Extremely light volume allowed DaBoyz to plump up stocks during the traditionally brain-dead-but-buoyant post-Thanksgiving Friday. The short-squeeze added 182 points to the DJIA, recouping exactly half of the losses sustained earlier in the holiday-shortened week.  However, we were wholly unpersuaded of the rally’s sincerity, and found ourselves bidding for some December 129 Diamond puts a minute before the final bell. Alas, there were no sellers of these puts sufficiently despairing to dump them into the thieving hands of market makers who had thoughtfully advertised a fire-sale bid of 2.95.  It would seem that even on so-called Black Friday, brazen opportunism has its limits.

(Click on chart to enlarge)

We should confess that our futile attempt to buy put options ahead of the weekend was more emotional than rational, since, as you can see in the chart above, the Diamonds created a bullish impulse leg in the final minutes of the session. This they did by slightly exceeding a 129.64 peak that had marked the intraday high on Wednesday. This small but not inconsequential feat is properly interpreted by the disciplined trader as bullish for the very near-term, even if in our heart of hearts we decided to give it a sneering thumbs-down. One reason we were feeling conflicted was that the dollar had touched a new post-War low earlier in the day. While this seems to have registered only dimly on Wall Street if at all, it was reason enough for us to infer that the world’s financial problems are not likely to melt away between now and Monday morning. (Note: Since the Dollar Index's nascent rally on Friday holds potentially very important implications for stocks, energy resources and precious metals in particular, you should consider Monday's Touts  as a must-read.)

A Red Herring

Speaking of global financial problems, the gathering debt contraction is almost palpable by now, and once it gets rolling it could make 2008 the first deflationary year since the early 1930s. This is notwithstanding the fact that the Treasury Secretary, as well as the factually challenged spinmeister who currently heads the Federal Reserve, continue to allude to a supposed “threat’ of  “inflation.” One would think that even the self-aggrandizing imbeciles who parrot such falsehoods on CNBC would recognize that the debt contraction so obviously under way precludes any kind of inflationary episode in the foreseeable future. Is there anyone who still does not understand that talk of “inflation” by officialdom is just a red herring intended to distract us from the far more dangerous dragon of deflation?  Distract us for how long, though, is the question. It’s not as though Bernanke et al. are going to sidle quietly into retirement before the ravages of a debt implosion hit full-bore.

For those who doubt deflation is indeed bearing down on us, here’s something persuasive that we received from our fellow deflationist Jas Jain that originally appeared at BCA Research:   “The implied Taylor Rule real-funds rate and two-year real yield are now effectively negative and forecasting a negative real Fed funds rate ahead. Technically, one can make a case for the two-year yield at 2.5%, implying the Fed funds below 3% in the relatively near future.

Fannie & Freddie

“With Fannie and Freddie increasingly appearing to be suffering capital impairment, banks and insurers are going to be less likely to acquire agency paper to shore up balance sheets, leaving US Treasuries as the most liquid securities to weather a default cycle, requiring the Fed to eventually dramatically expand the monetary base and cheapen reserves to allow banks to buy Treasuries in our own Japan-like ‘quantitative easing’ cycle.

“The expansion of the monetary base will most likely result in a steady decline in money velocity as a result of the bulk of the increased money base supply being absorbed in the financial  sector to repair balance sheets against mounting defaults and underperforming loans. A decline in money velocity and falling equity and real estate prices risk an actual contraction in y-o-y debt-money growth, that is, a debt-deflationary contraction and outright price deflation.”