Friday July 29, 2011
Note to readers - it is imperative to keep an open mind about what might happen. Indeed the live between the quick and the dead is somewhere between the plausible and the probable. THere are four levels of probability
True - something known to be factually accurate, boats can cross the Atlantic
Probable - most boats succeed in crossing the atlantic
Plausible - without radar or a ver alert lookout, it it is plausible that a boat could hit an iceberg at night in the North Atlantic
Wrong - Aliens destroy boat in the Atlantic
No one boarding the Titanic considered the plausible, that icebergs posed a danger. This failure to consider all plausible alternatives is the key to the unfolding of disaster, be it the attack on Pearl Harbor or the World Trade Center, what is plausible
Here are a few recent examples
9/11 - Tom Clancy laid out this possibility with a Japanese 747 hitting a joint session of Congress, a smal band of dedicated people took that idea and made it their own, no matter how awful the event is to us
Toyota in San Antonio - One of the big economic achievements here in San Antonio was luring Toyota to build a $1 billion plant to make the Tundra pickup. After heralding this for months, the plant shut down with after its first 90 days of operation, the town was stunned, no one considered that Toyota's planning was five years behind the energy cost curve
The Government saves Bear Stearns but not Lehman thereby locking up the entire commercial paper market anyway, the first act was pointless given the second, how foolish was that?
Natural disasters have hit Galveston, Japan, and the Mid West lately, most were unprepared
My point is that the following scenario does not have to happen in this way in part or in total, but it pays to think about it. ........semper paratus
Now on a more serious note, let’s look at the oil market. We announced in our weekly column, July, 2008 that the Parabolic timing model has flashed a monthly sell signal for crude oil and unleaded gasoline. Never mind how it works, it does. Monthly signals are rare. The last sell signal was that one, July 2008, The last buy signal lagged the recovery and occurred in the summer of 2009, a full two years ago. Now we have another ominous sell signal. I take these very seriously; everyone s should do likewise. Please recall that by December, 2008, crude oil had plummeted to $40.
I don’t think anything quite that dramatic will occur this time but I do think this is an important signal for a top. Silver is near flashing the same signal and gold likely made a top this week at just over $1600.
Okay you say, what could go wrong; glad you asked. The US dollar has been beaten down by our government (hoping to boost exports), the debt talks, and the absurd idea that the Euro is in dandy shape. The following is hypothetical but I can play Tom Clancy just as well as he can......
The US finally makes a debt ceiling deal. It is short term and will have to be re-visited before the 2012 elections. The President does not like it but has no option but to sign it. Immediately the US bond market firms and the Dollar soars. In Europe the façade around the Club Med countries quickly dissolves. Not only are the small countries like Greece and Portugal in trouble, now the long-term neglect in Spain and Italy surfaces. And there is no one but the German and French banks to roll over and agree to take massive hits on their foreign bond portfolios. The riots in Athens quickly spread to Rome, Vienna, and then on to Barcelona and Madrid. It seems everyone wants to know why they have been suddenly disfranchised; Pension payments cannot be made and bond interest is on hold.
The Euro currency goes into a tail spin. Other currencies are dumped wholesale in a scramble for dollars. Gold and silver margin requirements are raised again; this is met with liquidation of positions as margin calls mount. With riots in the streets of Europe and calls for austerity among those defaulting, business brakes to a halt. The demand for oil plummets, after all there was never a supply shortage anyway. Arab countries, never under an OPEC enforcement agreement, flood the market with oil. They are desperate to raise money for immediate social schemes to calm their out of work populations.
Stock prices plummet world wide as investors liquidate portfolios to make debt payments. Dubai defaults on another payment for its City Centre Investment in Las Vegas. The crowds suddenly desert the new casinos in Macau; MGM China denies a liquidity crisis but misses a junk bond interest payment. Russia calls for production quotas among OPEC members.
Already nervous, weak states like Michigan, California, Illinois, and New York beg the Federal Government for funds to make pension and bond payments. Unemployment bolts to 9.4% nationwide. Schools ponder four day weeks for the nearby fall semester. The President’s approval rating falls below 40%.
Hugo Chavez has not been seen for days; Caracas erupts in riots. Crude oil has fallen to $60. Peru, Bolivia, and Venezuela appeal to the IMF for help. A news blackout falls across Cuba. US accounting firms abandon more Chinese clients amid questionable asset and loan values. The Australian and Canadian currencies are limit down in fall trading. Property values collapse in Vancouver.
Well that may be a bit much but it is not out of the question. This of course could play out in a dozen ways with more or less of this or that. It is a fact that Brazil, India, and Chinese stock markets have been declining since last November. Like crude oil, they too have flashed a monthly sell signal, months ago. Overheated stocks like Netflix are already down 10%. A handful of high techs like Google, Amazon, and IBM hold the market up, not to mention this week’s IPO for Dunkin’ Donuts (swell). Energy service stocks like Patterson PTEN now re-visit their same high prices as in the summer of 2008. Recall that the collapse in 2008 did not really start until September. So don’t dismiss the idea just because it does not immediately happen.
Our point today was to issue a wake up call. A mere 7% of investors are bullish on the US Dollar. This is typical of market bottoms. A dollar rally will sink gold, silver, stocks, and yes, crude oil.
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