Thursday, May 14, 2009
NEW YORK (Reuters) - Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.
Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said.
The U.S. S&P 500 stock index's .SPX rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters. (more)
By Scott Burns
Prices dropped last year. But we still need to invest to protect ourselves from inflation. That's why our retirement-plan investing needs an inflation "tilt." You'll understand why in a few paragraphs.
How bad will future inflation be? I don't know. Neither does anyone else. It could be a normal inflation of 3% to 4% a year. It could also be a banana-republic 10% a month.
What we know is that all governments make promises they can't fulfill. Our government certainly has. Under both political parties, it has taken promise making to a high art. This is not hyperbole. The figures can be found in regularly published government reports. (more)
May 14 (Bloomberg) -- President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.
“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”
Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”
The president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare and said he was confident that the House and Senate would pass health-care overhaul bills by August.
“Most of what is driving us into debt is health care, so we have to drive down costs,” he said. (more)
Banks, take the blue pill. Public, please take the red pill. If I had to characterize the current economic environment, it would have to consist of two completely different sets of beliefs. On one hand, you have banks and Wall Street receiving massive bailouts from the U.S. Treasury and the Federal Reserve, bailouts of the magnitude that would gear up for a Great Depression and imply that the banking system of our country is insolvent. Then on the other hand, you have Wall Street and the crony banks trying to convince the public that this is a minor recession and all will be well in Q3 and Q4 of 2009. The problem of course is that this is not your typical recession yet the public is being led to believe that all is well while bailouts are being dolled out by the truckload to the wrong locations. The actions we are taking keeps in place the banking oligarchy and sacrifices the public under the guise that this is good medicine for the general economy. (more)
Risk aversion trades are back in full swing as the dollar gradually joins the yen in drawing risk-aversion after having struggled earlier in the week by the combination of falling treasuries and struggling equities as well as leader of Japanese opposition Party calling for halting Japan’s purchases of US treasuries (despite the fact that this appears to be all political posturing). The dollar may further join the yen in benefiting from reduced risk appetite at the expense of CAD (1.19), NZD (0.5750). Note that sterling has finally broken below $1.51 as dollar strength builds on the BoE’s negative outlook. A break of $1.50 and move towards $1.4960 appear possible.
While both oil and equity indices reveal preliminary signs of a consolidation, downward momentum may particularly weigh on oil. This is especially supported by the possibility that oil prices may underperform metals, which is signalled by a looming potential rebound in the Gold/Oil ratio. The chart below cogently illustrates how the turning points in the Gold/Oil ratio tend to be driven by commodity markets' vote of confidence for the economy. Notably, the "green shoots" theme of the past 8 weeks unleashed substantial gains in oil prices (60% from Feb lows), which in relative terms outpaced the recovery in gold (12% from Jan lows), silver (24% from Jan lows) and copper (47% from Jan lows). Thus, it is no surprise that the Gold/Oil ratio is down 40% from its 14-year highs reached in February.
With equity indices apparently due for a prolonged pullback (macro picture does not seem to justify shares' further nearing to fair value) and the prospects for another govt-driven boost for banks in Q2 diminishing, risk aversion trades appear set to re-emerge in favour of metals (led by silver), the yen and the dollar (to lesser extent than yen) possibly at the expense of equities and energy prices. US Treasuries may be given a respite as yields may temporarily retreat towards the 3.00% level.
Oil technicals suggest an initial test of $54 may occur by early next week, followed by a possible test of $51.80, with any attempts for a rebound seen limited at $57.80. Gold and silver trends still appear to be positive backed by the notion of a potential win-win situation for gold, silver and copper whereby: (i) further gains in equities could fuel metals on improved global risk appetite (what's good for China & the green shoots theory may be seen as good for metals) and; (ii) any pullback in equities (and banks) could fuel the rotation from financials into metals and ETFs. Technically, each of the last 3 attempts by gold to break below its 200-day MA has failed over the past 4 weeks. $935 appeared as the initial resistance for gold, followed by $975. A clear break of $1,100 may be possible on trend after the end of Q2.