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Market Update - Equities and US Dollar

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August 17, 2009 – Comments (27)

Time for a more in-depth examination of the equity markets and the US Dollar. As I have talked about in the past (and is abundantly obvious to anybody who has been watching the market longer than 5 minutes), the US Dollar and Equities have been inversely correlated. Or put another way, the weakening US Dollar has been fueling the rally since March. Analysis of this "bull market" (used very loosely) equity rally necessarily requires and examination of the US Dollar, and where it might be headed.

Before I delve into this current analysis of the Equity Markets and the US Dollar, allow me to provide some background material so you can understand where I am coming from:
Some More Wave A Thoughts - Aug 13 - My preferred EW count
A Look at Some Indicators - Aug 14 - Daily and hourly indicators as well as CPC
SPY Price and Volume - Aug 14 - Examination of Price/Vol "Energy Levels"
There is a Reason You Don't Take Hot Air Balloons Up 3 Miles - Aug 11 - Market update post
Do Your Part to Help End the Current Bull Market. Become a Bull! - Aug 9 - In-Depth Market Analysis. Both FA and TA. Highly Recommended!
USDX Count Update and Thoughts - Aug 12
Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog. - Jun 17 - In-depth analysis of the US Dollar and inflationary/deflationary pressures

.... continued in the Comments section ....

27 Comments – Post Your Own

#1) On August 17, 2009 at 3:56 PM, binve (< 20) wrote:


Original Post can be found HERE

Equities - EW count of SPX

Here is my longer term Primary / Intermediate scale count:



Drilling down into Wave A of the final zigzag. Per my preferred count (Some More Wave A Thoughts) last week, I believe Wave A has ended. Here is an update on the subsequent price action. New price move is clearly outside of the channel. Wave 1 and Wave 5 (minute) are roughly the same size with a clear extended 3rd. Move looks complete.

The reasons why I still like this count:

1. NDX and COMPQ (the "leaders") made new highs on Aug 12. This (IMO) is the true end of Wave A
2. The overshoot on the SPX on Aug 7th was unconfirmed by NDX and COMPQ. I believe this is a B wave within Wave 4 (B waves are often unconfirmed), driven mostly by finanicals
3. The hourly and daily indicators are rolling over in topping action. Now this can be a fakeout. They can "roll over" and simply consolidate. But the daily chart has some strong trend changes and negative divergences. I think we are correcting (probably only slightly) for a bit.



Subsequent price action is shaping up to be a flat (most likely). I believe the first leg (minute A) of this correction (minor B) is done or almost done.





Indicators - Daily, Hourly, Price/Volume Levels

The Daily indicators have finally rolled over. Negative RSI Divergence. Negative cross on MACD. Downtrending CMF, Piecing of the EMA 20 for the first time in a months, etc. Things are beginning to look legitimately bearish on the indicators. Market looks ready to finally correct for a bit.



On a 60 minute chart, the Bearish Divergence which were building up for weeks look like they have finally taken hold. Additionally, the price is clearly below the MA ribbon (MA 5 all the way up to MA 120 - very bearish), and there are CCI readings not seen since early July.



The observation that I made in SPY Price and Volume was that the Price/Vol bands tend to act like "energy levels" and that the rally spent so much energy getting to the top, that it seems like it needs to pullback and rest at the previous energy level before making another strong move up. Well it looks like the observation is panning out:



Sentiment - CPC

The sentiment surveys still say more bullish than bearish among investors. Which is a good gauge on how we are progressing along towards the end of Primary Wave 2. But for a more immediate look at sentiment (via option investors) with regards to the current rally / correction, lets take a look at the CPC.

The CPC is typically a contrarian indicator. And the last 2 weeks, while the rally was still near the top, the CPC was still registering at the bullish extreme. I remarked last week that that was some more circumstantial evidence a correction was imminent.

Currently we have a "trigger" (Black line - EMA 20 over Orange Line - MA 100) suggesting the CPC is headed up (bearish). When the CPC hangs out in the 1.2 area for a couple of days, then I think the correction will be over.



US Dollar

Robert Prechter was interviewed recently talking about a major bottom in the US Dollar and deflation. I will agree that we made a bottom in the dollar recently, but I think the qualifier "major" is up for interpretation.

First: ---- DISCLAIMER: binve IS A LONG TERM DOLLAR BEAR ------
Short term is all noise. And the current dollar weakness is fueling the equity rally. Long term, equities will go down (due to poor fundamentals) and the dollar will go down (due to confidence crisis) together (such as 2007-2008 and numerous other occasions)



I could spend pages and pages right here talking about why I think the dollar is not strong, why I don't think the ultimate outcome is deflationary. In fact I am really fighting the urge not to. But I have dedicated a whole other blog post to this issue, which I wrote on June 17: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog.

Some more recent thoughts why I am long term bearish on the dollar (besides the ones found in this post):

1. GDP is fake. All consumer based GDP components are dropping drastically. All production based growth is anemic / slightly negative. And the biggest growth portion is the government.

We are deficit spending (and devaluing the dollar) on non-productive GDP growth just to make GDP look "not as bad as it really is".

2. Treasury auctions are so much worse that most people imagine. The Fed is now buying a *HUGE* portion (like 50%) of the latest treasury auctions.

They are hell-bent on keeping interest rates low at the direct expense to the value of the dollar.

And yes, while I realize that the US is not the only one doing this, no other central bank is even close to the magnitude that Fed is engaging in debt monetization.

So in terms of a bottom, yes I think we have a "temporary" bottom (for a couple of months). I think wave 1 (gray scale) is complete and we will be into a correction up (bullish for the US Dollar) for the next few months while it completes a 2 (gray scale). But I think this setups up a Head and Shoulders. However H&S or no, my preferred count is still bearish on the dollar long term.





But I believe this strict relationship is in the transition process. Currently there still is inverse correlation, but at some point that will break down. Eventually I believe equities and the dollar will fall together, as they have many times in the past.

The Long Term View

Just for kicks, here is a glimpse of the long term view from my perspective.

Here is my little speil on why I think US equity prices will still drop despite the inflationary environment

- If I thought the outcome was truly deflationary, I would be making a call for the S&P to drop to 133 (during 1929, after the initial 50% drop, the stock market dropped another 80%! over the next few years). 20% of 666 = 133. And no I do not think that is realistic given governement policies. I think something like ~400 on the S&P (~4000 on the Dow) is more realisitic
- But what the big drop in the middle of inflation?
- Because earnings still stink!
- Inflation is not enough to keep prices high (I think all the inflated money will find itself in real assets, not the stock market), however, I think inflation will keep prices in the stock market from dropping as low as they otherwise would
- Inflation will also help earnings from dropping in prices terms as low as they would go (in real terms they will be much lower)
- I have said before, that the market needs to make a bottom in terms of valuation before it can go up again, and historically that is when PE is 6-10.
- Just for kicks, lets use PE = 8 as the bottom.
- Earnings (GAAP) from good analysts (such as Mauldin) are around $40. And for the sake of argument, lets say they stay the same for the next few years (I see a much stronger argument that they will actually shrink, I see no compelling argument that they will grow). But lets say inflation keeps them about $40.
- PE of 8 * $40 earnings = $320 Price of S&P at the bottom
- This is where I get my ~400 estimate for the S&P.
- I think we will have inflation big time, but I think the market fundamentals are so bad that they will fall regardless of inflation
- Indicidentally, my gold argument still stands. Dow at the bottom of ~$4000 (not as bad as an equivalent Great Depression move) still puts Gold at $4000 eventually if you believe like I do that the Dow-Gold ratio will bottom at 1 (or even less).

.

Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.


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#2) On August 17, 2009 at 4:10 PM, ReadEmAnWeep (36.90) wrote:

You really think it will drop down that low?

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#3) On August 17, 2009 at 4:38 PM, portefeuille (99.66) wrote:

prechter agrees ...

 












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#4) On August 17, 2009 at 4:40 PM, portefeuille (99.66) wrote:

(somewhat)

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#5) On August 17, 2009 at 4:51 PM, cthomas1017 (98.42) wrote:

Brilliant post. (As usual!) :) +! rec

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#6) On August 17, 2009 at 5:00 PM, Londamania (48.41) wrote:

http://www.investorsfriend.com/S%20and%20P%20500%20index%20valuation.htm

I posted some extra discussion on this but lost it somehow when the comment didn't take.  Hope you read the link Bin it's great info on GAAP earnings and also timely.  Main point - a GAAP P/E of 17-22 is typical for the past few years and using their earnings estimate of $45 (close to your $40) that puts S&P 1000 right in the sweet spot of expected value.

Interested to see how far down we go right now.  I am expecting it is as you say - not much farther than coming right back up.  Going with the linked earning anallysis that puts us waffling around the current levels for some time to come.  I tend to agree with all the rest of your analysis and am hoping it shows up a bit at some point in my exporting and materials companies :)

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#7) On August 17, 2009 at 7:22 PM, binve (< 20) wrote:

ReadEmAnWeep, Yeah, I do. I think it is a realistic possibility. I could be completely wrong, and this is a new bull market and SPX 2000 is the next stop in a few years. Or I could be wrong and now the SPX is fairly valued. But I don't think so at all. I think the market is still grossly overvalued for the current strength (GDP is largely fake, see above in my post) and I think the future pain coming in the next few years (especially from Option-ARM resets which will affect the entire economy) is not being adequately discounted.

portefeuille, Hey port, while Prechter and I are in a agreement here transiently with respect to the dollar and equities, I think we are largely in huge disagreement on the big picture:

(I am not an EWI subscriber, this is just what I see publically) As I understand, Prechter / EWI forecast for the long term:
- Wholesale Deflation
- Drops in the stock market to Great Derpression Levels
- Oil to 10/bbl
- Relative underperformance of gold
- Extremely strong dollar due to defaltion (USDX to ~100)
- etc.

My view is significantly different long term:
- Moderate Deflation now, massive inflation in the next 1-2 years
- (see my spiel at the end of the orginial post for the stock market drop in the middle of inflation). Stocks will drop but infllation will prevent a drop to GD level in nominal terms (I have no doubt we will be there in real terms)
- Oil to triple digits
- Gold to low/mid 4 figures
- Extremely weak dollar / currency crisis, USDX to 30-50
- etc.

cthomas1017, Thanks, I appreciate that!

Londamania, Hey Londa! I will definitely read the link, but I have to discuss you comment immediately first

Main point - a GAAP P/E of 17-22 is typical for the past few years and using their earnings estimate of $45 (close to your $40) that puts S&P 1000 right in the sweet spot of expected value.

See, the problem with this is that any "hisotorical analysis" that looks back say 30 years, will find a conclusion *exactly* like this one. Why? Because up until 2000 we were still in a mega-bull market! Overvaluation from 1990-2007 was rampant!

My basic premise is that since 2000, we are in a secular bear market (2000-2007 was just setting up, the worst years are yet to come). And using GAAP "average" PEs of 17-22 (taken from bull market times) is comparing apples to oranges. I know we may not see eye to eye on this, that is just where I am coming from.

I still think 950-960 is a pullback area in the next couple of weeks.

Thanks for the comments man, I really appreciate them!.

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#8) On August 17, 2009 at 9:06 PM, madcowmonkey (< 20) wrote:

binve- you need to be getting ready for the big day man. What are you doing posting during Lamas (spelling) class. HHHEEEEE HHHHEEEE hhheeee. Breathing really worked for us during the big show....the epidermal also helped.

What is going to kick off the inflation over the next 1-2 years? I don't really see oil going back to triple digits in the next 2 years. I would be interested to hear more about the ratio of Dow and gold. Man, I forgot about the option arms. Those will be restructured by the government or else the banks will get demolished. Indy Mac was the big option mortgage bank that went under right away. I think the fed learned something there and will help hold it off so it doesn't unravel the entire banking system. They are an evil type of mortgage.

The USD is a big catalyst for the market as I stated on another blog of yours. If there is a decoupling with the market and USD, I think the commodities will really run again.

I don't see the market reaching the 400's. Ever. If we do get another 80% drop like the GD, then there will be more to worry about then the USD. Does your 1-2 year thought process run with the next presidential election campaign?

Take care and watch oil and gold drop for a better entry or re-up. 

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#9) On August 17, 2009 at 10:30 PM, Tastylunch (29.40) wrote:

madcowmonkey

I know you asked Binve but I figured i might chime in (i'm sure Binve has a diffrenet answer in mind).

I'm in the deflation until I see otherwise camp, but I dont think inflation is out the question.I agree with your call on Oil. The risk is to the downside now.

To me the question of deflation vs inflation hasn't been determined by what the Fed has so far, but will be what the FED does next. We are at a tipping point imho.

Thye've exhausted the Japanese playbook, it didn't work. As we should have expected because it didn't there either.It's still deflationary in the consumer sector.

The question is now will congress or the Fed bypass banks and directly inject consumers (ala zimbabwe) via homeowner bailout or stimulus or wage increases for gov't workers?If they do that I bet you'll see inflation take hold very very quickly. All that money is sitting behind a very thin damn of fear at the banks. If one major bank gets courage that the consumer will be able to pay back their debts....

Or will the Fed raise rates to try to slow inflation before it arrives? if they do that we could have a real deflationary problem.

But until they do something that I think we have mild deflation as odd as that seems. Demand is just so so slack. Banks are stuck with lots of NPLs and weakening by the quarte, rent prices are falling everywhere, consumer good are very very slow. I see just  no tractionfor inflation to grab onto yet.

1-2 years does make sense when you consider that Bernanke is up for reappointment in that time frame and you have midterm elections...

what's your thoughts my man?

 

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#10) On August 18, 2009 at 4:47 AM, uclayoda87 (29.35) wrote:

If you look to the US to see where inflation might come from, you won't find it.  That's because inflation will come to us from China, when they use their US dollar assets to buy commodity products from the US.  When the US commodity producers start feeding the expansion in China, we will be left with more US dollars at home, chasing fewer commodities like food.

Even though prices will rise, don't expect wages to increase ouside the commodities producers.  We will likely have stagflation for some time to come, even after the US commodity exporting businesses have recovered.

I doubt that China will continue to have an appetite for US debt, but they might be interested in some real estate, like maybe Hawaii or Alaska.

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#11) On August 18, 2009 at 8:27 AM, Londamania (48.41) wrote:

Hey Binve - hopefully you read the link I attached.  The GAAP S&P P/E ratio from 2003 - 2007 was between 17-22 and that market scenario could be very similar to the one we face over the next 5-10 years.

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#12) On August 18, 2009 at 9:28 AM, binve (< 20) wrote:

madcowmonkey, Hey man! Yeah we are about a week away from the due date, much excitement in the house :)

What is going to kick up inflation in the next 2 years?

- Steve Saville: Market Value, Money and Credit - Layman's description of TMS and its importance
- Steve Saville: Money Confusion and Inflation/Deflation - Excellent discussion as to what constitutes money and why some monetary discussions are invalid
- Zeal: Big Inflation Coming 2 - Discussion of inflation and deflation.
- Mises: TMS - *The* Definition of True Money Supply (TMS).
- Saville: Inflations New Upward Trend - Misuse of the Velocity of Money concept
- Steve Saville: Withdrawing the Stimulus - How monetary supply enters the economy unevenly and non-productively.

Inflation is already built in. It is being injected (monetary supply being increased) in tremendous amounts starting a year and a half ago. And if you read the articles above, Saville's (and mine, except he says it much better :)) contention is that lags in monetary supply growth and price inflation take about 2-4 years to manifest.

So to be clear, it isn't future actions that will bring about inflation, it is current and past actions.

I don't see oil going back to triple digits in 2 years.

That isn't quite what I said. I said my long term predictions (as compared to Prechter) was that inflation would manifest in 1-2 years (as opposed to wholesale deflation) and that in the long term oil would go back to triple digits. Will it happen in 2 years? I have no idea. When I say long term I am thinking 10 years out. But I do think $100 is a more realisitic that $10 for oil over the long term.

The USD is a big catalyst.

I agree man. That has been a big theme throughout my analysis for a long time as well. When I look at the Dollar I see fundamntal weakness, and there will be decoupling (as I show in my chart above) as there have been many times in the past.

I don't see the market reaching the 400's. Ever.

Fair enough man :)

So what's up with closing all the madcow picks? Thanks for the comments bro!

Tastylunch, Hey Tasty :)

To me the question of deflation vs inflation hasn't been determined by what the Fed has so far, but will be what the FED does next. We are at a tipping point imho.

Actually from my response above to madcow, I am in the opposite camp:

Inflation is already built in. It is being injected (monetary supply being increased) in tremendous amounts starting a year and a half ago. And if you read the articles above, Saville's (and mine, except he says it much better :)) contention is that lags in monetary supply growth and price inflation take about 2-4 years to manifest.

So to be clear, it isn't future actions that will bring about inflation, it is current and past actions.

Or will the Fed raise rates to try to slow inflation before it arrives? if they do that we could have a real deflationary problem.

Yeah,  I don't see that as a realistic possibility (because the Fed fears "deflation" so much), and I do not buy this as a valid mechnism for the Fed controlling inflation. They have often used the Fed funds rate in conjuntion with the "gas pedal" analogy. And I don't think it works after the rampant TMS growth the past couple of years:

- Steve Saville: Withdrawing the Stimulus - How monetary supply enters the economy unevenly and non-productively. 

Thanks for the comments man! I also read all the comment in you massive macro post. And I am in a agreement, it is one of the most useful, if not the most useful post on Caps! Thanks again for taking the time to write it!

uclayoda87, Actually the opposite will happen. As China starts buying less and less Treasuries, to keep intrest rates the same, the Fed has to buy more. This is literally throwing gasoline on the fire. Treasury debt is non productive and the interest paid is a suck on the economy. On top of that the Fed buying the same US debt is directly inflationary (the Fed has *no wealth*). It buys the newly issued Treasury debt by devaluing the dollar (creates new ones out of thin air to buy the debt).

Thanks for the comment!

Londamania, Hey I did read the article, and I have *so many* problems with it. Big surprise, eh? :)

PE of 17-22 is greater than the long term (last 100 years) historical PE average of 14. The argument (from this paper and several similar other I have read) is that this is the "new economy" or "this time it's different"? ... BS. It is the same until proven otherwise. 5 years vs. 100 does not signal a trend change. At this point it is nothing more than a euphoria-driven anamoly.

I could go into long term PE valuation, and Valuation cycles, a look back at PEs from the mid 70s and 50s, etc. but I think you know where I am coming from.

Second: The GDP argument from the paper. LOL!!! Yes, during times of legitamite GDP growth, earnings will follow. But here's the deal. *GDP is not real right now!*

GDP is fake. All consumer based GDP components are dropping drastically. All production based growth is anemic / slightly negative. And the biggest growth portion is the government.

We are deficit spending (and devaluing the dollar) on non-productive GDP growth just to make GDP look "not as bad as it really is".

Hey man, just to be clear, all of my emphasis and indignation is directed at the link you provided, not at you. Whne the author does that much "historical comparision" and misses the mark so completely, I just have to shake my head.

But thank you for the comments and always trying to bring a contrary view to the discussion. I really appreciate it!..

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#13) On August 18, 2009 at 9:58 AM, outoffocus (23.49) wrote:

Great article.

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#14) On August 18, 2009 at 10:42 AM, XMFSinchiruna (27.12) wrote:

A phenomenal analysis and discussion, as always!!!!

A+++++ :)

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#15) On August 18, 2009 at 1:17 PM, Tastylunch (29.40) wrote:

binve

Naturally I disagree a bit (well except about what the Fed does next they are definitely pro-inflation, we def agree there) :)

I think if you had a moderately healthy banking system than what you describe would be what would be happening (I watch my supply chain like a hawk to see if I can see any meaningful price increases, so far in 09 it's been mild price decreases)

The Fed certainly has tried to inject inject inject, but with the new FASB rules and banks' massive insolvency i see another banking implosion as now being increasingly likely. and since the banks are the ones who were injected an not the public...

I just don't see the money circulating until the banks get off lifesupport.

LIBOR is back to reasonable levels but the consumer is cut out more than ever now.

Just my two cents.

Anyway don't know if you read Itulip but they have switched have deflation to inflation now (as part of their Ka-Poom philosophy). They have the best inflation argument I personally have seen.

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#16) On August 18, 2009 at 2:15 PM, madcowmonkey (< 20) wrote:

binve- here is what I am chewing on right now; TMS is currently about 10% higher than it was at this time last year. From the Seville article on TMS. I agree/agreed with the outlook that inflation will be at our doorstep, I just don't have a timeframe or I guess the tipping point as tasty mentioned. I partially agree that it is already in the works, but I don't completely agree with the statement. There are actions that can be taken to keep inflation at bay still. That is why I asked what would kick it off, but I see what you mean. 

the oil game is showing real signs of weakness. OPEC is cutting production and the US keeps the analysts coming back saying we might drop 200,000 bbl of oil this month, when in fact we go up by 2.5 million. I also believe there will be a surge in alt fuels in the next 10 years. So if oil goes to 100, I expect real competition to take place. I don't think too many economies can manage with oil that high....I know the US would really be hurt. Besides, we can just purchase oil off the mexican drug cartels until Mexico does something about it:)

 The 400 comment wasn't meant like that, but I just see 400 as a number that just isn't attainable. If we reach 400, then that means 80% of the banks just went under. We have already seen the fed take action on that. I thought 550 and 600 would be attainable from a couple months back, but at this point it is really up in the air and that is what I am going to stick to until more stuff plays out.

I closed my picks, similar to what I did last year. I want to get rid of all the junk that I have been putting in there and just start putting stocks in when I purcahse. Just really trying to get rid of the static stocks and help more. We will see what comes of it. I am not too hip on giving out actuall selections, so i am not sure how it will pan out, but hopefully it will be relevant and helpful. I don't see me adding anything until down the road a ways.

If the CPI does go up and they do stop money from going in, then watch out. I think they need to be ahead of the game on that one. 

One thing that the government could do, would be to creat jobs in the energy fields. Let's get smaller grids going that deliver more locally. 

Actually, real jobs that produce goods for this country would help in general. The energy field is just a place to start. I just think creating jobs would help stall the inflation we could be heading for.

thanks for the feedback. 

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#17) On August 18, 2009 at 4:41 PM, binve (< 20) wrote:

outoffocus, Thanks, I appreciate that!!

TMFSinchiruna, Hey man, thanks!! You're "blind leading the blind" cartoon was brilliant. Very nice find :)

Tastylunch, Hey Tasty, LOL! Yeah, I was expecting something far from agreement with my response :)

So to be clear, the price increase are 1-2 years in the future. That is the point I was making in comment #7. Moderate deflation now, price inflation in 1-2 years. This is due to the lag (2-4 years) between severe monetary inflation and price inflation.

The point I am making is not "IF" price inflation comes, it is "WHEN". There is nothing the Fed can do at this point to stop it. The montary inflation bomb is buried with a timer. There is no fuse that needs to be lit to set it off. I believe based on past and recent monetary policy, it is an inevitability.

Actually I haven't read Itulip. I should, it is just on my list of things to read, and I never got around to browsing the site. But I think I should :)

Also, I have a favor to ask you, could you send me your email address? It doesn't have to be a personal one (disposable one that you will check is totally fine). If you could send it to me at meewhooo2@yahoo.com. Thanks bro!!

madcowmonkey, The scary thing is that TMS growth is accelerating... again. And like I said to Tasty above. There is nothing to set off the price inflation from all this monetary inflation (no fuse for the bomb). The bomb is on a timer and in 1-2 years it will unevenly manifest itself in the system.

Also, to further the discussion, the Fed is not going to change course. And any talk about changing course (on inflation) is just talk. A couple of years ago, the Fed looked at this issue, convinced itself the deflation is the worst possible outcome, and set monetary inflation into motion. Quantitative Easing is the Point of No Return on the path. The Fed is saying "Inflation be damned" quite literally.

When I look at the body of evidence, I see inflation over the long term. And I see price inflation manfesting itself as early as mid 2010.

Re: Oil. Like I was saying above in comment #12 to you. I think 100 oil is another long tem number. I think there will be weakness in the short term. I think $10 oil is not even remotely realistic in the near term and fairly ludicrous in the long term. But, I agree with you, there are some real supply / demand issues that must be addressed with oil that high again. But that is an issue for the future :)

Re. 400. I am not so sure. I don't think 400 corresponds to 80% of the banks going under (although there will be a large portion that deserves to). I think the market as a whole is still fundamentally overvalued right now. And I think the move from 1000 to 400 will happen over a span of several years (like in my last chart in the original post). I will not be a crash that happens in 6 months.

I think the next phase will be a grinding and forced erosion of the "fluff" that is present in the economy. And yes, I think a big portion is valuation and the fact that future weakness for the consumer and anemic / negative production is not being properly discounted.

Re: Picks. Oh yeah, that's right. I forgot about that. Any idea what your new pick thesis will be?

Actually, real jobs that produce goods for this country would help in general. The energy field is just a place to start. I just think creating jobs would help stall the inflation we could be heading for.

I agree 100%. All of this keeping interest rates artifically low to prop up consumer spending is not a solution. It is a stall tactic and it is routing wealth (since the government has no wealth) away from productive enterprises to non-productive ones.

Thanks man!!.

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#18) On August 18, 2009 at 9:28 PM, Tastylunch (29.40) wrote:

binve

At least for me it's an "If", I actually am aligned with you 100% on the "when" "if" that's the route we go. :)

Alo agree I think there is little chance of Oil going to ten bucks unless we whlesale phase it out as a fuel. vereleger thinks 20 bucks. I think anything below 30 is very very unlikely due to geopolitical reasons.

Shoot I juts lost the itulip link it's in their forum I'll see if I can dredge it up. You'll want to read it. Janzen is my favorite inflationist

Yeah sure I'll email you bud, np. Kinda bummer the fool email fnction is usted, but I had to turn mine off anyway. Some of the spammers didn't care for what I was saying about their various trash companies.

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#19) On August 18, 2009 at 10:39 PM, madcowmonkey (< 20) wrote:

binve-  It is a stall tactic and it is routing wealth (since the government has no wealth) away from productive enterprises to non-productive ones

I agree. It is actually a shame and a waste. Again, I think the government needs to do less spending and start using the purchasing power for productive enterprises. We all know that is the problem, why is it not already laid out in black and white. Instead the fed is just interested in moving numbers around.

I am still beside myself that money was set aside to the tune of 500 billion for foreign central banks. It is very clear to me that the fed audit bill needs to be implemented....quickly. If there is another stimulus package or even more money to be dolled out, it needs to go to companies that are creating products within our country. I think this could really keep inflation at bay.

For discussion sake, I agree with your sentiment about long term inflation, but I still think it can be managed. The only difference between our thought process.

My thesis for stocks: I am still letting things play out right now. Tasty has brought up an interesting argument about commodities decoupling and I have been interested in them for a while now. I still believe tech will be there when you want it. I would personally like to see a big pull back in gold and oil and have been waiting for that one to come back around. I know you are in gold, so I am not trying to vex you on that one:) But I still see a correction coming again in spot gold. I still think solid small caps are where it is going to play out big for me. I will not be jumping in everything at once though. So don't expect 30 picks to be up in one day:) I don't short in RL, so I don't know what to say on that note and I really want to be able to make an argument that I believe in good fundamentals for companies, but it just isn't there yet. I think I learned a little bit from the OCT/NOV and MAR Markets. So seeing low numbers on the market, shouldn't be as foreign to me this time around and I am hoping to capatilize on some long term positions with that. Wherever that number is for me anyway:)

400- I think I will stick with this one for a little bit. There was so much reasoning behind the downturn in 08' with banks and everything piecing together. I know 660 hit with the idea that more banks would go under, obviously it didn't happen with TARP and whatever else the fed/gov pulled off. But 400 and 80% of banks going under seems to fit to me pretty much by basic numbers. So I just can't see 400 being viable. Just like your claim to the gov feeding the inflation beast, they will also not let banks go....if they can help it. I guess we would have to look at when option arms were really hot and when they reset. I think it was 5 years, so 2010 would be about right to see the true inflation come out if these things get out of hand. The more I talk about it, the more your argument is making sense in my head. I guess I am just in that denial camp of inflation is going to be here wether you like it or not. In my mind it can still be curtailed so it doesn't get out of hand. Repeating I know......it isn't flattering:)

BTW- I did like 10 minutes of snooping to find that email:) It isn't even the right one either:) What the heck.

 

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#20) On August 18, 2009 at 11:27 PM, Tastylunch (29.40) wrote:

Hrrmm I seem to have lost the itulip link, but here is another couple to two very very good ones on ka-poom theory and argentina

http://www.itulip.com/forums/showthread.php?p=106493#post106493

http://www.itulip.com/kapoomtheory.htm

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#21) On August 19, 2009 at 12:04 AM, madcowmonkey (< 20) wrote:

from the forum article:

The axiom of Ka-Poom Theory, that defines a specific economic, trade, and finance process that occurs under circumstances unique to our time, is that the appearance of a sharp period of deflation after a bubble collapses is in and of itself a warning sign of potential impending out-of-control inflation. That is why we give it a special name disinflation to distinguish it from deflation. 

And here

During the FIRE Economy Depression, PCE registered its first ever year over year negative growth rate. After a bounce off -$100 billion last month, this month PCE resumed falling and is now at -$150 billion. We’ll return in a month to see where we are. If it is lower still, watch out. That means the U.S. economy may still be trapped in a vicious Argentina 2001 type of production-consumption down cycle. 

Naturally, PCE cannot rise at a sustained pace until unemployment has stopped rising. 

I guess we are effed:) No wonder the unemployment numbers have been so mis-managed.

What a great article. I will have to keep reading tomorrow though. Too many of my wifes sierra nevadas are starting to take their natural course with my mood.

Thanks for the links tasty. 

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#22) On August 19, 2009 at 9:17 AM, binve (< 20) wrote:

Tastylunch, Hey man, thanks for the links! I only just scanned through them right now, but I am going to go back a re-read fully. But the think that caught my eye right off is "dis-inflation". Perfect! That is exactly what it is. That is exactly what I have been calling what we have right now as "moderate deflation" or a "deflation-scare". As long as the Fed has power, inflation is the long term outcome, IMO and this is simply a current (and short, relatively speaking) period of "dis-inflation", not true entrenched deflation. Because money supply is not actually shrinking. We have deleverging and some price deflation, which is a fear-based transient event, but the root cause for long term inflation has not been altered and recently in fact has become worse.

Thanks for the articles !!

madcowmonkey,

I am still beside myself that money was set aside to the tune of 500 billion for foreign central banks. It is very clear to me that the fed audit bill needs to be implemented....quickly.

Yessir. Our money is on a path to worthlessness (maybe not to zero, but the literal worth-less-ness). Savers will be the catalyst to turn our economy from consumption based to production based. We need real capital investment, not low-interest debt-financing, to fuel America's transition. But the Fed is directly punishing savers. They are the biggest obstacle to truly fixing the economic problems.

For discussion sake, I agree with your sentiment about long term inflation, but I still think it can be managed. The only difference between our thought process.

Thanks man, I agree that our discussion has only been about degrees and not polar opposition :)

And FWIW, I am not gung-ho on Oil right now for a trade. I bought at $35 and it hit my technical target of $77. I agree with you and Tasty, the near term (next 3-6 months), the risk is definitely to the downside. The is true for most commodities in the near term. Does that mean they reach their 2007-2008 lows, again? maybe.

But I still think long tem (next 10 years) the risk/reward still favors being very long commodites (which I am). So we could get some better entry points, and if we do I will take advantage. But I still remain fundamentally engaged.

And no worries on trying to vex me with gold :)

If we do get a pullback there, I will take full advantage of it too. I have my base position established and pullbacks for future buying opps are fine by me, because I think the long term (10 year) direction is up.

Thanks man!.

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#23) On August 19, 2009 at 4:53 PM, Londamania (48.41) wrote:

Hey Binve glad you read the link and had a great response.  Several counter counter points:

You are using 8 in your longer term analuysis but seem to agree 14 is the historical #.  Should it be 14?

One of my first comments on your blog (not this post) was about "French General Thinking" and how using the past as a guide can break down (spectacularly) when technological advances have changes the underlying playing field.  This definitely applies to military planning and I think also applies here.  SO MUCH has changed in the past 20-30 years (let alone since the great depression) that relying on old trends, and ignoring the new ones, seems to me just...wrong.  In your first response here you said we needed to use the current data since we are now in a secular bear market, then when I showed you the current data you said we needed to use the old data!  It's getting hard to follow :)

We crashed in 2000, ran up to 2007, crashed again, now - to think we might run up again for a while (few years) and do it using the same P/E ratios we just did 5 years ago - doesn't seem so outlandish to me.  People say that the economic activity we have is "just" stimulus based, then I hear in the next breath how so much of the stimulus isn't even spent yet and isn't being applied in the right areas even.  And in large part I am long right now because so much of the stimulus HASN'T been spent yet - look what we have even without so much of it!  Companies have figured out how to operate in real time with reduced volumes and still make a nice profit.  How?  With computer technology micro-managing so many parts of their business that 20 years ago was not in place for most companies.  The earnings we are seeing are real and they will stay in place.  What is going to take a while is for unemployment to recover.  That's a whole separate debate about how to count that but I see it as a strong headwind preventing things from improving not a doom anchor.   Where we are right now around S&P 1000, with a modern P/E multiple of 22 on a GAAP earnings forecast of 45 is just about right where it should be.  I won't be suprised if we spend the next year going up and down around this level. 

Longer term - it's all about this debt load.  We need to fix it, but we can't find the collective where-with-all to take the pain of doing that.  That may be the end of us but it will take a while to come to pass.  Probably as soon as we become just another equal player to a group of other nations (more like it was in the early 1900s say) then we might very well drop right down to insolvency.  Before then - no one with the power has an interest in seeing that happen.  If we go down now we are taking everyone else with us - including China.

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#24) On August 19, 2009 at 5:59 PM, binve (< 20) wrote:

Londamania, Hey man :)

You are using 8 in your longer term analuysis but seem to agree 14 is the historical #.  Should it be 14?

14 is the long term historical *average*, *bottoms* typically occur at PEs of 6-10. Here is a great article that discusses that: http://www.zealllc.com/2007/longwave3.htm

One of my first comments on your blog (not this post) was about "French General Thinking" and how using the past as a guide can break down (spectacularly) when technological advances have changes the underlying playing field.  This definitely applies to military planning and I think also applies here.

I remember that discussion. It is from this post (back in April), comments number 30 and 32. Look at my response in comment #32, and you will see that it is still roughly the same story I have been sticking to.

Regarding old data vs. new data. I think you are misunderstanding what I was saying (or maybe I was misunderstading what you were asking) :)

*Any* analysis that takes place has to consider that 2000 was a secular trend change. We are now in a secular bear market. Don't believe me? Look at real (inflation-adjusted) prices for the SPX.

And so looking back through the historical data, you must use bear market comparisons to make valid comparisons (such as mid 70s-80s, okay comparison, or 1920s-1930s, much more valid for root causes). Doing any kind of comparision of PEs of the last 15 years is a complete waste of time IMO. Because PEs in the 90s went to 47!!!, There was a complete overvaluation of *everything!*. We have bubbles galore bursting. Even now, we are still on the way down (not up) of a collapsing debt bubble.

So while I appreciated before and still appreciate your French General Analogy, saying there is no basis for comparison between now and the Great Depression hugely misses the mark IMO.

The biggest difference, the "game changer": inflation.

And there is my speil, accounting for the French General Strategy :), thanks takes into account the historical comparisions as well as the current monetary policy:

Here is my little speil on why I think US equity prices will still drop despite the inflationary environment

- If I thought the outcome was truly deflationary, I would be making a call for the S&P to drop to 133 (during 1929, after the initial 50% drop, the stock market dropped another 80%! over the next few years). 20% of 666 = 133. And no I do not think that is realistic given governement policies. I think something like ~400 on the S&P (~4000 on the Dow) is more realisitic
- But what the big drop in the middle of inflation?
- Because earnings still stink!
- Inflation is not enough to keep prices high (I think all the inflated money will find itself in real assets, not the stock market), however, I think inflation will keep prices in the stock market from dropping as low as they otherwise would
- Inflation will also help earnings from dropping in prices terms as low as they would go (in real terms they will be much lower)
- I have said before, that the market needs to make a bottom in terms of valuation before it can go up again, and historically that is when PE is 6-10.
- Just for kicks, lets use PE = 8 as the bottom.
- Earnings (GAAP) from good analysts (such as Mauldin) are around $40. And for the sake of argument, lets say they stay the same for the next few years (I see a much stronger argument that they will actually shrink, I see no compelling argument that they will grow). But lets say inflation keeps them about $40.
- PE of 8 * $40 earnings = $320 Price of S&P at the bottom
- This is where I get my ~400 estimate for the S&P.
- I think we will have inflation big time, but I think the market fundamentals are so bad that they will fall regardless of inflation
- Indicidentally, my gold argument still stands. Dow at the bottom of ~$4000 (not as bad as an equivalent Great Depression move) still puts Gold at $4000 eventually if you believe like I do that the Dow-Gold ratio will bottom at 1 (or even less).

regarding the Realness of earnings: We are seeing this differently my friend. I see your points, I just don't agree with them. Vice versa for you. And this point, I think we can only agree to disagree and give it time to see how it plays out in reality.

Re: Unemployment. It is so bad, and it is going to get worse. Unfortunately. The thing about "stimulus" is that it is artificial. So any jobs that are created are a function of stimulus, And those jobs exist because of stimulus (i.e. cash for clunkers, etc.). So the will be industries (which are ultimately non-productive) developmed from artifiial stimulus. And as soon as the stimuls is gone, many of those jobs will go too. And where does the stimulus come from? Not the government. The government has *NO WEALTH*. It comes from debt financing (Treasuries) or dollar devaluation. The government stimulus does not actually fix anything, it just moves the problem around. And becuase the government has no resources of its own, it is quite literlly diverting / re-distributing productive captial to non-productive enterprises (i.e. bailout of financials).

Debt is the biggest deal right now.

This is why I am convinced that a currency crisis in the US Dollar is all but inevitable at this point.

As always my man, thanks for the discussion and the debate !!..

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#25) On August 20, 2009 at 5:27 AM, GoodVibe4Ever (< 20) wrote:

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#26) On August 20, 2009 at 10:09 PM, capf00l (< 20) wrote:

 Goldman and Bank of America run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.

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#27) On August 22, 2009 at 12:24 AM, kstarich (30.67) wrote:

Binve

Here is the link I was looking for  Yamana hedges from Fool of course.

Kstar :-)

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