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An unemotional look at where the economy is headed, featuring amazing TA charts

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March 19, 2009 – Comments (22)

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.

Chart 1:

Chart 2:

Chart 3:

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.

Deej

22 Comments – Post Your Own

#1) On March 19, 2009 at 10:24 AM, 4everlost (29.42) wrote:

The charts are enough for +1 rec.  I agree with your analysis, too.  Keep up the good work.

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#2) On March 19, 2009 at 10:44 AM, Paxtor (29.00) wrote:

I agree with your TA, but I think you missed the fibonacci elliot Q wave version 5 by a bit on the 3rd chart.

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#3) On March 19, 2009 at 11:02 AM, Rehydrogenated (32.16) wrote:

Your 3rd gyration is a bit off, if you go too low she'll get mad when you hit the backend wave (o.o)(II)

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#4) On March 19, 2009 at 11:25 AM, jamasony2 (< 20) wrote:

Beautiful

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#5) On March 19, 2009 at 11:35 AM, innerflame (< 20) wrote:

As someone with a 13 year old who loves stick figures- this was perfect. And I needed to laugh today. No one has the answers but from all signs- emotional or not- we have a long road of struggle ahead financially for most of the working class. TA has it's place but it is only a tool-sometimes a shovel. As my Dad always said- the right tool for the job makes everything go easier. When you are in the trenches- a hammer, screwdriver, prybar and duct tape are really handy.

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#6) On March 19, 2009 at 11:39 AM, GNUBEE (24.34) wrote:

Nice Charting,

I too think that dollar implosion is not imminent.

There will be a subtle and slow unwind.

 

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#7) On March 19, 2009 at 12:01 PM, TMFDeej (99.26) wrote:

Thanks everyone.  As long as the dollar does not implode, I have a feeling that we're headed to the same place with the economy just that it will take a lot longer to get there.

I have been saying for a while now that in my opinion lower mortgage rates would be by far the most effective way to prop up the ailing economy.  Again, I don't think that they necessarily should have taken this action or do anything for that matter...just that this will be much more effective than what they have been doing.

Here's what Calculated Risk had to say on the subject this morning:

"

David Greenlaw at Morgan Stanley makes an interesting point:

"The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. ... In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year."
David Greenlaw, Morgan Stanley, WSJ Real Time Economics March 18, 2009

According to the BEA, the effective mortgage interest rate in 2008 was 6.235%.

If the Fed's actions drive mortgage rates to an effective rate of 4.5% on all outstanding mortgage debt that would be about $190 billion in stimulus (on an annual basis). However not all homebuyers will be eligible for a 4.5% interest rate mortgage. But even half that stimulus would be significant.

According to Housing Wire, we are already seeing a refinancing boom: Fannie Mae Refinancing Volume Jumps

Fannie Mae’s refinancing volume jumped to more than $41 billion in February, nearly three times the refinancing volume the company experienced during the month of January and the largest refinancing volume in nearly a year, the company said Wednesday.
...
The Mortgage Bankers Association reported last week an 11.3 percent week-over-week surge in application volume –two-thirds of which were from homeowners who wanted to refinance.

Just wait - the mortgage brokers will be really busy!"

That is exactly what I have been saying.  Here is something that I wrote on the eubject a few days ago:

Will the Fed start to buy Treasuries?

It appears to me as though this is exactly what's happening right now and I didn't even have to use any magic beans or any other charting mumbo jumbo to get to come to this conclusion.

On a related note, I sure am glad that I closed my short Treasuries picks in CAPS, like TBT.  Some people in the real world took a beating on it yesterday.  It fell almost 10% instantly when the Fed's move was announced.

Deej

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#8) On March 19, 2009 at 12:59 PM, BradAllenton (31.58) wrote:

I think the third chart should have shown the stick guy bent over and the arrow going up his arse because that is what the inflation is going to feel like.

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#9) On March 19, 2009 at 1:15 PM, lenri (70.81) wrote:

I can just see Obama in his sweater sitting in the Oval Office in '11 telling us to be patriotic and turn down our thermostats.

Pretty funny Brad. I agree. But it will be okay because a lot of uppity former rich people (those that hit life's lottery--remember Daschle's comment some years ago) will be joining us in the soup line. And that will make us feel better, not fuller but better. Revenge is so sweet. Who cares if less people get taken off the unemployment line by punishing the producers? We would rather have the revenge than a paycheck.

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#10) On March 19, 2009 at 2:44 PM, JTShideler (75.58) wrote:

I just refinanced my condo from 6.5% to for 4.5%, so now I can take all the money I am saving and buy Gold and Oil.

If you think Inflation will be bad doesn't it pay to borrow for real assets in today's dollars since you will end up paying less valuable dollars back for them?

 

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#11) On March 19, 2009 at 4:11 PM, lenri (70.81) wrote:

Smart move, JT. Good luck.

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#12) On March 19, 2009 at 4:24 PM, TMFDeej (99.26) wrote:

As I mentioned, the dollar really took a pounding yesterday.  To put the move in context, it was the third largest percentage drop in the history of the greenback (at least since daily pricing of it started in 1970).  It will be interesting to see if this knee-jerk reaction continues or if the dollar stabilizes at a level near this.

Deej

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#13) On March 19, 2009 at 5:32 PM, GoodVibe4Ever (< 20) wrote:

TMF Deej wrote:

"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."

........

DJ, you say one thing and then use TA now and then to prove your point including your #12 comment. :) Don't you think it's an irony to use garbage when it serves your best interest and then go and call it tarot card?

Why you don't stick to what you know. If you are failing to see something else no matter what amount it jumps and bite you in the nose, why don't you raise your standards and use a better approach like admitting ignorance, which believe me is a blessing and a beginning for a true learning instead of showing close mindness through your words?

I might throw some people off here by my response to you? They will say what happened to GoodVibe and "keeping his peace" mentality. Let me tell you and those who read this why I decided to do so.

As per my record here in Caps and per many great people’s record who used TA not only to save people money but also to make them tons of money, don’t you think it’s time for people like you to either be open-minded to the idea that TA might be better than let’s say FA that made people something akin to negative 50 to 100% during the last 15 years and if they lucky, they are just breaking even?

You see, I read and heard here in Caps and in my life far worse more than you wrote above. But my statement above is my first direct personal response to those who ridicule my work here (as you hint to me in your blog). This is not because I got offended - As usual, not an iota! Believe me; it’s your loss. ;) - But because you are a TMF member who should hold his comments regarding other bloogers who are trying to enrich the place you call home to a better standards than those who are spitting in the face of the wind. TMF members must show the ability to tolerate and stay open minded. After all, they should be the cream of the cream. I appreciate Caps giving me the space and freedom to express what I believe to be a far superior trading and investing methods even than their own. It's something I promise not to abuse by attacking their ways even if it's not my cup of tea.

I hope you take my words above not as a personal attack towards you but just a friendly reminder that leaders must held themselves to better standards than the rest otherwise your innocent words might unintentionally prevent others from improving their financial life or at least avoiding catastrophe such as the current situation that was promoted by the conventional wisdom of FA alone, if they only gave TA a chance to be incorporated into their work and analysis.

TA is "what is" not "what you wish". It's where people put their money where their mouths are. The charts never lie, people do.

At this note, I hope this find you well.

GoodVibe

And for all those people who are anticipating inflation.. Inflation.. Inflation.. Where's inflation for heaven sake for the last year! It's deflation and nothing but deflation! Wait until IMF sell their gold to provide liquidity to combat - guess what? DEFLATION.

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#14) On March 19, 2009 at 10:23 PM, 72SIGAR (< 20) wrote:

Ok Finally something Geitner and the Rev. Obama can understand!!! Good job. I don't know about Nancy P. Might be over her head

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#15) On March 20, 2009 at 2:21 AM, BGriffinFlorida (27.16) wrote:

GOODVIBE:

You can't hoard the charts. Charts are not the sole property of those believing in technical analysis.

Deej, did not use TA to prove a point in #12.  He references a chart, as a useful tool for conveying the history of price.  He does not attempt to predict the future price range, nor probability there of, using the price history.

 

We are all allowed to view and reference charts, without declaring allegance to TA.

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#16) On March 20, 2009 at 4:08 AM, uclayoda87 (29.31) wrote:

Time appears to be compressed as large financial events now occur on a daily or hourly basis.  The financial changes of the last 18 months far exceed what I can remember in the past 30 years, so when one states that the collapse of the US Dollar is not imminent, by what time frame are you referring?  What may have taken 10 years in ordinary time, may only take 6 months in the special time that we are living in today.

A new branch of science may have been discovered:  Physical economics.  I suspect that this branch of physics also has a big bang theory, which we will likely witness in the next year.  Are financial black holes in our future?

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#17) On March 20, 2009 at 5:53 AM, TMFDeej (99.26) wrote:

Thanks for reading everyone, you too GoodVibe.  You certainly are being awfully sensitive. A small portion of the above post was used to discuss the merits of an investment strategy that I believe is ineffective. That is no different than what I have been saying about non-dividend paying growth stocks.  I have been saying don't buy them, but rather stick to corporate bonds and safe dividend paying stocks in this environment.  If I believe that an investment strategy is ineffective, I don't see anything wrong with saying so.  You are taking things waaaay too personally.  I certainly wouldn't get all bent out of shape if someone made fun of buying corporate bonds and I believe that I am the only one who has been consistently promoting that idea here.

The Motley Fool's mission statement is "To educate, amuse, and enrich."  I think that the above post did just that without getting personal at all.  I shared my thoughts on where the economy is headed, with a little humor at the end.  I never specifically mentioned you and I have never gone over to your blogs and posted any comments, yet you come here and attack me. You're being awfully hypocritical don't you think?  The TMF label should hardly preclude me from providing my opinion about an investment strategy or having a little good, clean fun.

As far as me using TA in my post, Ha I don't think so.  The chart that I pasted into comment #12 was merely to illustrate what a large drop the U.S. dollar had yesterday.  I borrowed it from Bespoke Investment Group.  They are the ones who put the stuff about the DMAs in there.  I ignored it.  Charts are fantastic tools to see where things have been, like looking on the rearview mirror.  They can even be used to illustrate where one believes things are headed, like I used them for when talking about GDP at the end of my post.  I just don't see how they can magically predict where something that is impacted by independent real world events is going.

I clearly am admitting my ignorance about TA.  I think that it's absurd.  I don't get it and don't think that it will work over an extended period of time.  Prove me wrong and use it to rack up a huge score in CAPS over the next several years and I won't be able to dispute its effectiveness.

Deej

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#18) On March 20, 2009 at 10:24 AM, GoodVibe4Ever (< 20) wrote:

Deej -

Thanks for your response. I welcome you and all to come and express your opinions in any way, shape, or form on my blog. My response to you was not personal attack nor a defense to my mortal self or TA. You're missing the whole point of my response, which can be found here:

Leaders must hold themselves to better standards than the rest otherwise your innocent words might unintentionally prevent others from improving their financial life or at least avoiding catastrophe such as the current situation that was promoted by the conventional wisdom of FA alone, if they only gave TA a chance to be incorporated into their work and analysis.

People who read your funny comments and illustrations subconsciously or consciously will say to themselves; "Oh! I like DJ and trust him and if he believes this about TA, I bet it's no good even to try." You see, this is why a leader and influential blogger should keep the door open for himself and others to learn and prove to themselves if something works or not before judging it as absurd.

DJ, if it doesn't work, why many people follow it. If it doesn't make people money, why people keep at it. And if it's their imaginations or luck or whatever, which is not, who care if it makes people money - big one at that! :) I know it's not for everyone but no one know if it's for you or not without trying. Attitude like yours -no offense- is an obstacle towards that chance to try to learn something.

This is why I am investing a lot of time here trying to accomplish one thing.

Give people a chance to try and judge for themselves!

I know you have the right to express your believes but again a leader is in a different position than the rest. That was my only concern about your sentiment against TA, nothing personal for me or towards you. You're way off thinking that you hurt my feelings. Not an iota! :) And I see know ho wyou use the chart as rearview mirror not as evidence. I misunderstood this one. 

And I'll seek not to prove you or anyone wrong. We're all can end up be right. Time will tell!

I wish you as much as you wish for yourself and yours.

GoodVibe 

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#19) On March 20, 2009 at 10:50 AM, TMFDeej (99.26) wrote:

Hi GoodVibe.  As a little background, I have always been a very black or white individual.  I am loyal to a fault and I rarely make the same mistake twice.  I don't know, perhaps it's slightly OCD.  I also am very opinionated and I'm not afraid to express my opinions.  I suspect that is why some people read my blog.  For better or for worse, this is just how I am.  I will continue to express my opinion on matters that are related to investing.

I don't think that it is irresponsible at all for me to express my opinion (that's exactly what blogs usually are) that TA is a bunch of bunk.  It's no different than me saying that GE Capital corporate bonds are a terrible investment right now.  Should I refrain from saying that because they could ultimately end up being an OK investment and I might dissuade someone from buying them?  Of course not.  People aren't sheep.  They should think for themselves, not blindly follow someone else's advice.

To me, thinking about it logically the only reason why TA might work is if one was playing momentum and hopping on a direction that the market is headed for a while OR if enough people practice it that it actually becomes a self-fulfilling prophecy.  For the life of me, I can't understand why someone would use TA, but they do.  That's fine.  Good for them.  I can't understand why people join the Church of Scientology either.  I think that it's a bunch of BS, but clearly some people believe in it.  Do I hate them for it?  Of course not.  Would I try to dissuade someone who I cared about from joining it?  Absolutely (no offense to any members who might be reading this).  I care about The Motley Fool and CAPS and I express my opinions to try to help people here. 

I'm sorry that you don't like my opinion, but that's all it is...one man's opinion on an investing strategy.  People can and should judge whether it works on their own.

Deej

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#20) On March 20, 2009 at 11:23 AM, GoodVibe4Ever (< 20) wrote:

Okay, Jason! Well said. Now, I know where are you coming from and at least we agreed to disagree. Although I don't disagree with you rationally disagreeing or criticizing TA (that the way to go), I will disagree of your approach by ridiculing a legitimate investing and trading tool. Now, let people judge for themselves and let time be the arbiter of all matters.

Just one last thing as food for the thought.. Out of all of your 425 posts in Caps, this post is your all time high most recommended one! :) Irony! Not that I am hinting that I am the reason (I dare not) or that making fun of TA nowadays is the way to add high Recs. (everyone to his own) but I leave this for you to figure out why? ;)

"All truth goes through three stages. First it is ridiculed. Then it is violently opposed. Finally, it is accepted as self-evident."

Hope I had my first two stages and the time is near for the third stage. Have a good day and thanks for adding great value to the community we call home.

GoodVibe

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#21) On March 21, 2009 at 7:32 PM, DDHv (< 20) wrote:

I read an analysis on technical analysis vs. fundamental. They used a simplified market and computer simulation. The conclusion they came to is: if a small enough proportion of the market is using TA, it can work. However, if too large a part is using TA, you get positive feedback and the market prices go into oscillation. Which allows value traders to pick up some bargains! ;-))

 I'm using a variation of fundamental: watch list on a spreadsheet with all the key statistics that can be crammed in, and one column for evaluation. The latter is cleared (when there is some investable cash) and for each key statistic the sort is used. Those stocks in the top 5% for that statistic get an increment amount based on how important I think that key statistic is. This brings it down to about 2% of my watch list that is worth further work. At this point, one of the things I do is look for price inflection points, as well as check out reports and the other due diligence.

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#22) On March 24, 2009 at 11:15 PM, bostoncelitcs (45.30) wrote:

We need another "Great Depression"!! 

Families need to start moving back in with the "in-laws" like in the OLD DAYS if they can't pay their mortgages!!  No federal govt. buying "toxic assets"......Let the Chinese buy the McMansions.

 We got ourselves into this situation.......we are going to have to get ourselves out of it!!

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