SP 500 WEEKLY Chart - Bear Market Update April 12

The intra-week volatility is significant, and snapback short covering rallies are normal, and not the exception in this market.

Despite the Fed's almost unprecedented interventions, at least since the 1930's, the market trend is still lower. Look at the daily charts linked on the side of this blog to keep an eye on those chart formations.

Be careful with your leverage, and in particular the use of options, especially April stock index and 'popular plays.' With these continuing low volumes heavy trades to one side invite a violent hit from the well-heeled trading desks.

Watch for cross market correlations and inversions and use these as hedges if you wish to be an aggressive trader. This requires significant capital to maintain adequately.

Cash is a position. Contra-dollar 'cash' positions paying decent yields have been some of our most rewarding plays. There are forex ETF's in addition to actual foreign government bonds and high dividend stocks. Forex trading is triple black diamond, for experienced traders only, with the odds heavily against even a talented amateur.

Sometimes NOT trading is a very powerful tool as you wait for the odds to improve in your favor, or your gains to run higher over time in a position. We have positions contra-dollar we've not touched since early 2006.

Hyperinflationary Depression in the US 2010 - John William, Shadow Government Statistics

We don't necessarily agree with John Williams' analysis here. But its not sufficient to merely disagree. One has to listen to the argument, the key points and mechanisms, and then show WHY they might be invalid and where they might be less probable than something else.

John may be right. We have an enormous respect for him. His site is worth looking at, and his arguments are worth a listen. But we think he makes the error of assuming that the trends will be as they are today, and one can just extend them into the future, without limit, and not account for 'step changes' and likely exogenous events. This is an all too common error with model based predictors.

As a thumbnail sketch of our disagreement, we think that deflation and hyperinflation can only occur deterministically with reference to an external standard. With the lapse of the gold standard, there is none. Therefore its more likely to be the end result of policy decision(s).

Before the US lapses into a hyperinflationary depression the G8 will have an enormous incentive to essentially bail the US out by inflating their own currencies in sympathy and allowing the US to essentially and selectively default on its sovereign debt, in order to save the world financial system. In many ways Bear Stearns is a microcosm of the United States Treasury.

Doing nothing increases the probability that there will be a war, a significant world war, which will tend to wipe the slate clean, at least for the victor (if there is one) in terms of debt obligations. Not only is the US too big to fail, its too big a warpower for anyone to be easily able to collect what's owed to them.

That's what we think, but all things being equal, John does have his points in order, and his hypothesis is probable, more so than deflation, which is also a possibility. Volcker said deflation has an extraordinarily slim chance of occurring in the US. We tend to view it as an overt policy decision. Net debtors do not willingly choose deflation; they are compelled to it by some external force or constraint.

The best argument for the deflation alternative is that our monetary system is dependent on bank loans for the expansion of debt, and debt is money. However, we think the Fed is going to give us a lesson in monetizing debt, and there is plenty of it to go around. Common sense is a fine tool, but more detailed knowledge and rigorous thinking is essential.

John Williams is interviewed by Jim Puplava - MP3 Audio download: A Hyperinflationary Depression in the US 2010

Shadow Government Statistics Homepage

An Accounting View of the Financial Credit Crisis

Here's a joke to cheer up GE shareholders on this difficult morning.
(Hat tip to Sean, the Irish gnome in Zurich)

There are two sides to a bank's balance sheet - the left side and the right side.

The problem is that, on the left side, there is nothing right,
and on the right side, there is nothing left!

And some weekend reading for Jeff Immelt.

As a reminder, US financial companies start reporting their quarterly results next week.