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Pivotal Events

The following is part of Pivotal Events that was published for our subscribers April 7, 2010.


Some Time Ago:

"Socialism as an alternative has disappeared from the discourse. Capitalism has won an enormous victory and all we could do was watch."

- Socialists In America Meeting, National Post, April 3, 2000

What a change since then, and it only took a couple of years of a Democrat majority and one-year of the Obama Administration.

"The American people will never knowingly adopt socialism, but under the name of 'liberalism', they will adopt every fragment of the socialist program until one day America will be a socialist nation without knowing it happened."

- Norman M. Thomas, Leader U.S. Socialist Party, 1948

"Every collectivist movement rides in on a Trojan Horse of 'emergency'. It was a tactic of Lenin, Hitler and Mussolini".

- Memoirs: The Great Depression, 1929-1941, P. 461, Herbert Hoover

The current administration is following up Obama's campaign promise to change America. The ambition is breathtaking and the method has been brutal.

Consequent turmoil and opposition suggests that the U.S. is becoming "ungovernable". Not so - just the government has become ungovernable, as it bypasses the constitution.

Many understand that a constitution provides law and order as well as defense. The other and essential characteristic has been to limit the ambition of government and parts of the "ObamaCare" health bill is considered unconstitutional. The struggle to restore America's traditional checks and balances will be interesting and ultimately successful.

Regrettably, the struggle will intensify as political warfare that will eventually be unsettling to most financial markets.

In the meantime, the expected advance has made it through March and is into enough of a party to show up in some of our indicators.

Along the way, there have been a number of startling statements:

"We are not going to save our way out of this recession. We've got to spend our way out of this recession."

- House Majority Whip, The Hill, February 5, 2010

Fortunately, Mrs. Thatcher's advice from 1976 when the labor unions were running England has value today:

"The trouble with socialism is that eventually you run out of other people's money."

The last one prompts THE question about run-a-away spending and capital running away and hiding. Hopefully, over the next few months the markets will provide some answers.

* * * * *

This Year:

"Hedge Funds Get Their Mojo Back"

"Huge Paydays"

- Financial Post, April 3, 2010

"China's booming economy produces a bumper crop of millionaires."

- Financial Post, April 3, 2010

"Banker teaches philanthropy to clients"

- Financial Post, April 3, 2010

* * * * *


Our February 4th edition noted the degree of the slump and concluded: "It is worth looking for some positives."

Beyond the rebound from an oversold condition, positives would include a seasonal rally for base metal and crude oil prices. Favourable action was likely to run through March, which it has and it could continue.

But, the above upbeat quotations are now being matched by some of our stock market indicators. The S&P is becoming very overbought and the ChartWorks list of individual stocks that are generating Upside Exhaustions is growing very quickly - as it does at important highs. Some important names are Ford, Boeing and Brookfield Properties. It is unlikely that the S&P itself would register an Upside Exhaustion. It is a broad index.

A "helper" on the way up has been the rally in crude, which could run well into April. The latest rush has been bold and the RSI is approaching a level that will limit the move. Much the same holds for copper.

Upside action has also been assisted by a couple of declines in the US dollar. We had thought that the decline would be more consistent but it came in a couple of slides that have been "constructive". It looks as if the dollar could remain in a trading range, and perhaps the best contribution from dollar weakness is in the stock market.

The other "helper" has been the gold/silver ratio. As this turned down in early February it confirmed the stock rally, and now it is at an RSI that could limit the move. A turn up would be a caution on the stock market's advance.

Banks and Financials is an important sector, particularly as most economies have become experiments in financial engineering. From the crash low of 18 a year ago, the BKX rebounded to 45 in the summer and stayed at that level until December. It got up to around 47 in January and then declined to 44 in early February.

The rally since has rather good and has made it to 54 this week. The weekly RSI has reached 73 and this is the highest since early 2004. At the record high of 121 in early 2007 the weekly reached 71.3, which got our attention then.

Also worthy of attention is that our propriety Bank Trading Guide had a recent low of 141 on February 8. The rise to 160 this week is a new high for the move and its RSI is approaching a level that can limit the move.

The Guide is confirming the outstanding overbought condition for the banks themselves. When this kicks in a "sell" signal it usually applies to most banks in most countries.


"The higher a people's intelligence and moral strength, the lower will be the prevailing rate of interest."

- Eugene von Bohm-Bawerk (1851 to 1914), Austrian Economist

Clearly Bohm-Bawerk could not have imagined a period of relentless experiment in currency depreciation that drove long rates in the senior currency to 15% in 1981. Nor, quite likely, could he imagine bill rates falling to zero. It can be easily said that zero is not a measure of the intelligence and moral stature of a country.

Some think that it has been policy-driven, but central bankers in full panic cannot be considered as "intelligent" or "moral". So old Eugene's observation seems not to be universal. Of course, he was likely referring to the difference in spreads that existed then between, for example, between England and the more excitable Mediterranean countries.

In the Austrian School any voluntary transaction between individuals is considered moral. A forced transaction whereby one agent takes something, such as by way of taxation, from someone who has earned it and gives it to someone who hasn't earned it is obviously immoral.

But, the pioneer in Austrian economics would definitely consider that one of the key objectives with the European Union was to legislate uniform interest rates for all European countries. It was an impractical dream and not based upon the intrinsic differences between European countries. The first hit to the impractical dream was a natural and massive widening of spreads in 1989. It took out LTCM, one of the most celebrated hedge funds in history.

Subsequent to that warning, artifices within the European Union have encouraged excessive borrowing at below realistic rates to, as in the 1870s, "half-barbarous" countries. Although run by the establishment, the artificially low rates of interest have been immoral and in the case of Greece and others the results are coming apart.

As we have been noting, post-bubble contractions, run for a long time. This one started with the sub-prime mortgage bond disaster. Next was the same for corporate bonds which ended in March a year ago. The rebound since has been spectacular and is becoming mature. The "new" disaster has been in sovereign debt.

And as regretable as it may be, The US treasury market seems to be next on the path to a classic post-bubble bond revulsion. This will be made worse by extremely radical government in Washington that is hell-bent to impose its narrow view upon anything that captures its attention. Once in power, neurotic intellectuals brook no opposition such that foreign and domestic affairs will be the most dislocated since FDR in the 1930s.

Under such reckless assault to the norm, capital will go into hiding. The investment demand for the liquidity of gold will soar as liquidity for orthodox investments again disappears.

This will include the appetite for long-dated treasuries.

Enduring support has been often found at the 115 level, and the slip to 114.3 yesterday is interesting. However, the action is near-term oversold and the time to focus would be on the next slide to 114. Taking out 112.5 would set the downtrend that could reach the 104-102 level.

This, with a corresponding decline in corporates would be a profound hit to capital markets and the global economy.

Investors could find a haven in 3 to 4-year treasuries and the same term high-grade corps. Investors outside the US should be positioned in these instruments to take advantage of longer-term appreciation in the US dollar.


The Dollar Index did not decline as steadily from early February as we thought likely. The prospect of the European Union becoming precarious has been a plus for the dollar. We have often called the EU "Moscow on the Maastrich" with all of the authority of that mindless bureaucracy, minus the culture of political murder.

Fortunately, there were a couple of DX declines sufficient assist a good rally in orthodox sectors. Job done and the stock market is now rolling over.

The DX is at neutral momentum and the next important move will extend the uptrend. However, another phase of financial distress seems to be arriving and the sudden turn to bad news may suppress the dollar for a while.

The Canadian dollar is at par, where it should be. Differences between the neighborly dollars across the world's largest trading border induce too much "friction" by way of hedging. Of course, the reason the dollar fell to 63 against the US was that depreciation transferred private savings to the state and the despicable Liberal government liked having industry dependent upon depreciation.

This is long gone and the next step to sanity would have Ottawa set up a currency board with the mandate to keep the C$ at par. The main role of the Bank of Canada has been to depreciate the currency and when you think about it - there is no other agency capable of that responsibility.

Now that depreciation no longer seems the main policy of government the installation of a currency board could be accompanied by the elimination of the Bank of Canada.

To be serious, the Canadian dollar can decline a little as the air goes out of commodities.

Link to April 8, 2010 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1611


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