Trader’s Narrative

Back in November 2008, when the market was just days away from making that year’s lows I pointed out an ominous double top formation on the S&P 500 index.

The market managed to bounce from that support but when it was tested again last week, it wasn’t strong enough. The double top formation has unquestionably completed. The only remaining quandary is will it complete?

Before I showed a log scale chart (see above link), so here’s an arithmetically scaled chart of the double top:

If we take the neckline to be 776 on the S&P 500 (the 2002-2003 bear market low) and the top to be 1576 reached in October 2007, then a measured move would be meaningless because it would require the market to drop 800 points - something it can’t do right now. Unless we invent a way for stocks to go into negative integers.

Even half-way completing such a measured move would mean utter catastrophe for the stock market and by extension the global economy. Especially if it happens suddenly.

Before you think that is completely impossible, consider the reality that a long term Japanese investor faces:
Continue reading ‘Are We Headed Back To 1980?’

The Federal Reserve made a bold move and lowered rates effectively to zero. Here’s the full statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

It took a few years but finally they’ve moved in front of the bond market. As I’ve been saying for more than a year, the Fed allowed the bond market to get way ahead of it and then started to play a game of catch up where they would lower only to see the 90 day Treasury bill rate slip lower still.

To put it bluntly, the Fed is punishing saving and rewarding spending and debt. With inflation running at ~1% anyone who saves money is a chump. Many money market funds now have a negative return (due to MERs).

Anyone who goes in debt to the gills wins. Isn’t that how we got into this mess? you might ask. Well, who said common sense had anything to do with monetary policy.

Believe it or not, the US now has a lower interest rate than Japan. And the lowest rate since records have been kept.

After Japan, the lowest rate is claimed by Switzerland after the Swiss national bank cut their benchmark rate to 0.5% last week. Then Canada at 1.5%. Follow the link to see more global central bank rates.

According to Jim Stack of Investech Research, there are a few conditions which must be met before a new bull market can be born. They are a mix of monetary, technical and sentiment measures. I’ve looked at four of them already:

• Consumer Sentiment
• Formal Recession
• 20%+ Decline
• Coppock Guide

Here is the fifth: monetary policy. Of course, almost every single central bank around the world has reduced interest rates. Here is a quick summary of a few key ones:

US Fed
The intended Fed funds rate stands at 1% but the problem is that the Federal Reserve took its sweet time in lowering interest rates. Rates topped out in June 2006 at 5.25% and were taken down by the Fed subsequently. But as the bond market repeatedly was warning, the Fed was behind the curve by a very wide margin.

The US is also undertaking a gargantuan multi-trillion dollar fiscal stimulus package with a much more comprehensive one waiting in the wings until January 20th 2009 when Obama takes over.

Canada
Almost one full year ago, the Canadian central bank began its easing cycle and I wrote that since central banks move in packs, this was the beginning of a world-wide trend.

The Canadian central bank has since lowered interest rates continuously. The overnight rate has almost halved from 4.5% to 2.5%. The next meeting in early December is seen by almost all as another opportunity to cut further.

China
The Chinese central bank announced a massive 108 basis point cut in their key interest rate today (to 5.58%). While this is their fourth time cutting rates since September, this recent move shows just how worried the Chinese government is. Usually interest rates are stepped up or down by just a 27 basis points but this move is four times larger in magnitude.

China has also announced a $590 billion fiscal stimulus package as well as lowering the reserve requirements for several banks to pump more money into their economy. Right now, putting money into a bank account is a losing proposition since the latest data has inflation at 4% and banks pay 2.5%. Basically, China is pushing its people to consume, rather than save.

England
The Bank of England is no stranger to large rate cuts. At the beginning of November, it cut 150 basis points off its key lending rate (from 4.5% to 3%). That followed a 50 basis point cut in early October 2008. Most are expecting another cut next week when the monetary policy committee meets. Some are even calling for a further 0.50% cut.

England is also pushing forward a VAT reduction (to 15.0%, from 17.5%), and a $30 billion stimulus package.

European Central Bank
The ECB has been the most sluggish in responding to the current decline in economic activity. They are under pressure in their next meeting of December 4th to take drastic action and lower by 50 basis points. But considering the extremely hawkish tone of the ECB that is very unlikely.

The ECB has already cut 100 basis points since October to bring their rate to 3.25%. But as the Eurozone faces its first recession in 15 years, it may not be enough.

Australia
The Reserve Bank of Australia topped up its rate in March 2008 at 7.25% and ever since has been lowering it. On October, it also cut 100 basis points and more recently, by 75 basis points to bring the target cash rate to 5.25%. This is the steepest cut in rates since the 1991 recession in Australia. And it may just help them to dodge most if not all of the fallout.

The Australian government is also implementing a stimulus package of $6.7 billion - helping first time home buyers and pensioners.

Japan
In its most recent decision, the Bank of Japan held interest rates steady at 0.3% (not a typo). They are reluctant to return to the zero interest rate policy they adopted between 2001 to 2006 because it was not that helpful. But the Japanese central bank is pursuing alternative ways of pumping money into their economy. For example by accepting a wider assortment of assets as collateral.

Warm up the helicopters!
At this point, all central banks are focused on the present battle against the very real danger of a deflationary spiral. Of course, if they overdo it, as they almost always do, then they have to quickly mop up the extra money sloshing around the world financial markets without causing another dramatic downturn.

Don’t you just love central planning comrade?

Since the chart of crude oil priced in gold was interesting, Edward requested a chart of crude oil in Euros:

and for good measure, here is a chart of crude oil priced in Japanese Yen:

You’ll notice I didn’t include the axis on the charts - that’s because they would have been meaningless since I took the price of crude and calculated a ratio of it and the Euro Index and the Yen Index. So the charts are a very good approximation but not exact in showing crude in either currency. They are still useful and do provide a lot of information.

In any case, they show pretty much the same thing as the normal crude oil chart (priced in US dollars). It is safe to say that everyone is hurting.

I have family in Europe and they tell me things are very grim economically. From anecdotal evidence it would seem even more so that in North America, Europe is undergoing a deep recession.

Readers from Europe are free to chime in with their own views