The approach to this intervention is quite instructive. The EuroBank raised rates the week before to universal yawns and a new breakdown in the Euro, as the German BundesBank chief went out of his way to feign indifference. Doubtless this broke the early Euro longs who were either not the "right" longs or perceived to be weak, as the case proved. It was also a signal to the big boys to pile in, as indeed they did.
So by Tuesday or Wednesday last the FED and its gaming partners knew there would be massive support for intervention. We can argue about whether the Big Boys were tipped off or figured it out by themselves. We mere mortals will not likely ever know unless someone gets senile enough some day to slip up and put it in his or her memoirs.
EuroFx jabbed up to the top of the Andrews' Channel and settled back at the Friday close. It will take a consolidation before attempting to make the break out, but that now seems most likely.
Naturally, since gold is, I believe, yet another alternative currency, we can see in the CFTC COT chart that gold has also given a buy signal in the weeks leading up to this intervention.
My read, as long term followers will know, is that the Kondratieff Wave peaked in 1973-74, after which we experienced the typical "plateau" recovery phase from 1976-1981, and then began the long decline of crude goods (commodities) and interest rates which lasted until 1998-99.
The rate of annual increase of M3 turned around and became positive in 1992-93 just as did short term interest rates. That was when the danger of runaway deflation prompted the new regime (post-Volker) to re-inflate the economy. Think back to the Japanese market crash and the contractionary effects of the US Savings & Loan debacle. Had not reflation begun at that time we might very well have had a repeat of the 1930's, something which slavish Kondratieff Wave liquidationists are still expecting.
Instead we had disinflationary growth, and the economy rebounded even as long term rates and crude prices continued to decline: the Goldilocks economy.
The decline of the annual rate of increase of M3 from 11% to approximately 7% in 1998-99 was accompanied by the US stock bear markets, the Asia crisis, and the bear market lows in long term interest rates and commodities. But the bottom did not fall out of the economy despite the financial panic of 1998 and the commodity panic of 1999, as many economists and market analysts expected. The reason, apart from the Long Wave cycle itself, was that the money pumps had been running flat out for six years already.
The so-called "liquidity trap" of Keynes and Paul Krugman, wherein the monetary authorities cannot "pump" enough funds fast enough to prevent deflation, proved to be a "bear trap" instead. My take is that Krugman's "The Return of Depression Economics", which he rushed into print after the meltdown of 1998, will prove to be as classically wrong a statement at a deflationary bottom as Irving Fisher's "permanently high plateau" was for the pre-crash heydays of 1929. The experts got it wrong again!
The intervention fits into this because it confirms and begins to unwind the conundrum of a higher dollar accompanied by higher inflation which we have seen for the past 18 months. Most international commodities are priced in dollars, so the worst of inflation has been seen in Europe. This inflation overcame the normal European advantage of selling their products into a strong dollar since their imported crude goods were also priced in dollars! The dollar and yen blocs largely escaped this squeeze.
If it sticks, and I think it will, the current EuroFx intervention will effectively be the second US dollar devaluation of this Long Wave down phase, the first having been in 1985. This drives the last nail in the deflation coffin. The US will be starting the long up phase with a realistically priced dollar vis-à-vis Europe and Japan, unlike the situation coming out of Bretton Woods (1944). Coupled with already high M3 annual growth rates and rising interest rates and prices, this insures that inflation is back to stay for a long time.
The market implications are higher prices of goods of all sorts, not necessarily all at once. The one investment you must avoid is notes and bonds. They will be losers, except for swing traders or long term shorts.
The stock market should continue to benefit from inflation until the first real inflation scare. Some time down the road after that scare, it will become clear that inflation is so bad that all currencies will melt down, and we may get what James Turk has referred to as the "Weimar solution" when "anything but cash" will be king, including stocks. But that is for later.
SHORT TERM
My remarks last time out that the S&P500 futures had a bigger plunge ahead into 22 September looks pretty good, so far. The opening NYSE TRIN on Friday was 0.10 on a NASDAQ limit down move, so the players and the dippies were out with the big scoops and trucks, loading up once more.
With the hyper-volatile day-to-day moves lately, and the fact that the market closed so near the high on Friday, there remains the possibility of another selloff Monday *IF* SPZ0 gaps down and has a high for the day under 1468.
My 2C Sentimeter never got over 80 on this move down, so two primary scenarios exist. The first would be a substantial rally which fails and drops into October when the market is more sold out. ~3 October is looking interesting on several grounds. There are also dates in late October.
The second scenario would be like the late July or late February 1999 situations where we get a short term blowoff out of a relatively bullishly exuberant bottom perhaps also into one of those dates.
In either case, unless we sell off Monday and just go down, down, down, we should get a rally. In these days of extreme day-to-day volatility, one simply has to play this day to day. Unless one is a futures or options trader, one may just have to wait either for an extremely over bought or oversold situation.
Gold and "other currencies" seem ready to make good bull moves. Further intervention by the central banks may be needed or may not. Certainly gold and currencies were overdone on the downside.
Grains remain an enigma. Corn and wheat have the best charts and CFTC COT parameters, but none looks like an immediate buy.
The Clintonian "statesman-like" intervention in the crude oil market is as patently political as the man himself. There is no substance to it apart from electioneering. The main thing the whole affair has demonstrated is that Al Gore will be a far more "hands-on" interventionist than Clinton.
If anything goes wrong Gore will be in there handing out blame, especially if it is free market-related. The market will be blamed for everything, and the democrat constituency will be bailed out of any problems. This too is up phase of the Long Wave action. The entrepreneur as role model is gone. Industry is "bad" and "victims" are good. We must spank the bad entrepreneurs and protect the innocent victims. Expect a lot more trial lawyer industry-wide suits and anti-trust convictions.
Labor costs will rise, initially seen as warranted after a long down phase for labor and everything else. Don't fret about it, it's just inevitable. So position yourself, don't lose sleep over it, and do the best you can. Your best should be very, very good indeed if you understand the process. It will take most folks five to ten years even to catch on to "what's wrong".
27 September 2000
TENORIO RESEARCH LETTER © 2000 IS PUBLISHED BY TENORIO RESEARCH & TRADING, DR. THOMAS DRAKE, EDITOR.
Email: td@TenorioResearch.itgo.com
WebSite: http://TenorioResearch.itgo.com
