The Greater Fool Theory
"There are two Arkansas farmers, one of which had a beautiful purebred hog. He sold it to farmer # 2 who held it for a period and then resold it, for a handsome profit, back to the original seller. Back and forth, these two farmers sold and resold this hog to each other, always for a profit. Alas, one day farmer # 2 sold it to a complete stranger from Iowa, to which, when told of this, farmer # 1 told farmer # 2 in disgust: "Why'd you go and sell that hog to that feller from Iowa fer? We was both making a good living selling that hog to each other."
Signs of Deflation Hidden Inside the Benign CPI
It is clear that the Fed is only using the CPI numbers at their face value to measure
inflation, but not digging deeper to find what's beneath them. While the benign CPI is finally showing signs of inflation, signs of deflation is actually growing like a cancerous cell. [
read]
When Feb raise short rate above 1% to fight inflation, the deflation items hidden inside the CPI will be more appearent than ever.
The Fed will miss the deflation in 2004 just as it did for inflation in 2003, and while causing the stock market to crash by wrongfully manipulating interest rates in the wrong direction.
It's not just me, even the Pro is seeing
DEFLATION hovering over the horizon.
[read]
Inflation is over; here comes deflation
Everywhere you look there are signs of Inflation (gas prices are up, milk, paper, lumber, etc…), but the Fed said deflation is now under control and producers are starting to gain pricing power (the fuzzy language from Greenie which simply means Inflation maybe peaking up).
On the contrary, I see deflation coming. The appreciations of the big ticket items are over. We are now seeing depreciations on them: commodities, stock markets, auto and real estates. The Fed is extremely late on seeing the inflation in the raw materials (the commodities); stock markets are topping out as you can see from my previous postings; we are seeing more rebates from auto dealers as the inventories are fully stuffed; and real estate can’t go any higher because this massive debt bubble has already topped the credit limits. Sure the recent campaign on 0% down might sustain the demand for a while, but I just don’t see how real estates can appreciate anymore than the current outrageous level during this summer hot season. As matter of fact, we are seeing a drop in
real estate in Dallas, in addition to a
drop of mortgage requests to January level.
I am thinking the Fed, led by the elusive Green Giant, will miss the real deflation, just as it missed the real inflation in 2003; thus, before the Fed can gradually raise the rates 100 basis points to fight off the “late-call” inflation, it will make a quick U turn, sometimes in 2005-6, dropping the rates below the current 1% level to fight the deflation that zoom by the “sneak eye” Greenie. Sounds impossible?
Here is another thought. Rising oil price may keep rate low
[read].
On a separate note: since Fibonacci said short-term low was met on May 12, we should see a short term rally. Unfortunately, we are witnessing a very weak rally taking place. Today, for example, DJIA was up most of the day, as high as 10,093, but it closed down at 9,937. Although I don’t do short term trades (this finicky market is increasingly hard to predict), I won’t be surprise that 10,093 is the mark of a short-term high. But then again, this is the option expiration week, and since the general market consensus is still overly optimistic (not as strong as before), DJIA trade above 10,100. Only time will tell. I don’t mean to contradict myself, but pinpointing high and low is as hard as predicting the total points scored on a basketball playoff game.
One thing to keep in mind is DJIA will most likely fall to a 9,850-9,650 trading range for a while before hitting the 9,353 bottom.
Fibonacci Says the Next Stop for DJIA is 9353!
Before we begin, we need to make one simple assumption.
The assumption is that the market has topped out because of multiple lower highs and lower lows since the DJIA intraday high of 10,753.6 on February 19. If you bring up a chart for
DJIA, you can draw a dome along the line from December 2003 to May 2004.
There are two lower highs in April, 10,570.8 and 10,537.3 respectively. DJIA had three lower lows after February 19, two in March and one in May at 10,092.5, 10,007.5 and 9852 respectively. 9852 was an intraday low, but the fact that it broke the previous low of 10,007.5 still has significant implication. There were no higher highs and higher lows which would've broken the topping trend.
So where is DJIA heading next?
By using the Fibonacci number, we can calculate the next intermediate low for the index. We multiply the latest rally distance to 2.618, and deduct that number from the high of the rally.
10,570 – (10,570 – 10,007) x 2.618 = 9353
Noticed I didn’t use the latest rally point of April 21 to 27, because the 4-day trading period is too short for the intermediate-term prediction. But it can be used for short-term prediction. If you use the late April rally to calculate the next low point, it came up to 9785, which is only 67 points from the low of 9852 occurred on May 12. In other words, by using April 21-27 rally data, the Fibonacci number predicted the next short-term low with 91.2% accuracy. That is as good as a prediction you can make for anything.
Since the goal is to pinpoint where DJIA is heading in the intermediate term, the longer March 24 to April rally is used instead, and Fibonacci said 9353.
So, there you have it. The next objective for DJIA is 9353, but the next question is when.
And, I will leave that question open for future posting.
Let the Battle Begins
Today is one of the most apparent battles between the BULL and the BEAR in months.
The battles in Dow Industrials and S&P 500 are like a mirror image. The indices started down on a 45% descending slop all the way to noon EST, then they hit a small bump from noon to 2:00 PM. At that moment, the BULL was able to conjure all its might, and push the BEAR temporarily out of scene, as both indices rallied hard on the eleventh hour to break free onto the positive territory--a breathtaking 192.97 point swing for Dow Industrials, and 20.96 for the S&P 500.
The BULL is still strong; complacency still stands tall.
This war is not over (until the DJIA hits 9100*); tomorrow is another new battle.
At the young age of 30, my youth got the worst of me as I eagerly load up some cheap PUT options in the Technology sector (mostly semiconductors) and GM (my Enron of the year). I don't know what will happen tomorrow, but option has the luxury of limited downside.
* The number is based on the spiral theory using Fibonacci. I will write a short article on that tomorrow.
Are We Hiding the REAL News from the Public?
Under WSJ.com World News section today, an AP headline reads “U.S. Destroys Baghdad Office of Radical Shiite Cleric Sadr.”
On the third paragraph, it reads:
Elsewhere, insurgents bombed an oil pipeline in southern Iraq, setting off a huge blaze that has slashed daily Iraqi oil exports by about 25%, or 450,000 barrels per day, an official said Monday. Militants set off the bomb Saturday under the Faw oil pipeline, some 35 miles south of the main southern city of Basra, said an engineer at Iraq's Southern Oil Company, speaking on condition of anonymity.
Wouldn’t you think a 25% disruption of oil distribution is HUGE? Wouldn’t you think the success of oil pipeline bombing is BIG? Why does it not have its own headline? Why is it not reported by any NEWS syndication?
Granted crude oil reached $40 per barrel last Friday
[1], the highest in 13 years, I think our government is just trying to control the after shock. The news will probably come out in mass media 3-4 days later when the pipeline is restored. But the truth still lies; it is possible to stop this world economy with just one bomb. It may never happened (God forbids), but the fear will have a harmful effect on the market no matter how you tame the news.
Note: DOW Industrial hit below 10,000 just as I suspected on my Friday post. It closed today at 9,990.02.
I was going to write about TREND 1 today, but instead I believe this note from Adrian Van Eck is far more informational at this time.
Hope you can "stand the truth."
==================
Adrian Van Eck's Hotline on Money and the Economy (1 800 219 1333).
For: Thursday, May 6, 2004
I WANT YOU TO PROMISE ME THAT YOU WILL KEEP A COPY OF THIS HOTLINE IN A SAFE PLACE. I THINK YOU WILL WANT TO REFER TO IT IN THE WEEKS AHEAD. I ALSO RELEASE YOU FROM ANY CONCERNS ABOUT OUR NORMAL COPYRIGHT PROTECTION CLAUSE. YOU ARE FREE TO FORWARD THIS HOTLINE TO AS MANY PEOPLE YOU KNOW WHOM YOU BELIEVE WOULD GRASP ITS IMPORTANCE AND COULD BENEFIT FROM IT.
THIS WILL BE AT BEST AN EARLY-WARNING MESSAGE. IN A COUPLE OF WEEKS I WILL SEND MY MONEY-FORECAST LETTER SUBSCRIBERS A MUCH DEEPER FORECAST THAT YOU SHOULD ALSO TREASURE! I BELIEVE YOU WILL NEED BOTH AS ANTIDOTES TO THE HUNDREDS OF ARTICLES, COLUMNS, LETTERS AND REPORTS THAT YOU WILL SEE FROM WALL STREET BROKERAGE FIRMS, INVESTMENT BANKS, GOVERNMENT BUREAUS, THE FEDERAL RESERVE AND THE KIND OF BANKS OFTEN REFERRED TO AS “TOO BIG TO FAIL”.
They have already begun to spin this story into a clever pattern of deception, hoping to avert your eyes from the simple facts I will now call to your attention. I can say the above with confidence because I have lived through a nearly identical situation before, back in September and October of 1979. That was the time when I was the first writer in America to predict that new Fed Chairman Paul Volcker was to abandon the failed concept of trying to control inflation - then raging at a near 20% rate - by raising interest rates. Borrowers did not care what the rates were I said, because some of them assumed their firms might not survive to pay the loans off, and others were sure they would earn a profit bigger than the interest charge.
Years later, Volcker’s secretary would ask me how I knew he was going to make such a switch. “I didn’t know,” she said. “And neither did his wife. No one else was closer to him that we were. So how could you, way up there in Boston, know that he was going to shock the World of Finance and turn it on its head?” My answer was so simple it surprised her, but she instantly nodded in agreement and understanding. “I knew what he was reading,” I said. “It was an enormously profound essay on money by one of the great minds of our Age. It so happened that I had just read it myself. I knew the moment I read it that this penetrating, scholarly piece was going to change the world, if only one other person - Paul Volcker - would wrap his awesome mind around it. And then someone I knew at the Fed casually mentioned to me that Volcker was alone in his office, deep into this essay that no one else at the Fed was taking seriously.”
I realized at once what was coming. And I hastened to inform my subscribers - who were far fewer in number than is the case today. Some of them thought I had gone off the deep end. Everyone knew then, just as everyone knows today, that the only way to control the economy was by manipulating interest rates. They call that tightening money. How silly. If you want to really tighten money you must close the spigot that is pouring money supply forth rapidly.
But the Fed had been trying rate hikes for years. And Volcker had just come back from a meeting in Switzerland of an organization that few in America had ever heard of. It is sort of a Central Bank for the various National Central Banks. These are the Big Boys of Money… towering over even the biggest of private bankers. At that little-noticed meeting, Volcker had gotten an earful from angry foreign Central Bankers who wanted to know when America was going to get its act together and DO SOMETHING about our massive and growing inflation problem.
Then early in October, one month after my Money-Forecast Letter warning that the world was about to turn upside down, Paul Volcker called the first emergency Saturday meeting of the Fed’s Open Market Committee since the Great Depression. He assembled in Washington the other members of the Federal Reserve Board plus all the Presidents of the far-flung independent Federal Reserve Banks. Before the meeting ended, he convinced them to abandon interest rates and to switch to controlling Money Supply Growth.
Of course I knew what would happen next. Having recommended the purchase of Gold at $140 a few years earlier, I put out a quick sell advice at $420, cashing in a “Triple.” Wall Street did not believe me - or Volcker. In their denial, they bulled the price of Gold up another 100% to $840 in the next 90 days. Then Gold collapsed to well below our sell price. Finally the markets saw evidence that controlling money was biting deeply into inflation. Our readers told their friends how right we were and our major growth began.
WELL, NOW FAST-FORWARD TO 2004. THE PROBLEM HAS NOT BEEN INFLATION THESE PAST THREE YEARS. IN FACT, NO ONE EVEN BELIEVES INFLATION IS POSSIBLE THESE DAYS. FED CHAIRMAN ALAN GREENSPAN HAS PERSUADED ALL WHO WILL LISTEN TO HIM THAT HE HAS SPRINKLED A MAGIC POTION OVER THE ECONOMY AND HAS GENERATED PRODUCTIVITY INCREASES GREATER THAN HAVE EVER BEEN SEEN BEFORE IN THE WORLD. COMBINE THAT WITH A POPULAR BELIEF THAT COMMUNIST CHINA IS GOING TO GROW SO BIG AND SO FAST THAT IT WILL FLOOD THE WHOLE WORLD WITH CHEAP PRODUCTS, CAUSING INFLATION TO BE RELEGATED TO THE MUSEUM OF ECONOMICS. IT IS AN UPDATING OF THE SOVIET PREMIER - WHO ONCE TOLD US THAT HIS PLANNED ECONOMY WOULD BURY US! YOU KNOW HOW THAT TURNED OUT.
For well over a year now I have watched as Wall Street has created the myth of a communist China converting to capitalism. There were large fees to be gained as rewards for pushing this make-believe story. The REAL Red China was sucking into its vortex every bit of American money and technology it could muster, whether by lying, cheating or where necessary by stealing. It had chosen 35 giant state-owned corporations as its vehicles for a planned takeover of all the world’s industrial production.
Some foreign corporations were invited in to partner with these companies, the better to gain from the foreigners precious know-how in management and marketing. It was seen by them as prudent to follow the same path trod earlier by Japan and then South Korea. First they would perform the most menial assembly tasks, gradually demanding and getting more and more complex duties and the high-tech know-how and equipment that went with them. When they were ready they would brush aside the U.S. brands and promote world wide their own brand names. You are already seeing the start of that with the one million Chinese-brand computers being sold through their favorite Chinese “factory-outlet”, WAL-MART.
In order to push its program, China had cut the value of its money in half against the U.S. dollar and then locked it in tightly to the dollar. They did this ten years ago. A few years after they carried out this plan, much of Asia collapsed financially. They had tried to compete with Chinese prices and had lost so much money doing so that they went broke. Indonesia in particular saw 30 years of patient construction of a middle-class wiped out in a few years, and once affluent people fell into the ranks of the poor. The Philippines also suffered mightily. Japan fell into a recession from which it has yet to fully emerge. South Korea also fell victim. For some reason, America praised China because they alone did not then cut the value of their money. It was not recognized that they had done so before everyone else and had triggered all the other nations’ problems and that their plague brought on the Russian and Latin America defaults.
American big business, in its greed and ignorance of the fundamental principles of capitalism, fell in love with China’s planned economy and assumed that its workers would put up with slave labor wages and working conditions for two more generations. So dozens and then hundreds of American manufacturing plants moved there. The American Purchasing Managers Association changed its name to the Institute of Supply Management. They began putting out glowing reports on American productivity, production, new orders and employment. Their numbers have grown further and further away not only from the harsh realties of life in America (nine million unemployed, worst since the Great Depression of the Thirties) but even from the Federal Government’s own numbers - which all too often (as in the case of the alleged GDP growth, the CPI and recently the number of new jobs created) have begun to resemble only the vivid imagination of bureaucrats being pressured to come up with the “correct” numbers.
Through it all I have watched the way China was absorbing $120 billion in trade surplus and another $50 billion in direct corporate and Wall Street investment per year. For an economy that totals only one and a quarter trillion dollars a year (about one-tenth the size of ours) that was a way-out-of-line sum of money. That money largely went into China’s four big government-owned banks and then was distributed via a constant series of make-believe “loans” (really subsidies) to Chinese corporations, especially the state’s BIG 35. The result was that the banks were increasingly holding worthless loans equal to two-thirds of their deposits, a number no civilized nation can tolerate. Once, twice, three times China announced “reforms” that consisted of gigantic government cash infusions into their banks, to help them get solvent. But bad loans have been building faster than the bailouts. They were getting cash transfusions while bleeding out 1000 holes.
Then came the climax. China has few raw materials. To build new factories for Americans and themselves, they purchased iron ore, copper, aluminum cake and a host of other commodities - plus advanced machinery and more recently food to feed the millions of farmers who had flocked to cities and had given up growing foods. The volume of imports grew so high that Japan, Asia, Europe and Latin America were living off China, taking from China the money flowing in from America. I knew it could not last and in a recent Forecast I said so. I predicted that one day soon the bankers would call their biggest borrowers into their office and say: “The party cannot afford these huge subsidies we call loans. You will have to raise your prices to cover at least most of your costs.” That is exactly what happened a week ago. Wall Street is desperate to hide the fact that its investments are at risk and that it peddled worthless junk to pension funds and mutual funds. They are using a pile of lies and are claiming all is well in China.
I say they are lying. And the proof I have waited for appeared in Barron’s this past weekend. China has been buying U.S. Treasuries to fund a portion of our debt. That alone kept the Treasury from blowing the whistle on them and their big American CEO friends, who have shipped three million jobs to China and falsely called it productivity increases. (The ISM does not ask members where new orders are being produced.) But guess what: American banks have stripped their loan portfolio dry, cutting back every category except purchase of Government securities, which rose a shocking $15.7 billion. Over at the Fed, foreign holdings of U.S. Treasuries (which had been rising by $6 billion a week for a year actually fell by $1.86 billion). And Fed credit, which had only increased by $23 billion in the previous 51 weeks, jumped an astounding $5.7 billion in one week. In addition, the Fed bought outright $753 million worth of Treasury securities.
We had been warned over a year ago they could and would do this when it was necessary. Greenspan had flown to Asia and told them he had a bottomless checkbook and a bushel basket and would buy any T-debt they wanted to sell. And Governor Ben Bernanke - a genuine scholar of both the Depression and the decade-long period ending in 1951 when the Fed had printed money and brought as much Treasury Debt as needed to keep both long and short Treasury rates very low, had pledged to send helicopters aloft all over America and dump cash out to the public, the way ranchers drop bales of hay to cattle caught in the fields after a snow storm.
SO BRACE YOURSELF. If this is the beginning of the move that I think it is, America will experience a new round of inflation. It will be denied on all sides, as it is being denied now. (I know of no one who believes the government’s inflation numbers. If the real inflation data were subtracted from nominal GDP, it would be seen that both growth and productivity are well below what they claim today.)
Nevertheless, while denying there is inflation, the government and the ISM are boasting that prices paid and received by businesses are climbing at the steepest rate in years, and they say this new pricing power has come just in time to save many businesses that were starved for funds before. So forget whether the Fed dropped the word “patient” from its new announcement. And don’t worry about a quarter-point “tightening” at the end of June or the middle of August. You are seeing the first bales of money dropping from Bernanke’s helicopters. Before they are done, true inflation will be up to 8%, although the government will claim it is either 5% or 6%. And everyone in the financial media, especially the Wall Street Journal and Investor’s Business Daily, will brag about how modest and benign inflation is.
During this new period of DENIAL, Gold is acting as if there is no inflation and will be no inflation. Well, along with my son Jonathan Van Eck I believe they will be proven wrong about inflation and the value of Gold again today, as they were in late 1979. But this time the surprise will be to the upside.
By the way, I will deal with this in detail later. But Alan Greenspan’s fourth term (17 years) officially ends in days. He wants to serve another 18 months, to become the longest serving Fed Chairman in history. No one has mentioned another term officially yet. Maybe the President will let Alan hang by his thumbs for the rest of the year. Greenspan will know the whole time that he now serves at the pleasure of the White House, and if he does something to anger them his dream of a record will be smashed. Just thought you’d like to chew on that.
Copyright 2004 by VE-T. Reproduction in any form is prohibited
The summary pulse for this week
We had three uninspired up days from Monday to Wednesday, and literally the shit hit the fan on Thursday and Friday. It felt like a preface to a crash (I am not predicting a crash coming; I am simply reading the pulse of the market out loud. In other words, what the underlying market is telling me)--frankly, I will not be surprise to see
DOW Industrial break below
10,000 next week. If not, sometimes this month.
The market sold off in heavy volume due to additional evidence of US economy recovering. The notion doesn’t feel right. But that is the exact pulse of the market. The market is contradicting the economic data. Once again, the market sold off in heavy volume due to additional evidence of US economy recovering.
You must know the market is omniscient. It is saying that the improving economy will force rates higher (that is a no brainer). But here is the kicker. Higher interest rates means pressure on the market, especially one that was built from consumer debt. The key is "consumer debt". The market knows the debt is what caused the market to go up for the past year, yet not many investors realized it (mainly because they watch the bubble-vision MSNBC and read only mainstream newspaper like WSJ). In addition, I also see many investors know something is wrong, but are unwelling to question it.
Since high interest rate is the pin that pops the debt bubble, the market reacted negatively. And you can see that in the financial sectors (
C,
COF) and consumer goods (
WMT,
HD). The only sector that defies the gravity in today’s action is the wildly oversold Semiconductors (
$SOX).
If you don’t believe in the fundamental debt bubble, at least believe the technical breakdown of Financial Select sector SPDR (
XLF). The debt bubble is cleary in danger.
Although I try not to make stock recommendations on this blog (I may in the future), I do want to urge investors to stay out of the stock markets, and just hold cash.
The Double-edge Sword: Raising Interest Rate and the Fear of It
The message from the May FOMC is “that it can be cautious in removing its policy accommodation.” A slight mood change from January’s “patient” to today’s “cautious” is a clear view that the Fed is gearing itself to move out of the emergency/deflation prevention level of 1%--a level which PIMCO’s Bill Gross
{1}, the King of Bonds, believe we should’ve never be at in the first place.
The Fed’s mood is a double edge sword. The “cautious” comment will spawn a flood of marketing efforts urging consumers to obtain every last drop of cheap money before June’s FOMC. While the refinance game has slowed considerably
{2}, we will see record level mortgage loan and credit card debt this summer, as the hypnotized lemmings madly dashing to meet loan officers, and reach the credit limit of ever credit cards, even their grandparents if they can get their hands on them. And what we will see is over consumption and over borrowing--not that it hasn’t already happened. The pace will quicken and the number increased. The rising retail sales
{3.1} {3.2} fueled by hyper borrowing level will generate over estimated manufacture orders; thus, cause over inventory
{4} in the future, and increase the amount of debt delinquencies and bad debts
{5}. Hence, the notion of raising interest rate is a double edge sword, as it will accelerate sales (where most economists mistaken as economy recovery), but at the expense of debt, which will burst in two main areas: housing market and credit card debts. This will result in the final collapse of the financial world.
I can not tell you when it will happen. But instead, I can assure you that the higher borrowing will not generate record retail sales and revenue in the coming quarters. We’ve simply passed the optimal rate of return, which means it will take more than $1 of borrowing to drive $1 of revenue. Consumers are now refinancing their own debts, where they pay off debt with new debt. It is a vicious cycle, and a downward spiral.
Numbers from Friday's close
DOW 10256.02 -16.25 -0.16%
S&P 500 1107.30 -6.59 -0.59%
Nasdaq 1920.15 -38.63 -1.97%
A word of caution to those market timers out there.
We are now moving to the historically bad performing 6-month (May to Oct) cycle. As Mark Twain said, "history never repeats itself, only rhymes."
Following up with my previous post, I am beginning to think the cyclical BULL is over. S&P 500 peaked at 1156 on March 5, 2004, an increase of 45% from the low of 800 on March 11, 2003. I unofficially marked March 11, 2003 as the start of this cyclical BULL. If March 5, 2004 is indeed the end of it, then it lasted 359 days, which matches the characteristic of the previous 17 cyclical BULLs.
The reasons why I think the BULL is over is because in 2004, S&P 500 touched the 1150 mark four times. Interestingly, once every month in the past four months. Non-conforming pattern from RSI and MACD each time S&P 500 reached that level is what caused me to think the top is completed--the index will never reach and break above 1150. DOW chart shows a slight different story, but same conclusion. NASDAQ has the worst chart of all--it is now below it's 200-day moving average after Friday's close.
Overall, the three major indices are showing signs of major weakness. I am not saying the market will not move up from here. As the top is complete, we will not see these levels for years to come. The BEAR has awoken. Get ready for the turbulence as the BEAR and BULL duke it out in May. I don't know how long the fight will last, but I am sure in the end, the BEAR will prevail. And the BULL will be no more; the secular BEAR continues. To that, I suggest buying some PUTs to protect your profits, as well as making some during the coming down cycle, which I believe will be more vicious than the 2000-2002 cycle.
But don't despair. Cyclical BULL will show up again, and give longs another 50+% upside advance. During Japan's last 12-year secular BEAR run, cyclical BULL emerged 3 times, bring 50~75% upside in each of its appearances.
