Saturday, December 12, 2009

There’s Something Happening Here…

What it is ain’t exactly clear...

Does this chart with the precipitous fall and the rising wedge look familiar? This is a weekly chart of the DOW from 1929 and into 1930. Note the last positive weekly candle and that it finished at roughly a 53% retracement, just above the 50% mark.

Now take a look at this weekly chart of the DOW, look kind of similar? Yep, big fall, big bounce, rising wedge. Note the last weekly candle is a hammer and that it’s getting just above that 50% retrace mark:

So, while this bounce has been spectacular, it is most certainly NOT unprecedented. Now, there’s a chance that the similarities end right here and we go rocketing higher. Hey, history never duplicates but it does often rhyme. What’s the risk if it does rhyme? Oh, nothing much.

So, you have to ask yourself, are the underlying forces that produced that wave C different this time? Have we entered a new, more modern era where things like that just don’t happen because we are so much smarter? Remember what was being said about the internet in the year 1999 and what the experts said about the valuations in the market being the new norm? It’s just different this time, isn’t it?

I mean back then we were on a gold standard that held the quantity of money constant, RIGHT?

Hmmm… well, according to Wikipedia discussing the gold standard during the Depression, “Fearing imminent devaluation of the dollar, many foreign and domestic depositors withdrew their funds from U.S. banks in order to convert them into gold or other assets. Since the gold standard depressed demand for dollars, interest rates rose.”

Sound like anything familiar? Umm, let’s see, converting to gold and other assets, CHECK! Umm, Interest rates rose? Oh, oh…


Long Bond P&F target = 94:

So, back to the gold standard keeping the supply of money under control… let’s take a look at this chart of debt dating back to 1920… Yes, that is a parabolic rise in debt, and note the year the debt peaked – it wasn’t 1929, no, it peaked in the year 1932, the same year the stock market finally bottomed. Did gold really keep the supply of money under control?

And get a load of the direction of debt now! Will our current curve just continue straight up like that forever and ever? NO! It will begin to fall, THAT is when we will be on the road to recovery. But because of the government pumping trillions and trillions in new debt, that is not being allowed to happen – yet.

Now, let’s look at a seven month and a 3 year chart of the dollar. Here you see a descending wedge and a clear breakout higher. Note that stock prices have remained flat while this breakout has occurred. Look back at this chart at rising dollar times and look at the action in stocks, then do the same on the longer term dollar chart:

Since March, Oil has risen right alongside the market while the dollar fell. Now we have a clear breakdown in oil that coincides with the breakout in the dollar:

Next is a longer term chart showing the correlation between oil prices and stock prices. Not always perfect, but in general, falling oil has equaled falling stocks… will this time be different?

And finally, I was playing around with the charts over at the St. Louis Fed like I like to do and I came up with a chart that at first glance just looks like a bunch of squiggly lines, but I want you to look at this carefully. There is a thin horizontal line sitting at about 1 to 2%... that line is the population of the United States, growing steady.

Now, I took and drew the large line across the chart at ZERO. The other lines are PPI, CPI, and M2 money supply. In other words, money and prices. Now pull back from the chart and just look at the balance… money and prices predominate at a growth rate much greater than zero and MUCH greater than the growth in our population. There are only momentary corrections. This is the essence of the bad math! Over time these numbers compile upon themselves, eventually producing parabolas and collapses. Why do we do that to ourselves? It’s a function of the way we back our money with debt! That causes bankers and politicians to always produce more. This is NOT a natural state of being, it sets up a very unstable economy, one where the swings get larger and so do the inputs, as we’re experiencing now!

Is it just me, or is there something happening here?