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Economic Outlook: Cut Out the Noise

by: TheLFB August 03, 2008    

TheLFB

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Economic this, opinion that, screaming headlines here, doom and gloom there. Where is the value of the current economic situation really shown, and what is the Fed's stance on it? If it is in the USD values, we can trade that. If it is in the perceived value of the dollar compared to what the Fed has in reserve, or at a value that an overseas holder of U.S. debt has, then we may never know the real answer. It was an outrageous move from the Fed to stop printing the money supply numbers, added to that, Fractional Banking allows for only 10% of the value of notes printed to be held as a reserve. If we do not know the number of notes in circulation, how do we know that 10% is even right? The US is carrying a mountain of debt, and that has to be funded if economic stability, and therefore the value of the economic situation can be plotted.

That is all agreed, but is it really inportant right now whether it is right or wrong? The answer seems to be that it is what it is, the bad news looks to be baked in already, and we are looking now at a market that really is now focussed on what is coming rather than what has been; that looks to be a technical dollar bounce, and a technical move is nothing other than a reflection of percieved economic values. So rather than looking in the headlines for economic value being right or wrong, we just need to see it in the charts. That was an easy fix.

We are trading the charts, and the charts tell us that a new U.S. Business Cycle may be underway, it may be shallow, it may be undesirable, it may be many things, but it is here. Until the charts reverse these 4 hour set-ups that have the dollar pushing each of these majors up to, the likely story is that a weak U.S. economy supports a dollar that is increasing in value. Let's get real on it, the dollar has been pounded lower, and now those pairs that were inflicting the pain for the last twelve months may just have to pass the whip for a while whilst they go through their contraction phase.

Euro GDP is forecast at zero, Australia may be cutting rates, the UK consumer is in a world of hurt, and the U.S. has already been through the tread-mill. Dollar falling further from here? Maybe, maybe not, time will tell, but the dollar does not look to be getting much weaker, and we will trade the charts and not the headlines and let it all evolve however it wants.

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This article has 9 comments:

  •  
    Aug 03 09:40 AM
    A lot of bad is already in the $ price, other currencies should follow particularly in Europe. I also think that from here, the $ should stay or go higher.
    Reply
  •  
    Aug 03 09:54 AM
    I don't think there's any question wether it is right or wrong that the Fed is printing money like there is no tomorrow and that our nation is falling deeper and deeper into debt.

    It is emphatically wrong! These are not noise, but forewarnings of very unpleasant things to come. Those who minimize or ignore these threats to our way of life and our liberty, are deluding themselves.
    Reply
  •  
    Aug 03 11:45 AM
    You don't read what I read from folks smarter than you & I. 19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking How the hell can Countrywide add to Bank of America earnings? Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over Fraudulent Conveyance are now surfacing.

    20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $7.85 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.

    21. Shares of Ambac (ABK) fell from $90 to $2.50. Shared of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.

    22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.

    23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

    24. There is roughly $6.84-Trillion in bank deposits and $2.60-Trillion of that is uninsured. However, there is only $53-billion in FDIC insurance to cover $6.84-Trillion in bank deposits! Moreover, IndyMac will eat up roughly $8 billion of that $53-billion.

    25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

    What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent. So much money has been printed with so much more to come that we are in a hyper-inflation period. Wages will not go up much as jobs will continually be lost and loan losses increase. The USA has had its golden years unless we find cheap energy. If not, the terrorist have won, the country is bankrupt, and most don't know it or care to believe it. The dollar will lose another 40%+ within 3 years and silver & gold will become real money again in place of the fiats of the present civilized old world. Because of the cheaping $ jobs will stop being sent over seas as we become the old, new 3rd world. Congress, the Fed, investment banks and dummified citizens are to blame for short term thinking that has destroyed our founders dream and warnings. With out cheap energy we can't work out of this hole. Buy PUTS while short term $ recovery exists, and take delivery of silver bars, eagles, maple leafs, & a gun. Read the silverstockreport.com on FAQ's and butlerresearch.com and save your butt with action. Watching the slide to disaster won't be as painful. The easy life is ending. Don't be fooled by the any near term $ strength just because the euro might stop raising rates or drop a bit. It also has an active printing press. Now, hope liquified coal gets a push to solve energy shortages, the Democrats allow off shore drilling, and Obama sinks in the polls. Can someone make a chart comparing the S&P500 with gold & the $ over the last 5 & 10 years? This should show the Bear market as it really is! How do you like less stock loss write offs and more stock tax on gain just due to inflation and no real value gain ?
    Reply
  •  
    Aug 03 01:00 PM
    The Dow is down more than 70% in gold/CRB terms since the top in 2000. It's just that nobody seems to care and assumes we can borrow ourselves out of the hole.

    Ain't gonna happen and deflation (that's right) is coming. The metals and commodities are the last bubble of the recent lifetime bubbles of tech stocks in the late 90's and real estate from 02-07. There is nothing left but a few little "green" bubbles for the masses to suck on.

    Consider that it is over. The life of leisure and the digital age are at an end for a few years.
    Reply
  •  
    Aug 03 03:26 PM
    Investing in the US dollar simply because its less weak than other currencies ,doesn't sound like a good investment to me .
    Reply
  •  
    Aug 03 05:28 PM
    I've been of the bear view on the U.S. stock market since the start of the year, and feel it will continue for awhile. But there's a scary word for an investor - "feel". Usually the market doesn't do what you "feel" it should. What investors are feeling is usually a good contrary indicator. And now, the feeling is gloom.

    When I study the charts on how small vs big cap stocks behave in bull/bear transitions, I see something that disagrees with my feeling.
    In the past bull/bear/bull in '00, the small stocks led the turn down as well as the turn back up. In '07, it was the small stocks, especially small cap value, that led the turn down by a few months. Well don't look now, but the Russell and other small caps are starting to lead a turn back up! And for the Dow theorists, the transports have stubbornly refused to make a new low from the January low. Could the end of this bear be coming into view? Naaaah. That just doesn't feel right.
    Reply
  •  
    Aug 04 04:27 AM
    The Dow and S&P charts are still in the "catch a falling knife" phase. The Nasdaq, at its highs in this cycle, had to go up another almost 100% to make a new high. The Russell 2000 is stiil down about 20%.

    The Russell will act better because the small companies within it can react faster to the garbbage coming down the pipe or at least they did back in the 70's.

    I have yet to see those charts you are referring to. The Bullish ones? 2000 was a Bubble not a bear market. The last Bear growled in the 1966-1982 time frame...sure there were unsustainable bullish/bearish phases, but it took 16 years for the Dow to break above the Level first seen in 1966.

    Gloom? what gloom? Barron's has a chart which tracks Euphoria/Panic. It is smack in the middle. When it drops deeply into the Panic area, then a buying opportunity will emerge.
    Reply
  •  
    Aug 04 04:44 AM
    Took a quick look at the RUT chart, looks like a right shoulder of an H&S formation. A break by this puppy below 650, will signal a drop into the mid 500s.

    Haven't look at it for a while. I was hoping that someone was seeing something I was missing.

    6 month charts mean squat when dealing with Trends, a one year chart is iffy, 3 year charts are usually very good. I use 5-10 year charts on Indexes and 3 or more for individual stocks.

    In the 70's I used to use The Mansfield Stock Charting service along with Value Line. Nowadays, it appears to be that Value means schlock and Momentum Trading is the Fashion. If I'm going to gamble, I would rather do it in Vegas. At least there, I know what the odds are at the various Table Games.
    Reply
  •  
    Aug 04 08:47 AM
    Let's review a couple of points. 1. Our banking system looks to be insolvent now, but it has been before. Most recently, throughout the 1980's, the banking system had negative equity (possibly not as severe as currently) for most of the decade. We recovered, and had a good economic (and stock market) performance in the process.
    2. There may or may not be a commodity bubble. I have a Seeking Alpha article to be published (probably tomorrow) discussing the history and outlook for commodity prices.
    Reply
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