The Decision Path For US Equities

These charts show two potential rising wedges on the US stock futures.

They are in a period of uncertainty after the long rally from the bottom of the financial crisis.

ECB to Buy Bonds In Secondary Market to 'Address Severe Tensions In Certain Market Segments'

The limit to the ability of a central bank to create money is the acceptability of the underlying bonds and currency.

When a central bank turns to buying the bonds in order to support their price, or more properly the interest rate paid, this is the beginning of the end, the point at which the national currency becomes little more than a Ponzi scheme, creating more money to pay the interest on the old money.

Now both the US Federal Reserve the Bank of England, and the ECB have fallen into this. We are seeing the controlled demolition of the fiat currencies of the developed world. This will resolve itself no later than 2018, and probably before that. For that is the outer bound of when the US will be unable to service its debt without at least a selective default, a draconian diktat, or resort to hyperinflation.

Bloomberg
ECB to Intervene in Bond Market to Fight Euro Crisis
By Gabi Thesing, Jana Randow and Simon Kennedy

May 10 (Bloomberg) -- The European Central Bank said it will buy government and private bonds as part of an historic bid to stave off a sovereign-debt crisis that threatens to destroy the euro.

The ECB wants “to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” the central bank said in a statement today, minutes after European finance ministers announced a loan package worth almost $1 trillion to staunch the market turmoil.

The central bank said it will intervene in “those market segments which are dysfunctional,” signaling it views the recent surge in some of the region’s bond yields as unjustified. Policy makers are seeking to restore confidence in markets and protect the economy from a double-dip recession. The bank said the moves won’t affect monetary policy and the resulting liquidity will be reabsorbed.

“They are not cranking up the printing presses,” said James Nixon, co-chief European economist at Societe Generale SA in London. “This is a much more targeted, surgical approach. They buy the duff stuff that no one in the market will touch...”

...While the ECB cannot buy bonds directly from governments, the euro’s founding treaty doesn’t ban it from doing so in the secondary market, providing the bank with some room to execute today’s plan. The bank’s council will decide the scope of the intervention.

Bundesbank President Axel Weber said May 5 that the threat of contagion from Greece’s fiscal crisis didn’t merit “using every means.” Without referring specifically to bond buying, he said “measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term...”

Perspective: SP 500 Rally From the First Bottom of the Financial Crisis

Here is a longer term chart of the SP 500 showing the decline with the unfolding financial crisis, and the rally from the first major market bottom in equities. The rally has been a nearly perfect 50 percent retracement.



Here is the same view of the SP 500 but deflated by the Euro. This puts the rally into a slightly different perspective, which is not nearly so dramatic, about a 38.2% retracement which is a decent bounce.



Again the same chart of the SP 500, this time deflated by gold. The rally is stripped of the monetary inflation supplied by the Fed, and appears to more accurately reflect the 'jobless recovery.'

Market Perspective from the Daily Charts

Even if one does not use technical analysis, it is a good idea to take a look at a chart now and then to maintain one's bearings in a market. It is a natural tendency to get caught up in the short term movements, to be affected by the hype and hysteria from the bulls and the bears, and to lose the bigger picture and the general intermediate trends.

It appears to us that we are seeing a lifting of US equities in response to a government sponsored program of reflation using monetary stimulus and creation.

The dollar is showing a commensurate decline as we might expect, since the increase in equities (and the long end of the curve) is being accomplished through dollar dilution.

Déjà vu?

They can try.