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Posts Tagged ‘Federal Reserve System’

Is the breakout for real?

Posted by Dan on June 9, 2014

Stocks have pushed to new highs in rather convincing fashion. Is this a real breakout, or a just blow-off top?
Here is the current chart for the S&P 500 (click for larger image):

S&P 500

Our lunar red period has not stopped the recent rally and the S&P 500 chart is showing a clear breakout from the recent sideways pattern. This kind of breakouts is usually tested, so I think the market will drop back to 1920, where resistance should have turned into support, before possibly heading higher in the next lunar green period. Meanwhile my technical indicators have dissolved the bearish divergences that plagued the market since the start of the year, and there is now further room to rise based on the long term up trend channel. A drop below 1850 would tell us that this is a false breakout.
We cannot rule out a peak at this point, but on blogs and social networks I don’t see the kind euphoria that normally comes with major tops. Rather on the contrary, I see massive disbelief, cynicism and even anger about this stock market’s continued climb. Everybody seems to be trying to go short at the top. Comparisons with 1929 or 1987 have been getting extensive coverage in financial news media, implying that we are about to crash. Few and far between are the calls for a continued bull market.

It is one of the great benefits of writing a financial blog or newsletter that the responses (or absence of them) often provides good clues where the market is actually going. For the last couple of years, whenever my analysis or chart points to an impending decline in stocks, it gets comments and likes on twitter. But whenever I post a bullish scenario it just harvests silence. And for gold it has been just the reverse. So, I have gradually learned to doubt my forecast if too many readers agree with it. The scenario that nobody believes is not rarely the one that pans out.

For example, almost nobody is considering the possibility that we are in a repeat of the 1920s, a scenario I have been watching since last year. Since our latest update the odds for this scenario have continued to go up. Here is the updated chart (click for larger image):

Dow vs 1920s

The correlation between “Dow Aug 1921 – Nov 1926” and “Dow Feb 2009 – May 2014” has now climbed to a whopping 90.4%, up from 81% when I first posted this chart. The case has become even more compelling with the news that Q1 US GDP was negative. A mild recession in 1927 also forced the Fed to delay their unwinding of ultra-low rates. When they finally started raising rates in 1928 it caused the stock market to double within 18 months, and then a collapse into the great depression. The Fed is quietly setting us up for a similar disaster, simply repeating their mistakes from the 1920s.
One of the conditions to keep this scenario on the table was that the Dow needs to break out above 17000 this year. We are now very close to that point. I still think the market will deviate from the 1920s at some point. But the question is: when? Keeping up with the roaring twenties would give us Dow 20000 by early 2015, with the market spinning out of control after that. If so, I would expect to start getting comments and likes for bullish posts, while harvesting silence for bearish scenarios. That’s how we will eventually know when we are close to the top.

Good luck,



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Posted in Financial Astrology, Market Commentary | Tagged: , , , , | 8 Comments »

Why QE fails to start the economic engine

Posted by Dan on November 20, 2013

I get occasional questions about the quantitative easing (QE) programs that are being perpetuated by the world’s central bankers. Will it work? When?

The idea of QE is to add some extra money-fuel to start the economic motor. This is really no different from priming an engine before you start it in cold weather. If you own a classic car or an airplane, then you may still know the art of priming the motor before starting it. But with modern cars it isn’t needed, so most people, including our central bankers, have probably forgotten how to prime an engine.

I used to sell motorized vehicles in my early 20s, so I have explained the problem of over-priming countless times. But to keep this piece short you can read all about it in this well-written article:
The dynamics of an economic motor are really very similar. So where the article correctly states: “Engines will fail to start for 2 reasons: too much fuel and too little fuel!“, we could as well say:

Economic engines will fail to start for 2 reasons: too much money and too little money!

When the economic weather turned unusually cold, and they tried to prime the economic engine with QE1 and QE2, it made sense. But since QE3 they are basically saying: we will continue to prime this engine until it starts. And that makes no sense. Then the engine fails to start because of over-priming. Then all you get is black smoke coming out. The motor stutters along but doesn’t really catch on properly. Black economic smoke has been belching out of Europe, Japan and the USA for years, but these central bankers fail to make the proper diagnosis: they have flooded the engine. It would have been better to put a car mechanic at the head of the Fed, because it looks like universities fail to teach such basic principles in their economy classes.
The mentioned article also correctly describes the dangers of continued priming. The extra fuel-money will accumulate in certain places and risk causing an engine fire. So the stock market could catch fire (speculative mania) or commodity prices could go crazy (hyper-inflation), both very damaging for an economy. At the moment it looks like we are coming close to the first possibility.

Now, for the sake of this little exploration, let’s assume that despite repeated over-priming the economic motor catches on somehow. Some more black smoke is seen and suddenly we hear the promising noise of an engine coming up to speed. Then our grounded economic plane is still not up in the air. There are still a few other problems to tackle.
Given the weather conditions and the amount of horsepower, an economic plane can only take a certain maximum load. Three things are typically weighing down an economic engine: interest rates, taxes and regulations. The burden of interest rates has been reduced to near zero. But governments in Brussels and Washington have not stopped inventing new taxes and adding more regulations on top of the old ones. Even with zero interest rates this plane may not realistically be able to take off anymore, it is overloaded.

And to make matters even worse, what we have is that the cockpits have gradually become bigger than the rest of the plane. Champagne is being served in those cockpits, quarrels are being heard from them,… but the plane doesn’t fly, it always stalls as soon as it gains a little bit of altitude. And the mechanics are getting the blame.
That is an ugly situation.

In a second part we can explore how to unburden this plane so it can fly again.

Be well,

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