Commentary for the Week of March 8

Chiding the inflationistas here yesterday, we elicited a torrent of informative responses, including the 5000th post to the Rick’s Picks forum (worth a free 30-day subscription to the lucky lady!).  We’re going to stick with this provocative topic for now, since we think it’s crucial that readers understand why deflation will be with us for a ruinous while, notwithstanding The Guvvamint’s desperately extravagant but so far ineffectual attempts to resuscitate inflation in the housing sector. A popular misconception is that the Fed stands ready to do “whatever it takes” to beat deflation. In fact, the Fed has already shot trillions of dollars at the problem without producing even the tiniest blip in home prices. That’s because countervailing forces of deflation are drawing irresistible power from the deleveraging of a global financial edifice once valued at nearly a quadrillion dollars. Under the circumstances, Helicopter Ben & Co. might as well be attempting to raise the level of the seas using a garden hose. For our part, we have long expected home prices to fall by at least 70%, and nothing we’ve seen so far has changed our outlook. The implication is that home prices, even after having fallen for nearly three years at the steepest rate since the Great Depression, are no more than halfway to the bottom. Concerning the inflation-vs-deflation debate, we’re going to try and kick the level of discussion up a notch or two with a couple of suggestions.  First, because the pro and con arguments often bog down in pseudo-intellectual claptrap about what constitutes “money,” we are going to provide you with foolproof way to recognize deflation for what it is – namely, an increase in the real burden of debt. Some will say that this is just a symptom of inflation, but we would tell them that

We thought the inflationistas would back off now that global deflation has ravaged just about every asset class save bullion and T-Bonds for the last couple of years. Actually, they’ve been pretty quiet lately, even if there are still a few money-supply nuts who believe not only that inflation is, or will be, a concern, but that the deflationist somehow have the big picture wrong. To all of you we say once again, Wake us when Americans can sell their homes for a quadrillion dollars, give or take a few zeros. Meanwhile, with CPI inflation sinking rapidly toward zero, check out this link to an essay by Puru Saxena, who raises some of the weakest anti-deflationist arguments we’ve heard so far. It’s good for laughs, but not much more. A reader sent us the link after we’d promoted a Wall Street Journal report earlier this week that some major-league financiers have finally copped to the reality of deflation. We’re talking about guys whose opinions count: Bill Gross, Jeremy Grantham, and hedge-fund managers David Tepper and Alan Fournier, to name a few of the best-known converts. "Deflation isn't just a topic of intellectual curiosity, it's happening," said Gross, who runs the $239 billion Pimco Total Return Fund. Lo, no sooner had we published the link than we heard from our old friend Zane B., who continues to push the intuitively appealing argument that inflation is about to take off because of a weakening dollar. (What’s about to take off is marginal tax rates, as far as we can surmise, and surely no one would argue that that is inflationary.)  Zane used to work for a foreign auto manufacturer, and he asserts that foreign autos, for one, will need to become pricier in dollars if their makers are to turn a profit.

Bulls failed a key test yesterday when they were unable to push the Dow above 10719.  All it would have taken was a measly 44–point rally, but the blue chip average never even made it into positive territory. What does that mean? Our hunch is that August will be a so-so month at best for the stock market. Using Hidden Pivot analysis, we explain why in a five-minute video, “Bulls Are Chickens Underneath,” that you can view at the bottom of this commentary. Our flat-to-bearish outlook is notwithstanding headlines earlier in the week that waxed optimistic about a global economic recovery. Those stories were based mainly on strong Q2 earnings reported by European banks, but banks in Euroland are no healthier than American banks, which only seem healthy because they were allowed to unload more than a trillion dollars of worthless paper on the Federal Reserve.  The Government’s strategy is to sell the debt securities when the financial system gets stronger, but we don’t expect that to happen.  Instead, we look for deflation to continue for at least a few more years – long enough that the Fed governors, the politicians and the spinmeisters will eventually be forced to acknowledge that the securities, which are mostly collateralized by real estate, will have to be written off. In the meantime, Wall Street seems untroubled by the gathering storm. Yesterday, for instance, although the economic news more than hinted that the U.S. is slipping back into recession after a failed, multitrillion dollar stimulus, the Dow gave up a mere 38 points.  That is surely no show of strength, as we have noted above, but it is indicative of the blissful and evidently widespread state of ignorance that has more or less inured stocks to bad news since March of 2009, when the

A hundred points here, a hundred points there, and pretty soon you’re talking about a real rally. Yesterday’s 208-point thrust in the Dow didn’t quite qualify as a powerhouse, however, since it failed to exceed a peak “along the wall” of the daily chart.  That quirky little rule has saved us time and again from jumping headlong into trouble, since it provides a generally trustworthy benchmark for distinguishing bogus rallies from the real McCoy.  The chart below shows the peak that will need to be impaled by the end of today’s session in order to signal the kind of buying power that’s likely to last more than a mere day or two. According to the Hidden Pivot Method that we used to trade and forecast, a push above 10719 today could sufficiently re-energize the bull trend to keep it going for the whole month of August.  As you can see, it won’t take much, since the as-yet-unconquered peak lies within spitting distance of yesterday’s close.  How close? Exactly 44.48 points, which is about how far the Industrial Average leaps, on average, in the first 30 seconds of sessions that have opened on a short-squeeze gap. Yesterday’s squeeze goosed the Indoos 135 points in the first two minutes, locking out all but a relative handful of true believers who went home long on Friday. We know there couldn’t have been many of them, relatively speaking, since the broad averages would not have soared with such devil-may-care lightness if they had been burdened by profit-takers the whole way up. The news helped too – as when has it not? -- with Eurobanks reporting an upbeat second quarter and an unexpected climb in June construction spending.  We’ve learned to take these ostensibly bullish statistical outliers with a grain of salt, although Wall Street

The response to Mario Cavolo’s glowing take on China and the global economy was eye-opening, to say the least. It’s not hard to understand why someone who lives and works in China, as Mario does, might believe that the country’s economic prospects are so spectacular as to all but preclude the possibility of a deflationary depression elsewhere in the world. We’re not so sure ourselves and have a few things to say about it below. But we were nonetheless persuaded by Mario’s argument, and by comments made by others in the Rick’s Picks forum, that China is doing many important things right, economically speaking. Some Westerners don’t come easily to this notion, since it requires one to put aside very troubling concerns about China’s repressive, authoritarian political regime; for it is both unfortunate and undeniable that dissidents do indeed disappear in the middle of the night, never to return; and that “troublemakers” such as the Falun Gong, a Taoist sect, have indeed been tortured and expelled from civil life. Even so, and seemingly paradoxically, China’s political leaders seem to have the long-term well-being of the Chinese people foremost in mind when it comes to managing the economy. On this point, we found the following comment in the forum, by “Adiehua,” particularly illuminating: “Like most of the correspondents here, I come from a background that prizes democracy and freedom,” he wrote. “However, I consciously try to avoid the trap of believing that it is the only system. The popular belief that China is a somewhat totalitarian state is erroneous. It is authoritarian but the Chinese have had various versions of authoritarianism for 2000 years. To ask them to adopt Ben Franklin’s philosophies in a heartbeat is not practical. Chinese Solutions “Nearly everyone I know in China is acutely aware of the

( Rick’s Picks frequently runs guest commentaries expressing opinions that differ markedly from our own. Below, Mario Cavolo, an expatriate who lives in China, argues that there is no global, deflationary depression bearing down on us, but rather a muddle-along economy with strong spots as well as weak ones. We disagree and see a period of economic darkness more severe and widespread than any ever recorded.  That's because the world is unwinding a financial asset bubble with a notional value of nearly a quadrillion (i.e., $1,000,000,000,000,000) dollars. Considering the sum involved, there can be no easy or quick return to economic health. More logical is that a totally corrupt global financial system will have to be destroyed before we can rebuild the economy on honest trade. As things stand, the world’s financial-products-and-services balance sheet is at least ten times as large as the ledger for trade in real goods and services. Mario notes optimistically that Japan has muddled through its decades-long deflationary recession without experiencing social disintegration. Although this is true, we would argue that it is so only because Japan had the rest of the world – including an insatiable U.S. consumer – to keep its powerful export machinery humming as it traversed deflation's valley of death.  But who will bail out the U.S. and Europe as we continue to sink together? We could take on Mario’s arguments point by point here, but we’lll let that happen in the Rick’s Picks forum, which continues to attract an intelligent and articulate following.  RA) It is easy to continue feeling humbled and confused by the sentimental and fundamental dance of the world’s asset classes and regions, be they equities, currencies, commodities, or that shiny stuff; feel free to pick your basket of market sectors to analyze and track.  DaBoyz is a moniker here at

We were looking for a 350-point rally as the week began, but at the rate stocks have been rising it could be Labor Day before the Dow Industrials hit our 10757 target. In the meantime, dirges like yesterday’s could have satisfied neither bulls nor bears, since it took the blue chip average six tedious hours to work its way just 40 points lower. (Get a week’s worth of free forecasts, as well as access to the 24/7 chat room, by clicking here.)  Ordinarily we would chalk this up as another day of consolidation within an uptrend that at times seems unstoppable. However, in this case there is a so-far minor concern that bears close watching, since it could be a harbinger of trouble immediately ahead. Specifically, the Indoos have pulled back from Tuesday’s fleeting peak without having exceeded the 10594 high recorded on June 21. You can see this in the chart below, and it suggests that buyers may have run out of steam earlier this week. Indeed, if they were feeling feisty, they would have demonstrated it by going the extra few inches to conquer the June 21 peak. Instead, they stopped 16 points shy of it before turning tail and heading lower. In the parlance of the Hidden Pivot Method that we use to forecast stock and commmodity prices, this is an impulse-leg failure. According to the simple rules of this method, healthy rallies must continually refresh the bull trend by “impulsing” above two prior peaks with each new, cyclical thrust. Of course, the Dow could come roaring back this morning and surpass the two required peaks with room to spare. But it should have done this yesterday, on the first try and without a 40-point pullback, to be considered healthy and robust.  Not that we think the

Has Gold’s price action been getting you down lately? Take heart, since relief could come as early as today or tomorrow in the form of a Hidden Pivot support at exactly $1140.10.  For the last two weeks, that’s been our downside target for the correction begun five weeks ago from around $1266, although it didn’t begin to emerge with clarity until the August Comex contract plunged from $1208 right after the July 4th holiday weekend. (You can get a week’s worth of free forecasts and access to the 24/7 chat room by clicking here.)  At yesterday’s lows, the correction so far had knocked 8% off the price of gold relative to the all-time high recorded on June 21. Even though we’d been expecting this weakness, we told subscribers at the outset that we didn’t foresee anything more serious developing. Although we avoid chiseling such predictions in stone, we’ve advised cautious bottom-fishing near $1140, using a tight stop-loss of $2 or less. Our confidence is high that there will be a tradable bounce from the target, although a decisive breach would be the equivalent of the groundhog seeing his shadow – i.e., six more weeks (or so) of winter.  Please note that we’ve identified a secondary target at 1155.00 that may have been fulfilled by yesterday’s 1156.90 low.  However, our gut feeling is that this Hidden Pivot support will fail, sending the August contract down to the more important one at 1140.10. T-Bonds Turning? Speaking of targets, a T-Bond forecast (and trading recommendation) disseminated to subscribers on Sunday night caught yesterday’s low in the September futures to the exact tick. We’d been quite bullish on the bond futures but told subscribers not to buy any contracts until the “Seps” corrected down to 126^07. (Click here to see the actual recommendation.)  We

Stocks on Monday achieved a bit less than a third of the gains we had unenthusiastically projected for the week, with the Dow Industrials settling exactly 100 points above Friday’s close. We say we were unenthusiastic in forecasting a 350-point rally because share buyers themselves have shown little enthusiasm for the task.  Even so, they’ve continued to lift offers more or less steadily, producing a rising trendline with a pitch of about 12 degrees. We’ve seen steeper grades driving through Nebraska, but that’s not the point. In fact, the lukewarm, steady buying that has persisted in July is exactly the kind of buying that typically accounts for most of the stock market’s gains most of the time.  This summer’s rally has been punctuated by short squeezes and gap-up openings whenever conditions have been favorable, which has been about once or twice per week. The actual close on the Dow yesterday was 10525, exactly 232 points shy of the 10757 target sent out to Rick’s Picks subscribers Sunday night. (Get free forecasts and access to the 24/7 chat room for a week by clicking here.) If you’re a market timer, we’d suggest paying close heed to that number, since, according to the Hidden Pivot method we use to predict swing points both minor and major, it is not exactly chopped liver. We’ll likely use Diamond puts to get short if and when the opportunity arises, although we would be doing so without any preconceived notions about catching the Mother of All Tops. Simply catching “a top” is usually good enough to chase summer boredom and perhaps make a few bucks in the process, but we would be the first to acknowledge that few have gotten rich over the years by buying put options. (As much could be said of those who