October 10th, 2006 Price: Subscribe »

ARCHIVED COMMENTARY

Although I had grown weary of explaining why deflation is the only possible outcome for our mortally sick economy, a chat group that I monitor drew me into an argument with someone who sees only the possibilty of inflation. The crux of his case is that, even though deflationary catalysts such as an incipient real estate recession are present, “the government has already planted the seeds of continuing inflation in the huge and accumulating budget deficit.” I would assert that deficit spending, no matter how extravagant, will not be nearly strong enough to surmount the fatal drag on household spending about to be triggered by a housing bust. 

 

But my further response was to some very important facts which the inflationist  failed to acknowledge:

 

“Your argument does not consider that it is requiring ever-increasing amounts of borrowing to sustain each dollar's worth of economic growth at the margin. When I wrote on this relationship for Barron's more than a decade ago I believed that credit stimulus had reached its effective limit, since it was requiring about $2.50 of borrowing to create a single dollar's worth of GDP growth.  How shortsighted I was! This ratio was at its most favorable around 1947 (if memory serves), when we could correlate a dollar's worth of GDP growth with about 57 cents of new borrowing. However, more recently the ratio has hovered intractably above $5 to $1 (according to Richebacher, the only economist who has paid much attention to the relationship), and although this ratio is manifestly unsustainable, there is nothing that could conceivably cause it to contract -- other than deflation.

 

Housing ‘Milked’

 

“The pushing-on-a-string argument must also be given its due, since the promiscuous amount of borrowing that has been required to sustain merely moderate economic growth in recent years has required an economically dubious inflation of an asset class, residential real estate, that arguably cannot be milked for more leverage than we've gotten from it already.

 

“The important thing to consider is that deflation's power to overwhelm will continue to draw on one source that cannot be thwarted: an increase in the real burden of debt. To the extent this is so, it will not take a collapse in home prices to trigger full-blown deflation, merely a downtick of 3-4 percent. This would expose mortgage payors whose collateral is falling in value to effective real rates of 10% -- a figure that most hedge funds would be hard-pressed to achieve nowadays. Servicing a six percent mortgage is no strain if one's property is increasing in value by 5-7% or more per year. However, let values stagnate or -- heaven forbid -- fall, even slightly, and a "low" mortgage rate of 5.65% becomes, for many, a crushing burden.

 

Now What?

 

“That is where we are now -- for sure in Colorado, where I live, but also in California, Florida and Arizona, among others. To reverse the incipient momentum of this deflationary trend presumably would take quite a large stimulus -- much larger than it took to merely push home prices higher when both buyers and sellers were filled with bullish certitude. Does this imply we would need to bring administered rates down to zero, were it even possible to do so? We cannot be confident the dollar would survive such a measure, especially with virtually all other nations currently in tightening mode. And even if the central banks were to agree that stimulating a new credit binge is the only way to ward off a global debt implosion, they would have to reckon with the fact that any such attempt would run up against the $5 to $1 debt-to-GDP ratio noted above. Of course, the effort would have to target home prices, since that is the only asset class big enough to stimulate enough of a wealth effect to get consumers to freely spend money they don’t have.

 

“Hyperinflation will always be an option, but that would only postpone the day when liquidations bring debts and assets back into balance through an essentially deflationary process.”

 

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Real-Time Chatter

 

Rick’s Picks has added a chat room to the growing list of services and features available to subscribers at no extra cost. If you’re an active trader looking for potentially profitable ideas and precise swing points in real time, check it out! Take a one-month trial subscription to Rick’s Picks and you will gain instant access to this valuable service and meet some Hidden Pivot Seminar grads who are well on their way toward achieving success. 

 

Immediately below is a small snippet of conversation from the chat room’s inaugural day. When the dust settled, we had bought shares of Kinross Gold three cents off the intraday low,  after the stock fell sharply earlier in the session:

 

Rick :: Only 24 have traded for 1.00 today

its me :: any update on ibm?

Rick :: 0.55 bid for eight Jan 70 IBM puts!

Rick :: Sellers are not exactly fighting to unload them for 0.55

its me :: thanks. i actually jumped the gun and bought at 0.65 a couple of days ago

Rick :: 55x65 B/A market now 2200 contracts by 4400 contracts, but only (a grand totasl of) 13 have traded at all - for 0.60

Rick :: Heard from someone who 'accidentally' bought them for 0.60 too. Keepers.

its me :: thanks. this chat room is really fantastic

Rick :: Cancel bid for DIA puts. Stock would need to push above morning's highs to get me filled, at which point I won;t want to be filled.

Rick :: IBM bullish impulse leg on lesser charts suggests that any pullback will be a "buy". I'll leave the bid in for some puts, though -- at least for a while -- since no one seems to want to sell them.

Guest 5491 :: Good Morning Room

Rick :: Impulse leg in IBM defined by push above a peak at 79.08 recorded yesterday, along with a series of minor descending peaks recorded throughout the day

Hunt :: KGC DLY has reached its target , Evryone keep an eye open for a down impulse leg on a shorter Tf, as a place to get long. The Abc on the Dly is real clear, Try 11/14 for your A

Rick :: Hey, Hunt!

Hunt :: Gm SIR! Reporting For DUTY!!

Rick :: Did you see my series of three targets for Kinross (KGC) in today's Touts? Rally is pretty extended, for sure, but I'm counseling a bit of greed, witha 14.22 exit, minimum

Hunt :: Yes, That is why, I am talking about it

Rick :: Be interested to find out what kind of trading platforms, if any, those in the room right now are using. I'm on TradeStation myself.

Hunt :: The Dly tells me to take at least partial Profits, A= 11/14 B= 1/31 C= 3/10

10:00Rick :: I see. A 14.04 target. Your choice of A's is conservativw -- between two others that catch the eye: 6.49 on 10/20, and 7.47 on 11/30. One way to see if the choice of A's is valid is to see whether anything discernible occurred at the respective midpoint pivots. Let me work your numbers and see...

Guest 3524 :: can i buy gold at this position

Hunt :: THxs, but I am really looking for a down Impulse leg To get long, The up Move is quite impressive

Rick :: A=6.76, B=11.94, C=8.77. Those price points yield a D target at 13.95, and a midpoint (along CD leg) of 11.36. What happened when Kinross hit that number, 11.36, the first time? Answer: Hard to say. There was a definite consolidation with an 11.25 top, so I'd say the point A you've used here is in the ballpark. But the 'pivot effect' at 13.95 is not likely to be decisive, so I'll simply stick with my several 'greedy' targets above it.

Rick :: Hunt/Monica: Looking at the daily chart, what is the best-looking spot to bottom-fish in gold over the next few weeks?

Hunt :: Thats Why You get The Big Bucks! Thxs!I If I see a down impulse will Post

Hunt :: Reguarding Gold , I like 592, then 571, 571, is a test of the up C

Hunt :: There is alot of congestion, between here and 610

Butler :: Hoping to bottom fish GLD 57.85 ish

Hunt :: Reading the Up Stoch on the Dly, relative to Price movement tells me Price is weak

Rick :: Check out the BIG pattern that uses May 17's 734.00 as a point A. From there, B=557.10, and C=691.20 (July 17), for a midpoint of 602.70! That'd be my minimum downside for December gold right now.

Rick :: The pattern is sufficiently compelling that I would be disinclined to say a bullish word about Gold until 602.70 is touched. ZThe good news is that it can be bought very aggressively with a very tight stop-loss.

Hunt :: With you on that one

Butler :: that gives me 51.30 T for GLD, 58.86 P if I have typed the numbers correctly into the calculator

Guest 3524 :: stop loss for gold

Rick :: Incidentally, I'm still bidding 0.55 for those IBM puts. If you look at a daily chart of this put, you can project a 0.50 downside target for it. We didn't look at charts for puts and calls in the seminar, but their price patterns can be tracked the same as stoicks, indexes and commodities. In this case, for the Jan 70 IBM put, I'm using a 4.00 point A (June 27, 2005), a 1.50 point B (July 19, 2005), and a $3 point C (sept 21, 2005) = 0.50. We're practically there!

 

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NYC Seminar:  Last Call!

 

There is still room for a few more students, since I’ve yet to receive confirmations from  a number of those who said they would like to attend the Hidden Pivot Seminar, slated for October 14-15 in New York City. If you would like me to reserve a place for you, please let me know by requesting a registration form at this link.  Meanwhile, here’s a FAQ to help the decision along:

 

 

Seminar FAQ

 

 

When will the Hidden Pivot Seminar be held?

There are four seminars scheduled over the next four months, all on weekends. The first will be in New York City on October 14-15; the second, in Vancouver on October 28-29; the third, in San Francisco on November 11-12; and the last, in Sydney on December 2-3.

 

 

The class takes two full days, then?

Yes, from 8:30 a.m. to 5:00 p.m. on Saturday and Sunday. After an on-site brunch the second day, the remaining hours will be devoted to an informal Q&A session.

 

 

Can I take the course online?

We do not offer an online seminar at this time, but this may change if demand warrants it.

 

 

Is the seminar open to those who do not subscribe to your Rick’s Picks advisory service?

The course is open to subscribers and non-subscribers alike. However, I encourage all seminar students to subscribe to Rick’s Picks, if only for a month or two, so that they can become familiar with my methods and trading style. Also, the archives and educational pages offer a useful resource for learning about my proprietary methods prior to the seminar.

 

 

How can I sign up for the seminar?

You can request a registration form by clicking on the blue hypertext line under “Last Call!” above.

 

 

How much does the seminar cost?

Tuition for the two-day event is $1,500, This covers course materials and extensive post-grad mentoring in a real-time chat-room held during market hours.

 

 

When is the money due?

A deposit of $300 is due with the registration form. $100 of it would be non-refundable, and the remaining $200 would become non-refundable six weeks prior to the session. 

 

 

How about the remaining balance of $1,200?

It would be payable by two weeks prior to the session and would be refundable. A check is preferred, but you will be able to use a credit card for an additional administrative fee of $50.

 

 

What will I learn?

The goal of the course is to enable students to master the Hidden Pivot method and to use it to forecast price reversals at least as accurately as experts who do it for a living. In addition, you will learn to use some basic risk management strategies and to leverage swing points with puts and calls. If you’re interested in what my subscribers have said about hidden pivots, click here.

 

 

Can someone who knows little about trading or technical analysis benefit from the seminar?

Although many professionals have taken the course, it is an ideal place for the novice to start, since it offers a relatively simple, stand-alone method of forecasting and trading.  No prior trading experience or knowledge is required.