GS paid and guided the grading companies as to the investment risk associated with products that it packaged. GS knew the actual risk composition of the product and also knew that it varied widely from the rating assigned. GS marketed these products with fictitious ratings while keeping mum on the shoddy tranches within the products. GS made tens of billions in the decade that it made book on mortgage derivatives. GS was not the only deceitful packager, almost all of the major banks played the same game and are the second shoe to drop. Which is why the market declined today.
The SEC does not have a good track record of proving fraud. It cannot hire minds of near the caliber of GS. Back to the point: IF the SEC case is shown to have merit the volume and notional value of derivatives will decline by at least half over several years. Regulation of derivatives will dimish the potential profitability of new product and existing product of questionable quality will self-liquidate. The money supply, based as it is on debt outstanding, will contract as the level of derivatives unwinds. Just as the creation of derivatives stoked world economic expansion until 2007 it will serve as a brake on the world economy going forward. Commodities are a short-sale now as the new reality sets in.
Stocks were down but did not break critical support at 10,930. Until this happens I will sit on my hands. It is hard to break bullish psychology, even when a seminal event occurs such as today. I expect a sigh-of-relief rally to carry stocks back to near the highs. The high tick has probably already occurred, with topping action likely over the next week or two. I still hope for I1 to levitate the market, even though I suspect that will not occur; that within the next week the DJI will break support.
Posting the I1 chart:
There is a formal sell signal at the 4/29 peak because the trough June 8 is below 3.25 (actually 2.53). There is an intervening bottom 5/10 at 3.61 that peaks 5/24 at 4.01. Since this is less than a .50 move I am ignoring it for longer-term trades.
As I promised last week I will be posting the slow version of I1, which isolates longer trends:
Use of the slow I1 is:
1) Timing of tops and bottoms is precise only for major moves (15% in 3 months). Minor turns are always late due to the moving average
2) Short-term tops and bottoms (moves less than 15% in 3 months) should use the normal I1 for pinpoint turn dates.
So, if the market is in a fast move use of the slow I1 is beneficial.
Silver was down a ton. I bought ZSL at 38.40 when the 90-minute close on May futures declined below 18.15 (well below, which is why the fill does not provide me with the profit that the chart may indicate. ZSL closed at 39.20.
Bought small and will wait for a rally to 18.00 in the may futures to add to position.
Steve
ReplyDeleteYou are right, this is very, very, very deflationary. Robert Prechter thinks like you, that the start of a major wave down is coming very soon. His views of the future are very similar as yours but he thinks as we deflate the dollar will rise were as looking at your I1 charts you feel the dollar will fall. Who is right? Does your I1 chart for the dollar take into count the debt that will be washed away by either consumers paying off there debt and saving more and the defaults that will take place (BK's)for those who cannot pay and the fact that other countrys are in worse shape then us. People rushing to the dollar as a safe haven and the government contracting the stimulus. Or is your I1 chart right about the dollar but only relative to gold and not other currencies as most people view it. Robert see's gold falling during this time period. I tend to lean on the side of Roberts views, the dollar is getting ready to take its next wave up as gold goes down, to every ones surprise. Note the first wave down of this cycle down (mid 07 to early o9) the dollar rose then fell back as the market rose then started to rise again as the market started to top. If the dollar were to fall here then the carry trade would still be on and this would not be the current market top. Note i'm a student of history and current events not a teacher and just looking for your insights. As hard as I try I still have trouble understanding the I1 charts and what constitutes a I1 top sell signal and a I1 top thats not a sell signal. Your friend and mentor
Hello Jack,
ReplyDeleteWorld governments are looking to regulate derivatives because most have been negatively affected by the crisis in credit quality stemming from their usage. Perhaps the impact will not be as profound as I project (a 50% reduction in derivative notional value). Even standing still is a headwind for the world economy since derivatives have been on a 20% growth path through 2007. This has been a shadow financial system (off the books) generating increases in asset values, money supply, and enabling debt extension for lesser credits and spec ventures.
The dollar index has it's own forward gauge, quite apart from the I1. I1 only applies to the U.S. stock market (and by extension the aggregate of world stock markets). I use the dollar index gauge as a short-term tactical tool. I use the I1 as a strategic tool, influencing all other markets through the stock market. Putting it this way, the stock markets are the dog sniffing future conditions and commodities are the tail responding to the resultant liquidity flows. The I1 is the gauge for which I have the scrictest rules, as it is the measure of the purest subliminal impulse in the financial world, the stock markets. So, the sell signal starting with the 4/29 peak is a formal sell signal because the trough June 8 is below 3.25 (actually 2.53). There is an intervening bottom 5/10 at 3.61 that peaks 5/24 at 4.01. Since this is less than a .50 move I am ignoring it for longer-term trades.