22 October 2009

Global Perspectives: Steep Market Declines Coming

Steve Meyers makes some very good points. Rather than make them ourselves again, here is his video analysis. We do not agree on every single point of course, but on the main issues and conclusions.

Do not underestimate the power of the Fed when they are monetizing, and especially in a quantitative easing environment. The Adjusted Monetary Base was expanded in a way not seen since the aftermath of the Crash of 1929, and it did temporarily rally the nation out of the early stages of the Great Depression for a time.

The market can go higher if they keep printing at their current rate, unless something happens to break the spell. But for now, they are buying the bond and indirectly stocks, toxic debt from the banks, and whoring the dollar.

However, our portfolios here at the Cafe are on watch for a sharp correction that could be a precursor of a greater decline in November. Cash feels nice, with a few hedged longs.

This does not mean that we would be getting out in front of a rally fueled by a monetizing Fed. We learned that lesson in 2005. We underestimated the power of the yen carry trade. A useful pivot might be 1060 on the SP December futures.

Here is Steve's analysis.