will ultimately fail is because we are dealing with K-wave winter and K-wave winter is a natural part of a long-term economic cycle that must take place before a new cycle can begin. This cycle, the markets and the economic disaster we are all facing is far bigger than the Fed. For the benefit of newer readers I have again included a few of the signposts surrounding K-wave winter.
"Global Stock Markets Enter Extended Bear Markets"
This should be obvious to all.
"Trends During Winter: Stocks Down, Bonds Up, Commodities Down"
I would say that this is still on track.
"Interest Rates Spike In Early Winter Then Decline Throughout"
In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25% and since August 2007 the Fed has been forced to cut the Discount rate back to .50%. So, this too seems to fit and now the Fed is targeting long-term rates as well.
"Economic Growth Slow or Negative During Much of Winter"
This too should be obvious to all.
"Commercial and Residential Real Estate Prices Fall"
This obviously began back in 2006 and is still in a major slump.
"Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy"
This has obviously begun and is no doubt related to the housing and credit bubbles.
"Social Upheaval and Society Becomes Negative"
We are only just beginning to see this.
"Banking System Shaken and New One Introduced"
The banking system is now only beginning to be shaken. There should be much more to come.
"Free Market System Blamed and Socialist Solutions Offered"
This has not yet happened, but just wait.
"National Fascist Political Tendencies"
More to come.
"Debt Level Very Low After Defaults and Bankruptcy"
This has not happened.
"Trade Conflict Worsen"
This basically has not happened.
"View of the Future at a Low Ebb"
This has not happened as everyone seems to be looking for the bottom.
"New Work Ethics Develop Since Jobs are Scarce"
If I can assure you of one thing it is that this has not happened.
"Greed is Purged from the System"
I can absolutely assure you that this has not happened yet.
"Real Estate Prices Find Bottom"
This has not happened.
"There is a Clean Economic Slate to Build On"
Not happened yet.
"Investors are Very Conservative and Risk Averse"
Again, this has absolutely not occurred.
"Interest Rates and Prices Bottom"
"A New Economy Begins to Emerge"
Has not happened
"Stock Markets Reach Bottom and Begin New Bull Markets"
This is still a long ways away.
So far, these signposts remain on track and ultimately they are telling us that these reinflation efforts will fail and that in the end any bout of inflation that is sparked will ultimately end with the deflationary grind into the K-wave winter low.
From a Dow theory perspective, we are still operating within the context of the bearish primary trend that was established on November 21, 2007. I also want to remind everyone that according to William Peter Hamilton, on November 21, 2007 the "Stock Market Barometer" forecasted "Stormy Economic Conditions" and today nothing has changed. Therefore, the Dow theory is also currently suggesting that these reinflation efforts are not going to work. The current chart of the Industrials and the Transports can be found below.
As for Dow theory, I want to point you to the following quotes from the great Dow theorist Robert Rhea.
"Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.
Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.
The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:
'A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.' (Nov. 29, 1908)
'Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.' (Feb.26, 1909)
'...the market itself is bigger than all the 'pools' and 'insiders' put together.' (May 8, 1922)
'One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, 'Between the Chains,' in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.' (The Stock Market Barometer) '...no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.' (April 27, 1923)
'The average amateur trader believes the stock market is guided in its trends by a certain mysterious 'power,' this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.'
'It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or 'manipulating' the market for a short period. The professional speculator is always ready to help the movement along by 'placing his line' while the little fellow timidly 'lays out' a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the 'technical situation' so dear to the hearts of financial news reporters.'
'Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!'
Yes, it is true that this is not the early 1900's. We also know that today the Fed has more tools available to influence the market as well. But, at the same time the markets are much, much larger than they were in the early 1900's. So, even though the Fed has more tools available, is this fact over ridden by the fact that the market is now many, many times larger than it was then? Personally, I would say yes. Can the Fed actually hold off K-wave winter or keep the market up forever and ever and create a period of endless prosperity without the market ever experiencing Phase II or Phase III of the bear market? I guess this remains to be seen, but my view is NO.
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