Not a lot happened in the markets on Friday, and very little new information was presented. About the only thing interesting I noticed all day happened right after the close of regular trading at 4:00pm eastern, when the S&P 500 futures zoomed up into their close at 4:15pm.
I don't know what the heck that was about, but it just doesn't look like a market that's about to go off a cliff. This market -- despite a slew of reasons -- just doesn't want to crack. The market continues to bullishly congest in a sideways fashion, yet there's no available negative sentiment to push it higher. And now our Sentiment Tank is empty, pegged at 0%. That's always good for at least a short-term sell-off. But these are strange days for sentiment, so we'll see.
Today could be another slow market day (Columbus Day), so I want to use this time to elaborate on the U.S. dollar. Last week I mentioned how veteran market watchers are focused on the U.S. dollar as it slides to multi-year lows. Some readers don't feel comfortable with the nuances of the underlying "macro" theme on this, so it can't hurt to revisit this obviously important topic. (After all, most of us earn and spend dollars....)
While a slowly eroding dollar is interpreted by many as a good thing, as it can help narrow our massive trade deficits -- with price trends in the currency markets you have to be careful what you wish for. Like Humpy Dumpty, if the U.S. dollar has a "big fall", then there just might be "no putting it back together again". At least that's the bear's argument on the dollar.
Doug Noland writes a weekly piece called the "Credit Bubble Bulletin" that I never fail to peruse each weekend. He has been making a detailed case, week after week, that the fiscal policies of the Greenspan Fed have generated the biggest credit bubble in history. If anybody is qualified to deliver an explanation of what can go wrong if the dollar really breaks down, it's Doug Noland. So here is his conclusion from this weekend's report:
"The flaw in prevailing reasoning is becoming clearer. There is now a significant inflationary bias that permeates the U.S. and global financial system. Moreover, this bias is broadening, deepening and strengthening. There is grossly excessive global liquidity enthralled with a lengthening list of markets and economies. The dollar is not one of them. Some key commodities, however, look vulnerable to shortages and possible panic buying. And considering this financial and economic backstop, U.S. interest rates are way too low and excess liquidity unmanageable. The problem becomes only more acute with the unfolding dollar crisis. The U.S. Credit system needs to dramatically reduce the creation of new dollar claims (dollar inflation/devaluation). It won't.
Back, during those halcyon days of King Dollar, global liquidity and inflation issues were moot. Obliging Bubble dollar liquidity flowed out to the global system and then came prancing right back into the confines of the U.S. Credit system - the greatest free ride we (or anybody) will ever experience. And the Greenspan Fed absolutely wallowed in the fantasy of itself as the brilliant financial Master. That nature of the inflationary beast was docile and agreeable; it didn't miss a cue. But wild animals have been known to turn on their masters and well-intentioned defenders.
We've now entered a new stage of global wildcat finance, and it's going to be something to watch. The transition has begun away from the hegemonic dollar and its deluded master. There are No Tears, yet. But that's only because the Fed and market participants fail to appreciate that a break in dollar confidence in this New Global Wildcat Environment will shatter Pandora's Box. Dollar devaluation will beget only greater Credit excess, further devaluation and irreparable damage to dollar financial assets. The hideous U.S. Bubble economy will be left to its own devices."
That's not a pretty picture. However, in the interest of objectivity, many bears have been predicting the end of the dollar for decades, and it just hasn't happened. But it's starting to feel like this time we really could have the makings of a full-fledged dollar crisis, with government spending and deficits accelerating out-of-control, while taxes are being cut, and U.S. savings rates plunge to record lows.
So the key will be to watch how quickly the dollar declines, and the ensuing reaction in the stock markets, and in bonds too. The stock market went up the last time the dollar really got hammered, so obviously nobody was too worried about a doomsday spiral. If that changes, and stocks and the dollar start going down together, then a major dollar crisis could indeed be unfolding, and that is definitely something we'll need to be keenly aware of.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Drained 0.3 points to 0% full of negative sentiment. That's empty.
SHORT-TERM: Hourly gauge is in a neutral position with a positive bias.
MID-TERM: Progressed 8 points to 62% on the advance side with Confidence rising 2 points to a bullish 2.
LONG-TERM: W/W the gauge progressed 1 point to 26% on the decline side with Confidence at a neutral 0.
BOTTOM LINE: The only way this is bullish is if the Tank stays under 5%, preferably at 0% as liquidity rushes out of cash and/or bonds and into stocks. That's possible but very unlikely with the tank completely empty.
The graphic below plots the Tank's level against the SPX.
The last time the SPX was up at 1040 (September) there was still some fuel in the tank. This time the tank used absolutely ALL its fuel just to get back to 1040. That's a bearish divergence.
Since September 8 the Tank and the SPX have been inversely correlated to the tune of -0.93. Over the past year that inverse correlation has been -0.92. Those figures are about as close to perfect as it gets in real life. While a bullish breakout of the SPX is possible, these figures make it look darned unlikely.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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