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Deranged Bull About to Cool?Rick Ackerman
I don't usually pay much heed to conventional trendlines, since they are too well watched to be trader-friendly, but the one governing the S&P 500 Index shown below is pretty compelling. It connects five tops going back nearly two years, including one made just two days ago at 1270.64. Was there by any chance a hidden pivot close by? Turns out there was - at 1275.07. The nearly five-point differential is substantial enough that we could not have gotten short there, habituated as we are to penny-ante stop-losses and micro-targeting. However, the actual high was close enough to the hidden-pivot target to afford us at least a mild presumption that an important peak has been seen. If so, it won't much affect our swing-trade approach, but a serious decline from these levels will doubtless restore a sense of normalcy to all who have viewed the stock market's steep ascent in recent weeks as... well, deranged. America's orgiastic consumption binge is no longer running even on fumes now that mortgage re-fi mania is dead. Prayer alone might get us through the holidays without a thousand-point break in the Dow. But a flight of fancy above 11000? Not unless Chaos rules the universe. (Click on chart to enlarge)
*** Inflation vs. Deflation The following series of letters continues our ongoing discussion of deflation, an economic outcome that I long viewed as both inevitable and unavoidable. First up today is 'Andrew,' who believes that hyperinflation lies ahead, not deflation: 'About deflation: I don't get it? You must be familiar with the term 'inflate or die'? Well isn't that what the FED must do literarily - inflate or die? Do you really think the FED and government will stop inflating? Either way it doesn't matter because: True deflation (total restraint in monetary creation) will destroy the dollar as the system will break down so badly that it will become unworkable and be abandoned - check out Antal Fekete. [Many of Fekete's arguments support my deflationist point of view. See for yourself by clicking here. RA] Obviously hyperinflation will destroy the dollar. Inflation of the dollar has gone too far now to be recovered in a reasonable way. If the FED stops inflating the system will collapse to such an extent that the dollar standard will simply become unworkable and will be abandoned for something better. In which case debt will be defaulted on - it will simply be wiped out and we will start all over again with a new currency. 'Dollar Will Die' If, as I think, the FED continues to inflate the dollar will die via hyperinflation - again same outcome: debts will be defaulted on and wiped out, and a new currency created. This is the way I see it: There is nothing backing the dollar - gold has been abandoned and pushed out of the monetary system Inflation of the dollar system has gone way beyond the point of no return - inflate or die. Trillions of dollar debts will never be re-paid, they will be defaulted on or hyper inflated away. Precious metals will be the only thing left standing when all this is finished. Also, the elites don't care which way it goes - deflation leads to ownership through bankruptcy; inflation, through taxation (of property, primarily). For the conspiracy-minded the NWO (New World Order) has been plotting and planning for ages to usher in a one-world currency -- to purposefully destroy the global monetary system (dollar standard) and then quietly stand back in all the carnage and offer the solution - a one-world currency. One final point - how long will it take for everyone to pay off their debts? Because in the next few years the oil supply is going to falter and then the whole financial system is done for. My response: Inflate-or-die long ago reached the point of diminishing returns, Andrew. In the early 1990s, I did a piece for Barron's that focused on the relationship between debt and GDP growth. At the time, we were getting about 38 cents worth of growth for dollars borrowed at the margin. I thought disaster was imminent, unable to imagine then that ten years hence, we would be borrowing as much as $6 in a fiscal quarter to "create" $1 of growth. Of course, any trend that cannot go on forever, won't. The fact that we have increased borrowing in the last several years by trillions of dollars to produce so faint a "recovery" should be telling you something. And here's an insightful and provocative letter from Bryan Post. My comments are in italics: Deflation, But First... 'I have been enjoying your exploration of the deflation / inflation debate and I would like to ask you some questions. I went back and reviewed all of your previous commentary on the subject before composing this letter. I believe that deflation is the ultimate outcome in the US (and probably the world) but I'm not sure about the timing or about how bad inflation could get before widespread deflation occurs. Right now we seem to be experiencing significant inflation in the cost of living and I think Mr. Bernanke will do everything in his capacity to continue on this path. 'Believing that a deflation in property values was imminent (Robert Prechter - Conquer the Crash), I sold five investment properties (23 units total) in San Diego between 2002 and 2004. In hindsight, I left 500K or so on the table by selling 'too early'. I now have only one property, a four-plex - my parents and I occupy two of the four units. I have over $1 mil in equity in this property but no positive cash flow. The property would have minimal positive cash flow if all four units were rented at current market rates. In the ultimate deflation that I expect, most or all of this equity will disappear and rents will decline to boot. The thought of losing $1 million in equity makes the 'cash out and rent' idea very appealing. The Rent Option 'On the other hand, if deflation of property values doesn't occur for a few more years and inflation feeds into rents, the rent option could become very expensive financially and psychically. As you state in your 10/13 letter, '... don't expect real estate prices to collapse until millions of people are thrown out of work ... ' I could spend a lot of money renting two housing units while I waited for property values to drop significantly. 'I've completed the conversion of the fourplex into condos so I have the option of selling two units and keeping the other two. This is not my first choice because I would give up control of the property while continuing to live there. I had the condos on the market for four months and they did not sell - started at $459K and dropped to $419K - condo market in San Diego very soft. Some Questions Specific questions: 'Any thoughts on how your readers with significant equity in owner-occupied real estate can analyze when it makes sense to sell and rent?' It makes perfect sense right now, although there's probably not a spouse in America who will go along docilely. There are times when a safe 3% return is where your money should be, and that is now. 'If selling doesn't make sense, does it make sense to tap this equity for some non-real-estate investment like junk silver or Canadian Federal T-bills?' Debt is the last thing you want as we head into a deflationary depression. Don't you believe that the Fed can or will 'bail out' debtors. 'Why do you expect rents to decline? (10/12/04 you said, 'Rents are entering a downward spiral ... ')' I believe I was quoting another source, but I agree with the point. Rents will decline because tens of millions of Americans will be broke. 'Why can't inflation feed into rents? (My guess: housing demand drops as people double and triple up, adult children remain at home, etc.)' It is deflation that will feed into rents. A supply problem is coming, too, since every home in foreclosure will become a 'rental.' 'Do you think inflation can feed into US wages?' There has been no real wage growth in decades. That's why I continue to say that the things which are viewed as 'inflationary' are ultimately deflationary. With no real income growth, every price increase is beginning to sap consumption. '5th Wave' Possible? 'What are the odds of getting an expansionary '5th wave' between now and the 2008 Olympics? (Two more years of orgasmic credit / debt expansion before the whole US economy is allowed to collapse.)' I'd say between 40-50%, predicated on Bernanke backing out Greenspan's thirteen rate hikes. That's why they have been raising rates in the first place: so that they can be lowered when recession / deflation threatens. 'Numerous people have been predicting massive economic collapse for several years now and it hasn't happened (8/15/04 you said, 'Roach says catastrophe is imminent, and I agree.') At what point do we decide we are wrong and change our world view?' Timing aside, a deflationary collapse cannot be avoided. The problem continues to grow, even if it has yet to precipitate out. We know this because it is taking more and more borrowing to create an additional dollar's worth of GDP growth at the margin. Any trend such as this that cannot continue forever, won't. Depression Is Next 'As part of my big picture planning I am keeping track of what I consider to be the significant factors influencing the economy. I have included these factors below. They suggest to me that we might continue with the current financial game(s) until the 2008 Olympics. After that the headwinds blowing against the US (and world) economy get stronger and stronger. Everything I have read tells me that what comes next is a depression to wash away the financial sins and frauds - the only question is when. 'Thanks for the great work that you do! Feel free to publish any of this.' And thank you, Bryan. Here are the economic factors you've cited: Negative influences on overall economy and real estate market: Rising energy costs / end of cheap oil / rising resource demand from China and India straining worldwide inventory and production capability Significant increase in cost of living in last few years - energy, food, health care, housing, etc. Jan/Feb 2006 (after Christmas shopping season) - doubling of minimum credit card payments (part of changes made to bankruptcy laws in 2005) Spring 2006 - Iranian oil bourse trading in Euros could cause significant shift away from US $ as reserve currency - interest rates would have to rise to continue attracting buyers for US bonds 2006/2007 - first significant reset of sub prime ARMs - by year-end 2006: 4 million mortgages will be reset - $543B total - average mortgage is $150K - average reset will be +2% - even larger $ amount of mortgages will reset in 2007 Increased difficulty of declaring bankruptcy - painful for consumers because they will not be able to wipe the debt slate clean as easily - also limits ability of banks to expand credit since old debt will stay on the books (?) and the bankrupt debtor will not (should not) be able to take on new debt. 2008 - leading edge of Baby Boomers start to retire - as part of his effort to sell the 'privatize Social Security' idea, President Bush acknowledged that the Social Security Trust Fund is full of empty promises (unfounded IOUs from the US government) - an empty trust fund means $$$ for Boomer retirement comes off the printing presses (or Boomers get stiffed on their expected bennies) Ongoing exportation of US jobs and declining real wages - workers aren't going to insist on cost-of-living increases when they are thankful just to have a job (although inflation is starting to show up in wages evidently). Competitive devaluations and trade wars - fiat currencies currently being expanded at approx 10% rate worldwide - and this is in a 'healthy' economy - printing presses will shift into even higher-gear if / when the economy starts to falter (of course we won't be able to tell how fast credit / debt is expanding because the Fed is going to stop publishing M3 and other indicators) Negative indications about health of economy and real estate: Weakest 'recovery' on record Four new US dollars of credit / debt to get 1 US dollar's worth of GDP - i.e., the cost of supporting existing debt is becoming more burdensome Home builder's stock weakness in Oct / Nov 2005 Toll Bro's recent downgrade of expectations for real estate sales in 2006 Tom Barrack openly liquidating his US real estate holdings because there are too many amateurs on the field (FORTUNE magazine Oct 17, 2005 US Federal Reserve announcing that they will stop publishing M3 and repurchase agreement information in March 2006 (M3 helps us gauge the rate at which credit / debt is expanding and the repurchase agreements seem to be instrumental in keeping the US equity markets afloat) Negative aspects of being a landlord in an economic crash scenario: Lost equity Buyer's will probably be scarce at more than pennies or dimes on the dollar (i.e., after the crash owners are stuck with whatever they have No fun to evict a tenant who has lost their job and has nowhere else to go Local / state / federal governments could impose a moratorium on rent payments and/or evictions (look at aftermath of Katrina and Rita) Own an asset that could be considered part of the 'public good' as local housing stock - any number of government decisions could cause tremendous financial hardship for the property 'owner' (like moratoriums on rent and/or evictions - not to mention the newly expanded use of eminent domain) Long-term studies pointing to a significant economic / social upheaval: Bottom of Kondratieff winter expected in 2010-2012 timeframe Bottom of 120 year Kress cycle expected in 2010-2012 time frame Fourth Turning event expected in 2005'ish (book by William Strauss and Neil Howe) - every four generations there is significant turmoil, usually war or disease George Ure (www.urbansurvival.com) theorizes that no fiat currency can be expanded for more than 83.5 years - at that point the interest expense to support the debt (remember that fiat currency IS debt) goes parabolic and the whole mess collapses under its own weight - 1933 + 83.5 = 2016.5 (not sure why George uses 1933 instead of 1971) Potential reasons to maintain the status quo for a while longer: US mid-term elections in 2006 US presidential election in 2008 Olympics in China in 2008 - China dumping $700B in US Treasuries prior to the Olympics seems unlikely (although they may spend this money quietly on resources and gold) China's desire to join WTO Conspiracy theories that support a significant economic / social upheaval: Elitists desire a significant downturn in US economy because destitute people living in turmoil are easier to control and manipulate than wealthy people who have options - final steps toward one world government would be taken under cover of recession / depression Elitists desire a significant downturn in US economy because US consumes too many resources per capita - this is no longer acceptable after the end of cheap oil (and besides, Americans are up to their eyeballs in debt while there are nearly 3 billion Asians just waiting to be exploited with our banking games) Elitists desire to purchase US assets for pennies on the dollar - motivated by greed and perhaps part of the one-world-government plan How we could maintain the status quo in housing Lower long term interest rates enough to trigger another round of refi's (doubtful that current buyers of US treasury bonds would support this effort so Fed would have to directly monetize the new mortgages as lender of last resort) Lengthen mortgage durations at current (or higher) interest rates in order to lower monthly payments (Japan was originating 100 year mortgages before their real estate bubble popped) - this allows new buyers to continue buying houses but only the financially desperate and/or irrational would use these mortgages to refi or purchase a move-up house Prevent massive unemployment by creating work programs funded with printing press money We could send a few hundred people to Crawford to help the President clear brush We could massively expand our space program with a 'Go to Mars' initiative (of course we'd have to start by educating our children above what was considered the 7th grade level at the turn of the 20th century) We could pay all the not-allowed-to-be-unemployed people to further their educations in online or local classes Thanks again for weighing in, Bryan. I'm sure my readers will enjoy your gimlet-eyed view of a U.S. economy that has been teetering on the edge for too long. *** Taming the Mini-Futures Trading the S&P futures with a stop-loss of one point or less? Come visit our archives to see how it's done. You can get a free one-day pass to visit the site, or a two-week trial subscription with no risk, by clicking here. Rick Ackerman *** 321gold Inc |
