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The Biggest Bear Market Rally of all Time!

May 20, 2002

We're just in the beginning the most desperate of times. We are about to hear the last gasp of our once great world economy. Call the summer of 2002 its swan song. Sweet song of sorrow, it will become a hymn. Few will foresee the devastation to come. Most will believe they are experiencing the best of times. "Surely these good times will never end," will become the mantra of the street. To the masses this summer's song will sound like "Ode to Joy". Its rhythm will define "real prosperity" for generations. More words will be written about summer 2K2 than were written about any other season in history.

This will be a summer of the greatest DOW rally of all time. Do not be deceived. Avoid all temptation of the high-flying finale. Stay the course; it will not harm you to miss the crescendo!

Why a rally?

The debt implosion has already started. Witness is born in the chart presented in a recent post by Adam Hamilton aka Zelots. I have the greatest respect for Adam's analysis and his genius.

Money has started vanishing faster than the FED can create it. That's the hidden implication of the chart. The entire monetary system is debt created and debt driven. Very soon, the graph must and will turn upward again. To understand the significance of this begs the question: "Where is the demand for money going?" The short answer is that money is vanishing through defaults, and through debt reduction. Both of these actions do in fact reduce the amount of debt and thus reduce the amount of FRN money. The FED would not simply turn off the spigot. There is insufficient demand for money. The FED is obviously having difficulty finding new assets to monetize. Housing is just about all used up, government spending isn't growing fast enough, and credit card borrowing is maxed out. Did someone mention that corporate capital spending is toast! The FED will now find a new asset class to monetize, because they must.

Collapse thwarted?

Very soon there will only be two types of debtors in the economy. There will be the borrowers who are destroying money through default and a smaller set who will destroy by paying down debt. More money will be needed than ever before to prevent a deflationary spiral. Interest payments owed require that the slope of the graph turn upward once again. Catastrophe waits in the wings, but the day of collapse must be thwarted until the last possible moment.

There will be two components to the FED's delaying tactics. First they must encourage borrowing through psychological means and create a general sense of euphoria so that consumption continues. For this they need to throw a party like no other party America has ever known. Secondly they must find an asset class to monetize that stimulates the party atmosphere. For this party to succeed we must all "Buy America" like never before.

Nothing has ever been more American than the DOW, despite the fact that few actually play the market themselves. The retirement plans, pensions, 401(k)s and IRAs are widely used as a surrogate for feelings of future security in America. If we are secure in the future we can enjoy today. Everyone must be encouraged to "really enjoy" this summer. All need to party like there's "no tomorrow", unaware of the sinister double meaning. The DOW is just the ticket!

Creating illusion

Knowledge of past manias would convince anyone that there is no amount of money/debt that can't be spent on an asset like DOW stocks. So how do you get everyone happily involved in the stock market? Expect the FED to actively intervene to begin the push-up in the DOW stocks, first by offering incentives to the brokerage houses, until their maximum level of discomfort has been reached. Then the FED will directly purchase stocks into it's special accounts already setup for just such purposes. When the hysteria over a rapidly rising DOW goes to critical mass, individuals will be clamoring to invest even if it means more borrowing. The "good news" will quickly reach every corner and class of America. Is this not the great American dream of "prosperity for all"? It will truly be something to behold. Only a few will watch in disbelief.

The rise in the DOW stocks over the summer will resemble a weather balloon being filled by a tank of helium with the valve stuck full open. At least it will be magnificent until the darn thing pops.

It is my belief that the FED is all set to begin restoring FRNs to the system and they will do so at an increasing rate. All they need now is a trigger event to unleash their minions. Some excuse will occur between now and June 3rd that will allow the final chapter to unfold. Once set, the celebration will start. The party will grow slowly at first, but rapidly it will pick up speed. The climax will occur with the first hint of fall. Appropriately fall.


I would not be surprised to see DOW above the critical 11,600 by the end of August. This will be the greatest party of all time, a party to end all parties! Yes, it will be unexpectedly so! Before first frost this last party will come to a close. "Turn off the lights, it's time to go home."

What sweet sorrow. How very sad. This song will be long remembered.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."
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