Monday, May 10, 2010
Another Way to View the Chinese Bear Signal
Big bounce today in general stocks. I used the opportunity to re-establish a small bearish position in commercial real estate (puts on the triple bullish DRN ETF) and will add to this position if we go higher. I remain bearish on the stock market. As Jim Sinclair said today: "The problem with 'Pretend and Extend' is that each time the cost of Pretend goes up, the time period of extend goes down."
There is less shock and less awe with each helicopter drop. Is a 2 day (or even 2 week) short squeeze worth $1 trillion of imaginary money? It might be if you're Goldman Sachs and properly positioned for the move based on illegal insider information. But for we ants, it seems a rather expensive weekend getaway from reality, no? The problem is debt and its mathematical limits, not necessarily in terms of what can actually be done by apparatchiks with no concern for the future unless we are talking about the next election, but in terms of CREDIBILITY. This is part of the problem:
A trillion here, a gazillion there, pretty soon we're not talking about much money at all any more. Corrections in Gold are for buying, as credibility and confidence in the masters of the universe behind our colored paper debt tickets are evaporating. Despite the short-term panicky drop in the Euro, the European markets have dropped like a stone. I have laid out my rationale for a return/resumption of the bear market in multiple recent posts.
I would like to visually show you a few more reasons why I am worried about global stock markets. The first is the Shanghai stock market, which is badly lagging the U.S. and many other global stock markets. As I have stated before, if the Chinese miracle growth story is slowing down, the rest of the world cannot be doing well. Here's a 4 year ratio chart of the Shanghai Stock Exchange ($SSEC) divided by the S&P 500 ($SPX) thru today's close ($SSEC:$SPX ratio chart):
Next up in the bearish warning signal campaign, the LIBOR rate ($LIBOR):
I also talked about monetary aggregates in a recent post. I should have waited a few more days, as the April data for reconstructed M3 has just been posted on shadowstats.com:
Reconstructed M3 year over year rate of change at -5%? When we were at +17% just 2 years ago - are you joking? The next leg of the bear market has already started for Europe and China. Why in the world wouldn't the U.S. join in when credit/"high-powered" monetary aggregates are collapsing? We've already hit the extremes in sentiment that support a significant intermediate-term top. The bullish scenario is a lengthy correction here. I am not a paperbug, however, and I see a full-on resumption of the bear market around the world.
I decided to take profits today on my Gold mining call option positions. I still hold some Gold miner positions that are non-leveraged. If we get a decent short-term correction, I will likely get back in. I may regret this move, but I don't want to watch those profits evaporate and I am getting nervous about the stock market. We certainly could get a few more days of bounce in the general stock markets in terms of time, but I am guessing that today took care of the majority of the bounce in terms of size in the general stock market indices. Though many Gold bulls may shudder at the thought, I feel safer in paper cash than in the stock market for the short term.
I would like to recommend that readers check out Stephen J. Williams' latest commentary (it's been way too long!). He shares my view that we are in deflation, but only if you measure in the right currency. Deflation has been upon us for a decade in Gold terms, but the Prechter scenario of the U.S. Dollar rising to infinity makes no sense. Gold, on the other hand, will keep moving higher and higher as the deflation intensifies and the paper medicine to "fix things" is sprinkled over the land in increasing amounts. It is an easy concept if you remember that Gold is real money and paper currencies are promissory notes that will never be repaid. Bad debt is market to true value during a secular credit contraction and real money is highly valued. Thus, we will have both inflation (in U.S. Dollar terms), deflation (in Gold terms) and asset price collapses in stocks and real estate that could mean U.S. Dollars continue to outperform these two asset classes for a while longer.