Sunday, March 6, 2011

+ 7.75 % Also In February Fifth Good Consecutive Month For Our Galaxy Portfolio Systems

Nella sottostante tabella sono raffigurate le equity line mensili dei trading systems che compongono il nostro portfolio systems Galaxy ed il riassunto MTM dell’operatività dal Novembre 2009. Galaxy chiude con un ottimo risultato anche il mese di Febbraio, dopo un equivalente risultato nel mese di Gennaio, portando a 15.29 % la performance del 2011. Quello appena chiuso è il quinto risultato utile consecutivo a livello mensile dopo la breve pausa alla fine dell’estate dello scorso anno. L’equity continua a svilupparsi in maniera armonica mantenendo un’inclinazione positiva e costante grazie all’elevata diversificazione all’interno del portfolio. I risultati storici di Galaxy Portfolio System sono disponibili ai seguenti link:, I risultati dei singoli trading systems sono a disposizione al seguente link:

In the table below you can see the monthly equity line of the trading systems that make our Galaxy portfolio systems and the MTM performance summary since November 2009. Galaxy ends with a good result also the month of February, after a similar result in the month of January, bringing the performance to 15.29 % in 2011. One just closed is the fifth consecutive positive months after the brief pause at the end of the summer last year. The equity continues to grow in harmony while maintaining an upward slope and steady thanks to high diversification within the portfolio. Historical results of Galaxy Combined Portfolio System are available at the following links:, Historical results of single trading systems are available at the following link:

Galaxy Risultati Febbraio

Equity Line Trades, Giornaliera e Mensile di Galaxy / Trades, Daily and Monthly Galazy Equity Line
Galaxy Trades Galaxy Time Galaxy Settimanale

Performance MTM Mensile di Galaxy Portfolio System con un capitale iniziale di $ 200.000
Monthly MTM Performance of Galaxy Combined Portfolio System with $ 200K initial capital


1.19 %
2.90 %
(4.28 %)
24.49 %
2.99 %
1.76 %
15.62 %
4.35 %
10.60 %
(0.41 %)
(4.73 %)
1.75 %
12.80 %
1.50 %
7.54 %
7.75 %

Material in this post does not constitute investment advice or a recommendation and do not constitute solicitation to public savings. Operate with any financial instrument is safe, even higher if working on derivatives. Be sure to operate only with capital that you can lose. Past performance of the methods described on this blog do not constitute any guarantee for future earnings. The reader should be held responsible for the risks of their investments and for making use of the information contained in the pages of this blog. Trading Weeks should not be considered in any way responsible for any financial losses suffered by the user of the information contained on this blog.

Stock and Currency Market Triangle Price Patterns Pending Breakouts

Stock indices in Asia and major currency pairs are closing in on the conclusions of large triangles that have been in formation since around 2008. 

Shanghai Composite:

Source: Yahoo Finance


Australian index:

Are these indices lagging the West and about to break out upwards? Or have Western indices begun a topping process which will be accompanied by a breakdown in Eastern indices?

We see a similar formation behind the scenes of the S&P500 action, looking at market breadth:

Source: Astrocycle / Stockcharts

The Mclellan oscillator typically produces a positive or negative divergence ahead of a move in the stock market. It has been teasing us for some time by narrowing in its range, and it has been one indicator diverging from the rally. Keep an eye on it for a lead move, particularly downwards.

Turning to the major currency pairs, and relations between USD, GBP and Euro:

Euro / GBP:

Euro / USD:


Breakout against the dollar? Is the big move coming to be a breakdown of the US dollar, associated with a breakout for long term treasury yields and a big move up in gold?

Source: Yahoo Finance

Source: Gold Scents

In all the above scenarios, a safe strategy is to await a breakout, then a successful backtest of the breakout (to ensure it is not a fakeout), before trading in the direction of the breakout.
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Tech Stocks Set to Fuel Resurgent U.S. IPO Market

Jason Simpkins writes: After falling off the radar for three years, the U.S. IPO market is off to its best start since before the financial crisis. And with several high profile technology companies set to go public this year, it's likely to carry that momentum forward.

Companies around the globe have raised more than $26 billion through initial public offerings (IPOs) this year, a 20% increase over last year and the best start on record, according to Dealogic. Globally, 15 IPOs were crammed into the first two weeks of February - a month that last year had seen a total of just four IPOs.

Not since 2007, when 17 companies listed, has the IPO market been so active. By comparison, just three companies listed in February 2009 and four in 2010.

A big reason for the increase was a flurry of activity in the United States, which had previously lagged the Asia Pacific region. There were 24 U.S. IPOs in the first month and a half of the year, compared to 13 during the same period in 2010, according to IPO research firm Renaissance Capital in a Feb. 23 report.

The largest IPO so far this year has been Kinder Morgan Inc. (NYSE: KMI), which raised $2.86 billion through its Feb. 10 offering. The company raised a total of $3.29 billion after underwriters exercised an overallotment option, making it the largest U.S. energy IPO in more than a decade. 

With Kinder Morgan taking the lead, U.S. IPOs raised a total of $8.1 billion by mid-February - up from $1.9 billion last year, according to Renaissance.

"After strong IPO issuance in November and December, the IPO market seems to be sustaining the momentum seen at the end of 2010," Renaissance said. "These are signs that the IPO market is back to normal levels of issuance that is expected in a growing economy."

The firm said the United States would continue to lead the world, as 34 companies are still on tap for IPOs this year. Dealogic's IPO backlog stands at $48 billion, with about a third of that destined for U.S. markets.
What's more impressive, though, is that the U.S. companies set to go public in the weeks and months ahead are healthy prospects with solid fundamentals - not paper tigers.

"Most of the companies that are in registration or are starting the process, are companies that have really good prospects," Mark Baudler, a partner at Wilson Sonsini Goodrich & Rosati, told MarketWatch. "It's not fly-by-night companies hoping beyond hope that there is a way to get out the door. The pipeline is so good that the best companies are at the front of the line." 

One such company is Hospital Corporation of America (HCA) Holdings, which aims to raise $3.5 billion when it lists on the New York Stock Exchange (NYSE) next week.

HCA is the largest non-governmental hospital operator in the United States and a leading comprehensive, integrated provider of health care and related services. 

Hospital companies have been in an upswing for the past six months, with four of the most commonly followed stocks up 49% on average in the last six months. Community Health Systems (NYSE: CYH) is up 43%, Health Management Association Inc. (HMA) is up 47%, Tenet Healthcare Corp. (NYSE: THC) 61%, and Universal Health Services Inc. (NYSE: UHS) is up 45%.

Still, the most fertile ground for IPOs has been the technology sector. The seven technology companies to go public in the first month and a half of the year raised a total of $700 million, according to Renaissance.
Nielsen Holdings NV (NYSE: NLSN) was the headliner, raising $1.75 billion in its listing.

Most all of the tech companies to go public this year - Nielson, Demand Media Inc. (NYSE: DMD), InterXion Holding N.V. (NYSE: INXN), BCD Semiconductor Manufacturing Limited (Nasdaq: BCDS), and NeoPhotonics Corporation (NYSE: NPTN) - are trading above their IPO prices.

"Investors want to play the big themes in technology, such as cloud computing data storage and security, and it is hard to get that exposure by owning big technology companies," Eric Mandl, global head of software and large-cap tech banking at UBS AG (NYSE: UBS) told the Financial Times.

Right now, no technology theme is hotter than social networking, and three big players are about to go public.

In the Pipeline
Though none of them have set a date, Groupon, LinkedIn Corp., and Skype Ltd. are among the tech heavyweights expected to list this year.

With so much buzz surrounding Facebook Inc. and Twitter Inc. - neither of which have announced any intention to go public - these companies are often overlooked. But these are three of the world's most unique and successful social networking companies.

And more importantly, they have demonstrated profitability, scores of potential and valuations that aren't quite as overblown as Facebook and Twitter.

Groupon, the deal-of-the-day site that spurned a $6 billion takeover offer from Google Inc. (Nasdaq: GOOG), may have the biggest offering this year. The company expects its debut to raise $15 billion or more. NeXtup figured a potential $40-per-share price for Groupon, based on an initial public offering of 165 million shares.

The company just raised a record $950 million from big investors, including Fidelity Investments, T. Rowe Price Group Inc. (Nasdaq: TROW) and Morgan Stanley (NYSE: MS).

The Wall Street Journal recently cited a memo from Groupon Chief Executive Officer Andrew Mason as saying his company's revenue rose to $760 million in 2010 - a 20-fold increase from $33 million in 2009.
"The earth is super old - thousands of years, some say - and no one has ever done anything like this," Mason said in the memo to his employees. "You should all exude a borderline-annoying sense of pride in what you've achieved. You should be wearing a big, toothy grin - the kind that makes people want to punch you in the face. No one deserves to be as happy as you are right now."

Groupon offers its members discounts of up to 70% on local services, provided enough members sign up for any single offer. It then takes a commission of 30% to 50% from the merchants who provide the services.
The company grew to 50 million from 3 million users across 500 cities in 40 countries over the course of 2010.

LinkedIn, the social networking site for professionals, has more than 90 million users in 200 countries. The estimated value of the company is about $2 billion, following a $20 million investment from Tiger Global Management last July. It is seeking to raise another $175 million in its IPO. 

LinkedIn's sales more than tripled from 2007 to 2009, led by increased revenue from advertising, premium accounts, and job listings. The company posted a profit of $1.85 million in the nine months through September 2010 and revenue doubled to $161.4 million. That compared with a net loss of $3.4 million and revenue of $80.8 million a year earlier. 

Skype is set to have a comparable listing. The Internet calling service aims to raise $100 million in an IPO this fall. The company claims to have 27 million users online during its peak hours, up from 15 million a year ago.
The company's goal is to collect 1 billion users; analysts say that's achievable if more businesses adopt the technology. 

Skype over the past several years has already built a loyal user base.

"As a result, businesses will give Skype a chance," Peter Fader, a marketing professor at the Wharton School of Business told Telemanagement. "The Skype name is already a verb [as in 'skyping' with someone] and can certainly go down the business-to-business path. That's where the money is."

Indeed, unlike the tech boom of the late 90s, Groupon, LinkedIn, and Skype have solid fundamentals and huge potential. And they're likely to keep the U.S. IPO market churning through 2011.

"I think the IPO market is as healthy now as I have seen it in 15 years, and that is because it is still very selective," Lise Buyer, principal of Class V Group in Silicon Valley, which guides private companies through the IPO process, told MarketWatch. "Companies have truly compelling stories, acceptable fundamentals and a truly strong management team."

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Cheap Money, Speculation andGold Hoarding

Vigilant? Jean-Claude Trichet ain't no Charles Bronson...

CLICK HERE and you'll find a picture of $1 billion – in cash – courtesy of Austrian artist and prankster Michael Marcovici.

Click here, on the other hand, and you'll find proof of $1 billion-worth of physical gold bullion, every last gram of it privately-owned by customers of Bullion Vault.

It's fatuous to ask which is more valuable. To most people, the pile of Dollars wins hands down, because it has far more immediate utility; you can't go shopping with gold. But to the handful of people (well...21,000 or so) holding that $1 billion in gold at BullionVault, there's a clear preference for rare, indestructible metal. Because as an asset to hoard, rather than spend, gold is unsurpassed.

"Keeping your gold in the dirt doesn't help if you have to get up and flee," says one chatroom comment. "It does if it's buried where you're fleeing to," says a reply. Which explains, perhaps, why BullionVault's predominately UK and US-based users have opted to keep 75% of their gold property in Zurich, Switzerland, rather than in our alternative locations of London or New York. But for as long as the rule of law still reigns in your home jurisdiction, might the utility of gold as the hoarded asset par excellence be under attack? The finance industry would like you to think so.

"Copper is also increasingly being seen as scarce and is in many ways adopting some store of value attributes normally associated with precious metals," said J.P.Morgan's metals strategist Michael Jansen to a conference in Shanghai last month, talking up the attractions of JPM's copper-backed trust fund ETF. More broadly, "Global liquidity conditions influence the dynamics of [both] crude oil and fine wine prices," find Serhan Cevik and Tahsin Saadi Sedik of the IMF in a recent working paper.

"Even though this impact does not necessarily imply financial speculation in price formation, global excess liquidity – associated with low real interest rates – is likely to have magnified the price pressures stemming from supply/demand imbalances."

Car-drivers and wine-snobs alike are thus exposed to "excess liquidity", aka the deluge of cheap money still pouring out of central banks the world over. For all his tough "vigilance" talk on Thursday, Jean-Claude Trichet of the ECB is no Charles Bronson; allowing US bond yields to reach their 200-year average of 5.8% would risk destroying the republic. And with the money-flood set to roll on, the bid for rare, tightly supplied physical assets looks set to keep rising.

"Welcome to the world of a gold analyst," as John Reade – then metals strategist at UBS, speaking to the LBMA Conference – said to industrial-commodity analysts back in 2005. "Classical supply and demand analysis will matter less in the future. Investment flows and speculative positioning may become the dominant drivers of your markets."
Speculation, hedging, hoarding or whatever else you call it has, in short, been a growing trend since the start of the century. Once upon a time, such flows into natural resources, whether financed or frightened by loose money, would have wound up in gold and silver bullion. Whereas today, and throughout the last half-decade, cash-rich investors have also sought stronger and faster returns in other, more volatile, less traditional investment markets.

This chart from Morgan Stanley, republished with permission by our friends at the Cobden Centre, shows a connection if not causal link between world commodity prices and US monetary policy. However the Fed's quantitative easing got into the market, the investment bank's Caitlin Long believes it clearly boosted the CRB index of raw material prices substantially. On her chart, QE1 marks 25 Nov. 2008, the day that the Fed began buying mortgage-backed securities. Whereas QE2 marks not the start of asset purchases but the clear intent, stated by Fed chairman Bernanke – at the Jackson Hole central-bankers' summit – on 27 Aug. 2010.
Morgan Stanley's chart misses a trick though. Because just as commodity prices seem linked to the Fed's largesse during and after the banking crisis, so they look tied to US interest-rate decisions on the pre-crisis chunk of the chart, too.

In June 2003, the Fed cut rates to a (then) record low of 1.00%. Commodity prices bottomed and rose by a fifth before the Fed then began raising its key lending rate 12 months later, in June 2004. The Fed then raised rates 17 times over the next two years, nudging the cost of Dollars higher each time until it reached 5.25%. At which point, in June 2006, both the broad commodity market and the foodstuff sub-index stopped moving sideways and broke upwards.

But are central banks or speculators to blame? Central banks merely pump out cheap money; it's the evil hoarders of hedge funds, gold buyers, oil traders and ETF designers who choose to direct that money into hard assets...rather than, say, US housing or mortgage-backed bonds. Right?

"Prices have risen sharply for many commodities that have neither developed futures markets (e.g. durham wheat, steel, iron ore, coal, etc.) nor institutional fund investments (Minneapolis wheat and Chicago rice)," found a study for US watchdog the CFTC from its very chief own economist in May 2008. "Markets where [big fund] index trading is greatest as a percentage of total open interest (live cattle and hog futures) have actually suffered from falling prices during the past year.

"The level of speculation in the agriculture commodity and the crude oil markets has remained relatively constant in percentage terms as prices have risen...[while in agriculture and crude oil markets] speculators such as managed money traders are both buyers and sellers."

Quite how the Fed's cheap money has got (and will continue to get) into the costs of foodstuffs remains unclear, in short. But that it has pumped up the cost of getting by worldwide is clear, we fear. Call it speculation, hedging, hoarding or profiteering if you like; it won't matter. The rise of commodity and gold prices off the back of ultra-cheap central bank money looks set to continue regardless.

Pivotal Events for Gold, Commodities and Financial Markets

"Any investors willing to bet that the commodities boom is running out of steam may need both courage and patience. Major mining companies have wagered more than US$110B on the opposite view." -Financial Post,

"Consumer Confidence in U.S. Increases to Three-Month High" -Bloomberg,

"U.S. treasury secretary: poor financial regulation in Britain fueled financial crisis." -Telegraph

Regulators seem innocent of knowledge about financial regulations and financial crises. It is runaway speculation that causes panics, and when a mania erupts there is no way of curbing it. Even when the senior currency was convertible into gold there were huge bubbles and consequent collapses. As a prominent banker in the mid-1800s observed, "No warning can save a people determined to suddenly grow rich."

The problem is that governments enjoy tax revenues from the boom and do everything they can to enhance a financial mania. This became more insistent as interventionist economists gained influence. In the mid 1920s policymakers were attempting to keep commodity prices from falling by injecting funds into the markets. With ample supplies of commodities the excess liquidity helped drive financial assets to the moon.

Then, in a fit of recriminatory regulation, the SEC and Glass-Steagall Acts were passed. The first was intended to prevent another 1929 Bubble and one of the populist-backers boasted that it "would put a cop on the corner of Wall and Broad Streets."

The SEC did not prevent another speculative bubble and when whistle-blowers went to the SEC with blatant accusations of fraud the regulatory agency did not act. Failure on both mandates!

Glass-Steagall separated commercial banking from Wall Street banking and when it was time for another great financial mania it was taken off the books. Government could not resist the speculative party!

Has this happened before? Oh yeah.

The South Sea Company was set up as a quasi-government company that had a scheme to fund the state. And when the party launched, the scheme brought in enough money to retire large amounts of outstanding and deeply discounted debt. Then as the bubble was culminating, the government saw too many other companies being floated and moved to constrain the roaring "new issues" market. (For those of us who have been in the markets since 1963, the term "IPO" has never had the same cachet as "new issue.")

The Anti-Bubble Act of 1720 was intended to keep the mania going and a few decades later some considered that it was intended to prevent another bubble. The act did not pass the House of Lords, but in 1772 it was taken off the books. Just in time for the culmination of the next great financial bubble!

History suggests that no regulation will prevent a financial mania; governments will exaggerate the mania and all will condemn a bubble during the distress of collapse. Treasury Secretary Geithner is little different than his counterparts in history. Perhaps his pride and hubris is outstanding, but this only a matter of degree, not distinction.

What do you call today's quasi-government agencies that are set up to fund the state?

More on the Speculative Eruption

Last week's Pivot summarized the development of an outstanding buying frenzy. This was identified in November when our Momentum Peak Forecaster was going straight up. This stopped going up at the end of December and indicated that the action could climax in one to three months. By way of emphasis, this means that the hot stuff goes straight up until it goes straight down—typically—within three months.

At the latest this counts out to around March. For those who deal in quarterly reports or annual averages, this may seem a precise forecast. It should be considered as a six-week window when the hottest items could reverse. Last week's piece noted that technical work, independent of our Forecaster, was registering Upside Exhaustions and these could reverse in March.

Last week's caution was that participants were "dancing on the edge of a cliff," although, "this is ending action and the hot participants may not all peak at the same time." Tuesday's Memo noted the reversal in cotton and faltering prices for other agricultural items as crude oil and precious metals continued strong.

The overall speculative thrust is changing as some items fail and perhaps it could become a "commodity-pickers" market—for a few weeks. To be serious, typically as a great rush culminates the action is focused on fewer and fewer items. On the stock exchange this is the equivalent to declining advance/decline ratios.

At the end of 1979, the fury was focused upon gold and silver. At the end, silver began to underperform gold some two weeks before the top on January 21, 1980.

Other points we have mentioned are that on the Forecaster signals with soaring prices in 1973-1974 and in 1980, there were reports about "food shortages" and extreme trouble in the Middle East. The "Yom Kippur" attack on Israel occurred in October 1973 and our Forecaster registered on November 23, which was three months before the climax. The Iranian hostage incident began on November 4, 1979 and the Forecaster signal occurred on November 9, which was 2.5 months before the glorious blowout on January 21, 1980.

This week, the Conference Board reported that Consumer Confidence jumped from 64.8 in January to 70.4 on the February number. Clearly, consumer confidence is still soaring with our Forecaster. Perhaps it will "blow out" with the culmination of the buying frenzy.

The hit to base metals and agricultural commodities this week is an alert, in real time, to the inevitable culmination of this huge speculation.

Stock Markets

Stock markets have been important participants in the All-One-Market phenomenon and have faltered with the setback in most everything other than precious metals and crude oil.

The rally up to early February has been within our Forecaster model, which suggests a cyclical peak for the stock market is developing. On the rush, momentum and sentiment figures reached outstanding numbers that are typically found at a stock market peak. The Forecaster has been anticipating a cyclical peak and technical measures have been confirming this melancholy prospect.

The key question is will the economy turn down with the stock market or will the decline in the S&P lead the downturn in the business cycle?

We know that post-bubble recessions start virtually with the first post-bubble bear market. In ordinary business cycles the stock market leads—by up to 12 months. It is possible to put this in mathematical terms that Keynesian economists usually find so instructive:
Market Peak - Economic Peak = 12 Months


MP - EP = 4 quarters

To be serious, the business cycle could roll over on this developing crisis with very little lag between the start of the bear market and the start of the recession. Let's check back on the last first business cycle out of a post-bubble crash.

According to the NBER, that recession started in May 1937 and the big stock rebound peaked on March 13. Only a one-month lead on that one. Of interest, is that Ron Griess ( points out that the great rebound out of the 1929 Crash ran 104 weeks to the key high on March 13, 1937. The gain on the S&P was 134%.

On our great rebound, the 104-week count works out to a potential high on February 25. For the S&P the gain has been 102% to 1343 on February 18.

Coming out of the 2009 Crash we used 1937 as a model and did not stay with it. We should have as the correlation has been fascinating.

Ron points out another example of a 104-week great rebound out of a financial panic. The rebound out of the 1907 Crash ran until November 20, 1911. Transposed to now, the equivalent high counts out to March 11, 2011—which is more than just interesting. Both post-crash rebounds were followed by a 15% selloff. This works out to around 1135, which was the break-out following the early summer slump.

The financial establishment may wonder how these pages can have a forecast for straight-up speculation and a strong economy and at the same time look for a sharp decline in both.

Well, it is the way financial history works during Anthropogenic Financial Climate Change, or AFGC. This observation refers to all market participants, not just to policymakers who have been naively blamed for not keeping the 1929 mania going. More recently, the Obama administration has naively blamed the Bush administration for not being able to keep the 2007 financial mania going.

The point is that there is no power on earth that can prevent a financial mania and there is no power that can keep one going beyond its shelf-life.

We think the same applies to great rebounds and this one is within six weeks from failing. Confirmation is provided by our Forecaster, which when the big action includes commodities the recession has started close to the heads-up alert. On the signal in November 1973 the recession started that November. On the November 1979 signal the recession started in January 1980.

Wonderful two weeks ago, the outlook is now bleak.


It seems to be time for an old saying: "There is only one cure for high prices and that is higher prices." The conclusion of soaring prices is accomplished as high prices prompt significant increases in production and significant declines in the rate of personal consumption.

We know that the Fed has pledged to boost prices "forever"—or more realistic—while it remains in business. But it has been attempting to inflate currency and credit since it opened the doors in 1914 and booms and busts have prevailed.

Commodities are close to starting another cyclical bear market.

Interest Rates

Last week, we noted that the long bond could rally as most commodities weakened, but that rallies would be limited by the possibility of another general wave of bond revulsion.

The risk to corporate bonds is increasing by the minute. Prices and spreads are now vulnerable as this business and commodity cycle rolls over.

S&P earnings go up and down with commodities and the down indicates poor pricing power for business and that means deteriorating ability to service corporate debt.


Since early November, the DX has been building an important base. The recent decline to the 77 level on February 2 seems to be testing the 75.6 level of early November.

The Dollar Index could churn around for a few weeks when another upturn seems likely. Rising through 79 would confirm the uptrend.

Precious Metals Sector

Gold and silver could still rally with crude oil. Precious metals could rally even if crude oil prices leveled off.

Precious metal stocks are a good way to play the trend, but often shares lead the culmination of a bull move for metals. Investors should consider that if crude goes hysterical oil stocks may not perform in the final stage. If crude goes hysterical so will silver and gold go along with the ride, but precious metal stocks may not perform in the final stage.

Our "dancing on a cliff" theme suddenly applied to agricultural and base metal prices. It is not rocket surgery to wonder when it may hit crude oil and precious metal stocks.

Representing the oil patch the weekly RSI on the XOI has reached 82—the highest reading since the 80 attained in 2007.

Gold stock (HUI) momentum is nowhere near as high, nor is momentum as high for Silver Wheaton Corp. (NYSE:SLW; TSX:SLW), which we use as a proxy for the silver camp.

Now for the play in gold and silver: The silver/gold ratio which is sympathetic to the bull move for both has reached a daily RSI momentum of 79.8 which in ordinary conditions would prompt a correction. On stronger moves this measure can get to the high 80s and tradable corrections have followed. That was basis for our Correction Zone that began in November.

Precious metal stocks have rallied in the initial stage of our Construction Zone and investors could take a little money off the table.

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Fed Funds Target versus 2-year T-Note Yield
Milton Friedman once famously quipped that, “I have, for many years, been in favor of replacing the Fed with a computer.”  Speaking in a 1999 interview, Friedman went on to add, “The Fed has had very few periods of relatively good performance.  For most of its history, it’s been a loose cannon on the deck, and not a source of stability.”

12 years after that interview, the problems of the Fed are still the same.  The FOMC sets interest rates at its whim instead of where the market shows that they need to be set, and this causes excitation and repression of the business cycle at the wrong times.  This results in economic dislocations and misallocation of assets which do not help the economy.

In this week’s chart, I compare the 2-year Treasury Note yield to the Fed Funds target rate.  One could use other short term rates for this comparison, but I have found that the 2-year yield seems to do the best job of indicating what the Fed should do.  And the 2-year yield does a great job of indicating ahead of time what the Fed is going to do.  If the Fed would just set the Fed Funds target close to the 2-year yield, we would see a lot more stability in the financial markets.

For two periods back in the 1990s, the FOMC kept the Fed Funds target well below the 2-year note yield.  The result was a great period for stock market investors, as all of the extra liquidity helped to fuel the tech boom.  In between, the Fed was asleep at the switch for a while in 1998, missing the dip in 2-year yields that was underway.  That led to an illiquidity crisis which brought us a Russian debt default and problems for the world’s stock markets in late 1998.

When the tech bubble broke in 2000, the Fed was too slow in reacting, keeping its rate well above the dropping 2-year note yield most of the way down.  And in 2003-05, when the outgoing chairman Alan Greenspan was said to be worried about his legacy, he kept rates well below the 2-year note yield, thereby helping fuel the real estate bubble.

In 2006, the 2-year yield signaled that there was trouble brewing well before the peak of the stock market in 2007.  It moved below the Fed Funds target, and the Fed under Bernanke failed to take notice of that warning.  By the time that the FOMC finally lowered the Fed Funds target from 5.25% to 4.75% in September 2007, the 2-year note was already down to below 4%, showing that the Fed was way behind the power curve.

Now, the 2-year T-Note yield is hovering around 0.75%, the Fed insists on keeping the Fed Funds target at 0% to 0.25% “for the foreseeable future”.  One effect has been to push up gold prices, which in turn has pushed up general commodities prices after about a 4-month lag.

Another effect has been to help stimulate a doubling of the stock market indices from their March 2009 low.  This next chart takes that spread between the 2-year yield and the Fed Funds target and puts it into an easier to read indicator.
Spread between 2-year T-Note yield and Fed Funds target
A positive reading for this spread means that the 2-year yield is above the Fed Funds target, or that the Fed is keeping rates lower than it should.  This condition tends to be very stimulative to the stock market, as evidenced by the movements of the NYSE Advance-Decline Line.  When the Fed sets short term rates too high, meaning higher than the 2-year note yield, this indicator goes negative and it is a restrictive condition for market liquidity.  It can take a few months before that stimulus or restriction is manifested in stock prices, but the pressure is there.

Continuing to maintain this big imbalance between what the FOMC decrees and what the market knows is having the same overstimulation effects that the Greenspan Fed did in the 1990s and in 2003-04.  Perhaps now is finally the time for Milton Friedman’s metaphorical computer to take over monetary policy, and start setting short term rates where the bond market suggests it needs to.
See the original article >>


By Carl Swenlin, Decision Point

The U.S. Dollar Index is in immediate danger again, so lets take a close look at charts from all three time frames, beginning with the daily bar chart. The most important feature on the chart is the bold rising trend line near the bottom. That is a long-term rising trend line that we will see on the longer-term charts. Note that in November the Index bounced off that line only to retest and penetrate it just a month later. The November breakdown was a bear trap, resulting in a strong rally, which ultimately failed.

The decline from the January top has resulted in a test and retest nearly identical to the previous one, and we are left to wonder if this latest breakdown will be another bear trap.
I am assuming that this is more serious than the first. As of 1/20/2011 the US Dollar Index is on a Trend Model SELL signal. And the PMO configuration is less promising than the oversold PMO bottom in October followed by a PMO positive divergence in November.

The weekly chart below shows the entire rising trend line and demonstrates that it is important support. The weekly PMO is negative and falling.
Finally, the broader context of the monthly chart shows that the rising trend line forms the bottom of a reverse pennant formation. A decisive breakdown from that pennant would have serious implications regarding the potential downside.
Bottom Line: The Dollar Index has broken down through important long-term rising trend line support. A similar breakdown in November proved to be a of no consequence, but technical indicators are less favorable this time around, so we should expect the decline to continue longer-term, although, a short-term snapback toward the line

Inimical Inflation, Why we are Bearish

Why are we bearish?  
We like to go bearish when the market is testing the top of its channel as there is generally a higher percentage probability that we drop than we pop back over. Secondly, as I mentioned yesterday, it's not just the Federal Reserve that is in denial but the commodity speculators, the equity investors and even the bond investors as the ALL believe they are going to get paid while MATH says that's not even remotely possible.

What is math?  I know - thanks to cutbacks in our education budgets over the past 30 years, that is a question that vexes many Americans and it also creates a perfect environment for the people who CAN do math, those in the Financial sector perhaps, to design endless levels of complex instruments that are all designed to con people who have lower math skills than they do.  

Complexity is good.  Just like the legal scam, complexity forces you to seek assistance with your finances - the more money you have, the more complex your finances become and the more you need help and this allows swarms of leeches or, to be kind, remoras to attach themselves to you and feed endlessly off your earnings and savings (they don't care which as they will happily destroy the host and simply move on to the next big fish).

Personally, I prefer simplicity. My Grandpa Max was a Depression kid who built a business from scratch and invested his money well and had a nice life for himself.  He taught me how to invest when I was a little kid and, as you can imagine, he did not ask a "financial adviser" what to do with his money as he had seen where that had gotten his parents generation when he was young (he was 24 when the Global markets collapsed).  

Our investing days would begin by reading the papers (not just one - they all say different things, don't they) together and pointing out things that looked interesting.  Not just the Business Section but whatever seemed like an important World event or a trend worth watching that would help us get ahead of the curve with our stock selections.  I will share with you what I consider the most important and simplest thing going on in the world today - something I have been pointing out for quite some time and the number one reason we remain very cautious on the markets - Inflation:

This is not complicated.  This isn't the hypothetical elephant in the room and it's not the 800-pound gorilla we avoid talking about. This is a FACT!   These are 12-month price hikes and this is also a 12-month decline in the dollar of 6.5-17.13% against other currencies and that is NOTHING compared to how far our buying power has fallen when measured in things we consume every day like cows (20.36%), oil (21.24%), hogs (22.8%), cocoa (27.8%), gasoline (33.52%), milk (35.69%), wheat (36.96%), sugar (38.98%), oats (41.6%), corn (71.44%), coffee (95.97%) and cotton (168.01%). THAT IS INFLATION FOLKS - no matter what lies your Government chooses to tell you.

As David Fry points out in his chart - That's OK because we are a nation of fat, spoiled bastards anyway and we can all afford to cut back a little. That's why a lot of inflation has been passed through to you in the form of smaller package portions at the store and smaller portions of lower-quality food at restaurants and maybe at your kitchen table. When you see 12-month price trends like this - it is kind of hard to imagine it's all a temporary spike and will all be "back to normal" by summer, right?

So let's accept, for a moment, that Ben Bernanke is wrong and inflation is a real thing. Just yesterday, ECB President, Jean Claude Trichet said the Bank "will exercise "strong vigilance" over rising inflation, signaling that a rate rise was only a month away."  This sent our Dollar even lower and gave our markets, which are priced in dollars, a huge boost as it takes even more of our worthless currency to buy the same stocks we bought yesterday.

In fact, if we were to put the S&P 500 on that inflation chart above, we'd see that it has inflated 15.65% since last March, performing just about as well as platinum but quite a bit behind gold and barely half as well as copper.  Does this mean we should abandon equities and all invest in commodities?  Sounds good (and this is how we force a massive transfer of wealth from the non-investor to investor classes) but - No....

Here's where the ghost of Grandpa Max comes back to haunt us.  Max Davis owned a dress shop in London with a high-end clientele.  When I would visit him in the summers he would take me on buying trips around Europe where he would negotiate with designers and sellers of cloth and buttons and bows and he would, God bless him, explain to me exactly what he was trying to accomplish and would take me through the whole supply chain, right up to the point where my Grandma Lucy would take the people's money for the finished dress back in England and my Grandpa and I would head to the bank (banks, actually, as only a fool keeps all his money in one!) to make the deposits.

Exchange rates were very important in the business, of course, and our trips would often be planned around currency fluctuations. When the Pound was strong against the Lira - we were off to Italy and there would be Italian dresses featured in the Fall and when the Pound was up against the Franc in July, French fashions would be all the rage in September.  That is how the World works and even the high-end clientele that would pull up in limos to visit Lucia's on the High Street in London would haggle over prices and it was always hoped the Pound would be weak when we sold and strong when we bought.

Today, the Dollar has been weak for almost a year.  The buying power of the Dollars you own, the ones you have saved you whole life, has dropped from 88 to 77 (12.5%) since last June and yesterday was one of the worst day's in months so it's hard to say things are improving.  If Americans had roughly $100Tn worth of assets at the beginning of last summer - they have $87.5Bn today - UNLESS they invested in the things that went up like oil, gold or the S&P, which also beat the devaluation of the dollar by an entire 3.15%.

That all sounds like a great idea, right?  Of course we invest in the things that are going up.  No says Grandpa Max - who was born in 1903 and has seen his share of speculative bubbles.  While speculators can drive prices up to extreme levels for what may seem to be extended periods of time - in the end, these commodities have to be made into goods that have to be sold.  

What happened in the housing crisis?  Land went up, lumber went up, builder margins went up, prices went up and, when people could not afford the homes anymore, rather than let that put a natural break on the price of homes - the mortgages were repackaged and the rates were lowered and the lending requirements were waived along with the pom-poms of the "analysts" on the Financial News Networks as they encouraged everybody with a job and a pulse to buy a home.  Why? Because it was the final sale of all those jacked up commodity prices and because the Banksters collected some very fat fees as did the complicity local Realtors and mortgage brokers, who enabled the lunacy by shoving suckers consumers into homes they clearly couldn't afford based on ridiculous extrapolations that the gains in the value of the home would outweigh potential rises in taxes and utilities and, of course, everyone expected to get raises over time as well.

That didn't happen did it?  But think how many years it took us to realize that and think of how quickly it all fell apart once we did.  Now we are in a very similar situation.  Cotton is perhaps 20% of the cost of your clothing, so we won't worry about that one as up 168% means a $10 T-shirt now costs $13.60 - so "just"  36% clothing inflation assuming all the other costs stay the same.  The $2 cup of coffee you get in the diner actually uses about .20 worth of coffee so now it's .40 and your cup "only" goes up 20% on the 95% increase in the commodity.  This is how these insane prices are able to be passed through but - small increments though they may be - they do add up over the course of a consumer's average day - especially on those days when a 15-gallon tank of gas costs an extra $15 to fill.

As noted in Wednesday's Beige Book (my commentary for Members available on Seeking Alpha), to a large extent "non-wage input costs" (Fed-speak for the inflation noted above) have not yet been passed on to the consumers.  From that we can assume that the Q1 margins are taking a beating but the Fed is enthusiastic that manufacturers and retailers will be able to shove high prices down the throats of US consumers in Q2 and that "optimism" gave the commodity bulls a green light to jack things up to new highs - boosting the market like a rocket since the 2pm release: 

I added the titles of my morning posts to give you an idea of our daily positioning on this very stormy week.  On the whole, "everything is proceeding as I have freseen" - which is always fun - but that doesn't mean I have to be happy about it because it is an unfolding disaster!

EVERYTHING can't go up unless wages go up.  Hiring people (and we added a healthy 191,000 jobs this month - only 8.5M to go to get back to the 2007 highs) does not solve the problem because each person's wages still have to be divided up among the various things they need to survive.  If anything, it exacerbates the problem for the already strapped consumers as one may choose not to buy a $13.60 T-Shirt in order to pay $60 for a tank of gas but another (city dweller) may not need the gas and will pay the $13.60 for the T-shirt.  That means each consumer is inadvertently keeping the price pressure high on the other through the aggregate (demand) choices they make.

What this does, ultimately, is lead to a lower standard of living for the workers - even as there are more of them in total - as each additional worker hired is unable to put his money to work on the local level and continues to funnel money up to the speculator class, who make up in volume what they can't accomplish anymore in price action.  This is what happened at the peak of the housing bubble as homes were selling as fast as they could be built (even faster with pre-sales) and that caused a massive mis-allocation of resources. as predicted by Hayek, who tells us that the easy-money Fed policies lead us to mistake inflation for demand.  By pushing that money UP from the workers to the top, all we are doing is funneling more money from the lower to the upper classes which, ultimately, leads to a much greater crash in the next wave.  

Of course it was Keynes himself who pointed out that "the markets can remain irrational A LOT longer than you and I can remain solvent" and he should know, having gone bust himself as a speculator.  I don't mind inflation - inflation was MY IDEA, way back in December of 2006, I wrote "Burning Dollars to Fight Gravity" suggesting the only way out of our debt crisis was going to be massive inflation and I felt that Hank Paulson's appointment to Treasury Secretary was a clear signal that the Bush Administration planned on putting my plan into action.  In early 2008, I once again extolled the benefits of inflation with my "Inflation Nation" article.
Unfortunately, the path we have taken to inflation is not the "good kind," where Keynesian stimulus pushes wages higher, creating jobs and boosting prices from the bottom up, leading to better Corporate profits while devaluing the debt.  As I had noted in my "2010 Outlook - A Tale of Two Economies," the Government was creating the BAD kind of inflation - top down inflation in which stimulus is handed to the speculator class as that $100Tn of National Wealth was being squeezed away from the bottom 90% (who owned just 65% of it), who could not participate in the equity and commodity rally and thus lost that 15% of their 65% asset share to inflation (9.75%) while the top 10% kept pace or got ahead and raised their portion of the Nation's wealth from 35% to 44.75% - a transfer of another $10Tn from the bottom 90% to the top 10% since the crash.

All sounds great so far, if you are in the top 10% (really the top 1% because those guys in the 10-1% range are just the suckers we rope into the markets because they THINK they are one of us, right?). We degraded the quality of life of 270M people by 15% ($65Tn to $55Tn) and boosted our own assets by 28% ($35Tn to $65Tn) - what can be better than that.  As we point out to the plebes, over and over again until their brains are thoroughly washed - even down 15%, the workers of our country still enjoy a better standard of living than the workers we outsource our labor to. 

In fact, if they would just get the Government off our backs and stop the unions from demanding fair treatment for American workers and stop confiscating our record profits through record low taxation - I'm sure we would throw them a bone and open up an unsafe sweatshop with poor working conditions, low wages and no benefits at wages that a Bangladeshi goat herder would consider very good!

Really, when they put in 40 years for us, toiling away in our factories since we got rid of Kennedy - they didn't really believe we would honor our commitment to fund their retirement did they?  Why should 2010 me pay for what 1970 me promised?  That is just downright unAmerican!  No, it is every man for himself because that is the American way and, if they don't believe it, then they are not watching enough of the television networks we own...

Unfortunately, there is one small problem with this whole scam we are running on the bottom 90%. Most of our profits, so far, are on paper.  The stock market is up 100% but have you seen what happens on days when anyone tries to sell volume?  Scary stuff. Not as scary as oil in the Middle of February, which fell from $93 to $86 (7.5%) in 10 sessions - wiping out $7Bn on the NYMEX in just two weeks!

We have loads of money and we can keep trading gold, silver, copper, cotton, coffee, NetFlix, Chipolte, etc. back and forth with each other at any price we choose but can we really sell 25% of Netflix for $2.7Bn or is the price pretty much a joke with a p/e ratio of 68 to 1?  How about gold?  What if someone actually tries to find buyers for even 10% of the World's $6Tn in holdings (4Bn ounces).  Gold has jumped $3Tn since it bottomed out at $681 an ounce in October of 2009 and even that was up $2Tn from where it was just a few years earlier.

Actual consumers only bought about $100Bn of gold in the past two years and the rest was just speculators hoarding it and us top 1%'ers passing bits of paper back and forth with each other, just crossing out the last price and putting on a higher price each time.  This game of "hot potato" is how us commodity speculators get rich but let's just make sure we have chairs when the music stops (and it always does).

How long can the markets remain irrational in this cycle?  We're already seeing some major bears go "insolvent" (poor Whitney Tilson and his NFLX shorts for one) and what we're not seeing in this "exciting" jobs report is rising wages and that means you damn well better have your hands on a chair - even as we dance around to the music!

The Fed's Promise of Inflation Means More Unemployment...

The Federal Reserve tells us we need inflation to overcome the overhang created by debt and its inflationary aspects. The inflation does not create jobs – it just distorts prices upward. We are told by the head of the Fed, Mr. Bernanke, that he can end inflation when he thinks it is necessary. That is not true, because if inflation ends deflation takes command and the economy collapses. There is no finely honed instrument for turning these two opposite effects on and off; thus, inflationary instruments have to be blunt and overused. That means more often than not that inflation is over implemented. This is the opposite of the Fed’s mandate of promoting price stability, full employment and in fact is used to prop up the banking system. 

Over the past three plus years the Fed has been attempting to assist the banks in getting rid of bad assets and these efforts may last for another fifty years. These banks hold more bad assets then they have ever held before. These problem assets are the result of excessive lending and speculation between 2003 and 2008, and low interest rates that lasted far too long. The quality and existence were recognized in the credit crisis that began in 2007. Most of these impaired assets are still on bank books, but the Bank of International Settlements, the FASB, the accounting agency and the government say it’s perfectly fine to keep two sets of books. If you did that in your business you’d end up in jail, but it is perfectly fine for the financial sector and transnational banks to do so. That is what QE1 was all about – bailing out the financial sector and other elitist corporations. These bad assets, that haven’t been sold to the Fed, are frozen on the balance sheets of these institutions, perhaps in perpetuity.

Fed created inflation raises the real value of assets artificially, so that these bad assets appear to be appreciating when in fact they are not. Toxic securities that are being held by banks, brokerage houses and others, that were worth $0.30 on the dollar, are now worth even less. All the inflation in the world won’t change the value of these assets. It may help interim earnings, but it won’t help in the long run. These policies won’t work long term. The interest on debt now and in the immediate future will be greater than revenues generated. At the same time $900 billion is a nonsense figure. When all is said and done the figure will be almost double that at $1.7 billion. QE1 will provide for 14% real inflation in 2011 and QE2 will provide 25% to 30% inflation in 2012. QE3 will give us hyperinflation. Monetization will be king.

The die has been cast and it is disturbing to see Mr. Bernanke lying to Congress. What will he tell them when he has to admit he created $1.7 trillion, which has been monetized into inflation and that he still holds official interest rates at just above zero, but real rates on the 10-year T-note went to 4-1/4 then 5-1/4? The American public is going to be stunned.

Again, the Fed and the US banking system are in a box and they cannot get out. If they were to officially raise interest rates it would lead to financial collapse. If they do not want to raise rates they could curtail QE2 and as a result the economy would collapse, just like Japan did so in 1992 and they have been in depression ever since. Either choice would send unemployment to a U6 level of 37.6% matching that of 1933. Worse yet, if the Fed’s commitments were marked to market you would find the Fed to be insolvent, a condition that has existed for some time. It is not surprising that the Fed and its banker owners don’t want the Fed audited and investigated. Any sale of bonds by the Fed would drive bonds lower and yields higher putting downward pressure on the economy. Much of what the Fed is holding is MBS and CDO’s from QE1, when they bailed out lenders and select transnational conglomerates and insurance companies. 

Such actions would render the Fed officially insolvent, which in fact they are already. Just to show you how terse the situation is their capital is about $60 billion and they have about $3 trillion on the balance sheet. Now you can understand why real interest rates have to be held low. The stock and bond markets have to be held up artificially so that the Fed’s balance sheet won’t collapse. What many do not understand is that almost all of what is on the Fed balance sheet has been created out of thin air and monetized. Part of that hot money and credit has offset the deflationary undertow; part is exported in dollar foreign balances and the rest of the inflation pass into the economy. This is the beginning of out of control inflation and the Fed is well aware of it. They quite frankly are not concerned that people lose their life savings. They only care about saving the financial sector, which owns the Fed, the government and transnational conglomerates. 

Inflation will not stimulate the economy. It will hinder it and not create jobs, which is already evident. It is all lies, smoke and mirrors and psywar. 

QE1 and QE2 have spread across the world exporting part of US inflation. This inflation gets stronger daily enveloping the financial world. Food prices have gone ballistic and in countries where food makes up 75% of income the result has been the overthrow of one government after another. Even the price of your clothes is going to triple. The cause of these problems lies with central banks and banks that control them in Europe and the US. It is just one giant fraud like too big to fail. There will be no recovery only continual efforts to sustain the criminal enterprise. 

As inflation climbs, unemployment will grow and wages will remain stagnant so that the anointed can continue to accumulate wealth. The beneficiaries will as usual be the elitist connected corporations, all those crooks who do not go to jail. Soon profits for smaller and medium sized companies will diminish as they are forced to absorb part of price inflation. Needless to say, there will be no hiring.

People worldwide see the dilemma of the US, UK and Europe and that in part is why you are seeing turmoil that has had its beginnings in North Africa and the Middle East, not that the US, UK and Europe were involved in the uprisings, but the catalyst had been in place as well. The reason for change is higher food prices. The world public is tired of tyrants and governments that refuse to answer the needs of the people. Again, part of the reason for change is the discovery that these dictators and those who control governments have to be dispensed with. You might say, as Saudi Arabia goes, so goes the Middle East and North Africa. If the so-called monarchy falls in Saudi Arabia the entire region is up for grabs. That would spell the end of the petro dollar, which would signal the demise of the dollar. That is something to be aware of and to contemplate.

As you know, historically when you have bad episodes such as those we are seeing in North Africa and the Middle East that the dollar has rallied strongly. Not this time. The dollar is falling not only against the six major currencies, but also versus gold and silver. We could be headed toward a test of 71.18 soon on the USDX. That makes US imports more expensive and exports cheaper, which would cause a balance of payments surplus. The downward dollar pressure would continue though, because the $1.6 trillion deficits would continue. We believe as history is evaluated Ben Bernanke as well as Alan Greenspan will be found to be totally incompetent. Today we have price and monetary inflation that are terrible. Eventually as the economy and coming hyperinflation becomes manifest we will then see a fall we have all been anticipating for years into deflationary depression.

After three attempts to rally past 82 the dollar in the USDX has faltered again, this time to 76.48. There is technical support at 76 and fundamental support at 74 and 71.18. Current weakness is systemic, but it is being aided by QE2 and stimulus 2.

Finally players are realizing that real inflation is more than 7%, headed for 14% this year, as a result of QE1 and stimulus 1. Next year the result of QE2 and stimulus 2 will start to drive up inflation. At the same time wages and salaries are under intense pressure, especially by major corporations. Next year we will see inflation in excess of 20% and in 2012 and 2013 we will see the inflation caused by QE3 and stimulus 3. That should take us over 30% inflation and into hyperinflation. What else can be expected with QE and stimulus spending of $2.5 trillion a year? You are going to find your government, the Fed and Mr. Bernanke along with Wall Street have been wrong about just about everything. That means that August could bring a debt downgrade for the credit of the US. That would bring further pressure on the dollar downward and pressure to the upside on interest rates. These events will expedite the need for a major meeting among countries, similar to the Smithsonian meetings in the early 1970s, the Plaza Accord of 1985 and the Louvre Accord of 1987, where currencies are devalued and revalued versus one another and some form of multilateral debt default. They would bring about a recharged dollar with 25% gold banking, or a combination of currencies in an index, also backed by gold. It is coming, but probably not this year. During this coming period unemployment will lie stagnant and the US will begin to experience 3rd world poverty. Were it not for food stamps and extended unemployment benefits and other forms of government aid the US would look like it looked in the 1930s. At the same time $100.00 oil along with food price inflation signals a loss in consumer buying power of $200 billion and $120 oil will signal more than a $400 billion loss in purchasing power. That means GDP would fall ½% to 1-1/2%. 

The above means that any future currency will have to be backed by gold or silver or both, whether the elitists like it or not. Multilateral acceptance is extraordinarily important, because such backing and discipline is the only element that can save the financial system and the elitists know that. On the other hand such backing puts a governor on their wealth accumulation, power and dream of world government. 

The euro could have worked had it been structured properly and the SDR is hopeless. The yuan simply isn’t seasoned enough and China has a host of problems, which are seldom discussed. Thus, it is either a reformulated dollar or an index of gold and or silver backed currencies. Anything less simply won’t work never mind be accepted. The world has seen again that unbacked currencies and corporatist fascist economic policies do not work. They lead to the subjugation of the people and destroy the quality of life for everyone except the wealthy, connected, elitists, who live well while the remainder of the world lives in poverty. The ongoing effect to bring about world government will again fail and mankind will again emerge from the economic, financial and even perhaps the rubble of WWIII. Desperate people do desperate things; so do not be surprised if another war is deliberately started like so many wars throughout mankind. Sound money is the only answer and really the only alterative is a reformulated dollar backed 25% by gold at a much higher price. An index of currencies or 4 or 6 regional currencies won’t work well either. A gold standard guarantees stability, enforcement of law and the unbridled excesses of Wall Street and banking. We need Glass-Steagall back and we need jail time for the crooks running Wall Street and banking.

See the original article >>

Are Booming Economies Good for the Markets?

By John Mauldin

The Delusion of Crowds and the Endgame
Let the Good Times Roll
Are Booming Economies Good for the Markets?
Back to 2007?
My Strategic Investment Conference
Don’t Miss This Speech
Media, La Jolla, London, Malta, Milan, Zurich, and New York

People only accept change in necessity and see necessity only in crisis.

—Jean Monnet

The economy is doing better, and we will survey some of the highlights. But does this mean the stock market is headed higher? A chart from Louis Gave got me to thinking, and I shot off a few thoughts and questions to Ed Easterling and Vitaliy Katsenelson. What ensued was a lively “battle” of charts and thoughts and more questions, so this week I let you look over my shoulder at our conversation. This letter will print longer than normal, as there are a lot of charts. I think you will find it very thought-provoking, if only a little cautionary. And we start with a look at a survey about what Americans think of the current fiscal deficit and the ways to remedy it.

At the end of the letter I give you a link to a speech by my friend Pat Cox, which is one of the best speeches and PowerPoints I have seen in a long time. It will only remain up for another ten days, per agreement with his publisher, so you really do want to find some time to listen. And I remind you about my conference in La Jolla April 28-30, with its gonzo all-star lineup, which I modestly think makes it the best investment conference anywhere. It is rapidly filling up. Don’t procrastinate. And I have some TV and radio times for next week as well. Now, let’s jump in to today’s letter.

The Delusion of Crowds and the Endgame

My good friend Dennis Gartman pointed me to a recent survey of “likely voters” done by the Tarrance Group. The results were disturbing to me, and show how truly ill-informed the American electorate is. This does not bode well. You can see the survey at , but let me highlight a few key points.

“There are widespread misperceptions about the state of the federal budget. A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse. Voters do not casually agree with these untruths – at least 40% strongly agree. Further, less than half (44%) believe Medicare and Social Security costs are a major source of problems for the federal budget (49% disagree).

“The waste in government is a strong concern to voters – again 60% believe fixing the waste will solve the nation’s budget problems, and voters say that a mean of 42% of each federal dollar is wasted.”

I was on the speaking platform yesterday with David Walker, the former Comptroller General of the United States and head of the Government Accountability Office (GAO) from 1998 to 2008, and we once again got to spend a good deal of time afterwards talking about the fiscal crisis as we were waiting for our respective spots on a PBS interview talk show hosted by Dennis McCuistion. Walker and I share a mutual concern that if “We the People” do not come to an agreement on the fiscal deficit of the US government, the country could be plunged into a crisis of Greek proportions. But he feels (and I agree) that part of the real problem is that people do not understand the true nature of the problem. The survey underscores his point. We have a deficit of $1.6 trillion, and Congress is debating over $61 billion in spending cuts, as if the Republic would founder with those cuts.

That is in large part the message of my new book, Endgame: The End of the Debt SuperCycle and How It Changes Everything. To avoid a crisis that would devastate this country, putting us into a decade-long recession (or worse), we must bring the deficit back (to at least!) below nominal GDP. That means a trillion dollars plus in spending cuts and/or tax increases.

I agree there is room for some serious reduction in waste, etc. The GAO just came out with a paper highlighting scores of redundant government programs. But reducing waste and redundant government programs won’t get us there. Not even close.

There are going to have to be a lot of “sacred cows” led to the altar. The weeping, wailing, and gnashing of teeth as subsidies, tax preferences, deductions, and other government benefits are eliminated or curtailed will be loud and long. The simple fact is that the federal government is now too large for our current income tax base as it is structured, and we have made promises that cannot be kept without a major change in the tax structure. Long-time readers know that I do not like taxes. I stutter when I even try to say the word. But the national conversation we must have as adults is, how much Medicare do we want and how are we going to pay for it? If We The People decide we want Medicare at close to the level we have today, even reformed and optimized, it is likely going to require some form of value-added tax (VAT). Even rescinding the Bush tax cuts on the rich won’t get us close. But we need to recognize there are growth costs (and thus joblosses) that come with higher taxes. If we are going to have a VAT, we need a true top-to-bottom reform of the tax system.

Whatever we decide, we must get the fiscal house in order before the bond market forces us to, because waiting until there is a true crisis will leave us with only very bad choices. Now our choices are merely very difficult. This is going to require either true compromise, which today seems sadly lacking, or political courage that is all too rare, to avoid the very bad choices and long-term destruction that a crisis will force upon us.

As noted at the beginning of the letter, “People only accept change in necessity and see necessity only in crisis” (Jean Monnet). Endgame tries to show why we need to make the difficult choices now.
The official publication date is next Tuesday, March 8. It may (should) start showing up in bookstores this weekend. If you are buying online, kindly wait until Tuesday. I will send you a friendly reminder (actually lots of them!). The reviews have been very kind so far. I am proud of the book, and must say that no small part of its value was contributed by my brilliant young Rhodes scholar co-author, Jonathan Tepper.

I truly hope it leads to a more informed national conversation, not just here in the States but throughout the world, as we all must come to terms with a world that now has a debt-to-GDP ratio of over 300%. We simply must if our children are to enjoy a better economic life than we have been privileged to have (so far). Waiting until the crisis actually hits us (and it will, if we do not act!) is a guaranteed life- and investment-altering event. It will not be fun. Think Greece or Ireland.

Let the Good Times Roll

The economic data that came out this week was mostly strong. The ISM survey numbers, both manufacturing and service, were quite robust. The new unemployment claims were as low as we have seen in years. Today’s employment number was 192,000, which is good, although it should be averaged with a weather-affected January, which brings us back to a number that is growing only slightly more than the population. But we have had four months in a row where the revisions have been upward. That is a good trend.

Same-store sales were solid. Factory orders were also in very good territory. The unemployment rate fell by 0.1%, this time without help from people dropping out of the workforce, although the total employment rate (jobs per population) was down.

Still, the bears in the crowd can point to very disappointing income growth, and there are spots in the jobs picture that are unsettling. More than one commentary I read pointed out the fact that the following chart from data maven Greg Weldon ( shows. The unemployment rate for certain sectors of the economy is not good at all. Single mothers are still above 13%. Plus, the average duration of US unemployment is still rising and is at an all-time high:

The average duration of US unemployment is at an all-time high:

Still, the economy is doing as well as it has in a long time, and the trends are more or less improving.

Are Booming Economies Good for the Markets?

As I noted above, I was reading the daily missive from GaveKal, one of my normally more bullish reads, and I found the following:

“The important question instead is whether booming growth is always good for equity markets. And on that, the data is frankly mixed. Indeed, while strong growth usually leads to higher earnings (good news), it also typically leads to a tighter liquidity environment as a) companies need money to finance larger inventories and capital spending, b) inflationary pressures may impact margins and c) central banks usually respond by draining excess cash away from the system. Of course, today, one could argue that the strong growth need not be a concern as a) companies are sitting on record amounts of cash and are still seeing their financing costs drop and b) Western central banks have yet to start tightening monetary policies. So the liquidity environment has yet to really tighten up.

“Still, we thought we would look at periods when the OECD LI stood 2% above their long term trend—identified as the areas shaded in blue on the chart overleaf. Interestingly, as the performance of the World MSCI (black line) shows, periods of strong economic growth do not always equate to tremendous stock market performance over the following six months. Equity markets struggle all the more if, while growth is booming, oil prices suddenly surge (red bars on the chart); a relationship which makes sense given that a high price of oil further drains excess liquidity from financial markets and typically generates large misallocations of capital (moving money from the pockets of Western consumer to those of Ahmadinejad, Chavez and Gaddafi is not really a good long-term use of capital). In fact, as the chart illustrates, the most dangerous periods for equity markets are typically periods of strong economic activity combined with rapidly rising oil prices.”

The team at GaveKal rightly noted the problems of a doubling in the price of oil and the shocks to the stock markets and world economy that would result. Good friend David Rosenberg puts those facts into this commentary, along with a graph:

“There have been only five times in the past 70 years when this has happened within a two-year time frame: January 1974, November 1979, September 1990, June 2000, and August 2005. And now, December 2010. . . . Of the five instances cited above, all but one involved a recession for the U.S. economy and that was in 2005 during the height of the credit and housing boom, which acted as a huge offset. But oil prices did keep rising and managed to outlast the euphoria in credit and residential real estate, so the recession may have been delayed at the peak of the ‘growth rate’ in the oil price, but it was not derailed, as history shows.”

So, I posed the following question to Ed Easterling of Crestmont Research (latest book, Probable Outcomes) and Vitaliy Katsenelson (The Little Book of Sideways Markets). They love this type of stuff.
As Ed notes, the stock market is not correlated with economic growth. In fact, as the next charts and tables show, secular bear markets even have higher nominal GDP growth than secular bulls.

Next he points out that 34% of the years since 1950 with economic growth have experienced declining earnings per share (EPS) growth!

Back to 2007?

Vitaliy wrote back:
“Here [in the charts below] is PMI vs. Dow 1966-1982 and 2000-today. Also, what worries me is that corporate profit margins are approaching pre-2007-crisis highs (see the third chart). A small slowdown in the economy, or just stagnation, will send profit margins down. Hopefully this helps. Also, as you normalize PEs for high profit margins (i.e., look at 10-year trailing PEs), the market is trading 30%+ above average PE – secular bull markets just don’t start at these types of valuations. In addition, the market did not spend enough time at below-average PE for this move to be the new secular bull market (in the 1966-1982 sideways market, PE was below-average half the time).

(Ed has his own way of normalizing earnings ( He has developed a methodology – one that is fundamentals-based – that produces similar results to that of a ten-year average, or something like Shiller’s work, yet also provides forward-looking insights. In brief, it uses the close and fundamental (not coincidental) relationship between earnings per share (“E”) and gross domestic product (GDP) to adjust for the business cycle. The baseline E for each period is essentially based on mid-point values for E across the business cycle – peak and trough periods of actual earnings reports are adjusted back to the underlying trend line to reduce the intra-cycle distortions.)

If you use his form of normalized earnings, and use the earnings projections from the S&P website, you find us back in the nosebleed territory of 2007, which is both Vitaliy’s and my worry. Stocks are once again priced for perfection, but I worry that we live in an imperfect world. The markets are assuming a normal business cycle, but as I strongly suggest in Endgame (shameless plug), we are not in a normal business cycle. It is the dénouement – the end of the debt supercycle, which distorts the normal financial physics that markets have come to rely upon. When markets get this distorted, whether to the upside or the downside, a correction of some sort is around the corner.

As both GaveKal and Rosenberg note, a doubling in the oil price is not good for markets. And if we actually do begin to work on the deficit to the tune of $150 billion or so a year in cuts and tax increases, while it may be necessary for the survival of the economy, it will also be a headwind for economic growth and earnings. There is no free lunch. Again, not dealing with the deficit is a “game over” event. There are no choices that do not have some pain involved.

As I wrote a few weeks ago, we are entering a period where recessions are likely to be more frequent and markets more volatile. These are not times for normal buy-and-hold strategies.

Let me offer a brief commercial plug for my US partners who specialize in alternative investments. Whether you are an individual or an investment professional, you should call them and see what they can do to help hedge your portfolio against the type of volatility I have discussed above. In general (and with some exceptions), Altegris Investments deals with accredited investors whose net worth is above $1.5 million. They are specialists in hedge funds, commodity funds, and other types of alternative portfolios. You can call them at 1-800-828-5225 and tell them I sent you.

My friends at CMG generally work with investors whose net worth is smaller. They have a platform of active managers who run liquid discretionary accounts. With either firm, you can choose among managers that make sense for your personal situation and needs. You can reach CMG at 800-891-9092.

If you are outside the US, or would rather register online, you can go to and click on The Mauldin Circle, and one of my partners, either in the US or around the world, will call you. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

My Strategic Investment Conference

I want you to mark your calendars for April 28-30, when I will host, along with my partners at Altegris Investments, what I think will be the single best investment conference of the year. It will be the 8th annual Strategic Investment Conference in La Jolla. Let me give you the Killer’s Row line-up of speakers, in alphabetical order: Martin Barnes (Bank Credit Analyst), Marc Faber, Niall Ferguson (author and Harvard professor), George Friedman of Stratfor, Louis-Vincent Gave of GaveKal, Neil Howe (The Fourth Turning), Paul McCulley (if he ever surfaces from his fishing vacation), David Rosenberg, Dr. Gary Shilling, Jon Sundt (of Altegris) and, of course, your humble analyst. I mean, really. Most conferences have one or two top-tier headliners. We have nothing but the best. These guys are all great speakers, but getting them on panels together? Way cool. Plus some of the best hedge-fund managers (personal opinion) show up to give you their thoughts. And maybe a surprise last-minute guest or two. If this conference lineup were a baseball team, they would sweep the World Series. Oh, and the best part? Your fellow conference attendees. The interaction among them is what truly makes this conference the best.

You can still register today at Sadly, the conference is limited to accredited investors with a net worth of more than $2 million, as there are funds presenting that require that minimum (and some even more). Those are the rules we have to live with, whether I like them nor not (I don’t, as long-time readers know). But we follow them religiously.

Every year the conference sells out. Every year some of you wait to the last minute, thinking we can “always take one more.” We can’t. There is a limit to the space. We are getting close to capacity. If you have attended in the past, call your Altegris representative and make sure you get on the list. Do not procrastinate. (1-800-828-5225)

Don’t Miss This Speech

Pat Cox is one of my real “go-to” guys when it comes to finding life- and economy-changing new technologies. He writes Breakthrough Technology Alert, which is one of my true must-reads and a solid source for investment ideas. I am a huge fan. He did a speech in Vancouver last year that simply blew me away, and the PowerPoint was awesome. I finally got his publisher to let me post it for a few weeks – at least until March 15. You really should take the time to hear how the ideas of Schumpeter and others feed into opportunities today. The presentation is at
(As part of the deal with his publisher to get the speech on my website for free, there is an offer to subscribe to Pat’s letter at a substantial discount. For those interested in new tech, you really should consider it.)

Media, La Jolla, London, Malta, Milan, Zurich, and New York

Next Friday Tiffani and I fly to La Jolla for one night to be with my partner and friend Jon Sundt of Altegris Investments as he celebrates his 50th birthday. I can guarantee he will do it in style! Then back home to watch the Mavericks take on the LA Lakers. Now that will be a rocking weekend.

The next weekend I head to London, where I will be the guest host on Squawk Box on CNBC in London, then head off to Malta for meetings of some funds I serve on the boards of, then it’s Milan for a public speech, and then Zürich on Friday and back the next Saturday. Lots of planes, trains, and automobiles.

My other US partner, Steve Blumenthal of CMG, also turns 50 on April 2, so I will head to Utah for his gala bash, then dash back to New York (April 4-6, right now) for a few days to talk about my book wherever I can. Next week I open on Monday morning on the Ron Insana radio show, then Tuesday at 10:15 Eastern on Bloomberg, that afternoon on Fox Business with Liz Claman, and later on Canadian channel BNN. On Thursday I will be on MSNBC with Dylan Ratigan, sometime in the 4-5 pm EST time slot.

I remember a time in my life when, even though I had multiple businesses and seven kids, I had time to watch TV and take naps on Sunday. Life seemed slower, as I look back on it, than it is now, although I remember feeling quite busy at the time. Lately, I feel as though I am drinking life through a fire hose. That is not a complaint, understand, as I am enjoying every day and the opportunities I have. I am grateful.
This weekend is filled with family and the gym, as I fight the good fight with aging. My youngest son needs a new phone and I need to get on the list for the new IPad. There is an Irish Festival and my kids are insisting I go with them (I taught them young to enjoy Celtic music). So maybe there is time to slow down after all. Have a great week, and remember to buy my book on Tuesday!

Your hoping for a fourth best seller analyst,
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