Dodging Rocks & "The Recession is Over" - by Casey Research

http://day-trading-the-stock-market.blogspot.com/

Dodging Rocks...

Dear Reader,

As I write, the Fed is meeting, and Mr. Market waits with bated breath to see if the coven of central planners will change a sentence from the notes of their last meeting. According to Bloomberg:

Fifty-four of 63 economists in the survey said the central bank will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates. The Fed has kept its benchmark interest rate in a range of zero to 0.25 percent since December 2008.

If the central planners do change the sentence, perhaps to something that suggests that maybe the Fed scents that the economy is actually improving, then Mr. Market might get all worried that rates will soon rise and the big bond bubble blow-up will begin.

Alternatively, if the central planners were to hint at the potential for a pocket of economic dead air ahead, then Mr. Market might jump to the conclusion that the rising calls for the Fed to create another $2 trillion to be used in buying up long-dated Treasuries at today’s suppressed rates will be answered. In that case the dollar’s fall, and gold’s recent rally, could really gather steam.

While no one can be certain what the Fed will do in today’s meeting – or in the next – one thing is certain: the business community and we as individuals have been reduced to the role of participants in a one-sided rock fight.

We watch the guys with the rocks – the Fed, the Treasury, Congress, and the many agencies I touched upon yesterday – and try to anticipate when and where they are going to throw the next rock so that we might duck.

This uncertainty makes it very, very hard to focus on other things – building businesses or making investments, for example. How can it be otherwise when you’re constantly trying to calculate where the next rock is coming from?

Get it right, and you might buy yourself a brief respite before the next rock comes flying your way. Get it wrong, however, and the consequences can be dire. I get a lot of emails from readers, many of them entrepreneurs, and many contain tales of woe, the result of running afoul of the rock throwers and ending up out of luck and out of business.

And the setup is much the same in all of the aging, degraded, and indebted democracies. An eye-opening case in point was sent over this morning by one dear UK correspondent in the form of an article out of the Daily Mail. As you’ll read, that country’s new coalition government is about to start throwing a lot of rocks at anyone with an income. Some relevant quotes…

Clegg tax war on the middle class: Families could face 'lie detector tests'

Middle-class families could be forced to undergo lie detector tests as part of a major crackdown on tax avoidance being spearheaded by Nick Clegg.

Tens of thousands will face intrusive new tax investigations under the plans unveiled by the Deputy Prime Minister yesterday.

…The moves, unveiled at the Liberal Democrat conference, were designed to guarantee Mr Clegg's popularity with mutinous grassroots members, but were described by critics as ‘bully boy tactics’.

…Today Mr Clegg will accuse middle class earners who pay accountants to minimise their tax bills of behaving like ‘benefit cheats’.

He will say that legal tax avoidance and illegal evasion are ‘just as bad’ as falsely claiming benefits, adding: ‘Both come down to stealing money from your neighbours.’

Tax evasion by the better off is to be aggressively pursued in a £900million drive which will see the number of people targeted for tax checks rise from 5,000 a year to 150,000.

Half of all the people paying the new 50p top rate of tax will have their tax affairs raked over by a dedicated team of investigators every year.

Lib Dem sources said the number of criminal prosecutions would increase five-fold. The tax crackdown will be undertaken by HM Revenue and Customs, the beleaguered department which recently admitted getting the tax codes of millions of workers wrong. A team of investigators will be created to catch those hiding money offshore.

They will use the benefits fraud model, which does include the use of lie detectors, as a template for what action they can take.

'Voice recognition analysis', which picks up when a caller sounds nervous on the phone, could be used to help work out if someone is misleading tax inspectors.

Read the full article here...

Maybe the British income earners will just suck up this latest effort by their own government to bean them, but if I were a UK resident, I can assure you that the minute they started rolling out the lie detectors, I’d begin shopping for flights elsewhere.

Which, at the end of the day, is pretty much the only rational thing for a business and individual to do when confronted by such manifestations of a dysfunctional, and ultimately doomed, democracy.

Simply, once the business/legal/regulatory/tax environment in a country becomes extraordinarily changeable, and therefore unpredictable, your choices boil down to continuing to try to dodge rocks or moving to a steadier clime.

What’s the Fed going to do in today’s meeting?

Frankly, Ben, I don’t give a damn.

Unless and until the government makes an honest attempt at slashing its expenses well below the level of current revenue – in the process bringing an abrupt halt to the endless cycle of both raising revenue and taxes, with a solid dose of expensive new regulation thrown in – then the ultimate outcome is carved in stone.

And that outcome is that the dollar and likely all of the fiat currencies are going to crash. That’s what gold is telling us, and it’s speaking very loudly just now.

Now, you may not believe me, but I’m not a gold bug per se. Rather, I am a raging fiat currency bear, and that only because I’m doubly bearish that the insane levels of debt now overhanging the large Western economies can be resolved without serious monetary, political, and social consequences.

Unfortunately, the rock throwing is only just beginning, and it’s only going to grow in tempo as the powers-that-be and the powers-that-wannabe increasingly are forced to do “whatever it takes” to maintain the status quo – as broken and bent as that may be.

Don’t forget to duck!...

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The Recession Is Over!

By Doug Hornig, Casey Research

Woo-hoo, break out the Moët et Chandon. The recession is over. That’s right, over. Officially.

You might not think so, what with continuing record foreclosure levels and double-digit unemployment and all the rest of the negative economic indicators. But you’d be wrong.

Because the National Bureau of Economic Research has declared an end to the recession, and they’re the ones who get to decide. A self-proclaimed “private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works,” the NBER makes the call because they know things that we don’t.

Here’s another thing we didn’t know: Not only is the recession over, it ended in June. Of 2009! And then the recovery began.

Skeptical? No need. It’s simply a matter of definition, you see. A recession begins with a period of at least two quarters of falling economic growth. And it ends when GDP hits its low point and returns to some form of growth, no matter how pitiful. The length and strength of the recovery seen during the past 15 months is sufficient, the NBER panel said.

The stock market rallied on the news, but the reaction from other quarters was less enthusiastic. In fact, one of the NBER panel members got a bit defensive, writing that “we are only saying that things started to get better in June 2009, not that times are good.”

It’s clear that they are not. True, GDP did bottom at -0.7% in the second quarter of ’09, and it then advanced to +1.6% in the third quarter and a seemingly robust +5% in the fourth. But at that point it stalled out and has been declining since, from +3.7% in 1Q10 back to +1.6% again, in 2Q10.

At that rate, job creation will be non-existent. The Organization for Economic Cooperation and Development figures the U.S. economy will wind up growing 2.6% this year. It would take growth twice that fast to drive down unemployment by a single percentage point.

While economists might accept the NBER’s conclusion that the recession is technically over, many acknowledge the possibility of a so-called “double dip” that others might see as merely a continuation. Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York, puts the chances of averting a double dip at no better than 50-50 at this point.

The NBER also pointed out that, at 18 months’ duration, the recession of 2007-2009 was the longest since the 3½-year downturn that ended in 1933. And the recovery from that one petered out in 1937, yielding to a second recession that lasted more than a year.

Whether we’re in for something similar is debatable. But consider this: June 2009 also marks the month when spending from the Recovery Act stimulus was at its maximum.

Which means what?

One conclusion is that the stimulus played an important role in bringing the recession to an end,” says Mark Zandi, chief economist at Moody’s Analytics.

But one might just as well conclude that the stimulus money masked the true extent of our economic weakness, and that as it eased we were destined to fall back to the anemic growth levels seen this year.

In which case the government response is likely to be déjà vu all over again. More “stimulus,” more intervention, and more and more debt...

http://www.caseyresearch.com/displayCdd.php?id=541

An Election Year Bounce?

http://stockmarketchartanalyst.blogspot.com/

This article is from the Casey Research website. Read the second article down from the top:

It’s safe to say that most of the Casey Research team are contrarian by nature and in practice. The reason is simple. Once everyone comes to believe that something is going to happen, then they’ll act in accordance with that belief. In investment terms, that means placing bets. For a while, the outcome becomes something of a self-fulfilling prophecy, until the point where pretty much everyone who is going to invest, has invested. At which time there’s little juice left in the trade.

That’s where the contrarian steps in with his opposing view and investment. That’s because, with everyone all in, the most likely next move will be a reversal that ultimately triggers a scramble to disinvest – once again resulting in a self-fulfilling prophecy, but one that provides the contrarian with outsized profits.

When viewed through that lens, the case for gold these days is interesting. Despite a lot of chatter and interest in the yellow metal within the community of what might be termed hard-asset investors, the broader investing universe knows little of gold and owns even less. I suspect that if you polled your ten closest friends and colleagues, you’d find that nine of them own no physical gold, no gold ETFs, and no gold stocks. “Too risky,” they might add with a harrumph.

Thus, while the price of gold has marched upwards relatively steadily over the past eight years and is breaking to new highs as I write, it would be a gross misstatement to say that it’s overbought.

Which brings me to the question of the U.S. stock market.

As readers of more than a few days will know, I don’t put a lot of stock in the institutions of our degraded democracy. What’s going on in Washington today is akin to a warped game where one team does everything it can to undermine the other, based on no real principles other than getting elected. The cost of the game is borne by none of the players, but by the people they are supposed to be serving. That cost can be seen in the insane levels of debt and the seemingly permanent state of war this country has been in for most of the 50-plus years I’ve been alive.

Now, that may seem off the topic of the outlook for the U.S. stock market, but I can assure you it’s not. For the Democrats to avoid being soundly thrashed in the inning scheduled for this November, they must first and foremost avoid any further bad news for the economy between now and then. And nothing shouts bad news louder than a stock market crash.

Yet, there is strong sentiment among the professional trading community that a stock market crash is just what’s coming – and a big one. On that topic, there was this out of Bloomberg yesterday.

Futures on the Chicago Board Options Exchange Volatility Index are pricing in a three-month gain of 31 percent and contracts based on swings in Europe and emerging-market equities have risen to near records, data compiled by Bloomberg show.

Translated, futures and options traders are expecting a lot of volatility in the near term.

Today’s gold price action, which has now decisively broken out on the upside – to over $1,270 per ounce – is also signaling a run for safer harbors. The underlying causes were an unexpected stumble in the German manufacturing sector – the only real lantern of hope in the eurozone – as well as increasing expectations that the Fed will buy up another $1 trillion in Treasuries.

Adding a few sticks to the fire, a persistent inflation has taken hold in the UK, running ahead of the government’s 3% target for the sixth month in a row.

“Wait a minute, chappie,” you might hear some old member mumble down at the club, “I thought it was deflation we were supposed to be worrying about?”

But I digress.

Given the highly politicized nature of U.S. economy and investment markets, we have to expect the Democrats will take desperate measures to try and prop up the stock market through the November elections.

Now, I’m not going to go on record as suggesting that those measures will include anything so devious as the sub rosa existence of a plunge protection team. I have no direct proof of it, though the Teflon-covered stock market of recent weeks – a market that bad news simply slides off, which is the case again today – does give one pause.

More overtly, however, we are able to see the latest political play unfold, in which the Democrats have suddenly decided to reverse themselves on the Bush tax moratorium that they so strongly derided during their presidential electioneering. Sure, if their proposal is passed, the moratorium will be extended only for those who make under $250,000 – but that can only be cheering for stock markets. And they have cleverly invited the Republicans to join them in this initiative, expressing dismay that the Republicans would stand in the way by insisting that America’s fattest cats – those who earn over $250,000 – enjoy the same extension.

That has put the Republicans in the uncomfortable position of having to defend the wealthy (heavens forbid!), while being seen to be obstructionist and penalizing the middle class (voters).

Good move by the Democrats.

In the end, it is almost certain that the Republicans are going to have to roll over on this issue – giving the Democrats the round as champions of said middle class. Or perhaps the Democrats are going to have to give in to the Republicans, saying as they do that at least they fought the good fight.

Either way, the news of the tax relief extension for some, or all, of a significant constituency can only be seen as a positive development for the economy and the stock market.

Though I am sure that the market is already pricing in some sort of an extension – should it be granted, the market could put in a solid surge.

What other moves might the Democrats make?

At this point, I can’t tell – but I do think it’s safe to say that they’ll do whatever they can to prop up the stock market until November. Which makes taking a bearish bet on the market just now a risky proposition. Especially given the large number of net speculative short positions now on against the stock market… you can see the elevated quantity of net short positions in the newspaper clipping just here.



If the market continues to weather the storms or bounces on a tax extension, then a classic short squeeze could occur. In other words, short sellers will be forced to buy in order to cover their positions, sending the market sharply higher, economic realities be damned.

And that added bounce could give the Democrats the cushion they need to make it through the elections.

What happens after the elections? Anyone’s guess, but the Fed’s buying of a trillion dollars worth of Treasuries is certainly in the ballpark. That’s because President Obama, as skilled a political player as has made it to the big game in decades, is almost certainly already laying out dramatic plans to ensure that he doesn’t strike out and get sent home after just one term.

Whatever he’s going to do, he’s going to need to do it with extra vigor, and he’s going to need to do it soon after the November elections.

It should be a wild ride. For the time being, however, if you’re short, be careful.

http://www.caseyresearch.com/displayCdd.php?id=535