A financial blog on investing in stocks, commodities and the gold bull market.
Thursday, April 17, 2008
Debasing the dollar
This post is for all the bears out there (and I know there are a lot of you). Many of you are wondering if all of a sudden the collapse of the housing market is finished, if the banks are all of a sudden out of hot water, etc. I'll be the first to sound off with a resounding NO. No way in hell are we even close to being out of this mess. We had the largest real estate and credit bubble the world has ever seen. That doesn't get cleaned up in 6 months. No this will be a multi year process. It's been 8 years since the tech bubble burst. Thousands of companies have gone out of business and we still aren't even close to making new highs yet in the Nasdaq.
So far we haven't even seen one of the big home builders go out of business, although I suspect we will.
So far we've only seen one big bank go down (well it would of except the Fed bailed out BSC)
No this has several years yet to play out. It all depends on if the Fed let's the market do it's job and clean out the excesses or if they continue to try and prop things up as to how long this will last.
So if this still has years to go how come the market is rallying like it has already discounted the worst? I think it's for the same reason the last bear market ended. The Fed is again flooding the world with liquidity. Notice in 2001-03 how much the dollar declined. It took that kind of debasement of our currency to halt the bear market. It took a continued debasement to sustain the rally until 07. The reason it worked is because commodity prices at that time where just entering into a long term bull market and were still very depressed.
Now the Fed is applying the same cure to the present ills. However the environment is hardly the same as it was in 01. Commodity prices are now skyrocketing from 7 years of monetary inflation along with the problem of good ole supply and demand. So for the Fed to try and halt this bear in the same fashion as it did in 01 they will be throwing gasoline on the fire of commodity prices. Doesn't make sense does it but I think they are doing that very thing.
Look at the first chart of the dollar. Every time in the past that the dollar has gotten stretched 8-10% below the 200 DMA it has either bounced or traded sideways back to the 20 week moving average before resuming the primary downward trend. However now look at the last chart. After having gotten stretched almost 10% below the 200 DMA the dollar has now closed below the recent low without ever having come close to bouncing back up to the 20 WMA. If this continues and we see another leg down it will be unprecedented. It will also be a sign that Bernanke and co. have pulled out all the stops in an attempt to halt the bear market and have decided to sacrifice our currency to that end.
So while I think the fundamentals for the bear market are hardly over I also think the Fed is going to print however many dollars it takes to keep this market levitated for as long as possible.
How long this continues is just a matter of how long the economy can hold together with inflation spiralling out of control.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.