Home Page : www.otcjournal.com
Email Questions or Comments To:
editor@otcjournal.com
To
OTC Journal Members:
 |
This is Not
Your Father's Recession |
|
The consumer sentiment reading came
in at 64 on Friday- that's the lowest rating since 1983- BTW- 1983 was
the start of a strong 17 year bull market.
The forces hampering our economy
at present are far different than the forces we endured in the 70's and
early 80's energy/inflation crises. True, the supply/demand dynamic is
similar- the market perceives there is more demand for oil than supply,
but it's far different from your father's recession (or, in my case and
perhaps yours, the recession of your youth).
The driving force in today's market's
is the globalization phenomenon. A few decades ago the US Economy could
be measured and judged on a stand alone basis. We represented the majority
of Global GDP- today, the US economy's percentage of world GDP is dropping
rapidly, giving way to China, India, the old Soviet Union, and Latin America.
These are booming, growing economies, while the US is about at a stand
still, or possibly sliding backwards.
The entrepreneurial spirit flourished
in our free enterprise system in the 20th Century. We left a lot of the
planet in the dust in terms of wealth creation. Towards the end of the
20th Century, the rest of the world adopted the free enterprise approach,
and vast quantities of human resource have been unlocked. There are a billion
Chinese who had been living in a 17th Century agrarian economy. Their children
are embracing the Western life style, and putting huge demands on the global
resource base.
Current FED Chairman Bernanke
is
faced with challenges that differ from those who came before.
In previous recessions, a FED Chairman
could simply lower interest rates and increase the money supply to stimulate
economic activity. In today's environment, the consequences of such actions
would be a continued falling dollar, leading to higher oil prices, thereby
exacerbating the inflation problem. The cause and effect is far too immediate
and global. We are no longer the "stand alone" source of demand for resources.
The purpose of today's edition- to
take a look at how we are setting up for the second half of the year. Call
me an optimist, but I believe the market is setting up for a far better
second half of 2008- After all, how much worse could it be?
The Wall Street pundits are starting
to look at two key issues- liquidity and interest rates. Here's something
to think about for the second half of 2008.
The market is betting the FED
is
going to reduce interest rates one more 1/4 point and be done with the
stimulation process. Like it or not, we do have inflation thanks to soaring
oil prices, which has a domino effect on all commodities.
Since the lowering of interest rates
will be done, and the liquidity should start to come back without printing
money, the big trade will begin to unwind- Short the dollar and long gold
and oil. As it unwinds, the respective securities will move back in opposite
directions.
This is a chart of the ETF for the
Dollar. It's a weekly chart, so each bar represents one week of trading.
Note the dollar has been pretty stable, trading between $22 and $23 for
the past 6 weeks, down from $25 a year ago. If this were a stock, it would
seem like no big deal. 3 points could be made up on the right day. However,
this is the dollar, and that's a 12% drop in the past year. In International
economic terms, that's a mind boggling number.
Since Bernanke rather cleverly figured
out some ways to get liquidity back into the system without printing money,
the dollar has stabilized. I believe once we get past one more interest
rate cut, the dollar will start firming up.
So, if the dollar really is going
to find a bottom and start reversing, what's going down on the other end?
I'm not sure it will be oil, although it would certainly help dissuade
inflation fears if oil were to come down.
I believe a firming dollar it will
be at the expense of gold- the favored hedge against inflation. Here's
a weekly chart of the Gold ETF measured over the same one year time frame.
As you can see, in Q1 of 2008 there
was a parabolic rise in the trading value of gold. Like oil, gold arrived
at an inflation adjusted new all time high when it hit $1,000.
Gold has since rolled over, and many
believe it is forming the dreaded head and shoulder formation, which forecasts
much lower prices ahead. Some say its a reverse head and shoulders- very
simply, if the precious metal rebounds and goes on the make a new high-
above $1,000 per ounce, all bets are off. However, if new high territory
cannot be found, gold will probably give back that whole parabolic rise
from $650 to $1,000.
Oil is not as good a candidate for
such a big pullback as it is truly consumed and demand in increasing. Gold
is sort of the fake commodity- While there is certainly some demand for
gold in practical use, it really is a kind of fictitious commodity- simply
an entity people like to own as a hedge against inflation.
If I am right, and the dollar firms
as gold falls back, look for the US Markets to start behaving much better.
A lot of International money has stayed away from the US market as gains
were being given back with losses in the currency exchanges. Once we see
break outs in the bigger indexes, the small stocks will follow and we'll
return to some level of normalcy.
In my view, this will happen throughout
the 2nd half of 2008. Stay in your seats for this movie. We're all hoping
for a happy ending for the US markets and our money.
Home Page : www.otcjournal.com
Email Questions or Comments To:
editor@otcjournal.com
|
