The long-term forecast as laid out in 2010 Forecast contains the following:
My longer-term forecast is predicated on I1 values which, from 5/2010 through 5/2015 will contain only 7.25 months with I1>4, averaging 1.43 months per year. I1=4 is considered a balance point and historically the market averages 7 months per year >4.
To put this into perspective the only other extended bear market was 1966-1974.
The bear market decade of 1966 through 1974 had a total of 13.5 months with I1 values > 4, averaging 1.5 months/year. I1 stayed below 4 from 7/12/1999 through 5/5/2003 (the I1 bottom was earlier at 2/10/2003). Even the most recent bear market from 6/2007 through 3/2009 contained 5.25 months with I1<4, averaging 3 months per year.
So I1 is calling for a prolonged bear market with sub-par I1 values through 5/2015.
The last I1 selling point prior to May of this year is 4/22. My opinion is that the acceleration phase will begin at this point.
The details from this time forward are:
4/2 is a I1 signal lasting through 4/12
4/13 to 4/21-4/28 is some kind of recovery, probably not retracing the prior decline.
4/22-4/29 Top. the bear begins in earnest leading into a prolonged period of suppressed psychology
Here is the current I1 chart extending through November, which includes the entire 1st leg of the upcoming bear market:
Although the data after September is estimated, it is a good estimation process. As can be seen sell signals are rendered into lows in June, July, August, September, October, and November. My estimated bottom date is 11/18. So, 4/2 is the first in a long string of official sell signals (I1 bottom < 3.25). This defines a bear market. This can be verified by inspecting the historical charts in Intro and Concepts. 3/5 did not define the top, there was no sell signal. Since there was no sell signal my exposure was tiny. My initial foray into shorting the market rally resulted in 1% impact on capital. My exposure at the close 4/1 will be 15% of capital because it is a high prior to a decline below 3.25. This will be increased to 30% when DJI breaks its 5-minute, 380-unit M/A. Of course, if the DJI breaks this level beforehand then that will be the intial entry point at 15%.
During this time, try as they might, nothing the government does will yield fruit, only increasingly bitter reaction. This psychology will extend to corporate management, which at this time is already fairly conservative. As the decline proceeds their investments in equipment and software will pay negative returns causing even greater retrenchment. Economists are happy with 3% growth second half 2010. That is not real growth, but nominal growth. My take is less than 2.5% growth.
The period 5/2010 through 5/2015 will witness almost continual depression of psychology.
The current expectation of economists is at variance with this thesis.
The spreads between lower-tier and upper-tier credit have returned to normal. This has some economists making optomistic forecasts. The spreads are strictly due to Fed and Treasury support for entire pillars of the debt market. The bad assets have not been cleared, as has happened in ALL prior recessions. Hence, the spreads absent government intervention should be wider than they currently are. The markets will rediscover the bad assets in future earnings reports.
Another fallacy in economic thought is the "normal" trajectory out of recession, as determined by prior recessions. Economists concede that employment will remain higher than after prior recessions, yet they insist that 2011-2012 will take us back to higher growth rates. However, the American economy has been permanently relegated to a service economy dependent on government spending. In this new world incremental prosperity is disappearing as high-paying jobs are supplanted by low-paying jobs. The government(s) employment has been growing rapidly but has hard limits on how much of the workforce they can employ (short of communism). High unemployment is a systemic issue, not a transient one.
Finally, I believe that most people realize that this government will not return to fiscal balance. That being said, the forces for budgetary restraint will gain an upper hand over the next several years. Thus, trillion dollar deficits will start to become a political third rail. While any hope of balanced budgets is a fairy tale the stim will be off the rose (real spending net of interest payments will start to decline). This is fiscal drag even with budget deficits. Interest payments are not inflationary. Social Security payments are not inflationary. The health care bill is inflationary but will be partially offset by spending cuts in other areas as it becomes politically gauche to launch new programs in the future. The U.S. interest rate on public debt will force interest costs up going forward and this will apply pressure to find budget cuts to offset.
Only after years of budget-cutting will the Fed be turned loose to monetize more debt. The Fed monetized $1.5Trillion boosting its balance sheet with mortgage-backed securities. They will not be disposed to undertake another round for a long time. Congress will not be disposed to see the Fed expand its balance sheet and is currently sitting on the Fed's shoulder threatening to peck their eyes out. Thus, the inflationary impact of the Fed's folly has already been felt in the gold/silver market and the dollar. The dollar's rally off of the December lows puts a nail in the coffin for continued monetization.
More in future posts....
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