that is about as good a gold call as anyone will get anywhere,
especially since it isn't clouded with arbitrary price and time
targets, but rather a timeless, relatively observable, condition.
is funny about markets and human nature. It never fails; that
what goes up must come down (though not necessarily vice versa).
Yet, if this market fact is readily acknowledged, why is it that
at market tops so many of us still get caught believing that this
one is somehow different, in that it will not stop but continue
to go up, and up? To be sure, there probably are as many reasons
as examples, but maybe I can contribute a unique perspective.
at this hypothetical top, having just bought millions, or billions,
of dollars worth of stock, you think to yourself "wouldn't it
be silly now if we all had to turn around and sell what was just
bought?" Of course, you may or may not have this enlightening
thought before the market actually turns down, but regardless,
the realization is that the shares should not have been bought
in the first place… like maybe the day before.
my own experience, no one can fool me as ingeniously as I can
maybe on some level we persuade ourselves that it is better to
be wrong if everybody else is wrong than it is to be wrong all
alone. In fact, it is during times of extreme one-way market sentiment
that mass emotional imbalances like this tinker with the competitive
forces, which foster a diversity of opinion and thus liquidity.
In any case, it is at that moment when (if) that thought passes,
where the men are separated from the boys. It is at that moment
when you need to ask yourself, "did I really buy this crud for
the long term?" How honest you are with yourself just then will
determine how much money you will ultimately lose.
if you lie to yourself, and it is a top, then odds are you're
in it for the long run, dogmatically persuading yourself and others
that in the end, these particular shares will somehow be worth
more. Chances are that if you had persuaded yourself, on the way
up, that investors don't (or shouldn't) sell stocks ever then
you are already at a disadvantage… in making the necessary psychological
adjustment. The buy and hold song is a confidence game. It doesn't
work for trading speculative markets, which today (as well as
yesterday) has become everything and anything denominated in paper.
is absurd to believe that once people buy stock, they don't ever
sell. Even, and maybe especially, if stocks just go up and up
and up and up.
consider that one day they have been going up for so long that
it doesn't even matter anymore. Planning for retirement gradually
takes a back seat as the prospect for untold paper wealth lies
just around the corner.
course, not everybody will be able to relate (or admit) to this
particular set of experiences, but I hope you will. It comes from
someone who has had the benefit of managing money for enough people
that he is able to perhaps observe a common thread in human behavior.
as the need to plan for the long term becomes increasingly insignificant,
people will generally raise their living standards in the present,
perhaps even living beyond their current needs. Someone once told
me that the thing about greed is that it is reliable. I will second
that, and raise… it is as reliable as change itself. The point
is that people will sell stocks, even if they do nothing but go
up. Unfortunately, the transactions may not occur logically. In
other words, it is more than conceivable that the rise in living
standards comes not at the expense of the investor's equity stake,
for that would apparently not be prudent. It might "apparently"
be wiser to borrow the money instead. This way people will figure
out a way to keep an "income"-producing stake in the stock market,
for that is their wine and cheddar.
of that, let's check in on the condition of our paperweight, I
So, was that a
bubble, Mr. Greenspan?
we say that, now that we have the benefit of hindsight? We have
been waiting for the opportunity to get that off our chests. I
suppose that a quick glance at the two-year Nasdaq chart closes
that argument off, for good.
consider further, the possibility that the blue chip averages
are choking off the potential for a rally in the Nasdaq, even
from these levels, by virtue of the axe that has yet to fall.
All that this means is that speculation needs leadership that
ignites the imagination. Today that means something that is so
bullish it makes a Dow drop to 7000 seem inconsequential and a
breakout to new highs all but certain. But it also means, today,
that it has to be something with substance, because there is no
substance in the stock market's current valuation.
being said, the bulls have been putting in one heck of an effort
to will the market up. The breadth of US stock markets has been
expanding rather consistently (and surprisingly) during this last
month or so, prompting analysts to come out of the wood work in
order to establish themselves as potential lead bulls. The word
recession has been thrown around so much that they are beginning
to use it to their favor in pointing out how stocks are not generally
falling on bad news anymore.
prompted us to look at the technical condition of the market extra
close this week because certainly, these are valid points for
the bullish case. As far as the discussion of recession is concerned,
what doesn't wash with us is that if everyone has considered a
recession to be a real risk, why are the stock markets only discounting
a soft landing? And why do most sentiment indicators continue
to gravitate toward optimistic readings? Maybe because the talk
is still talk and no one has considered it a serious risk… maybe
because Mr. Greenspan has promised to save the stock market for
boy, did I just say promise? Yup! Though the promise is as shrouded
with ambiguity as is the Fed's role in guaranteeing the debts
of various mortgage issuers, it is nonetheless a promise, defined
by his actions in office. Actions, which have become so notorious
that history has already chosen a name for them: The Greenspan
Put, his promise to America.
blew the whistle, Mellon rang the bell, Wall Street gave the
signal, and the country went to hell. - depression
era song invented by unknown author.
too, made promises he could not keep. Only broken promises can
turn a man from someone having a national monument built in his
name to someone whose name is only cursed, in a span of about
this time will be different however, as Mr. Bush confronts similar
historical circumstances with a reality check for our delusional
nation. Only time can tell. Back to the market…
So, what if Fed
policy has become impotent?
The breadth observation is legitimate as far as it is a fact (see
the above charts). However, an analysis of an observation entails
much more than just plugging that "fact" into a convenient spot
to provide support for an otherwise imperfect bullish argument.
In this instance, the fact that the indexes are masking the bullish
performance in the broad market is incomplete. It needs to be
related to the past. For example, the broad market rolled over
into a primary bear some time in 1999, but that fact had been
masked for a considerable period of time afterwards, by the bullish
performance of the relative "minority" of stocks, which had an
enormous statistical impact on the averages. Additionally, these
are facts that the blue chip indexes have yet to expose, or confirm.
Thus, to the extent that the big blue chip averages continue to
obscure "this" fact, the invisible broad market rally is probably
just your average bear market rally.
it is our contention that the market cannot meaningfully bottom
while analysts are still swift in their dedication to the bullish
cause. That psychology has to be purged if this is going to be
a bona fide stock market bottom.
NYSE composite put in a little bounce last week, which could easily
be nothing more than a typical retracement in an overall bearish
circumstance, or at best, neutral technical circumstance. The
Dow Industrials didn't. Bounce that is. In fact, the average spent
all week long trading sluggishly beneath its fast (50 day) moving
average, ending the week at the low end of the week's trading
range. To us, that is a bearish development for a few reasons.
The most important is technical, and has to do with the fact that
the week before, the average closed the week flat on its bum after
a rate cut. Where were the wise analysts then, to tell you that
the market is not going up on good news? Probably in the same
penalty box that Abby Cohen is in for calling 10% rises, but never
calling for 10% declines…
much better do the bulls want then a 50 basis point surprise inter-meeting
Fed move like that, on both the funds rate and the discount rate?
Nonetheless, the speculative Nasdaq Composite tried real hard
to break away and establish a one-month diamond on the chart,
perhaps trying to follow the AMEX composite. It ran out of time,
however, and right into a steep downward sloping trend line, by
Friday's session last week, which is still firmly controlled by
the bear (since September).
remains to be seen whether the bulls can overcome. A turnaround
will require that bulls take out the first point of resistance
at roughly 2800 (50 day moving average) before charging away at
the bearish stronghold, slightly above 3000. It is not an even
fight, it is a bear market... thus, any failure to turn things
around this week ought to resolve in bearish reassertion, shortly
only two things that the bulls have on their side, and which come
to mind, are the laws of physics ensuring an inevitable bounce,
and an old trader's myth, which states that a short week runs
countertrend. Oh, and they also have the Fed on their side, though
we do not view that as an asset any longer. For if the eroding
value of the currency, the dollar in this case, begins to erode
along with it, the benign state of disinflation, which investors
in higher risk tech issues are used to and require, where is the
rationale for speculative stock valuations?
key to the Nasdaq is going to be the S&P500, which technicals
better match the Nasdaq and the AMEX than they do the blue chip
markets. Indeed, here you will find the same structural (bearish)
controls on prices as you do in the speculative averages. The
reasons, which we know, are less important than the observation.
For the observation implies that the destinies of both averages
are intertwined, at least in some ways, and further, that a Nasdaq
rally probably cannot sustain without confirmation from the S&P,
its CEO. On the other hand, the blue chip averages, NYSE comp
and DJIA, are going to be hard pressed to make new highs stick,
without a similar confirmation from the broader (distribution
of the) SP500.
regardless of how perky the illiquid speculative issues appear,
certainly the broad market still looks heavy. Thus, we maintain
that a leadership rally out of the Nasdaq, without confirmation
from the S&P500 and/or the other blue chip averages, will precede
a crash in the blue chip markets. Further, if the bulls are a
no show tomorrow, we fully expect the put/call ratio, which has
given us another sell signal as of Thursday afternoon, to rack
up some gains, quickly.
Perhaps the bond
will guarantee it....
Year US Government Treasury
Weighted US Dollar Index
the case of the bond, it did break out of a diamond… down. Both,
prices and yields resolved a one-month diamond pattern (typically
a short term reversal pattern on the chart). Another obstacle
for the Nasdaq, and maybe another lead for the financials and
the bank stocks this week. The S&P Insurance index has already
slipped, undoubtedly related to the "stuff" that they may have
been buying in the money markets lately, as so many other companies
have been finding out about their balance sheets also. This time,
the bad news bears are the California Utility companies.
Transportation and Airlines issues pulled back last week, though
they are only now coming off of a two-month winning streak. The
average bears watching closely over the ensuing week or two, as
participants have been expecting the December correction in oil
prices to prop up fourth quarter earnings. We don't think that
the rally has got legs, especially if we are correct on higher
energy prices ahead. The relevance here is in the psychological
blow to the bullish camp when (if) this average reverses the otherwise
beautiful double bottom on the two-year chart.
Utilities are now wrangled in a political nightmare, which cannot
be bullish in the near term, at least psychologically. Accordingly,
the Dow Utility Average slipped last week, though in this case,
the slip comes after the Average pierced the 40 week moving average
only the week before. The development bears watching because government
intervention in the industry cannot be good for its component
so much for stocks, they appear to be passé anyhow. What of gold?
Can gold go down, and never come back? That depends on how you
look at it, I suppose. Unfortunately, the way we look at it is
that it is the dollar, which has sucked everybody in.
is the dollar, which has been created out of thin air, as every
other paper currency ever has. Gold has been around a bit longer.
Wars have been fought over it. Would anyone invade America to
steal dollars? Not likely, for they would be rendered useless
then wouldn't they? We would likely have to use the invader's
in (North) America, we have concluded that once a dollar is bought,
it is bought. There is no reason for buyers to turn into sellers,
especially if the currency goes up and up and up and up. Sound
familiar? Right, just like stocks. There is no difference. Well,
there is one big difference. Stocks can only be priced in paper.
Their value is relative only to the currency.
in todays overly, and perhaps deliberately, complex currency arrangement,
a currency is valued relative to other currencies as well as relative
to the things with which it can buy. This latter is called a currency's
objective value. For all intents and purposes, the former is the
currency's subjective value. This subjective value can be maintained
so long as all is well in the world and other governments co-operate.
what determines their cooperation? A formula that works for them
equally as well as it does for us. For most of this decade, this
cooperation existed because the dollar, still deemed the international
reserve currency, performed. No, not just in its price relative
to other currencies, but also in its ability to contain the prices
of real things, which in the end, a currency is intended to buy…
thus, the concept of objective value.
this period of "performance" came at a price. The strong dollar
policy knocked other developing economies, which were playing
around with free-floating exchange rate regimes, right out of
the water. In doing so, it accelerated the manipulative monetary
forces, which were already at play in America, and turned the
dollar into a global magnet for capital. While this trend created
all sorts of imbalances in markets such as oil and palladium,
not to mention our terms of trade, self-perception, and credit,
we began to find all sorts of reasons for this inflating "subjective"
value. Many of them we are now beginning to suspect as at least
not quite right, but still, too many of us are at the early phase
of that revelation, still expecting the Nasdaq to lead the party,
this "reasoning" is all still occurring even while the objective
value of the dollar has already been falling for nearly two years.
Since we have been trained (through decades of dollar reign) to
price commodities in terms of dollars, rather than dollars in
terms of commodities, our understanding of the concept of inflation
has never been more erroneous, ever.
keep it simple shall we? Inflation is simply any expansion of
the money supply. Thus, we are Inflationists because our economy
depends on the manipulation of the money supply. When this inflation
no longer works, it breaks down, and causes a reversion of the
currency to its "objective" value, whatever that may be. This
has been happening for over a year now, but few participants recognize
it and fewer still understand its significance. Why is that? Again,
it is because most of us know nothing of this ancient logic. But
as the guardian of our currency churns out ever more of it, this
problem is likely to become much more visible.
is that monetary policy that seeks to increase the quantity
of money. Native inflationism demands an increase in the quantity
of money without suspecting that this will diminish the purchasing
power of the money. It wants more money because in its eyes
the mere abundance of money is wealth. Fiat money! Let the state
"create" money, and make the poor rich, and free them from the
bonds of the capitalists! How foolish to forgo the opportunity
of making everybody rich, and consequently happy, that the state's
right to create money gives it! How wrong to forgo it simply
because this would run counter to the interests of the rich!
How wicked of the economists to assert that it is not within
the power of the state to create wealth by means of the printing
press! Other Inflationists realize very well that an increase
in the quantity of money reduces the purchasing power of the
monetary unit. But they endeavor to secure inflation nonetheless,
because of its effect on the value of money; they want depreciation
because they want to favor debtors at the expense of creditors
and because they want to encourage exportation and make importation
difficult. Others, again, recommend depreciation for the sake
of its supposed property of stimulating production and encouraging
the spirit of enterprise. Ludwig von Mises, The Theory
of Money and Credit
there is significance to the presently declining purchasing power
of the dollar, a very big significance. The foreigners who had
bought dollars over the decade, or longer, are not likely to cooperate
with the US government if it does not guard their investment in
dollars, the international reserve currency, from inflation, this
"real" inflation, which when breaking down, always destroys the
purchasing power of a currency. Are the Europeans, for example,
going to want the Euro to go down with the dollar? Who is going
to cooperate with the currency policy of a nation who reacts to
the monetary crisis by issuing more money, does not recognize
the inflation exacerbating aspect of state intervention in the
California oil crisis, and who keeps piling on the debt in both,
the public and private sector?
The Power Crisis
No, we don't mean the Oval Office. History
ought to record the root cause of the California power crisis
Federal Reserve System in the United States financed a stock and
real estate bubble so large that it literally blew a circuit breaker
in the heart of bubble America -- California.
to press reports, the State of California is about to be endowed
with the responsibility of buying wholesale electricity in bulk,
secured by long-term contracts with sellers that agree to sell
the state of California their electricity today at an acceptable
(fixed?) long-term price, on behalf of the state's less capitalized
utility companies, and in order to smooth the disruptive forces
of the market by selling it at a discount to the same utility
companies. Better known as subsidization, the question thus becomes,
how is this intervention going to interact with the market price
of all, aren't we taught that intervention cannot affect a change
in market trends? Why then would the state's intervention in California's
energy crisis be any different? Ok, the intention is to smooth
rather than change, right? How can an economic system, which encourages
demand even when that may be part of the problem, do anything
but accentuate the trend? Of course, we are certain that Clinton
and Summers believe that this move will help transfer some of
the visible inflation to the less visible electricity market.
Thus, we think that our focus ought to stay on the interaction
between state and free markets.
am reminded of a quote, as I ponder our government's reactions
to the inflation breakdown of the seventies:
man who does not learn from his mistakes is a fool, but a man
who does, while he is guaranteed not to make the same mistake
again, he is also guaranteed to make one of a thousand of its
to the dollar…
Of course, the Europeans have to play along for now. They have
to give the Fed and the incoming administration some room to maneuver,
undeniably, because they have a vested interest in the same paper
currency regime, perhaps for lack of a better one. To be sure,
everyone does. But again, that would be missing the point, which
is that the inflation is not working, and not likely to work,
for the Fed any longer. A new world currency is required in order
to keep people believing in the inflation. Think about that one
for a while, and then consider the following.
Japanese aren't waiting around to find out whether there is or
isn't going to be a dollar problem. They have been talking up
the French to join them in their effort to develop an Asian currency
bloc. And word is, the French are listening.
the weekend, according to the South China Morning Post,
"Japan and France finance ministers urged Asia to include the
Euro and Yen in a new post-crisis managed currency regime, arguing
excessive reliance on the United States dollar had brought disaster."
the proposition meets early skepticism by other Asian nations,
which have been scared into adopting the dollar as their reserve
has argued against the free flotation of currencies in developing
countries as inappropriate, and is flogging an alternative to
the dollar peg, which they feel was responsible for the Asian
crisis. Let's face it though. In a world that appears to be up
for division between two non Asian world powers, the dollar and
euro, Japan no doubt feels left out as its own trading partners
opt for the American idea of free floating exchange rate regimes,
thus, leaving the Yen all alone on the continent, and rendering
it incapable of effective monetary policy in the region.
IMF response, or (rival) opinion, was religious but clear
The IMF argues that in most cases it is better for a developing
country to adopt a free-floating exchange rate mechanism than
to either peg their currency or to manage it. The reason, Mr.
Kohler, managing director of the IMF, suggests, is that what the
country needs to do in order to avoid a sudden test in international
currency markets is almost undoable. He is referring to the tough
policy decisions that need to be made in order to fix a currency
against a standard such as the dollar. Apparently, under such
a system there is no room for policy error.
opting for such a system must pursue, unwaveringly, sound macroeconomic
policies, and also need to be fully aware of the associated costs,
including the possibility that extraordinarily high interest rates
might be required at times of severe financial market pressure.
Mr. Horst Kohler, managing director of the IMF, January
there is a message to the Fed and US Treasury, whose vast policy
web is primarily devoted to managing the greenback's value. Indeed,
I will argue that a floating exchange rate system is preferable
to a managed, or fixed currency regime, but that includes all
currencies, including ours.
idea is that currency markets will naturally punish countries
that pursue weak economic policies (presumably for short term
gain), and will reward countries that pursue strong economic policies
(also for short term gain). But again, this assumes that exchange
rate (dollar) markets are entirely freely trading, which is not
the case today. It also assumes that there is a standard against
which all other (inferior?) policies are measured.
standard so far has been the dollar, for a long while now. But
dollar policy has been arguably exploitive, abused, and perhaps
now, has turned somewhat imperialistic. Furthermore, Mr. Kohler
IMF's largest member countries do have a responsibility to make
the most of possibilities for effective policy coordination to
reduce exchange rate volatility and risk of misalignments."
who is there to correct misalignments in the major currencies
when the good times roll in their direction, and their owners
seek out a little too much short term gain for their own good?
There certainly needs to be a currency standard of some kind,
whether we like it or not. The evidence is overwhelming.
the Japanese and the Europeans will build a new "inflatable" currency
standard, but somehow, this whole process of change is going to
have to get very bumpy for both, the dollar and possibly the Euro,
but especially the dollar, before the transition is complete.
For that is the source of the global economy's current ills and
poor expectation sets.
is easy to be a critic
The solution for monetary policy makers everywhere is to peg their
own "policy" to the way that the nation's currency interacts with
the freely floating gold market price. This way, they can more
easily monitor that elusive character of prices, influenced by
a change in the currency's purchasing power, and adjust policy
accordingly, maybe properly, and certainly with accountability.
What an achievement that would be, and the Internet just might
help us do precisely that. How? By encouraging the evolution of
a freer press and thus, a freer flow of information.
the question must be asked:
the Internet function in the private sector without the assistance
of the government?
it is a relevant question in today's elusive profit picture.
Point of Recognition
point, therefore, cannot be too far away. But as long as currencies
can still be "managed," so can gold prices. Thus, it is this argument,
which is central to the gold debate, and it is when investors
realize that the daunting task of managing a currency is a banker's
version of utopia, that gold prices will soar, and never look
only time that a group of people generally will all agree that
there hasn't been any gold manipulation, is when they want to
do a stock deal.
GoldenBar Global Investment Climate is not a registered advisory
service and does not give investment advice. Our comments are
an expression of opinion only and should not be construed in any
manner whatsoever as recommendations to buy or sell a stock, option,
future, bond, commodity or any other financial instrument at any
time. While we believe our statements to be true, they always
depend on the reliability of our own credible sources. Of course,
we recommend that you consult with a qualified investment advisor,
one licensed by appropriate regulatory agencies in your legal
jurisdiction, before making any investment decisions, and barring
that, we encourage you confirm the facts on your own before making
important investment commitments.