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September 22, 2011

Storm Clouds

An unforgivable two months have passed since my last public post, but between moving into a house, establishing an investment partnership, traveling, family time and, of course, writing the nightly Member Letter, finding extra time for such work has slipped down the priority pole. I would like to get back to posting on the blog at least weekly, but I make no promises. In the meantime, I offer a small consolation in the form of the public release of the September 20 Member Letter.

Market conditions are looking quite ominous. Over the past few weeks, equities managed only a paltry rebound from the summer slaughter, despite public sentiment remaining bearish. In fact, the weekly view may be indicating that a repeat of the summer action... at least in stocks... is upon us.

SPX_Weekly

If a mid-point consolidation is in play, we are facing a move down into the SPX 850-950 range over the next several weeks... an outcome that few are anticipating, but which carries a non-neglible posiibility. Such a drop would likely be accompanied by a continued launch higher in the dollar index.

DX Daily

The way in which a second-stage stock market crash would differ from the summer is that commodities, particularly gold, will also suffer from the liquidation event rather than benefit as a safe haven play.

Gold Weekly

Furthermore, commodities are well on their way into a multi-year cycle low anticipated for late 2011 or early 2012. As this decline plays out, the selling should reach a panicked climax, putting further pressure on gold and other commodities. However, this multi-year cycle low will likely provide the most lucrative buying opportunity of the commodity bull market.

As stocks tank along with the commodity complex, public sentiment regarding further stimulus effort is likely to swing from reticence toward eagerness. In fact, by the January FOMC meeting, I anticipate the Fed will unleash QE3, entailing a printing effort large enough to put the first two rounds to shame. The public and Wall Street alike will be begging for a market rescue, and politicians will be keen on seeing some sort of recovery going into next year's general election.

Unfortunately, the most profound result of such a massive counterfeiting operation will be to spike commodity prices sky high, and the footings of any recovery will be undermined by soaring input prices. Furthermore, politicans will react to such developments with price controls, tariffs, and other attempts to manipulate the market into conformity with their desires. Just as with the Great Depression, however, the current economic malaise will be made worse by such interference. Only when politicans are handicapped or distracted by greater issues such as war will market mechanisms be free to clear out inefficiencies and set the economy up for a new expansionary phase.

 

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