September 27th, 2009

Will 2010-2030 Equal 1910-1930?

Sorry to leave you all in the lurch last week and what a week it was. Condolences if you were long commodities, gold and other stocks tied to the $US (as I was) because you probably took a greater than average beating because of some new found strength in the Dollar. But we have our game plan and we’re going to stick to it until conditions dictate it should change. Here’s the big picture:

While this was a costly week, nothing in the trend analysis indicates a radical change in market participants’ sentiment. Volume is still acting favorably, the moving averages continue to turn up and moving towards a perfect bull market alignment (index above all MAs which are arranged from fastest to slowest). And when it becomes clear a correction is at hand, my guess is that it will take the form of a long slightly downward sloping pattern along the lines of 2004 and not the beginning of the second dip of the “W-type” bottom.

But what if you are long stocks tied to a weak dollar as I suggested a week ago in “New Place to Mine for Winners“? Then some news out this afternoon may be supportive of your positions in the coming week. The World Bank’s President issued a warning, as reported by Reuters, that

“the United States should not take the dollar’s status as the world’s key reserve currency for granted because other options are emerging….global economic forces were shifting and it was time now to prepare for the fact that growth will come from multiple sources.”

It’s unclear as to whether the emphasis should be on the growth of other economies greater than that of the US or that there are other options for a reserve currency (perhaps a synthetic currency, an weighed index, comprised of 5-10 top world currencies into which world currencies could be converted and would be the World Bank’s lending currency). What does that shot across the US bow mean for commodity prices (especially gold) priced in $US. Would that mean that the $US would suffer further erosion? It’s clear that significant changes are coming and the economy and world trade will look dramatically different in 2030 than it does today.

I love history and one can gain a wonderful insight into future possibilities by looking through the perspective of past realities. If you don’t think we’ll see significant structural changes, just look at the change that took place between 1910 and 1930, a comparable period known as the Roaring Twenties or the Jazz Age. An economic review of the period in “The onset and persistence of secular stagnation in the U.S. economy: 1910-1990” highlights the following factors:

  • real growth from 1913 to 1929 was only 2.8 percent as compared with 4.0% in previous century
  • the post-1910 record has been interpreted as stagnation
  • laissez-faire capitalism in the United States began a significant slowdown of growth about 1909-10.
  • the rate of growth of the labor force dropped substantially over 1910-1929 but was pushed aside by a jump in labor productivity
  • there was much less use of available labor resources in 1910-1929 than there had been in 1890-1910. Furthermore, the labor cost per unit of output declined significantly between 1910 and 1929
  • decline in investment in business structures was responsible for the drop in total nonresidential fixed business investment demand after 1910

Interesting; see possible similarities?

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  • Anonymous

    from your nice chart, the congestion area is @1240-1250…we will get there soon or later.

  • Anonymous

    SATURDAY, SEPTEMBER 26, 2009

    Buy real gold, not derivatives, Invest in Asian equities and commodities
    Speaking at the CLSA Asia Pacific Markets investor conference in Hong Kong. Mr. Faber told the audience to put money in Asian equities and commodities. He said gold is important, but buy real gold, not derivatives, and keep the gold outside the U.S. The U.S. confiscated gold during the Great Depression, he noted.
    He, like Warren Buffett, Nouriel Roubini and others, thinks the dollar is destined to erode, though Mr. Faber said it could rebound over the next few months as signs of deflation stick around. “The dollar in the long run is a doomed currency,” he said. “This is the short of the century…The government’s policy is to make it worthless.”

  • Anonymous

    I was watching credit market last week, The credit market was down a little (but still above 50ma) & bought some edc & tna on the dips.

  • Minnesotalee

    SP500 has pulled back. The momentum remains in favor of the bulls according to the chart patterns. Still looking for a price objective of 1290. Charts patterns cannot be formed unless there are pullbacks. It's healthy and we don't need HOPE!!! We just need the bullish pattern to continue. The chart for the USD is very bearish. The PO is $65. Therefore the commodity stocks such as gold, oil, and anything that hurts when dropped on your foot (some pundit's expression) will remain inversely proportion to the USD. I think this boils down to a big correction once the 1290 is reached. The 3rd qtr earnings will be the catalyst (sequential basis)to get us moving backup after this modest pullback (correction).