-- Posted Friday, 25 August 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Friday, August 25, 2006
For investors who’d rather be smart than lucky
Although I had grown weary of explaining why deflation is the only possible outcome for our mortally sick economy, a chat group that I monitor drew me into an argument with someone who sees only the possibilty of inflation. The crux of his case is that, even though deflationary catalysts such as an incipient real estate recession are present, “the government has already planted the seeds of continuing inflation in the huge and accumulating budget deficit.” I would assert that deficit spending, no matter how extravagant, will not be nearly strong enough to surmount the fatal drag on household spending about to be triggered by a housing bust.
But my further response was to some very important facts which the inflationist failed to acknowledge:
“Your argument does not consider that it is requiring ever-increasing amounts of borrowing to sustain each dollar's worth of economic growth at the margin. When I wrote on this relationship for Barron's more than a decade ago I believed that credit stimulus had reached its effective limit, since it was requiring about $2.50 of borrowing to create a single dollar's worth of GDP growth. How shortsighted I was! This ratio was at its most favorable around 1947 (if memory serves), when we could correlate a dollar's worth of GDP growth with about 57 cents of new borrowing. However, more recently the ratio has hovered intractably above $5 to $1 (according to Richebacher, the only economist who has paid much attention to the relationship), and although this ratio is manifestly unsustainable, there is nothing that could conceivably cause it to contract -- other than deflation.
Housing ‘Milked’
“The pushing-on-a-string argument must also be given its due, since the promiscuous amount of borrowing that has been required to sustain merely moderate economic growth in recent years has required an economically dubious inflation of an asset class, residential real estate, that arguably cannot be milked for more leverage than we've gotten from it already.
“The important thing to consider is that deflation's power to overwhelm will continue to draw on one source that cannot be thwarted: an increase in the real burden of debt. To the extent this is so, it will not take a collapse in home prices to trigger full-blown deflation, merely a downtick of 3-4 percent. This would expose mortgage payors whose collateral is falling in value to effective real rates of 10% -- a figure that most hedge funds would be hard-pressed to achieve nowadays. Servicing a six percent mortgage is no strain if one's property is increasing in value by 5-7% or more per year. However, let values stagnate or -- heaven forbid -- fall, even slightly, and a "low" mortgage rate of 5.65% becomes, for many, a crushing burden.
Now What?
“That is where we are now -- for sure in Colorado, where I live, but also in California, Florida and Arizona, among others. To reverse the incipient momentum of this deflationary trend presumably would take quite a large stimulus -- much larger than it took to merely push home prices higher when both buyers and sellers were filled with bullish certitude. Does this imply we would need to bring administered rates down to zero, were it even possible to do so? We cannot be confident the dollar would survive such a measure, especially with virtually all other nations currently in tightening mode. And even if the central banks were to agree that stimulating a new credit binge is the only way to ward off a global debt implosion, they would have to reckon with the fact that any such attempt would run up against the $5 to $1 debt-to-GDP ratio noted above. Of course, the effort would have to target home prices, since that is the only asset class big enough to stimulate enough of a wealth effect to get consumers to freely spend money they don’t have.
“Hyperinflation will always be an option, but that would only postpone the day when liquidations bring debts and assets back into balance through an essentially deflationary process.”
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Real-Time Chatter
Rick’s Picks has added a chat room to the growing list of services and features available to subscribers at no extra cost. If you’re an active trader looking for potentially profitable ideas and precise swing points in real time, check it out! Take a one-month trial subscription to Rick’s Picks and you will gain instant access to this valuable service and meet some Hidden Pivot Seminar grads who are well on their way toward achieving success.
Immediately below is a small snippet of conversation from the chat room’s inaugural day. When the dust settled, we had bought shares of Kinross Gold three cents off the intraday low, after the stock fell sharply earlier in the session:
Rick :: Only 24 have traded for 1.00 today
its me :: any update on ibm?
Rick :: 0.55 bid for eight Jan 70 IBM puts!
Rick :: Sellers are not exactly fighting to unload them for 0.55
its me :: thanks. i actually jumped the gun and bought at 0.65 a couple of days ago
Rick :: 55x65 B/A market now 2200 contracts by 4400 contracts, but only (a grand totasl of) 13 have traded at all - for 0.60
Rick :: Heard from someone who 'accidentally' bought them for 0.60 too. Keepers.
its me :: thanks. this chat room is really fantastic
Rick :: Cancel bid for DIA puts. Stock would need to push above morning's highs to get me filled, at which point I won;t want to be filled.
Rick :: IBM bullish impulse leg on lesser charts suggests that any pullback will be a "buy". I'll leave the bid in for some puts, though -- at least for a while -- since no one seems to want to sell them.
Guest 5491 :: Good Morning Room
Rick :: Impulse leg in IBM defined by push above a peak at 79.08 recorded yesterday, along with a series of minor descending peaks recorded throughout the day
Hunt :: KGC DLY has reached its target , Evryone keep an eye open for a down impulse leg on a shorter Tf, as a place to get long. The Abc on the Dly is real clear, Try 11/14 for your A
Rick :: Hey, Hunt!
Hunt :: Gm SIR! Reporting For DUTY!!
Rick :: Did you see my series of three targets for Kinross (KGC) in today's Touts? Rally is pretty extended, for sure, but I'm counseling a bit of greed, witha 14.22 exit, minimum
Hunt :: Yes, That is why, I am talking about it
Rick :: Be interested to find out what kind of trading platforms, if any, those in the room right now are using. I'm on TradeStation myself.
Hunt :: The Dly tells me to take at least partial Profits, A= 11/14 B= 1/31 C= 3/10
10:00Rick :: I see. A 14.04 target. Your choice of A's is conservativw -- between two others that catch the eye: 6.49 on 10/20, and 7.47 on 11/30. One way to see if the choice of A's is valid is to see whether anything discernible occurred at the respective midpoint pivots. Let me work your numbers and see...
Guest 3524 :: can i buy gold at this position
Hunt :: THxs, but I am really looking for a down Impulse leg To get long, The up Move is quite impressive
Rick :: A=6.76, B=11.94, C=8.77. Those price points yield a D target at 13.95, and a midpoint (along CD leg) of 11.36. What happened when Kinross hit that number, 11.36, the first time? Answer: Hard to say. There was a definite consolidation with an 11.25 top, so I'd say the point A you've used here is in the ballpark. But the 'pivot effect' at 13.95 is not likely to be decisive, so I'll simply stick with my several 'greedy' targets above it.
Rick :: Hunt/Monica: Looking at the daily chart, what is the best-looking spot to bottom-fish in gold over the next few weeks?
Hunt :: Thats Why You get The Big Bucks! Thxs!I If I see a down impulse will Post
Hunt :: Reguarding Gold , I like 592, then 571, 571, is a test of the up C
Hunt :: There is alot of congestion, between here and 610
Butler :: Hoping to bottom fish GLD 57.85 ish
Hunt :: Reading the Up Stoch on the Dly, relative to Price movement tells me Price is weak
Rick :: Check out the BIG pattern that uses May 17's 734.00 as a point A. From there, B=557.10, and C=691.20 (July 17), for a midpoint of 602.70! That'd be my minimum downside for December gold right now.
Rick :: The pattern is sufficiently compelling that I would be disinclined to say a bullish word about Gold until 602.70 is touched. ZThe good news is that it can be bought very aggressively with a very tight stop-loss.
Hunt :: With you on that one
Butler :: that gives me 51.30 T for GLD, 58.86 P if I have typed the numbers correctly into the calculator
Guest 3524 :: stop loss for gold
Rick :: Incidentally, I'm still bidding 0.55 for those IBM puts. If you look at a daily chart of this put, you can project a 0.50 downside target for it. We didn't look at charts for puts and calls in the seminar, but their price patterns can be tracked the same as stoicks, indexes and commodities. In this case, for the Jan 70 IBM put, I'm using a 4.00 point A (June 27, 2005), a 1.50 point B (July 19, 2005), and a $3 point C (sept 21, 2005) = 0.50. We're practically there!
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