Monday, September 5, 2011


I will have to admit for the last 3.5 years I have been bearish.  I recall thinking I was making the mistake of all mistakes in early December of 2007 when I moved all of my retirement assets from a "normal asset allocation" to 100% cash because bond market action and economic factors looked really poor. 

Despite the powerful and relentless rally where I have been forced to buy garbage stocks that had no reason to go up (along with some quality names) I felt deeply that all of the purchases were simply "trades" rather than investments because the fuel used to propel the market's launch was clearly going to run out.  Friday's job figures were the cherry on top of smoke signals that have been telling us that the economy's fuel tanks have been jettisoned and we've discovered that there have been cracks in the ship's fuel containers.  In other words, the report marked the beginning of the end and the beginning of all sorts of other nonsense.

The 14/40 EMA is something I've used for quite a while to look at long term trends.  While I would normally be jumping up and down screaming to short this market because this indicator has been so reliable for so long, one only needs to look back at the last time it happened to find a reason to pause.  When was it you ask?  Well of course, it was last August before we had the incarnation of QE 2!  The tsunami of new mind-boggling liquidity for liquidity's sake unleashed the fury of velocity-less fiat and made asset prices soar. 

Now I have read some information that has said that the slope of the EMA's has a lot to do with the validity of the signal, and that is notable. In the 2010 crossover, the moving averages were not both downward sloping. In the two other previous crossovers in the last 10 years they were, and the results were devastating. I am posting a long term view of the information and you'll need to click on the image to see something a bit clearer, and this is also a weekly view of the 10 EMA / 50 EMA (sorry my system can customize these for some reason!). But the results ARE clear. A downward sloping crossover is not a good thing and has led us to the tech collapse in 2001 and the financial crisis in late 2007.

Do I think that a QE 3 could be around the corner?  Of course.  The jobs report and complete slow down of the US economy and European economies is more than enough justification for more monetary fun from the boys at the Fed.  The problem we may face though is that QE 3 and its future iterations are have less and less of an impact on asset prices in terms of magnitude of moves and in terms of the duration of time they are working.  In essence we are getting less bang for our electronic bucks.  There is no doubt that they will try and they will do whatever they can to continue to stimulus.  The only problem is that the economy doesn't need more money, it needs solvency, real buyers, confidence, and truth.  Additional ramps up in the Dow of 1000 points don't deliver conviction that everything is alright with Bank of America or European banks, and it certainly doesn't give a small employer confidence to hire new people when they believe that our economy is slowing again.  

Also, the Financial Conditions Index has confirmed that we are "all in" when it comes to recession.  As you recall, any figure under zero indicates a recessionary period. 

So, yes, I'm as bearish as I have been and I have the economic stats to back it up and the sour mood is going to be a feedback loop over the economy that makes its prospects worse and worse.  European recessionary issues are also looming there and we have a full blown banking crisis about to explode in the next month.  Real estate markets in Australia are also beginning to show the stress of a blowing bubble.  I've got all the reasons in the world to be as bearish as I want to be, I simply keep it in check because I know that Team Fed is meeting on September 20-21st and they'll be looking to gun the markets and make everything look better.  Trouble is, they can't.

I'm short a lot of things, many of which I posted the other day, however I am not short gold.  As long as the European banking situation is brewing, I will continue to stay long gold as there is a real fear that the Euro may collapse and as I've noted before gold is simply the "un-currency" despite the chart that needs to revert to its mean. - CHARTS TO WATCH.  No matter what the charts say, we are finally going to get an answer to who is bigger and badder?  Are we going to find that the FED is so big that they can overcome the biggest bearish signal we've had in 3 and 1/2 years?  Perhaps, but with all the problems in Europe they better get working cause the calendar is against them.  I will post the economic calendar later, as it is important.


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at