Our economy is in big trouble folks.
Really, really big trouble.
Today import prices came in with more than a double-digit increase year/over/year, and 1.8% up on the month.
Uh, guys. Psst - INFLATION.
The Fed cannot cut into this data. No frapping way.
What's far worse is the data out of China on imports. Up until May, it was deflationary (that is, import prices paid from China were trending down.) In May that reversed and since then has been accelerating precipitously. Why? Primarily because all those people who make 20 cents an hour over there want to make 30, so they can buy some Nikes. This upward pressure inevitably leads to higher unit labor costs which is then forced through the pipeline. We have a long way to go in this regard; the era of our inflation being held down by cheap imports is over, and from here things only get worse.
No matter what Bernanke does going forward, he (and the market, and our economy) loses.
Ben made a critical miscalculation in dropping by 50bips in September; instead, he should have defended the previous target by draining liquidity.
But now we've got a plunging dollar and import prices are ramping. This will show up in headline inflation within a month or two, making further Fed rate cuts impossible.
Ben will be forced to hold or tighten, and both are in fact a tightening, as he will be forced to drain liquidity to defend the target.
There will be no other choice.
Bernanke was clearly unhappy being in front of Congress yesterday. He was stuttering and fidgeting - and dissembling. He got nailed severely with his claim that "inflation is not affected by a weaker dollar", and its going to get very, very difficult for him politically if he tries to cut into the current import prices-paid data. This isn't a couple of month thing any more - it is clearly a trend; six months worth now with respect to China - and at an accelerating pace!
Rising real rates and rising inflation pressures into an overleveraged economy is very bad news.
The only end solution is for asset prices to contract (houses primarily but also the equity markets) so that the "excess" comes out. Unfortunately as "the excess" was paid for with debt and not savings, this is going to bankrupt many consumers and businesses. Those who "levered up", whether personally or corporately, are going to be punished severely.
We are going to get a nasty recession and I won't be eating part of my WSJ on the webcam. Sorry guys, I know you wanted to see it, but I put the odds of being wrong on this one now at something like one in ten.
Months ago I opined that "share buybacks" funded with debt were a likely death sentence when (not if!) this confidence game came apart. That too is going to become clear as all these "great" corporate balance sheets are now having a rude surprise administered to them in the form of margin compression and growth disappearing - including the only "strong" holdout so far - overseas.
This is, roughly, where we are now:
Is that clear enough?
We are now at serious risk of an all-out Bear Market and perhaps a spec-driven market crash. The amount of spec-driven market "ramping" in tech stocks has been enormous with many of the "leading" stocks on the Nasdaq posting 100% gains during the last three to six months.
There is absolutely zero justification for this on the fundamentals of these firms - it is simply the result of too much money chasing too few shares, with an awful lot of that "hot money" having the afterburner of leverage behind it as well. When the "hot money" realizes all of the following it will head for the door faster than the crush of patrons in a theatre that has flames licking the curtains.....
I am raising my probability of a primary Bear Market indicator being tripped to 50%.
If you cannot trade this market on an active basis and are a "long-term investor" get out and get to high ground. This means short-term treasuries or cash. Cash is an asset class that is widely unappreciated, but it is a legitimate place to hide from a stock-market rout.
Do not be surprised if we get a rally after the end of next week into the start of the Christmas season. Even during bad years - true Bear Markets - we often get a counter-trend rally over the Thanksgiving to Christmas holiday period.
This, if it happens, is not an "all clear" signal; quite to the contrary, and it could abort at any time, especially if the "Black Friday" numbers come in bad.
Beware of the siren song of "foreigners will find everything in our market to be cheap and snap it up." The assumption here is that foreigners will have anything to spend on those assets. Oh sure, the oil-rich Middle East does, but will those other foreigners when their liquidity contracts as the global economy starts to melt? A bet on them doing this is a bet on their economies being just fine while we go down the hole in the center of the toilet!
I have only one thing to say to those who believe it will play out that way: SOLD TO YOU!
Today we took a second run at 1450 in the SPX and on the morning it held. For now.
This is the same pattern we got with 1490; my money is on 1450 falling and then the 1430 target comes into full view.
Below that we are in real trouble with the February lows being all that this market has left as a critical support level.
All of this - if its going to play out - probably does next week. This means that the volatility next week is likely to be outright nauseating.
At this point earnings are basically done, and the S&P posted negative earnings growth for the first time in a long time. In addition we are now starting to see earnings expectations for 4Q coming down, but this is not being widely reported by CNBC and the other cheerleading squads. Gee, I wonder why?
Oh, and if that wasn't enough, The House passed a bill today that would raise taxes on Hedge Funds and other "liquidity partnerships". It also patches the AMT, which is the good news. The White House has threatened a veto, and Senate support is uncertain... we shall see how this plays out.
Put all this together and the odds are not in favor of higher market prices.
But - at least for today - we are still in "correction in a Bull Market" mode...... for now.
My "crash indicators" are, for the first time since August, flashing "caution" signs.
"Caution" means that we could resolve in either of two directions:
Crashes, remember guys, always initiate in the credit markets. Always.
And if you want to see what ought to be freaking you out, here are two items that damn well ought to get your attention:
Note the ramps over the last few days. They're nasty, and are now beyond what we saw at "The Depths of Hell" in August.
Credit markets lead folks, equity markets follow.
Don't ride the short bus.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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