June 2005

Today I introduce you to the deflationist arguments of Whiskey and Gunpowder editor Mike 'Mish' Shedlock, whose logic is quite similar to my own ' perhaps even uniquely so, given its unmitigated vehemence. For one, we both agree that nothing short of outright deflation can cure the world of its debt disease. For two, we both see deflation as not merely likely, but inevitable; and for three, neither of us has met a counter-argument that couldn't be knocked down as easily as a shooting-gallery duck in the crosshairs of a .50-caliber machine gun. Not that that has stopped the ducks from quacking away, In the polemic below, Mish takes on Jim Puplava, whose observations about the economy and stock market at Financial Sense Online usually make good sense. This time, though, facing Mish's impressive firepower, Jim comes off as a sitting duck. You can judge for yourself: . 'Sometimes,' Mish writes, 'I wonder whether I am on the same planet as those who espouse hyperinflation. The debate among inflation, stagflation, deflation, hyperinflation and just plain "'flation" has been raging for years. Most sides do not even state the other side's viewpoint correctly. Now, perhaps I mean that most do not understand my viewpoint correctly, which is indeed a different thing altogether. Then again, there is so much general confusion that it is high time we get a decent dialog going so we can better understand the other points of view. In that regard, I have been following the "deflation debate" on the Financial Sense Newshour with Jim Puplava. Deflationists as Dummies 'Let's backtrack to May 7, 2005. In a one-hour commentary (in the segment entitled "The Big Picture") Jim Puplava attempted to explain "Why the Deflationists Simply Don't Get It." Here is a summary of what he said then, at

Another flatulent day on Wall Street. But just as I was getting Friday's Touts under way, this message popped up on my computer screen: Hackers. You gotta love 'em. Turns out the 'TkBellEXE' referred to in the 'Value' line is yet one more virus out to change the world for the worse. This same nasty little bug tried to infect my computer yesterday, but it failed then as well. I simply clicked on 'Block' and zapped the malignancy into hyperspace. I enjoy seeing these critters vanquished, but there's an auto-kill setting for those who'd rather remain oblivious to the catch-and-destroy process. I can't recommend Ad-Aware too highly. I use the paid version, but the free one, though less featured, does the job just as well. But what I really want to tell you about is an application that will totally and absolutely eliminate spam from your life in just a few minutes. Trust me to know how, since, if I were judge and jury, all spammers over the age of 12 would suffer the same punishment Mel Gibson's William Wallace received at the end of Braveheart. Unfortunately, very few spammers are ever caught, much less get disemboweled, then drawn-and-quartered. The only way we can beat the hackers, really, is to tune them out. Evil Malantha I pondered this goal one day after receiving fifteen virus-laden attachments in the space of just three hours. Someone calling himself 'Malantha' was out to get me. And that's when I began what turned into a months-long search for the deadliest spam-killer in a cluttered market. I succeeded, finally, with the help of the Wall Street Journal's Walter Mossberg, who gave this particular product, Digiportal's ChoiceMail, a rave review in his Personal Technology column. Don't search for it in Consumer Reports, though, because the magazine

You've heard the saying, 'a watched pot never boils.' Well, neither, apparently, does a watched stock market. Judging from my mail these days, tous le monde thinks shares are fixing either to scream or to collapse. Even my own technical indicators appear to be demanding some BIG event, and soon. And how did the stock market alleviate our mounting anxiety and suffering yesterday? Why, with another dollop of wretched tedium, of course, sending the Indoos down a whopping six points on the day. Something's gotta give, for sure, but perhaps not before we ' meaning you and I ' can agree on a way to hold our expectations in check. Here's my plan, for anyone who believes that by month's end the Dow Industrials will be trading at least 500 points above or below Tuesday's closing price, 10476. The trick will be to diffuse our expectations so that, on a given day of the week, 'anticipation karma' will be operating at a much reduced strength. Achieving Indifference This can be accomplished most easily as follows: If your last name begins with the letter A-E, give free rein to your bullish or bearish bias only on Mondays; if F-K, only on Tuesdays; if J-N, on Wednesdays; if O-S, on Thursdays; and T-Z, only on Fridays. To stay calmly opinionless and aloof, the 80 percent of us who are cooling our jets on a given day should repeat the following mantra for ten minutes, preferably before the NYSE opening: 'Like, do I care? Like, do I care. Like, do I care.' Let's practice for a few minutes, reciting the following while visualizing the NYSE ticker tape moving at the speed of mildew: 'Like, do I care�like, do I care�like, do I care�like, do I care� like, do I care�like, do I care�like,

Investors reverted to their worrisome ways yesterday, taking stocks for a rollercoaster ride after seemingly contradictory statements about the Fed's intentions were made, respectively, by Alan Greenspan and Jack Guynn, a member of the Open Market Committee. I won't try to deconstruct either guy's words here, since that might run afoul of the Fed's modus operandi of sowing confusion whenever the second-guessers grow too brazen. No more rate hikes after June? That's what the buzz has been predicting for the last few weeks. But the Fed chairman evidently has other ideas, and it's even possible that he used Guynn as a straw man to help make the central bank's intentions perfectly unclear. Given yesterday's gyrations in the stock market, it would appear that he succeeded. But Guynn had the final word -- 'My view is that we've still not reached a neutral policy stance' ' and that's probably why shares finished the day on the downswing. Speaking of sowing confusion, a poison-penned lurker from Saskatchewan, Dennis P., sent me an unprintable message execrating me for my bullish/bearish two-step over the last couple of days. On Monday I reiterated a forecast for a tediously bullish summer; then, yesterday I warned against a possible swoon over the near term. I see no contradiction whatsoever between these two predictions, only the disquieting implication that summer could produce no more than fleeting satisfaction for bulls and bears both ' but no epiphanies for either. It's hardly inconceivable that stocks could dive soon but still recover and then some by summer's end. In fact, that's what I expect, based on the stochastic evidence presented here over the last two days. We can always change our minds if a modest rally over the next few days alters the menacing trajectory of this indicator, but as I

For now, I'm sticking with my prediction of a tediously bullish summer, but there are some unmistakable warning signs that suggest stocks could fall over the near-term, perhaps sharply. Below is a chart that I published intraday that shows an incipiently bearish arc developing in the Dow Average's daily-bar stochastic. While it would require only a modest rally over the next couple of days to render this pattern docile, a mild decline could just as easily turn it savage, setting up a downdraft of perhaps 300-500 points. If so, the reversal will have begun from a logical place, since it was just a few days ago that I signaled a potentially important high in the S&P cash index. The analysis was as follows: 'Heads-up: The S&P cash index has stalled today within an inch of a fairly important hidden-pivot resistance. I hadn't noticed it earlier, but when a friend with whom I talk regularly asked for a reading on the S&Ps, my calculations produced a hitherto unobserved hidden swing point at 1205.61. Since the actual high was at 1205.64, we should be alert to the possibility of a substantial pullback from these levels, or perhaps even a major top. Please note, however, that a two-day close above the pivot, or an intraday move exceeding it by more than a point or so, would signal additional upside potential to as high as 1275.' Considering the foregoing, as well the possibility that long term-yields may have bottomed for a while, we should be extremely cautious about taking on any new long-stock positions right now. Meanwhile, we are prepared for the worst by way of QQQ puts we've been accumulating, most recently June 39s for 0.65. We also hold a substantial number of June 34 puts as part of a rolling short position

It's no secret: I'd rather be known as a child molester than keep company with CNBC's bull-pen regulars. Let me tick off some of the reasons why we should shun the mindless optimism that these days passes for hard analysis on the Street: 1) the economy is being propped up by record borrowing; 2) a monstrous housing bubble could pop at any time; 3) two of the country's largest manufacturers, GM and Ford, are seriously on the ropes; 4) the Fed has already tightened eight times; 5) Europe is increasingly becoming a drag on global GDP; 6) Japan is slipping yet again into deflationary coma; 7) energy quotes are once more on the rise, threatening to establish a floor at $50 a barrel; 7) the yield curve is flattening; 8) etcetera, etcetera. So why am I bullish at the moment? Because most of my stock charts are pointing higher, is why. Take the one of the Dow Industrials below, which updates a picture that appeared here on May 24 alongside a forecast for a tediously buoyant summer. The chart shows that higher price peaks have been matched by correspondingly higher stochastic peaks over the last several months. In technical parlance, this is a 'non-divergence,' and it suggests to me that the current, bullish trend is likely to continue, at least for a while. It also argues against the likelihood of an out-of-nowhere collapse in share prices, a possibility that has been bandied about by several quite respectable market technicians whose work has been brought to my attention recently by some of my own evidently anxious subscribers. Do I care what the other gurus are thinking? Not at all. In fact, I'm convinced that resolutely tuning out all such noise has boosted the accuracy and consistency of my forecasts greatly in

Below is another of the many letters I received in response to my recent commentary on the decline in mortgage-lending standards. It's impossible to know how many Americans fear that a housing bust is imminent, but judging from my mail such fears run deep. The letter is from a man in the lending business whom I quoted here earlier. In further recounting his apprenticeship in the mortgage business under Golden West Financial's Herb and Marion Sandler, he has provided us with a benchmark against which we can measure the egregious slippage in lending practices that has occurred since. I am eager to put it all on-the-record because I'm firmly convinced that a deflationary collapse in real estate lies ahead. Our correspondent writes as follows: 'I [have believed since around 1990] that the real estate market could not continue in its present course without a major meltdown. I developed analytical software and spreadsheets during my time at World Mortgage, and I saw the Meltdown of 1990 happen. We had 13 people in the Atlanta office, and one day a regional manager came in to let us all know that we were all laid off. I had just walked into the office with a new loan package when I was greeted at the door by my manager. Everyone in the office had that hung dog look on their faces. 'A.H. Ahmanson, one of our two portfolio competitors, had closed their office the month before, and that left only two portfolio lenders with offices in Atlanta -- Great Western and ourselves. World had an economist do a study on the Atlanta market to determine if it was wise to continue lending in that marketplace, and the conclusion was as follows: ** The second highest bad credit district in the nation. We were the

The bad-news-is-good-news mania that has ruled financial markets in recent months appears to have given way to a new mood, one that apparently perceives good news as, well, good news. T-bond prices soared as yields on the 10-year bond smashed below 4.00%. When active trading ceased for the day, they were trading to yield 3.89%, their lowest level in 14 months. Shares were nicely in gear, with the Dow Industrials gaining 82 points on the day, the S&P cash index 10.70. What might account for this joltingly exuberant display of rationality? Just this: American manufacturing continued to grow in May, albeit at a somewhat diminished pace, while inflation in the sector shrank dramatically, according to the Institute for Supply Management, an industry trade association. Traders of both stocks and bonds took the news and ran with it early in the session. Both seem to have inferred that it will all but clinch a pause, at least, in the Fed's tightening campaign, which since last June has pushed the fed-funds rate from 1% to 3%. Relative to our hidden-pivot targets, the rally implies that 30-year bond futures are headed significantly higher, with yields moving commensurately lower. We risked a few ticks trying to short the 30-year mini-bond near 118^00, but, as I implied in the forecast, the subsequent move above 118^03 suggests that quite a bit of buying power remains to be spent. Specific targets for the September 30-year bond were disseminated intraday, but there's no compelling reason for us to try and short them when they are reached, since they are more likely to produce minor-cycle reactions rather than a major top. The dollar showed strength as well, with both the euro and gold continuing to lose ground. Those of you who took long positions in the latter based on

My recent feature on the steep decline in lending standards drew some illuminating responses. I will reprint several of them this week, starting with the following letter from a man who once worked for World Mortgage, the primary lending arm of Golden West Financial Corp.. Although Golden West still enjoys a stellar reputation, the source quoted in my commentary raised doubts about whether the firm has continued the sound lending practices established under Herb and Marion Sandler, Golden West's co-chairs. The writer has only praise for the Sandlers personally but says the realities of the marketplace may have dictated certain changes in the way the company they run does business: 'I have enjoyed reading your articles on 321Gold.com, and your recent article "Lending Standards Plumb New Depths" caught my attention especially because I used to work for Golden West through their Savings and Loan Association, World Mortgage, in their Atlanta office. It was the best financial education that I every had in my career. What they taught me opened my eyes to the foolishness of the reality lending market. 'World Mortgage had to deal with competition like every other S&L, and even though the Sandlers kept a strict set of standards, there would always be the reality of the marketplace that we had to deal with. During that short time with the company, and in the industry, no-documentation loans were lighting rods for mortgage fraud. I had countless Realtors approach me with offers of shady deals, dual contracts, falsified loan applications, questionable incomes, and the like. The Sandlers gave total veto power to loan officers in the field. Herbert Sandler said that there is no shame in one of his loan officers saying 'no'. Golden West's Pride 'But after reading your article, it seems that their lending guidelines have changed