Stock Market Still Riding a Thermal Wave

Birds can stay aloft for hours riding thermals or updrafts of warm air. I look at the human responses to adaptation level effects in much the same way. When things are better than what we have in recent memory, we feel good, relatively speaking. The stock market now is riding an emotional thermal upward and may continue to do so for a while. Of course, it is also riding a tsunami of Fed-supplied liquidity that has engendered a new carry trade in paper assets.

My best guess is still that the market will make a final top this winter before entering a multi-year period of turbulence and flat to negative growth as the most severe economic contractions and bear markets tend to occur early in the decade (see this). The current period most resembles 1970, 1974-1975, or 2001-2003.

The graph shows my “animal spirits” stock market oscillator and the venerable Coppock Guide, both of which are still coming off impressive bottoms.

Just for kicks, here is the picture if you adjust the S&P 500 by the CPI. We could very easily have another big down leg coming in real terms (using any reasonable price index). Note that it took fourteen years from the 1968 top to hit a final bottom in 1982. A similar interval from the top in 2000 would put our final bottom in 2014, which is consistent with my general view of the current business cycle. It’s also generally consistent with the Great Depression experience. The biggest debt-deflationary collapse is yet to come, and may be “stagflationary” in the event given tightness in critical commodity markets.

Comments

[CaptainJJack:]

While I cannot argue that the stock market is likely going to correct at some time, I think it is more do to future GDP expectations being too high than it is due to excess liquidity.

The issue is not the STOCK of money, which we all know is VERY high, it is the FLOW of money, which has been very, very low.

Contrary to all the gold bugs, just because Treasury floats a lot of debt, and the Fed buys that debt, does NOT mean there is excess liquidity in the system. All that means is that the banks have a lot of money to lend, but if they do not lend it, the system liquidity is unchanged.

When the banks start ACTUALLY lending money, THAT'S when there will be excess liquidity in the system, and every thing I read says they are not lending to the private sector.

As I see it, there are two problems: people quit buying things, and banks are worried about the loans they hold now -- they are worried about capital adequacy.

If you want to worry about something, worry about this: by implicit agreement with the Fed, the banks are borrowing (deposits) from the Fed (I.e. the excess money supply), and they are buying long US government bonds. This is a common strategy employed by the Fed to recapitalize the banks.

It is also providing a convenient back door way the monetize the debt, temporarily, as the banks buy what the Fed would have had to buy if it wanted to monetize the debt, as the gold bugs fear. Treasury is happy, too, because it has a buyer to fund the US deficits (i.e. banks ARE lending, but only to the US government)

BUT, this is a very dangerous game. The Fed has little real control over the long end of the curve, and if the long rates start to increase, the banks could face HUGE losses in their long bond portfolio.

And THESE losses are marked to market immediately.

Finally, I have to admit, I do not understand the carry trade. I used to think that it was a way to get LEVERAGE in a country whose interest rates are low and whose currency is expected to remain stable or weak.

While the dollar debt would make sense, GIVEN the ability to borrow against your capital, I cannot imagine why a bank would want to lend to a hedge fund on this basis without requiring so much overcapitalization that the trade makes no sense.

Nov 15 11:53 AM

[Northern Da...:]

CaptainJJack, I think you've got the picture exactly right.

At this point in time, those reserves are only being loaned out to branches of, and friends of the FED who are using and abusing the once mighty American dollar for their own greedy purposes. Who couldn't make profit when money can be borrowed at zero interest and invested at 1% interest? It's a crime, that's what it is! Anyway, as such, the criminals are not currently contributing to the "velocity of money".

When ("if" is probably more accurate) those funds are loaned out to American corporations who know how to do something productive with it, only then will the USA begin any true form of recovery. This current recovery being "fanfared" by the MSM, the media branch of the FED, is a laughable farce. But when those honest American corporations deposit their new loan money into a bank somewhere, 90% of it will be loaned out again, and 90% of that new loan will be loaned out again, and so on, and so on. Until that "velocity of money" picks up, which it would do very quickly, the threat of inflation is minimal in spite of the printing presses being in overdrive.

So the table is set, where the masses are expecting massive inflation when in fact, there's a very good chance we're going to see a surprise and sudden demand for the dollar. There are two or three factors that could set it off, but with sentiment at 98% bearish, it wouldn't take much to send the dollar on a short squeeze that nightmares are made of. Who's expecting such a deflationary scenario? Very few!

Only after that, only after the money is taken out of the hands of the greedy banksters and into the hands of the people it was intended for, will we see any sort of recovery. Unfortunately, it will also set off a belated bout of inflation the likes of which the world has never seen before. I don't see the inflation bomb going off any time soon. Instead, I see a deflationary scenario just around the corner that the equities markets aren't going to like one bit.

On the flip side of that coin, once the inflation nuke goes off, what's to stop the Dow from hitting 20,000 in worthless dollars. Not a damned thing. In fact, it's virtually guaranteed to happen.

Nov 16 10:30 AM

[Floyd Brown:]

If a person has some extra money what are they to do with it?
It don't do much good to stick in your mattress or put in the money market & CD's & savings accounts are a waste. Gold may get you some action but do you really think that gold will ever back money again?

Most won't be able to start their own business. I think that at this time the stock market is the place to play with your extra money.
Buy when most are selling & sell when people are buying. Don't
Be greedy. Don't hang on to loser's to long & don't hold the winners to long. If you are going to park money in stocks get those that pay some dividends.

Take the little gains and keep the losers small & just maybe you can build a small nest egg.
Don't be greedy

Short Selling sucks for those that go long but so what. What is is.

Nov 16 10:55 PM