Latest Stock Market Outlook from Jim Rogers, Marc Faber, Richard Russell & More!

With the markets looking as turbulent as they've been in the past 15+ months, the financial gurus are out in full force. We've got links below to the latest commentary from our favorites - Jim Rogers, Marc Faber, Richard Russell, Bob Prechter, and more.

Also below are links to important investment trends that you should be keeping an eye on!

Richard Russell: Expect Downside Action in Stocks
If the May 7 lows are violated, look out below!

Why We Shorted the S&P 500 This Week
An update on our latest trade

Robert Prechter: These Technical Indicators Have Me Worried
These 8 "rarely" line up on the same side of the trade

Marc Faber's Outlook on China
There's a crash coming!

David Rosenberg's Latest on the Money Supply
What inflation? Wake me up in a few years.


Excellent Economic Outlook Analysis for US
David Galland Separates Economic Fact From Fiction


Gold Vending Machines in Abu Dhabi
More signs of a top!


Deflation is Alive and Well
So says the US dollar

The Outlook for Crude Oil
What do the technical indicators reveal?

Jim Rogers' Latest Thoughts on Euro and European Bailouts
Why he'd look at silver right now, too

Latest CPI Numbers
Still no inflation to be seen

Germany to Ban Naked Short Selling
Revealing charts on how that worked out for US, Australia

Marc Faber's 3 Favorite Commodity Picks
These picks may be tracing out a "historic low"

How to Differentiate an Inflation Induced Rally From a Normal Run-of-the-Mill Retracement

Just a retracement?

Or is the bull really back?

Maybe inflation?

Deflation Camp - Anyone Left?

Outside of a few lone voices, the deflation camp sure seems to be getting lonely. This is interesting, because the US markets have only now retraced 60% of their previous losses. An impressive rally, for sure, but still within the 38-62% "Fibonacci range" that is generally expected of retracements.

FWIW, the Great Depression retraced a little over 50% of its initial leg down - so we're ahead of the 1930 rally, but just by a bit.

It DOES feel like this rally has been going on forever - over 13 months old, it's sure been impressive in it's magnitude and duration. BUT, it is important to realize that nothing has been decided - at least yet - regarding whether this is a technical rally off of extremely oversold lows, or a brand new bender driven by trillions of new cash.

Viewed with 5 years of hindsight, the current rally looks a bit more "normal" than when you're living it day-to-day.

(Chart source: Yahoo Finance)

The Early Symptoms of Inflation?

What's tricky, though, is governments around the world ARE printing money as fast as they can. And the first symptoms of inflation typically show up in either asset prices, or commodity prices - or both.

Today, we've got asset prices rallying, with financial stocks leading the way - exactly the first place you'd expect to see this "new money" showing up. A lot of financial commentators I've heard recently - good ones too, not just CNBC talking heads - believe this rally is now being driven by newly printed money.

Personally I think it's too soon to tell - we've retraced 60%, not 100%, after all.

But, if we're trading short term, we...

Gotta Respect the 200-Day Moving Average

And revisiting the S&P chart once again, we are indeed still north of the 200-day moving average. Check out the last five years too - you could have done a lot worse than being long stocks when the S&P is trading above the average, and being short when it's below:

According to the 200-day SMA, you should ignore my calls for an impending decline. Instead, you'd set stops around this mark.

(Chart source: Yahoo finance)

So while I may continue to hoot and holler about the odds of a downturn far outweighing upside potential, to be honest, you should probably ignore me, and just respect your trailing stops!

And for more on the power of respecting the 200-day moving average, check out this excellent article from Steve Sjuggerud in Daily Wealth.

If Everything Tanks, What Would Hold Up?

Judging by the price action across the board last Friday - not too much...

Almost everything is getting kicked in the teeth today.

(Source: BarChart.com)

Crude oil and precious metals got taken to the woodshed along with stocks on Friday - no place to hide there.

One bright spot - actually I should say one dim but not dark spot - are the grains. They haven't rallied much this year to date, so there may not be much downside from here.

Grains, by the way, are still one of my favorite secular plays - I just think it's best to avoid them right now. If the Great Depression is a guide, then grains should lead the way out of the Greater Depression as they did last time around.

Some Deflationary Evidence: Two Revealing Charts of Consumer Credit Trends

Late last week, our good friend and fellow deflationist Carson sent over a link from Mish Shedlock's blog, reporting a sharp annualized decrease in consumer and revolving credit.

I just plotted the Fed's historical data since 1978 (which I chose because there was a single quarter anomaly in 1977 that I didn't feel like dealing with).

First, we see that consumer credit, as of February 2010, is decreasing at an annual rate of 5.5%:

Consumer credit, after trending positive YOY in January, is once again heading south.

Next we look at revolving credit, where the data is even uglier, both in current and historical terms. Revolving credit decreased at an annual rate of 13%:

Will this debt ever be paid off?

The sharp decline in revolving credit, which is defined as credit that does not have a fixed number of payments or payment schedule (think credit cards), would appear to support the debt deflation argument (of Robert Prechter, most notably) that much of the current debt outstanding is going to go unpaid.

So while the government has engaged in quantitative easing to "ease" the issuing of its own debt, it has not yet offered to print up some greenbacks to pay off the debt of American citizens.

Thus far, it appears Americans are still choking on their massive loads of accumulated debt, unwilling to take on more credit, no matter what the Fed does.

It will be interesting to see if the Fed is able to reverse these trends.

Though Maybe We Should Just Short American Stocks Right Now

What's the most damning future indicator for America's near term economic outlook?

How about the latest cover of Newsweek?

Uh oh!

PS: Hat tip to MarketFolly for the tip here.

PPS: If you're into contrary investment thinking, I'd HIGHLY recommend The Art of Contrary Thinking by Humphrey B. Neill, which I reviewed here (ironically the same week we interviewed MarketFolly for the blog too!)

Another Bernanke "Guru Moment" - An Instant Classic?

The man who proclaimed the subprime problem was "contained" in March 2007 (after which Jim Grant hilariously quipped "yeah, to planet earth") - is back in the news again with another "guru moment".

The Wall Street Journal reports:

The U.S. economy should continue to recover at a moderate pace this year, but it will take time to restore all the jobs lost during the recession, Federal Reserve Chairman Ben Bernanke said Wednesday.

In his latest assessment of the economy, Mr. Bernanke told a congressional committee the pace of the recovery this year will depend on if consumers spend and companies invest enough to make up for fading government support.

"On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters," the Fed chief said to the Joint Economic Committee.

Any fellow contrarians want to take the "under" on Ben's latest gem?

Jim Rogers Says Get Ready for $2,000 Gold!

Here's the latest Jim Rogers interview on Bloomberg:

http://www.youtube.com/watch?v=c-vd1-Ec2FY

A short bit with another clueless interview, so there's not too much new:

• Still likes commodities for another 5-10 years (based on the secular bull market beginning in 1999)

• Thinks gold will top $2,000 by the end of the decade, thanks to money printing

Jim notoriously sandbags his own trading acumen - always insisting he's "no good" at calling price/timing specifics - yet those who follow him closely know he's often pretty accurate with these calls as well!

You may also like:

• Why Richard Russell is very worried about the bond market

And My Current Positions - Cash, and Pass!

While it's very tempting to take a flyer short position, betting on a near-term decline, I'm going to actually respect the 200-day moving average this time. We'll see how it works out.

Other than some longer term short S&P and long US dollar positions I've got via ETF's, I'm mostly in cash, mostly waiting for the next mega leg down that I think is coming.

In retrospect I should have kept my long positions, and just kept moving up the trailing stops, until they were stopped out. Ah well, investing and trading is a lifelong learning process.

Have a great week in the markets!

Contrary Investing Weekly Wrap: Fear is Dead; Delinquencies Skyrocket; Marc Faber - and more!

No Fear, Again: Market Participants Are Opting For Extra Yield, Risk Be Damned

Last week, a buddy from college sends me an email:

"Hey, I got a little bit of cash sitting around, earning next to nothing in a savings account. Anything you'd recommend to get this cash working for me?"

"Not really - everything looks pricey right now...hey, does that mean you paid off your law school loans?" I asked.

"Actually no," he informed me.

I suggested he may want to work down the debt first, no matter how low the interest rate.

Meanwhile, California pension funds are still counting on a cool 8+% annual return to deliver on existing obligations - based on historical returns, of course, which only includes the greatest bull market of several generations.

Anyone want to take the other side of that bet?

Not to be outdone, junk bond funds are back in vogue once again. And of course, the crappiest quality bonds are the hottest!

Chart courtesy of EconomPic Data.

It's hard to believe that this time last year, we were talking about how Return OF Capital was the new Return On Capital!

So is everything rosy again, or is this "reach for extra yield" mentality exactly what a bear market bounce is supposed to engender during it's final phases? My bet is on the latter, but in any case, we should find out soon!

Nothing To See Here - VIX Hits 18-Month Low

Volatility on the S&P is nowhere to be seen these days - perhaps the market crash was merely a figment of our imaginations!

The VIX is low, and it continues to head lower.

(Source: Yahoo Finance)

As you can see from our experience in 2008, when the VIX breaks out, it breaks out in a big way. So a breakout on the VIX would be a good cue for us to start slamming the PANIC button as hard as humanly possible.

But for now, all is calm in the markets, as February's drop now looks like a pebble tossed in the pond in hindsight.

The VIX could continue to head lower - who knows - but one would have to expect a spike in our future again sooner rather than later.

Scary Chart of Delinquency Rates Skyrocketing

Can you spot the trend?

Chart courtesy of http://www.calculatedriskblog.com/

Hat tip to friend, reader, and monetary expert Dave for sending this gem along.

For further reading on the real estate trainwreck, check out this interview with real estate entrepreneur and guru Andy Miller.

The Hidden, Historic Bubble That Could Burst Any Day

Of course we're talking about...

...all at once now...

Muni bonds!

Yay! Of course, municipalities far and wide have no way to pay back their increasing deficits amidst falling tax revenues.

Of course you knew this already, being an astute reader and no doubt a contrarian thinker. But the mainstream press is even starting to catch on.

The Contra Costa Times reports:

Declining income from property, sales and other taxes coupled with growing pension obligation debts and the residual effects of the financial meltdown are inflating a dangerous bubble in the $3 trillion to $4 trillion public bond financing market.

If the bubble bursts, agencies will be unable to borrow, and would cancel or postpone public projects such as school construction or building roads and highways. At worst, governments could default and upend the historically safe municipal bond market.

"This is the most serious municipal debt crisis in U.S. history, including the Depression," said Denver-based attorney Jeff Cohen, who represents bond issuers and buyers. "Arizona has huge problems. So do Nevada, Illinois, New York and New Jersey. And California has the same credit rating as Kazakhstan."

Small to mid-size public agencies, in particular, have been hit hard, said Cathy Spain, director of the Center for Enterprise Programs at the National League of Cities.

Not only has public agencies' income dwindled, but they can't even buy the bond insurance that would lower their borrowing costs. Most of the bond insurance companies, who participated in the mortgage-backed securities shenanigans, spiraled out of business during the bank meltdown.

Get your popcorn ready - this should be a doozy!

Also check out Robert Prechter's thoughts on why you should run, not walk, from these "safe" muni bonds.

Why Marc Faber Is Predicting A Large Correction Right About...Now

About a month ago, Marc Faber told Bloomberg that we could easily see a correction of 20% if the S&P topped 1150 and approached 1200.

Well, it seems like we're just about there, so we'll see how Faber's near term musings fare in the weeks ahead.

You can check out a video of Faber's Bloomberg interview here.

Some other thoughts from Faber:

• He thinks the Euro is very oversold, and can rally to 1.40 before going lower

• Doesn't see anything much good about the Euro, or the Dollar, for that matter

• Debt monetization is inevitable in the long run

• He likes precious metals and Asian currencies - says "most currencies are sick"

• Better to be in stocks than bonds over the next few years, because he expects increasing inflation

Faber's book Tomorrow's Gold is excellent by the way - if you haven't read it, and you are a Faber fan, I'd definitely recommend you pick up a copy.

Interestingly Faber was a deflationist when he wrote the book almost 10 years ago, and has since flipped to the inflation camp, because he believes that sovereign printing presses will overwhelm broader deflationary forces.

Further reading: Why Marc Faber sees no way around US inflation.

A Few More Links, In Case You Missed Them

• Sir John Templeton's Final Memo: We're Screwed

• How to Answer Your Census, Christopher Walken Style - Hilarious Video

• Robert Prechter's Deflation Primer - What You Should Know

My Current Positions and Market Outlook

The trend of all markets still (yes, still) appears to be up, but the risk appears to be predominantly to the downside. The only trend that appears to have changed for certain is that of the dollar, which is currently taking a breather after a multi-month rally.

The US dollar's trend is officially UP. It's well above it's 200-day moving average.

(Chart courtesy of StockCharts.com)

If the dollar is indeed the linchpin of the financial equation, then we'd expect the other markets to roll over one-by-one in turn here. We shall see if things play out this way.

(PS - Here's why I concur with folks who believe the dollar is the linchpin of the global financial markets).

I am still in wait and see mode, with no long or short futures positions.

Have a great week in the markets!

A Deflation Primer: Guru Robert Prechter Explains the Basics That You Must Know

Regular readers know that while we are more sympathetic to the deflation argument, at least in the near term, we keep our ears open to the inflation camp as well. And that's not hard to do, as some inflation believers become quite hostile at the mere muttering of deflation!

For my money, the guy with the strongest argument still is Mr. Deflation himself, Robert Prechter. In this guest piece, Bob eloquently explains what you need to know about deflation, and why the Fed, contrary to popular opinion, is actually powerless to stop it...

***

Surviving Deflation: First, Understand It

Deflation is more than just "falling prices."

By Robert Prechter

The following article is an excerpt from Elliott Wave International's free Club EWI resource, "The Guide to Understanding Deflation. Robert Prechter's Most Important Writings on Deflation."

The Primary Precondition of Deflation

Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way: "In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by a deflation of excess credit. This was the one factor in common."

"The Fed Will Stop Deflation"

I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.

Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone’s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if it’s free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.

Jaguars, anyone?

***

Read the rest of this important 63-page deflation study now, free! Here's what you'll learn:

• What Triggers the Change to Deflation
• Why Deflationary Crashes and Depressions Go Together
• Financial Values Can Disappear
• Deflation is a Global Story
• What Makes Deflation Likely Today?
• How Big a Deflation?
• More

Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

Ed. note: I am a paid-up and satisfied EWI subscriber and affiliate.

Clay Shirky on the Collapse of Complex Business Models (and Complexity) - Great Read

Great piece by Clay Shirky entitled "The Collapse of Complex Business Models." It'll make you think, for sure, as Clay points out the mysterious tendency of complexity to simply collapse throughout human history - think Romans, Mayans, etc.

Sometimes the more a society or sector advances, the stronger the pull back towards simplicity - with outright collapse being the quickest and most violent way to achieve this.

Clay writes:

In 1988, Joseph Tainter wrote a chilling book called The Collapse of Complex Societies. Tainter looked at several societies that gradually arrived at a level of remarkable sophistication then suddenly collapsed: the Romans, the Lowlands Maya, the inhabitants of Chaco canyon. Every one of those groups had rich traditions, complex social structures, advanced technology, but despite their sophistication, they collapsed, impoverishing and scattering their citizens and leaving little but future archeological sites as evidence of previous greatness. Tainter asked himself whether there was some explanation common to these sudden dissolutions.

The answer he arrived at was that they hadn’t collapsed despite their cultural sophistication, they’d collapsed because of it. Subject to violent compression, Tainter’s story goes like this: a group of people, through a combination of social organization and environmental luck, finds itself with a surplus of resources. Managing this surplus makes society more complex—agriculture rewards mathematical skill, granaries require new forms of construction, and so on.

Early on, the marginal value of this complexity is positive—each additional bit of complexity more than pays for itself in improved output—but over time, the law of diminishing returns reduces the marginal value, until it disappears completely. At this point, any additional complexity is pure cost.

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

The ‘and them some’ is what causes the trouble.

You can read the full piece on Clay's blog - highly recommended.

Hat tip to our boy Carson for sending the link along! As he put it in his email, this outlines potential deflationary implications for our economy and government - implications that right now are not fully understood.

Also the theme of decreasing marginal value reminds me of the diminishing returns on debt we've seen discussed of late. When the marginal value drops below zero is when we get into real trouble!

Why Richard Russell is Very Worried About the Bond Market

Richard Russell thinks the bond market may be saying ENOUGH with the quantitative easing, reports The Daily Crux.

From his Dow Theory Letters:

The bond market is now very close to saying, "We've had enough."

... Many older subscribers probably remember my lifelong emphasis on the POWER of COMPOUNDING. But what of the power of negative compounding on debt? I think we are about to find out.

The power of negative compounding will be brutal. The cost of carrying the world's debt (including the US national debt) will be devastating. It will be highly deflationary and it will crush everything in its path.

You can read Russell's full commentary here.

I don't subscribe to Russell, but I do try to follow his writings and thinking as best I can from the outside, and this is the first I've heard him mention deflation. Very interesting!

Here's what Russell had to say in early December about gold, the dollar, and the Fed's effort to re-inflate.

Are Deflationist Arguments Still On Track? A Checkpoint in the Debate

Whither deflation...

Chased away by reflation?

Or eye of the storm?

Revisiting the Deflationist Arguments of 2009

Earlier this week I revisited two of my favorite inflation/deflation interviews of 2009, both courtesy of Jim Puplava at the Financial Sense Newshour. Being sympathetic to the deflationist arguments, I was interested in seeing if their forecasts were still on track, despite the relentlessness of the reflation trade.

Puplava's interview with Bob Prechter was a classic. Prechter argues that the Fed cannot do anything to stop the powers of deflation, because most of the outstanding debt in the world is going to go unpaid. And that deleveraging process will occur faster than the fed can reflate the system.

In the September interview, Prechter correctly forecasted gold's late year push, while expressing his belief that 2010 will be a banner year for deflation. In terms of timing, his thesis is still on track...he thought the shoe would drop late last year, or early this year.

As a subscriber and affiliate of his, it's clear to me that he believes a turndown is imminent, as he's aggressively laying his reputation out there right now, basically calling the top right here, right now.

In summary, the winner of the Puplava/Prechter inflation/deflation debate is still too early to call, though I anticipate the next few months will tip the scales one way or the other. I love Prechter's bravado in trying to cement his legacy - we'll see if it pays off for him!

Demographer Harry Dent was then interviewed by Puplava in October, where he shared his demographic research, and what he thought that meant for the financial markets. Dent made an extremely prescient call on gold, which was trading around $1,000 at the time of the interview. He said it'd be the last market to roll over, and that it could go quite high - even above $1,200.

When asked what could disprove his thesis, Dent mentioned the timing of the markets topping - he expects them to tank in the 1st half of 2010. If things are still humming midway through the year, Dent said he would need to re-examine their hypothesis, to see what they were missing.

So thus far from Dent's side, things are also still inconclusive, but so far roughly mapping to his forecast from a few months ago.

Revisiting these two interviews was an instructive exercise. Because us market junkies follow things every day, and every week, it's easy for us to grow impatient when things don't turn our way quickly. And that's often a big mistake, as you can go from being early, to being wrong, if you give up too early on a position.

So in summary, if you are a deflationist, as I am, I don't yet see anything that doesn't jive with the deflationist argument. Let's hold tight, and see what the next month or two has in store for us. Nothing has been proven yet, either way.

But Aren't We Missing Something?

Both sides of the inflation/deflation debate love to argue that the other side is missing one or more critical points.

I try to read as many opposing points of view as I can, to balance my thinking, though I have to admit that I find many inflation arguments to be a bit too simplistic.

But I just posted a solid guest inflation article today from Casey Research's David Galland, appropriately titled What the Deflationists are Missing - and while I am a subscriber of David's and think the world of his analysis, I thought it'd be fun to raise some counterpoints on "what we're missing".

While I don't fully agree with all of David's points, all of my counterpoints are merely academic at this point as well. As usual, the markets will be the final arbiter of who's right, and who's wrong!

So here are some excerpts from David's piece in italics, with my deflationary counterpoints beneath:

Galland writes: For starters, there is already a massive inflation operation being run by the Fed, evidenced in a historic spike in the monetary base over the last two years.

Yes, true, the Fed has increased the monetary base by a trillion or two over the last two years. BUT, a larger amount of credit was destroyed during the last market crash - 10 or 15 trillion dollars worth, depending on the source.

In that light, the Fed appears relatively powerless in their efforts to goose the money supply. It just can't print fast enough when credit is being destroyed at a breakneck clip.

If you believe the global economy has stabilized, then perhaps the inflation argument holds water. But I think the real doom and gloom is yet to come, and that we've only seen the tip of the iceberg in terms of credit destruction!

In a deflation, the value of the money increases – which is actually a pretty desirable thing, if you ask me. Inflation, by contrast, means that pretty much everything you own in the local currency steadily loses value – forcing investors into a perpetual game of catch-up. It’s hard for me to calculate how the government can dramatically increase the money supply and yet have each of the currency units become increasingly more valuable over a sustained period of time.

Arguing against that point, Evans-Pritchard makes the case that the U.S. government is making much the same mistakes that were made in the first part of the Great Depression, i.e., being overly tight with the money. And that the velocity of money is falling.

There are a couple of key differences between now and then, however. First, the Fed didn’t actually know what the money supply was back then. They literally had no monitoring tools in place, mostly because no one thought it was important enough to track. Second, they didn’t have fiat monetary powers. Today, neither of those factors apply.

During the Great Depression, FDR was able to devalue the dollar overnight by 50% by confiscating gold, and resetting it's price in dollars. This is not possible now, precisely because we have a fiat monetary system. The value of the US dollar is determined by the market everyday.

So while the Fed does have fiat monetary powers, and the theoretical ability to put as many dollars into circulation as it would like to, it is merely pushing on a string, because we have a credit based monetary system. Creating a trillion or two dollars out of thin air is not net inflationary when credit is being destroyed at a faster rate.

In fact, if the Fed swapped out all credit outstanding today, that wouldn't even be net inflationary...it would be a break-even.

The Fed will eventually have the ability to inflate, but only after most of the outstanding credit has been destroyed. At that point, the Fed may not even exist - but that's a speculation for another day.

There is something else that I think the deflationists are missing, and that has to do with confidence in the currency. If the U.S.’s many creditors come to agree with our point of view – that the dollar is being led to the altar as a sacrificial lamb to political expediency – then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals.

I agree that at some point, the bond markets are going to start rebelling against the fiscal profligacy in the US. But, I also don't see how that is an inflationary event. If long term interest rates were to spike tomorrow, that would severely hamper the Fed's ability to swap out bad debt. So instead of being propped up, that debt gets marked down to its true value - which is likely much lower than the value it's being carried at on the books today - which is deflationary.

Much of the inflation argument hinges upon the Fed's supposed unlimited ability to create new money out of thin air. But that type of activity can go on only as long as the bond market permits. And when the bond market screams "no mas", the party is over.

My Trading Activity - Shorted the S&P (Again)

On Thursday night, I shorted the S&P again, after being alerted of a favorable technical setup for a pullback. So far so good, as stocks got routed on Friday, despite the "good news" being reported in terms of earnings.

Puts expired worthless, but the new short is off to a good early start.

I've got a stop at recent highs, so not much downside on the trade. If stocks have finally tipped over, I'll look to hold this position all the way down...that being below the March '09 lows, in my estimation.

And the dollar still looks like a screaming "buy" here, as even the most optimistic projections have the dollar rallying another 10-15%. I like it to rally above it's previous highs, and will continue to look for an appropriate re-entry point in this trade.

The S&P got slammed Friday, despite good earnings news...great example of why trading on news can be unreliable at best!

(Source: Barchart.com)

Meanwhile the dollar is gearing up for it's next leg up.

(Source: Barchart.com)

Another way of playing the dollar rally would be to short currencies primed for a fall, such as the Euro or the Australian dollar. Both have started to turn down sharply.

Have a great week in the markets! Comments are always welcome and very much appreciated.

Colorado Minimum Wage Set to - Drop?

According to the Associated Press, Colorado will become the first state to reduce its minimum wage due to a "falling cost of living."

Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.

But because Colorado's provision allows wage declines, the minimum wage will drop because of a falling consumer price index. It will be the first decrease in any state since the federal minimum wage law was passed in 1938.

Sure sounds like DE-flation to me!

Hat tip to my good friend Super Joe for finding this on The Drudge Report (a great site btw).

Mr. Met Casts His Lot in Deflationary Camp

The New York Mets announced today that they will be cutting season ticket prices by at least 10%, according to ESPN.com.

"The Mets are sensitive to the economic realities facing our fans and we have lowered our ticket prices in response to these challenging conditions," Mets executive vice president Dave Howard said. "This move underscores our appreciation of our fans' ongoing loyalty and support."

And you know what I love most about this story? That the Mets call home Citi Field.

I remember sitting in the upper deck at Shea during 2007 - at the height of the loose credit mania, probably right at the end of the Third Turning - when they did an artists rendition of the new Citi Field on the scoreboard, highlighting all its luxuries. Ooh! Aah!

Man, how things have changed in just two years!

Hat tip to my good friend, loyal reader, and diehard Mets fan Super Joe for sending this link along...appropriately with an email subject line of "Deflation!"

Great Essay on the Threat of Hyper-Deflation

Yesterday in our weekly column, we kicked around the possibility that the hyperinflationists are wrong...or at least early to the party.

My piece was also picked up by Seeking Alpha, and you should check out the comment stream from livid gold bugs and monetary purists!

I get a kick out of folks that truly believe they "know" what's going to happen in the world of finance. In reality, we've all got something in common - none of us have a damn clue! I've learned to enjoy the banter between various opinions, and try to factor all reasonable points of view into my outlook. If there's one thing that can lead to ruin, it's being wed stubbornly to one point of view.

On that note, yesterday was fun, as we jumped sides and started waving the flag of the deflationists...much to the consternation of the commenters over at Seeking Alpha!

If yesterday's piece was up your alley, here's another deflation argument that's a beauty - courtest of Bill Bonner at The Daily Reckoning. I think Bonner's essays are works of art - the guy can absolutely write, and his contrarian views are always extemely intriguing. Here's a quick excerpt, with the full essay here:

Deflation is the immediate problem. Our guess is that it will be deeper and more vexing than even they believe. The feds’ money machine is broken. They can add reserves. But they can’t turn the reserves into price inflation at the consumer level. Result: deflation…maybe hyper-deflation. But far from eliminating the danger of hyperinflation, falling prices practically guarantees it. In other words, it’s not inflation we worry about; it’s the lack of it.

Related reading: Is Deflation "So 2008"? Hyperinflation Trade Looking Crowded

Is Deflation “So 2008”? Hyperinflation Trade Looking Crowded

As the Federal Reserve continues to print money, the “hyperinflation trade” seems to be a crowded one.

The premise seems sound and reasonable – whenever a government prints money and devalues its own currency, rising prices follow. A deflationary environment cannot hold for a sustained period of time, because the government will print money, or drop dollars from helicopters, or do whatever it needs to do to create price inflation.

But is it really that simple?

If so, then gold is playing one hell of a rope-a-dope on all of us. Why has gold not been able to crank past the $1,000 mark decisively if inflation, and perhaps hyperinflation, are in the cards? After all, the market is supposed to be a forward looking mechanism!

Perhaps gold is merely climbing the “wall of worry” on the way to the final mania stage... doing a fine job at shaking out the weak hands and non-believers before ultimately skyrocketing to $1500…$2000…or higher.

Gold has risen each of the last eight years versus the dollar, and appears poised to extend that streak again this year, so maybe I’m being overly harsh.

However thus far, plays on hyperinflation have mostly disappointed. Sure, gold has rallied off it’s lows, but so have the broader markets, in what appears to be a textbook bear market rally.

Recently I’ve started wondering if there’s something fundamentally wrong with the hyperinflation hypothesis. A few weeks ago, I mused that the “buy gold” trade seemed a little overdone, at least in the short term…punctuated by Northwest Mutual’s purchase of gold for the 1st time in the company’s 152 year history.

When insurance companies are rolling up to the party, you can bet the cops are also on the way and ready to shut the joint down!

So please indulge me for a moment, and let’s ponder “what if” Helicopter Ben can’t print dollars fast enough.

Here’s what could gum up the efforts of the money printers says Robert Prechter in the June 2009 edition of The Elliott Wave Theorist:

“You can’t beat deflation in a credit based system.”

Prechter says that growth in money supply requires activity on the part of lenders and borrowers. And once a credit bubble implodes, there is no way to restart the engine.
Japan’s recent deflationary recession is a classic example of this – despite unprecedented efforts by the Japanese government to devalue the Yen and generate inflation, they weren’t able to do either!

No amount of public works projects, increases in federal spending, and monetization of debt has yet been able to snap Japan out of its deflationary nightmare. When its credit bubble popped in 1989, it stayed popped for good.

Was Japan an anomaly? With the US employing the same “hair of the dog” tactics, we’re going to find out soon!

If we had a cash based economy, then printing money would indeed cause price inflation, Prechter says. But in a credit based economy, credit is being destroyed at a much faster rate than the Fed can print.

(Roughly $14 trillion in credit down the drains so far, versus $2 trillion in deficit spending and monetization…so quite a large gap).

Eventually, enough credit is destroyed that the Fed will be able to affect the money supply. So, ironically, we could see hyperinflation at the end of this all…of whatever little money is remaining!

As engaging as this intellectual exercise is, at the end of the day we need to figure out where to put our money! There is no safe haven, after all – even if you’ve got your money in cash, you’re “long cash”…and “long” the currency you’re stocking it in!
So what are we to do?

Well, I think we’ve got to watch the charts, and listen to what the market is telling us. This is a time to protect our capital, not to reach for extra yield. If an asset class is getting taken to the cleaners…get out! That was the biggest mistake I made during the Great Deleveraging of 2008…that was the time to follow your stops, go to the beach, and catch a little R&R while the world fell apart.

That said – if we see gold smoke past $1050, $1100, etc – we probably want to be in gold. We’ll take that as a cue that our musings about credit based systems, while fun, were perhaps wrong!
For now, I think cash is not a bad place to be. With gold not yet able to break through, and the hyperinflation trade getting more crowded by the day, another burst of deflation could catch most folks with their pants down.

Remember, in a deflationary environment, cash is king…so don’t worry about yield. Cash gains purchasing power as prices deflate around it…so if you’re able to preserve your capital in nominal terms, we could do quite well in real terms!

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 5 Most Popular Posts...

1. Why Jim Rogers Has Covered All His Short Positions
2. Why Silver and Gold "in the Ground" is Seriously Undervalued Right Now
3. What's the Best Month to Buy Gold?
4. Trend Following - Your Only Hope for Investment Survival
5. What Stage is This Depression At?

Positions Update

We bought the sugar breakout this week...I don't know how much legs this rally could have - and honestly, I don't care - it's a 3-year high for sugar, so we gotta buy this breakout!

OK, if you want a fundamental reason - we've got a global deficit this year - and these can always be fun on the upside!

Current Account Value: $31,385.06

Cashed out: $20,000.00

Total value: $51,385.06

Weekly return: About even

2009 YTD return: -38.0%

Prior year's results:

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

How Does Gold Perform in Recessions and Depressions?

I started tracking Robert Prechter of Elliott Wave International recently because, to my knowledge, he's one of the only guys who correctly anticipated the Great Crash of '08. Now, he had been waiting for this crash since he wrote Conquer the Crash in 2002, but better to be early than late in this case.

A few weeks ago I read Conquer the Crash and enjoyed it immensely. I find Prechter's analysis to be extremely well researched, grounded in solid historical examples, and frankly a bit "out there"... which challenges my own assumptions. Previously I had regarded Elliott Wave Theory as something cooky...now I find it pretty damn interesting, if perhaps still a bit cooky.

Here's a guest piece by Prechter, taking a look at the price of gold in recessions and depressions. Yesterday Jeff Clark took a look at the performance of gold miners during the Great Depression, so this is a great follow up piece. I hope you enjoy.

***

Does Gold Always Go Up in Recessions and Depressions?
June 4, 2009

By Robert Prechter, CMT

The following article is adapted from a brand-new eBook on gold and silver published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. For the rest of this revealing 40-page eBook, download it for free here.

I have often read, “Gold always goes up in recessions and depressions.” Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data.

The first thing to point out is that gold did not make a nickel of U.S. money for anyone in any of the recessions and depressions from 1792, when the gold-based dollar was adopted, through 1969, a period of 177 years. Well, to be precise, there was a change in the valuation in 1900, when Congress changed the dollar’s value from 24.75 grains of gold, the amount established in 1792, to 23.22 grains, a devaluation of just six percent total over 108 years. The government did raise the fixed price from $20.67/oz. to $35/oz. in 1934, but that action occurred during an economic expansion, not during the Depression. In 1968, gold finally began trading away from the government’s fixed price. Even then, it slipped to a lower price of $34.95 on January 16 and 19, 1970. So the idea that gold always goes up in recessions and depressions is already shown to be wrong. It did not go up in terms of dollars in any of the (estimated) 35 recessions or three depressions during that period.

What almost always does happen during economic contractions is that the value of whatever people use as money goes up as prices for goods and services fall. When gold is used as money, its value in terms of goods and services goes up. But gold can’t go up in dollar terms when gold and dollars are equated. So no one “makes money” holding gold under these conditions. It is a fine point: What tends to go up relative to goods and services during economic contractions is money, and when gold is officially money, that’s how it behaves. What we want to know is how gold behaves in recessions and depressions when it is not officially accepted as money.

Many gold bugs say that because gold was a good investment during the Great Depression, it is a “deflation hedge.” We addressed this topic in At the Crest of a Tidal Wave (1995, p.357) and Conquer the Crash (2002, pp. 208-209). At the time, government fixed gold’s price, so it didn’t go up or down relative to dollars. Gold was a haven during that time, the same as the dollar was, since they were equated by law. But gold served as a haven because its price was fixed while everything else was crashing in price during the period of deflation. Gold bugs like to claim that gold would have gone up during that period had it not been fixed, but the crashing dollar prices for all other things suggest that in a free market gold, too, would have fallen. It would have fallen, however, from a higher level given the inflation of 1914-1929 following the creation of the Fed. So gold became worth more in dollar terms than it was in 1913, which is why it began flowing out of the country. In 1934, the government finally recognized the new reality by raising gold’s fixed price. Since 1970, markets have been in a large version of 1914-1930, except that gold has been allowed to float, so we can clearly see its inflation-related, pre-depression gains.

Observe that gold’s price remained the same for a Fibonacci 21 years after the Fed was created in 1913; it was revalued in 1934. [Ed. Note: For a full chapter on Fibonacci time considerations for gold, download the 40-page Gold and Silver eBook.] Then it held that value for 35 (a Fibonacci 34 + 1) years, through 1969. So aside from the revaluation of 1934, the inability to make money holding gold during recessions, depressions, or any time at all save for the day of the revaluation in 1934 held fast for 56 (a Fibonacci 55 + 1) years following the creation of the Fed. So even after Congress created the central bank, no one made money holding gold in a recession or depression for two generations.

In 1970, things changed dramatically. Investors lost interest in stocks and preferred owning gold instead, for a period of ten years. The same change occurred again in 2001, and so far it has lasted seven years. But, as we will see, recession had nothing to do with either of these periods of explosive price gain in the precious metals.

The period of time one chooses to collect data can make a huge difference to the outcome of a statistical study. If we were to show the entire track record from 1792, gold would show almost no movement on average during economic contractions. If we were to take only 1969 to the present, it would show much more fluctuation. To give a fairly balanced picture, combining some history with the entire modern, wild-gold era, I asked my colleague Dave Allman to compile statistics beginning at the end of World War II. This is what most economists do, because they believe “modern finance” began at that time and that things have been “normal” since then. It’s also when many data series begin. So our study fits the norm that most economists use. It also provides results entirely from the Fed era, making it relevant to current structural conditions.

[Ed. note: To study the six tables revealing gold's performance record vs. stocks and T-notes since WWII, download the 40-page Gold and Silver eBook.]

Table 1 shows the performance of gold during the 11 officially recognized recessions beginning in 1945. Although one could make a case for different start times, we took the 15th of the starting month and the 15th of the ending month as times to record the price of gold. The results speak for themselves. Even though it is accepted throughout most of the gold-bug community that gold rises in bad economic times, Table 1 shows that such is not the case.

The only reason that the average gain for gold shows a positive number at all is that gold rose significantly during one of these recessions, that of 11/73-3/75. The average gain for all ten of the other recessions is 0.16 percent, almost exactly zero. The median for all 11 recessions is also zero. If we omit the five recessions during which the price of gold was fixed, the median gain is 3.09 percent.

For long-term forecasts and more in-depth, historical analysis for precious metals, including the six revealing tables mentioned in this article, download Prechter’s FREE 40-page eBook on Gold and Silver.

Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.