In my recent, yet sparse, posts to the public blog, I have discussed why the rally out of March 2009 is doomed to fail. I have maintained little hope of being proven wrong, and as time passes and I read more of the follies of politicians, the more I am convinced my dearth of hope is not gratuitous. Take, for example, the recent statement by Vince Cable, Great Britain's Business Secretary, that banks will lose their bonuses if they do not lend more. The threat reeks of central planning, an economic malfeasance that not only consistently ends in disaster, but also an action for which the west is notoriously bad.
As if to swiftly and deliberately betray the idiocy of the effort, Mr. Cable states he wants to assure that banks lend to struggling enterprises. A struggling enterprise is exactly the sort of business with which banks want to avoid entanglement, especially when said banks are struggling themselves. Basically, Mr. Cable is trying to force institutions which are trying to escape insolvency to make high-risk loans to businesses that are obviously not in a position to produce a substantial return on those loans. Such nonsense can only be the brainchild of an individual playing with someone else's money, namely the taxpayer. In fact, the same perversion of risk induced the banks into the mess which now burdens them.
Mr. Cable goes on to say that banks "are not acting in the national interest," once again wafting us with the stench of the central planner. In fact, it is not the banks' duty to act in the national interest, but in their shareholders' interests. And I repeat that if western governments had not nutured moral hazard within our system, the banks, acting in their own interests, would have been much more risk averse in their practices, and thereby would have acted in the general interest, as well.
Closer to home, the FDIC recently announced the issue of $500M of U.S.-guaranteed FDIC senior certificates. Apart from the fact that the FDIC is using a loophole of questionable legality to bundle the notes into agency-backed pools (thereby avoiding official Congressional approval), one can be assured that the effort will not end at a mere half billion dollars. This first issue is likely a test run to see how the notes are received, both in the market and judicially. Don't be surprised to see the issue sizes expand into the hundreds of billions at some point, nor to see the taxpayer pick up the tab via the Fed's balance sheet. Does anyone yet doubt the veracity of gold's bull market?
Beyond these acute incidences, the U.s. seems to be engaging in spats on a nearly daily basis with trade partners in Europe and with China. Once economic conditions worsen, trade wars are almost certain to follow as politicians seek scapegoats for their own malfeasances. One cannot be at a loss with regard to the striking parallels between the current situation and that of the 1930s. However, given today's debt levels and the lack of moral seating within business, as well as public, attitudes, the current situation can be characterized as the Great Depression on steroids.
More pertinent to traders is exactly when the grand counter-trend rally will expire. I've detailed in the Member letter why cycles suggest the rally likely ended in April and is now playing out the first failed rally of a renewed bear market. In fact, we have plenty of evidence suggesting economic woe ahead, not the least of which is the plunge in the Baltic Dry Index:
If stocks are, indeed, in a counter-trend bounce, the April high should not be exceeded. As for timing, keep an eye on sentiment and news. I suspect that just as sentiment reaches the typical levels that terminate significant rallies, we will begin seeing, publicly, the first cracks in what will prove to be a dollar crisis by next spring. Since money will be fleeing dollar-based assets, U.S. stocks and bonds will tank along with the dollar while the flight-to-safety play will be... what else? Gold.