Posted on 10/31/2002 4:43:01 PM PST by rohry
Market WrapUp for the Week Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials Thursday, October 31, 2002 Looking For a Catalyst The Chicago Manufacturing Index also fell to recession levels last month and the Chicago Purchasing Management Index fell to 45.9 from 48.1 in September. A reading below 50 indicates a contracting manufacturing sector. From the viewpoint of manufacturing, it looks like the double dip recession is here. The Institute For Supply Management report out tomorrow is also expected to show that manufacturing in general around the country is heading back into recession. More worrisome for Q4 is that consumer confidence is now at a decade low indicating that consumer spending may have peaked. Without the stimulus of another round of mortgage refinancing the consumer has no place else to go for money to maintain spending. What Will It Be? That leaves the good ole consumer. It will be important to watch chain store sales next month for signs of consumer retrenchment. This will give clues as to the all-important Christmas retailing season. If consumers pull back, then the economy will be back in recession. There dont appear to be any new catalysts that can drive consumer spending now that mortgage rates have moved up somewhat from last month. In order to create another spending boom, Greenspan needs to create another bubble somewhere that can be tapped and monetized, such as mortgage refis. Without a new asset to borrow against, the consumer is left only with credit cards to support additional spending. The Buyer of Last Resort The left is calling for more spending and more taxes to support new government transfer programs. The tax burden is already greater than 40% for most Americans, and even higher if you include state, property and sales taxes. Tax rates in the US are higher today than what the average serf paid his liege lord in feudal times. Yet more taxes are being advocated. Here in California the governor passed a major energy tax on consumers that will be implemented over time after next weeks election. With the state now financing 25% of the annual budget with debt, more income tax hikes are coming after the governor wins his reelection bid. It isnt understood by most politicians that in hard times, government should decrease the burden of taxation on its citizens. Instead it does just the opposite. After the Clinton Administration increased taxes in 1993, they followed it up with monetary stimulus and a credit boom, which gave us the 90s bubble. Now it appears that the same prescription is being advocated again, to raise taxes to pay for more spending and follow it up with lower interest rates and more credit. This is the standard answer you hear coming from Democrats, and you are increasingly hearing it come from Republicans as well. They should know better. Very few politicians today have the moral courage to tell voters the truth. What's The Truth? The Road to Perdition Instead we hear more calls for government to alleviate the pain when it was government that created the pain in the first place. There seems to be this mistaken belief that the government can solve all economic problems with continuous intervention in the economy and the markets through price supports, monetary expansion and fiscal stimulus. In each case of intervention, it has paid with more debt. It simply has not dawned on policymakers, academics, economists, or analysts that there is a limit to all of that debt. The financial profession is filled with a plethora of advisors from financial planners, brokers, anchors and news columnists who are out giving everyone advice based on a bull market. There are all sorts of rationalizations and explanations as to why there was a recession or bear market. It is easy for the profession to explain everything; while understanding nothing. The idiotic commentary that accompanies most earnings reports is a good example of this, as are the comments for 3-4% economic growth based on a continuous stream of borrowing by consumers, corporations, and lastly government. If federal, state, or municipal governments cant balance their budgets, they borrow more money. When borrowing money isnt enough, they raise taxes and that action is looked upon as fiscal discipline. It is the credit bubble of the 90s and the mortgage, consumption, bond, real estate, and dollar bubble that now exist on top of a stock market bubble giving me confidence that my Perfect Storm thesis is correct. In fact, I would recommend the reader pick up a copy of Charles Mackays Extraordinary Popular Delusions and the Madness of Crowds and read the chapters on the South Sea Bubble and John Laws Mississippi scheme to look at where we are heading. It is also recommended that the reader look at Charles Kindlebergers Manias, Panics, and Crashes for an understanding on what happens when governments and markets go to extremes as they are today. It's Here. The Four-Step Bear Market Rally Process The individual investor is coming back into the market after the majority of the rally has taken place. Up until last week, money has been flowing out of stock funds each month since July. Over $52 billion came out in July, $3 billion in August, and it is now reported another $16.1 billion came out in September. I believe it will be more of the same for October, since up until the middle of last week, money was flowing out of equity funds. Investor sentiment has done a remarkable turn around. It has gone from 28.4% bullish to 43.4% bullish, exceeding the number of advisors who are bearish. Investors are now putting money back into the market as the rally nears completion. The biggest worry now is missing out on all of the action. The advice given to the public is to buy now before all of the good news comes in before it is too late to own stocks. This next phase of the bear market should shear investors once again, but this time I believe it will lead to capitulation. Once burned, twice shy -- three times, bye-bye. For the month of October, the Dow gained 10.6%, its best showing since January of 1987. It was the first monthly gain for the Dow since March. The S&P 500 gained 8.6%, the biggest advance since March of 2000 when it peaked. The NASDAQ added 13.5%. During this month, smart-money commercial hedgers doubled their short position from 16,452 contracts to 31,052 contracts. Tomorrows report should show additional short positions being added. Whats more, this latest rally has taken place against a backdrop of declining volume, lower breadth, fewer new highs versus lows, and the bulk of the gains experienced in three-day gaps. Mutual fund cash positions are also at very low levels so there is very little fuel to support another rally without strong investor support coming in off the sidelines out of cash. Technically the market pattern is emerging out of a diagonal triangle that came too far, too fast. This is usually a pattern that signals an approaching end with some sort of reversal pattern to follow. The next leg down should be more horrendous taking the averages down to newer lows before we get a sustainable intermediate-term rally. It should be interesting to see what happens next week if the Fed cuts rates. Investors should watch the dollar to see how it holds up. A fourth reason not to cut rates not mentioned yesterday is that it telegraphs to the world that things arent going well. Lowering rates again leaves the Fed with very little ammunition to ward off a financial crisis when the next one occurs. Suffice to say there are plenty of financial crisis candidates around to give the Fed reason for pause. Volume increased on heavier selling today. Most days of distribution are accompanied by heavier volume while rallies have been occurring on weaker volume, which is not a good sign. Big board volume rose to 1.51 billion shares and Nasdaq volume rose to 1.7 billion. Volume on the NYSE was nearly 5% above the three-month average. Market breadth remained barely positive by 6 to 5 on the NYSE and by 10 to 9 on the Nasdaq. The VXN rose 1.7 to 52.99. The VIX fell .17 to 35.91. Overseas Markets Japanese stocks fell, completing a fifth month of declines, after the government backed away from bank industry changes some investors say are needed to end a 12-year economic slump. Nippon Telegraph & Telephone Corp. and other companies that rely on domestic demand slumped. The Nikkei 225 Stock Average dropped 1.3% to 8640.48. Treasury Markets Copyright © Jim Puplava |
Your posts are both very simplistic and very insightful.
You express the ultimate bottom line of monetary policy here--"discipline in . . the creation and maintenance of money base." This is the ultimate issue. And the cause of the economic cycle; all depressions, most contractions, all can be laid at the door of the fed--the severe cycles resulting from excess credit creation and consequential bubbles.
But there is a good market mechanism to solve the problem--maybe more than one. Private money unrelated to a government sponsered entity might work. A much simpler answer is to use pieces of gold as money which proposal has been the subject of extended debate here on other threads.
But you have to recognize that there is a reason for the Fed--or actually two reasons. The US Government does not want to cede the power of control of the money system to the private market exchange system because that is one of the greatest powers government has over its citizens. So, powerful owners of capital, under the guise of the fed which was labled as a central bank but which is not, took over the money system of the United States as part of a legalistic maneuver that on paper was intended to insure that the money system would be managed as a level playing field (which may have lasted for a while).
Well, you need to convince Dubya of that.
But he doesn't seem to want to hear anything about it.
What a clever idea!
Hire a "hit man" so we can keep up appearances as "legitimate" businessmen!
Must've gotten that one out of the mafioso handbook.
I kept looking for that growth number when reading the report, it was not there. What kind of 'report' is this? I guess in there 2000+ words there was not enough room to say 3.1%. All they said was how disappointing todays numbers were. What a crook. No one was expecting 3.1% growth. This STUPID report needs to be renamed TODAY'S MARKET GLOOM PROPAGANDA.
Housing starts each months are over a million. If 10,000 houses are put back into the market, it will not pop any 'bubble'.
I KNOW people who work inside these agencies: NBER, Treas Dept. and (previously) Commerce. They are good, honest people who don't arbitrarily "fudge" numbers so that Pupulva or Financial Sense Online can say "oh, they are s**t" just because they don't like them.
Now, I don't recall you, or anyone else, when the numbers were DOWN, saying, "Oh, we can't believe them. They are lying about a good situation." Nope. Didn't hear that. With you (apparently---correct me if I'm wrong), if the numbers are BAD, then they are genuine and honest, but if they are good, they are fraud. That's Barbra Streisand, and you know it. And I object to the implication that good, honest people are lying. If you had a clue about how these numbers are compiled in the first place, you'd know it's darn near impossible to "fudge" them just from the manner in which they are compiled. Now let's remove the tinfoil, please.
But you are way off as a seer.
But the point is, rate cuts don't HELP the money supply, so it is the wrong policy prescription.
So no matter how much consumption increases, there is so much idle capacity from increased production efficiency, that it cannot outpace increasing price competition, ie DEFLATION.
An unprecedented economic situation, indeed, and one that the economists have (as of yet) failed to recognize and incorporate into their models.
BUMP
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