I am going to measure my words carefully, as I know some of you are going to think I’ve gone off the deep end. But I’ve thought this through. I didn’t come to this opinion last week, but many weeks ago. I am deeply concerned about the state of our leadership. I also have to share with you that I’ve been a keen student of boom and bust cycles in this country, and have come to the opinion there is one characteristic among them, and that is that there's a match that sparks any recovery. Without that match, we are lost and down the river without a paddle. If you want to disagree, that’s fine; I can take it. So here goes: By unleashing QE3, the Fed has unleashed the “animal spirits” within us to finally get this heap of an economy moving again. Let me just go out on a limb and be the minority voice, and say I support QE3 100%.
And who is Egan Jones? Let me just say they’ll still be talking about President Obama, the do-nothing Congress and Bernanke 100 years from now. This ratings agency trying to piggyback some headlines will be an afterthought in a few short years.
It was nearly a year ago the President tried to enact some kind of jobs bill when Congress came back from whatever it is they do all summer on Capitol Hill. Oh yeah, last year they did us the favor of staying in session longer to show us they know how to hammer out a debt ceiling deal. How did that work out for you? If you recall, at that time I wrote it was a textbook case of Black Swan 101. If you want to destroy confidence, just a put a bunch of people in a room and threaten to sink the US economy when everyone knows it doesn’t have to happen. You know why the market sold off last year? In a single word it was CONFIDENCE.
It was the no less than the great FDR who told us at the height of the Great Depression that the only thing we had to fear was fear itself. Unfortunately, by the time it got to 1936 and his re-election campaign he started giving in to the budget hawks of the day and decided to attempt a balanced budget. It was the single biggest mistake of his Presidency. Why does a whole generation of politicians, media pundits and economists forget this? The net result was Great Depression II.
All of which brings us to the present. The President did his best imitation to channel his inner Roosevelt these 4 years to come up with a mere shadow of the New Deal while the GOP did their very best to reinvent their inner Herbert Hoover. You remember that guy. Isn’t he the one who told us the cure for the ’29 crash was a balanced budget because it would ‘restore confidence’ to the business community? Wasn’t he also the guy who told us “Happy Days Are Here Again” right at the height of the bear market rally that ensued after the 29 crash? Given all of the activity on Capitol Hill this year, a record year of 61 new laws passed by the do-nothing Congress. In fact this Congress has the worst record for any year since 1947. In case you forgot that’s the last time the opposition party tried to stonewall a weak President who ended up getting re-elected again anyway. All of that being said, Ben Bernanke should be remembered as a great American, a great leader and a patriot to this generation. In an age where there is a dearth of leadership at least we have one man willing to take bold action.
Bold people are going to be disagreed with in loud terms. But in this Mr. Bernanke, God bless him is probably the most keen student of the 1930’s in public life. So I ask you, who would you rather be in the trenches with, Governor Rick Perry, Ron Paul or Ben Bernanke? I pick on those 2 fine politicians from Texas not because I don’t like Texas; it’s just fine but it just so happens they are his 2 biggest critics. These guys might be great politicians but they know little about running the world’s greatest economy.
So in a time where so many are so scared to take action, the Fed finally fired the bazooka. Is it going to be perfect, no! But here’s what they’ve done. They’ve unleashed the animal spirits among us. As I’ve already set you up for this, the real key to recovery comes in one word, CONFIDENCE. The stalemate in the Executive and Legislative branches of the government have totally wasted a full year while the American people just sit back, suffer and take it in the chin. Somebody had to do something to get things moving in the right direction. It’s already working. The market likes it and if the market likes it, that’s good enough for me. The haters are already predicting Armageddon because they think the Dollar is going to tank. Folks, I’ve shown you the Dollar chart and I might as well show it to you right now again:
This is the month of September. It broke its uptrend line for 2012 BEFORE the QE3 announcement and if you take a serious look at this chart you’ll see in the long run a triangular shape that has been in the works for years. If this is some grand cycle 4th wave, we have a 5th wave test of the lows to come at some future point anyway.
Let’s be honest about something. Ben was dealt a lousy hand. In his own press conference he alluded to the fact the whole idea of this program is to make people feel a little wealthier so they’ll spend because the house or portfolio value will be worth a little more. If there is a reason to pour cold water here, that’s it. But we had an incredible run of GDP growth in the past 2 decades based on the strength of consumer spending. Certainly we’d like to see investment in plant and equipment. But that’s out of Ben’s hands. He’s responsible for monetary policy, not whether some company builds a new plant. So should the Fed do NOTHING as some of you are advocating? A lot of you look at what you believe will be downside to these policies. Folks, we are already AT the downside.
I don’t have to think about damage, it’s already been done. I see 2 things. In terms of an inactive economy, I see a deteriorating culture where you can take your life in your hands going to a movie theatre. Why? People have had it and we’ve had what feels like a record number of massacres in such a short time. Remember the day that guy shot his old work colleague in front of the Empire State Building last month? That same night Chicago must have been setting a world record for killings in one night. It gets the gun debate going which is an absolute waste of time. What people fail to realize and mostly it’s the Park Avenue crowd who go on CNBC, Bloomberg or FOX, is that all of the inactivity to restore confidence is hurting real people who are giving up hope. My friends, hope is the one thing people cannot afford to lose. Oh yeah, they go on television and say let this, that and the other thing fail. Let’s cut, cut, and cut.
That’s fine, they’ll cut to the budget to the bone, but tens of thousands of good military jobs will go by the wayside next year if they don’t get their act together soon. These people at Egan Jones can pour cold water on QE3 all they want until such time one of their daughters gets shot up in a movie theatre like what happened in Aurora. All of this happening at a time when the Middle East is going up in flames. All of this inactivity is really unleashing the animal spirits elsewhere, like Libya, Egypt and today Iran.
See, in terms of social mood, we are so damaged, so scarred by the financial crisis that most of our leadership is paralyzed into inactivity that instead of taking bold steps they do nothing. Worse, the plan they do have will most certainly lead to a repeat of the kind of history that led to Great Depression II. Who is Egan Jones anyway? They are just a rating agency that probably did nothing when the country was really counting on them to do the right thing back in the bad old days of the subprime bubble. Now they insert their 2 cents. Folks I have news for you. I’ve been following these market cycles for years and years.
Next page: Baby steps...
When the time window comes, if the trend wants to change its going to change. IF anything what the Fed did this week is take the first baby step to restoring confidence to a fragile economy and dare I look at the political landscape I think he’s sending a message to the austerity party that he’s not afraid of them. In fact, if Mr. Bernanke is a student of socionomics he might also realize that by keeping the market going higher another month or so he probably helps Obama build a lead in the polls that he’ll nurse to the end, thus insuring there won’t be huge budget cuts next year.
At the end of the day, it was none other than the great Bill Clinton who bragged on himself just 2 weeks ago of how he managed to balance those budgets when he was President. But that was a time of prosperity and it was easy to get rid of deficits in those days. That was the right prescription for the 90s. This isn’t the 90’s; if we don’t watch out we are recreating the 30’s all over again. Those who don’t learn from history are doomed to repeat it. We should be grateful that Chairman Ben is not channeling some inner Herbert Hoover.
For this week a lot of charts are getting close to important resistance levels, namely Gold and Silver. I suspect there should be a digestion and consolidation. I suspect there will also be a reaction to the downgrade by Egan Jones. But we stick to the charts and with a VIX as low as it is and a market that finally got a whiff of euphoria we are still building towards a high in October at the big time windows. Does it have to happen? NO! In fact the QE3 event ruined a perfect long term 4500dg Gann square of 9 peak dating back to the 2002 bottom this week. But for the life of me I can’t see how we don’t get a major change of direction in October if the VIX ends up near some historic low. Be careful, participate where you can but do not be the last man in.
I’m for bold action, even if it won’t be perfect. It’s not the perfect action and it’s not a panacea. However I sincerely doubt it will create the kind of disaster some of you are predicting. The one thing we have going for us here at Lucas Wave is our strong belief in our symmetry calculations that have guided us very well these past few years. Our Gann calculations have worked out better than even I could have imagined. The chances of a repeat of 08 are small. So we support Big Ben’s actions.