Friday, March 12, 2010

TRADING ALERT: Too Much Liquidity is Your Friend

I've often talked about the evils of Federal Reserve corporation counterfeiting, but sometimes it is your friend. Today's stock market is a good example...

Over the past 97 years, the Federal Reserve has slowly flooded our markets with funny money, creating the greatest global market hyperinflation since the BoE engineered the South Sea Bubble.

Think of modern-day hyperinflation as the water level above an ocean floor. There are features on the floor that the make underlying terrain unique, like a variety of financial different markets should behave, each with its own, independent and characteristic, price behavior. But after you flood the earth with liquid, baseless paper in the metaphor, the water level eventually drowns the interesting features below, and coincident waves of liquid cash create the dominant force driving prices of all markets.

The DJIA is a perfect example of hyperinflation. Since its low of 40 in 1932, the original Dow 30 index has kicked every company out except GE. And yet, this shadow of a ghost, that one-thirtieth of what $40 used to buy, now sells for a little over $10,600. Literally, it takes a wheelbarrow full of worthless paper cash to buy what little remains of the 1932 Dow.

The "evil" part is that the Federal Reserve has sold The People of the United States mountains of this worthless paper in exchange for real assets; those assets are gone (to the Fed's private owners). So what's the "good" part? Why is Fed counterfeiting our friend at the moment?

For the answer, see the chart snippets below. As of today, we sit at the top of a minor W2 of a major W3 in virtually every market. Why do all the counts interlock? $10,600 of pure paper liquidity flooded on top of every $1 or $2 dollars of 1932 value. These counts are dominated by nearly 100 years of mounting hyperinflation.

Proof? Look no farther than P/E ratios, floating almost fifty-fold above the 1932 ratio of 5. That is exactly what you'd expect as the result of hyperinflation.

Am I predicting hyperinflation? No. I am pointing out that it has already occurred. It is the dominant force driving all market prices today.

Stocks, oil, gold, silver, corn, cattle, you name it, and of course, inversely, the dollar--all waves are aligned on this March 2010 morning--and in all cases, a major downward W3 is forming (the USD being reversed: about to explode upward).

Every table is set, or already in breakdown. The charts below are all 3 months long. Minor details are more clear in some than others, but it doesn't matter, if you can count one, you have counted them all.

Idealized Impulsive W1-W2 (downward):

Oil (already in breakdown):

Silver (already in breakdown):

Gold (already in breakdown):

Stocks (about to breakdown):


  1. Marc Faber is now your antithesis. He is calling for a collapse in the dollar and bonds, with a sharp rise in commodities and equities. Do you have a track record at all? I was wondering who has made more money calling the markets, you or Faber. I have read some of your thoughts here and they seem logical, but the money seems to flow in the opposite direction. You seem to be standing beside a Salmon stream proclaiming they will soon swim downstream because that is they way the water is flowing. What you fail to see is the purpose and make up of the Salmon itself. What does Faber see that you don't, or vice versa? I'm sure he would have an argument If you simply told him that destroying a currency was impossible. Perhaps he sees a back channel of fed paper into the markets that you don't. Inflation is really heating up on the consumer front here in Chicago, mostly food and clothing so far. What would make these prices rise and at a velocity which I can't remember?

  2. Deutsche bank raising their 2010 target on the S&P to 1325 as people sorely misunderstand global trade and the impact on earnings. With the S&P trading at around a 14p/e for this years earnings, you will need to see earnings tumble some 70% over the next 2 quarters to have a shot at a decline in the magnitude we saw last year. You obviously believe this is possible, what other than debt on banks balance sheets would drain the balance sheets of companies to drive earnings down by 70% before summer. With companies understaffed to handle the magnitude of this comeback a lot of fortune 500 companies are looking to hire this spring and hire in a big way. My wife works for a staffing firm and they are seeing massive employment gains and are having trouble finding enough skilled workers to fill all the positions they are getting. By the way, the staffing firms are hiring to handle the load of requests from all these companies. I think we start to see job gains in the hundreds of thousands in the next few months, possibly as high as 500k a month from what she sees. She was spot on in seeing the decline in payrolls before the collapse, so if she is right again we should see the rally really take hold in the next couple of months. I know a lot of people are upset about missing the bottom, but we would need another financial collapse unseen to generate the selling panic required to take the market down.

  3. Very few bloggers have P2 as acting like a wave 2 anymore. The count is very easy to count as impulsive and is making a clear 5 wave structure. Could this be wave 1 off the bottom with the largest bull market in history about to unfold. Looking back at the chart from 1975 forward on the DOW it look like the consolidation of the last 10 years is about to break out huge.

  4. FDR,

    I started reading The Creature from Jekyll Island--great book. However you and Griffin differ on what will be the end result of never-ending bailouts. He argues that the American consumer will pay for the bailouts in the form of inflation.

    I totally get that the Central bank wants to steal our wealth in this way, but it's harder to see how they will seize assets as you suggest. Any comments?

  5. The mutual fund market has told a very telling story over the last year.

    People have pulled money from stock funds throughout the year. I believe at all time record amounts, but stock market has rallied in spite of this.

    On the flip side, corporate bond funds have seen huge increases.

    My theory is that all the financial firms taking the feds free money were buying the stocks. For two reasons, one to give the impression things are getting better. Secondly, to sell the stocks back to general public at much higher prices.

    Now, we have come to point were the financial firms would like to sell this stuff back to the people at inflated prices.

    I don't think the people are going to be fooled into it.

    Some say retail is never right, but this time I think they are.

  6. To believe in hyperinflation is to believe all of your debts will disappear overnight. Seriously, take your wheelbarrows of US dollars directly to your bank and pay off your mortgage, car, and any other debts you have.

    Now who sounds like the lunatic?

  7. "To believe in hyperinflation is to believe all of your debts will disappear overnight."

    I think you missed the point, which is, hyperinflation has already happened from 1932 to the present. Roughly speaking, using the now defunct Dow 30 as a guide, only GE remains in the index, the rest were kicked out or went bankrupt. If you do the math with splits and Dow weighting, GE has more than doubled in real terms. So with 1932 Dow reading of 40, GE would represent about 70 points today. The rest of the 10,600+ is inflation. I call that hyper.

    Unfortunately, many people's debts will never go away, because debts today are locked into hyperinflated dollars. As we deflate back to earth, the debts won't change.

    It is the opposite of the Weimar, instead of rolling a wheelbarrow full of worthless cash to buy a loaf of bread, most people will owe a wheelbarrow full of valuable deflated cash for every loaf of bread they previously charged.

    Hyperinflated debt is a crushing obligation that most will never be able to repay. And defaulting on that debt, already circulating as currency, is what causes the subsequent hyperdeflation.

  8. "People have pulled money from stock funds throughout the year. I believe at all time record amounts, but stock market has rallied in spite of this."

    Prices have (rather mildly) bounced from the fall from 14,000. That's not a "rally" in the sense of a bull market, it's to be expected as a few people still believe--that's what drives bounces. The key to discerning a bear bounce vs a new bull trend is volume. Almost no one is participating.

    Today's stock market is the Coyote standing on a tree branch that the Road Runner has already already sawed off (no volume, no support). He's still hovering in the air, but starting to notice the cavernous valley below. After a few years of a whistling sound, he become a little puff of smoke.

  9. "Very few bloggers have P2 as acting like a wave 2 anymore. The count is very easy to count as impulsive and is making a clear 5 wave structure"

    I don't know who you follow, but they should know that C waves are five wave structures. Notice in the idealized wave diagram, above, the ending C is a 5 wave up, and the ending 5 of that 5 is also a 5.

  10. I'm not sure why Faber was brought into the discussion since he's made some godawful calls.

  11. At the height of the currency crisis an interested spectator commented:

    "The government calmly goes on printing these scraps of paper because, if it stopped, that would be the end of the government. Because once the printing presses stopped - and that is the prerequisite for the stabilization of the mark - the swindle would at once be brought to light. Believe me, our misery will increase. The scoundrel will get by. The reason: because the State itself has become the biggest swindler and crook. A robbers' state!?If the horrified people notice that they can starve on billions, they must arrive at this conclusion: we will no longer submit to a State which is built on the swindling idea of the majority. We want a dictatorship."

    Thus spoke Adolf Hitler.

  12. Looking at my daily SPX chart, I can't see your count. I see what seems clear to be 5 waves of an A wave forming, which would point to a B wave correction soon followed by a massive C wave move to new highs.

  13. "Looking at my daily SPX chart, I can't see your count."

    Here is the big picture for context. For teh Dow, we are completing the first W1-W2 of the large W3 downward. The first red line on the charts located here:

  14. Today

    M Jackson estate 250 mil deal from Sony

    Tiger Woods return bigger than Superbowl(MktWatch)

    Two classic symbols of the Bull Mkt(Prechter)

    Both in classic topping action of their w2

    retracement on the same day.

  15. Since the market has had no trouble with the 50% retracement in the DOW, should we look to see how it handles the 11,247 area next. I think if you are right about P3 then we need to hit 12,382 first, in order to get enough people in to sell. There is no way this market declines here because the ownership is too small and they just don't need to sell. As long as the public stays out of this market, we should retrace much further. Taking out 10729.90 this week should launch us right to 11247 before the end of March or first week of April. I assume the jobs report in April will give us the pop to the mid to high 11,000's. Then into the summer, where the volume will slow down and the VIX will trade back into the 12's. At this point the public may get itchy and start buying in the fall. The banks will give them a taste of success and the buy volume will drive us to the 12382 area with an over throw to 12500. From here I think we fall in dramatic fashion into the late fall and see where we are. I recommend continuing to buy high beta names here and financials, as we have a couple of thousand points to go before the rally has any risk of rolling over. The fall in the VIX should generate more of a levitation affect ahead. If the news starts to actually get better, then that may hurt the bullish case. As long as the news is terrible and the deflationists are still worried then there is a lot of upside left in the market. Volume means very little because rally's always start on low volume then pick up volume late. You want to buy when the volume is low and sell into volume, as they are late to the game. If this were opposite then the majority of people would make money in the market, not the opposite. All those buying in disbelief right now are making more money than any time in the history of the markets. 500-600 percent returns in months. Congrats to fellow longs, when the volume picks up, start lightening up and look for huge volume in the fall to start getting short

  16. FDRAOA, where exactly do you look to judge market volume?

    Is it the DJI index?

  17. Just a follow up to the volume question.

    What time period do you use for the volume comparison?

    Do you look back 1 year, 5 years, etc.?

  18. Hi FDR, Thanks for answering endless questions. I read everything I can. I hope this question interests you.

    I just found this comment/chart on Zero Hedge:

    deflation = debt default, debt default = currency crisis, currency crisis = hyperinflation event and/or bank closure with forced currency devaluation. IMO we are within striking distance of a bank closure event here in the U.S.

    See the graph. Be the graph. We are one with the graph. See those lovely two flirtations with deflation going into the crackup? #2 coming right up.

    Question is: How are we different from Argentina?

  19. LOL. P2 is going to be larger than P1, which means of course that P1 was not P1 after all, which means this is not P2, which means there is no P3. Dow theory buy signal today with NKE coming out with sales doubling. Oh, the poor consumer is buying 2 pairs. FDR, have you lost your way. See you at my targets, like taking candy from a baby with you shorts.

  20. Hi FDR,

    Very much related to your current topic, I found an interesting chart online.

    I would appreciate if you could give your opinion on this one. Thanks!

  21. Are you changing your P2 targets now, seems we have a long way to go. Since everyone knows what the EW targets are, won't the FED and GS just take them out to negate all the counts. If we can take out 14k on the DOW this summer, would you change your count? The market seems cheap here with companies like NKE coming in with sales up 100%, it seems the consumer is alive and well. I have yet to see this recession as anything more than garden variety. The cycle should be swinging in the direction it is. I assume we have another 3-4 years of upside here with very little risk unless earnings turn down, but with unemployment falling fast the profits should continue to outperform and the market should as well. I think we see a dramatic pickup in lending and thus short term rates soon. My broker has been spot on averaging me down through 2008, it was scary but he was right. I am up 100% from the top in 2007. I agree that is insane, but the government is giving us free money as long as we keep buying. I am not sure how much you can make with your thesis but what would it take for you to double your cash like me? If it is cash you desire, why don't you want more of it? I don't understand that part of your thinking, you speak of cash as king, yet you don't want any. What gives?

  22. FDR -

    I talk to 200+ real estate agents every single day (M-F)

    There is a firm belief that interest rate will remain low for years.

    I ask them what would happen if interest rates went up. They all say it would be a depression.

    So if the Fed chases the 3M. When will the 3M rise?

  23. China allowing the yuan to rise should be explosive for the US equity markets going forward. I suspect a large move tomorrow north on this news. The EW count will soon see the magnitude of the largest bull market in US history. The global economy has never been in better shape and we will see the DOW trade north of 20000 in 3 years on the biggest expansion in history.

  24. FDR, simple question. Sorry, I'm a newbie, what does deflation have to do with the stock market? It seems like you make a lot of sense, but in the real world you are completely wrong? What am I missing?


  26. FDR, have you seen this? WT*?

  27. Hey fdralloveragain,

    I would like to hear your take on the latest news hitting the blogs about removing the reserve requirement on banks.


  28. Consolidation continues, making this a clear 4th wave of larger degree. Get ready for the wave 5 rocket north

  29. The VIX is heading to the 2008 lows of 15.82.
    What do you see in the VIX?



  30. What do you make of the effective fed funds rate going up lately? If there is more demand for fed funds, does that mean loan demand is picking up?

  31. "What do you make of the effective fed funds rate going up lately? If there is more demand for fed funds, does that mean loan demand is picking up?"

    We've seen the 3-M T pick up to 0.15% or so. But that's effectively 0%. Getting exciting about .15% is like taking comfort in your BSC stock tripling in one day to 3 cents.

    You hear the same irrational exuberance in stocks, "we made 70% in a year!" To which I offer the same BSC analogy. Nobody who's been generally long stocks, has made money in over a decade. If you figure buying power loss, most stock holders are close to zeroing out. Even major indexes, with the luxury of rotating out of the losers, are down 85-95% inflation adjusted.

    It is interesting that over the past decade they lost during a period of intense inflation (2000-2007: Dow up 20%, gold up 300% = huge loss of buying power).

    And during deflation, they are losing just as big (2007-2010: Down down 35%; gold up 15% = huge loss in buying power).

    This confirms the view that the era of hyperinflation from 1932 ended in 2000, not 2007, because if those who have been in paper since then are losing both ways. The seesaw is teetering, but the fulcrum is falling.

  32. "FDR, simple question. Sorry, I'm a newbie, what does deflation have to do with the stock market?"

    Ask Hoover why he didn't get reelected.

  33. "I would like to hear your take on the latest news hitting the blogs about removing the reserve requirement on banks."

    I think it is to be expected, the Fed is stone broke. As long as they aren't allowed to print money to stuff directly into their own pockets, they have to find a borrower to print and the interest on printing more currency is how they make money.

    That clearly isn't happening or they wouldn't be fire-saling funny-money at 0%.

    The move to eliminate reserves has virtually no impact, since banks keeping no reserves is what created our un-backed currency crises.

    It is a move of desperation, though, which is interesting given that the "recession is over."

  34. FDR,

    I think you should frame some of these uber bullish comments and revisit them a year from now. I've never seen such sentiment, even at the October 2007 peak.

  35. Wow. Based on the confidence, bordering on stridency I am seeing in many of the bullish oriented comments (and the almost deafening silence from the bear side), can an inflection point really be that far away?

  36. Did Bernanke just declare war on China?


The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

Free Hit Counter