Pivotal Events

By Bob Hoye

Institutional Advisors

June 24, 2009

The following is part of Pivotal Events that was published for our subscribers Thursday, June 18, 2009.

Signs Of The Times:

Last Year:

"Corn, Soybean Prices Rise on Global 'Buying Panic' to Avoid Food Shortages"

– Bloomberg, April 15, 2008

"Prices are soaring and stand every chance of staying high because this
crisis is different."

– The Globe And Mail, April 12, 2008

"Sell in May and go away hasn't been reliable over the past 10 years."

– Financial Post, April 12, 2008

*   *   *   *   *

This Year:

"China Optimism Prompts Investors to Load Up on Commodities"

– BMO Global Commodity Strategy. May 12, 2009

"Why a Commodity Super-Boom is Inevitable"

– Prosperity Network, May 12, 2009

The reasons for the new "Super-Boom" was the usual dollar depreciation and China – same as last year’s ravings.

"Hyperinflation and the Changes it is Going to Generate"

– Tactical Investor.com, May 22, 2009

Well, May has gone leaving behind another nicely-timed "silly season". A
couple of weeks ago our match up of financial market statements included the
one from the equivalent move in 1875, some twenty months from the start of
the post-bubble bear in 1873:

"A rather sudden change has passed over the money market. The discovery of
unsound business in quarters where no such discovery ought to have been
made."

– The Economist, May 29, 1875

Trade union unemployment, which had been at 3.9% in 1870 declined to 0.9% in 1872. Then it increased without relief to 11.4% in 1879.

This time around, at about twenty months from the stock market high, there
has been a change in the money markets with the sharp rise in short rates on
June 5. This anticipated the stock market slump that began on Monday.
Something similar started in May of 1931 – twenty months from the high.

So far, so good.

*   *   *   *   *

STOCK MARKETS

As each day goes by it becomes more apparent that the prosperity of the world depends upon the ability of policymakers to continue the habit of dollar depreciation. It's a maxim that stocks and commodities go up when the dollar goes down, and lately it seems that it only takes a few minutes of stability for the bulls to ramp their favourite price up. After a few unpleasant days, on Wednesday the DX down ticked and the senior indexes in NY found some relief.

But not so much in Toronto where pressures on resource sectors continued.

On the longer term, two models have been working for us. One has been that the power of a classic fall crash would set up a classic spring rebound to around April-May.

The other has been the count whereby some twenty months after the stock market high credit markets take a turn to bad health. As noted above, the hit to money markets started on June 8 and stocks set the high on June 11 at 8877 on the Dow. On the same day commodities set their high as well at CRB 266, and the bond future set its low at 112.

It is satisfying when "unconventional" research works out in calling for a rally, and then to have the probability of a failure confirmed by technical analysis. As noted last week, warnings of change were provided by a series of ChartWorks. On June 1 it was on the Canadian dollar, which we took as indicating a firming of the DX. On June 3 it was that crude had reached an Upside Exhaustion. On June 5 the call was for a correction in gold, and on June 7 it was that the dollar index had accomplished a test of the December
low.

Also, last week's Pivot noted the Upside Exhaustion on Goldman's grain index (GYX), and yesterday high-flying agricultural stocks took the dive. The week has been unkind to banks and base metal mining stocks as well.

Obviously, a lot of investment and professional opinion is resting upon the ability of interventionist economics to "manage" a way out of last fall's "accident". A thorough review of market history and policymaking would observe that interventionism has been based upon personal revelations about what "ought" to happen, rather than upon hundreds of years of evidence on how financial history has worked – particularly on the methodical transition from a great bubble to a great contraction.

Our view in April 2007 was that the inverted curve would reverse to steepening by June 2007 and that because the credit mania was blowing out on schedule it was another example of "Rational Exuberance". While a play on Greenspan's concerns of December 1996, our message was serious. The next stage of the theme was "Rational De-Exuberance" in June 2008, when we noted that credit conditions would continue the typical path to disaster.

Of course, the cyclical bear market will end with "Rational Dismay", and we are not there yet. Our website includes the greeting "Welcome to the rational fringe" and the next step on the post-bubble path occurred with the change in money markets that began early in the month.

 It is highly probable that the path will continue, and as conditions deteriorate, more people will begin to understand that all the stuff about "stimulus" has been a slick promotion. In 2007, "stimulus" would keep the boom going. Then in 2008, "stimulus" would prevent something bad from happening, and in April it was that "stimulus" had ended the crisis.

Now, "stimulus" has guaranteed that the recovery will be underway by later in the year. Indeed, on May 27 a survey found that 90 percent of economists thought that the recession would end this year. Within this, 74% expected it to end in the third quarter.

Our view remains that "stimulus" has been applied since the Fed opened its doors in 1914 and that Mother Nature runs the business, or in recent times, the speculative cycle. And as the record of market history shows She and her tag-team partner, Mister Margin, have always been "rational".

One of the destructive events in a post-bubble contraction has been the inevitable turn to protectionism, and this is underway with "Beijing Orders 'Buy China' For Stimulus Projects" (AP, June 17).

bobhoye@institutionaladvisors.com

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