A New Marshall Plan Would Shake Things Up

If Central Banks Played Heavy Metal The Would Turn Their Money Amps To Eleven

The financial markets seem to be equally betting on whether the Federal Reserve and the European Central Bank (ECB) will decide to unleash the printing presses at any time in the near future and what the consequences of this actually happening or not may be for the future of the global economy.

It's really complex, but it's not complicated. In 2008, after several years of excessive speculation in real estate, fueled by unethical business practices in the subprime mortgage industry, the housing market in the U.S. and eventually the world collapsed. That's pretty normal market stuff. Eventually somebody is the last buyer at the end of a trend and the market collapses.

What made this crash different was that not only were subprime mortgages built on fiction, but there were trillions of off the book derivative bets that were betting that eventually there would be a collapse in the fool's market. When those bets proved to be sound, it was time for the fools on the wrong side to pay up. The fools turned out to be German banks, U.S. insurers, such as AIG, big investment banks like Morgan Stanley and Merrill Lyncy and other dumb money types who believed their own publicity. The winners were a handful of hedge funds and individuals who were fortunate enough to be on the right side of the bet.

The result is that a significant amount of money exchanged hands. The problem is that none of the losers had the money. So they had to sell stocks or get bailouts from their respective governments. Governments like Greece, where no one actually paid their taxes, went broke trying to bail out those who made the fool's bet on the wrong side. So, here we are. Everyone is broke, except the guys who were right on betting against subprime mortgages and the institutions who were deemed "too big to fail" and got bailouts.

So the real question then is why are we in such a mess? Aside from the above summary of issues, the smart guys who got paid for betting correctly on subprime mortgages have all the money. And they're not putting it to use. Why should they? The banks that got bailed out need the bailout money to make their balance sheets look reasonable. Why should they make loans? And everybody else is hurting because the money that usually made the world go 'round is in the pockets of the smart guys and the vaults of the banks who got bailed out.

What's the answer? Well, the Fed and the ECB could tell this story to the public. After all it's the truth. They, of course, would have to explain how their policies, along with those of the governments' that they serve helped to set up the mess in the first place. And, that, of course, could have some serious consequences.

The alternative is to turn the printing presses on to ELEVEN, as if they were a stack of Marshall amps at a metal concert, to close their eyes, and hope that it works.

The central banks know that they are in a big pickle. They don't want to implement the Marshall amp plan because they are afraid of inflation. So, they're hoping to jawbone the markets into moving higher so that people feel good about life again.

That, of course, is o.k. for the small number of people who live on what the market gives them. The rest of us need our day jobs to survive. And it's about those of us who have day jobs that the Fed and the ECB don't seem to know what to do about.

The problem is that time is running out. Unemployment levels and poverty that has been thrust upon those who were previously prosperous tends to lead to social unrest. We've seen what can happen when the rubber band snaps. It was dubbed "The Arab Spring."

So, since the Fed and the ECB can't seem to make up their minds, the markets are marking time, waiting for something to happen. Money is moving into the S & P 500 and little else. Small stocks are languishing. Gold is moving sideways. Commodities are trading on weather. And currencies are range bound.

How long can this last? It's hard to gauge. You'd think that something would have given by now. But it hasn't. So we walk the tight rope. We wait for something to happen. And we hope that the guys at the central banks get it right. Othewise, harder times lie ahead.

The Markets

Chart Courtesy of StockCharts.com

The S & P 500 (SPX) is still fighting to remain above 1400. One thing is fairly obvious, though. This is where a lot of the money that is going into stocks is ending up. The higher highs and higher lows sawtooth pattern remains intact. This is good for the S & P 500. But it remains to be seen if it's good for the rest of the market. Bull markets are better off when larger numbers of stocks tend to be participating.

Chart Courtesy of StockCharts.com

Small stocks in the Russell 2000 Index (RUT) are clearly struggling. They are simply not keeping up with the large cap stocks in the S & P 500. This is worrisome. It's not as worrisome as if the S & P was rising and the Russell was in a down trend. But it's worrisome enough and it is worth continuing to note.

Chart Courtesy of StockCharts.com

The Gold (GOLD) chart is also speaking volumes. This sideways movement suggests that investors are undecided about what lies ahead. But it doesn't mean that they've given up on gold. Underlying this sideways pattern is the understanding that if the global central banks decide to really prime the pump and hit the printing presses, there could very well be a significant increase in inflation.

Chart Courtesy of StockCharts.com

The other market that is starting to bet on a massive round of money printing is the treasury market. The U.S. Ten Year Note yield (TNX) has risen above 1.6% and has challenged 1.7% over the last couple of weeks. That is indicative of two things. One is that some in the market are hedging against inflation by selling bonds and also by shorting bonds. The other is that some of the money leaving bonds is moving into the S & P 500.

The Nasdaq Advance Decline line (NAAD) has made a double bottom but is volatile. Some days it's fairly encouraging. On Friday it was a bit disappointing. This kind of pattern supports the notion that money continues to move into the large cap stocks and not into the mid and small cap sector. This, if it continues, is likely to be negative for the markets.

Chart Courtesy of StockCharts.com

The Nasdaq Hi-Lo line (NAHL) is also not acting as well as it was a few months ago. We'd like to see this line start moving up on a regular basis. As it stands right now, it's a sign of flagging upward momentum.

Chart Courtesy of StockCharts.com

Conclusion

This remains a very segmental market where targeting of certain areas makes more sense than trying to be too diversified.

Much of what happens still depends on what central banks do, and how the U.S. election situation develops.

To subscribe to Dr Duarte's market Intelligence reports, which are emailed daily "before the open" to subscribers, please visit our website at http://www.joe-duarte.com