Fed Makes Same Mistakes of the 1970′s
- After 4 days of lateral consolidation SP500 dips to the 10 day EMA. Of course it must have been due to the pending government shutdown.
- Liquidity versus Oil: Oil breaks $112/bbl and may have finally hit consumers’ choke point as Fed makes same mistakes of the 1970′s.
- Bernanke, a Great Depression expert, needs to bone up on the 1970′s.
- Rapidly declining dollar adding horsepower to the oil and commodity price spike, and consequently, inflation.
- Tired of whiners.
- Despite all the hoopla Friday, it was a pretty normal, and small, pullback.
MARKET SUMMARY
A normal dip is packaged as a ‘shut-down selloff.’
I had ‘Wizard of Oz’ d j vu today listening to the so-called financial stations covering the potential government shutdown. Listening to the sanctimonious leaders of the Senate and House, I was reminded of the phrase, “Lions and tigers and bears! Oh my!” One side argued that women were not going to be able to get their cancer screenings at Planned Parenthood while others argued over an amount of money that, with a deficit of $4B piling up per day in the US, was less than 10 days’ worth of activity.
I am not sure how you spell futile, but looking it up in the dictionary they may have a definition that talks about our two-party system arguing over an amount that is 0.25% of our deficit. I heard a Congresswoman from Florida saying the 2012 budget proposed by Mr. Ryan would be a tornado through the rest homes of the elderly. Piled on top of the rest of the nonsense we have heard this week, it appears that our leaders’ hypocrisy knows no bounds.
The government does not need to be shut down. What needs to happen is to get rid of all of these so-called leaders and I mean from the Senate, the House, and from the executive branch. We should start over with people who have backbones and can actually make decisions on how to run the country. Of course all of the networks and so-called financial stations feed right into the hyperbole and dogma by reporting breathlessly about this government shutdown and how it will impact the economy.
Looking at a chart on the session, it chopped around all day and then as the last two hours started, the market sold off for 45 minutes. You would have thought there was a 10.0 earthquake in Japan (or in DC, for that matter). Everyone said it had to be the shutdown that was imminent. Frankly, history shows us that the stock market does not sell off because the government shuts down. It kind of likes it. It feels like the government is taking a vacation and not spending money, so the stock market goes up. Maybe there was a bit of impact on the market. Maybe.
Let’s take a look at a chart of the SP500. For the past week it has been moving laterally in a tight range. What have we said? It could either consolidate in a tight range or come back and test a bit. It only made it down just below the 10 day EMA on the Friday low and then rebounded to hold that on the close. It has had a three-week run to this level right before earnings. It went up to another resistance point on top of a big rally already, and then a decent-sized selloff. Does it make perfect technical sense that the market got a little ragged at the end of the day? Damn right.
Of course just when all the journalists who try to pass as market analysts got totally worked up about the selloff, it turned, reversed, and cut more than half of that last two-hour selloff heading into the close. Despite the market being petrified by a supposed imminent shutdown, buyers still stepped in and used the dip to buy. Could it also have been that there was some light volume on the session? Trade was very light. It made it quite easy for a mutual fund or two to take some profits after a nice rally and a lateral move below resistance that could not make the break. And right before a weekend. Did it make sense that they took some gains? You betcha. Sorry, I do not mean to quote Sarah Palin again, but that just rolls off the tongue. I cannot help myself.
So what was the problem? Was it a government selloff? Poppycock. Nonsense. I would call it something else, but some kids listen to this. There are some serious issues facing us versus less than 10 days’ worth of our deficits. That has to do with oil, my friends. Looking at the chart, oil shot higher again to $112.79, up $2.49. It is exploding higher as our dollar swirls around in the toilet and is heading to the sewer right now. That is the problem.
The Fed has its massive liquidity versus a tanking dollar and, consequently, surging oil, surging gold, and surging all commodities. It is a game of the Fed and its liquidity trying to inflate our way out of our deficits versus the rest of the world taking action against too much liquidity (or actually having a strong economy, such as China). Also their currencies are inflating versus the dollar, thus we are getting it from both ends. The dollar is weaker, and then everything denominated in dollars is even more expensive. Every time the dollar drops, you have to pay with more dollars to get those commodities. It is a vicious cycle, and we could have some serious trouble ahead.
This break today was very important. A lot of very smart economists and investors are saying that $110 barrel of oil was the choke point. That is the critical level for the consumer and the US economy. Now we are blowing through that. It was a gusher through that level. It was a blow out. Yes, my hypocrisy knows no bounds either as I use painfully trite phrases, but you get the point. There is a serious dichotomy going on here, and we have a problem.
I am a bit off path from the way we normally do things, but these are important issues. We have a Fed chairman who is an expert in the Great Depression, and he does not want the same things that happened then to happen now. He is more worried about deflation. I heard the people on the left talking on TV last night about how we are in a deflationary environment. What world are they living in?
The Fed was talking about the iPad coming down in price the other day as if that was some proof of deflation. I’m sorry, but most of us do not buy more than one iPad a year. The problem we have here is this is not the Great Depression anymore. We foster the same policies we did after the Great Depression, but now this is something more akin to the 1970′s on top of the Great Depression. What happened then? We had oil shocks. Oil spiked higher, the dollar dived, and inflation ran rampant. We do not have inflation running rampant yet, but we are sowing the same seeds we did in the 70′s that led to the 22% interest rates and stagflation. The Fed is monetizing the oil rally. It is further deflating the dollar by pumping more and more liquidity and keeping interest rates low. The Fed did just that in the 1970′s when it felt it had to monetize the economy in order to keep the consumer from completely going stagnant.
What happened? The consumer and businesses went stagnant because interest rates shot to the moon as did all commodities and other prices and nobody could afford anything. The Fed is doing the same thing by putting the pedal to the metal as oil rises. The Fed is guaranteeing that we will have inflation. It is guaranteeing stagflation. In trying so much to avoid the sins of the past and the Great Depression, it is committing the sins of another era. It has been blindsided by the 1970′s. While it was looking for low and away just like Moonlight Graham when he was up to bat. They are looking for low and away when they should be looking for in their ear. And it will catch them in the ear.
That all sounds pretty gloomy. It is not a great scenario, but it did not really tear the market apart. Why not? The market is going to be a bit slow to come around because we have that battle ongoing. Liquidity provided by the Fed is good for financial assets. Inflation is starting to move up, but it is not ripping higher. It is not going to eat into the stock market and stock gains. Sometimes inflation actually helps stock prices initially. If the Fed even started to raise rates anytime soon, history shows that the stock market does not mind the initial wave of rate hikes. It even holds up well into the last round when the Fed gets aggressive. That is what finally turns the market down. The market is still enjoying the liquidity.
The dollar may be tanking, but it is doing okay because a lot of the stocks inside the SP500, NASDAQ, American Stock Exchange, et cetera, produce the commodities that are going up in price. They will do just fine. A lot of companies produce the equipment that helps to mine these commodities and bring them to market and refine them. They will do just fine as well.
The stock market can do well while Rome starts to burn. Eventually when Rome burns down, the stock market has a hard time. Some day we will get there, but we are not sure when that will be. We will keep watching the market, but we are still early in the progression. We may not see anything for quite some time. The worry near term is the price of oil and how it is exploding higher. That could be a very serious problem. Is it at an all-time high? No, but we are killing the dollar right now to get there.
We are pursuing a policy to prevent deflation when it is our opinion (and the opinion of many smart economists and other investors) that we are pursuing a policy that will create some horrid inflation. It is not the 1930′s anymore. We have to fast forward into the 1970′s. The problem is shifting. We better shift our policy with it, or we will throw ourselves from one crisis of the 1930′s-era to the next in the 1970′s. Been there. I do not want to go back to the 70′s. Disco music, the Beatles had broken up it was not good. Let’s not go there again. We need leadership. We are not getting it from the Washington, unfortunately. I think the leadership we are getting from the Fed is already outdated.
Looking at the market, the losses were not that severe. NASDAQ, -0.5%; SP500, -0.4%; Dow, -0.25%; SP600, -1.2%; SOX, -0.8%; NASDAQ 100, -0.5%. The SP600 took it on the chin. There are worries that the small caps will take the hardest hit if the government shuts down. This is one area where there may have been some selling with respect to a shut down, but there was nothing major. The market chopped around again and tried higher. The indices tried higher toward the February peak and could not do anything about that. It sold off and bounced off the 10 day EMA. No major damage done.
MONDAY
There will be more scheduled data than this past week. There will be import and export prices, and that should be very interesting. Retail sales for March come out, and that should be decent given what we have heard from the Same Store Sales. We will also have the PPI and CPI along with more regional manufacturing reports and Industrial Production and Capacity. There will also be Michigan Sentiment. We will see how they are feeling up there in the cold north.
A lot of data coming out, but a lot of the focus will be on the oil prices. There will also be some focus on what the federal government is doing. We want to get them back to work as soon as we can; we do not want the whiners out there. There are definitely some whiners. I heard stories today and saw some on TV. Small businesses that have government contracts will not be able to work their people because the government is shutting down. They said they never expected that to happen, but it is like the people who joined the National Guard who never expected to go to war. It is just part of the deal.
Frankly, if you think you have the security of government contracts, I’m sorry, but this just makes you join the real world. Join the business world. Contracts can be canceled at any point with the government included. This is not even canceled. They will be back to work in short order, and the work will still be there. Quit your bellyaching. It reminds me of the people who get luxurious pensions and are worried about having to lose some of it. The rest of the private sector world is facing those issues every day, thank you very much. Join the real world. But I digress once again, and I am sure I have upset a few people. Sometimes I just cannot control myself.
In any event, let us talk about what we are looking at next week. We are getting what we want as far as the market. It is not rallying higher. That would have been nice, but we might get a bit of a pullback. That will give us a better ramp to the upside. Earnings will come out, so a little pullback would not hurt at all. It would make things all the better. Having rallied for three weeks ahead of this lateral move, the market is vulnerable to a pullback at this level just below resistance as initial earnings come out.
We do not expect them to be weak. We have hard very few warnings positive of otherwise so we are looking at basically in-line. Will in-line drive them further? Maybe not with oil at $113, the dollar sinking, and inflation rising. Any pullback we get ahead of that would be a good thing. If we get a pullback to the 50 day EMA or the February low, that might get very interesting. We have good stocks that are already in buy position. Take industrials such as JOYG and DE. They are out there. We want to be able to pick them up as they bounce, so we will be watching. A pullback is a good thing right here because it will put even more stocks in good position to buy.
We will mind our stops, of course. We watched the market bounce back after the selling today. It put a lot of our positions that were dancing around with our stop points back above them. We do not know how this oil thing will play out, so we will mind our stops and protect ourselves. We have some good gains and we do not want to lose them. Then we will see how things play out. If we get a pullback, we will be able to buy back in and make new good trades to the upside, whether short term or longer-term trades. We do not always do it over a day, a week, or three weeks. We have had trades for months and months and even years. You know we will let a trade run as long as it will run for us.
Watch the oil. Expect a pullback and do not get freaked out by that. Just be ready to move in and take advantage of it. We have some hedges. We have some downside plays, and we took some gain on one of them on Friday. If we get another pullback, we will be able to take some more on the SPYder play and others. We have ourselves a bit hedged. We will mind our stops, and we will look for opportunity while we wait and see how this plays out.
Try to enjoy what you are seeing somewhat. If we survive all of this, it will be interesting to tell the grandkids and the great-grandkids someday. You will also be able to tell them how you kept your head and were able to take advantage of it to build up the inheritance they will enjoy. Have an outstanding weekend. Enjoy the spring and do not let the shutdown worry you. Maybe the President will not get his trip for the weekend and that as him annoyed. Whatever. We are bigger than that and we see the big picture. We know what is going on, and we know the fight is to come when we try to rescue our country from this debt. I will see you on Monday, and maybe we will find the media a bit less lathered.
