It seemed at that time as if the whole nation had
turned stockjobbers. Exchange Alley was every day blocked up by
crowds, and Cornhill was impassable for the number of carriages.
Everybody came to purchase stock. "Every fool aspired to be a
knave." In the words of a ballad, published at the time, and sung
about the streets, ["A South Sea Ballad; or, Merry Remarks
upon Exchange Alley Bubbles. To a new tune, called ' The Grand
Elixir; or, the Philosopher's Stone Discovered.'"] Then stars
and garters did appear Among the meaner rabble; To buy and sell,
to see and hear, The Jews and Gentiles squabble. The greatest
ladies thither came, And plied in chariots daily, Or pawned their
jewels for a sum To venture in the Alley. The inordinate thirst
of gain that had afflicted all ranks of society, was not to be
slaked even in the South Sea. Other schemes, of the most extravagant
kind, were started. The share-lists were speedily filled up, and
an enormous traffic carried on in shares, while, of course, every
means were resorted to, to raise them to an artificial value in
the market - The South Sea Bubble, from Extraordinary Popular
Delusions and the Madness of Crowds, Charles MacKay, 1841
Maybe there'll be a day when historians
write about today and make vague reference to all of the various
bubble sites, bubble broadcasters, and bubble heads. It's so hard
to see things for what they are at times when the nation is engaged
in delusion. That's what I learned from the book. Commentary
like the example below may seem knowledgeable today, but in hindsight
I doubt it:
Low interest rates played a huge
part in lessening the impact of the recession. Now that the economy
is expanding, some worry that higher interest rates may also lessen
the benefits of the recovery - 19 April 2002, Dismal-Scientist.com.
It is still not discernible to what
extent the interest rate may have been too low, and to what extent
the impact of the recession has yet to be felt as a consequence.
If it were too low, over-consumption would result at the expense
of savings, which would result in new economic dislocations for
the market system to contend with.
Here is the correct way to say what
the above economist tried to say:
Low interest rates played a huge
part in re-inflating the aggregates, by inducing the consumer
to borrow more from his future wages and allowing the government
room to expand its large debt burden. Now that the aggregates
are inflated, some worry that profits won't follow, or that it
won't matter they do - Ed Bugos.
Let both of those comments stand
the test of time.
Dollar volatility should continue
on Forex markets this week and the bond market will have to brace
for reports on durable goods orders and housing activity in the
US for the month of March, as well as a preliminary estimate for
first quarter GDP.
The US dollar had a rough last week,
finishing off against all of the currencies over the past five days,
including gold. The dollar index put in a lower low in the
three-month downtrend that began in February, and came within half
a point of breaking what we view as bullish intermediate trend support
at 116 (see chart below).
Since landing at the week's low in
Thursday's session, the dollar was only able to bounce against gold
and yen by Friday.
Gold had 2 down days last week.
The first was on Tuesday when
the Dow put in a 200-point rally, and the second was on Friday when
the dollar rose against the yen. Generally though, gold prices gained
only a point against the dollar.
The weakness in yen at the end of
the week was reportedly related to expectations it will be talked
down by Japanese authorities this week after the G7. The IMF and
the Treasury had been jabbing at the Japanese through the press
by Friday, specifically, they said Japan's government has to borrow
more and its bank has to inflate more. The Japanese fought that
claim prior to the G7.
At the time of writing the G7 has
finished and there was nothing in the communiqué about the yen or
otherwise related to the pre-G7 banter in the media, but the press
has already gone to work. Reuters' take is that since there was
no public backing of Japan's proposal to cut taxes in June,
or for its plans to clean up Japanese banks' non-performing loans,
the yen would naturally lose value now, since it needed the rest
of the developed world to corroborate the credibility of its plan.
That is the bearish argument for
yen. Because the world doesn't approve of Japan's policies the yen
should fall in value. Unfortunately, the world is awash in dollars,
not yen. The bearish argument for yen also assumes more downside
for the economy in Japan than in the United States. This argument
has been discounted several times over by the market already.
What the market hasn't discounted
is the possibility (probability) that there is more downside in
US markets today than in Japan. Nor has the market factored the
difference in foreign holdings of government bonds and other liquid
assets. And it certainly hasn't even begun to consider that a new
bull market in the Nikkei could be around the corner. Yup, the perfect
recipe for a surprise reversal in the Yen.
Still, I expect to hear post-G7 comments
by politicians through the press in coming weeks that will continue
to reflect the West's unhappiness with Japan's policies, and especially
as the yen continues to rise. Threats will be made how a rising
yen will be bad for the Japanese and world economy. Meanwhile, the
rising yen will likely occur coincident with a rising Nikkei, which
will be a prosperous development for Japan, at least in the medium
However, technically, while the dollar
has been moving to its breakdown level, it has yet to break down.
This week's economic news could either turn out to be just bad enough
to do the trick, or it could be good enough to recover some bullish
sentiment in the dollar. The stock market is an enormous factor.
The bulls have been able to hold on to Tuesday's stock market gains
(this is written just prior to Monday's down day), but outside of
Johnson & Johnson as well as GM on the surface, the other Dow
components (half of the Dow has reported now) have reported rather
poor earnings news for the first quarter.
The broader market starts to report
this week, and we expect Dupont, Disney, AT&T, and 3M to report
for the Dow. 3M recently upgraded the street's expectations, which
is apparent in the performance of its shares since and before then.
3M is scheduled to report before the others, so the bulls may set
the tone by tomorrow. Unless the good news is already factored into
the share price, which it could be after a 25% gain so far in the
new year, at 34 times trailing earnings and 22 times forecast 2003
earnings. 3M shares have been one of the Dow's best supporters since
the bear market began in 2000.
If bulls can take out last week's
high on the S&P (1133) they'll have reversed the run on stock prices
that began mid-March. On the Dow, that resistance figure is 10400,
which is the prior week's high, or the last lowest high in the five
week down trending sequence. There is little reason to suspect that
they'll accomplish anything but a run at those levels, and perhaps
marginally through them at best.
Threatening their confidence, besides
the bad earnings news from WorldCom and Ericsson on Monday morning,
or the prospect of a yawn at 3M's earnings news, is that several
Dow components are still swimming in deteriorating technicals, such
as Boeing, Citigroup, GE, Honeywell, Microsoft, SBC Communications,
AT&T, Wal-Mart, and United Technologies. Outside of the latter 2,
the rest are already in established bear markets. Both Wal-Mart
and Home Depot have been weak in recent weeks, and the durable goods
report due this week could set the tone in the retailers just ahead
of their reports expected by late May. In that sense, the fate of
the retailer's shares and the dollar are probably intertwined this
week. In fact, this morning (Monday) Wal-Mart is down a good chunk
of change ahead of the durable goods number.
Pushing bull's confidence
along besides the promotion of 3M's upcoming quarter, is bullish
momentum in American Express, Disney, GM, Johnson & Johnson, Coke,
McDonalds, Morris, and would you believe JP Morgan shares have been
making a comeback. To be sure, I'm not sure whether that's bullish
or bearish because there's lots of resistance at these prices for
the stock. However, analysts expect the company to earn almost $3/share
by the end of 2002, which would essentially represent a recovery
of the last decade's earnings power.
But I would be very cautious about
buying any bank stock (let alone this one) when the broader market
is likely to take a turn for the worse, along with the dollar and
interest rates. Their forecasts could all easily be, well, lowered.
A potentially bullish factor for
gold in coming weeks is that China plans to open its 1st ever gold
exchange in May. The country's foreign exchange reserves have swelled
with dollars in recent years and they're confidence in the Yuan
appears to be on the rise.
In other words, they may prefer to
redeem some of those dollars in gold rather than support the Yuan.
In the short term, the gold market
is probably going to continue to be sensitively averse to any bullish
winds for global share markets or the dollar. A break through 116
on the dollar index could be enough to send gold prices through
$312, however, while 108, or last year's low on the dollar index,
would send them into orbit.
We've reached a point where gold
prices and the dollar are both threatening primary reversals, in
opposite directions of course, on the long term charts. The momentum
has overall been shifting, and continues to, in favor of gold, right
up until last week, and despite Reg Howe's honorable defeat (or
so it seems) against the BIS et al, as of last week.
I suspect the break out will come
just as the dollar index caves through those levels (as mentioned
above). Gold shares have already been simmering in anticipation,
but they too have refused to continue their advance beyond the higher
high made in most of the indexes last month.
you know, however, it isn't just gold and the dollar that have reached
a cross roads, technically. So has the bond, which has been threatening
to break down out of a one-year top, and oil prices, which now threaten
to bust out of a 16 month bear market.
Not to mention the CRB, that is consolidating
this year's gains near the last lowest high in its one-year intermediate
downtrend - a reversal point. A break out above early April's high
is all that it would take to set in motion, or confirm, a new bull
market in commodities.
Outside of any Yen machinations or
upside earnings surprises this week, we continue to see general
equity weakness undermining the investment premium on the US dollar,
and aggravating pent up inflation imbalances in the US economy.
Moreover, we continue to favor the yen as the currency most likely
to surprise investors in the weeks ahead, on the upside, along with
That's how we're reading the markets