An unemotional look at where the economy is headed, featuring amazing TA charts
Wow, the Federal Reserve's move to purchase long-term Treasures has certainly drawn some emotional responses from CAPS members (BTW, it's never a good idea to threaten violence against government officials...unless you're interested in getting a visit from some fellows in black suits).
I think that we all need to take a step back and look at the current state of the economy unemotionally to see where things are headed.
Here's what we know:
- The U.S. economy is fundamentally flawed. It had become way too dependent upon consumer spending (which recently peaked at around 70% of GDP) and the use of debt by both consumers and government.
- The savings rate for U.S. citizens had dropped so low that it actually became negative. This trend is not sustainable. Eventually consumers will begin saving a significantly higher percentage of their disposable income. This shift has already started and it will continue for some time.
- Home prices had risen to the point that they were out of whack with all reasonable measures of affordability. This is in the process of correcting. The correction process will continue for at least another 10% to 20% if not more until homes are affordable, possibly overshooting on the down side.
- The Baby Boomers have passed their peak spending years and they have experienced a massive amount of wealth destruction over the past two years. Their reduced spending will create a drag on the U.S., and in turn the global economy (which as it turns out is not decoupled at all) for years.
One way or another, these trends are going to correct themselves and growth is going to be anemic for a number of years, regardless of the action that the U.S. government takes to try to prop things up again.
The question is whether the recent government action, in the form of slashing the Fed funds rate to zero, passing a huge "stimulus" package, and engaging in quantitative easing (things like buying treasuries, TALF, RALF, MALF, etc...) will serve to slow the inevitable decline in the economy and drag things longer than they would have out OR whether it will serve to destroy the value of the U.S. dollar and eventually cause interest rates to head much higher down the road.
Clearly the knee-jerk reaction was a negative for the U.S. dollar. It immediately fell off of a cliff when the Treasury-purchase announcement was made. Things that are priced in dollars, like oil (which is comfortably sitting over $50 right now) and gold (which soared $50 higher this morning) are off to the races. Will this continue? It is tougher to say than many believe. What we are in with currencies right now is a race to the bottom. As difficult as it is to believe, many other countries' economies are actually in worse shape than the U.S. economy currently is. Furthermore, many foreign governments are actively attempting to devalue their currencies.
When things settle down, I personally have a feeling that it is going to take a lot longer for the U.S. dollar to implode than many of the gold bugs and dollar bears believe. As I have said repeatedly, in the land of the blind the one-eyed man is king. Currencies are all relative. A currency can only drop in relation to something else. Yes, the dollar stinks, but it's less stinky than many other currencies. This doesn't mean that it won't eventually implode, I just don't see it happening in the near future.
Hmmmmm too many deep thoughts. We need some pictures. I have stated in the past that I strongly believe that technical analysis is a bunch of garbage. Real events happen in the world that influence markets which no amount of Tarot card reading can predict. Having said this, since technical analysis has mysteriously become so unbelievably popular around here, I figured that I'd lay out put my thoughts on where the economy is headed using graphs.
That's all the time I have for now. Please post your thoughts on where the economy is headed in the comments section of this post. I'd love to hear what others think.