Signs of The Times
Gold, Dollar & Stock Market Update
Mar 17, 2009
The following is part of
Pivotal Events that was published for our subscribers Thu, March
The something interesting going
on continues, and recalls the old saying "The US dollar
is as good as gold." Admittedly, this prevailed long after
policymakers became corrupt, but as "sound as a dollar"
could be coming back, as well. If so, it would be confounding
to the evil ambitions of central bankers.
As we wrote in 2007, the worst
thing that could happen would be a stronger dollar. After all,
the panacea of policymaking has been to depreciate the dollar.
In the typical post-bubble condition, the senior currency becomes
chronically strong relative to most currencies and most commodities,
for most of the time.
Also typical, is that the real
price of gold declines during a mania and increases during the
post-bubble contraction. This seeming paradox perplexes goldbugs
of all ages, as well as the same for interventionist economists.
Wistfully, we noted that without the latter, the former would
not exist. Just think - a world without economists and goldbugs.
Fortunately for the record,
this bust has been working out. At the height of the stock market
infatuation in 2007, gold was at 700, and the DX was at 75. At
the recent lamentable dismay in stock markets, gold was at 1007
and the dollar was at 89.6. With this, our measure of gold's
real price has increased from the low of 143 in May 2007, which
turned up as the credit markets turned to disaster. With the
worst of liquidity pressures a few weeks ago our Gold/Commodities
index reached 519. This represents a huge increase in prosperity
for gold miners.
Gold shares are generally undervalued
relative to the increase in the real price. The case is clear,
either gold stocks soar, or the real price declines.
We have been expecting the
latter as commodities rally into April, but even with this correction,
gold shares are cheap. This has been behind our recent theme
that the stage is set whereby successful exploration programs
will build outstanding chart patterns, rather than brief spikes.
Also, the tendency for the
big stocks to trade up and down with the S&P will continue.
But, over time golds will make outstanding net gains while the
general stock market nets out the opposite.
While as bullish the longer
term is, the sector has been outstanding and due for a consolidation.
Perhaps for a month or so.
Recently, we've had a few parameters
on equities, one was a price-target on the Dow of 6600, which
was revised to 6250. The low was 6470 on Monday.
Another force was the important
turn in currencies possible last week. Representing the action,
the Dollar Index set its high at 89.4 on Monday and the decline
has had a pleasant effect upon stock markets.
The other conditioner was the
Post Euphoria model that was looking for an important low some
14 to 16 months from the high. March is the fifteenth month.
From time to time, we have mentioned the 1937-1938 failure and
this model, as formatted by Ron Griess (TheChartstore.com), also
calls for an important low in March.
Needless to say, but sentiment
is at "bargain basement" levels. Altogether, it looks
like this week's recovery will be more than a two-day wonder.
As we have been noting, rallies are for selling and only nimble
traders should attempt counter-trend moves.
Fundamental support seems to
have been provided by a modest firming of commodities and rising
interest rates. The latter may not be sufficient to force an
increase in central bank rates, but so far the rise in bill rates
has been encouraging.
Of course, we are concerned
about the low of 6250 not being reached. The key will be the
nature of the test of last week's disaster.
A couple of weeks ago we noted
that banks were battered enough to prompt a brief rally and the
BKX jumped from 19 to 28. Last week, we thought that the subsequent
slump to the low was working on a test. The low was 18.6 on Friday
and so far the rebound has made it to 24. This could run into
Seasonal forces for crude oil
and base metals could pull the stock market recovery into April.
This may generate more relief than enthusiasm, but whatever it
accomplishes it will be another selling opportunity.
In the meantime, although central
banks will continue their compulsion to flood the money markets,
as with post-1929 it may not stimulate an immediate return of
prosperity. It is worth repeating that after a credit binge,
banks still in operation become puritanical and will only lend
to prime-rated companies and these companies protect that important
rating by not borrowing. The net result has been a collapse in
money velocity that overwhelms the Fed's efforts to inflate asset
prices. The old "pushing on a string" observation prevails,
which used to go with the other banking observation--"Lithic
Credit Spreads were expected
to reach a disaster in the crash and then narrow out until around
March. The advice in November and December was to get long some
lower quality corporates. The BBB was yielding 10% and the price
rallied 14 points to February 19 when the advice was to start
selling, and the following week's advice was to sell.
Since then the yield has increased
from 8.76% to 9.47%, as the spread widened from 525 bps to 575
bps on Monday. Lesser credits such as junk have widened to extremes
for the move. Yielding 10 % at the height of the market in October
2007, junk is at 41.7 % now, with the spread at 3800 bps over
This represents severe deflation
in financial assets, that was preceded by the collapse in sub-prime
mortgage bonds. Of which, the putative AAA-rated were at 80 a
year ago in April, now they are quoted at 33.8. On the same move,
the BBB sub-prime has plunged from 11.25 to 2.38. In 2007, when
the street was buying risk in 2007 these confections were priced
There is further to go as our
target has been that many issues will trade not in percentage
points of par, but in parts per million (PPM).
financial and economic storm."
"There is a real prospect
that [the recession] could be a serious one, without strong policy
action." -Lawrence Summers, Wall Street Journal.
March 14, 2008
Again, the establishment believed
that strong action would avert a disaster. This is despite his
aggressive, if not belligerent, injections of cash at the end
of the 2000 tech-bubble, when he was secretary of the treasury.
"Ben Bernanke is smarter
than I am and thinks about this 24/7. He leads a superb committee.
He is backed by the best monetary policy technical economic staff
in the world."
Therefore, nothing could go
wrong, according to the March 19, 2008 blog by J. Bradford
De Long, NBER Professor at Berkeley.
"US oil and gas companies
should not receive federal subsidies in the form of tax breaks
because their businesses contribute to global warming."
-Timothy Geithner, Reuters, March 5, 2009
"Chavez calls on Obama
to follow the path of socialism." -Drudge Report.
March 6, 2009
Too late for Chavez to take
any credit for advice. Inauguration day was January 20.
Mar 12, 2009
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