Trading Diary

Stock market forecast for 2010

From January first week another burst of energy will carry Dow index up to 11664 which shall occur during middle of August 2010.January will be a bull month . From August the market shall see a correction which shall take Dow up to 8649 in November.

Metals ,agro and energy will the leaders. The boom in commodity will be caused by increase in demand by a buoyant world economy and hoarding by cash rich country like China to disinvest its paper dollar surplus .

Underperformers will be the real estate,infrastructure sectors and the banking sector which will be subject to volatility .

Oil will cross 80 in the first week of January 2010 and reach 100 by end of January 2010 and will be in the range of 120 to 140 for the whole year.

Gold will not go down below 1040 and shall trade between 1040 and 1207.

 Euro will have the steepest fall and by the middle of 2010 shall precipitate a crisis in European banks .

Dollar will be the fastest rising currency. World Markets will start to decline by august 2010 and the trigger will be caused by Bank of Japan increasing its interest rate which shall unwind the carry trade.

Guess estimate for 01 December 2009

Dow $indu: Expect a gap up and then dow  shooting up to +170 and then ending at  +110 after a small correction..intraday long positions should be out at least 2 hours before the market close

IMPORTANT DATES FOR CHANGE IN THE MAJOR TREND as per GANN

As written by W.D.Gann in 1929

 The following dates should be watched for important changes in the major trend of both Industrial and Railroad stocks. If any stock makes top or bottom around any of these dates, you can expect a reversal in trend, especially if there is a sharp decline or a sharp advance around these dates:

Feb 8th to 10th, March 21st to 23rd, May 3rd to 7th, June 20th to 24th, August 3rd to 8th, Sept 21st to 24th, Nov. 8th to 11th, Dec. 20th to 24th. These dates are based upon a permanent cycle, which does not change.

Important dates are based upon a permanent cycle, which does not change. Important tops and bottoms are made in many stocks every year around these times. Watch the stocks that reach extreme high or low levels around these dates. DATES FOR ACTIVITY AND WIDE FLUCTUATIONS The following dates indicate times when stocks will be very active and have wide fluctuations, making tops and bottoms. While all stocks will not make tops and bottoms around these dates, some of the most active ones will and if you watch the ones that turn around these dates, it will prove helpful in your trading:

January 5th to 7th, 12th to 15th, 18th to 24th February 9th to 12th, 20th to 22nd, and 27th to 28th. March 10th to 11th, very important for change in trend; 21st to 22nd important; 28th to 29th another very important date for change.

April 3rd, 9th to 10th, 13th to 15th, 21st to 23rd. May 3rd to 4th – watch stocks that make top around this date; 9th to 11th another important date when some stocks will make bottom and other stocks will make top. 22nd to 23rd and 29th to 31st – very important dates for change in trend; watch for stocks that will make top around this date.

June 1st to 2nd – quite important; 7th to 10th another important change; 21st to 23rd a more important change. July 3rd to 5th – very important for change in trend; 9th to 10th also quite important; 21st to 24th more important.

August – one of the most important months for change in trend. Many stocks will start on their long down trend. 7th to 8th – quite important; 16th to 17th important; 23rd to 24th important, 29th to 30th of minor importance.

September 2nd to 3rd important; 16th to 17th important, should be bottom of a panicky decline. 21st to 24th important for top; 27th and 28th important for bottom of a big break.

October 2nd; 8th to 9th; 18th to 20th very important, – which stocks which start to decline and go with them; 26th to 28th minor importance.

 November 10th to 22nd – a very important period for wide fluctuations. Airplanes, radio and some electrical stocks may have sharp advances.

Other important dates for changes are 1st to 2nd, 17th to 19th, and 24th to 25th. December 1st to 2nd important; 16th to 17th of minor importance; 23rd to 24th greater activity and of major importance.

The above dates are not only important for changes in trend and times when bottoms and tops should be reached, but on these dates important news is indicated and some will be of a sudden, unexpected nature, at times favourable and at other times unfavourable, but causing stocks to be active and fluctuate, making tops and bottoms and changing trend.

HOW TO TRADE WITH THE FORECAST The time given for tops and bottoms is the most important factor for you to know and watch. It makes no difference about the price a stock is selling at. So long as you KNOW WHEN it will reach low or high levels you can buy or sell and make money. When the Forecast indicates bottom at a certain date and stocks decline, you should buy the ones given as in strong position or the ones we recommend buying and place a stop loss order 3 to 5 points away according to the price the stock is selling at. With stocks that active and have wide fluctuations, making tops and bottoms. While all stocks will not make tops and bottoms around these dates, some of the most active ones will and if you watch the ones that turn around these dates, it will prove helpful in you trading:

January 5th to 7th, 12th to 15th, 18th to 24th. February 9th to 12th, 20th to 22nd, and 27th to 28th. March 10th to 11th, very important for change in trend; 21st to 22nd important; 28th to 29th another very important date for change. April 3rd, 9th to 10th, 13th to 15th, 21st to 23rd. May 3rd to 4th – watch stocks that make top around this date; 9th to 11th another important date when some stocks will make bottom and other stocks will make top. 22nd to 23rd and 29th to 31st – very important dates for change in trend; watch for stocks that will make top around this date.

June 1st to 2nd – quite important; 7th to 10th anther important change; 21st to 23rd a more important change. July 3rd to 5th – very important for change in trend; 9th to 10th also quite important; 21st to 24th more important.

 August – – One of the most important months for change in trend. Many stocks will start on their long down trend. 7th to 8th quite important; 16th to 17th important; 23rd to 24th important; 29th to 30th of minor importance.

September 2nd to 3rd important; 16th to 17th important, should be bottom of a panicky decline. 21st to 24th important for top; 27th and 28th important for bottom of a big break.

October 2nd; 8th to 9th; 18th to 20th very important, – watch stocks which start to decline and go with them; 26th to 28th minor importance. November 10th to 22nd – a very important period for wide fluctuations. Airplanes, radio and some electrical stocks may have sharp advances.

Other important dates for changes are 1st to 2nd, 17th to 19th, and 24th to 25th. December 1st to 2nd important; 16th to 17th of minor importance; 23rd to 24th greater activity and of major importance. The above dates are not only important for changes in trend and times when bottoms and tops should be reached, but on these dates important news is indicated and some will be of a sudden, unexpected nature, at times favourable and at other times unfavourable, but causing stocks to be active and fluctuate, making tops and bottoms and changing trend.

Guess estimate for 03 November 2009

Dow $indu: Expect a very volatile day ahead with dow going in the plus and minus territory and back. today day trading will ba a profitable day if one can sell or buy and exit at the slightest change of direction shown by the technical indicators. Expect  the  Dow to end at +10. 

Oil $wtic : oil  fall to 76 due to the strenght of the dollar.

gold $gold: gold will fall to 1042.

CFR.org has a good video on the current financial crisis

CFR.org – Crisis Guide: The Global Economy.

International Monetary Fund ‘now estimates global bank losses at $3.4 trillion’

The International Monetary Fund (IMF) has reduced its estimate of global bank losses by $600 billion – but warned the new figure of $3.4 trillion could rise further due to high unemployment rates across the world pushing up loan losses. Rising security values combined with a new way of calculating losses are to thank for the improvement on the original $4 trillion deficit calculated in April.

But the IMF says that around another $1.5 trillion worth of loan writedowns will hit banks by the end of 2010.

Along with the new calculation, the Global Financial Stability Report also stated that financial institutions continue to face three main challenges – strengthening earnings, rebuilding capital and weaning themselves off government support. The IMF report also outlined the challenges facing the policymakers who are in charge of regulating the banks. It said they need to ensure there is sufficient credit growth to support the fledgling economic recovery while also managing the risks that come from heavy borrowing from the public purse.

The IMF believes stronger action is needed to increase bank capital and earnings capacity so banks are more able to support lending. Jose Vinals, head of the IMF’s monetary and capital division, told Reuters: “We’ve come from being on the brink of a financial meltdown to a situation where stability has returned to the financial system.” He added that the next challenge is how to make the financial system that is now in place support the economic recovery.

Guess estimate for 02 november 2009

 Dow $indu: The chart rest on 54 simple moving average whch is 9683.29  while the low was 9684.54 . The next move will commence after nov 4 after the fed meeting. Tommorow expect the dow to end at +70. 

Oil $wtic : oil will fall to 76 due to the strenght of dollar.

gold $gold: gold will fall to 1035.

Baltic Dry Index (BDI) and the dow index

The

The baltic index show a very good correlation with the dow index. the index is slowly picking up and the momentum is towards the higher side.The global economy is picking up and this one indicator is also flashing this message.

what is Baltic dry Index

The Baltic Dry Index (BDI) The Baltic Dry Index (BDI) is a measure of what it costs to ship raw materials—like iron ore, steel, cement, coal and so on—around the world. The Baltic Dry Index is compiled daily by The Baltic Exchange. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. Once they have obtained these numbers, they compile them and find an average. To ensure they are getting a comprehensive view of the entire shipping industry when looking at various shipping costs, the Baltic Exchange looks at costs for each of the following four sizes of ships: – Capemax (10 percent of the global fleet): ships that can carry 100,000+ dead weight tons of cargo and are too big to pass through the Panama Canal – Panamax (19 percent of the global fleet): ships that can carry 60,000-80,000 dead weight tons of cargo and can barely fit through the Panama Canal – Handymax, or Supramax (37 percent of the global fleet): ships that can carry 45,000-59,000 dead weight tons of cargo – Handysize (34 percent of the global fleet): ships that can carry 15,000-35,000 dead weight tons of cargo Why Investors Watch the Baltic Dry Index The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects. Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing. The Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate. Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand. The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply. The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped. Nobody is going to pay to book a Capemax cargo ship who isn”t actually going to use it. Interpreting the Baltic Dry Index The Baltic Dry Index typically increases in value as demand for commodities and raw goods increases and decreases in value as demand for commodities and raw goods decreases. Here”s what it typically means when the Baltic Dry Index turns around and starts moving UP: – Global economies are starting to, or continuing to, grow – Companies are starting to, or continuing to, grow – Stock prices should start to, or continue to, increase in value – Commodity prices should start to, or continue to, increase in value – The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, increase in value Here”s what it typically means when the Baltic Dry Index turns around and starts moving DOWN: – Global economies are starting to, or continuing to, contract – Companies are starting to, or continuing to, contract – Stock prices should start to, or continue to, decrease in value – Commodity prices should start to, or continue to, decrease in value – The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, decrease in value Baltic Dry Index (BDI) The Baltic Dry Index (BDI) The Baltic Dry Index (BDI) is a measure of what it costs to ship raw materials—like iron ore, steel, cement, coal and so on—around the world. The Baltic Dry Index is compiled daily by The Baltic Exchange. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. Once they have obtained these numbers, they compile them and find an average. To ensure they are getting a comprehensive view of the entire shipping industry when looking at various shipping costs, the Baltic Exchange looks at costs for each of the following four sizes of ships: – Capemax (10 percent of the global fleet): ships that can carry 100,000+ dead weight tons of cargo and are too big to pass through the Panama Canal – Panamax (19 percent of the global fleet): ships that can carry 60,000-80,000 dead weight tons of cargo and can barely fit through the Panama Canal – Handymax, or Supramax (37 percent of the global fleet): ships that can carry 45,000-59,000 dead weight tons of cargo – Handysize (34 percent of the global fleet): ships that can carry 15,000-35,000 dead weight tons of cargo

Why Investors Watch the Baltic Dry Index

The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects. Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing. The Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate. Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand. The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply. The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped. Nobody is going to pay to book a Capemax cargo ship who isn”t actually going to use it.

Interpreting the Baltic Dry Index

The Baltic Dry Index typically increases in value as demand for commodities and raw goods increases and decreases in value as demand for commodities and raw goods decreases. Here”s what it typically means when the Baltic Dry Index turns around and starts moving UP: – Global economies are starting to, or continuing to, grow – Companies are starting to, or continuing to, grow – Stock prices should start to, or continue to, increase in value – Commodity prices should start to, or continue to, increase in value – The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, increase in value Here”s what it typically means when the Baltic Dry Index turns around and starts moving DOWN: – Global economies are starting to, or continuing to, contract – Companies are starting to, or continuing to, contract – Stock prices should start to, or continue to, decrease in value – Commodity prices should start to, or continue to, decrease in value – The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, decrease in value The Baltic Dry Index (BDI) is a measure of what it costs to ship raw materials—like iron ore, steel, cement, coal and so on—around the world. The Baltic Dry Index is compiled daily by The Baltic Exchange. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. Once they have obtained these numbers, they compile them and find an average. To ensure they are getting a comprehensive view of the entire shipping industry when looking at various shipping costs, the Baltic Exchange looks at costs for each of the following four sizes of ships: – Capemax (10 percent of the global fleet): ships that can carry 100,000+ dead weight tons of cargo and are too big to pass through the Panama Canal – Panamax (19 percent of the global fleet): ships that can carry 60,000-80,000 dead weight tons of cargo and can barely fit through the Panama Canal – Handymax, or Supramax (37 percent of the global fleet): ships that can carry 45,000-59,000 dead weight tons of cargo – Handysize (34 percent of the global fleet): ships that can carry 15,000-35,000 dead weight tons of cargo Why Investors Watch the Baltic Dry Index The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects. Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing. The Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate. Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand. The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply. The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped. Nobody is going to pay to book a Capemax cargo ship who isn”t actually going to use it. Interpreting the Baltic Dry Index The Baltic Dry Index typically increases in value as demand for commodities and raw goods increases and decreases in value as demand for commodities and raw goods decreases. Here”s what it typically means when the Baltic Dry Index turns around and starts moving UP: – Global economies are starting to, or continuing to, grow – Companies are starting to, or continuing to, grow – Stock prices should start to, or continue to, increase in value – Commodity prices should start to, or continue to, increase in value – The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, increase in value Here”s what it typically means when the Baltic Dry Index turns around and starts moving DOWN: – Global economies are starting to, or continuing to, contract – Companies are starting to, or continuing to, contract – Stock prices should start to, or continue to, decrease in value – Commodity prices should start to, or continue to, decrease in value – The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, decrease in value.

oil price

Oil prices swooned after China’s National Development and Reform Commission said it will hike the price of gasoline, diesel, aviation fuel and electricity.

The Chinese government lifted fuel prices by 11% in November but had kept them frozen at that level, part of an effort to avoid boosting already-high inflation rates.

Chinese gas prices are well below the levels seen in the U.S. and other nations, thanks largely to heavy subsidies. The government said it would lift some of those subsidies, effectively boosting prices by as much as 18%.

Scorching demand in China for refined crude products has been one of the biggest drivers of the global surge in crude prices. Thursday’s announcement of higher prices in China sent the price of U.S.-traded crude oil falling sharply. July crude dropped $4.75 to $131.93 a barrel.

Keep prices at an artificially low lever and you’ll also keep demand at that level. Raise prices by removing the subsidy and you’ll see demand drop.

The interesting question is why is China doing this now? They have more than enough currency reserves to maintain the subsidy for the foreseeable future. In addition, they have experienced a fair amount of civil unrest lately which this decision is not going to help. Finally, this is right before the Olympics which many people are speculating Beijing will use as its official “coming out” party on the world stage.

US INFLATION

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.

What lies ahead will be extremely difficult and unhappy times for many. Ralph T. Foster, in his “Fiat Paper Money” closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor at Harvard and University of California Berkeley, who experienced the Weimar Republic hyperinflation:

“It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.”

This Special Report updates and expands upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, exploring: (1) the causes and background of the evolving hyperinflation and great depression; (2) why circumstances will differ from the deflationary Great Depression of the 1930s; (3) implications for politics and the financial markets; (4) considerations for individuals and businesses.

The broad outlook has not changed during the last year. More generally, though, developments in the economy and the financial markets have been in line with projections and have tended to confirm the unfolding disaster. Specifically, the current inflationary recession has gained much broader recognition, while the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding. While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar. That event is important to the shorter-term timing of the pending hyperinflation.

Defining the Components of a Hyperinflationary Great Depression

Deflation, Inflation and Hyperinflation. Inflation generally is defined in terms of a rise in general prices due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.

In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II and in the dismembered Yugoslavia of the early 1990s.

The historical culprit generally has been the use of fiat currencies — currencies with no asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its system, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.

Foster details the history of fiat paper currencies from 11th century Szechwan, China, to date, and their consistent collapses, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.

Here are the definitions:

Deflation. A decrease in the prices of goods and services, usually tied to a contraction of money in circulation.

Inflation. An increase in the prices of goods and services, usually tied to an increase of money in circulation.

Hyperinflation: Extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency.

If you look at the plot of the level of economic activity during a downturn, you will see something that looks like a bowl, with activity recessing on the downside and recovering on the upside. The term used to describe this bowl-shaped circumstance before World War II was “depression,” while the downside portion of the cycle was called “recession.” Before World War II, all downturns simply were referred to as depressions. In the wake of the Great Depression of the 1930s, however, a euphemism was sought for future economic contractions so as to avoid evoking memories of that earlier, financially painful time.

Accordingly, a post-World War II downturn was called “recession.” Officially, the worst post-World War II recession was from November 1973 through March 1975, with a peak-to-trough contraction of 5%. Such followed the Vietnam War, Nixon’s floating of the U.S. dollar and the Oil Embargo. The double-dip recession in the early-1980s may have seen a combined contraction of roughly 6%. I contend that the current double-dip recession that began in late-2000 already is rivaling the 1980s double-dip as to depth. (See the Reporting/Market Focus of the October 2006 SGS for further detail.) Please note that the definition for “great depression” below has been revised to a contraction in excess of 25% (from 20% stated in the March 16, 2008 newsletter), in order to be consistent with the usage in last year’s Series.

Here are the definitions:

Recession:Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor such as a truckers’ strike. The NBER, which is the official arbiter of when the United States economy is in recession, attempts to refine its timing calls, on a monthly basis, through the use of economic series such as payroll employment and industrial production, and it no longer relies on the two quarters of contracting GDP rule.

Depression:A recession, where the peak-to-trough contraction in real growth exceeds 10%.

Great Depression:A depression, where the peak-to-trough contraction in real growth exceeds 25%.

On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II — as officially reported — have been recessions. Using the somewhat broader “great depression” definition of a contraction in excess of 20% (instead of 25%), the depression of 1837 to 1843 would be considered “great,” as technically would be the war-time production shut-down in 1945.

The current economic contraction is about halfway towards being classified as a “depression,” based on my definitions and GDP accounting. As the Great War became World War I with the advent of World War II, so too may the Great Depression become Great Depression I, as the current crisis reaches its full, terrible potential. As with the two world wars, what may become known as Great Depression II had its roots in Great Depression I.

Current Environment

Before examining how the current circumstance can evolve from an inflationary recession to a hyperinflationary depression and then great depression, it is worth defining the nature of the current economic and inflation conditions in the United States, and likely near-term developments.

Based on the regular material discussed in the SGS Newsletter, the U.S. economy is in an inflationary recession as will be reported in official statistics. Real (inflation-adjusted) fourth-quarter 2007 GDP, in July’s benchmark revision, and/or first-quarter 2008 GDP should be in contraction, with most underlying economic series showing distressed levels of activity consistent with a recession. Annual CPI inflation is at 4.0% and headed higher. Oil prices remain over $100 per barrel, weakness in the dollar is just beginning to impact the CPI, and the inflationary effects of soaring broad money growth should start to surface around mid-year. Official CPI could be running in double-digits by year-end 2008.

Net of gimmicked methodologies that have reduced CPI inflation reporting and inflated GDP reporting, the U.S. economy has been in a recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first downleg was the recession of 2001 that really began back in late-1999. Annual CPI inflation currently is running around 11.6%, again, facing further upside pressures.

The current outlook does not exclude further bounces and dips in economic activity. As was seen during the Great Depression, in severe contractions the economy can hit bottom and then bounce briefly until it falls again, finding a new bottom. As discussed in the Depression/Great Depression section, the current economic downturn reflects a structural shift, which increasingly has constrained consumer activity during the last several decades, and which cannot be turned quickly. The current downturn, by my numbers, already is halfway to qualifying as a depression. The evolving depression quickly will move to great depression status, when the hyperinflation hits, as such will be extremely disruptive to the conduct of normal commerce.

The efforts by the federal government and the Federal Reserve to prevent a systemic collapse as a result of the banking solvency crisis has started to spike broad money growth, as measured by the SGS-Ongoing M3 measure, which currently shows a record annual growth rate of 17.3%. While the Fed has not been formally creating new money — yet — by adding to reserves, it has had the effect of creating new money by re-liquefying otherwise illiquid banks, by lending liquid assets versus illiquid assets. As a result, a number of banks have been able to resume more normal functioning, lending money and creating new money supply. As the systemic bailout proceeds, formal money creation will follow and already may be starting to show up in official accounting.

In response to the rapidly deteriorating fundamentals underlying the value of the U.S. dollar, selling of the greenback has been intense, but contained, with brief periods of stability as seen at the moment. In the near future, dollar selling should build towards an extreme, with heavy foreign investment in the dollar fleeing the U.S. currency for safety elsewhere. With the domestic financial markets and U.S. Treasuries so heavily dependent on foreign capital for liquidity, the Federal Reserve — now touted as the formal financial market stabilizer — will be forced increasingly to monetize federal debt. That process will build over time, given the federal government’s effective bankruptcy, as discussed in the section U.S. Government Cannot Cover Existing Obligations. Therein lies the ultimate basis for the pending hyperinflation.

Again, the current circumstance will evolve into a hyperinflationary depression, then great depression. Although such is not likely much before 2010, or after 2018, that financial end game for the current markets will tend to come sooner rather than later and will break with surprising speed when it hits. As discussed later, this likely will not be a deflationary environment as seen during the Great Depression.

What lies ahead for the current year will be severe enough and financially painful enough to affect the outcome of the 2008 presidential election. Historically, the concerns of the electorate have been dominated by pocketbook issues. Prior to gimmicked methodologies making the reporting of disposable personal income largely meaningless, that measure was an excellent predictor of presidential elections.

In every presidential race since 1908, in which consistent, real (inflation-adjusted) annual disposable income growth was above 3.3%, the incumbent party holding the White House won every time. When income growth was below 3.3%, the incumbent party lost every time. Again, with redefinitions to the national income accounts in the last two decades, a consistent measure of disposable income as reported by the government has disappeared. Yet, even with official reporting, the current annual growth in real disposable income is at 2.2%, well below the traditional 3.3% limit.

Accordingly, odds are quite high that the numbers for 2008 will favor an incumbent party loss, i.e. a victory for the Democrats. Where I always endeavor to keep my political persuasions separate from my analyses, for purposes of full disclosure, my background is as a conservative Republican with a libertarian bent.

What follows or coincides politically with a hyperinflationary depression offers a wide variety of possibilities, but the political status quo likely would not continue. Times would be financially painful enough to encourage the development of a third party that could move the Republicans or Democrats to third-party status in the 2010 mid-term or 2012 presidential elections.

Historical U.S. Inflation: Why Hyperinflation Instead of Deflation

Fire and Ice

Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

– Robert Frost

As to the fate of the developing U.S. great depression, it will encompass the fire of a hyperinflation, instead of the ice of deflation seen in the major U.S. depressions prior to World War II. What promises hyperinflation this time is the lack monetary discipline formerly imposed on the system by the gold standard, and a Federal Reserve dedicated to preventing a collapse in the money supply and the implosion of the still, extremely over-leveraged domestic financial system.

The price levels shown prior to 1913 were constructed by Robert Sahr of Oregon State University. Price levels since 1913 either are Bureau of Labor Statistics (BLS) or SGS based, as indicated.

The magnitude of the increase in price levels in the last 50 years or so, however, visually masks in the first graph the inflation volatility of the earlier years. That volatility becomes evident in the second graph, with inflation history shown only through 1960.

that up through the Great Depression, regular periods of inflation — usually seen around wars — have been offset by periods of deflation. Particular inflation spikes can be seen at the time of the American Revolution, the War of 1812, the Civil War, World War I and World War II.

The inflation peaks and the ensuing post-war depressions and deflationary periods tied to the War of 1812, the Civil War and World War I show close to 60-year cycles, which is part of the reason some economists and analysts have been expecting a deflationary depression in the current period. There is some reason behind 30- and 60-year financial and business cycles, as the average difference in generations in the U.S. is 30 years, going back to the 1600s. Accordingly, it seems to take two generations to forget and repeat the mistakes of one’s grandparents. Similar reasoning accounts for other cycles that tend to run in multiples of 30 years.

Aside from minor average annual price level declines in 1944 and 1955, the United States has not seen a deflationary period in consumer prices since before World War II. The reason for this is the same as to why there has not been a formal depression since before World War II: the abandonment of the gold standard and recognition by the Federal Reserve of the impact of monetary policy — free of gold-standard system restraints — on the economy.

The gold standard was a system that automatically imposed and maintained monetary discipline. Excesses in one period would be followed by a flight of gold from the system and a resulting contraction in the money supply, economic activity and prices.

Faced with the Great Depression, and unable to stimulate the economy, partially due to the monetary discipline imposed by the gold standard, Franklin Roosevelt used those issues as an excuse to abandon gold and to adopt close to a fully fiat currency under the auspices of what I call the debt standard, where the government effectively could print and spend whatever money it wanted to.

Roosevelt’s actions were against the backdrop of the banking system being in a state of collapse. The Fed stood by twiddling its thumbs as banks failed and the money supply imploded. A depression collapsed into the Great Depression, with intensified price deflation. Importantly, a sharp decline in broad money supply is a prerequisite to goods and services price deflation. Messrs Greenspan and Bernanke are students of the Great Depression period. As did Mr. Greenspan before him, “Helicopter Ben” has vowed not to allow a repeat of the 1930s money supply collapse.

Federal Reserve Chairman Ben Bernanke picked up his various helicopter nicknames and references as the result of a November 21, 2002 speech he gave as a Fed Governor to the National Economists Club entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” The phrase that the now-Fed Chairman Bernanke likely wishes he had not used was a reference to “Milton Friedman’s famous ‘helicopter drop’ of money.”

Attempting to counter concerns of another Great Depression-style deflation, Bernanke explained in his remarks: “I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States …” As a quick point of clarification, Mr. Bernanke’s actions to address the current banking system’s solvency issues are still in the preventative phase. The money supply is not in collapse, and the Fed has not started dropping cash from helicopters, yet, but the choppers are in the air and remain at the ready.

As expounded upon by Mr. Bernanke, “Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” The full text of then-Fed Governor Bernanke’s remarks can be found at: http://federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm.

Where Franklin Roosevelt abandoned the gold standard and its financial discipline for the debt standard, eleven successive administrations have pushed the debt standard to the limits of its viability, as seen now in the ongoing threat of possible systemic collapse. The effect of these policies has been a slow-motion destruction of the U.S. dollar’s purchasing power, as seen in the accompanying table, since the gold standard was abandoned in 1933.

Loss of U.S. Dollar Purchasing Power through March 2008
—-Since January of —-
Versus: 1914 1933 1970
Swiss franc -80.4% -80.4% -76.5%
CPI-U -95.1% -94.0% -82.3%
Gold -97.9% -97.9% -93.4%
SGS-Alternate CPI -98.2% -97.8% -93.6%
Note: Gold and Swiss franc values were held constant
by the gold standard versus coins in 1914 and 1933.
Sources: Shadow Government Statistics, Federal Reserve,

The limits to the unlimited abuse of the debt standard are particularly evident in the GAAP-based financial statements of the U.S. government, which show the actual federal deficit at $4.0-plus trillion for 2007, alone, with total federal obligations standing at $62.6 trillion. With no ability to honor these obligations, the government effectively is bankrupt.

At such debt levels, the markets soon will recoil from lending Uncle Sam whatever he needs. Major buyers of U.S. Treasuries from outside the United States, including a number of central banks, already are balking. These investors have funded nearly all net U.S. Treasury debt issuance of the last five years, putting to use the excess dollars flushed into the global markets by the United States’ excessive and ever-expanding trade deficit. This practice, however, generated liquidity for the U.S. markets that has helped to depress long-term Treasury yields as well as to boost equity prices, in general.

Although the U.S, government faces ultimate insolvency, it has the same way out taken by most countries faced with bankruptcy. It can print whatever money it needs to create, in order to meet its obligations. The effect of such action is a runaway inflation — a hyperinflation — with a resulting, effective full debasement of the U.S. dollar, the world’s reserve currency. The magnitude of the loss of the U.S. dollar’s purchasing power in the last 75 years now has the potential of being replicated within a few days or weeks.

In the present environment, the chances for the collapse in money supply needed to generate a consumer price deflation are nil. First, the discipline of the gold standard that helped trigger historical deflations is gone. Second, both from the standpoint of the government’s fiscal irresponsibility and from the Fed’s standpoint of providing the financial system with whatever liquidity is needed to keep it afloat, the U.S. central bank already is pushing broad money growth to new extremes, not containing it.