Is Mood Shifting Back to Crisis?

We’ve grown so used to forecasting with blandly mechanical detachment that it can be jolting when our instincts struggle to take over, as they did when Goldman Sachs shares dove without warning on October 15. Considering the firm’s stock chart by-the-numbers, we expected higher prices. Had the charts failed to warn us of an important top? To be sure, our strong preference for technical analysis over fundamentals comes from having gotten ambushed too many times when we followed fact and logic into a dark alley. Still, when Goldman gapped $5 lower on the opening that day, we sensed that something had changed. Since then, our unease has only grown. The bank stocks have continued to fall, although not yet severely enough to be called a crash; and gold has reversed direction as well, albeit more gently than the banks. From an all-time high of $1070 on October 15, the Comex December contract has eased to $1033, yesterday’s low, representing a total decline of a little more than three percent.

Doorknob

But the real attention-grabber has been the U.S. dollar, which has rallied less than two percent  off recent lows. That’s not much of a rally, we know, but when it is the dollar that is doing the rallying, it is a true man-bites-dog story. Just this week, the greenback launched from a saucer-shaped bottom that had been forming on the intraday charts for the last two weeks. This caused the NYBOT Dollar Index to hit a high yesterday of 76.32, but if it goes just a bit further, exceeding a Hidden Pivot target of ours at 76.68,  that would strongly imply the rally’s got legs. 

A Dubious IOU

As we might have expected, the dollar’s upward progress has seized the attention of the multitudes who have been waiting for “something” to happen. Some observers see the rally as a flight to safety — a notion that we find hard to believe, considering the dollar’s intrinsic worthlessness. Much as we dislike slinging ad hominems around, we can only conclude that those who think of the dollar as a safe haven are rank imbeciles with the reasoning power of a doorknob. Note to all of you:  The dollar is no longer money; it is at best an IOU of, to put it mildly, dubious value.

Gold bulls’ take on the rising dollar turns the argument 180 degrees around. They see it as just another routine blip in a bear market that has a long, long way to go. We are in this camp ourselves, albeit with our own, purely technical, reasons for expecting an interim low in the Dollar Index around 72.93 — about 4.3% below yesterday’s settlement price. That would be ugly, but hardly a crash. We also are allowing for the possibility of a short-squeeze that could briefly lift a fundamentally worthless dollar into the stratosphere. It would be brought on by the inability of debtors to raise cash when some financial tsunami has made it impossible for them to roll short-term obligations.

Coming back to the question of whether “something has changed,” we believe it has and that its main symptom will be felt more and more acutely as an ebbing of trust in the banking system. This trust was so egregiously misplaced to begin with that it seems almost a given that it will vanish overnight. Will you be ready?   

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  • Dusty October 28, 2009, 9:53 pm

    Patrick Heller has a theory as to why gold is dropping this week. If he’s right, it should pop back up on Friday.

    http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=8134

    Dusty

  • Richard Landwirth October 28, 2009, 7:27 pm

    Day and night, gold’s alright!

    Ok! Ok! So gold broke thru 1033! Big deal! What we gotta focus on–and get happy about–is the fact that gold is still comfortably above $1000–with all the firepower of the Cartel–with the hit to silver and HUI, ya’d think gold would be $920 by now…I’m starting to think gold still is resilient–also, remember the idea that if the world “re-crashes”-like in late 2008 that gold will go down initially, then start a big move up-even with the $-like it did in 2004- as RECOGNITION TIME dawns on the world investing community that ALL currencies are suspect…low print on Dec gold is $1027.10–real time is $1029.70

  • ricecake October 28, 2009, 5:40 pm

    Sir Wong, the best economic financial guy in Hong Kong media, has been saying that every time the US Treasury auction its T-Bills and debts, the Dollar is always up and the market is always down. This time is no exception. After all, didn’t the US Treasury just successfully auction lots of TIPs to buyers from around the world?

    So when will be the next US Treasury auction take place?

    p.s. Do you think the Asian stock markets, especially in China or the India, will go in a different direction away from the US stock market? Japanese stock market has been a bear ever since since, while the US and other world stock markets were at all-time highs. I wonder will the Asian stock market do differently moving away from the US stock market trend in the future? I mean if the major growth are in the emerging market like the Chinese market for example, why shouldn’t they in bull market while the US in bear market just like Japanese stock market has been doing for decades opposite to the US stock market in the past? After all the US is following Japan’s footsteps.

    http://www.youtube.com/watch?v=ZaABREIaUUI

  • C.C. October 28, 2009, 5:24 pm

    Well, I reckon a round 2 crash could be engineered for a near-death experience (90 days or so, for a false-flag ‘strengthening’ of the dollar to lend credibility to our political elite who have been giving lip service to same), because in reality, it would be rather difficult to keep this phony high-wire act going until next November on a Tuesday, but just think: What euphoria (and political cache) would be gained for the ruling party, if round 2 of the bigger crash is followed by a rocket outta the bottom – say again in the new year of 2010 that lasts just slightly longer than election day 2010?

    Silly?

    Judging by the impact that spikes of liquidity injections have had on the market – and short-term market sentiment, doesn’t it seem reasonable to assume that the government has the crash-flu injection syringes lined up and ready to use at the appropriate time? Is it not reasonable to assume that the party in power – recently elected, with an appetite for power heretofore unmatched, would do whatever it takes to maintain a (phony) sense of ‘optimism’ going into 2010? Is it not reasonable to assume that same party is not about to let the other (bunch of phonies) across the isle, retake power in November? Is it not reasonable to assume, from what we already know, that our Treasury secretary, various cabinet members and the Federal Reserve act in concert to direct markets?

    Although I am in agreement with those that believe market forces are ultimately more powerful than our ‘officials’ capability to distort the laws of financial physics, I am aware that ‘ultimately’ is not necessarily, Now. A few more months, electioneering, platitudes, phony housing & unemployment data will likely be the ‘ultimate’ arbiter of actual direction.

  • Chris T. October 28, 2009, 4:45 pm

    “…and that makes investments in gold much more challenging in the short run than the long.”

    Why would anyone “ionvest ” in gold in the short run anyway?
    You can trade or speculate in gold in the short run, you invest in the long run.
    The former you can (still) do with the paper forms, the latter in physical, which makes the holidng-on easier too, due to greater difficulty of liquidating the physical holding, and provides some imposed discipline.

  • Rich October 28, 2009, 3:32 pm

    Big4 still long Dollars, Pesos and Pounds, while short others including Ruble and Yen…

  • coolsaint October 28, 2009, 3:31 pm

    In my opinion you are correct . The rising dollar is a short squeeze of those who think interest rates will go up . The higher this rally goes , the farther it will fall . Once the shorts are gone , there’s no bottom .Same think for the stock market . With fewer shorts the bottom is lower .

  • Rich October 28, 2009, 3:21 pm

    Meanwhile Yen killing dollars in titanic battle of trade protectionism with dueling currencies. Yuen solved that pegging to the dollar at 7 well below trade parity value. China may eventually have to let that go or watch gold soar too soon before they have enough to cover their US Treasuries. In that case, the dollar wins big. Cashin may have it right with all the official interest rate hike denials, that the unwinding of the short dollar carry trade may be upon us, in which case a quick and dirty 10% equity bond bath or more. Unusual to see bonds, equities and gold trading down together while oil climbs higher…

    http://www.cnbc.com/id/33491733

  • Rich October 28, 2009, 3:07 pm

    None other than Pimco Bond Don with fees on half a trillion debt is bearish on the dollar today. Still living in inflation land. Check out Business Week’s less than laudatory take on his track record. And El-Erian, after 15 years with IMF and 22 months running Harvard’s endowment int time for the crash, now telling Bloomberg they’re going into equities. That cinches it. …

    http://www.cnbc.com/id/33504871

    http://www.businessweek.com/investing/insights/blog/archives/2007/06/pimcos_bill_gro.html

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a87D6zSxtV78

  • mario cavolo October 28, 2009, 11:59 am

    Rick, I have been in a state of particularly deep pondering of these issues for the past 3-4 days, stimulated by the way, by my carrying around and reading Taleb’s classic Fooled By Randomness, when I had a sudden insight. In the same way as I have learned here from you and others as well, we realize that “DaBoyz”, the “PPT” and various other interested groups (the GS trading desk with 40X higher volume) with such ability, even possibly illegal ability, interfered and manipulated the market with enormous cash infusions after the March low, forcing it up beyond reason and fundamentals, such heavy handed manipulations demonstrated by all kinds of evidence in daily trading activity, volume spikes, etc.

    Well guess what? THEY are at it again my friends and why shouldn’t it be the case? In the short and intermediate term time frames, they absolutely can and do manipulate index levels, gold AND the dollar if they want, right or wrong? Those same BOYZ have made their latest set of new strategy decisions, of what WILL go up or down in the range they’ve decided within the context of the current overall state of affairs and the intermediate term time frame. The action including strange inexplicables, is sending the message right now; Part I. Yes, gold and stocks have had their nice ride to the topside of the trading range, and there is not much upside left IN THIS INTERMEDIATE TIME FRAME, so it is time to reasonably take profits, let the market breathe/correct/trade sideways. Well they KNOW that’s what most everyone IS thinking now; there is very little upside to this run, few are THAT foolish a risktaker, eh? DaBoyz know it too and know its time to let it breathe/correct for awhile. Taleb just taught me about this “asymmetry” in the upside and downside. Part II. of this: Yes at the same time as stocks/gold popping up, the dollar has had its scary ride down to the lower side of its trading range and now its time to take those stock and gold profits and park it safely in dollars.

    A dangerous game? Yea yea of course. Do they have a choice? No. They have to do this Rick, to address it, to manage it, to make choices, (while also preserving their own status of course). They are responding and adjusting, responding and adjusting, while praying that some random black swan doesn’t suddenly appear again to disrupt the delicate balance of the sandpile currently in place. The state of affairs here in October is quite different than May. In fact, what would you really do to unwind it, to solve it, to balance it, to save it? I am surely incapable of properly answering such an enormous question.

    Cheers, Mario

  • Rick Ackerman October 28, 2009, 7:19 am

    Posted for Phil Dorsey by Rick ackerman:

    Rick,

    I pick no fights with you this time.

    When the dollar was higher and the yen carry trade was big I thought your short squeeze on the dollar theory wasn’t worth much, but after near zero interest rates and a dollar carry trade carrying stocks higher it could explain why the dollar moves inversely to stocks and why gold and stocks move together.

    In the long run we need to fear the exodus of foreign capital. Yet, for now the dollar appears to have been driven down not by fears of too much dilution but by too little return on the investment. The borrowing of dollars at near zero interest rates to buy, just about anything short of tulip bulbs, leaves us vulnerable to a bounce in the dollar when stocks fall — and gold could fall too just as it did in late 2008 on bad news (a bull market correction, of course).

    I’ll leave it to you to figure out when that is happening. I will just observe that although I expect gold someday to rise as a safe haven — not just an alternative to the stock market for those with a risk appetite — we don’t seem to be there yet. The path of economic undoing is looking to be a long and crooked one — in more than one sense of the word; and that makes investments in gold much more challenging in the short run than the long.

    Phil

  • Occdude October 28, 2009, 5:15 am

    I think we are do for a little pause, but I wouldn’t sharpen the spears too much, there ia a hell of a lot of momentum that needs to be negated and thus far we don’t have the cataclysmic storm clouds that were swirling last year before Lehman went to sleep with the fishes.

    Im nibbling but staying humble. I like the story of a short squeeze on the dollar, but that won’t cause capitulated sell signals. This next cycle needs to have a dramatic tone to it with the technical setup in place. Possibly one more spurt up on the sucker money express before something big like a reversal of Fed policy due to bond market pressure busts everyone out and makes the word “stock” a perjorative.

    I can see a time when, if someone steals your parking space you would say”hey stock you man!” or “your mother’s a banker!”

  • Senor Cuidado October 28, 2009, 4:48 am

    Yep. And the Fear/Greed oscillator will be pegged to fear by mid November.

    It really looks like this is the turn. Mish kept on eye on the corporate bond chart that was rising lockstep with S&P and that trend line finally broke a couple weeks back. IMO that was the key tell that was missing from the H&S last summer and the other junctures where the bears got excited during this rally.

    Also some very interesting commentary on the dollar today from Jesse’s Cafe…which dovetails with your article, Rick. Meaning last year’s dollar buying was not a “flight to quality” but something much more sinister and apparently unlikely to be repeated.

    http://jessescrossroadscafe.blogspot.com/2009/10/us-dollar-rally-of-2008-bull-market-in.html

  • Rich October 28, 2009, 3:42 am

    Great Panic Part II makes sense to US.
    Kudlow Forbes & Guests still talking bullish with a 5% GDP.
    The second great scramble for cash may be upon US…