Tuesday, March 9, 2010

Global US Dollar Liquidity Growth .... or lack thereof.

A friend brought to my attention, via Gold Digest, quite an interesting piece by Jay Taylor, the editor of Jay Taylor's Gold Mining and Technology Stocks. Jay's piece entitled 'Looking Over Into the Abyss' which somehow managed to escape my attention, carried with it a most interesting chart, one which Jay mentions Charlie Clough followed closely. Regular readers know my affinity for the former chief strategist at Merrill Lynch who was sadly was run out of dodge for being too bearish on stocks.

I have reproduced the piece by Mr. Taylor below for your viewing pleasure.

Looking Over Into The Abyss?
Jay Taylor
We have never subscribed to the notion that the policies given to us by our ruling elite would fix our economy. In fact, we are of the mind that each "remedy" is making everything far worse. Why? Because all the so-called fixes involve printing more money, which is to say creating more and more debt at a faster and faster pace. Since debt combined with mal-investment that results from huge amounts of money pumped into the economy in a short period of time, policies provided for us have been pathological.

Check out our chart of Global U.S. Dollar Liquidity Growth (GUSDLG) below. We started tracking this data series after Charlie Clough of Merrill Lynch reportedly used it during the Asian crisis in the late 1990s.' Since we believe that inflation and deflation are a monetary phenomenon, I took a great interest in this stat and began charting it weekly.

GUSDLG has been a road map for the stock market and commodities markets. When it rises, it indicates the system is inflating. When it decreases, it indicates the fuel that drives prices higher is not sufficient to sustain the fraudulent high prices those rose not from the creation of wealth but from fiat (debt). There is a yet-to-be determined lag time between the change in GUSDLG and prices, but ultimately when GUSDLG declines it seems to guarantee falling asset prices.

I would like to call your attention to a couple of points regarding this chart.

  1. The first peak of 52-week liquidity growth was at 14.66% in March of 2000. This top corresponded almost perfectly with the dot com stock market bubble. When this measure of liquidity decreased to 0.08% in February 2001, trillions of dollars of wealth were lost in stocks. As GUSDL was bottoming in 2001, panic was setting in at the Fed and the U.S. in general as visions of a deflationary depression was growing. It was at that time that Ben Bernanke wrote his paper, "Deflation, Making Sure it Doesn't Happen Here." His remedy? The same as Mr. Greenspan's during the Asian crisis. Simply print mountains of more money, which of course resulted in huge amounts of more debt since debt is the "raw material" from which our fiat money is created.

  2. Greenspan followed Bernanke's recommendation. The second peak occurred in April of 2004 with the annual rate of liquidity growth at 21.85%. This rise in liquidity pumped into the economy by the Greenspan Fed was the fuel that drove the housing market to its insanity and what is causing so much pain in America now. Let's give a big round of applause to Alan Greenspan for "fixing" our economy!! When GUSDLG was brought down this time to a bottom of 9.21% in September 2005, it set the stage, for the greatest deflationary plunge in asset prices since the Great Depression following the Lehman Brothers failure in September 2008.

  3. True to form, the Fed hit the monetary accelerator lake a mad angry drunk, boosting GUSDLG to an insane 48.07% by January of 2009. Up until about seven weeks ago, GUSDLG had been decreasing in a gradual fashion, from 48.07% in January 2009 to 32.02% in late October 2009. However, take a look at what has happened since October 26, 2009. GUSDLG has fallen off a cliff to close this past week at an annual growth rate of 16.87%. In my view, the plunge in the stocks and commodities this past week is not unrelated to the massive and very rapid decline in GUSDLG. Moreover, if you recall the deflationary devastation of wealth that occurred following the peak of March 2000 and the peak of April 2004 (albeit delayed in that event) you have to be very worried about what is in store for asset prices NOW!

Indeed Dr. Robert McHugh believes Wave (C) down has begun. Agreeing with him would be Ian Gordon and Robert Prechter. If this is the start of the dreaded (C) wave down, we may be in for some very hard times. Indeed, our Model Portfolio fell sharply this week to a year-to-date gain of a mere 1.12%, down from 8.44% last week. To try to improve our chances for higher returns, I am suggesting you consider some more aggressive hedges, like increasing exposure to the Prudent Bear Fund or buying ProShares Short S&P500 (NYSE-SH).

26 January 2010

Jay Taylor, Editor of J Taylor's Gold & Technology Stocks

Thanks for the insight Jay, much appreciated.

Housekeeping notes;

EDZ experienced a reverse 10:1 split which adjusts my cost accordingly (hint, moving the decimal over one to the right).

Today I was stopped out of my GS short at $171.22 for a loss of about 9 1/4 pts on 1 unit. Enjoy the run bulls, I will simply leave it at that as the volume on it and this overall market simply amazes me. Enjoy it till it ends for when it does... awww heck you can just blame the shorts.

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $19.34
Long 2 units Direxion Small Cap 3X Bear ticker TZA @ $12.06
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $60.50
Long 2 units Direxion Financial 3X Bear ticker FAZ @ $19.65
Long 2 units Ultrashort Xinhua China ticker FXP @ $8.49
Long 1 unit Ultrashort Real Estate ticker SRS @ $9.82
Long 2 units Direxion Tech 3X Bear ticker TYP @ $10.52
Long 1 unit US Dollar Bull ticker UUP @ $22.52 stop @ $21.97

Short 1 unit Daimler ticker DAI @ $52.23 stop @ $52.23
Short 1 unit CurrncyShr Aus Dlr ticker FXA @ $89.65 stop @ $91.71
Short 1 unit Goldman Sachs ticker GS @ $162.05 stop @ $171.21

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