Weekly Musings 38 10-2-11
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For those who are new to the Musings: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights, and thank you for supporting the site.
Global Financial Crisis, Part 2 and "timing is everything"
If we had to distill down the challenge facing the Status Quo/Powers That Be to a single task, we might say that it is to persuade people not to sell their stocks and mutual funds and redeem their hedge fund holdings when every bit of evidence suggests that selling out now would be highly prudent.
This agenda has been painfully visible for many months, stretching all the way back to the initial Eurozone banking/sovereign debt (Greece) crisis of May 2010. Rather than actually address the underlying problem--insolvency--the authorities have tried to massage the crisis away with a campaign of perception management: every "new solution" is trumpeted from the mountaintops while every shred of evidence that the "solution" fails to address the foundational problems is discredited or buried.
Understood in this light, we can anticipate the global market's reaction when people finally tire of being manipulated with transparently false reassurances and promises: they will head for the exits, so to speak, en masse.
Many people believe "don't fight the Fed," that is, the Federal Reserve and other central banks have so much financial firepower that they can reverse markets at will. In non-volatile markets, a few tens of billions injected into the market at fragile intersections has certainly worked magic.
But we need to keep the Fed's supposedly supernatural powers in mathematical context: there are around $160 trillion in global financial assets, roughly 1/4 of which resides in the U.S. economy. The Fed's $2 trillion balance sheet looks less like a Death Star and more like a popgun when we factor in that the political constraints I have been describing on the blog: the Fed has been forced to rein in its balance sheet, and it is now restricted to playing around with the bonds it already holds, selling short-term bonds to buy long-term bonds.
Compared to $160 trillion sloshing around the global economy, $600 billion in bonds doesn't look so impressive.
History suggests that central bank manipulation/intervention only works in times of stability or for brief periods of time. Eventually market forces will re-set to their "natural" levels.
What the Status Quo/Fed/ECB/Bank of China et al. fear is widespread selling of financial assets, which has to potential to trigger more selling as stops are hit and people start feeling nervous enough to prefer cash over any asset.
I suspect we may be close to just such a cascade of selling.
Ultimately, putting money at risk is a matter of trust. Once trust is lost, people no longer feel they can adequately assess the risk in a market. This weekend the Wall Street Journal published an article entitled: Investors Sing a New Tune—'Won't Get Fooled Again'.
Add in "when the music stops, I'm out" money managers, hedge funds closing down as investors pull their money out and the official announcement of recession, and you have a potent recipe for a widespread loss of trust in both the market and in official reassurances/perception management.
Timing Is Everything
William Shakespeare summarized the market rather well: “Timing is everything. There is a tide in the affairs of men which when taken at the flood leads on to fortune.” We might add that selling at high tide and buying at ebb tide also tends to lead to fortune.
As you know, I follow cycles, not from conviction that they are guarantees but from the experiential view that nature often works in symmetry and cycles. In scanning various charts this weekend, it looks likely to me that the net result of Global Financial Crisis Part 2 will be a retest of the March 2009 stock market lows.
The exact timing and level of the next ebb tide/bottom is of course unknown, but we can look at the first global financial crisis of 2008-9 for some guidance: that process took less than a year to drop the SPX (S&P 500) from 1,400 to 670. If we take the top in July 2011 as our starting point, that would suggest a bottom perhaps as early as Spring 2012.
Other cyclical patterns suggest late 2012-early 2013 as the low tide of the market; nobody knows the future, so all we can do is be alert to possibilities and key support levels. One possibility to watch is a major rally off the March 2009 lows, if those levels hold. Such a rally might run for quite some time before reversing.
In this scenario--just a thought experiment, not a prediction--then stocks might rally strongly in the 2012-13 timeframe before fading back into a Bear Market in 2014, with a new bottom reached in 2015. This aligns somewhat with the political cycle: Doom and gloom might prevail until the election in 2012 clears the deck for "real reforms" etc. which reanimate the hopes of investors.
If the reforms are watered down, stymied or were half-measures at best, then their failure would trigger the downturn to a cyclical low in late 2015, a date which aligns with Martin Armstrong's major "turn date" of September 2015.
Armstrong's July 2013 date could be a mid-cycle bottom or a top, depending on when the rally begins. I somehow doubt the market will wait 2 years to reach bottom from its recent top in July 2011, as market declines tend to be impatient things while market advances tend to be explosive off sharp bottoms and then mellow into a more leisurely process. If markets break major support (the 200-week moving average, where they now hover precariously), then the market could slide to March 2009 lows as it did in late 2008, in 5-6 months.
Aligning the Dollar Rally with the Stock Market Ebb Tide
Perhaps coincidentally, perhaps not (it doesn't really matter in my view), this "final bottom in stocks" in late 2015/early 2016 happens to align with various cyclical targets for the top of the current U.S. dollar rally that I called your attention to in April/May (and repeatedly since then). If we trace a line from the dollar highs in 1969, 1985 and 2001, we find a cycle of about 15.5 years from peak to peak. A similar pattern appears if we trace lines from trough to trough.
if we add 15.5 to 2001, we get 2016 as a potential target for the next dollar top. That aligns rather interestingly with the stock market bottom other cycles indicate in late 2015/early 2016.
It also suggests that the dollar rally could last 4-5 years--something very few believe is "possible." That skepticism is a good thing for dollar bulls, because the skeptics provide a vast pool of future buyers as they relinquish their dollar bearishness and reluctantly board the dollar bull train.
Anyone who believes stocks will soon find a footing has to answer this question with plausible technical analysis: once the market breaks key support, why shouldn't it fall to test the March 2009 lows? That's what markets do when they break support: they re-test lows. Unless "it's different this time," (ahem), then there is little reason to be in stocks of any type globally and plentiful reason to secure one's capital in cash until the market bottoms.
Those falling knives are sharp. Why chance getting slashed trying to jump in before the tide has fully ebbed?
My Apologies
Due to travel and illness, I missed last week's Musings--please accept my apologies. Due to the timing of my travel and the slow availability of the print version of "An Unconventional Guide to Troubled Times," I have only been able to order my own copies recently. Since I embark on another 2-week round of travel tomorrow, I will be unable to ship the many signed books I owe you until later in October. I am sorry about the delay, and greatly appreciate your forgiveness and patience. With my time online over the next month severely limited, I will also be unable to do more than read email a few times a week. My apologies must sound repetitive by now, but once again I appreciate your understanding.
From Left Field
The Eurasian Face -- an interesting book of photo/essays, judging fom the website
Thanks for reading--
charles
