Tsunami Warning Issued

Thank the Federal Reserve & Washington DC!

Tsunami Warning, Is It Time?, was the title of my last editorial I wrote back on August 16, 2010. The TSUNAMI WARNING now has been officially issued here at PSTL. We know all of the arguments many are making as to why the economy will be fine but are they really legit? The economic numbers suggest something far different and are downright scary and continue to worsen as the year continues, an improvement would be welcomed.

This past week we saw Existing Home Sales and New Home Sales implode. Existing Home Sales plummeted 27.2% to a 3.83 million seasonally adjusted annual rate (consensus 4.72 million) in July – the lowest level since records began in 1999. Meanwhile, New Home Sales in July declined to 276,000 (consensus 315,000), which is the lowest level since records began in 1963.

In addition, this past week we saw Durable Orders tank and continued to see a soft Labor Market.

The last piece of economic news for the week was the GDP-Second Estimate reported Friday; it came in at 1.6%. This was ahead of revised estimates of 1.4%. Many cheered at this number because it was ahead of consensus estimates but big deal, the trend is firmly down.

Ben Bernanke spoke this past Friday, August 27, 2010 at the Annual Symposium of Central Bankers in Jackson Hole, WY and said the Fed will do whatever they need to keep things from going further off the rails. He also implied he did not see it as a done deal that the economy was going to fall apart. He did say, he expects a pickup in growth in 2011. However, he did not assure anyone that deflation or a double dip recession were off the table.

Here at PSTL, we almost feel as though we really never came out of a recession since any growth we saw over the past year was artificial from all of the stimulus packages Washington trotted out. With all the stimulus gone, we see the real health of the economy, it’s not pretty.

I continue to say follow the trend on treasury yields for the time being until circumstances dictate. While things are looking very poor in the economy, we at least have not seen a widening of the credit spreads which would be very alarming. The credit spread being, the difference between the yield on a corporate bond and a government bond.

Speaking of yields, the 10-year note yield closed this past Friday at 2.652%, rallying from a low yield of 2.419% this past Wedensday, August 25, 2010, which represents a key support area. Below that becomes a danger zone. Bernanke’s statements at the Annual Symposium of Central Bankers along with an overbought and crowded trade were the main causes for the back up in yields (selloff in bonds) on Friday. Here at PSTL we have been alerting our members to these overbought conditions and advising them to look for some type of a selloff.

Too Big To Fail Was All BS and Still Is!

Remember the words to big to FAIL? Give me a break, it was all BS!

There never should have been a too big to fail policy instituted. The only implication of failure is that stock and bondholders of reckless institutions aren’t rewarded for their malinvestment at the public’s expense. That was all a bunch of crap. The only thing we did was reward and save stock and bondholders and pass their toxic debt onto the public.

They trotted self-interested bank and Wall Street executives in front of the public to steal from the nation through fear of the word “failure.” The reality is, banks fail all the time and customers don’t lose a penny.

Here at PSTL we believe the scare tactics of our government and institutions have made a bad situation into a potential decade long problem.

Washington DC & The Fed Are Thieves!

Typically, when you are robbed, you are robbed from masked men but these bandits are unmasked and don’t care that they are stealing our future and our children’s future.

Obamanomics and the Federal Reserve are robbing us blind! Beyond TOO BIG TO FAIL, the policies have been inexcusable over the last 18 months. They have failed to make the hard choices, thus the reason we are in this TSUNAMI WARNING.

It seems like all the government wants to do is tax more, spend more, and create anti business policies. That my friends, is not a recipe for meaningful economic growth. You and I know that; doesn’t Washington? Apparently not!

Good policy is not rocket science. It begins with the refusal to make people pay for mistakes that are not their own. This economy continues to struggle with a fundamental problem which is that debt obligations exceed the ability to service them. While policy makers have done everything to preserve the patterns of spending and consumption that created the problem in the first place, they have done nothing to restructure those obligations.

And for the Federal Reserve, all it wants to do is create funny money and drop it from Bernanke’s helicopter and try to inflate our way out of this mess. They apparently don’t get that monetary policy is not the answer. It would appear we are in a liquidity trap. The Fed is trying to force consumers to spend, banks to lend and businesses to invest/hire people; none of which is happening.

It’s not going to happen with current policy and there is nothing anyone can do about it. The consumer is in a MAJOR deleveraging mode, banks have no desire to lend and corporate America has no desire to invest/hire.

Deflation then Hyperinflation?

It would appear the only way we get away from deflation is to have escape velocity and the only way we are going to achieve this is through ANIMAL SPIRITS or some MIRACULOUS EVENT.

Many believe inflation is on the way. Here at PSTL we believe the inflation word might come to fruition at some point but only in the form of hyperinflation due to the lack of faith in our currency, not due to economic growth. The reality is that hyperinflation is first and foremost set in motion and driven by a deteriorating fiscal situation. In fact, significant economic weakness and deflation is a precursor to hyperinflation.

Too many analysts believe that there has to be some economic demand or some consumption to stimulate inflation or hyperinflation. Printing money because you are broke and can’t service your debt is what leads to hyperinflation.

Latest reports show the core inflation rate is below 1% and when you see those types of numbers you're not a long way from deflation. If the inflation rate stabilizes from here fine, but down much further becomes very dangerous.

Any further decline in home prices, a weaker stock market, or the inability of banks to lend at all, could push us over the deflation threshold. Maybe this is why Wall St. continues to catch stocks and push them back up. Or could it be that stocks are looking historically cheap? Currently, the S&P 500 is trading at an 11.7 price to earnings ratio based on the coming years earnings estimates. Let’s not forget, those are only estimates.


Here at PSTL, we believe barring any real positive economic news; the only catalyst to prevent stocks from continuing their decline and making new lows on the year will be gridlock in Washington DC. The November elections are few months away and a win by the Republicans might create enough impetus for stock buyers to come back in. Either way, interesting and exciting times are ahead!

Here at PSTL we still think the three D’s are in play and are nearing the tipping point, DEBT ISSUES, DEFLATION, and DEPRESSION.

Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcasts to be vigilant in this continued complex market environment. We teach our members how to protect their portfolios and actually capitalize and make money in a declining market. We believe for the foreseeable future all rallies will be false and abortive in nature and all MAJOR risks continue to be to the downside.

About the Author

Senior Trader
BrianP [at] ProfessionalStockTraderLive [dot] com ()