The big story of the week is the Detroit bankruptcy, which is an American tragedy and unfortunately largely brought on by our own arrogance and complacency. This is a story 40 years in the making.
Let’s go back to 1973, the first oil shock. My first car was a Chevy Vega. It was a sporty looking car; I liked it, but was likely the lemon of the 20th century. That was the year of the first oil spike where gas went from 0.30-0.60 by the time they got done with those gas lines. My dad had a 1966 Pontiac Le Mans and that was an incredible machine, but with its V8-326 engine it only got 8 miles to the gallon. Gas guzzlers were the theme of the day.
Now let’s back up to the 1950’s and 60’s to a fellow named W. Edwards Deming. Do you remember him? If you don’t you should study him sometime. He’s the father TQM, Total Quality for Manufacturing. He’s the guy who went to Japan and not only saved the Japanese auto industry, he gave them the keys to the kingdom. He built them into a world powerhouse. If you’ve driven a Honda, Toyota or Datsun back in the day, odds are you loved that car and its design and manufacture was influenced by Deming. I’d go so far as to say that if it weren’t for Deming, Detroit would not be going bankrupt right now.
Detroit’s problems started when the market changed in the 1970’s and quite frankly they never recovered. Oh I’m sure Lee Iacocca made a difference to revive the industry in Detroit but once America had brand loyalty to a foreign car, many people never looked back. The other problem is the unions, and I’m not a union expert but it doesn’t take a rocket scientist to figure out their fat contracts, which were not supported by the market, have been a major downfall all these years.
You can talk about crime, transient communities and people moving to the suburbs but it all gets down to one thing. Detroit has always been an auto town and they had complacency about them where they stopped being the best at what they do in the late 1960’s. Geopolitics changed the landscape forever and they couldn’t adapt.
Is it a lesson to the rest of the country? Quite frankly, I don’t know if we are so far gone as to not learn the lesson. In a non-related story, State Senator from Utah, Aaron Osmond has declared his state should end mandatory education.
Folks, I couldn’t make this stuff up if I tried. Aaron Osmond, you know the name, just so happens to be the nephew of Donny and Marie, yes he is. I guess he didn’t get the memo or read Outliers by Gladwell and well discussed in this space when the book was a bestseller. The memo he didn’t get was just how far Asian kids have surpassed us when it comes to science and math. At first thought you wouldn’t think these 2 stories have anything to do with each other and on the surface they don’t. But if we are looking at a national mission, a national strategy if you will for American renewal, letting kids cut school legally for the rest of their lives isn’t going to get the job done.
Last week we got follow through to the downside on the US Dollar which confirmed we are back in the traditional inverse relationship to equities over the past few years as markets digested the idea they ‘misunderstood’ the Fed’s mixed signals when it came to tapering. Consequently, the stock market put in new highs last week and was not confirmed by the European markets that had previously spent months in a leadership role. So are the American markets leading or is the leadership role in Europe which is not confirming? That’s what we’ll need the rest of the summer to help us digest. At this time last week the Dollar attempted a bounce and all it did was fill the gap only to make a fresh low against the prior week.
Here’s why the Dollar chart is so important. The early part of last week was a bounce to fill the gap. As you see there was a fresh low and all that bounce could do was rally up to the point of the final sequence before they filled the gap. What does that mean? Quite frankly, it means the people who filled the gap participated in a bull trap which is being sprung as I write this and quite possibly as you read this as well. That’s why we could see lower Greenback prices at least the first part of the week.
That also explains why the stock market is setting new highs, why the stock market violated the 161 day window off the November low. But now we have another window, we are on the back end of the 1597 calendar day window to the March 6, 2009 low and right in the heart of that same window off March 9, 2009. So we could end up with a volatile sequence this week where it’s feasible to put in a reflex low in the Greenback, blow off high in the stock market and end up with a shake of the trees to allow the nuts and coconuts to fall out. The recent time windows are showing us we are not ready to put in an important top. We are likely heading for the fall time windows for the potential of a more important high. But that doesn’t speak to the fact we could end up with stocks moving from weaker to stronger hands. That’s what a shakeout is all about. It’s short, hard, swift and intense. But it ends and we move on.
Gold seems to have put in an important trading low. I’m not prepared to call it a long term bottom. Last week it took out a high near 1296 which means it really took out a high with a square root at 36 which is important in the world of Gann. Just as important is the longer term Silver chart which has a very good square of 9 reading at its low which seems to be holding over a 3 week period. It’s important to see when a market has important square of 9 readings or symmetries hold because if it doesn’t, we know the potential of more technical damage is great.
The VIX also dropped which means we are getting close to happiness if not euphoria and that can’t hold for long. I don’t know exactly what is going to happen, but the market should be looking for an excuse to shakeout. It will be interesting to see what they come up with. But at the end of the day, I’m still looking for the bigger correction which seems to be elusive in the fall again. We are closing in on important windows in the fall; doesn’t that always seem to be the case?