I hope you’re enjoying Summer and spending time on what’s really important: your well-being, freedom and those who are dear to you. Okay, this week’s letter has to be short and sweet as I’m touring places beyond civilization this week and internet coverage is poor…
Now, remember, I want a recovery out of this recession as much as you, but unlike the happy-clappy media, I’m not going to tell you what you want to hear so you don’t ‘switch off’. I’m going to say it how I see it and how you can profit by it.
Long time readers will recall that back in March I said the stock market was in a bear-market rally and that eventually, this bear will take off his bull mask and take as many down as possible.
I think we’re at that moment now.
Here’s an interesting chart below. This is the Dow since the long bull market began in 1982:
< Insert Graphic>
The red straight line drawn diagonally across is a ‘trend line’. When anything breaks below this trend line, the path is usually significantly down to as low as halfway backwards- this would put the Dow at around 4000. Also, notice how the rally we’ve seen since March is a bounce that doesn’t get anywhere near to the trend line?
What’s the bigger picture?
In short, a giant cover-up and quick-fix has been hastily cobbled together to firefight what is the greatest financial crisis since the Great Depression. The government has flooded the banks with money and relaxed accounting rules to repair their balance sheets and allowed them to borrow money at 0% (that’s right, get a loan with a bank now and every percentage is pure profit for them).
Because quite simply, the whole house of cards depends on the average American getting deeper and deeper into debt to buy consumer junk. That’s why this ‘green shoots’ PR nonsense started; to restore confidence so people started spending and borrowing again.
Small problem: Americans seem to have had enough of that game. For the first time in years, they’ve started saving instead of spending.
And so, the economy keeps deflating instead of inflating like the Fed wants it to. Too few dollars chasing too many things to buy. Yes, inflation is baked into the cake because of all the ‘quantitative easing’ (legal government counterfeiting), but that will come later on (possibly suddenly). The inflation/deflation debate is a ferocious one now and I think that’s because both sides are right… and wrong. ‘Stagflation’ is a possible scenario- that’s where an economy flounders but prices still rise.
If this recession would be allowed to follow it’s natural path- by letting the weak companies go and having everyone suffer the consequences of their actions, the pain would be short and sharp and rebuilding a stronger economy could get under way. Instead, they will keep throwing more and more of our money at the problem and the result will be a long and fragile recovery interlaced with crashes and financial crises.
The housing market is also critical- property serves as a guarantee virtually against the entire banking system. It still hasn’t stopped falling- just because it isn’t in freefall anymore, doesn’t mean it’s leveled off.
Washington rhetoric and Wall St BS can’t hide what’s really going on: unemployment keeps rising and property just keeps on sinking. There’s only so long they can keep this cover-up going.
The game the government and banks are playing is BUYING TIME. If they can just hobble through until the economy and property prices pick up, banks will be out of trouble and we can all go back to normal. That’s the thinking, anyway. But what I’m seeing anyway, is that things are getting worse as time goes on, not better.
Any day now, the market will unravel. And many traders will profit greatly by shorting it.