Fed Promises Easy Money for an Extended Period

by Claus Vogt 09-30-09

Every few weeks the world’s most powerful and influential central bankers — those in charge of the world’s number one reserve currency, the U.S. dollar — come together in what’s called the Federal Open Market Committee (FOMC).

They discuss the economy, interest rates, financial markets and whatever else they deem important. Then they decide to set the Federal Funds Rate at a level they think is appropriate.

And last week was their week. So today I want to analyze what their decisions mean for the stock market and for you as an investor.

The Fed Statement Reassures
A Very Lax Monetary Policy …

The FOMC meets regularly to decide where to set the Federal Funds Rate.

After each FOMC meeting, the Fed releases a statement. And the one for September 23, 2009, is very telling in my opinion. Here’s its most important part:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

As you can see, the Fed is promising a continuation of its extremely lax monetary policy “for an extended period.” So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.

Why?

Two reasons come to mind:

First, the Fed is still very concerned about the economy … the employment situation is dire … and a double-dip recession is a real possibility.

Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved … that most banks would go bankrupt if they had to implement mark-to-market rules … and that the banking system is still on life support.

This Is Important News
For the Stock Market

Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it’s not worrying about a possible stock market bubble in the making.

Why is this so important?

Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!

Source: www.decisionpoint.com

Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor’s, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they’re expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.

Historically the normal range for this very P/E ratio — based on 12-month trailing GAAP earnings — has been between 10 (undervalued) and 20 (overvalued). Hence even if the corporate sector will see the estimated jump in earnings, the stock market is still very expensive.

Classic stock market valuation metrics show that this is a highly overvalued market. And overvalued markets can stay overvalued for a long time and even become more overvalued — as long as the Fed does not take away the proverbial punch bowl.

This means one of two things …

We’re Witnessing the Next Bubble, Or
Earnings Have to Increase Dramatically!

Fed chief Bernanke’s inflationary stance could be the fuel that ignites the next stock market bubble.

Right now I can’t rule out either one. I do, however, lean towards the first. And in reading the Fed’s FOMC statement one thing becomes obvious: If we’re on our way to a new stock market bubble the Fed will not prick it any time soon.

The September 23 statement that I cited earlier is as clear as you can expect from the Fed. Much clearer than anything Greenspan said during his long reign. His famous “irrational exuberance” speech, which was never followed by any action, is a perfect example.

Bernanke is much different …

From the very beginning of his career at the Fed he made it known that he’s a first class inflationist, and he strongly believes prosperity can be achieved by printing money. Now the Bernanke Fed is clearly reiterating this inflationary stance. By doing so the Fed is rubberstamping the current stock market rally and apparently not worrying about a possible bubble!

There is an old Wall Street saying: “Don’t fight the Fed.” I think it’s wise to heed it in today’s environment.

Best wishes,

Claus

Bernanke’s Grand Strategy …

This article is suggesting the feds will not raise rates by the end of the year but it counters the trend of rising interest rates
(borrowing/lending) in recent weeks.

Even 12month CD rates are up. Taking ING as an example, they reversed their year long trend of CDs giving lower rates than their regular savings account (whose rates would dip a month after the new cd rate was updated).

Bernanke may be a scholar but he’s not going to destroy the value of the dollar because the repurcussions are huge and that would hasten the arrival of a global currency ie. End of the Western Civilization.

Either that or a war with Iran or some International conflict will drive investors to the dollar as a safe haven.

On 9/28/09, Tseten B wrote:
> by Larry Edelson on > September
> 28, 2009 at 8:30 am
> [image: Larry Edelson]
>
> By now it should be abundantly clear to you that my warnings are coming to > pass. Gold is acting firm, having made a new 12-month high above $1,000 an > ounce, and within a whisker of a new record high.
>
> And while it might not fully blast off yet, in time, it will — to well over > $2,000 an ounce … then even higher to $3,000 … and ultimately, probably by > the middle of the next decade, even to $5,000.
>
> Meanwhile, the U.S. dollar has sunk to a new 12-month low and is a mere 7 > percent above its record low reached in July 2008.
>
> It won’t take much for the dollar to start plunging, almost out of control. > A brief rally here and there, yes. But the long-term trend for the dollar > isdown, down, DOWN.
>
> Why am I so sure of it? Well, in addition to all of the reasons and all of > the material I’ve already written on the subject, consider the press > release
> issued from last week’s Federal Open Market Committee Meeting (FOMC). >
> The Fed signaled that the emerging signs of life in the U.S. economy are > simply not enough for it to stop printing money.
>
> So instead of letting market forces unfold naturally, the Fed will continue > to engage in “asset purchases” to help the economy “return to higher levels > of resource utilization.”
>
> That’s Fed-speak for printing money … monetizing debts … and reinflating > asset prices. The Fed is also extending its (largely phony) end-date for > printing money, from December to March.
>
> It also acknowledged that it will keep its Fed Funds interest rate in the > range of zero to 0.25 percent for an “extended period.”
>
> If you think extended period means a few more months, or even six months > before the Fed raises rates, think again.
>
> And if you think the Fed is worried about the sinking value of the dollar > as
> a result of all this, then you’ll be even more surprised.
>
> In fact, let me tell you a few things about our Fed Chairman. *Every move > he
> is making is part of his grand strategy to avoid the policy mistakes he > believes were made in the 1930s that caused the Great Depression.* >
> Bear in mind, I have read every paper ever published by Mr. Bernanke. I’ve > studied him more thoroughly than I have any U.S. central banker in history, > including his predecessor Alan Greenspan.
>
> So what I am about to tell you can serve to help guide you in the months > and
> years ahead to understand how Bernanke thinks and what kind of policy > decisions he will likely be making.
>
> Let’s get started …
>
> *Bernanke Belief #1: Monetary Policy Was Overly Tight at the Outset of the > Great Depression. Ergo, Keep Interest Rates Low Today to Avoid Another > Depression.*
>
> Bernanke believes that in the spring of 1928 and in the absence of any > signs
> of inflation, the Federal Reserve unjustifiably raised its discount rate > from 4 percent to as high as 6 percent in 1929 *with the explicit aim of > deliberately pricking the stock market bubble*.
>
> While it succeeded, ultimately the tight money move backfired. Instead of > the stock market bubble bursting naturally of its own weight and > overvaluations, the stock market imploded.
>
> Naturally, once the stock market bubble burst in 1929, the Fed started > lowering rates, all the way down to 1.5 percent by October 1931. But then > the Fed made yet another tight money blunder, doubling rates within the > next
> four months to 3 percent by February 1932, and in the absence of any signs > of an economic recovery.
>
> In Ben’s mind, the Fed engaged in overly tight monetary policy from 1929 to > 1932, turning what would otherwise have been a fairly normal recession into > a depression. The tight monetary policy had two effects …
>
> 1. It killed off any possibility of a recovery, by raising short-term rates > above market rates.
>
> 2. Importantly, the higher rates artificially boosted the value of the > dollar in international markets, importing deflation.
>
> So what is Ben’s thinking today? Keep rates as low as possible and don’t > even dare think about raising them until there are plenty of signs of a > rock
> solid economic recovery. Furthermore, don’t dare make any moves that will > strengthen the dollar, for fear of importing deflation.
>
> Keep that latter point in mind because it’s going to re-emerge in Ben’s > thinking when we look at how he viewed the latter stages of the Great > Depression, and particularly, the dollar.
>
> *Bernanke Belief #2: Encouraging Bank Failures Was A Disastrous Policy > During the Great Depression. Ergo, Do Not Encourage Failures Today.* >
> In the aftermath of the 1929 Crash, not surprisingly, as dollars were being > cashed out of stocks, bonds, and many other dollar-denominated assets > (excluding gold, which was hoarded), the supply of money and credit in the > U.S. began to implode, and banks began to fail.
>
> But the Fed and the Treasury did not want weak banks to stay in business. > Treasury Secretary Andrew Mellon actually publicly called for weak banks to > close their doors.
>
> But that policy clearly backfired, causing a banking panic, which saw more > than 11,000 banks go bust by 1932. And it also started to drain the country > of its gold reserves, which — because of the gold standard at the time — > further caused the supply of money and credit to contract, in a virtually > non-stop freefall.
>
> Bernanke thinks encouraging financial institution failures was the wrong > policy, a major blunder — especially so since *in the 1930s there were no > safeguards in place for depositors — the innocent victims of bank > failures*.
> * Not one. There was no depositor insurance whatsoever.*
>
> Today, we have FDIC insurance and other safeguards to protect innocent > investors and savings. *But Mr. Bernanke still believes that encouraging > banks to fail is the wrong policy.*
>
> Why? Because he knows darn well that there is no way depositors can be > protected, even today, if a mass banking panic were to spread throughout > the
> country. Washington simply does not have the resources to control an > all-out
> panic.
>
> Bottom line: Do not expect to see Bernanke encourage bank or broker > failures, other than Lehman Brothers last year. His views on this have not > changed regarding today’s great financial crisis. Nor are they likely to > change.
>
> *Bernanke Belief #3: Tight Money Policy Yet Again, in 1932, Was Disastrous > for the Economy. Ergo, Keep Rates As Low As Possible for As Long As > Possible
> Today.*
>
> In February 1932, after seeing the devastation to the economy that the high > interest rate policy caused, the Fed suddenly reversed course and dropped > the discount rate from 3.0 percent back to 2.5 percent in June, just four > months after raising rates.
>
> That was a smart move. But they botched it up again. Just nine months > later,
> in March 1933 — under strong pressure from Congress — the Fed cranked rates > back up one full point from 2.5 percent to 3.5 percent. Again, in the > absence of any solid data that the economy was recovering. >
> The result? The economy immediately took yet another devastating plunge, > taking down thousands more banks with it, and causing unemployment to soar > past 25 percent.
>
> What will Ben do today? It’s pretty clear: He’s not likely to raise > interest
> rates for quite a long time, until well after the economy has cleared the > crisis stage and is solidly back on firm footing. That could be a year from > now, or, even longer.
>
> *Bernanke Belief #4: Vigorously Defending the Dollar — Via Protecting the > Gold Standard Come Hell or High Water — Was the Biggest Mistake of All.* >
> Bernanke’s major conclusion is that almost all policy initiatives taken by > Congress and the Federal Reserve during the Great Depression were designed > based on one underlying motive: To protect the dollar and its underlying > gold reserves, at all costs. Even at the cost of causing a Depression and > 25
> percent unemployment.
>
> But that policy, according to Bernanke, had devastating unintended > consequences.
>
> Foreign countries around the world — worried that they were going to lose > gold reserves to the higher interest rates offered in the U.S. at the time > —
> began to competitively raise interest rates to defend their own gold > reserves, without any concern whatsoever for deteriorating economic > fundamentals.
>
> Hence, a worldwide race toward higher interest rates broke out in the early > 1930s, causing the entire globe to sink into a major economic depression > that became self-fulfilling and self-perpetuating.
>
> Furthermore …
>
> *Bernanke Belief #5: The Longer a Country Defended Its Currency — Via > Defending Its Gold Reserves — the Worse the Depression.*
>
> In one of his most important papers, published in October 1990 — “The Gold > Standard, Deflation and Financial Crisis In the Great Depression: An > International Comparison ” — Bernanke > puts
> all the cards on the table from his years of studying the Great Depression, > with the following two conclusions …
>
> 1. Supporting the dollar via the direct and indirect actions taken to > vigorously defend the gold standard was the single most important factor > causing the Great Depression.
>
> And …
>
> 2. The sooner a country abandoned the gold standard during the Great > Depression — and effectively devalued its currency — the faster the > economic
> recovery.
>
> *ERGO, TODAY, DO NOTHING TO SUPPORT THE DOLLAR AND INSTEAD, LET THE DOLLAR > FALL AS QUICKLY AS POSSIBLE TO HOWEVER LOW THE FREE MARKET FORCES TAKE IT, > NO MATTER WHAT.*
>
> You now know pretty much how Bernanke thinks. The only questions that > remain
> are …
>
> 1. Will his policies work?
>
> 2. Or will they backfire?
>
> 3. What unintended consequences might there be?
>
> 4. How does one protect their wealth and profit from Bernanke’s views and > likely actions regarding the economy, the dollar, interest rates? >
> I’d love to hear from you on the above questions, via my personal > blog.
> Just click here to give > me your comments!
>
> And click here to > become a savvy investor and to take advantage of these markets by becoming > a
> member of my *Real Wealth
> Report* > .
>
> Best wishes,
>
> Larry
>

Bernanke’s Grand Strategy …

by Larry Edelson on September 28, 2009 at 8:30 am

By now it should be abundantly clear to you that my warnings are coming to pass. Gold is acting firm, having made a new 12-month high above $1,000 an ounce, and within a whisker of a new record high.

And while it might not fully blast off yet, in time, it will — to well over $2,000 an ounce … then even higher to $3,000 … and ultimately, probably by the middle of the next decade, even to $5,000.

Meanwhile, the U.S. dollar has sunk to a new 12-month low and is a mere 7 percent above its record low reached in July 2008.

It won’t take much for the dollar to start plunging, almost out of control. A brief rally here and there, yes. But the long-term trend for the dollar isdown, down, DOWN.

Why am I so sure of it? Well, in addition to all of the reasons and all of the material I’ve already written on the subject, consider the press release issued from last week’s Federal Open Market Committee Meeting (FOMC).

The Fed signaled that the emerging signs of life in the U.S. economy are simply not enough for it to stop printing money.

So instead of letting market forces unfold naturally, the Fed will continue to engage in “asset purchases” to help the economy “return to higher levels of resource utilization.”

That’s Fed-speak for printing money … monetizing debts … and reinflating asset prices. The Fed is also extending its (largely phony) end-date for printing money, from December to March.

It also acknowledged that it will keep its Fed Funds interest rate in the range of zero to 0.25 percent for an “extended period.”

If you think extended period means a few more months, or even six months before the Fed raises rates, think again.

And if you think the Fed is worried about the sinking value of the dollar as a result of all this, then you’ll be even more surprised.

In fact, let me tell you a few things about our Fed Chairman. Every move he is making is part of his grand strategy to avoid the policy mistakes he believes were made in the 1930s that caused the Great Depression.

Bear in mind, I have read every paper ever published by Mr. Bernanke. I’ve studied him more thoroughly than I have any U.S. central banker in history, including his predecessor Alan Greenspan.

So what I am about to tell you can serve to help guide you in the months and years ahead to understand how Bernanke thinks and what kind of policy decisions he will likely be making.

Let’s get started …

Bernanke Belief #1: Monetary Policy Was Overly Tight at the Outset of the Great Depression. Ergo, Keep Interest Rates Low Today to Avoid Another Depression.

Bernanke believes that in the spring of 1928 and in the absence of any signs of inflation, the Federal Reserve unjustifiably raised its discount rate from 4 percent to as high as 6 percent in 1929 with the explicit aim of deliberately pricking the stock market bubble.

While it succeeded, ultimately the tight money move backfired. Instead of the stock market bubble bursting naturally of its own weight and overvaluations, the stock market imploded.

Naturally, once the stock market bubble burst in 1929, the Fed started lowering rates, all the way down to 1.5 percent by October 1931. But then the Fed made yet another tight money blunder, doubling rates within the next four months to 3 percent by February 1932, and in the absence of any signs of an economic recovery.

In Ben’s mind, the Fed engaged in overly tight monetary policy from 1929 to 1932, turning what would otherwise have been a fairly normal recession into a depression. The tight monetary policy had two effects …

1. It killed off any possibility of a recovery, by raising short-term rates above market rates.

2. Importantly, the higher rates artificially boosted the value of the dollar in international markets, importing deflation.

So what is Ben’s thinking today? Keep rates as low as possible and don’t even dare think about raising them until there are plenty of signs of a rock solid economic recovery. Furthermore, don’t dare make any moves that will strengthen the dollar, for fear of importing deflation.

Keep that latter point in mind because it’s going to re-emerge in Ben’s thinking when we look at how he viewed the latter stages of the Great Depression, and particularly, the dollar.

Bernanke Belief #2: Encouraging Bank Failures Was A Disastrous Policy During the Great Depression. Ergo, Do Not Encourage Failures Today.

In the aftermath of the 1929 Crash, not surprisingly, as dollars were being cashed out of stocks, bonds, and many other dollar-denominated assets (excluding gold, which was hoarded), the supply of money and credit in the U.S. began to implode, and banks began to fail.

But the Fed and the Treasury did not want weak banks to stay in business. Treasury Secretary Andrew Mellon actually publicly called for weak banks to close their doors.

But that policy clearly backfired, causing a banking panic, which saw more than 11,000 banks go bust by 1932. And it also started to drain the country of its gold reserves, which — because of the gold standard at the time — further caused the supply of money and credit to contract, in a virtually non-stop freefall.

Bernanke thinks encouraging financial institution failures was the wrong policy, a major blunder — especially so since in the 1930s there were no safeguards in place for depositors — the innocent victims of bank failures. Not one. There was no depositor insurance whatsoever.

Today, we have FDIC insurance and other safeguards to protect innocent investors and savings. But Mr. Bernanke still believes that encouraging banks to fail is the wrong policy.

Why? Because he knows darn well that there is no way depositors can be protected, even today, if a mass banking panic were to spread throughout the country. Washington simply does not have the resources to control an all-out panic.

Bottom line: Do not expect to see Bernanke encourage bank or broker failures, other than Lehman Brothers last year. His views on this have not changed regarding today’s great financial crisis. Nor are they likely to change.

Bernanke Belief #3: Tight Money Policy Yet Again, in 1932, Was Disastrous for the Economy. Ergo, Keep Rates As Low As Possible for As Long As Possible Today.

In February 1932, after seeing the devastation to the economy that the high interest rate policy caused, the Fed suddenly reversed course and dropped the discount rate from 3.0 percent back to 2.5 percent in June, just four months after raising rates.

That was a smart move. But they botched it up again. Just nine months later, in March 1933 — under strong pressure from Congress — the Fed cranked rates back up one full point from 2.5 percent to 3.5 percent. Again, in the absence of any solid data that the economy was recovering.

The result? The economy immediately took yet another devastating plunge, taking down thousands more banks with it, and causing unemployment to soar past 25 percent.

What will Ben do today? It’s pretty clear: He’s not likely to raise interest rates for quite a long time, until well after the economy has cleared the crisis stage and is solidly back on firm footing. That could be a year from now, or, even longer.

Bernanke Belief #4: Vigorously Defending the Dollar — Via Protecting the Gold Standard Come Hell or High Water — Was the Biggest Mistake of All.

Bernanke’s major conclusion is that almost all policy initiatives taken by Congress and the Federal Reserve during the Great Depression were designed based on one underlying motive: To protect the dollar and its underlying gold reserves, at all costs. Even at the cost of causing a Depression and 25 percent unemployment.

But that policy, according to Bernanke, had devastating unintended consequences.

Foreign countries around the world — worried that they were going to lose gold reserves to the higher interest rates offered in the U.S. at the time — began to competitively raise interest rates to defend their own gold reserves, without any concern whatsoever for deteriorating economic fundamentals.

Hence, a worldwide race toward higher interest rates broke out in the early 1930s, causing the entire globe to sink into a major economic depression that became self-fulfilling and self-perpetuating.

Furthermore …

Bernanke Belief #5: The Longer a Country Defended Its Currency — Via Defending Its Gold Reserves — the Worse the Depression.

In one of his most important papers, published in October 1990 — “The Gold Standard, Deflation and Financial Crisis In the Great Depression: An International Comparison” — Bernanke puts all the cards on the table from his years of studying the Great Depression, with the following two conclusions …

1. Supporting the dollar via the direct and indirect actions taken to vigorously defend the gold standard was the single most important factor causing the Great Depression.

And …

2. The sooner a country abandoned the gold standard during the Great Depression — and effectively devalued its currency — the faster the economic recovery.

ERGO, TODAY, DO NOTHING TO SUPPORT THE DOLLAR AND INSTEAD, LET THE DOLLAR FALL AS QUICKLY AS POSSIBLE TO HOWEVER LOW THE FREE MARKET FORCES TAKE IT, NO MATTER WHAT.

You now know pretty much how Bernanke thinks. The only questions that remain are …

1. Will his policies work?

2. Or will they backfire?

3. What unintended consequences might there be?

4. How does one protect their wealth and profit from Bernanke’s views and likely actions regarding the economy, the dollar, interest rates?

I’d love to hear from you on the above questions, via my personal blog. Just click here to give me your comments!

And click here to become a savvy investor and to take advantage of these markets by becoming a member of my Real Wealth Report.

Best wishes,

Larry

Dollar crashes against yen!

by Martin D. Weiss, Ph.D. 09-28-09

Martin here with an urgent update on the dramatic events that took place late last week and what they could ultimately mean for you …

Just when the worldwide onslaught against the U.S. dollar seemed to be temporarily subsiding, a new round of attacks hit Friday — this time from Japan.

On August 30, in a landslide election victory that shook the world, the left-of-center Democratic Party of Japan derailed the ruling party and swept a new leader to power, Yukio Hatoyama. It was the most significant tipping point in that country’s politics since 1955.

Now, 30 days later, we are starting to see the repercussions for the U.S. dollar: For the first time in decades, the new Japanese regime is effectively giving up supporting the greenback in the currency markets!

The consequences are immediate: Just this past Thursday, the U.S. dollar could buy 91.27 Japanese yen. By the end of the day Friday, it could only buy 89.63 yen.

In just 24 hours, the dollar fell by 1.81 percent, more that it would typically fall in 24 DAYS!

But if you think the dollar decline is far removed from your daily life, think again.

The Dollar Decline Could Deliver
A Major Blow to Your Wealth

Right now, American households own $67.2 trillion in assets, including stocks, bonds, and real estate.

Here’s the key: If measured in terms of Japanese yen, just between the close of business Thursday and close of business Friday …

Over one trillion dollars in American wealth was wiped off the map! All in just 24 hours!

Unfortunately, most people have no idea this is happening, and even if they did, no sense of how it could impact them. Their typical reaction:

“I don’t care how much the dollar is falling in Japan, Europe, or any other country. All that concerns me is what happens with my money right here in the United States.”

But there are four fatal flaws to this rationale:

Fatal Flaw #1. Your money isn’t just falling in far-away markets. It’s falling everywhere.

When the value of your money crashes globally, it also falls domestically.

Already, the cost of more than 90 percent of the products sold at Wal-Mart (all produced overseas) is being impacted.

Already, the vast majority of products sold in electronics stores, furniture stores, and appliance stores are being affected.

Ditto for the lion’s share of the oil, gasoline, and heating oil you buy.

So when the dollar falls, you ultimately pay.

Fatal Flaw #2. Your money isn’t really yours. A lot of it is actually theirs.

It’s been loaned to America by the very same foreign countries where the dollar is falling the fastest — Japan, China, the eurozone, and other countries. And it’s being loaned to America …

To finance the massive $1.58 trillion federal budget …

To fund our addiction to debt …

And to once again fuel the borrow-and-spend binging that helped create the financial crisis in the first place.

Fatal Flaw #3. When they want their money back, they GET it back.

When foreign central banks and investors want to pull their money out, they don’t have to grovel to the U.S. Treasury Department or wait on line at the Fed. They merely issue sell orders to liquidate their U.S. investments, convert them into cash, and exchange them for other currencies.

So far, this process has typically been orderly, with no panic. But if the action in the Japanese yen on Friday is any indication, it may not stay that way for long.

Fatal Flaw #4. They can sink YOUR investments.

The more the dollar falls, the more they want to sell. And the more they sell, the further the dollar falls.

But dollars aren’t sold in a vacuum. Whenever foreign investors and governments sell U.S. our dollars, they’re also selling U.S. stocks, bonds, and real estate.

And that’s how it comes back to bite ordinary Americans on the rear end, causing potentially big losses in the $67.2 trillion of household wealth.

The Unfathomable Risk
Our Leaders Are Taking

The U.S. dollar is not going to die. But our leaders are taking an unfathomable risk with our money and our destiny as a nation.

Every time we run budget deficits, we must go, hat in hand, asking for money from central banks and investors in Asia, Europe, and even Latin America.

Every time we run a trade deficit, spending more on imports than we earn on exports, we run back for still more money from Asians, Europeans, and Latin Americans.

And now, after thousands of such trips and billions of such transactions, the U.S. now has a total of $7.9 trillion in liabilities to foreigners.

Why It’s Now Far More Difficult to
Postpone the Day of Reckoning

Until recently, we were able to continually postpone our day of reckoning as a nation.

The U.S. dollar was king, the only reserve currency. And the U.S. financial market was the only game in town big enough to satisfy the needs of overseas investors. So they had to keep most of their money in dollars, whether they liked it or not.

They had no choice.

Whenever they lost faith in other countries — Argentina, South Africa, Thailand, or even a country like Great Britain — they could pull out along with hoards of others, sending those financial markets into a tailspin. But when the United States made similar mistakes, it got away with it.

And so it was that we merrily ran huge deficits, borrowed to the hilt, and continued to party as if nothing were wrong. And that’s why, despite it all, overseas investors continued to pour more and more money into America.

In the 1980s, it was primarily cash-rich Japanese who led the way, investing billions in U.S. stocks and bonds, helping to lift the Dow and Treasuries out of their worst slumps of the postwar era.

In the 1990s, it was mostly Germans who played that role, helping to drive the big tech boom.

And in the 21st century, China has become the big provider of new funds to the U.S.

But now all of this is changing and we’re nearing the end of the line:

• Foreign central banks have sought — and begun to find — viable alternatives to the U.S. dollar as a reserve currency.
• China and others have pushed progressively harder to replace the dollar with a basket of currencies.
• The United Nations has proposed a similar scheme, creating a new monetary system.
• And this past week, as I mentioned at the outset, even Japan, America’s staunchest and richest financial ally, is beginning to abandon its long support for the U.S. dollar.

But U.S. authorities remain conspicuously complacent. Despite rhetoric supporting the greenback, both the U.S. Treasury and the Federal Reserve have actively pursued policies that merely sink the U.S. dollar further — a national debt that will grow by $9 trillion by 2019 … and massive money printing to finance it.

Clearly, our government can think of no better response to the new pressures than to flood the world with still cheaper dollars.

Time for Action

Many years ago, my father tried to protect the U.S. dollar, and prevent it from declining.

He founded the Sound Dollar Committee.

He enlisted the support of men like Bernard Baruch who was the former adviser to many presidents … Herbert Hoover, the former president who presided over the worst of times … and Bill Martin, who was Chairman of the Federal Reserve.

He organized a massive grassroots campaign to balance the budget, fight inflation, and protect the American dollar.

He helped President Eisenhower achieve one of the few solid, balanced budgets of the 20th century. And he won several landmark battles for the dollar. But he lost the war.

Today, I am the Chairman of the Sound Dollar Committee and I wish I could accomplish as much as Dad did to stop the dollar’s decline. But the forces driving it down are too powerful; our leaders, too complacent.

Thus, today, my primary course of action is different and I will tell you more about what I’m doing next month.

Right now, however, your first urgent step must be to defend yourself from this madness with the investments we’ve been recommending that go up when the dollar falls.

Your second step: To go on the offensive, aiming for the unusual wealth-building profits that only crises like these can generate.

Stand by for further instructions.

Good luck and God bless!

Martin

Medium term outlook has high risk for Inflation

by Martin D. Weiss, Ph.D. 09-21-09

Step by step, with little fanfare and great complacency, we are witnessing a fundamental, global shift that’s rapidly transforming the investment scene:

The forces of deflation are temporarily receding; and in the meantime, the forces of inflation threaten to roar back with a vengeance.

They are everywhere. They could be overwhelming. They must NOT be ignored …

Inflationary Force #1
Never-Ending, Out-of-Control
U.S. Federal Deficits

As Larry Edelson explained here one week ago:

• Through August, the federal deficit hit $1.38 trillion, or three times last year’s all-time record deficit of $454.8 billion. And in September alone, the administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
• The U.S. government’s official debt is now at an all-time high of $11.8 trillion, or over $100,000 for each and every household in America.
• Both the administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, driving the burden per household up to $177,000.
• The Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
• Perhaps worst of all, the government’s unfunded obligations for Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.

Total burden per household: More than $1 million!

This is, by far, the largest federal deficit in U.S. history — in proportion to household income … in comparison to the nation’s population … or even as a percent of the total economy (other than during major World Wars).

It drives the Fed to print money without restraint. It pumps up demand for scarce goods. And in the months ahead, it’s bound to be the single most powerful pressure point on public policy, financial markets, the U.S. dollar and … inflation.

Inflationary Force #2
New Lows in the U.S. Dollar

Last week, the U.S. dollar sunk to a new, one-year low against a basket of major currencies.

It’s just five points away from its lowest level in history.

And, as Mike Larson detailed this past Friday, the U.S. dollar is now being driven lower by a new, unprecedented factor:

For the first time since 1933, it is now cheaper to borrow dollars than Japanese yen. Indeed, the three-month London Interbank Offered Rate (LIBOR) on the U.S. dollar has slumped to a meager 0.292 percent, while the equivalent rate on the Japanese yen is 0.352 percent.

This means that, instead of using Japanese yen to finance the carry trade — borrowing low-cost money to buy high-yielding investments — international investors will now start using U.S. dollars to finance the carry trade.

It means that, instead of the dollar being a magnet for frightened money, it is becoming precisely the opposite — a source of financing for the risk trade.

Most important, it means that, instead of buying dollars, they have every incentive to borrow dollars and promptly SELL them in order to purchase the higher yielding instruments.

End result: More momentum to the dollar’s decline.

Inflationary Force #3
U.S. Household Wealth
Now Expanding Again

For nearly two years, U.S. households were continually losing wealth. They lost trillions in stocks, bonds, insurance policies, real estate. And these losses, in turn, emerged as a major deflationary force, driving consumer price inflation to zero or lower.

Now, however, in the second quarter of 2009, that trend has reversed.

According to the Fed’s Flow of Funds released just last week, in just the last three months, U.S. households have enjoyed wealth gains of

• $1.1 trillion common and preferred stocks
• $494 billion in mutual funds
• $157 billion in real estate

These gains are still far from enough to recoup the peak asset levels of 2007. But the change in trend is enough to rekindle inflation, and that inflation is likely to take most economists by surprise.

Inflationary Force #4
Exploding U.S. Money Supply

Money pouring into the economy and chasing scarce goods is the classic cause of inflation.

But throughout 2007 and much of 2008, there was no growth whatsoever in U.S. money supply (M1).

During that period, despite the Fed’s efforts to shove interest rates down to practically zero, the total amount of money outstanding remained under $1.4 trillion — another deflationary force.

Now, however, as you can see in this chart provided by www.Shadowstats.com, the outlook has changed dramatically:

Since mid-2008, money supply has exploded beyond $1.65 trillion, with more rapid growth on the way.

Is Deflation Dead?

No. It will return.

But at this juncture, inflation is the primary concern, with far-reaching consequences on how you invest, when and where.

In the days ahead, my team and I will give you step-by-step instructions on how to protect yourself — and profit.

But first, I want to clear up a few basic points. Although we may sometimes disagree on the specific timing and magnitude of particular market moves, we are unanimous in our views about a few fundamental issues:

First, until and unless there is a dramatic change in these inflationary forces, it should be clear that the U.S. dollar’s decline will accelerate in the months ahead.

Second, despite its decline, the U.S. dollar will continue to be a viable, widely traded currency. It will not, as some seem to fear, simply disappear from the face of the earth.

Third, it is both impractical and unreasonable to abandon U.S. Treasury bills and other conservative dollar-denominated investments. They continue to provide U.S. citizens and residents the best safety and liquidity in the world today.

Fourth, the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.

Stand by for more details in upcoming emails from key members of our team, including myself, Larry Edelson and Mike Larson.

Good luck and God bless!

Martin

Easy-Money Fed Fueling Dollar “Carry Trades”

The yen carry trade is over but looks we are probably going to see a new currency for the carry trade. The US Dollar. My suspision has been confirmed after reading this article.

Buy physical commodities, sell dollars, and buy foreign currencies. Im personally waiting for a pull back to go long the Euro. -TNB

by Mike Larson 09-18-09

A fascinating thing just occurred in the global interest rate market: For the first time since 1993, it became cheaper to borrow dollars than Japanese yen! The three-month dollar-based London Interbank Offered Rate, or LIBOR, slumped to 0.292 percent, compared with the yen-based LIBOR rate of 0.352 percent.

I know. You’re thinking: “Who the heck cares?” But this development is big — and so are the potential implications. It’s all because of something called the “carry trade,” which I’m going to get into right now …

The Carry Trade Explained …

Let’s say you’re an international investor looking to boost your returns. One way to do that is to use leverage, or borrowed money. The cheaper you can borrow that money, and the greater the yield you can earn by investing it, the larger your returns. Every single basis point, or 1/100th of a percentage point, less you spend in borrowing costs falls right to your bottom line.

Carry trade is when global investors borrow in low-yielding currencies and lend in higher-yielding currencies.

The carry trade is just a global version of this game. Investors seek out the lowest possible short-term funding costs by finding the economy whose central bank is being the most generous. Then they take that money, sell the country’s currency, and invest the funds in currency and asset markets that yield more.

That’s essentially what the world did for ages in Japan. Japan’s twin busts in stocks and real estate caused the country’s central bank to slash interest rates to near zero in the early 1990s. Japan also flooded its economy with trillions of yen in excess cash.

But the money wasn’t used by companies and consumers to spend and invest at home … they were burdened by excess capacity and gun-shy about borrowing after getting burned in stocks and real estate. Instead, the money was used by global investors to fund investments elsewhere.

There was enormous profit to be had in this game because the rest of the global economy did fairly well during Japan’s “Lost Decade.” You could borrow yen at, say, 0.5 percent and invest in places like the U.S. at around 5 percent. It was a veritable gravy train of profits, derailed occasionally by events like the Long-Term Capital Management blow up in 1998.

What the Carry Trade Did to the Yen and Global Markets …
And What We May See Happen Here

The mechanics of the carry trade require that you sell the carry currency and buy foreign currencies against it. So one of the side effects is that it depresses the value of the borrowed currency.

Another side effect is that the carry trade helps inflate global asset bubbles.

Last time around, it did this by transporting the excess liquidity being created in Japan to foreign shores.

Now, thanks to the Federal Reserve’s incredibly easy policy stance, we may be in for “Carry Trade Round Two.” Only this time it’s not Japan’s currency that’s being sold relentlessly to fund risky bets …

It’s our dollar!

Look at the chart to the left of the U.S. Dollar Index (DXY), which measures the performance of the greenback against six major world currencies (the euro, yen, British pound, Canadian dollar, Swedish krona, and Swiss franc). It looks like a ski slope, pointing down and to the right.

Unfortunately for dollar-based consumers (that’s us!), the falling dollar has side effects. It drives up the cost of imports, raising our cost of living. It also boosts the price of commodities like gold and oil. And it means the cost of travelling abroad goes up, too.

However, you can actually PROFIT from the trend by socking money away in contra-dollar plays. That includes natural resource stocks, gold, and foreign short-term bonds and stocks. If you want to know more, I urge you to check out my colleague Larry Edelson’s blog. He’s got some great information for you there.

Until next time,

Mike

Three Different Ways of Looking at the Stock Market

Buy stocks for the medium term. Bullish bias. Commodities should outperform

by Claus Vogt 09-16-09

Many investors are finding that the current situation in the stock market is very difficult to read because the conclusions of different analytical approaches are unusually conflicting. So let’s review the three most important ones and discuss the relevance of each. Then I’ll tell you what I think is the best way to deal with them.

First …

We Have Fundamental Valuations

The most common and seasoned valuation measures are without doubt dividend yields and price-to-earnings ratios (P/Es).

Dividend yield is easy to figure out … and there’s no leeway for interpretation or adjustments whatsoever. Just divide the annual dividend payment by the share price … plain and simple.

Historically, the stock market was a bargain when the dividend yield was 6 percent or higher.

Right now the dividend yield is a paltry 2.8 percent for the Dow Jones Industrial Average, 2.5 percent for the S&P 500 and a miniscule 0.4 percent for the Nasdaq 100.

So according to this time-proven indicator, the stock market has to be rated expensive.

Now, calculating a P/E is not as straightforward as it once was. Back in the day, all analysts based the price-to-earnings ratio on earnings calculated using Generally Accepted Accounting Principles (GAAP).

To keep the bullish fire lit, Wall Street concocted creative ways to report earnings.

But during the 1990s, when stocks got ever more expensive, Wall Street analysts came up with new earnings concepts allowing them to stay bullish. And they tended to adjust reported earnings arbitrarily.

In my opinion, GAAP earnings are the best way to get a proper picture of what’s going on. And the SEC agrees. The Sarbanes-Oxley Act of October 2002 requires public companies to always include a GAAP financial measure.

So I recommend sticking with GAAP earnings. And I also recommend using them on a twelve-month trailing basis instead of relying on ever-optimistic Wall Street estimates.

The normal historical range for the GAAP P/E is less than 10 (undervalued) to 20 (overvalued). The current figure is 137 … a record high! So according to this indicator, stocks are extremely overvalued.

And even if we use a non-GAAP earnings measure, like operating earnings, and use forward estimates … the market is now trading at twelve times its two-year forward earnings. The historical mean for the two-year forward multiple is about seven.

Bottom line: Based on the two classic valuation methods, this market definitely does not look cheap.

And remember …

Fundamental Valuations Are
Only Long-Term Indicators

Unfortunately, valuation measures tell you nothing about probable stock market returns for the coming year or two. They’re better used for a seven-to ten-year time frame.

In fact, if you rely solely on traditional valuation measures, you’ll be out of the market for many years just waiting for things to get cheap. The chart below shows just how expensive things are right now …

Source: www.decisionpoint.com

This means you have to look at other methodologies, too. Especially if you want to make money over shorter time frames.

So let’s move to another way of looking at the market …

The Macroeconomic Picture
Is Somewhat Mixed …

In addition to valuation methods, we have macroeconomic indicators.

Unfortunately the picture they’re currently painting is very dire. The economy is in a post real estate bubble environment. Historically, the after effects of real estate bubbles are not only devastating but last many years. And there’s just no reason to assume that this time should be different.

Look at what’s happening already:

• The banking industry is in shambles … banks are failing faster than any time since the Great Depression.
• The consumer is over his head in debt and unlikely to go on a buying binge anytime soon.
• The labor market is depressed without any sign of betterment.
• Commercial real estate is starting to crack.
• A new wave of home mortgage credit resets are in the offing.
• Foreclosures are making new highs as are credit card loan defaults.
• At the same time the government is drowning in red ink.

I could go on and on. But I think you get the picture.

In spite of all the current problems, two LEIs are rebounding.

However, there’s one bright spot: Leading economic indicators (LEI). The year-over-year change of the Conference Board’s Index of LEI turned positive in July after hitting a cyclical low of minus 4 percent in March. This is signaling the end of the recession and a bounce.

Another leading economic indicator, the Index of the Economic Cycle Research Institute, has risen even more strongly. It has just registered its strongest rebound since the early 1980s.

Unfortunately these two leading economic indicators do not look very far into the future. Yes, they’re signaling the end of the recession and some kind of a rebound. But they tell us nothing about the durability of the rebound.

It’s very possible that they could reverse direction soon, and that the rebound is nothing more than a flash-in-the-pan made possible by a combination of huge governmental stimulus and the severity of the 2008 slump.

So in the end, I would say macro-economic indicators are mixed at this point. But …

Technical Analysis Yields
A Medium-Term Bullish Outlook …

The last way of looking at the stock market is through technical analysis. And here we get a very clear picture …

The long-term trend has been down since 2000. But the medium-term trend has clearly turned up this year.

If you look at the chart below, you’ll see a huge bottoming formation of the S&P 500 index starting in November 2008. In July 2009, the index broke above the neckline of this formation signaling a medium-term trend change from down to up and generating a buying signal.

Since then the trend following indicators, like the 200-day moving average and the advance-decline line, have confirmed the medium-term up trend.

Source: www.decisionpoint.com

This shows that a medium term up trend has started. And we should expect a continuation of this trend until evidence of another trend change starts to appear.

So based on the technicals, I see more upside for stocks.

Conclusion: Longer-Term Still Bearish,
But Medium-Term I’m Bullish

Bringing all the above together you could draw the following picture for the stock market:

• Valuations are high on a historical basis and a long-term negative, but medium-term they’re meaningless.
• Macroeconomics are longer-term negative or at least doubtful, but medium-term bullish.
• The technical analysis is long-term bearish, but medium-term bullish.

So all in all there’s a rather strong case for a medium-term bullish forecast for the stock market, tempered by a long-term bearish background. This picture should prevent you from getting careless or euphoric and make it clear that there are risks with getting fully invested.

But it also seems to be prudent to consider being partially invested in the stock market to profit from any medium-term surges. You just have to be very flexible and on the lookout for signs of renewed weakness.

This is no time for buy and hold investors. But there are attractive opportunities for medium-term oriented investors willing to buy now and get out on a moment’s notice.

Best wishes,

Claus

source- moneyandmarkets.com

What happens when they DO find an alternative to U.S. bonds?

by Mike Larson 09-11-09

Every time I talk about the risk of our foreign creditors selling off their U.S. Treasuries, I hear the same objection: These guys have no place else to put the money! They’ll ALWAYS buy our debt because our bond market is the most liquid, freest place to stash their money.

And you know what? In the immediate, short-term future, I agree. But the foundation for a LONGER-TERM trend change is being laid right now.

Washington doesn’t want to hear about it.

Our politicians are just sticking their heads in the sand and hoping the problem goes away.

But I urge you to chart a different course for a very important reason …

These changes won’t result in wholesale dumping of U.S. debt tomorrow. They won’t lead to a two or three percentage point overnight surge in 10-year Treasury Note yields. But over time, I’m convinced they WILL gradually lower demand for U.S. debt, pushing bond prices lower, and interest rates higher.

Why Our Foreign Creditors Are Looking for a Way Out —
And What They’re Doing about It

It really boils down to a few simple points:

First, the U.S. government has adopted an unofficial policy of U.S. dollar debasement or, at best, an official policy of not-so-benign neglect.

Second, despite a U.S. federal deficit that’s at least three times larger than the worst in history, there’s no plan to bring it under control.

Third, the U.S. Federal Reserve is monetizing the debt with printed money, a classic cause of rising gold, rising commodity prices, and a declining currency.

Concern is rising sharply in places like China, and for good reason. The country has a $2 trillion-plus hoard of reserves. Experts believe that portfolio is overly concentrated in dollar assets — to the tune of roughly 75 percent. The problem? If the dollar keeps tanking, the value of those Treasuries, corporate bonds, equities, and other holdings will decline.

Cheng Siwei, former chairman of China’s Standing Committee, warns about the dollar’s inevitable hard landing.

Cheng Siwei, the former vice chairman of China’s Standing Committee, warned in the London Telegraph newspaper that concern is rising, and rising fast. He said:

“If [the Fed] keeps printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.”

No less an authority than the United Nations also said that dollar risk is on the rise. The UN’s Conference on Trade and Development said in a report this week that a new supra-national currency may be needed to reduce countries’ dependence on the slumping dollar.

Think this is all talk? Think again! China’s Ministry of Finance just announced that it would sell 6 billion yuan worth of government bonds in Hong Kong soon. That’s less than $900 million at current exchange rates, a pittance compared to the $100 billion-plus in U.S. Treasury debt that we’re selling every few weeks. But it’s noteworthy because this is the first issue of Chinese government debt targeted at global investors. The idea is to increase international confidence in China’s currency and China’s bond market.

Market Impact Already Being Felt —
Have You Taken Steps to Protect Yourself?

I don’t know if you saw what happened to the U.S. dollar this week, but I sure sat up and took notice. The broad-based Dollar Index tanked through key technical support on Tuesday. The buck is now trading at its worst level against the euro since December, and its worst level against the Australian dollar in more than a year.

The U.S. dollar is now trading at its worst level against the euro since December.

Then there’s gold. As Claus told you on Wednesday, the yellow metal rocketed higher in recent trading, breaching the $1,000-an-ounce mark before taking a breather. There is NO better sign that investors are losing confidence in the dollar and the ability and willingness of the Fed to do anything about it.

As an individual investor, you simply have to position yourself to profit from this mega-trend. Buying gold is one easy step. You can also buy foreign bond funds to hedge against dollar risk. Or you can scoop up foreign stocks that generate the lion’s share of their sales and earnings in booming overseas economies.

In the meantime, please don’t disregard this important long-term trend. It’s going to lead to higher interest rates, whether the Fed and Treasury like it or not.

Until next time,

Mike

Gold Breaks $1,000 an Ounce; What’s Next …

by Claus Vogt 09-09-09

Yesterday, gold broke the $1,000-an-ounce barrier, after rising from $950 per ounce last week.

It was the precious metal’s fifth run-up to the round number. And now there are many signs indicating that yesterday’s decisive break is of major importance.

Take a look at the following chart …

As you can see, from November 2008 through February 2009, gold rose from around $700 to nearly $1,000.

The ensuing consolidation took six months … and ended last week. This consolidation has the form of a triangle, which typically confirms a trend.

With last week’s strong breakout above the upper boundary of this triangle, a clear buy signal was generated. And that explains gold’s move above $1,000.

Now, Momentum Indicators and Price Targets Point to More Gains Ahead …

The high momentum of this move is bullish. In spite of this healthy thrust, medium-term momentum indicators are not yet overbought. As you can see in the lower panel of my chart above, the price momentum oscillator (PMO) is still in neutral territory and just starting to turn up. In my opinion, that means there is a lot of room for additional price gains.

Sentiment indicators point in the same direction. Last Thursday, the Hulbert Gold Newsletter Sentiment Index stood at just 25.2 percent, which is a very low reading. During gold’s previous rallies to the $1,000 mark, this sentiment indicator stood at 61.8 percent on average. The high skepticism greeting the current rally is very bullish from a contrarian standpoint.

So how high could gold go from here?

Well, the width of that triangle formation can be used to calculate a minimum price target. It’s around $1,100.

A 10 percent move may not sound too exciting, but it’s just a minimum target. Plus, there is a very important additional message coming with this price target …

A Rise Above the Resistance Is Extremely Bullish

You have to step back a bit and look at a longer-term gold chart to realize the significance of a clear break above the resistance zone around the $1,000 level.

Here’s a weekly chart …

As you can see, gold started a huge consolidation period in March 2008. It reached a low of approximately $700, which is a clear support area. Then it moved back up to the $1,000 level.

This whole movement can be seen as nothing more than a typical correction taking place during a long-term uptrend.

A break above its upper boundary around the $1,000 level signals the end of this huge consolidation and the start of the next medium-term uptrend.

The minimum target of this larger formation amounts to $1,300. And since gold is in a long-term bull market, I see even this area as just an interim target.

Longer term I expect much higher prices. Here are the reasons why:

Numerous fundamental factors all but guarantee higher gold prices.

• As a consequence of the current financial and economic crisis government debt is going through the roof — not just in the U.S., but all over the world.
• Worldwide central banks are printing money like there is no tomorrow.
• Gold demand is rising due to rising wealth in emerging economies where the yellow metal is still favored as a store of value.
• Gold supply is stagnating or even slightly shrinking — despite the metal’s price rise since 2001. This is because it’s getting ever more difficult and expensive to get gold out of the earth.
• Finally, central bankers who were very eager to sell government gold at much lower prices a few years ago are getting increasingly reluctant to keep doing so. Emerging market central banks are even buying.

So with this important technical breakout now behind us, and these fundamentals in place, I expect the long-term bull market to continue. Much higher highs are very likely.

Best wishes,

Claus

Treat Any Stock Market Weakness as a Buying Opportunity

by Claus Vogt 09-02-09

The seasonal market statistics are clear: September has historically been the worst month for stocks of the year. Plus it’s followed by October, the month of the most spectacular stock market crashes in history.

This is why many bears — who have actually gotten more visible again during the past few weeks — say it’s time to get out of the market now.

These seasonal stock market statistics are certainly true. And after the strong gains since the July interim low, the market is due for a correction.

So the market may pull back a bit in the short term. But I don’t see it being more than a correction.

In fact, if stocks do go down during the next few weeks, you should probably consider that a buying opportunity.

Here are my arguments for that medium-term bullish view …

During This Phase of the Business Cycle
Fundamentals Do Not Matter …

To begin with, I want to put into perspective the power of bearish arguments based on the state of the economy.

First, during this phase of the business cycle — that is at the end of a recession or the beginning of a new economic uptrend — fundamentals do not matter for the financial markets. That’s because they’re mainly liquidity driven and based on hope, not on facts.

The gloomy state of the economy doesn’t mean a lot to the markets right now.

Moreover, economic data are a mixed bag at best. So the bulls and the bears can pick whatever news underlines their respective arguments. Only later during the cycle do fundamentals have to pick up to replace hope with facts. If they don’t, the bear will return.

Second, the Index of Leading Economic Indicators (LEI) rose four months in a row, finally crossing the zero line in July with a reading of 0.2 percent. This indicator has an excellent track record of calling important turning points in the economy. Right now it’s indicating the end of the recession. So there’s a good and historically valid reason for the above mentioned hope for some kind of a recovery.

Third, the stock market has a shorter time horizon than most of the fundamentally-based bearish arguments. So they’re not important now, but will start to matter later. And I expect the LEI and other time-proven indicators to warn us before this time arrives. Therefore, during the next three or four quarters I cannot see how the economy could collapse again, especially after all the recent massive worldwide stimulus programs.

Fourth, the stock market can ignore fundamental headwinds for a very long time. Fundamentals are long-term drivers of the financial markets. They have no short-to-medium-term predictive value. The very strong momentum of the current stock market rally gives you a clear hint that this rally has the power to ignore a lot of bad news for some time to come.

Plus …

The Market’s Technical Signals
Are Pointing to Strength …

Some medium-term bullish developments have taken place during the past weeks and months. You’ll see in the chart below, a very clear bottoming formation with a technically strong upside breakout.

S&P 500, Volume, Price Momentum Oscillator (PMO) 2008 — 2009

Source: www.decisionpoint.com

Let me explain the specifics in this chart, plus a few other technical indicators that aren’t shown …

First, most major indexes show very solid chart patterns. Take the S&P 500 as an example. You can see a nice bottoming formation, which started to develop in October 2007. The breakout, which happened this July, is a clear medium-term buying signal.

It indicates a medium-term trend change from down to up. The formation is an inverse head and shoulders, one of the most reliable patterns.

Second, coming off of the March 2009 low, momentum indicators (the rate of acceleration of price or volume) shown as PMO in the above chart, reached extremely overbought levels. This is typically a sign of impulse or a kick-off move.

Third, the breakout above the neckline of the bottom formation (950-955 in the S&P 500) was accompanied by very good market breadth (the number of stocks advancing relative to the number declining). This indicates a broad-based uptrend with most stocks and sectors participating.

Fourth, the advance-decline line and the advance-decline volume line both made distinct new highs for the year thus validating the new medium-term uptrend.

Fifth, two important indicators fell in line with the message of a new medium-term up trend: The 200-day moving average (MA200) changed course and started to rise. And the 50-day exponential moving average (EMA50) crossed the 200-day exponential moving average.

Sixth, longer-term sentiment indicators show that this rally is greeted by remarkable skepticism. Bull markets climb the proverbial wall of worry. This wall seems to be in a healthy condition.

What This Means For You …

Look at market drops as buying opportunities.

History shows that financial markets move in prolonged trends and can ignore fundamentals for a long time. And now the technical pictures of stock markets all over the world clearly show medium-term bullish patterns. They indicate a nascent uptrend and are usually followed by further gains.

In hindsight, technical indicators are telling us that a medium-term bull market had started at the March lows. So from now on, bull market rules apply. And the most important rule is: In bull markets, corrections are buying opportunities.

Best wishes,

Claus

Gold, Silver & Precious metals up huge

Wow Larry was right once again.

Gold, silver and other precious metals are up huge today. Gold is up $22 on comex.

I was almost pleasantly shocked to see my favorite stock AEM up 10.8%

I have been waiting for a pullback on gold to add to my positions but looks like that pullback wont be coming anytime soon.

This is a stock I have bought at $51 and several times it has reached my entry point area and now it has broken out. This is hugely bullish for gold.

On other news my other favorite trader posted an update on his blog yesterday on the overall market.

9/1

“I hope that you guys took some money off the table when you had a chance. Only a fool waits for the top price. We’ll see few bounces here and there but the general market is pulling back to support. Once we get to 950-965 range in S&P, it may be a good idea to get in the market. “
http://nepalitrader.blogspot.com/