As many of
you know I believe that we have begun the topping process of this cyclical
bull market. In a healthy market an intermediate decline is a profit-taking
event after a significant leg up. It should hold well above the prior
intermediate bottom. The decline into the June low was not a profit-taking
event. The market had not rallied long enough or far enough to warrant an
intermediate correction and certainly not one that would test the March lows.
The decline in May and June was the first shot over the bow that something is
wrong with the fundamentals driving this market.
Now let me be
clear because I think many people got the wrong idea from my last article. I
don't recommend anyone sell short the market. All I'm saying is it is too
late to have retirement funds positioned long at this time.
Asset appreciation is the FED's
stated third mandate. Bernanke is going to fight the bear tooth and nail.
There will be continued interventions into the markets. The rules will be
changed as we go. Anything and everything will be tried to keep stock and
bond markets levitated. That is not the kind of environment conducive to
making consistent gains on the short side. That is the kind of environment
that can and will whipsaw traders to death.
Even in a market free of intervention
the topping process is always volatile and dangerous. But in a market that is
being actively managed it is especially dangerous on the short side. Case in
point - the June bottom was way too early for a final intermediate bottom.
As I said in my previous articles we
should have seen a counter trend bounce to relieve sentiment extremes
followed by another leg down into a more lasting bottom. Unfortunately that
was not allowed to happen. The powers that be manufactured an explosive rally
on the low volume preholiday week in an attempt to create a massive momentum
move ahead of the end of QE2 that would be hard to turn around. Needless to say
Bernanke didn't want a repeat of last year when QE1 ended.
The Fed can temporarily turn the
markets higher but what they cannot do is reverse the economy. I said when
QE1 began that no amount of printing or stimulus would stop the underlying
cancer in the economy. All it would do is create a brief reprieve which would
be followed by an even deeper and more severe recession once the sugar high
wore off.
The simple fact is that we cannot
cure a problem of too much borrowing and too much spending with more
borrowing and more spending. We tried this in the `30's and it caused a 15
year depression. Japan tried it and it led to two lost decades.
The cure is to bite the bullet and
allow the deleveraging process to run its course. Yes it will be painful.
We've put this off for so long that it isn't just going to be painful it's
going to be catastrophic. But the longer we kick the can down the road the
worse the endgame becomes. The only ray of sunshine I can offer is that if we
let the markets work they will complete the deleveraging process fairly
quickly. Within 2 to 3 years the world can be back on a sustainable path of
growth. Continue to fight this and we could be stuck in an on-again off-again
recession for another 20 years with the final end game collapse so
devastating that it will make the Great Depression look like a picnic.
The last two employment reports are
clearly showing that the economy is slipping back into recession. I suspect
by August the employment report could, and probably will, turn negative. All
the manufactured rallies in the world cannot prop up the stock market if the
economy is rolling over into another recession. They can postpone the
inevitable only so long and ultimately will just make the bear that much more
severe.
The Fed's efforts have only extended
the topping process, they haven't stopped it.
Toby Connor
Gold Scents
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