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The Dawes Premonition

When a blind mathematician exits the market because an ominous technical omen indicates a crash ahead, what do you make of it?

Last week the whole internet was abuzz with the phrase “The Hindenburg Omen.” The “Omen” is actually a convergence of technical and momentum indicators which, when sighted, usually leads to a big market correction. Its creator Jim Miekka has used it to forecast major market tipping points. And this week, Miekka told the Wall Street Journal he had heeded the warning and was out of the market completely.

Miekka is right that September is historically a lousy month for stocks. Just why this has been the case is disputable. Is it well-rested and tanned North Atlantic fund managers getting back behind the desk and putting their brain in a psychologically defensive mode as the autumn and the winter approach? Is it cyclical? Is it random? Is it aliens?

Add to the Hindenburg Omen the “Dawes Premonition.” Writing over in Money Morning today, Dawes (the editor of Slipstream Trader) concludes:


The weekly charts show a market that has crashed between 2007-2009 and then turned and rallied to the 50% Fibonacci level of 5000 over 2009-April 2010.

We are now at the point where the bear market rally is looking dead and buried and a resumption of the downtrend is about to occur.

The long term trend has already turned down in May when the 35 day MA crossed with the 200 day MA. The rally of the past month saw an intermediate uptrend in place which is on the edge of failing with the 10 day MA about to cross with the 35 day MA to the downside.

Therefore we are about to see all trends aligned, from the short term to the long term trend and they are all pointing down.

The distribution of the past year is looking very tired and another retest of the c.4200 lows in the ASX 200 is going to crack. That will give immediate targets to c.3900. And below there it looks very scary indeed.

If the market does crack under this 4,400 level then I wouldn’t be surprised to see the market swan dive to 3,900 in a matter of weeks.

What about days? Today’s opening hasn’t been so flash. And with the news on the political scene getting increasingly bizarre – a unity government with Tony Abbot as Prime Minister and Kevin Rudd as a front-bencher and Foreign Minister – investors might start to get a bit nervous about what the political class is up to.

Our suspicion is that it is better to have the political class bickering like children with one another than cooperating toward some common goal. That common goal – defined by them and not you – will probably include spending more of your money, raising taxes, and improving the planet in some undefined and unproven but costly way. We’d rather have them at each other’s throats than clutching for ours in tandem.

At least Australia is not America, financially speaking. That economy appears to be circling the great historical drain. Economists told Bloomberg they expect existing home sales to have fallen by 12.9% from June. This shows that the recession in America never really ended. It just got papered over by asset inflation driven by Fed policy and government stimulus that lulled people into somnambulant complacency.

Yet it’s clear that ordering extra gravy on your fries will not make you thin. For example, the arguments implying that stimulus spending “saved” Australia from the recession persist and are taken as a gospel truth by most in the media. But even if they are technically true – in the sense that you define recession as two consecutive quarters of a contracting economy – what has really been engineered?

A recession is the natural way of correcting bad investments made at the end of the business cycle or a credit boom. Those bad investments are failed businesses or mis-allocations of credit that didn’t produce jobs, income, or a net economic benefit. Or sometimes people just don’t’ want to eat at Barnacle Bill’s.

Preferences change with time. And time changes with time. The market economy – a complex adaptive system – sorts the wheat from the chaff and generally delivers consumers more choice and lower prices. When credit excesses emerge, the recession wipes away the slate and puts the economy and the job market back on a sound economic footing where real growth based on real demand from real savings can begin again.

Maybe Barnacle Bill’s will make a comeback. Or the next big thing will be Mexican food. Or organic salads made from produce grown on sustainable farms. It will be something, but only if you allow recessions to do their work.

Not that we’re arguing in praise of recessions, although maybe we should. But preventing them is a wilful denial that any bad investments were made in the previous boom. It’s like saying you don’t need to burn calories to lose weight. You just need to eat more and let fitness come to naturally, while you gorge on Tim Tams on your couch and watch Master Chef.

To deny the necessity of a correction to bad investments and misallocated capital is to deceive people into behaving as if everything were fine. Instead of saving and building up the household balance sheet, people take on more credit and spend.

This, in fact, is what “avoiding the recession” accomplished in Australia. It encouraged Australians to believe the world is not as financially dangerous place as it actually is and to continue with behaviour (taking on mortgage debt) which makes them even more vulnerable to the next credit shock. That is not “saving” anyone. That’s leading them straight into the waiting room of the next financial slaughterhouse.

It would be nice if eating chocolate didn’t make your ass big. But it does. Each financial decision has consequences to. A government stimulus program is an attempt to avoid the consequences and costs for financial behaviour by passing them on to someone else. It feels good doing it because you’re avoiding pain and rewarding yourself by borrowing money someone else must repay.

That might feel good, but it doesn’t seem very ethical. But postponing an inevitable day of reckoning by deceiving people about the real state of things might be the sort of thing Big Brother or the Nanny State prefers to do. It’s easier to spend what’s not yours. And it makes people more complacent and dependent, when their financial lives are destroyed, on the government. But perhaps that was/is part of the plan, too.

In any event, nothing much has changed overnight in on our beautiful blue planet with its brittle and complex financial system. Bond yields remain at historic lows in one of the great ironic developments of the last fifty years (as investors confuse government bonds with safe financial ground). A great deal of confusion about corporate earnings is now making the picture for equities very murky. And the Federal Reserve has quietly begun monetising U.S. debt.

Our view is that mild deflation will simply be the prelude to a defacto debt default/devaluation in the U.S. This event will be massively inflationary and lead to much higher global interest rates, much lower asset prices, and a premium bid on tangible assets. Speaking of which, it’s time for lunch. Brownies anyone? Until tomorrow!

Dan Denning
for The Daily Reckoning Australia

18 Comments

  1. AnnoyingOrange says:

    If things are so bad, I am a bit confused by this one, is everyone flying to Argentina?

    http://www.news.com.au/business/breaking-news/flight-centre-net-profit-triples-on-sales/story-e6frfkur-1225909253119

  2. Biker says:

    Hey, c’mon, AO. It’s Dan’s _job_ to paint a WCS. Yes, his timing is all wrong… probably by 25 years-or-so…

    …but give the guy a break. The world _is_ a financially dangerous place. Australia IS in deep excreta. Chocolate will fatten your ass (sic). We’re all headed for the next financial slaughterhouse.

    Stay with the script, son!~ :D

  3. Ned S says:

    Never saw all that much especially offputting about a bit of nice well rounded aaaahhh …. Careful Ned; This IS a family site!

    Been looking for some good news for DD’s generation – There isn’t any! :)

  4. Ned S says:

    “Been looking for some good news for DD’s generation – There isn’t any” – Well that’s not totally accurate maybe? BB’s generation will continue to pay him for a lot of years I guess. :( :)

  5. wasabu says:

    Some knuckleheads translate analysis into prediction. “It hasn’t happened yet! It hasn’t happened yet! tee hee”. DD is on the money when it comes to analysis but occasionally strays into the lusty quack art of timing. The timing is just a little side show. Place your bets!

    Eating tim tams on the couch watching MasterChef (sic) leads to cardiac surprise, any doubt?

  6. chris says:

    I have about 15 cousins who all bought houses during the boom years, and then they bought more houses borrowed agaianst those houses, and then they bought flash cars with that debt, plus holidays, restaurants and diamonds and more diamonds. I got teased endlessly for reading books and going to seminars and being “the odd one out”. I wonder what they will say now?

  7. bearamundi says:

    No Chris, it’s not what they will say but what you will. This is a great opportunity for you to get payback. I personally would wander around saying outloud: “Living the dream!!” “L.I.V.I.N.G the DREAM” :D

  8. Biker says:

    “…then they bought flash cars with that debt, plus holidays, restaurants and diamonds and more diamonds….”

    Yep, property’s to blame here. Should have bought shares, I guess.
    Wait a bit. If they’d done _that_ they’d already be broke.

    Getting payback _should_ however, be the focus of your life.
    (Who is that wandering around in the background, mumbling in capitals? ;) )

  9. bearamundi says:

    Biker, get over it! We’ve got a man in the Hurt Locker who has obviously been taking some big hits. He has got the technical skills, with the Seminars and all. He just needs to few retorts, a lot of Jimmy Buffet, and it be Ali in the 5th round Rope-a-Doping…

  10. Biker says:

    They bought diamonds… more diamonds… ?!!~ Definitely troops you should dispatch to take out that machine-gun nest, Corporal Bear. :D

  11. bearamundi says:

    Very observant Biker, might be w*gs :roll: (not that there’s anything wrong with that)

  12. bearamundi says:

    Hey everybody, I just got back from being out all day and I hope my off the cuff comment hasn’t offended anyone. I’ve got Italian friends who regularily joke around in this fashion but it might be taken the wrong way on DR. In that event, sorry, I was just linking diamonds to the stereotype for humorous effect.

  13. Biker says:

    Being a direct descendant of Ares and Aphrodite, I was highly offended by your assertion, Bear. I’ve sent 300 of our people to thermopylise you, ravish your women, and deflate your bicycle tyres.

    Call me w*g boy again and you’re 480 BC.*

    * history

  14. Ned S says:

    Oh, I thought you meant wags ;) … As to the other lot, that’s just a generic term for the handful of poor misguided souls in the world who think soccer is called football isn’t it? (After intensive interrogation by Sydney’s finest, Ms Werbeloff additionally stated that the squabble may well have had something to do with whether a certain Ms Bingle’s $200K rock really got flushed down the dunny – And as Basil Brush would say, ‘Boom Boom! :) )

  15. John says:

    We follically-challenged reckoners object to your comments, bearamundi.
    Those of us who choose to wear hairpieces were offended by your remarks.
    Male pattern baldness is more common than you might think and your lack of respect is not something we’ll brush over.

    More respect in future, please.

  16. Ned S says:

    “Ares and Aphrodite” – That’s what Ares might have assumed alright – But I’d suggest a DNA test on Bes before Ares pays his child support? ;)

  17. Ned S says:

    I’m somewhat follicly challenged on top John. But have promised my lady love I’ll consider her advice that I’ll look better if I grow me chin whiskers long and brush ‘em straight back up on top to hide the loss … :)

  18. bearamundi says:

    Thanks so much guys, man did I feel like an anxious fool. I can say dumb things, not PC things because underneath I think workplace politics are stupid. Stupid maybe but dangerous if you don’t abide by them. That’s why I usually just keep my mouth shut so nothing can get mis-construed. Dudes, I sense you understand this as well and have taken a humourous line. As Van the Man would say:
    Men with insight,
    Men in granite,
    Knights in armour intent on
    Chivalry.

    Grazie!!

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