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“Our current period of international economic relations is as unusual as it is precarious. Eras of economic protectionism have historically coincided with monetary nationalism; eras of liberal international trade, on the other hand, have coincided with a universal monetary standard. Today, we are witness to an unprecedentedly liberal global trade and investment regime operating side by side with the most extreme doctrine of monetary nationalism governments have ever contrived. This is a recipe for periodic crisis, both economic and political.

“It is an admirable intention of government that interest rates in their country should be kept low so as to facilitate investment. It is also an admirable intention of governments that the exchange rate of their currency be stable, so as to facilitate trade and investment. But as a deputy to the French National Assembly said in 1790, in response to a proposal that government issue more fiat revolutionary currency—with the admirable intention of providing the people with more wealth: ‘It is necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally.’ Likewise, we do no good in being gracious to bad logicians with good intentions. Where governments grant themselves the right to print money in the future, interest rates will rise proportionally with people’s expectations of future exchange rate depreciations.”

                             Benn Steil & Maunal Hinds

FX Trading – Ouch! Mr. Consumer Surprises Big Time! Will stocks follow?
Who leads, who follows? Do rising stock prices make Mr. Consumer feel good i.e. wealth effect? Or does the ebb and flow of Mr. Consumer’s confidence blaze the trail for stocks?

US Consumer Confidence Index 2000-2010:

US Consumer Confidence Index 2000-2010

S&P 500 Index 2000-2010:

S&P 500 Index 2000-2010

As usual with seeming correlations, it’s not clear. But the two pictures do look eerily similar. The problem is, we can’t predict the direction of either. But intermarket correlations (if we can call it that) do help us add more pieces to our constantly building three-dimensional puzzle.

So, why might Mr. Consumer’s lack of confidence be leading the market this time? Possibly because of this very nasty looking chart below showing the number of “unemployed persons” statistic.

USA Unemployed Persons 2000-2010:

USA Unemployed Persons 2000-2010

I’m sure it can be argued (state numbers prove it) that a stat like this does not even begin to cover all the people really unemployed, let alone underemployed. But it does make it clear that this recession has been very nasty for workers. And with this number continuing to rise, and in such a dramatic fashion, it’s probably no surprise Mr. Consumer isn’t filled with confidence.

We told our audience in Vancouver, at the World Outlook Conference in late January, that we expected a double-dip recession. The employment picture and attendant lack of global demand, bolstered by a change in sentiment by Mr. US Consumer (and others) toward spending and debt, was our primary reasoning.

If our reasoning proved true on Mr. US Consumer, then for us, it was a direct line drawn to Chinese export demand; export demand that is vital in order to clear the market of the huge amount of new capacity the Chinese have created with their stimulus.

It is why we are squarely in the camp that says this move in stocks represents a bounce in an ongoing bear market. We label it as most in the Elliot Wave world do—a wave 2 correction.

S&P 500 Index Weekly:

S&P 500 Index Weekly

So far we have witnessed a 50% retracement of the high to low move from October 2007 to March 2009, respectively. Shorting S&P 500 here with a stop in the range of the recent high seems a decent risk/reward bet.

But Big Ben is stepping up to the podium today. Could he save us again? Maybe! But keep in mind even Atlas Shrugged.