Fighting Rehab

The week that just ended, May 18, 2012, had the feel of some sort of intervention. It seems that we are all strung out on leverage and debt and we need to go to rehab and sober up. Banks in Europe are buckling at the knees in the face of bank runs as they can no longer function as proper businesses. Every other minute a news story would pop up that Greece would exit the Euro zone and that would be followed with a news story that they could not exit the Euro zone. It would seem that the leaders of Europe are so drunk on debt that they cannot think straight. Across the Atlantic, JP Morgan’s admission of a $2 billion dollar trading loss grew to possibly $5 billion and counting. Does anybody really know? In a world where tens of trillions of dollars in derivatives are exchanged everyday, no one has a clue as to the real vulnerability of the financial sector much less any idea as to the real value of a few billion dollars. It is just paper. Can we all just ignore this stuff and continue to bid up the Dow? In a word, ‘no’.

Well, not forever. This was a week in which the US propaganda regime continued to pump the good news. Everything was getting better and the economy was getting stronger. Yet, Europe has surely slumped into a recession and China has slowed markedly. Australia and Latin America sell heavily into these markets and their economies are feeling the effects of the debt binge and the inevitable contraction. We euphemistically call this contraction ‘austerity’ so we don’t alert the world to the inevitable bear market that will evolve. Or, in my opinion, resume. It ain’t over until the world sobers up. The world must reduce debt, cut government spending, and learn to live with less. The only way to do that is in rehab. 

We have all been living far beyond our means for far too long. Investors have been lured along by the interventionist and manipulative Fed who has made it a priority to continually goose the stock indices higher thus making investors think of their gains as ‘skill’ and not the result of a manipulated con game. Much like three-card Monty, winners are manufactured to lure in the suckers. The more investors win, the more loopy they become. When a suggestion is made to sober up and face reality, the normal reaction is one of defiance. But in truth, there is no way out for Greece. There is no way out for Spain. There is no way our for the US. In truth, we all must go to rehab, get sober, and learn how to live within our means again. This of course will be catastrophic for the big banks. This is precisely why the central banks are fighting so hard to keep the party going and to avoid rehab. 

So here we are. The Fed is constantly feeding the world the drug of debt. We are strung out. We need help. We can’t afford the drug anymore. But the Fed will not give in to rehab. Look at the chart below and notice the red rectangles I have drawn on the SPX 4-year chart. They are the months of May through July basically. These are the months that the central banker stimulus programs terminate. Coincidentally, so too do the indexes of the world. The takeaway is obvious. Without the Fed dumping their debt drug into the vein of the economy, the indexes collapse. We are in the month of May. The Feds Operation Twist ends in June. The indexes are collapsing. The chart would tend to indicate that this may go on until July when the Fed introduces a new rescue program. We don’t want to go to rehab so we let the Fed keep us doped up. That just makes us dopers. Of course, we should look for patterns in trading that we can take advantage of like the chart below. Only this pattern takes guts, skills, and the ability to deal with heightened risks. Rallies end with the Fed and they start with the Fed. Extreme caution is advised.

SPX - 4 years weekly

Chart courtesy StockCharts.com

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.