WSJ – Monday, August 31, 2010

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This posting is about the other thing I do, looking at investment markets. Prior postings in this series are available here:

Posts with some relevance to trades, but not in the format of a full WSW analysis, are available under this category:

The charts in this posting are live charts, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it is more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonable choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now! If you would like to see the historical chart, you may enter custom date ranges on the charting tool at

Wall Street Week – Monday, August 31, 2010

So what made money last week? The gold bugs moving some into Platinum and the gold MINERS as an alternative. Water utilities. And some nibbles at Real Estate Trusts. Looks like the “sky is falling” trade…

10 Best Performing Industries
  Industry Name	Percent Change (over time selected)  

  DJ US Platinum & Precious Metals In...	12.14%  
  DJ US Gold Mining Index	4.10%  
  DJ US Water Index	2.97%  
  DJ US Diversified REITs Index	2.27%  
  DJ US Retail REITs Index	1.94%  
  DJ US Home Construction Index	1.92%  
  DJ US Speciality REITs Index	1.42%  
  DJ US Industrial & Office REITs Ind...	1.09%  
  DJ US Residential REITs Index	1.09%  
  DJ US Real Estate Investment Trusts...	1.08%  

Some bets were major losers. Here’s the worst places to have been:

10 Worst Performing Industries
  Industry Name	Percent Change (over time selected)  

  DJ US Coal Index	-7.35%  
  DJ US Brewers Index	-5.25%  
  DJ US Medical Equipment Index	-5.17%  
  DJ US Clothing & Accessories Index	-4.83%  
  DJ US Investment Services Index	-4.66%  
  DJ US Food Retailers & Wholesalers...	-4.15%  
  DJ US Tires Index	-3.91%  
  DJ US Paper Index	-3.91%  
  DJ US Forestry & Paper Index	-3.91%  
  DJ US Food & Drug Retailers Index	-3.87%   

Broadly, anything that depends on a viable economy with a robust consumer. Jobs reports are still lousy, so what else is new?

Mostly I’d just point out that the down are ‘near 4% or more” and the ups are a lot less than that. The up / down ratio is very against you…

The Long Term Context

This is a very long duration chart (5 years) of NYSE and one of the S&P 500 (SPY). They will not change much from week to week (just one tick mark) so guides longer term attitude.

Same as last time:

Notice that we’ve slowly rounded over into a flat trend line. The moving averages are pointing sideways. We’re going nowhere, but with increased risk of a fall.

We’ve got the Slow Stochastic nearing the bottom now, so we would expect a bit of a positive short term (on a long term chart… so it’s a few days) of flat to up starting in a few days as we reach 20ish and cross over upside). The MACD indicator is sideways and below the zero line to the negative , so the investment trend is to the downside. DMI is ‘Red On Top’ too, so the major bias stays negative. We’re in a longer term flat to falling market. Our long term context is significantly risky. Even the potential short swing trade that Slow Stochastic says is coming could just be a ‘flat’. During a falling market it can be “flat – down -flat -down” with little to no “up”…

UPDATE: [ Well, the good news flow today on manufacturing accelerated the turn. Notice that Slow Stochastic is showing a bit of a ‘knot’ at the bottom as it turns early. This “trade” looks to be starting now rather than in a ‘day or two’. We do still have some potential bad news on Friday, so it still could ‘wiggle’ some, but I also expect a lot of shorts will ‘cover’ before the long weekend. Especially after todays action. Not a time to be short..]

In the next few days we get a lot of news and noise and with The Fed minutes released. Expect choppy. Given that The Fed said ‘prolonged easing’ I’d expect the minutes to have some bad news to support that. So we’re well on our way to a ‘flat / downish’ week followed by more dropping. Yeah, it could reverse, but the bet for now stays ‘long term down’.

Last week I said:

This argues for a multi-week downward trend to the markets. Figure September for a loser of a month, and perhaps October too. Bias to be ‘out or short’. Cash, bonds, and perhaps gold as ‘safe haven’ plays.

I just wish I’d noted that Silver and Platinum are in the safe haven playbook too.

5 Years, NYSE

5 years, NYSE

Spiders (S&P 500) looks very similar. Sideways mostly with risk of down.

We continue to have ‘bear market be out or short’ indications. RSI is still ‘stair steps down’ from an approach to near 80. Williams %R and Rate Of Change both saying ‘be out’ as they are below the mid-line.

SPY 5 year weekly tick, RSI, Williams %R, ROC

SPY 5 year weekly tick, RSI, Williams %R, ROC

When we turn up, these long term charts will lag, but for now they remind us that it’s a generally lousy time to be on the positive side of this market.

UPDATE: [ Notice that Williams %R bounced off the middle line to resume a rise toward the top. When that happens it usually means a run has paused, and is resuming for a while. A fairly positive sign, even if low reliability. So watch for MACD crossover and DMI ‘blue on top’ to confirm any positive side trades. ]

What Is Our Asset Class Context?

Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a 20 year+ maturity bond fund, oil, gold, Yen.

Asset Class Races

Asset Class Recent Race

SPY       The S&P 500 ETF
GLD       Gold ETF
USO       Oil ETF
FXY       Japanese Yen currency fund
TLT       20 Year U.S. Treasury Bond fund
FXE       Euro currency ETF
SLV       Silver fund
BZF       Brazilian currency ETF
EWA       Austria ETF
WOOD      A wood and paper products fund

Bonds, gold, silver, Japanese Yen. Same old panic play. Ride it if you like, but be ready to jump when it changed course. Brazilian Real is climbing… could be time to move back to Rio ;-)

UPDATE: [ What a difference a day or two makes. TLT is tilted, Gold is lost some glitter, Rio is rocking and we even “got wood” going up. Looks like a “whale” is swapping from the ‘safety play’ to the “Got Growth?” play. Need to see some confirmation that it’s not just a short cover, but I got ‘bought in’ to several things today including Brazil and Australia ( EWZ and IAF / EWA ) This is why I liked Silver and Copper more than Gold at this point as the first two are also industrial metals, so you get a natural hedge. Semi-precious metal if the money tanks, but also an industrial demand growth if the economy does recover. I’m also back in FCX and Southern Copper SCCO as of today. ]

What about Brazil? A Closer Look.

India looking a bit like a ‘double top’ and ‘failure to advance’ while Brazil is still a bit downslope. I wonder if the money if flowing into Brazilian bonds, of if the volume is just not yet enough to move their stock up? Or most likely it’s just dollars being dumped against all currencies…

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

EWZ  - Brazil
BZF  - Brazilian Real currency
FXI  - China
EWA  - Australia
EPI  - India - WIsdom Tree fund
EWC  - Canada
EWW  - Mexico
GUR  - Middle East Fund

The stock indicators do not yet say buy. So we’re out, and still waiting for a reentry indication.

UPDATE: [ We have DMI “blue on top” (odd as it is usually slower than MACD) while MACD is looking like a set up to a crossover upside. Not quite a full ‘buy’ indication, but with a pattern of higher lows and with this rise starting from RSI further off the bottom than before, and in the context of rising Real currency, I’m “Back in Rio in size”. Time will tell if I’ve ‘shot the wad’ too early or not. ]

This chart has a couple of the other ‘trade’ indicators on it. Slow Stochastic (that isn’t very slow), Williams %R (that usually tells you the same thing as MACD, but sometimes more clearly), and “momentum” that is like Rate Of Change, but sometimes seems to move a bit faster. We see here that Slow Stochastic and Williams %R are in ‘buy’ territory (SlowStoch is inflected up of a bottom crossover and W%R is crossed over the midline) while Momentum is back at the midline. Not yet a ‘buy’ but at least a neutral.

Brazil EWZ with Slow Stochastic, Williams %R and Momentum

Brazil EWZ with Slow Stochastic, Williams %R and Momentum

OOTUS – Out Of The U.S.

See the racing stocks tab for currencies and for foreign emerging stock markets for the latest moves.

Currencies race

Currencies race

The only real ‘news’ here is that it adds the Swiss Frank to the currencies that are gaining.

UPDATE: [ Yen and Gold take a downtick while Euro and British Pound tick up. The Real continues to climb. It looks to me like ‘something is afoot’. More of my money is now in non-US dollar form than anything else. Brazil and Australia mostly. ]

Gold 1 year daily chart

Gold 1 year daily chart

Last week I’d said

A load of “talking heads” were saying to buy gold this week, last week it was Goldman Sachs. But I’m not so sure. It looks more flat to me. If you want to play ‘catch up’ with Gold, I would be more likely to use silver or copper.

That was bad on two counts. First off, when Goldman says buy, a load of folks buy, so don’t fight them, ride the trend THEN get off… Second, I ought to have said “use silver, copper, or PLATINUM”… Doh.

UPDATE: [ Technically the chart says to still be in Gold, but if a lot of the hedge funds who are in gold start selling to move into moving stocks, this could drop fast. I still like silver and copper better, and even platinum and palladium as they are both precious metals and industrial metals. ]

Some Selected Emerging Markets

Indonesia Fund 1 Year Chart

Indonesia Fund 1 Year Chart

This chart compares FXI – China 25 big stocks, EWZ – Brazil, EWO – Austria, EPI – Wisdom Tree India fund, and the Indonesia fund.

IDX  Indonesia Fund
FXI  China
EWZ  Brazil
EWO  Austria ('emerging Europe proxy)
EPI  India with dividends and growth fund

For Indonesia, we have “failure to advance” with a “double top”. Falling RSI. ADX line low (low directional strength) and MACD headed down. Time to leave Indonesia for a while. But the others don’t look very good either. So I guess it’s global equity liquidation and run for the vaults of Switzerland…

VIX the Volatility Index

Same as the last few weeks:

“We’re still getting the peaks characteristic of a falling market, but with lower strength over time. We did have a blip up, so as volatility picks up, things will get rocky and we drop some.”

Volatility Index and Related

Volatility Index and Related

VIX  - Volatility Index (not a ticker, you can't trade it)
VXX  - Short term VIX futures ETN (a ticker you can trade)
VXZ  - Medium term VIX futures ETN (a ticker you can trade)
FXY  - Japanese Yen
SH   - "Short" sell of SPY
SPY  - S&P 500 benchmark
IYT  - Transports, a leading sector
XHB  - Homebuilders, a leading sector and "canary" 
XRT  - Retail

UPDATE: [ The VIX took a big downtick today. That is ‘bullish’ for stocks and implies rising markets. We’ll see if it was a ‘one day wonder’. As VIX drops, buying calls becomes cheaper and selling options becomes less attractive, so if it drops even more, it could make call buying attractive. ]

The Dollar

This is a ‘US Dollar UP” trade chart of UUP. The down bet is UDN.

Dollar Trade -UP

Dollar Trade -UP

We had a big run up with a near parabolic “blow off top”, then an overdone drop to the downside, now the ‘dead cat bounce’ as it recovers from the plunge. Next? I’d expect a dribbling drop. Slowly, over a long period of time. The RSI returned to the midline. In a long term drop it will wander 20-50-20-50-20-50. In a flat sideways it’s more of 35-65 35-65 etc. So the next dip will tell. Since this is mostly measuring against the Euro, it’s less useful than looking at the whole basket of currencies.

UPDATE: [ Gee, one whole day for the predicted drop to show up… Not much time to act on it. ]

Ideas of the Week

Covering in some shorts, moving to ‘safe haven’ trades a bit more. Reducing dollar balances.

Update: [ Right advice, though not soon enough, and I’d now say there is also some movement out of ‘safe haven’ into ‘risk with growth’ happening. Need a couple of more days to confirm it though.]

What does the 10 day hourly chart say is happening now?

Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now. We also have EWO, an emerging Europe Austria fund, EWW for Mexico and IIF for India.

Close to nothing.

UPDATE: [ Well it was close to nothing right up until it spiked up. Then sat there nearly dead flat at the higher level. Very odd. EWA, Australia, especially is ‘off to the races’. I bought back into IAF for the larger dividend of about 10% but remember it is much more thinly traded than EWA and harder to get in/out in size fast.]

10 Day Hourly Interval Broad Market

10 Day Hourly Interval Broad Market

Other Asset Classes

The 6 month asset class race:

Asset Class Race

Asset Class Race

SPY  S & P 500 US stocks
GLD  Gold
EEM  Emerging Markets
FXY  Japanese Yen
JJC  Copper
TLT  Long term bonds 20 year+
USO  U.S. Oil
DBA  Agricultural basket
SLV  Silver
WOOD  Wood / Timber

Same thing we’ve seen before. At least the call on silver beating gold looks like it was a good one…

UPDATE: [ Silver, Emerging Markets, Copper spiking up. I’m now back into both emerging markets and copper. DBA the ag mix is rising steadily but unspectacularly. I was going to be in it, but got sucked into other things today with more action. Oil looks like a ‘double bottom’ with “failure to advance to the downside”, so I’ve bought back into some Canadian Tar Sands (IMO and SU). ]

So what happened in the Tech Market relative to world markets?

Tech vs Other Markets

Tech vs Other Markets

QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

Pretty crappy place to play…

UPDATE: [ Got a good ‘kick’ today with Slow Stochastic saying a fast trade at least is ‘on’. Still waiting for the slower MACD and DMI to catch up. ]

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race but with TBT (the “long term bonds” short sell ETN – that is, the thing that “shorts bonds”) as the main ticker symbol:

Bonds - TBT to Short Them

Bonds - TBT to Short Them

Yup. Still running higher. But at some point we’ll have a ‘failure to advance’…

UPDATE: [ And today that looks a lot like a ‘double top’ with ‘failure to advance’ in the green TLT line. The main ticker of this chart, TBT a bond short fund, has what looks like a ‘bottom’ with early indication of an entry. It would be good to look at Slow Stochastic for it, to plan a bond short, but that RSI is near 20 and the black ADX line on the bottom has made a hump inflection with DMI- headed down says ‘time to short bonds is soon’. As the economy shows life, The Fed will stop having near zero interest rates. Anyone still in bonds then will get creamed as the market price drops. Hard. You want to be out of bonds before then. The impact is worst in the longest dated bonds, so dump your 20 and 30 year bonds first, then the 10s and 5s… Me? I’m preparing to but TBT as a bond short. When MACD has crossover and DMI is “blue on top” it will likely stay that way for some time as The Fed can take a year or three to finish ‘tightening’ interest rates. It can be a very long and lucrative play, so no need to rush in to it. ]

What About Oils?

Some Selected Global Oils:

The Oil Majors Race

The Oil Majors Race

XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
BP   British Petroleum
STO  Norway
E    Eni Italy
TOT  Total - France
RDSA  Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU   Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

Same basic story as last two times:

Oils get spanked in economic slowdowns, so the ‘double dip’ talk has folks stepping out of oils. I’m still holding large dividend oil and gas trusts. Not much reason to own US oils until we know what the government is going to do to them.

But with the addition that it’s now hurricane season, so things can be very volatile in a weather driven way. Watch for hurricanes threatening the major oil refineries on the Gulf Coast and “The LOOP” where supertankers unload. BP is off the radar as a Gulf risk, but hurricanes are now on.

Natural Gas is lined up for a seasonal drop as AC demand leaves and heating does not begin. Time to prepare to buy on that dip.

UPDATE: [ All the oils took an uptick. Looks like an entry indication shaping up. I’ve got positions in PBR Petrobras now. I also doubled my CZZ (green line on the next chart) on the combined sugar / fuel / Real currency / growth story. ]

Some Near Oil and Oil Related Comparisions

What about oil service companies and Brazilian sugar / alcohol?

Oil Services and Oil Related

Oil Services and Oil Related

Last time I’d said:

CZZ has moved up nicely but took a dip. It’s back at the Simple Moving Average stack, so it’s a ‘reentry’ point. But the context is a bit of a worry. Still, sugar as a commodity is likely a decent play.

And that was exactly right. Love it when that happens!

UPDATE: [ Oil Services looks like an ‘entry’ call too. I’ve doubled my CZZ.

SEE the SEA!

No real change here from last two times either:

“Looks like crude oil tankers are in demand. VLCCF is also the abbreviation for Very Large Crude Carrying er Fellow… or Fleet, or something… ”

but with the addition that even they have ‘gone flat’.

Shipping Comparison

Shipping Comparison

When a slowdown is expected, shipping sinks 8-)

UPDATE: [ I’ve taken an early and small position in the cruise lines RCL CCL along with a ‘tiny’ marker position in a shipper and a modest position in TeeKay Shipping with a 10% dividend. Yeah, a bit early, but I sometimes need the ‘nibble buys’ to remind me to keep an eye on a sector… ]

Here is the RCL / CCL cruise lines chart. You can see how these have much more range (or “beta”) that the S&P 500 SPY fund:

Royal Caribbean Cruise Lines, Carnival C.L., and SPY S&P 500

Royal Caribbean Cruise Lines, Carnival C.L., and SPY S&P 500

The cruise lines can have a lot of ‘juice’ but can juice you in either direction…

The REITS race – Real Estate Investment Trusts

Looks like the bottom is in. They are starting to rise. RSI is stair steps up from near 20. MACD is blue on top and crossing to positive. DMI is blue on top. Looks like “good to go” from the indicators.

UPDATE: [ I’ve got a ‘tiny’ in PLD Prologis a logistics REIT and some small Mall Reit positions now. The Healthcare Reits are probably ‘good to go’ but for emotional reasons I’m not in them. Never trade something where you have emotional baggage…]



PEI  Pennsylvania Real Estate - Mall REIT (REMOVED to make better graph)
VTR  Ventas - sr. care, nursing homes, hospitals
PSA  Public Storage - junk storage units
BXP  Boston Properties - office REIT on BosWash corridor  
HCN  Health Care REIT -  extended care, senior care, medical offices
HCP  Health Care Properties - ex. care, senior living, Dr. offices
PCL  Plum Creek Timber - lumber and trees REIT
SPY  S & P 500 broad stock market benchmark
RPT  Ramco Mall REIT
PLD  Prologis - logistics 

UPATE: [ I’m in Prologis, but that is probably not the best choice for most folks. It’s just the one I know best. PSA junk storage and VTR and the health care REIT group are probably better. I’ve taken out PEI for now as it’s wide range is distorting the look of the rest of the chart. ]

Conclusions and Likely Actions

Moving to non-US Dollars, physical assets, and the whole inflation “Real Estate, Gold, Platinum, Silver, Yen, Swiss Francs” set. The “Summer cooling demand’ trade on natural gas is over (used to make electricity in peak demand turbines) and the winter demand is not in place yet. Watch for natural gas to drop and plan a re-entry just before winter gets rolling.

Automated Stock Screens

Still no comments from anyone on these, so I’m figuring on leaving them out.

So far nobody has said a thing about the automated stock screens, so I’m leaving them out for a while. If no body looked at them, there is no reason for me to do the work of making this part of the posting.

I’ve moved the automated tool screens here. They are large listings of stock tickers that are not all that visually interesting, so I’m putting them at the bottom. Holler if you don’t like it here. (There have been no comments one way or the other so I’m gong to leave them out for now. Well see. If you want them, holler…)

Running Stocks and ETFs

(On Hold unless someone says they want this.)

I have a tool that searches chart patterns and finds those that I describe to it as “interesting”. For this section, “interesting” is those that have price over the 50 day Simple Moving Average. Basically, those that are in a steady up run.

This is most likely to continue, but will at some point each ticker will hit a “dip” and fall off this search, only to return at the next rise. So a high number is good, until it fails, and a low number can mean time for a second bite at the apple. Being ON the list can be as important as rank on the list. Races tell you how to rank them. Realize that these have not been filtered significantly for the quality of the fund, nor for the volume traded, nor for what they hold. I have filtered for “over a buck” price. Each ticker must be looked at for those qualities before buying anything. This is just a way to find “things of interest” to explore.

Let me know if this is of any use to folks, or just takes up way too much room for not much of interest.

Stock Indicators – what and how

If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this paragraph and there is a bit of an explanation.

Click for Disclaimers, Disclosures, and Where To Get Charts

Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.


About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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16 Responses to WSJ – Monday, August 31, 2010

  1. Gnomish says:

    I’d be very interested to hear you analyze the impact of boomer retirement on anything that may change dramatically.(they never do anything but it’s a mass movement – and often called a migration)

  2. KevinM says:

    Ouch. My stop loss got lost in the crowd.

    Looks like it’ll run all morning. Wonder how the rest of the week goes. That falling triangle might be broken.

  3. E.M.Smith says:

    @gnomish: Boomer retirement will boost healthcare demand and leasure demand (cruise lines and liniment ;-)

    It will theoretically result in massive asset sales as boomers sell those assets to fund their retirement. But… A lot of folks die and leave those assets to the kids, so I’m not so convinced on that one… Also, as the distribution of age at death is from 50 to 90 and boomers themselves are spread over about 15 years, that’s about a 55 year spread. Kind of a diffuse impact if you ask me. So I’m sticking with cruise lines and medical as key themes. Unfortunately, Obamacare kind of screws the pooch on health care… so look at the health care REITS… And drug companies.

    @KevinM: I got ‘bought in” to a lot of stuff. Digging through the aftermath now. Brazil, Indonesia, Copper, Cruise Lines, etc. Just hope I can figure it all out before morning comes ;-)

    Looks to me like a combo of some “Whale” changing positions (dumping bonds and buying stocks) along with the usual First Of The Month 401K auto-funding.

    I’m expecting about 2 to 3 days of ‘run’ to it, but we’ll see. A few charts show a MACD crossover to BUY and with DMI showing “blue on top” so it could have even more legs…

    Trying to fight of sleep long enough to do some “this chart says buy” look-see…

  4. Gnomish says:

    I thought I had a clue about what ‘had to happen’ but now everything is messed up.
    if the 401Ks have been looted or diluted, plus the offspring can’t get a mortgage, will the boomers not be downsizing to retirement communities? Will they be exchanging rent & the promise inheritance for extended care at home like they do in the old country?

    Still hoping for usd to approach parity with cdn soon. Anything over 86 is gain, though. Gonna be back in USA house hunting shortly, maybe even get escorted.

    Life is twisty, eh? Saturday I had 2 rcmp pounding on my door wishing to deport me. Monday I was making a vid with the mayor to show off the shirt she gave me…lol.

    I should sit inside more and not stray from the keyboard…

  5. E.M.Smith says:

    I’ve put some ‘updates’ in the posting above as Tuesday was just a strange chaotic day. Several “buy if touched” orders got hit so now I have to go back and see if I was “bought in” in keeping with my chart driven trend following method or if some market quirk has put in an unexpected “long position” and now I need to do a “work out”… Time will tell.

    @gnomish: There is no “one answer”, there are millions of individuals each with their own answers. That’s the challenge of economics. So the “boomers” may be selling their GE stock to fund their retirement. Will there be more young Chinese buying GE as they become wealthy and want to diversify out of China? A distressed house in San Jose that I’m familiar with was just bought by a lady from Taiwan for her daughter who is in her 20’s. So you are asking, in essence, what will two generations do relative to each other. Will the older spend on itself, or will it give to the next? And you are asking what one continent will do relative to the other. Will Japan and the USA sell out to young China and Brazil? Or not sell?

    There is no real answer to those questions. One can speculate. I’d speculate that it will not be much different from the past. Most parents like to leave their children in a better place. So I don’t see a wholesale liquidation of boomer assets. (I, for one, expect to die with significant assets still ‘in hand’ since I expect to have little notice of when I need to ‘blow’ the last $200,000 …. )

    So for example, in my generation between me and my spouses family we have 2 houses. And three children. So on average they will get 2/3 of a house. We expect one more house, maybe, to be ‘married’ into the ‘group’ so then there would be roughly 1 house per future household. Not exactly an ‘imbalance’. The biggest risk is that the ‘old folks’ will live longer than the ‘household formation’ stage of the young folks. (Almost certainly). So there will be MORE home demand for a decade or so more. Then the older folks start to move. But in a ‘couple of decades’ those ‘boomlet’ kids start having kids moving out.

    So for housing in particular, especially given that we have net immigration still, there will be growth in demand. Just not as fast. So some of the minor builders will go out of business and some of the medium ones will be ‘mergered’… but there will be new homes built. (Just don’t expect BoomerTowns like Henderson Nevada again any time soon…)

    The same general pattern I would expect to apply to stocks, bonds, etc. No big sales, but no big extra demand either.

    And, as noted, due to deaths being smeared over a much longer time than births (that were started with one ‘staring gun’ at the end of W.W.II at a moment in time) the “boomers” impact has been slowly smearing out over time. Births were synchronized. High school demand too. College not so much. Jobs and families even more smeared out. Retirement even more (some at 50 after 20 years to 30 years as cops or military, some at 75 or even never…) and deaths at a much more smeared range.

    So I’m generally expecting a ‘loss of the bubble impact’ from the boomers, but no real ‘crash’ from them suddenly waking up one day to sell all their assets in sync.

  6. Gnomish says:

    ‘loss of the bubble impact’
    Interesting observation to complicate my projections. It makes sense.
    I try to follow ‘what has to happen’ – in theory, it’s supposed to simplify the intractable so it’s merely… um… a more narrowly bounded intractable? Well, events have conspired to curtail liquidity and mobility and whatever skill I thought I had was based on a healthy economy. This is not my yard in Kansas any more.
    But it sure looks like a great time to score a house in a warm climate!

  7. E.M.Smith says:

    Henderson Nevada was a big boom town of folks leaving L.A. and now ought to be quite cheap. Then the Florida Condo market is cheap now too, especially during hurricane season ;-)

    Both warm. Your choice of wet or dry…

  8. E.M.Smith says:

    Well, looks like being ‘bought in’ was a good thing….

  9. Gnomish says:

    you can see what I’ve been watching and why it sort of looks like another test for parity coming soon.

    I’ve been expecting a rise following a labor day anticlimax and another around xmas.

    If they sucker punch us with cap & tax, I don’t know what has to happen in the short term…

  10. E.M.Smith says:

    My take on the Looney currency chart:

    is that it’s in a strongly wobbling gentle downtrend. DMI is of very low strength, so not much trend – being at 15. ADX does have “blue on top” so it’s going up for now, but in the context of a longer downward drift (look at the simple moving averages trend). MACD confirms this as it is below zero, but is doing a ‘crossover upward’ so will have a positive run for a short while. I’d most likely trade it with a Slow Stochastic as long as DMI is below 25. RSI is wobbling around the midline with no real conviction.

    I’m just not seeing much enthusiasm for a Loony at or over parity. It does look like a bi-monthly trade-able ripple though. But it’s bounced off 98 three times now. Unlikely to punch through it.

  11. Gnomish says:

    My reasoning about ‘what has to happen’ may be off, but this is it:
    1) CDN is backed by easily accessible natural resources.
    2) they can’t keep pace with USD inflation (canada only has a population of 30 some million) and don’t need to because they sell stuff they dig up, not manufacture. Exports won’t suffer.
    3) USD inflation has to come home to roost- what else can you use the usd for, ultimately, except buying some USA?

  12. E.M.Smith says:

    @Gnomish: While I generally agree with your thesis, someone has to take the other side of it ;-) so:

    #2: Inflation knows no size limits. Look at the Zimbabwe $Trillion notes… And it’s not a matter of what is sold. Inflation is a ‘stealth tax’ on all money denominated assets. So a government who can’t raise tax rates can just print and spend, thus spending the value of the cash people hold without all that politically unpopular tax process. It is much more about that dynamic than about size or resources. That says that in countries with strong aversion to taxes but poor understanding of the longer cycle of print-spend-inflate you will get immoral politicians printing and spending instead of raising taxes. Rather like was played out under Clinton, Bush, and now Obama…

    #3: Yes, it does, but it can take 10 to 20 years… And at any point in that process you can get a Regan come along and slap it down from 18% to zero by sucking up the money with painful interest rates and spending less while taxing more.

    Though #3 does touch on an interesting side bar: The USD is used for “Reserves” globally. Banks and even countries all around the world have giant hay stacks of them to show how safe it is to use their bank or their local currency as they are backed by these ‘reserves’. Even the IMF uses them. So the international bankers could just decide to “raise reserves” as they are now and suck up a very large pile of them. And as other countries inflate more than the USA, we could hold that function even as “the best whore in the whorehouse”. Virtue is a relative thing…


    It is also possible that if we abuse that position too much, the nice folks in, for example, Europe and Russia and China (Oh My!) could decide to use the Euro, or even the Yuan and Ruble, as acceptable reserves instead of the USD. The sudden flood of dollars onto the global stage could be a grand disaster. And, IMHO, we are very close to that level of excess abuse. Were it not for the PIGS (Portugal, Italy / Ireland, Greece, Spain) in Euro land it would already be happening (IMHO) as Germany would be fuming at us, not at them.

    Even now, China is shifting some of it’s national savings out of dollars and is seeing the Yuan as better for a lot of domestic savings needs (where the USD had been better). I’d guess that in 20 years the Yuan will be an international reserve currency at present trend. (Ops! I’ve started arguing your side, sorry… ;-)

    FWIW, the USD is used as the national currency of several other countries (who’s central bankers were even more loose than ours…) so you can buy chunks of Liberia and Ecuador too… and it’s an informal currency in many other countries around the world. You could buy large plots of land in many illegal drug producing countries, for example, as the flood of billions of USD into them has made for a large USD based economy.

    And finally, never forget the power of The Fed. If Bernanke is half the man I think he is, when (and it is a “when”) inflation does kick up and deflation is clearly off the table: He will simply start sucking those dollars back to the furnace to be burned at a nice fast rate. He can simply let the real estate and bond holdings of The Fed ‘run off’ and then folks have to pay them USD that they can just sit on (or eliminate). The Fed could simply raise reserve requirements on all the banks, sucking any quantity of dollars out of circulation (like has been done in a minor way now with ‘raising reserves’ but on steroids…) and could easily destroy 1/2 the money supply over night (if desired – I can give an exposition on how fractional reserve banking works and why this works, but suspect most folks would not care…) And they have more ‘tools’ to use too.

    So in the end, it all comes down to The Fed creating or destroying dollars and The Congress taxing and spending; and the balance between them.

    While right now I see that balance swung to “inflate”, we are on the edge of deflation and that is what one does to prevent going over the edge. As we move toward the cliff of “inflation”, they could swing their balance to “deflate”. Classical Keynes, really.

  13. Gnomish says:

    I’m not sure the fed is in a position to destroy any significant number of dollars compared to what’s loose in the world, are they? What they may be in a position to destroy isn’t really ‘in the wild’ anyway, is it?
    The great idea to pump ‘liquidity’ via ‘home ownership’ has burst. It appears to me that the junkies cried for and got a big dose with the latest ‘stimulus’ but it didn’t even give them a buzz- as if the ‘tolerance’ is too high now. There seems to be an order of magnitude more ‘air money’ in this game of musical chairs this time around.

    Historically, there are 3 seats when the music stops – gold, goods and real property. That may be due to the fact that it is possible to exchange these things without institutional intervention.

    In a short while, I expect to purchase a property on contract with the owner, bypassing any bank with no regard for interest rates.

    Incidentally – here is my understanding of Canada – it’s not a real country; it’s Hudson Bay Co. gone wild.
    This article, between the lines, sort of captures the essence:

    There should always be a nice lag each time the brakes slip on usd inflation before it forces a reaction from the canadian treasury copy machine.

    In any case, I’ve made a guess – cuz I have to choose some time- and so far it’s looking good for that parity test around mid/late september:

    I’ll swap any time it goes above 98.

  14. E.M.Smith says:

    The Fed can make the money supply zero if they wish. The bulk of all “money” in the world is not “money”, it is not an inherent “store of value”. It is only a “currency”, and even there, most of it is not paper currency, but bits in a computer.

    The Fed does not ship bales of $100 bills to China, it makes an entry in a computer.

    So, thanks to fractional reserve banking, IFF I wanted to make the dollars in existence shrink by about 1/2, I can just raise reserve requirements to about double. (It’s not exact for a variety of reasons…)

    If reserve requirements are 50%, then say Joe deposits $100 in the bank. They must keep 50 in the vault, and can loan out $50. That then gets deposited in the bank (or another bank, or gets spent, and then deposited by the vendor. No difference). Then $25 is kept and another $25 is lent. Repeat… You get $100 + $50 + $25 + $12 + $6 +$3 + $1 (I’m going to leave off the fractional dollars) for a total of $197. (At the limit case, $200). So if we cut that ‘reserve requirement’ to 25%, we could double the money supply substantially over night as loans get made all over.

    Usually banking systems run with about a 20% reserve requirement for a conservative system. Don’t know what were at right now, but I think it was lower.

    So lets say we’re at 20% or a 5:1 leverage (Lehman was at 40:1 ). By Fiat the Fed can make the requirement 40% and destroy a boatload of money supply overnight. Banks stop lending and sit on cash as it comes in until the money is all on their books. Selling assets and calling in loans as needed. Thought experiment: What happens when the reserves ratio is set to 100%?

    Would they do it? Not likely. Are they able? You betcha… Look what happened to Lehman when reserves were required… and The Fed said no…

    So The Fed can make money supply near zero or near infinite with just ONE of the levers of power it holds. Never doubt the power of The Fed.

  15. Gnomish says:

    I can see they can influence the ‘domestic velocity’ but it looks to me that they are no longer the controlling shareholders of usd.
    You’re right on the mark, for I do doubt the power of the fed.

  16. E.M.Smith says:

    The biggest issue for your point is the dollars outside the USA. So, for example, Ecuador uses the USD. What is the reserve requirement THEY put on THEIR central bank? In theory, they could make an infinite supply of USD as well, just by setting their reserve requirement to zero. That is where the IMF comes in to play. They set general bounds via their ability to ostracize a given country from international trade / investment. Also the “counter party risk” puts a limit on how much, say, a Swiss bank would accept overnight paper form a country with such lax reserve requirements. But yes, theoretically, the “external USD” quantity can cause some issues for The Fed. BUT, if we started a dramatic dollar suckage, the resultant de-flation would cause those external folks to hang onto their dollars all the more dearly (thus adding to the goal) while if we start a dramatic in-flation, they would dump more of them (again moving in the direction of the goal). Few foreign bankers would try to move toward dollar inflation while The Fed was pushing the other way.

    However: It is possible that The Fed could try for deflation while a foreign central bank could ‘ease’ and try to create some more dollars for itself in it’s banking system. Lucky for us, that’s a minor (nearly trivial) percent of the total money supply in existence. (And even with the overseas USD, most of THAT is in European banks who are not using the USD for currency but rather for reserves. And reducing your reserves percentage to have more reserves is, er, um, not going to work…)

    BTW, the USA has the largest single voting block in the IMF, followed by Europe writ large. China is about 3.5% of the votes, IIRC. USA somewhere just shy of 15% (again IIRC). So the IMF is not going to be moving “against The Fed” either.

    Basically, the notion that The Fed would not be able to change the money supply is a non-starter. In either direction, and to any degree.

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