LIVING IN A DREAM
 | |  | |  | |  | |  | |  | |  |
***All New***Click Here For Howard Katz's Blog!***All New***
On Tuesday, the Fed paused in its 2 year old tightening campaign, and
therein hangs a tale.
According to conventional economic theory there ought to be a middle
ground between “inflation” and unemployment. There ought to be a middle
economy where there is just enough economic stimulus to employ all (or
pretty much all) of the labor force but not so much stimulus as to cause
prices to go up. This at least is what Keynes taught.
This seems so reasonable if you have been carefully brainwashed in your
college economics courses and if you are very careful not to study any of the
facts of Economics. After all, the United States went for a period of 140 years
with no net rise in prices. And during this time unemployment was so rare
that for much of the period there was no word for it. (The British word for the
phenomenon, “redundancy” is different from the American word precisely
because both are of such recent origin.) Furthermore, during this period the
economy of the United States was the greatest and most productive of any
nation in the world at any time of recorded history.
And yet this middle ground is so elusive that no Federal Reserve Board in
history has ever found it. Indeed, most have managed to blunder into both
“inflation” and unemployment at the same time, and the modern way of
dealing with the problem is by trying to define it away. For example, the
Kennedy Administration defined 4% unemployment as 0% (which goes to
prove that there are no mathematicians in the Democratic Party). And as the
rate at which prices rose was reduced in the 1980s, the media coined a
new word, “disinflation,” which they treated as though it were “deflation. This
was the case even though prices rose every year in the 1980s and in fact
have risen every year since 1956.
The explanation for this is very simple. What modern economists mean by
“the economy” is the economic well- being of the paper aristocracy. When
therein hangs a tale.
According to conventional economic theory there ought to be a middle
ground between “inflation” and unemployment. There ought to be a middle
economy where there is just enough economic stimulus to employ all (or
pretty much all) of the labor force but not so much stimulus as to cause
prices to go up. This at least is what Keynes taught.
This seems so reasonable if you have been carefully brainwashed in your
college economics courses and if you are very careful not to study any of the
facts of Economics. After all, the United States went for a period of 140 years
with no net rise in prices. And during this time unemployment was so rare
that for much of the period there was no word for it. (The British word for the
phenomenon, “redundancy” is different from the American word precisely
because both are of such recent origin.) Furthermore, during this period the
economy of the United States was the greatest and most productive of any
nation in the world at any time of recorded history.
And yet this middle ground is so elusive that no Federal Reserve Board in
history has ever found it. Indeed, most have managed to blunder into both
“inflation” and unemployment at the same time, and the modern way of
dealing with the problem is by trying to define it away. For example, the
Kennedy Administration defined 4% unemployment as 0% (which goes to
prove that there are no mathematicians in the Democratic Party). And as the
rate at which prices rose was reduced in the 1980s, the media coined a
new word, “disinflation,” which they treated as though it were “deflation. This
was the case even though prices rose every year in the 1980s and in fact
have risen every year since 1956.
The explanation for this is very simple. What modern economists mean by
“the economy” is the economic well- being of the paper aristocracy. When
thegoldbug.net
the Fed steals wealth from 95% of the American people and gives it to the 5% who constitute the paper aristocracy, they call
this “economic growth.” (As a counter example, in the 1930s Eddie Cantor disagreed with conventional economics and told
people that they were better off. He sang, “Tomatoes are cheaper; potatoes are cheaper. Now’s the time to fall in love.” He was
right, and he was a better economist than the economic advisors to FDR.) When the free market tries to correct this stealing by
taking wealth from the paper aristocracy and returning it to the American people, these same economists call the result a
“recession.” (A recession is supposed to be a moderate decline in the nation’s wealth as contrasted with a depression, which
is a more severe decline. Yet the weight of the evidence is that the vast majority of Americans are better off in such periods.)
In sum, when the Fed steals from the American people and gives to the paper aristocracy, these economists call the result
“economic growth.” When the American people are robbed, their losses are identified by these same economists as “inflation.”
To try to achieve a condition in which there is “economic growth without “inflation” requires enriching the paper aristocracy
without taking anything from the people. And since the whole thing is a zero sum game, then this is impossible. This is why no
Fed chairman has ever achieved a condition of economic growth without inflation. The whole thing is a fantasy, and the whole
lot of them are a bunch of idiots.
But present day Wall Street believes in the fantasy. They are like the people of the Middle Ages who always believed that God
was on their side in war. When the King of Spain sent the Armada against England in 1588, he was absolutely certain that God
was on his side against the heretic Protestants. But first, the English made mince meat of the Armada as it sailed east through
the English Channel. Second, the Armada failed in its fundamental purpose of rendezvousing with the Spanish Army in the
Netherlands and transporting it across the Channel to invade England. And third, on its return voyage home the Armada was hit
by a collection of troubles including storms at sea (firmly believed by the people of the time to indicate the displeasure of God).
Spanish losses were horrific. English losses were negligible. Still, the King of Spain believed that God was on his side.
And still Wall Street believes that there is a middle road between inflation and economic growth. And the current application of
this belief is that Bernanke has found it. He has tightened just enough to stop inflation but not so much as to throw the economy
into recession. What more natural assumption to make than that the next move is an easing?
And since the next (Fed) move is an easing, the bond market is discounting this easing by going up. And this, dear
subscribers, defines the current period. Watch the bond market. “That is all ye know and all ye need to know.”
And what bonds have done over the past fortnight is to break out of a double bottom formation (on Aug. 3 and 4). This double
bottom gives a point count up to 112-112½. This week’s decline in bonds represents a nice pullback to the apex of this double
bottom.
This technical analysis tells us that the advance in bonds (and hence the advance in stocks and also the dreamlike condition of
most of Wall Street) can last for several more months. The second thrust of the double bottom, including the breakout, took 6
weeks. The further advance to 112 should take at least as long. This means that we will be well into the autumn before bonds
turn down, and it is not likely that stocks will turn down prior to that time.
BOND ANALYSIS
As has been noted, we have had trouble with the T-bond call:put ratio for much of this year. The indicator has a very good
record. Occasionally it will give a false signal, but this is rare. For most of the period after the bond bottom of June 2004, much
of Wall Street was bearish on bonds because of the Fed tightening. But the T-bond call:put ratio kept giving buy signals and
caught the entire rally into mid-2005.
It did give a (weak) sell signal in December 2005, and this would have nicely predicted the important bond decline over the first
5 months of 2006. However, the indicator then malfunctioned and gave a buy signal before the decline had gotten under way,
and it kept repeating this buy signal throughout the first half of the year. The last part of this buy signal proved correct as it nicely
anticipated the May bottom, but we could not know that at the time.
The indicator at least moved in the direction of overbought territory for the June peak, and it nicely gave a buy signal at the late
June bottom. This buy signal was repeated (with a much stronger signal) last fortnight just before bonds broke out from their
double bottom (weekly basis chart). These last two buy signals give me some confidence that the indicator has started to work
correctly.
But we have other indicators on bonds, and one of the best is the simple chart pattern. As noted, it has just given a double
bottom signal on the weekly basis chart (p. 4), and this double bottom projects a move up to 112.
If you go back and look at the two year chart (dig out your Aug. 2005 issues), then there is a large head and shoulders top with
its peak in mid-2005 (June-Sept.). Its right shoulder is the January peak, and its neckline connects the March and November ’
05 bottoms. This head and shoulders top broke down in March of this year, and normal behavior would call for a pull back to
this (broken) neckline. That neckline is now at 112, which is precisely the price objective of the double bottom. Thus we have
two chart signals telling us that bonds are going to rally to 112, and this is confirmed by the call:put ratio’s very strong buy signal
in late July.
STOCK ANALYSIS
My analysis for stocks for the next few months is that they will follow bonds and utilities up in a move which will challenge the
early May peak.
Through the most amazing mental contortions, Wall Street maintains the belief in a permanent bull market. Most of the time
stocks are in an uptrend for the simple reason that they tend to go up only half as rapidly as they go down. Thus normal bull
markets last twice as long as equal bear markets. Then after the stock market has hit its peak, it often goes into a sideways
trend in which more and more stocks are topping out. The establishment continues its belief in a permanent bull market during
this period by going into the refrain, “It’s a market of stocks, not a stock market,” (meaning that it is a particularly difficult bull
market). Then by twisting their minds into little pretzels, many of them continue to believe in the bull market as the bear starts its
early ages. Finally, the bear enters its late stages. Virtually all stocks decline together (so that it is once again a stock market),
and the establishment takes massive losses.
At this point, they finally admit that they are in a bear market. “Something has gone wrong,” they shout. “Things are not natural.
It is the Government’s job to put money in our pocket and to let us go through life repeating the same actions without having to
actually think. Do something, Government, do something. Make the market go up.” And at that point the Fed eases credit and
makes the market go up. Then the establishment can go back to sleep.
But even as the bear market begins to pick up steam, the few members of the establishment with brains are not allowed to act
on their bearishness. They will come on talk shows and discuss their bearish views and then recommend that people reduce
their exposure from 70% stocks to 60% stocks. If you ask them the logical question, “Since you think the market is going down,
why don’t you recommend shorts? Their answer is very revealing. They don’t actually say this, but their body language reflects
the answer that the establishment will not let them go short, and if they recommend shorts, then no matter how right they are,
their careers are ended. (A mutual fund manager who predicted the October 1987 crash and whose funds ended the year #1
and #3 in the nation was thereupon fired (eased out) from his job even though all he did was go into cash.)
These establishment idiots will be alive and well for the coming few months. But either late in the year or perhaps early in ’07,
they will get their come uppance.
COMMODITY ANALYSIS
Looking through the commodity charts this past week, there are five symmetrical triangles in formation (not counting crude oil
with regard to which its triangles are complete). These are copper, gold, platinum and the CRB on the weekly basis chart and
coffee on the monthly chart.
The CRB triangle seems to have broken out this week; however, this is only because of the switch from August o November on
the near future chart. (The near future chart is a chart of the closest future month; it continues with that month until that month
expires and then it jumps to the new closest month. This week the August future went off the board, and the chart of the
November future was substituted. Since Nov. is higher than Aug. was, this gave the chart the appearance of a breakout.
However, we need confirming evidence to demonstrate that the breakout is valid.
Gold and platinum seemed to edge through their downtrend lines, but the breakout in each case was not strong enough to
count. Gold fell back into its triangle, and platinum is still hanging on.
My basic analysis is that the dream world which is now dominant in Wall Street will be negative for commodities. However, they
are so strong that I am not at all sure that there will be a significant decline in any of them. They may be able to just tough it out.
It will be important to watch what happens to the five triangles over the next 6 weeks.
July was a “disappointment” in the Sahara desert as the average temperature for July closed out at 99½º F, just ½º above
normal. This is warm but not that much out of the ordinary. But the temperature for the first 10 days of August has been torrid.
So far, it has averaged 3º above normal, and the forecast for the next 10 days is continued heat. A somewhat warm July and a
torrid August would give us a bad hurricane season, about as bad as last year (which averaged 2º above normal for July and
August). However, it would take the form of most of the storms occurring late in the season.
The war in the Mid-East has dragged on longer than I had anticipated. In every previous case, the peaceniks intervened and
ended hostilities before Israel had an opportunity to punish the guilty parties. Often Israel was forced to withdraw from land
fairly won in a defensive war. Since the Arabs were never punished for their aggression, they saw no reason to cease and
desist. Thu the behavior of the peace party was to continue the war. Here we are over 50 years later, and the war is still going on
(which if you study peace movements of the past, is fairly normal). However, this time there seems to be a different attitude
(which I attribute to President Bush). Exactly how it all will work out I do not know, but just maybe something different will happen
on this go round.
CONSERVATIVE RECOMMENDATION
We are long 2 contracts of December crude oil. Hold long and hope for a hurricane.
H.K.
gold, the economy, your wealth
| | | | | | | | | | | | |
***Howard Katz's Blog!***
The One-handed Economist
Sample Newsletter
Aug. 11, 2006
Model Conservative Portfolio
Start (9-7-99): $100,000
Last (8-11-06): $194,866
Nov CRB: 399
Sep T-bond: 108 9/32
DJI 11,088
Dec crude oil: 77.43
Start (9-7-99): $100,000
Last (8-11-06): $194,866
Nov CRB: 399
Sep T-bond: 108 9/32
DJI 11,088
Dec crude oil: 77.43