Clear Trends Are Beginning to Emerge

The dollar is staying stable against other hard currencies (appreciating against the pound and euro but deteriorating against the yen) and commodity prices continue to fall. Energy (oil, natural gas, etc.) construction materials (steel, lumber, etc.) and food (grains, soy, meat, etc.) are all demand driven precious metals tend to be a hedge against inflation. All of these assets are continuing their recent downward trend, as global deleveraging continues everywhere outside of the Federal Reserve's balance sheet. With the precious metal prices not holding up, more deflation is being priced in and appears to be creating a self fulfilling prophecy.

It seems very clear that the current brain trust has the means and will to inflate out of this by printing unprecedented amounts of dollars while artificially holding down long term rates via the use of the Fed's balance sheet, which has now become a black box. It is also apparent that no other nation sees it as being in their best interest to challenge the plan, as all stand to benefit from its success or feel unbearable pain from the collapse of the US economy - which is the only alternative outcome.

The next critical juncture will come when the economy begins to reinflate and it comes time to slow down and than cut off the flow of free fake cash. I, for one, am happy to see that Paul Volcker is around to help keep the reinflation from getting out of hand, as such a mistake would put us right back where we started.

It also seems that a strategy of selling into strength and waiting for a test of previous lows before covering shorts still remains intact. I am looking for S&P 685-710 and Dow 6900 to 7150 for the lows in this latest selloff with the indexes recovering to around 810 to 850 for the S&P and 8100 to 8550 for the Dow. Another trend that remains intact is extreme volatility with a new bottom of 120 for SRS and 140 for SKF with approximately 100% upside seeming likely.

Disclosure: Author holds a long position in SRS

Comments

[sumosama:]

Good strategy in trading the volatility. Not sure I agree with your numbers, but profit is profit! Great job!

2008 Dec 02 10:08 AM

[helplessobs...:]

Your post helps clarify what is going on in the investment fog. I am amazed that long term bond rates are staying so low. Usually the bond sheriffs force financial stability, but not now. In the past treasury 30 yr bonds paid 10-13 percent before Volker crushed inflation.

2008 Dec 02 10:46 AM

[NOWHEREMAN:]

Good article, like your assessment of the present situation. But do not expect Volcker to be anything other than a figurehead. I consider Paul V. to be an appeasement to the Conservatives. IMHO

Besides, has Volcker said anything in public about anything at all in the past 12 months? Bernanke raked him over the coals before Congress regarding "flawed Economics 101" but even that did not elicit a response that I know of.

2008 Dec 04 02:46 AM