Economic Update - The Calm Before the Storm

The fact that we are already halfway through September, historically the worst investing month of the year, without a sharp drop in the market tells us just how strong the internals continue to be. It also tells us that the market is going to keep rising...for at least a while longer. However, something happened over the weekend that could just change all that...more on this in a bit. Many experts believed that this would be the month that the bear market rally ended, however as long as interest rates continue at record lows, along with key market leadership from the financials and techs, we most likely have a market that will rally well into the winter. Ultimately, this could take the Dow to 10,000 to 10,500.

However...the events of this weekend could also signal a quick return of the bear. A full-blown trade war may have just erupted between the US and China after Beijing accused Washington of “rampant protectionism” for imposing heavy duties on imported Chinese tires late Friday. 

In Obama's first big test on protectionism (which was one of the major reasons the Great Depression lasted a full decade) the President sided with Americas unions, which have been complaining that a “surge” in imports of Chinese-made tires have caused 7,000 job losses among US factory workers.

China’s minister of commerce went so far as to condemn the decision, saying that it “sends the wrong signal to the world” at a time when the US and China should be cooperating to deal with the worst economic and financial crisis since the 1930's. He went on to say "This is a grave act of trade protectionism...", strong words indeed. Whether this leads to anything significant, like the Chinese selling some of their trillions in US dollar and govt. debt remains to be seen, but in no way can this be considered good news for US markets.

Still, every sell-off since March has been met with strong buying, and with over $3.5 trillion sitting in US money markets (earning next to nothing), we should not be surprised if this continues to be the case. I know I sound like a broken record, but as long as we remain comfortably above the 50 and 200 day moving averages, the path of least resistance will continue to be up, as the charts below indicate (from Cash Flow).   

There remains a huge conflict between the fundamentals and the price action of the markets.  TrimTabs warned last week that insider selling was at the highest level since May 2008. For every insider buying there were 30.6 insiders selling their stock... and who should know better about the future prospects of a company than the people that are running it?

A great example of fundamentals deviating from a bullish stock market are the number of banks  on government life support. Three more banks bit the dust on Friday-- regulators closed the Chicago based Corus Bank with $7 billion in assets. In Minnesota the Brickwell Community Bank was closed and the Venture Bank of Lacy Washington was closed. The FDIC said the three closings would cost the FDIC fund $2 billion. This brings the total to 92 banks closed in 2009 with many more on the way.

James Bianco-- former researcher at UBS Securities and equity technical analyst with First Boston and Shearson Lehman Brothers--figured bailout spending was equal to the inflation-adjusted cost of the Marshall Plan, Louisiana Purchase, Race to the Moon, S&L Crisis, Korean War, New Deal, Iraq invasion, Vietnam, and NASA - COMBINED. 

All that spending originates as borrowing, and there's no way it'll ever be repaid. It will be inflated away by the Federal Reserve's dollar printing... eroding the value of the money in your pocket, in your bank account, and ultimately in the value of your stocks. Again, this is why we own precious metals.

Gold prices rose again to close just over $1005---a level that had been strong resistance for the last 18 months. Gold is rising due to higher demand, lower sales from central banks and because of the collapsing dollar. As a dollar denominated commodity, gold trades as a direct result of the value of the U.S. dollar.

The dollar index fell again on Friday to close at 76.60---a new 52-week low. The worries over the growing U.S. deficit and the amount of debt created to bail out the financial system is reducing the value of the dollar at free fall speed and there is little on the horizon beside a rapid rise in interest rates that will check that fall. There is zero doubt in my mind that we will see a rapid move higher in interest rates...which will ultimately result in hyperinflation. Don't concern yourself with the scores of economists that are predicting low rates and low inflation...or even deflation. In my 24 years of market research I have yet to see a single year when the majority of economists were right....not ONE single year. Their hindsight seems brilliant but their crystal balls are an embarrassment.

Kip