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The Dow’s Phony New High, Part II

Posted on October 4, 2006
Filed Under Uncategorized |

By Michael Nystrom
October 4, 2006

Part I here

After making a tentative new high on the Dow, the market’s second day follow through action (10/4) was strong. What can I say? I’m a bear, but I have to call it like I see it. This slow, steady, methodical advance reminds me of Nasdaq 1999, when the market doubled in a span of less than a year. Phony or not, this market has the potential to move a lot higher, very quickly and today it declared its intention. So much of today’s program-based trading keys off momentum. This creates a positive feedback loop that sends stocks to new highs and buys any dips before they materialize.

As I’ve mentioned many times, never argue with new highs! Phony or not, what we have are new highs. If you’re a bear, get out of the way! Take a look back at Nasdaq 1999. The market bounced around between 2,500 – 3,000 for most of the summer, and when it finally broke through 3,000 — to new highs — in early November 2000, it barely corrected before hitting 4,000. Boom. 33% in two months. That was the work of the momentum buyers, creating new highs, buying the new highs, preempting the dips before they appeared. The march upwards was steady, strong and breathtaking. Bears were shown no mercy. Timid bulls were given no pullbacks to establish positions. It was day after day of steady, momentum driven advances.

If you recall late 1999, there were just as many skeptics as there were bulls: Only 3 years earlier the market had been trading at 1,000 – it had already come a long way without a correction. Nasdaq stocks had PEs over 100, over 200, over 500, if they had any earnings at all! Stocks would move 5, 10, 20% in a day! It was an unsustainable, unbelievable bubble, and bears knew it couldn’t last forever. Many bears tried to hold out, but they added their own fuel to the fire by throwing in the towel, little by little. Who could blame them? What bear could withstand a 100% gain in under a year?

Dow October 2006

Which brings us to the present. I’m a big skeptic of these new highs and I know there are lots of skeptics out there. People liked my article The Dow’s Phony New High. I got more email than ever today, and my message board is full of bears – and a few bulls. The fundamental problem the bears are having now is that we look at the big picture – the very big picture - and cannot believe how the market cannot see what we see.

The economic news is BAD: Real estate bust. Consumer debt out of control. Government debt simply unpayable. Zero household savings. A hollowed out American economy. An aging population. Baby boomers on the cusp of retirement. Etc. You know the story. How can the market go up in the face of all this bad news?

I sympathize completely. However, the bulls look at a much smaller slice of the pie: Interest rates are coming down, oil prices are coming down, the trend in stocks is up. Easy 1-2-3: buy stocks! It is a no-brainer. New highs? Buy more! This has been an effective strategy for the past quarter century, and this strategy looks like it’ll continue to work for at least a little while longer.

The Dow has made a new high two days in a row, which is a reality that we bears have to deal with. This is dangerous territory for bears. Once the bulls score a new high, there is no telling how high they can take it, as I have said many times and as Nasdaq 1999 reminds us. I was surprised to find that both today’s Wall Street Journal and Investors Business Daily treated the new high with a healthy dose of skepticism, not hyping it too much. The Money & Investing section of the Journal did have a goofy picture of a cartoon bull, lording over a knocked out bear, and red roses covering the page. But it was not all rah-rah. Under the fold, there was even a story, Despite Blue-Chip Gains, Hedge Funds Increasingly Are Faltering and Closing.

After today’s gains on very strong volume and breadth however, I imagine that their tune will be more bullish tomorrow, and will turn into a breathless orgy before it is all over.

Today’s Boston Metro, the free little daily newspaper digest that everyone reads on the subway here, was a little more optimistic. It had a big picture of the NYSE and a bold headline about the new closing high, and went on to say this:

[the new high] comes at a time when the stock market is more conservative, even more muted than the Wall Street of early 2000. Then, investors were still piling exuberantly into high tech stocks. In 2006, the market’s gains come only after investors’ careful parsing of economic data and corporate earnings reports…

Ha ha ha! Did you hear that? Are you investors out there carefully parsing economic data and earnings reports? No, I think it’s more like: New highs! Yeah! Buy the momentum!

And this is the similarity with 1999. Since its mid-July low, the market has seen very little in the way of corrections. The action has been slow, steady, and methodical. Just like before, dips are bought before they even turn into dips. This market hasn’t seen a 10% correction in over 3 years. Interest rates are coming down. The price of oil is coming down. Stock prices are going up and that is all that is necessary to start the positive feedback loop of higher prices.

As the great trader Jesse Livermore said, “There is only one side of the market – it is not the bull side or the bear side, it is the right side.” When it has run its course this rally will most certainly meet the same fate as Nasdaq 2000, and the greatest shorting opportunity of a lifetime will be upon us. But bears, keep your powder dry!

Your comments welcome below.

Announcement: The number of traders frequenting my site has recently increased dramatically, so I’ll be doing more writing specifically about my own trading in the coming weeks. As I said, we’re coming up on the greatest shorting opportunity of a lifetime. Positioning for it will involve some preparation, both practically and psychologically, and I’ll discuss that in depth. If you’d like to be notified, please subscribe. Like all of the best things in life, subscription is free.


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99 Comments so far
  1. dan desoto October 4, 2006 10:30 pm

    I’m a bear but more really I should be called a ‘chicken bear’. Intellectually I know that feelings and finances don’t mix, but I have the feeling it would be fairly easy to go broke in this market trying to call a top and then shorting. I’m using the old standby of just sitting with cash-I firmly believe in the next couple of years that there will be a tremendous opportunity to buy,especially the Eastern markets, ex. Japan.

  2. Bryan October 4, 2006 10:31 pm

    Spot on. How much of this is short covering?

  3. Alan Slawter October 5, 2006 4:17 am

    Interestingly enough, everyone I know has a 401k plan that has underperformed the market. I believe that the strategy is to siphon off the steady 401k incoming cash to cover risky positions elsewhere and make the fund managers rich. I’m no expert, but my own trading has blown away anything any of the mutual funds either of my 401k plans. Most of us are to busy trying to eep our heads above water at our own jobs to monitor the situation proplerly. Anyone else see this trend?

  4. Ed (aka longshort) October 5, 2006 4:20 am

    The yield curve is the most reliable economic indicator in existence. It is 100% accurate in calling a recession within 18 months of an inversion. It has never failed.

    At the beginning of 1999 the yield curve was normal, then at the beginning of 2000 it went flat, and finally went inverted around the first quarter. We know what happenend after that.

    For about a year now, we’ve had a flat to inverted yield curve - in fact, it inverted briefly in 1Q06. Currently, the discount rate is 5.25%; 3month T-bill is yielding 4.93%, 6 month 5.08% and 10 year 4.72%.

    Based on yield curve history, the current market conditions are more reminiscent of early 2000, right at the peak before the crash, then of 1999 when the market was experiencing ‘irrational exhuberence’.

  5. Ed (aka longshort) October 5, 2006 4:45 am

    In 1999, the average annual crude oil price was $16.50. In 2006 it is $60.

    In 1999, the average home price was $170K. In 2006 it is $260K.

    In 1999 M3 was around 6000, now its north of 12,000 (hard to tell, the Fed has stopped publishing it because the figure is so telling).

    In 1999, the DOW’s average PE was 23, at it’s peak in 2000 it was close to 24. Today it’s north of 20 (anyone do today’s calculation?). The average historical PE is close to 15 and the lowest its been is close to 6.

  6. zephyr October 5, 2006 5:09 am

    You ever have one of those mornings where you wake up with an idea that just seems so obvious? Well, guess what happened to me? This was confirmed by reading the last few contributions to the most recent thread from last night.

    Raise your hands if you believe any combination of the following:

    -The Iraq war (and probably Afghanistan) are merely excuses for oil-grabbing and empire-expanding.
    -the US economy is being run off a cliff.
    -9-11 was an inside job
    -a depression is inevitable
    -you’re against a national ID card AND an ID chip being implanted under your skin.
    -Our constitution is slowly being shredded
    -false-flag operations
    -horse-shit health care
    -devaluation of the $ and the subsequent inflation that follows
    -the federel reserve being neither federal nor a reserve, but a private bank

    I suppose that’s enough for now. Here’s my point: This web thread is great for spouting….but we need more. I’m proposing a March on Washington to air these grievances.

    Michael, you have tons of links on this website….the word can be spread easily enough. We must do more than just grumble. We are still “We The People…”.


  7. Rich October 5, 2006 5:29 am

    Its worth repeating:

    If housing is coming down and the markets are not going up then the party is over and Depression2 begins.

    Who believes this is imminent?

    If you have been around the bear sites for the past 5 years you’ll know that we’ve been debating this very event for that entire time.

    Personally I do not believe the party is about to end, I used to, now I see it going on for a few more years.

    That means either rates come back down and house prices rise again, or the markets go higher. There is no other economic engine out there big enough to boost the wealth effect of the US consuming public.

    I don’t see house prices rising, here in Seattle, just yesterday, I was passing a brand new development with houses starting in the $700K range and the local I was with said that all new construction had stopped several months ago and that the existing houses were not moving. This is happening across the country, and is much worse in many markets.

    With housing now eating away at the wealth effect that puts all of the onous for maintaining life as we know it on the stock market, and particularly the DOW - as there is no story in the Nasdaq.

    Finally, as others have pointed out, the markets have been stagnant now for several years as housing has carried the baton. Through that period we’ve had rampant inflation. So the markets have a ways to go before they even catch up to real inflation. The DOW could go to around 13,000 before it exceeds its former high, on an inflation adjusted basis.

    As for a march on Washington, its not about Washington and the politicians, its about the money power. The money power owns the politicians who provide a convenient shield for them. Identify who is behind the money power and go talk to them!

    Cheers Rich

  8. zephyr October 5, 2006 5:41 am

    Rich, you have to start somewhere! Individual grousing does no good. I think we have to at least show we have some pride, some balls. March on DC!!

  9. Jeff Kassel October 5, 2006 5:49 am

    Whoops….Abbey Joseph Cohen just came on CNBC and guess what…she is Bullish. I’m sure Mike is gratified to be backed up by a heavy hitter like her. We’re going higher according to Abbey…”Equities are underpriced!” And now Rich “Permabear” Lancaster is calling for Dow 13000.

    And let’s face it. With real estate weak and dropping, where else are all those new dollars going to go…wallpaper?


  10. Rich October 5, 2006 5:55 am

    I hear you zephyr, I do believe something must be done, but it needs to hit the mark.

    Ban government officials from being members of secret societies (where the agenda’s are hatched and run from), Nationalize the Federal Reserve (there’s an idea) - rebrand it as the National Reserve, oh yeah, and ban pedophiles from office!

    That will clean up a decent chunk of the mess!!

    Cheers Rich

  11. turtle October 5, 2006 5:56 am

    there are many technical non confirmations in the charts of the current move higher but to short the averages right now would be foolhardy. one cannot be impatient at this time. stay long and wait for the market to break before going short.

  12. zephyr October 5, 2006 6:09 am

    Rich, I wholeheartedly agree with you, all of these things must be done. But I don’t think the people that be, are going to read all these comments on all these websites and all of a sudden sprout angel’s wings. “OhmyGod, the people are right, we’ve been oh so bad!”

    The powers that be don’t even laugh at us, they disregard us. But maybe, just maybe, a couple of million people on the green in DC might garner some attention.

    Don’t forget what a tiny, bald man accomplished in India years ago.

    We are still “WE THE PEOPLE…”.

  13. Edmund OShea October 5, 2006 6:16 am

    I also am a Bear. Instead of shorting I have been buying 2008 & 2009 Puts. I have Puts on Countrywide, Bank of America, Suntrust, Walmart, and I am now looking at Starbucks Puts, and most of the middle class retailers. Look at Starbucks P/E and then think about, when the market turns how many commuters will be buying $5 cups of coffee.

  14. Ed (aka longshort) October 5, 2006 6:20 am

    Would you guys stick to the facts? Here’s the latest on the housing bubble:

    Study sees ‘07 `crash’ in some housing

    By Mary Umberger
    Tribune staff reporter
    Published October 5, 2006

    Applying the word “crash” to sagging real estate markets in some parts of the country, a new study predicts that in the coming year, the nation’s median home price will decline for the first time since the Depression.

    Real estate prices in more than 100 of the nation’s 379 metropolitan areas have a “significant probability of decline” by this time next year, according to Moody’s economy.com, which released a 195-page report, “Housing at the Tipping Point,” on Wednesday.

    The encouraging news for the Chicago region–though labeled “highly overpriced”–is that prices here probably bottomed out this summer, according to economist Mark Zandi, principal author of the study.

    “Chicago is down a modest 2.4 percent,” he said. “It has already experienced its price decline. But the Chicago market, after a very strong run, is going to move sideways for a number of years.”

    The prognosis was more dire for 20 other cities in the report’s so-called “crash” area, where it predicted that prices would decline by double digits from their peaks before leveling off next year and into 2008.

    The most serious price slides are seen in southwest Florida, numerous California metro areas and in the Phoenix, Las Vegas, Washington and Detroit areas, according to Zandi.

    His prediction of a 3.6 percent median price decline nationwide also crosses a line drawn by many economists during the most heated debates about the housing bubble–that home prices have never gone into negative territory countrywide.

    “Prices have never declined on a calendar-year basis for that length of time [since housing records have been kept],” Zandi said. “There have been quarters, but never an entire year.”

    David Lereah, chief economist for the National Association of Realtors, disagrees with the severity of the price downturn in the report.

    “It’s possible we could go under zero, if you include prices of new homes” along with sales data for existing homes, he said. “For existing homes, I’m still predicting that prices will be above [last year] by 2 percent.”

    Nonetheless, Lereah agreed that broad price declines in some regions are unavoidable.

    “I don’t think I would use the word `crash,’” he said. “When you use a word like that, it’s almost a self-fulfilling prophecy in the housing market. These are people’s homes. Their retirement is depending on it.”

    But Zandi defended the use of the word and his choice of 10 percent price declines as a benchmark. “It’s a round number, but it’s also a rule of thumb that would be applied to the transaction costs in selling your home,” he said. “If you have less than 10 percent equity and your prices fall by 10 percent, you’re toast.”

    Paul Kasriel, director of economic research at the Northern Trust Corp., disagreed on the Chicago outlook, saying the prices here had not stabilized.

    “Not in my neighborhood,” he said. “The same houses that have been for sale for six months are still for sale. Some of them have lowered their prices, and they still haven’t sold.”

    But Zandi sees a somewhat bright side.

    “Even though this is a very serious correction, that these [market conditions] are things we haven’t seen before, I am still arguing that the economy is going to hold together, that there’s enough strength to overcome housing’s weakness.”

    “That’s nonsense,” Kasriel said. “The housing market is an accident waiting to happen.

    “We’re already seeing a slowdown in employment growth, and a lot of it is housing-related. We’re also seeing a slowdown in consumer spending, and that’s housing-related.

    “It’s beyond me how something that has dominated the U.S. economy in the past four years and is clearly in a recession now won’t have spillover effects on the rest of the economy.”

  15. muleskinner October 5, 2006 6:31 am

    I once thought that if you bought a security at a high price, you were buying value, but no more.

    Don’t get suckered by this high market, you’ll lose.

    A house in my area is priced at 675,000 dollars. It is nowhere near worth that much. No takers in over three years.

    Real estate is at the bust point. There is no escaping the bloodbath coming. It can’t be done.

  16. Santalum October 5, 2006 6:47 am

    Wheat at 10 year highs, corn set to rocket, rice ready to rise - which ever way you look at it, inflation in staple food commodity values is here and it has the risk of evolving to hyperinflationary in nature. Forget oil and gas prices, for the job will be most definately finished with expensive food. The animal protein market is about to face its greatest challenge - hyperinflation of feedstock inputs and a mountain of cheap and largely substitutable vegetable proteins. Respect the agricultural commodities.

  17. Santalum October 5, 2006 6:48 am

    The future of food is evolving but nowhere near fast enough. http://www.australianuts.com Energy and water rationalisation will shape what we eat in the future.

  18. zephyr October 5, 2006 6:51 am

    Just an update, I spoke to Jason Bermas at Loosechange.com…the 3 young men who made a 911 video. Here it is, boys. March on DC Sept 11, 2007. I think that’s enough time for everybody to adjust their schedules.

    Ed (aka: longshort) I’m doing my best to stick to the facts. If you don’t think everything I mentioned in post # 6 is related, you’re sadly mistaken.

    As you and muleskinner have just stated….there’s going to be a bloodbath. If things get as severe as many believe, I mean let’s face it…people on this web are talking about hoarding gold and other supplies, then what happened in New Orleans last year is going to be played out on a much larger scale. Why do you think the govt is building large holding areas throughout the country? Think they might be anticipating something? Hint: it isn’t a Texas Hodown!

    If this is a disaster in the making, nobody will be immune. The sooner we all realize that, the better.

  19. Administrator October 5, 2006 7:10 am

    Rich is right - #7 - money is the puppet master behind both parties, and this is what Dave Stratman means when he talks about a dictatorship of the wealthy. How do we break the stranglehold? Keep thinking…

    Zephyr, can you give us some web references to the holding areas that the government is building? I saw one a while back, but I can’t find it now.

    After the huge rally yesterday, the Dow is down ten, and they’re buying the dip.

  20. zephyr October 5, 2006 7:14 am

    Michael, give me some time to find the references….gotta meet the old lady for lunch…..peace, guys!

  21. Marc Authier October 5, 2006 7:33 am

    What can you say? It stinks. The strategy is to find assets unrelated to the stock market, the financial system or crooks like Golman Sachs or JP Morgan. Find assets also that are not leveraged by financial bubbles and monster credit, that will soar when this stupid World CON game stops. Anyways in this context, oil and energy stocks are a screaming buy today, thanks to all the hedge fund fools at Amaranth and company.

  22. Rich October 5, 2006 7:46 am

    Hey zephyr.

    Queen Victoria was a tiny bald woman??!

    Cheers Rich

  23. Ed (aka longshort) October 5, 2006 7:46 am

    Marc: Do you think the oil stocks will be pulled down in sympathy with a market correction? Or are they about as low as they can go with such depressed PEs? I’ve been thinking about loading up on them, but am cautious because of the impending crash…..

  24. Rich October 5, 2006 7:48 am

    Here’s a little online test for everyone, I think we should all take it and then post our results!!


    Cheers Rich

  25. Administrator October 5, 2006 7:54 am

    Rich - I am a libertarian. 100% on personal issues, 80% on economic issues. My two maybes were:

    End government barriers to international free trade

    Let people control their own retirement; privatize Social Security

    Those are a little complicated.

  26. Chris K. October 5, 2006 7:58 am

    Interesting comments but a few days ago it was all about the coming equity correction. So who knows in these MANIPULATED markets? It’s anyone’s guess unless you are amongst the “in crowd” [Counterparty Risk Management Group, Exchange Stabilization Fund, Fed, Gold Cartel to mention a few] and then trade for your own account. My take - stick with Silver Eagles or other silver bullion coins. Even though silver is manipulated as much as anything, eventually (probably sooner) physical shortages will materialize, and silver is used in almost everything. The key is PHYSICAL SILVER - definitely not futures.

  27. Rich October 5, 2006 7:58 am

    Hey Michael,

    me too, 100% libertarian. I did vote for some welfare though. You can’t use charity to look after everybody, society needs to correctly identify who really does need help and then help them.

    There was a lot missing from the quiz that would move me a bit further around the political spectrum, but its a reasonable indicator.

    Hey Kassel, where do you end up on the grid?

    Cheers Rich

  28. Nolan October 5, 2006 7:59 am

    Words from a seasoned trader written for 10/5/06:

    Daily Forex Commentary
    By Jack Crooks

    Key News
    - Retail sales in the dozen nations sharing the euro rose for a sixth month in September. (Bloomberg)

    OPEC has agreed informally on the need to cut output by at least 1 million barrels a day to keep the price of its crudes above $50-$55. (FT)

    Bank of Japan Deputy Governor Toshiro Muto said he had no preset idea about the timing of the central bank’s next interest rate increase, adding that future policy moves would be made gradually. (Reuters)

    The current fast pace of world economic growth may be unsustainable, but expansion in Europe and emerging markets is likely to offset a US slowdown, the head of the Bank for International Settlements said on Wednesday. (Reuters)

    Key Reports (WSJ)
    8:30am Initial Jobless Claims: For the week of September 30: Previous -6K. 10:00am DJ-BTMU Business Barometer. For the week of September 23. Previous: -0.9%. 7:00am BOE Rate Announcement 7:45am ECB Rate Announcement

    “To-morrow, and to-morrow, and to-morrow, Creeps in this petty pace from day to day, To the last syllable of recorded time; And all our yesterdays have lighted fools The way to dusty death. Out, out, brief candle! Life’s but a walking shadow; a poor player, That struts and frets his hour upon the stage, And then is heard no more: it is a tale Told by an idiot, full of sound and fury, Signifying nothing.” - From Macbeth

    FX Trading - dawg-mat-ik rambling

    1. Relating to, characteristic of, or resulting from dogma.
    2. Characterized by an authoritative, arrogant assertion of unproved or unprovable principles.

    What comes to mind…
    · Global warming
    · Peak oil
    · Commodities bull market
    · Dollar bear market

    We need to have conviction (a firm belief) to hold an investment position-is it the same as being dogmatic?

    But to survive in leveraged markets we also need to be open and flexible-and be able to jettison our “views” when events or price action proves us wrong.

    However, I run across people everyday that can’t seem to shake their dogmas or convictions regardless of price action, or inconvenient truths.

    The market is wrong: Gold prices “have” to go up
    The market is wrong: There is no way the Dow “should” be making a new high
    The market is wrong: The dollar “must” fall because the deficit keeps growing
    The market is wrong: Doesn’t it know about “peak oil”?

    Well, maybe the market is wrong. And maybe all prices are flawed. After all, prices are set by market participants based on flawed future expectations-which are based on dogmas and convictions.

    A vicious circle of reason indeed! Is it any wonder why angst (a feeling of dread, anxiety, or anguish) is so prevalent among investors?

    It’s never easy. And we all get it wrong-way to often. We can’t abandon rational analysis [which is based in logical thinking which is marked by an orderly, logical, and aesthetically consistent relation of the parts] or we’d never invest/speculate/trade in the first place. We just need to understand that no matter how much conviction we have, events may prove us wrong.

    After all, not long ago, the world believed all swans were white; then the world discovered Australia-and a black swan.

    Black Swan offers a subscription-based currency advisory service for forex and futures traders.

    Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is president of Black Swan Capital, a currency and commodities market advisory firm - BlackSwanTrading.com

    For those who would care to read Crooks more often, you can go to the Asia Times:


    I have personally struggled with these issues for years and years. It is not easy. I can recall some of the great traders talking about the questions as well. Ed Seykota somehow found a way to turn off all of the inner voice chatter by making the issue strictly mechanical. He used computers for a long time and then graduated to more simple strategies.

    Linda Bradford Raschke talked about closing the door, turning off the radio and TV, and never listening to the talking heads, or any authority who presumed to know what the market or economy were going to do. Just stick with the program and if the market says it is going higher, follow the lead.

    Personally, I watch about 3 different indicators that have very good long term track records for defining the longer term trend. However, because I have been in this business so long, I do not trust these indicators either. So I look at the market’s “process” as a 4th way to qualify the move. I aluded to this once before. If in fact, the trend is up (or down) there should be ongoing proof of that fact. So that is my final indicator so to speak.

    After that, I simply trade accordingly.

    Can the market be wrong? I would say that the market’s ability to predict the economy is the issue in defining right or wrong. If the market is falling hard, and the economy follows to the downside, the market has been correct. If not, the market has failed.

    So go back and look at the last big sell-off, 2000-2003. Very nasty correction with the Nasdaq losing about 80% of its value. But the economy on a quarterly basis lost just 1/3 of 1%. How bad is that? Never in history has the market been so wrong.

    Even so, if you had followed the trend you could have made very good money. So does it matter whether or not the market is wrong? Perhaps not. And there is still the question of whether or not the market saw something that can still develop in the future. Perhaps the world central banks only managed to put off a serious collapse for a relatively short period of time. Won the battle so to speak, but will lose the war in the long run.

    I don’t know. Nobody does.

    All we can do is stay with the market. It is the market that makes the trader/investor the money. Not the economy. If you are in business the economy matters. If you are a trader/investor, only the market matters

    Happy trading.


  29. Sapiens October 5, 2006 8:00 am

    Libertarian; 80% Personal, 100% Economic.

    I think every male should serve a minimum military service.


  30. Rich October 5, 2006 8:00 am

    Hey Chris,

    Silver is a great call, I’m a believer. Some physical is always a good idea, as well as owning some SIL.

    Cheers Rich

  31. Turk October 5, 2006 8:53 am

    It seems that indecision and mixed signals are continuing to be the flavor of the month. The inverted yield curve has been sustained for over three months. This one thing has never failed to preceed a recession. Will the recession bring down the dow? You bet. Inflation is a real problem. What is a fed to do? Basically, not much has changed since June. Cash has floated around looking for a place to perch. The rampant uncertainty will continue until the real bull sector begins to move higher, consistently, and that will once again be commodities. The U.S. in a moderate recession will not stop the overseas markets need and greed to buy all the commodities they can. These will be strategic moves to stockpile materials, not necessarily rooted in current market needs. The U.S. consumers lack of spending during a recession won’t matter for a long while as the Chinese and others already have humongous cash positions. The lack of consumer spending during a recession will eventually effect those who manufacture our goods and they will begin to think about the best way to maintain the wealth we have sent them, until new markets for their goods come to life. I think by the end of 07 we will see all of the metals and many other commodities explode into new prices no one will believe. There will be strategic stockpiling of many commodities and watch for stockpiling of rare earth materials needed for technology by those willing to pay the prices. Unless someone is an extremely savvy trader, (I am not), I would say put cash into commodities now and sit and wait for within the next three years you will be greatly rewarded. The giddiness of the stock market today is a flash and will hurt those who think it will be sustained for any length of time, beyond the end of this year.

  32. ronandreas October 5, 2006 9:01 am

    Excellent points Nolan.I find it hard to imagine stocks going up right through a recession though. Some analysts think we may already be in one.???
    Has anyone done a recent risk/reward analysis on wheat and corn acreage? Diversification is good.
    Iv’e done a quick internet research on R.E. and found that SFHs in some Mich., Wis.,and Ill. markets are already value priced. Especially just above the median priced homes. Currently someone in a market that has not fallen yet could relocate to Benton Harbor(on Lake Michigan) for example and eliminate downside risk and or lock in gains.

  33. Read this October 5, 2006 9:21 am

    I found this article to be quite disturbing, so I’ll share it with you and hopefully you’ll see that all this talk about the economy means very little in the overal scheme of things:


  34. El Ancieno October 5, 2006 9:44 am

    “March on Washington”, huh? This ain’t the 1960’s, and nobody here is Martin Luther King. Before marching, you might want to look up the Bonus Marchers of the 1930’s, and what happened to them.

  35. Rich October 5, 2006 9:56 am

    When the Iraq war was getting started we experienced the biggest demonstrations against war that the planet has ever seen. People power was huge, and yet nothing happened. The media barely reported it.

    So, it seems that getting people on the street is not the thing that’s needed, getting the message in the media is the key.

    Americans spend 5 hours a day in front of the TV, so we don’t want people to turn off the telly and think, we want them to watch the RIGHT message and then ACT.


  36. Sapiens October 5, 2006 9:57 am

    Read This,

    It is expected, Thomas Jefferson called it more than 300 years ago.

    Unfortunatelly all awakenings are painful, we will have to go back and fight to defend our Natural Rights.

    Too bad you will be called an “enemy combatant” or terrorist.


  37. Tango42red October 5, 2006 10:02 am

    If folks take a look at the 27 page Lending Guidelines put out by the Federal Reserve at the end of last month, one can only come to the following conclusion;
    1) regulated lenders such as CFC,WM,WFC will no longer be players in the market.
    2)stated income loans all but vanish.
    3)pay option ARMS will be gone.
    4)increased downward pressure on prices in So.Ca. and other hot markets.
    5)Inventories will continue to rise.
    6)smaller pool of eligible buyers + less credit = higher foreclosures rate.
    To strengthen my argument I would offer this Head line from the Massachusett’s Sentinel “State Targeting Abusive Lenders” The Housing market, for now “Tag it & Bag it.” Tango

  38. ronandreas October 5, 2006 10:07 am

    How will you be going about tagging and bagging? Just curious.

  39. Atash October 5, 2006 10:18 am

    If interest rates are low compared to the rate of inflation, then people are apt to borrow money with dreams of “investing” it at a profit. They aren’t really investing it, especially not in overpriced stocks whose yields are low or more likely zero, and not in houses that are use assets not real “investments”.

    But in any case it is possible that they borrow money to bid up the price of assets–without respect to yields, hoping for capital gains.

    Why didn’t this happen in the early 1970s? Because a lot of the new money bid up the price of consumer goods. For some reason, inflation bidding up consumer goods makes people think they are poor, while inflation bidding up assets makes people think they are rich!

    The dangerous thing for the central economic planners are the inflationary feedback loops. The expectation of inflation creates an incentive to dump currency as fast as possible, causing a self-reinforcing feedback loop. The currency has no intrinsic value! The central economic planners of the 1950s and 1960s failed to account for this, which is why their schemes nearly collapsed into hyperinflation in the 1970s.

    One of the steps they took was to get agreements with the House of Saud (around 1974) to keep the price of petroleum as stable as possible in terms of $US. As long as the $$ were tradeable for a tangible commodity, the $$ was on a de-facto “petroleum standard”. As long as the princes got their catamites and cocaine, they were willing to play this game, at the expense of their subjects’ collapsing standard of living.

    Another step was to fiddle with the way that inflation was officially recognized, in part to prevent the “expectation of inflation feedback loop”, and also to contain the COLAs which exacerbate spending on certain so-called “entitlements”. Social security payments seem to be worth less in terms of relative purchasing power, than they were several decades ago. While the federal bureaucracy seems to have lost all fiscal discipline, at least some spending contained automatic starvation mechanisms through inflation and broken COLA mechanisms that were not keeping up. More of the spending seems to be allocated to off-budget “shock and awe” tools for dealing with uncooperative colonies of the shadow empire. Keeping it off-budget enhances the illusion of disinflation.

    Then interest rates could be lowered. This had the paradoxical effect of making US debt more attractive to foreign investors, because along with the bogus CPI numbers it created the illusion of disinflation. The flood of new debt financed the purchase of foreign-made goods (and now even services such as the Indian labs who develop the X-rays and send their opinions back to the hospital) which helped keep consumer price inflation under control.

    Unlike in the 1970s, we don’t notice inflation in the USA when new money just overflows our own economy (especially after the closing of the last vestiges of the gold standard, after which foreign businesses abruptly stopped accepting $$), but rather, when it overflows the whole world’s economy. It appears to have finally started doing that when global commodity prices started taking off in earnest.

    To contain that trend, which was threatening global price inflation, short-term interest rates were raised to create the illusion of “doing something about it”. But long-term rates have hardly budged!! That’s because debt was being surreptitiously monetized on the long end of the curve. That’s how the housing bubble lasted so long; mortgage rates just weren’t going up significantly.

    However, politically-connected institutions that make their money borrowing short and lending long do not prosper indefinitely under flat-to-inverted yield curves–especially with significant real inflation. Ergo the status quo can not hold.

    Higher long-term rates are also problematic; they could play out in a “revenge of Harry Figgy” scenario, where rolling over long-term debt causes accumulated public and private debt to snowball out of control. My guess would be that an excuse will be found to lower short-term interest rates again–perhaps for an ostensibly mild recession with political fallout minimized as much as possible.

    I do not know how it unwinds over time, but my feeling is that the important thing is to consider what the underlying motives of the central planners is. While they are content to pump the economy around election times, their overall goal is not to make sure that everybody has a house and a decent-paying job!

    In the mean time, the counter-strategy of “the little guy” would seem to be to live in squalor, avoid debt, and accumulate and hoard assets with intrinsic value. Falling yields make traditional investments unattractive, regardless of potential (if you sell out before the fin de bubble) capital gains. Hoarded uninvested assets have the advantage of not being tax-magnets until sold (when there is a potential massive bogus capital gain in terms of the depreciating national currency).

    Sapiens, I believe you might be needing this:


  40. Nolan October 5, 2006 10:22 am

    Indeed, the risk is great. But check out this article today:


    The generals themselves are pointing out the futility of the regime’s modus operandi. The generals themselves! Over and over again. This does not seem to end. So how long can a frightened public, that continually takes the bait (believes the propaganda), believe the “misguided” conclusions of the administration? How soon before the public turns? There are tilting points and at some point, the entire facade can come crashing down.

    Right now people continue to believe the nonsense being claimed over and over again. They want to believe the propaganda, even still, because they still feel helpless as a result of being told over and over and over again that those terrorists want to kill us and are trying to do so each and every day all over the world and even here in America. Believing the lies and nonsense in my judgment is primitive behavior, reptilian thought. Don’t think, just fight or flight. Crush them. Kill them. Quick! Quick!! And that is what we are being told we need to do over and over again.

    So along comes another general who says that not only is this counterproductive, it is dangerous and is leading to bigger and bigger problems. Do you recall that the administration did not even want the NY Times to use the word, “insurectionist”? Nor did (do) they want to hear about “civil war”. Why not? Because using words like that suggest that the so-called enemies are not ghastly monsters lurking about ready to kill us at any turn.

    In today’s WSJ there is an article about how our kids are trying to deal with hatred from abroad. It seems that the kids are thinking of studying the Iranian revolution of 1979 instead of the French revolution of 1789. Imagine if some of them started to study Arabic rather than French. The kids want to understand the cultures that supposedly constitute the threats to the US. They are asking questions. They want to know why their contemporaries overseas hate the US. This is “trouble with a capital T”. Sooner or later these kids are going to get some answers. And that is not good for the US regime.

    So why does a “government of the people” continue to spew all the sludge and waste material? Control. It is all about control, domination, and exploitation. These people who continually talk about the terrorist wanting to hurt us are themselves constantly doing things to hurt us. The record is miles long. You have to ask yourself who besides the elites are not being hurt. Reminds me of those great moralists like William Bennett, Rush Limbaugh, and what’s his name? Oh, yeah, Mark Foley. A gambler, an addict, and a pervert. Those are the folks who liked to preach to us. And the list goes on and on.

    The kids do not have a big stake in this yet. They are much more likely to see the truth. All we have to do is point out the obvious. And note why and how the strategies, practices, and policies of the regime are dangerous. Hey, even the generals are doing this. Over and over again. And the old time conservatives, the grand old guard, are doing more and more of the same.

    Things take time. We have to understand that. Sure it is dangerous. Sure things could get really ugly. In fact things are very ugly already in some places. But there is change in the wind every day.

    So we need to keep calm and tell the truth. And we need to point out the risks of believing the lies and propaganda. Follow the money. Ask who is benefitting from this garbage. And look at the behavior. “By their works will you know them.” The regime does not care about Iraqis. The regime does not care about workers. The regime does not care about the elderly. The regime does not care about children in schools. The regime does not care about the blind and disabled and the poor and the needy. The regime does not care about the soldiers in Iraq or Afghanistan or in the verterans’ hospitals. Check these things out. Again look at their works and not their words. And finally it becomes obvious that the regime does not care about us.

    And the truth will keep us free. The truth is being told.


  41. Ed (aka longshort) October 5, 2006 10:46 am

    When the Federall Reserve Chariman, Helicopter Ben, says it’s different this time around, you know the golden goose is cooked. To quote,

    “Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come….”

    Whoa….where & when have we heard this kind of nonsense before?

    (For an excellent discussion of inverted interest rates, click here: http://www.lewrockwell.com/north/north480.html)

  42. Sapiens October 5, 2006 10:49 am

    Atash, did my time. Thanks anyways. And yes, you can call me Sir!


  43. stevo October 5, 2006 11:05 am

    While the Dow’s new high may be phony, there are still sufficient reasons to be bullish re US equities.

    1) The dollar is trying to bottom.
    2) The gold bugs got their backs broken (again).
    3) The world is awash in stocks of light crude.
    4) The CRB has swooned.
    5) Current earnings yield on the SP500 is 5.59%, as compared to 90 day T-bills at around 4.8% (positive good — negative bad).
    6) At EOM October, Standard & Poors forecast the earnings of the 500 to be $81.10 for 2006. Capitalizing this forecast at 10 year govs gives an equilibrium price of 1752 for the index compared to the month end actual of 1338.88 (30.9% below equilibrium).
    7) Money will be invested somewhere. It’s presently coming out of commodities to go… At EOM October, the S7P 500 total yield (earnings plus dividend) was 1.56 times the 90 day T-bill risk-free rate. That’s generally a good enough spread to support stocks.
    8) Edwards & Magee said not to anticipate trends. Where in heaven’s name on the attached chart is any indication of a downtrend forming since November 2005?

  44. Sapiens October 5, 2006 11:05 am

    Hey Atash,

    Answer something for me, given the present conditions where do you think gold will be priced per oz. once the crash occurs?


  45. zephyr October 5, 2006 11:05 am

    Nolan, post # 40 God bless you….this is what I’m talking about.
    Rich post #35 I work in the media…they’re pretty much controlled by the same big businesses. Jason Bermas from Loosechange was at groundzero on Sept 11 this year. Our media…barely a peep….Mexico gave his group front page attention. You want to get the media….you have to do Tiananmen Square type shit. Yes, I’m serious. Failure the first time doesn’t mean failure forever. If that were true this country wouldn’t exist.
    Sapiens post #36 right on the money, everybody would be well served to read some of Thomas Jefferson’s quotes.
    Finally El Ancieno post #34 That’s the spirit. Hey, why don’t you send me your mailing address. Since you’re assuming the position already, I’ll mail you a jar of vaseline!!

  46. Simian October 5, 2006 11:42 am

    Rich - #35 - I’m down with you, brother. But what is the action to take? Everyone sees the problem, but we’re all banging our heads against the wall when it comes to action.

    What action do we take. Not just Rich - everyone???

  47. Atash October 5, 2006 12:03 pm

    >>Atash, did my time. Thanks anyways. And yes, you can call me Sir!

    It’s also a re-enlistment form. And it will work for your descendents too, Sir.

    >>Answer something for me, given the present conditions where do you think gold will be priced per oz. once the crash occurs?

    At your service. I am sorry that I can not give you a definite answer, due to both the question and the nature of chaos.

    I don’t know that a “crash” per se is going to happen. If the status quo were to unwind in a hyperinflation, then it’s hard to measure the price of anything in terms of currency (infinite?). Think of gold as “the money of last resort”. It’s not fungible now, but it is a store of value. If it is physical gold (not comex leprauchan gold) then it does not go “poof” and disappear during a cascading default. Over long enough periods of time, gold rises indefinitely against fiat currencies until their final demise.

    A 1970s-style “stealth bear”, in which assets decline relative to inflation, is another matter. I think that scenario is quite likely.

    I am not expecting $20 gold anytime soon. The deflationists have been wrong for 36-some years now. The current pullback is temporary, and I bet against it.

    Keep in mind that the “inflation deflation” debate is a false dichotomy. It is quite possible for illiquidity to happen simultaneously with inflation. The argentine peso was devalued 40% over a matter of days–while the banks were all closed and average Argentinos had no cash to try to dump, to give the global elites a fighting chance.

    Anyone who DID have cash in foreign banks, denominated in harder currencies, was able to go on a shopping spree and buy up assets at a deep discount. But milk for the babies soared in price. Simultaneous asset deflation and consumer product inflation. Priorities shifted because desperate people couldn’t eat apartment buildings.

    The same thing happened in Weimar Germany, when the German bus-boy bought the hotel where he worked for his 20-mark gold coin.

    Hmmm…there seems to be trouble in Eastern Europe these days. Inflation running ahead of economic growth, and lots of debt and speculation.

  48. Dave Stratman October 5, 2006 12:09 pm

    I think Nolan is right on the money here:

    “So we need to keep calm and tell the truth. And we need to point out the risks of believing the lies and propaganda…Ask who is benefitting from this garbage….Again look at their works and not their words. And finally it becomes obvious that the regime does not care about us.”

    The reason the media lie to us so much is because teh truth is so powerful and most people would not put up with the crap is they understood what is happening. But more and more people do understand it. Look at this excellent piece today, “Awaiting the Rebellion,” http://www.lewrockwell.com/reed/reed110.html

    The forces of rebellion are building. Spreading the truth–about the war, about 9/11, about the economy–is the key to challenging the sociopaths.

  49. Sapiens October 5, 2006 12:13 pm

    Thanks Atash, it was more than I expected. Pleasantly surprised I must say.


  50. Gemstocks October 5, 2006 12:42 pm

    Bank of France blamed for gold sell off


    They gave me a buying oppertunity.

  51. muleskinner October 5, 2006 1:55 pm

    The DOW

    Maybe it isn’t bull at all, just an onery cow on the rampage. Watch out.

    At one time there was a publication called the Duck Book, kind of a right wing magazine. It just came into my hands through the grape vine. Didn’t really know what it was all about.

    I read about the Swiss Army in it. The king of Switzerland was approached by the Kaiser of Germany. The Kaiser axed the Swiss leader what he would do if he would march a million man army through Switzerland. Swizterland had a 500,000 man army. The King of Switzerland said to the Kaiser, “Each man will shoot twice.”

    The Swiss are neutral, the best way to be.

    A well-regulated militia is going to scare the bejesus out of the US gov. Where is this all going? I dunno.

    The Vietnam War ended terribly. “Abandon all ships” There were many protests on US installations. The enlisted men deserted by some 65,000, maybe as many as 342,000 deserted. I’ve read those numbers.

    You don’t have to lift a finger. Iraq is wearing thin for the enlisted personnel over there. Mutiny is on the horizon. At some point, a critical mass of dissent among the ranks of regular army will accomplish an end to the war in Iraq and an end to the militarism that has become rampant here in the good old US of A.

    It can’t continue as such. It won’t go on like it is much longer. That is the hard reality. It is the forthcoming zeitgeist.

    “If foresight were only as good as forethought” - Napoleon

    The irrepressible force will meet the immovable object.

    The Bush Cabal stands to lose the most. They will. The ‘Republicans’ have lost it all.

  52. surfdude October 5, 2006 2:21 pm

    If the truth really got out, people will finally understood that the whole game is rigged. Our wealth is slowly being confiscated and our freedoms slowly taken away. Then the whole thing will come crashing down. Think about it… during the ensuing massive civil unrest, no one will go to work for worthless dollars. Therefore, there will not be enough food and other basic needs to sustain life. Grocery stores will be immediately looted, there will be no trips to the grocery store to pick up fresh veggies, steaks - or baby formula. People will do drastic things when they are hungry and watching their children slowly starve. Remember New Orleans? What if that happens nationwide, even world wide. Who would bring order to the chaos?

    The fear I have is that the coming storm is going to lead to such a scenario. We are too far gone - they have kept this Ponzi scheme going for too long. I think that most people deep down know this, but try hard not to think about it. They prefer to live for today, and satisfy their materialistic desires by going deeper into debt and drowning there fears with fresh consumption at the malls.

    Most people are taught that it is an admirable quality to “look at the glass half full” instead of half empty. However, not when survival is a stake. But I must admit, sometimes I wish that just for a day or so, I could have the attitude of a young child who looks at the world full of optimism and opportunity. But once you are aware of what’s really happening, you cannot erase it from your conscious.

    Know what I mean?

  53. Ed (aka longshort) October 5, 2006 2:50 pm

    Stevo, thanks for the refreshing bull comments. I welcome the debate. In response to your post #43:

    1) The dollar is trying to bottom because Ben has held the money flow flat for a couple of quarters. How long can he keep this up? He’ll have to inject more liquidity into the market to get us out of the upcoming recession…

    2)The gold bugs got their back broken again…depends how you look at it - at the beginning of ‘06 it was at $540, now its at $570. And the only reson it hasn’t contined its climb from the $250 range that started at the beginning of the decade is becuase the central banks are dumping their gold to depress prices.

    3) The world is awash in light crude….well the crack spread is the lowest its ever been. Do we really have excess supply or is the gasoline market being manipulated? In 1999 oil was $19.59, now its $60….hmmmmmm

    4) CRB has swooned because it was out of wack, just like the current equity market is.

    5 & 7)S&P 500 yields - you are including earnings, which isn’t a fair comparison against T-bills - its like talking apples and oranges. The only fair comparison would be dividends against yield. You can’t bank earnings - but you can bank dividends and T-bill yields. As you know, the majority of earnings are used in stock buybacks, stock options, capital investment, etc - earnings don’t end up in the investor’s pocket - that is a market fallacy - they end up in CEO’s pockets.

    6)I don’t understand this analysis - can you please elaborate.

    7) This chart didn’t show any down trend either, did it?

  54. Brian Ciara October 5, 2006 2:57 pm

    The storm is coming! It won’t just be a storm but a #5 hurricane. The new world order has long planned and executed the disaster to come…this is just a way to drastically decrease the wealth of the masses in order to further control and carry out the agenda.

    The only thing there will be to save oneself will be the purchase of physical gold and silver. Buy it, pay for it in cash and keep it your possession. There’s not a lot of time left especially at these low prices. Buy now and hold on to it…because the next 2 to 4 years will allow you to greatly profit allowing you to buy bargains.

    History always repeats itself, although this time around it will be beyond anything you could have ever imagined…

    And may God bless the antichrists >

  55. Turk October 5, 2006 3:42 pm

    You religious types are always fatalists. That is part of the problem with this world. Fatalists don’t want to take a deep look into any problem to learn how it might be fixed or made better. You are just along for the ride with your mythological beliefs. The same logic GW uses and the same logic Iran and the homicide bombers use.

  56. zephyr October 5, 2006 3:43 pm

    Simian, what action do we take? Something drastic. Communicate….have a national or partial don’t show up for work day. Impossible? Godammit! It happens in what we call 3rd world countries. It has happened in Europe when they’re pissed off about something. Are we so lazy, complacent or just too damned afraid to do something real in this so-called beacon to the rest of the world? Here’s a start, a march on DC on Sepr 11, 2007 is in the works. But in the meantime, ever here of civil disobediance on a mass scale? Maybe I’m wrong, maybe we don’t have the balls as a people to do anything but gripe!

  57. dan desoto October 5, 2006 3:44 pm

    Re: real estate

    HUD does not know how many properties it owns, or their value.
    Notice how Fannie and Freddie are out of the news all of a sudden? Anyone who believes that these problems have been anything but papered over, raise your hand. The person whose hand is raised the highest wins.
    P.S. The tallest nail is usually hit first.

  58. Dollarfocus October 5, 2006 4:16 pm

    Ed (aka says:

    In 1999, the average home price was $170K. In 2006 it is $260K.

    In 1999 M3 was around 6000, now its north of 12,000

    That says home prices are DOWN 24% in 1999 dollars.

    If we focus on the current value of the dollar in everything we say, and it’s bad enough. But if Ed is right in his numbers, a bubble in house prices it’s not. That does noot mean we will not see a crash in property. If no one wants houses, or cannot afford to buy houses, house prices will crash. In other words you don’t need a bubble to get a crash. It’s all supply and demand.

  59. surfdude October 5, 2006 4:18 pm

    Turk said “You religious types are always fatalists.” post #55

    Turk - here’s what you don’t understand. Religious people believe that Biblical text is truth, and that man will always screw things up when he rejects truth and goes for lies. Secularists reject true money (gold) and impose their Fiat money.

    Sure we’re fatalists - look where those who reject honest money have brought us.

  60. Ed (aka longshort) October 5, 2006 4:44 pm

    Dollarfocus - post #58 - Although housing has nearly doubled from 1999 to 2006, real wages have grown a paltry 4% annually at best (for the richest of the rich). Check it out:


    Inflations kills wages and income, yet it creates asset bubbles that pop, otherwise coined Ka-Poom theory:


    These asset bubbles percolated thru the NASDAQ and into housing which noone can afford and now they’re trying to get back into the mainstream equities, aka the DOW…..but me thinks it won’t happen this time. POP!

    BTW, how did ‘antichrist’ make it into an investment blog?

  61. turk October 5, 2006 4:59 pm

    Your idea of honest money is wrapped in the mythology of times from long ago. Sure, gold and silver are ‘precious’ and still thought of as money by most average people, however, as much as everyone maligns the current system, modern commerce would not work without it. You should ask yourself “what might have been if the modern system of credit and money never came into existence? Do you think the average family would have ever been able to acheive sending their children to college or own their own home if we all had to grovel for bits of gold and silver? I think not. Its not perfect and I am sure there is some truth to some of the conspiracies that have become widely dispersed on the web but, to simply say ‘what will be will be, because it has been fortold’ is the easy way to let your mind depart from responsibility to help make things better.

  62. muleskinner October 5, 2006 5:03 pm

    I use the user name of ‘muleskinner’ from the movie ‘Little Big Man.’

    Custer looked at Jack Crab and determined his occupation as a muleskinner.

    “Hire the muleskinner” - George Armstrong Custer

    “I had him” - Jack Crab, referring to George just before he went into the valley of the Little Big Horn

    Custer looked like a pin cushion after the Sioux were finished with him.

    A great movie, a classic.

    When a cow catches up with a coyote that has been viciously trying to kill her calf, there is nothing left of the coyote. The mama cow grinds the coyote into the dirt.

    A mad cow can be a real life saver.

    The Republic can be saved from the clutches of the wiley coyote of a US government.

    They’re toast, really. No empire has ever survived the barbarians inside the gates.

  63. Dollarfocus October 5, 2006 5:18 pm

    Yes thanks Ed.

    Where do you get your M3 numbers of 6000 and 12000?

    Shadow Statistics say the current rate of increase is 9% pa, up from 8% when it became classified information. You have it doubling in seven years, which would take a steady 10.5% per annum, or otherwise a much higher than 9% now.

  64. Bill October 5, 2006 5:26 pm

    I would like to see the Fed Govt reissue social security cards with biometric information. Now we have rampant
    identity theft used to commit fraud and steal money
    from innocent people.

    A recent poll showed that 81% of the public likes the
    idea of a foto ID to combat voter fraud. My Video store
    demands to see mine even though they know me. And I
    don’t disagree with them, I want my account protected.

  65. Ed (aka longshort) October 5, 2006 5:45 pm

    Dollarfocus - thanks for the rate calculations: I was thinking to myself I’m being too loosey goosey and need to get more precise.

    I took the easy way out with M3 by trusting prudentbear’s website (do you have any gov’t data?): http://www.prudentbear.com/bc_chart_library.html

    I would like to hear your take on Ben’s current money tightening/interest rate control policy. IMHO, something’s gotta give - either liquidity or rate control - you can’t have your cake and eat it to.

  66. the stranger October 5, 2006 5:45 pm

    “And so, while the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit.”

    The New Yorker September 9, 2002 / Cartoon - Robert Mankoff

  67. Dollarfocus October 5, 2006 6:46 pm

    OK Ed. Short answer, my take is that Ben is doing much the opposite of what he seems to be doing.

    The Fed Fund rate is up an impressive 500% over two years, but how is that Treasury Bonds yields are not? Interest rates are at all all time low according to the market, but at a high 5.25% according to Ben. Which is it?

    I’m sure he understands your cake, but fully intends to both have it and eat it.

    All currencies rise and fall together as each country seeks to preserve its status quo in trade. So measuring the dollar against any other currency is futile.

    There is no Gold standard, or any other current standard against which to measure the dollar. I must say Gold is doing its job in that regard, but that’s controversial, and a case can be made either way, depending on unavailable data of (especially) US Gold holdings. Is it still 8000 tons, and if so why no audit?

    So it gets back to supply and demand IMhO. I think we can go back to 1996, the year government statistics all became falsified in a coordinated and strategic manner. If we could get an accurate absolute money supply number for 1996, using Shadow Government Statistics for the annual rate of change, we could plot the current dollar value based on M3, in 1996 terms, for each of the last ten years.

    Then we could re-plot every index using those 1996 dollars, and gain a better understanding of just what happened and is happening, in unmanipulated terms.


    A subscription site.

  68. Gemstocks October 5, 2006 6:54 pm

    “Bearish patterns are complete. Elliott wave counts are finished. Overbought readings are everywhere. If stock prices do not drop sharply over the next three weeks then stick a fork in Free Markets, because it means the Federal Reserve and other members of the Plunge Protection team have forgone their independence and are supporting this market for political purposes. Period.”


  69. nestor October 5, 2006 7:01 pm

    lol. ‘Elliott wave counts finished’.. lol.

    man. the bears are pathetic.

  70. Dollarfocus October 5, 2006 7:07 pm

    Ed, I had a look at your Prudentbear site, and must say I found them reliable in the past. I intend to do some analysis there, but also using Shadow Statistics. Maybe the seeds of the truth are emerging.

  71. the stranger October 5, 2006 7:12 pm

    Hey Alan, that’s the way I see the 401K as well and this latest surge will just keep everyone in; the average Joe gets slaughtered. Santalum (16) I think you’re correct with food commodities price inflation (you elaborated a blog or two back) this is severe and already rolling down the track, and with no media play to boot. Just one more hidden problem leading us to the storm ed, surfdude, muleskinner et al are rightly pointing to.

    Atash (39) bravo! And if I understand your last paragraph, the common man has little use for this current BS market. Nolan (40, 47) great truth – and glad to read your take on the “inflation deflation debate as a false dichotomy” almost everything I read is either or.

    read this, the Fatal Vision is very dark indeed. And that’s the main point, isn’t it – ominous signs in every direction. This market is just a second rate prime time mini-series, that in-and-of-itself is a fatal distraction.

  72. Administrator October 5, 2006 10:31 pm

    A new one!

    Gridlock 2006


  73. Atash October 5, 2006 10:45 pm

    Thank you, Stranger.

    >>And if I understand your last paragraph, the common man has little use for this current BS market.

    I think it is very dangerous for him. Nobody should invest before he has savings, and nobody should invest what he can not afford to lose. Ultimately, assets have been bid up using borrowed money, and the yields have correspondingly been bid down well below going interest rates. This can not end well.

    >>And glad to read your take on the “inflation deflation debate as a false dichotomy” almost everything I read is either or.

    Note my handle with its Zoroastrian connections. “Eastern” philosophies seems less likely to fall for false dichotomies than “Western”, which are partly based on Aristotelian binary logic.

    The reason I fear the possibility of both inflation and illiquidity simultaneously is that the net creation and destruction of tradable units on ledgers is irrelevent. The question is where are they created, and where are they destroyed. Chances are, the new money is not created in your or my bank accounts!!

    Keeping the economy liquid through, say, government deficit spending, does not help my business, if neither I nor my debtor are government contractors. It is not as if the fed liquifies the economy by putting some cash into MY personal account!! Government monetizing of debt won’t prevent one of my debtors from defaulting on me, because the government isn’t going to buy it off MY hands.

    This is a bit rinky-dink but it’s something I wrote to warn Joe Sixpack away from debt:


  74. Dr Jane Karlsson October 6, 2006 3:39 am

    Nolan, #40: yes indeed, the truth is being told. Here is some more truth: our leaders are paralysed with fear because they expected new technology to save the world and it isn’t working.

    Tony Blair believed that by now, half our diseases would be prevented and the other half cured, and we would be exporting the cures and getting very rich. I know some of the scientists who told him that.

  75. Adam October 6, 2006 5:08 am

    I can’t believe anyone is giving Jason Bermas and his “Loosechange” friends the time of day. As an architect I’m insulted at his ameature attempt to show the downing of the twin towers through controlled explosions. Their film is not credible and doesn’t deserve media attention.

  76. Sapiens October 6, 2006 5:55 am

    Atash Says:
    October 5th, 2006 at 10:45 pm

    The reason I fear the possibility of both inflation and illiquidity simultaneously is that the net creation and destruction of tradable units on ledgers is irrelevent. The question is where are they created, and where are they destroyed. Chances are, the new money is not created in your or my bank accounts!!

    There are two parts to this, one is credit expansion and the other is monetization. On the first part, banks through fractional reserve banking expand the overall agregate, the movement of this additional agregate is acomplised through checks or electronic transfers (i,e. debit card, credit cards; the second part is the actual physical printing of cash. Illiquidity happens when the fractional expansioned money loans are repudiated (defaulted), by lack of circulation (cash flow). The local circulation ceases by exporting the physical currency without bringing it back into circulation as reinvestment. (importing goods, currency kept abroad)

    Atash Says:
    October 5th, 2006 at 10:45 pm

    Keeping the economy liquid through, say, government deficit spending, does not help my business, if neither I nor my debtor are government contractors. It is not as if the fed liquifies the economy by putting some cash into MY personal account!! Government monetizing of debt won’t prevent one of my debtors from defaulting on me, because the government isn’t going to buy it off MY hands.

    It does help if the currency is not exported. But since we don’t “make” anything….


  77. ronandreas October 6, 2006 6:17 am

    I am insulted by PBS Frontline’s 9/11 dogma. Thier diagram supporting the pancake hipothesis didn’t even show the core structure. Poof it’s gone. We don’t have to take it into consideration. Thier recent Taliban show used similar dissembling tactics. The message: these people are so evil we can’t negotiate with or reach accord with them, they just want to destroy us. Just like the 9/11 dogma it has no basis in logic. How could they hope to destroy us? Where is thier strategy? How do they benefit? It’s obviously nonsense.The main diference between PBS and Loose Change is that PBS is government sponsored war mongering propaganda.

  78. stevo October 6, 2006 6:22 am

    Ed (aka longshort):

    In response to your post #53, please note the following.

    1) The dollar index is relative to the exchange value of other currencies. The Euro is underwritten by the economies of Germany and France, both of which have more serious structural problems than does the US. The Yen is subject to further difficulties stemming from the post-bubble collapse of corporate balance sheets. And who can believe any financial number reported by China? Yes, the dollar has its difficulties, but aside from precious metals, I don’t see any present viable currency alternative to the dollar.

    2) Fluctuations in the price of gold will never be more than speculative ventures (as opposed to investment ventures). Gold will never again be used as a currency unless the world payment system passes through a most cataclysmic debacle. The geopolitical consequences of such a debacle could easily see the overthrow of established order and a worldwide sojourn into Hobbes’ state of nature where life would be solitary, bruitish, and short. To think that one could rationally plan for such an occurrence while being physically located at the imploding epicenter is much like the three men in a tub (of nursery rhyme fame) floating in the center of the whorling maelstrom, discussing their plan for escape, just before the angry, vicious, unavoidable waves break over their pointed, little heads. In past times of nations in crisis, gold was confiscated and its holders were ofter shot. Gold has historically provided an excellent store of value to its owners as long as the crap (cosmic level) did not hit the fan.

    3) Of course the petro markets are manipulated. OPEC does this every day — that’s their raison d’etre! Oil prices will recede long-term, since aggregate demand will decrease from an impending recession in the world economy driver, the US.

    4) When the CRB gets too high (or too low) for too long, countervailing forces come into play and a turnabout occurs. Prices in a freely traded market will never rise as high as the moon, or sink as low as the abyss. That’s how contrarians make their money.

    5 & 7) Lots of statistics are compared against 90 day T-bills — this is considered the “risk free rate of return.” Ned Davis (of Ned Davis Research) developed a very useful market timing indicator by comparing the earnings yield of the SP500 against the T-bill yield. Over a 23 year test period, this model’s buy signals gave annualized returns of 14% while sell signals yielded a 17% return (vide Barron’s, 27 March 1989: 26.)

    There is a theoretical problem in my combining earnings yields with dividend yields to deribve a total return. That problem is the multiple employment employment of the same data — what statisticians call multicolinearity. However, Louis H. Bean, former chief economist of the US Dept. of Agriculture, agreed that this was double counting but stated that the technique was useful in smoothing out the violent swings in earnings and PER analyses over time (vide Bean, L. H., (1969). The art of forecasting. New York: Random House.

    Retained earnings should be employed to grow the firm — that’s where growth comes from. If a CEO pockets too much of the earnings, the firm’s growth will lag and the board of directors will not generally be happy.

    6) This analysis indicates how the market is currently capitalizing earnings. It is a rough and ready measure of fair market value. (Years ago, prices consistently fluctuated +/- 15% of the equilibrium price — but fluctuations are much wider in recent times.)

    7) I am not certain that the chart of the NASDAQ rise and fall accompanied by your statement “This chart didn’t show any down trend either, did it?” conveys the message you intended. I have no idea of what you attempting to assert.


  79. Sapiens October 6, 2006 7:04 am

    Well, it has begun:


    Nothing like bankruptcy for contraction to take effect.

    Brace yourselves!


  80. puffdippy October 6, 2006 9:05 am

    Too many bears out there. When you all get discouraged and either go golfing of flip to the long side then the market will drop. Very few will be there to short the market when it does drop. Cept me. I will be there.

  81. nestor. October 6, 2006 10:39 am

    man. the analysis is pretty pathetic on the part of the bears. this market is nowhere near the late 90’s. any comparison is simply in the mind of delusional individuals. very amaturish analysis.

  82. tz October 6, 2006 11:19 am

    I think I agree with the original sentiment, however the one thing missing is what could happen to indicate a top is in.

    The 1999 analogy is both good and bad. The dot-coms were provably bankruptcies waiting to happen, but they went up too - until they didn’t. Then crashed.

    The large fear is that 2006 is 1999 writ large. That the Dow and the economy is a dot-com provably bankrupt, but still going up because hedge funds and others keep buying the bullish line.

    The market can continue upwards for a long time in the face of horrible fundamentals. But not forever.

    I would also note that the SPX and NDX haven’t made new highs or are even near doing so, but the mid and small cap indexes at least have earlier and haven’t returned.

    Another note about the NASDAQ in 1999 is that it was market cap weighted, so seven companies, most who have never at that time paid a dividend were causing most of the rise. The DJIA is similarly thin (or maybe think the may high was like the jan-14-2000 high and the current high is like the nasdaq peak around mar-10-2000).

    Finally, the levels to which it will correct to aren’t moving. So instead of a 38% retracement, we might get a 50% or 62%. The NASDAQ was going from 2500-3000 then ascended. Then like icarus, it lost its wings and crashed and isn’t even back to that range.

    Short term, I have my trigger finger on exiting my shorts (I would have earlier except I am allowing for some flexibility in my positions). Medium term, I’m waiting for the divergences to catch up with the indexes - if this isn’t the top, we are probably near in time if not points. Longer term, the Dow will make a new low below the 7500 area - and maybe down to 3000.

  83. surfdude October 6, 2006 6:38 pm

    Sapiens (Post (79) Kara homes bankruptcy has been rumored for months. I have been following this very closely - you would not believe the lies and coverup that have been going on during this time. Several very big homebuilers live in my town, Kara Homes owner is one of them. The RE brokers laughed at the rumors - even though several (at one point 12) spot “spec” homes have been sitting on the market for over 2 years. Forget about the developments - these were homes that were purchased for over 1.5 mil and then knocked down, and 5,000sq ft homes were built. These guys fell over each other, buying every decent size lot that they could get their hands on. If you were in the market looking for a property, FORGET IT! They bought sight unseen the day it came on. Then the bulldozers came out. I can tell you this is only the first of more to come, if my little town is any indication. Realty Trac has 4 more of these bueaties in preforclosure - and they were built by other builders. One such builder is rumored to have been forced to cut a deal with Hovnanian, who picked up the properties. Of course that is being denied by the local brokers. But so was this bancruptcy.

    Just the tip of the iceburg I say.

  84. surfdude October 6, 2006 6:58 pm

    This just in from MSN Money:

    Ouch! Your house payment just doubled

    Big, fat surprises are ahead for about 20% of homeowners: Their complicated, often-risky adjustable mortgages are going to soar as introductory interest rates expire.

  85. anomonis October 6, 2006 9:04 pm

    Vote for St. Michael and get him to start lopping off them there snakes heads in the town square. That, I’m afraid, is the only solution.

    rich - you can’t stop digging yet you still have to get to the occult. there is the battlefield.

  86. dan desoto October 7, 2006 2:15 pm

    A standard comment today is that, since so many people are bearish, it won’t be so bad after all. It seems to me that a true contrarian position would be that it’s going to be much worse than you thought. I believe this is a true contrarian position vs. the things are going to be bad for awhile school.

  87. Brent Berry October 7, 2006 6:21 pm

    Edmund OShea Says:
    October 5th, 2006 at 6:16 am
    I also am a Bear. Instead of shorting… $5 cups of coffee.

    If commuters buy $5.00 coffee… How much is fuel??? $15.00 a gallon? Commoddities are still infantile.!!

  88. Brent Berry October 7, 2006 6:27 pm

    Here is a thought for us. Bubbles are fed on the by the massses. The smart money can’t live with out feeding them. One asks where does the moeny go when the hedge funds unravel? The obviuos..NATURAL RESOURCES….1970 - 1980 ring a bell, boomers?

  89. marketoracle.co.uk October 8, 2006 10:14 pm

    All the bears are in for a shock !

    The shock being that the odds are stacked in favour of the Dow trending higher due to the fact ‘they’ can and DO remove dog stocks and replace with stronger stocks, not only that but the way the index is constructed the higher performing in price terms have an disportionate effect then the lower performing stocks, regardless of market cap.

    so those betting against the Dow, will naturally in the long-run lose.

  90. El Ancieno October 9, 2006 2:38 pm

    It’s always funny how the reckless ones, who paint a big target on themselves, regard prudence as surrender. If you truly believe that Bush is Hitler reborn, then gathering a whole lot of like minded people into one place is foolish, indeed.

    By all means send some Vasalene to me. I use it to make good tinder-igniters for campfires…

  91. The Sad French October 10, 2006 10:20 pm

    As a Frenchman I read this blog, and cannot help myself wonder: I wish I could live in a country that has been growing as strongly as yours for the past…….I can’t even count anymore….50 years; where unemployment is at ridiculous lows of 4.5%, where top notch engineers and scientists from the rest of the world fight to immigrate, where hard working and risk taking mexicans are willing to loose their lives to get in, where a pair of journalists can topple a president….
    Come on Americans!!Give us a break, yes ! you are living in a bubble because you can’t appreciate what you have and how strong your economy and your systems are! Please, take a look at the rest of the world and only then start complaining about your success. Remember nor Bill Gates, nor Jeff Bezos, nor Steven Jobs or Michael Dell would have been able to make it in France………..and for that sake, not in Japan, nor in Germany …..not even in Canada. Have you ever wondered why?

  92. Bob October 11, 2006 12:56 am

    Well Frenchman, I feel compelled to ask why the French government can’t report an unemployment rate of say 4%? Saying it doesn’t make it true, but it seems to work well here is the US! I’ll bet France could throw one hell of a party, and create many a billionaire if you could get some hegemony going on, and then bury yourselves 9 trillion in debt. Just think how fantastic every thing would be if France could put on a good poker face and bullshit the rest of the world into subsidizing a trillion $ a year deficit float! Maybe France could crank up the printing presses, and then keep inflation at bay by lying about real inflation rates, along with importing deflation by exporting your manufacturing base to incredibly cheap labor market countries. You could keep the party going much longer by selling your ports, turnpikes, natural resources, and what ever else they want to buy with their trade surplus dollars. Just think of how many extremely well paid paper-trading jobs you could create if you produce 400 trillion in derivatives to play with, never mind that it all comes from thin air fiat crap debt money! There would be so much wealth in France that I’m quite sure you could attract millions of illegal aliens, and I’m sure all the world scientists would want to come too, after all who could refuse a party like that. The question is, where do you want to be when the party is over, and nobody wants to play your scam anymore? If you had a big enough military, you could say keep playing or die, and who could refuse logic like that?

  93. marketoracle.co.uk October 11, 2006 6:21 am

    The problem is that the party may not be over for another 50 years ;)

    Having watched the ‘debt mountain’ from the days of Reagonomics, there ALWAYS seems to have been a get out clause.

    Probably the FED knows, if the going gets tough, they can inflate their way out of the debt mountain.

  94. bp October 11, 2006 8:35 am

    hm, marketoracle.co.uk - the party is over right after we bomb Iran - the US is trying to gain control of the oil and natural gas reserves in the Middle East by destabilizing the present governments, establishing “lillypad” military bases in these countries and turning the oil and gas reserves over to corporate oil companies - won’t work - the pipelines will be too vunerable to sabatage, we can’t fight tribal wars, and we don’t listen to advice - go figure

  95. marketoracle.co.uk October 11, 2006 7:17 pm

    America cannot afford to go to war with Iran, regardless of the rhetoric.

    The consquences of war with iran would mean, a loss of some 20 million+ barrels per day as the iranians stop tankers going through the straits of hormuz, resulting in a worldwide economic collapse.

    Its all sabre rattling, the most probable outcome is America becoming more friendly with the Iranians, by putting pressure on Israel to make peace with the palestinians.

    Offcourse were talking 5 to 10 years down the road, plenty of pre-election sabre rattling in the meantime ;)

  96. The Sad French October 11, 2006 9:18 pm

    To Bob:
    You’ve got a couple of good points there.
    The issue is that here in Europe, we also keep printing money, selling assets, - we might not be financing a war- but be are subsidizing the hell out of everything ( from farmers, to unemployed, to alcoholics…) , we also increase our debt……..but no new businesses are created and our manufacturing base is also being exported…….(which incidentally it is very effective to lower the price of goods for consumers). Oh, we also try putting a good poker face - that is one area where our politicians are better than yours- ,but nobody believes us anyway.
    If you want me to agree that not everything is perfect in the US……..OK, I can admit to that. But please keep on doing what you do best, which is imagining new businesses, dreaming up new ideas and leading the economic world; and let the developing world take care of the minutiae of implementation.
    When and IF the “party” is over ( a subject which has been debated amongst economists for the past 70 years with no agreemen in sight), the US might get a hangover and will sober-it up on its own, but Europe will have to come to you begging for help.
    …you are not a Democrat by any chance? If your are , don’t worry, Bush will retire…..eventually, just be patient and enjoy what you have or move over to Sweden in the meantime;)

  97. nestor October 12, 2006 8:50 am

    damn. look at that. antoher phony new high. lol.

  98. Marc Authier October 27, 2006 3:04 pm

    Screw the Republicans. These liars were supposed to give the US and the world a small government. Instead of that the US economy looks more and more as the one of the Roman Empire or the USSR! Corrupted, overbloated, incompetent government with record debts and crazy spending. Bush is a jerk and a moron. And you know what? There is nothing shameful to be a Democrat when you think at the mess the Republicans will be leaving not just in Irak but in the US and the rest of the world.

  99. Administrator November 1, 2006 3:49 am

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