The deflationary noose is tightening
Big falls in all markets yesterday as they acted in concert – and confirmed my view that in a deflationary world, all assets decline in price. In fact, Prechter calls this phenomenon “All the same market”.
Gold is currently the biggest loser of all, and what a shocker to the gold bugs who continue to believe that with turmoil in the financial world, people will flock to precious metals for safety. I have news – there is no place to hide in a deflationary depression, which is just now getting into gear.
A correction – there is a place to hide, and that is in US dollars; the cash variety. This is a contrary view – as is my call for liquidating stock and bond investments. But with bullish sentiment towards stocks pushing into the stratosphere (Investors Intelligence reading at a 26 year high this week), and very few even expecting a sharp decline, I believe I am on pretty safe ground.
Bear markets always start when bullish sentiment is extreme (and vice versa). This is when I am glad I am not running with the herd. Luckily, I do not seem to possess the gene that makes most people want to belong to a group to seek confirmation and comfort.
Although I have been looking for a top in stocks for some time, it is too soon to call the absolute final top in just yet. But with the Nasdaq backing off my long-term tramline (see Tuesday post), it would take an enormous buying spree to break through it. The odds are now favouring the view that the turn has been made.
The news yesterday that the ECB are considering a negative interest for holding bank reserves hit the euro hard, but this decline was on the cards earlier as the market was making a lovely kiss on a tramline (see later).
And the Fed minutes revealed a tendency to begin tapering soon. They say they are being guided by the unemployment figures. But with the US having reduced its workforce by 755,000 in October (as this many dropped out of the labor market, having given up looking), the percent unemployment rate is sure to be looking better – and closer to the Fed target.
If the US is in such a strong recovery, as suggested by the booming stock market, why is the labor participation rate for men now 69% – the lowest number since records began in 1948? The real US unemployment rate is closer to 12%. This will increase as we slide into deflation.
DOW
The rally to the 16,000 area was on a large neg mom div, and with yesterday’s break of the shelf of support (pink bar), the market dropped down to my lower tramline. This is a test.
If this support holds, I can see a rally back to the pink zone. But a break of the tramline should indicate we are in a wave 3 down – and that should be long and strong.
EURO
These are my tramlinjes I have been working since last month and the recent rally has carried exactly to the underside of lower tramline in a textbook kiss. The market is now in a Scalded Cat Bounce down. Remind me to put this in my tramline textbook, please.
That rally was the place to short, of course.
My first major target is the B wave low at 1.31 and then on to the 1.28 area.
I remain short.
DEC T-BONDS
A big hit yesterday as investors unload (they need the dollars!). We have a small scale five down to my w1, confirming the downtrend has resumed.
If my EW count is correct, the next move down should be a real doozy.
I remain short.
The markets are on a knife edge. No matter what the Fed say, don’t say, do, or don’t do, the next deflationary wave will sweep over all markets. They will be powerless to stop it.
The scramble will be on for dollars. Highly leveraged investors/traders will be trying to abandon ship at the same time. Try not to be one of them.
