Financial topics

[Higgenbotham]

In some other posts, I had mentioned the exact (to the day) 24 year separation between 2 large disasters and subsequent important stock market highs - the April 1906 SF earthquake and the April 1986 Chernobyl accident.

As an interesting aside to the remarks from CSI Wall Street and Richard regarding a possible August 25/26 stock market crash day, as well as my correlation to the 1929 pattern, there is also a 24 year separation between the August 25, 1987 stock market high and this coming August 25. So we have numerous independent indications that August 25/26 might be a significant day in the stock market and is shaping up to be a crash day. For those who don't know, August 25, 1987 was the high for the year and the market suffered a severe 1929 style crash from that high down to the October 19, 1987 low.

[aedens]

http://www.heritagewestfutures.com/down ... lendar.pdf

Contract Aug Gold & Silver 8-25 9-27 10-26 11-22

[vincecate]

So we have numerous independent indications that August 25/26 might be a significant day in the stock market and is shaping up to be a crash day.

But with all of this you are still in cash and not short?

[Higgenbotham]

So we have numerous independent indications that August 25/26 might be a significant day in the stock market and is shaping up to be a crash day.

But with all of this you are still in cash and not short?

Yes, true. I said awhile back, "The question I always ask myself when I cover shorts is: What will I do if the market heads straight down and never comes back? The answer needs to be "nothing and I'm OK with that". My first rule in trading is not to chase markets because it puts me on the wrong side emotionally."

Obviously, I don't think the market is going to go back up from here. But if it did the unexpected thing (say a $4 trillion QE3 program was announced), the rebound would probably be quite strong and I don't really have the emotional makeup (given that could blow out all my gains from the past 2 years) or trading skills to handle that with the kind of volatility we're seeing.

On the other hand, if still short from 1225 where I got out, I'd go ahead and continue to risk it.

[vincecate]

But if it did the unexpected thing (say a $4 trillion QE3 program was announced), the rebound would probably be quite strong and [...]

QE3 was announced so steathily that most people missed it. However, the market reaction was to crash. Bernanke promised to keep rates crazy low for the next 2 years. To even try to do this he has to print money like crazy and buy bonds like crazy (QE3). The market realizes that 2 more years of this is more than enough to cause lots of inflation. Inflation kills P/E ratios, so stocks go down. It will also kill bond prices, but with the Fed buying them like crazy now it is not showing up there yet. Bonds will crash at some point, even more than stocks. Note gold price of $1851. Gold noticed Bernanke's QE3.

[richard5za]

Inflation kills P/E ratios

Yes, absolutely, but so does deflation kill PE ratios.

Many people feel that stock market prices correlate to the economy. Not so, analysis of the Dow for the last 110 years shows the best correlation is to inflation. When inflation is low but positive PE ratios tend to be high; if inflation is high, or negative (deflation) PE ratios are low.

My prediction is that we will enter a period of low PE ratios. Using this, in 2009 I calculated that the Dow could bottom between 4800 and 3200. My prediction hasn't changed.

[vincecate]

On http://edition.cnn.com/BUSINESS/ the headline is "U.S. stocks continue to seesaw" and when you click on "full story" you see this graph:



Seems like "seesaw" is a rather optimistic spin.

[Bjorn]

I'm new to the board so excuse any ignorance. I read a lot about inflation taking off. In an environment like this would TIPS be a good bet or would they get crushed like BNDs are theoretically going to? Any comments?

[vincecate]

I'm new to the board so excuse any ignorance. I read a lot about inflation taking off. In an environment like this would TIPS be a good bet or would they get crushed like BNDs are theoretically going to? Any comments?

I think the value of bonds and the dollar are both going to drop so fast that it would be hard to even have a real increase in your wealth by shorting bonds. You could get a "win in dollars" but still come out at a loss since the value of the dollar dropped so much. I think this is part of why bonds are doing so well. Things are so bad It is foolish to even short bonds.

I think silver and gold are better than any bond denominated in dollars.

[Higgenbotham]

QE3 was announced so steathily that most people missed it. However, the market reaction was to crash. Bernanke promised to keep rates crazy low for the next 2 years. To even try to do this he has to print money like crazy and buy bonds like crazy (QE3). The market realizes that 2 more years of this is more than enough to cause lots of inflation. Inflation kills P/E ratios, so stocks go down. It will also kill bond prices, but with the Fed buying them like crazy now it is not showing up there yet. Bonds will crash at some point, even more than stocks. Note gold price of $1851. Gold noticed Bernanke's QE3.

Promising to keep rates low isn't enough. The Fed needs to give an indication that they will step up and buy trillions in bonds over the next few months if there's to be any chance of more economic expansion/inflation. The political will to do that has been lost. I think it's because any effect of a real multi trillion dollar QE3 would be very little economic expansion and just lots of inflation, which would make the economy worse. Gold is reacting (and everything else is going down in price) because without the Fed buying trillions in bonds over the next few months there will be bankruptcies. If the market was expecting QE3 style inflation due to trillions in bond purchases, oil and silver would be skyrocketing with silver moving up faster than gold, as happened when QE2 was still on (or in 1979). Overall, I see everyone grasping at straws and making moves of desperation. I think this last 20% move in gold is a bubble blowoff but I know I can't convince people of that. I don't really want to try to do that. All I can think to say is that when real estate was in a bubble I tried to tell people their real estate was in a bubble and you just can't get anywhere doing that. I'd hear things like the population always goes up so real estate has to go up, it can't go down. It's human nature to tune out anything to the contrary. I remember in 2004 trying to convince someone that gold was the place to be and not real estate. Impossible.

As far as the coming bankruptcies, I see a lot of trading accounts getting tied up and pennies on the dollar being paid out after the mess is sorted out. That's because if it crashes from here, this is not going to be gentle and probably worse than 1929. The brokerages of today may be like the banks of 1933. That's another reason I pullled out when I did.