Several weeks ago I speculated that we were “On the brink of an asset explosion” . So far events are unfolding about as expected. I might even say they are moving more aggressively than I thought. Well actually, there’s no doubt this cyclical bull is unfolding much more aggressively than anyone expected.
Compare the angle of assent of this cyclical bull to the last one.
It’s readily apparent what affect the trillions and trillions of dollars central banks have pumped into the system is having. I think Ben has clearly proved his point that in a purely fiat monetary system deflation is a choice, not an inevitability.
As long as a country is willing to sacrifice its currency there is no amount of deflationary pressure that can’t be printed away.
However, no amount of printing can erase the underlying problems. And those problems are going to persist until they are cleansed from the system. In his mad attempt to avoid the mistakes of the depression Bernanke is going to create a whole new type depression. This time the depression will materialize as a hyper-inflationary storm.
What the powers that be fail to understand is that we are going to suffer a depression that is unavoidable when a credit bubble forms and pops. All we are doing is choosing the form of the depression. In this case the memory of the deflationary depression in the 30’s has sent us down the other track into the beginnings of a hyperinflationary state.
Going back to our charts you can see that the February correction separated the second leg of the bull from the third and almost exactly matched the `04 correction in magnitude if not in time. Remember everything is unfolding faster this time.
I think we have by passed the middle years (2004-2006) of a normal bull market and have now entered the final stages of this cyclical bull. I tend to think we are now in the same state as the runaway move in late 2006 and early 2007.
I don’t really expect this stage to last as long as it did during the last bull though. Everything else is unfolding much faster I don’t know why this stage won’t either. Ultimately these extreme momentum moves usually fail dramatically with a violent correction that gives back several weeks or months worth of gains in just a handful of days. I’m expecting some kind of mini-crash (4-6%) at some point during earnings season.
Once that correction has run its course we should enter the final parabolic stage of the bull. That’s when I expect we will really see asset prices explode higher.
The first two legs of this bull gained 300 and 275 points respectively. I wouldn’t be surprised if the last leg gains another 300+ points before the whole house of cards comes crashing back down.
And what is going to bring it down? The same thing that destroyed the economy in 2008 …oil!
Without exception, every time oil spikes 100% or more within a short period of time (one year or less) it has eventually led to a recession. Well Bernanke’s insane monetary policy has virtually guaranteed that will play out again as oil has now risen over 140% since this cyclical bull began.
Amazingly enough oil has done this in a very low demand/high supply environment. This fact could only be true if the cause for oil’s rise in price is directly attributed to the Fed’s monetary policy.
Once the market corrects I think we can back up the truck in virtually any asset class for the final parabolic move as the Fed completely loses control of money supply. We just need to keep in mind this will be an end game not the beginning of a new secular bull.
Gary says – I think Ben has clearly proved his point that in a purely fiat monetary system deflation is a choice, not an inevitability.
“I think you are 3 years early on this call Gary. First we will have deflation before some sort of hyperinflation, or at least inflation that will become out of control.” I dont think we will have a 300 point parabolic top such as you describe.
I’m going to go with a continuation of the inflation theme until oil collapses the economy again. Then we’ll get another short bout of deflation followed by even more printing. At some point a currency is going to break…maybe the dollar.
Either way I expect when this is over the dollar will no longer be the worlds reserve currency.
Its not just the Fed, although they are certainly out of control, it is most central banks. There is global specualtion in asset prices that will fuel the next leg up, not just US speculation. Anyway, I agree with your insights, I’m just wanting to emphasize the global nature of the current paradigm…avoid deflation at all costs. I also think there is a chance that central banks are moving toward a global currency, and are doing this by conciously choosing the path of destruction of current fiat currencies in order to concentrate power. I hope I’m wrong.
as I mentioned here a few posts ago I believe the market is doing a walkover without correction. I think we could very well get to the last rush higher without any setback. Once this rally then corrects, I’d be very careful to pick a bottom and buy back in. At this level or the coming level it might very well be all this rally has to offer. I think April and May can continue without major setback (more than 2pct), but if it corrects in the early summer months, to then bank on another run up before the fall, I don’t know…
I don’t think the market has ever held up with sentiment at the current levels so I doubt we make it to May.
Something screwed up on the SoS table.
Blocks trades for SPY (south of -$200M toward the end of the day) ends up at -$32M by the 5 p.m. update. The screwed up part is the volumes (31 up vs. 63 down). Those are cumulative tallies. In other words, most of the trades that produced the -$200M print are missing from the final tally. Either they screwed up earlier, or they’re screwed up now, or I’m missing something.
I agree with your read of inflation/deflation, Gary.
There are smart folks on the other side, who think falling prices are coming, due to continued contraction of credit/loans.
Yes, credit/loans are contracting, but, to me, that only means the things that folks buy via loans — homes, businesses — will fall in price. The things that folks buy largely via cash — food, gas, other essentials — will remain immune to the contraction of credit/loans, I think.
Man, kiln dried 2x4s are getting expensive; one month ago, I could pick them up for $2.20 at Home Depot (six months ago they were $1.99). Now, they are $2.65 each.
great post, Gary, even if it does give me the heebee jeebies.
Good job! I won’t go as far as to say you are absolutely spot on, but you have been right in predicting this reversal.
Your scenario on oil is indeed very possible, although I would consider property bubble bursting as an alternative contributory cause to the up coming sharp correction.
Please don’t stop blogging, because this is one of the most decent financial blogs around.
I too see the inflation you’re talking about. I’m seeing it in raw materials (electronics, hardware, etc) that my business uses. I don’t know how the government cooks up their “non-inflation” outlook but inflation is there.
I noticed the same thing with regards to lumber prices. However, could this be a seasonal move in that the weather is warming and people are outside building and doing home improvement?
Somebody is copying somebody:
How many times must I repreat that we are the same person?
“…could this be a seasonal move in that the weather is warming and people are outside building and doing home improvement?…”
I don’t think so, as Home Depot and Lowe’s sales have been terrible; there has been nothing but falls in their business.
I think the price increases are a result of commodity speculation, fueled by cheap Fed money/credit.
Record exports of lumber to China. Read that building code changes in Shanghai and elsewhere now allow frame construction.
I think you are mis-using the word “hyperinflation.” The price of RE is going to get crushed over the next 3 years.
The price of real estate is irrelavant to whether or not we have hyper-inflation.
Hyper-inflation is caused by a governement going so deeply in debt they have no recourse but to print willy nilly or default.
I don’t think anyone would argue that the US is now on this path.
Thanks for taking one for the team yesterday and taunting the market gods to bring on a correction in the miners! Can you up your position to around 50% so the decline can really get cooking? 🙂
Gaps are now begging to be filled down under.
For all of us – please respond Gary.
I trade forex not the equities – and am having a real hard time with conflicting views here. As ‘we’ the forex community see it – Interest rates across the board are rock bottom and the world economy is only now starting to show signs of STRENGTH. As countries start to raise rates..economies IMPROVE etc…the U.S has less % outstanding debt/GDP than nearly every other country out there! – What kind of timeline could you possibly put on your ‘doomsday scenario’ – In my opinion the next 3-5 years will look great in the U.S compared to everywhere else – hence..more investment etc…No?
Hyperinflation is impossible without a means to transmit the rise in prices into wages. Because of the huge decline in union representation since the 70’s, along with the threat of outsourcing, hyperinflation isn’t mathematically possible. There are several other factors that affect the rate of inflation. For instance, hyperinflation depends upon an increase in the VELOCITY of money. Excessive inflation is ONLY sustainable when wages are linked to the rate of inflation, as they were in Zimbabwe, Weimar Germany, and the US in the 70’s. Politicians will not pursue policies that yield high inflation because that would cause political order to quickly COLLAPSE. That’s definitely not in their best interests. “
Anon at 9:57 AM makes a good argument that hyperinflation is not possible without raising wages.
How do you counteract?
It seems to me that most of the world is ready for a correction – but the US keeps rejecting it.
The stock markets will be ripe for a decent correction that will scare the bejesus out of everyone only when we stop hearing references to “the crisis,” and when we start seeing 1800s being bandied about as an S&P target on Y! Finance and other mainstream sites. Put to Call ratios be damned!
This market wont correct because everyone is expecting it. Period. Sideways market at best for the bears. Go long.
I really like your extensive stock reviews and how you have the charts. It reminds me a lot of another stock market newsletter I am subscribed to from bullrally.com. I will definitely keep reading your posts. Thanks.