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Is The FED About To Make The Biggest Mistake Of The Decade? (TZA, SDS, SLV, FAZ, VXX, TNA)

August 4th, 2011

Toby Connor:  Just as I expected, when the market failed to rally on the debt ceiling resolution, panic set in. As I have been telling people the stock market is not dropping because politicians are debating whether or not to spend more money. They have a long record of raising the debt ceiling whenever it threatened to interfere with their spending spree. So the resolution to the debt ceiling was never in question. We knew from day one that Washington would add another trillion or so to the deficit without any real attempt to cut spending. The market has been in trouble since May because it is starting to price in the next recession.

The S&P has now breached the March intermediate cycle low. In a mature bull market that is almost always a signal that a new cyclical bear market has begun.


 

I’ve been warning investors since late April that this was coming. Many were fooled by the phony manufactured rally at the end of June. I knew at the time that the Fed’s pitiful attempt to manufacture a momentum move as QE2 came to an end would fail.

All that being said, the market is now moving into the timing band for a major intermediate cycle bottom. My best guess is that the reversal today will probably trigger a weak bounce up to the 200 day moving average, followed by one more leg down. That should mark a more lasting bottom and trigger a 6 to 8 week bear market rally. That rally is going to look very convincing and I’ll tell you why in just a second. But just like the rally in June it is going to fail.

 
 

Folks, a recession is unavoidable at this point. The piper is going to have to be paid for printing trillions of dollars and bailing out the financial system. Unfortunately there’s no way around that. The question is will Bernanke make the ultimate blunder and initiate QE3? I’ll explain in a second.

Next we need to take a look at the dollar chart. It’s not a pretty picture. With the market in free fall the dollar should be rallying violently. If May marked the three year cycle low like I originally thought then the dollar should be rising rapidly by now.The fact that it’s not is a very ominous sign.

 

I’m starting to worry that Bernanke is going to initiate QE3 and he’s going to add a currency crisis on top of the economy sliding back into recession.The combination of both of these at the same time will trigger a collapse much worse than what we went through in 2008.

If the market decides that QE3 is in the cards that would be the trigger for our bear market rally. Unfortunately it would also be the trigger for another spike in commodity prices at the very time that the consumer is least able to withstand them.

What Washington and the Fed don’t seem to realize is that the problem isn’t the size of the dose, it’s that we are using the wrong medicine. We’ve already spent trillions to save the economy and it failed. Let’s pray that the powers that be have enough sense to recognize that more trillions are not going to cure the problem, they are going to exacerbate it.

Unfortunately what no one wants to admit is that there is no cure for our problem. We can’t stop it. It can’t be “fixed”. All we can do is make it worse. We desperately need to face reality and initiate the painful policies that are required to halt the car before it drives off the cliff. Failure to do that will mean that the market will force reality upon us as a major global economic collapse.

Before this is all over and done I fully expect the Keynesian economic model will get tossed into the trash heap where it belongs. If it wasn’t for politicians desire to spend more than they can afford Keynesian policies would have been discarded decades ago.

For the next week I’m going to reopen the 15 month special to the Smart Money Tracker premium newsletter. For the normal yearly price I’m going to throw in three free months. The premium newsletter is published nightly along with a more detailed weekend report. I cover the stock market, dollar index, and commodity markets with special emphasis on the gold and silver market.

I’ve done my best over the last several months to get investors out of the stock market, and those that listened to me have avoided this market swoon. If you would like help navigating the volatile times ahead I strongly suggest you consider a subscription to the premium newsletter. Here is the link to the premium website. Click on the subscribe link on the right-hand side of the homepage to get started reading the nightly and weekend reports.

Related ETFs: Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA), ProShares UltraShort S&P500 (NYSE:SDS), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ),  iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX), Direxion Daily Small Cap Bull 3X Shares (NYSE:TNA), iShares Silver ETF (NYSE:SLV).


Written By Toby Connor From Gold Scents 

Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market. Mr. Connor’s analysis skill of the markets is largely self-taught, though he admits to being an avid reader of Richard Russell and Jim Rogers, among several others.


NYSE:FAZ, NYSE:SDS, NYSE:SLV, NYSE:TZA, NYSE:VXX


 

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  1. James
    August 9th, 2011 at 16:49 | #1

    How can you imagine any of this disproving Keynesian economics? It sounds like the word on “balance sheet recessions” is out, and I rarely hear anyone deny that we are in one, but why is it that we aren’t following Richard Koo’s advice on the subject? Is there other evidence and literature I’m not aware of? He’s the foremost expert on Japan’s balance sheet recession, and has great advice and evidence to back it up. He also explicitly says that monetary policy is rendered useless if unsupported by fiscal policy. QE2 never had a chance of working because we’ve been pulling in the reigns fiscally in what was a very weak recovery (furthermore, the effects of QE shouldn’t work well at all when there’s not a large reserve of household savings). I agree that QE3 would be disastrous, but in the absence of fiscal assistance, the only other option is Libertarian “creative destruction”, and that’s been repeatedly proven to be all destruction and no creation. I’ve always taken Krugman to be too much of a liberal to be taken entirely seriously, but with bond rates going down after the downgrade, he’s looking like a damn genius right now. Somebody help me out if I’m missing something. Thanks.

  2. Posted
    August 8th, 2011 at 18:14 | #2

    The real issue is that our “Partner” in global growth turned against us (as expected) to curtail the growth of their currency. Thus producing huge deficits that we can not remove because of the risk, We The People caused the problem. We let our jobs move overseas so we could have more for less. Buck up and take it like an American. YOU helped cause this if you purchased anything.

  3. ChrisFS
    August 5th, 2011 at 16:49 | #3

    If you have been warning ‘since late April”, you have bad timing. Plenty of people keep warning about all sorts of things and celebrate when they get it right. Broken clocks are right once a day.

  4. Harry Johnson
    August 5th, 2011 at 11:36 | #4

    The problem is more fundamental. Since we have spent the last thirty years moving productive work offshore, there is nothing real to support all of the finance scammers who think they ought to be rich without working. When it all blew up in 2008, rather than let the banksters, stock analysts, hedge fund managers and other scammers fail, we set up the biggest welfare scam in all history to support them in their glorified lifestyle. The system is now completely unstable and ready to fall apart at any puff of wind. To fix it, a bunch of finance consultants, mortgage brokers, banksters and ratings agency heads need to do hard time in federal prison. We need to rebuild industry and realize wealth comes from what is produced not shuffling paper or expecting money to magically grow by itself. Housing, medical care, education, transportation and food costs have to come back in line with incomes either by raising incomes for someone other than the top 1% of finance hacks or by lowering prices or some combination. If people cannot afford to support themselves with average wages the economy fails. It is going to be a long hard ride forward and the so called investment community is hurting us, not helping at all.

  5. Riquin
    August 4th, 2011 at 21:46 | #5

    Dow down 500+ points:
    The main problem is instability. There is a change in the government model in the US. Where now there is basically a junta of 12 persons making all decisions. We investors really do not know how they are going to go so it is better to take our money out of the market and wait for some signals out of the junta.

  6. taamvan
    August 4th, 2011 at 20:08 | #6

    I think the core problem does not focus on government spending, but on government policy. Globalism, consumerism, mercantilism, efficient market theory, deficits, free trade can have short term (decades) benefits but are creating longer term structural problems; disparity of wealth, weak productivity, no manufacturing, consuming without producing, offshoring, etc etc. this is an economic sickness and permissive government policy, highly riskly leveraged investments and poison injected in the form of government support for risk taking are about to destroy the stock market and the developed worlds economy. The big guys are big short, again, as they were in 2007. Short dollar, short euro, short oil, short equities, short bonds. Only idiots are insuring such vehicles. Greed is on the verge of forcing a great depression upon us in the time of the most technological and scientific age mankind has ever witnessed. And why? Because greed is pushing us away from the innovations that represent the post post modern (futuristic) era (limitless energy, general equality) and towards a plutocratic and oligarchic model that is hidebound and regressive.

  7. Matt
    August 4th, 2011 at 15:39 | #7

    Good post. But I would say the problem is not the Keynesian model, but the fact that politicians and voters never remember that you’re supposed to slow down the economy during boom times. You’re supposed to raise taxes and cut spending when the economy is good, but Republicans never want to raise taxes and Democrats never want to cut spending. So money is printed during recessions, but not paid for during booms, leading to increased leverage and increased amplitude to the business cycle (and stock market)–the opposite of what consistent Keynesianism would do.

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