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This was added on October 5, 2010 and is my Update (a long one) for today.  I figured that given what happened, it would be good for everyone to be able to read this right away. 

Well, so they managed to blast it up again

Japan has been deteriorating in recent days - and the government finally panicked and announced efforts to try to do something about it.  The Bank of Japan voted unanimously Tuesday to cut its policy interest-rate range to between zero and 0.1%, from 0.1%, and it said it would take easing measures valued at $419 billion, including the purchase of Japanese government bonds.  The Japanese called what they are doing, which even goes beyond what I just mentioned, a “comprehensive monetary easing.”  My comment is that an announced interest rate of 0-0.1% is clearly panic mode - and it will probably be quite hard for the Japanese central bank to actually hold such a narrow interest rate range that is close to zero - but the Wall Street traders loved the fact that the central bank is doing anything at all, so the American stock market promptly soared, starting right at the open already. 

After a higher start, the stock market added some more gains after the Institute for Supply Management’s services index climbed to 53.2% in September from 51.5% the prior month.  This was higher than expected (although hardly a big rise) and caused the overoptimistic traders on Wall Street to celebrate even more.  Activity in the nation’s services sector has now expanded for a ninth straight month with September reported.  But what that means, simply, is that the services sector has been at 50 or above for nine months now - when, in fact, it has never made it above about 56 during that entire time, and was, in fact, down to 51.5% (i.e., just above the zero point) just last month.  This is hardly solid growth - and is not nearly enough to keep the economy going - but the overoptimistic traders continue to latch onto any tiniest crumb that they can find in an effort to try to keep things going. 

The longer they try to do that, the worse the consequences will be - because the economy is clearly not healthy and is not getting really any healthier in a meaningful way, and can't (see elsewhere on this website), and so the longer it gets pushed in an effort to make that happen anyway, the more things are going to be distorted and the more that happens, the worse things are going to be when the system just can't hold up anymore. 

Another comment about the services sector index.  For the sequence of numbers to be meaningful in the big picture for optimism, there has to be a rising trend - and one can hardly say that has been happening in the last nine months.  The numbers have been above 50 - indicating an expanding sector - but it has been stuck just above 50 the entire time, there has been no rising trend.  So the services sector is just barely hanging on - which is about what I expected (I did not expect it to get much past 60 during this recovery, and it has not even made it that far, as far as I can remember; as far as I can remember, the highest number was between 56 and 57).  But because the stock traders are looking for every positive crumb they can find, they view any number above 50 as positive, even if an uptrend in positive territory is not emerging.  The problem is that if an uptrend in positive territory does not emerge (and I don't think it will, I never thought it would during this recovery), the very weak growth going on will not be sustainable and it will come back down.  When that happens, the situation will not be good for the stock market. 

A comment about the stock index pattern for today - it is, in fact, a pattern very similar to the one for the entire bear market recovery since March 2009 (thus showing itself as an example of how Elliott waves are self-similar at different degrees of trend, even very different degrees of trend, i.e., fractal), and is a corrective pattern.  The pattern is classic - a blast-off at the beginning, with much enthusiasm, then tapering off fairly quickly and going nearly flat fairly soon, then continuing on up at a very slow rate of ascent for quite some time afterward relative to the amount of time that it took to blast up in the first place.  But the entire thing IS a correction - and will be completely retraced.  Obviously, the blast-up today will be completely retraced before the one from March 2009, which is a much larger version of the same pattern, will be. 

The stock market closed at a 5-month high today, with the Dow closing up 193 points at 10,945 - and the intra-day high, late in the day, at 10,966, was high enough to take out the previous intra-day high just below 10,950 (at 10,948.50, as I recall) last Thursday morning, so the traders have managed to once again just barely blast the market high enough to maintain the uptrend for now. 

And now a comment on what the central banks, including the Japanese central bank with its latest move, are doing.  The Japanese central bank was already doing extraordinary easing - with interest rates at 0.1% - but has now announced truly extraordinary measures, including a targeted interest rate of less than 0.1%.  The American central bank is doing about the same thing in the meantime (not quite, but close). 

The problem is the following - all of the modern Western (including Japan, which is Westernized) central banks are operating according to modern neo-Keynesian principles, which hold that recessions can be avoided forever even if governments are (nearly) always deficit spending, even during most of the good times (note - politicians are not known for cutting back on spending, even if economists want them to; Bernanke keeps asking the politicians to do so, and says he is confident that they at least eventually will, but they never do).  The debt keeps piling up and we are close to being drowned by it in the meantime.  In other words, the most basic assumption of the modern neo-Keynesians is incorrect. 

But the Keynesian economists still hold to their theory - so they are trying harder and harder as time goes by to make their methods for avoiding recessions work, to the point of absurdity in the meantime.  Their efforts are getting more and more extreme as time goes on, with the American central bank having gone to some pretty severe extremes lately (the American central bank, the Federal Reserve, increased their balance sheet by about $2.5 trillion during the downturn, but the money supply in the economy actually decreased by about $250 billion, due to the credit crunch), and the latest move by the Japanese central bank is truly absurdly extreme. 

It all happens according to the following principle - "If our method for keeping the economy going the way we want it to did not work out as good as expected recently, then let's just do more of it and see what we get."  They just never seem to eventually realize that if it is not working (the way it was anticipated) for so long, then there must be something wrong with the approach and what needs to be done is to figure out why it isn't working, rather than just trying all the harder to make what they were doing before work. 

The problem is actually that since the most basic assumption of the Keynesians is incorrect (i.e., that an economy can be kept going forever), their methods for keeping the economy going are going to be less and less effective over time, eventually very ineffective indeed.  We have reached that point - but they still keep trying anyway. 

The more they try - the more extreme and absurd their efforts become along the way, and indeed, they are quite extreme and absurd in the meantime - the more the imbalances in the economy will continue to build up and so the more upset there will be in and to the system when they finally can't keep it up anymore and the efforts (totally) fail.  In other words, the longer they keep at it and the harder they try, the worse the consequences will be. 

I really did not think the Japanese would try to go below 0.1%, but they have, indeed, now done so and so it is plain that the central banks are going to take it pretty much all the way before the system will be allowed to breath (i.e., go down).  The consequences, I think, will be devastating.  In other words, the system will continue to be pushed until it just can't go on anymore, period

I don't actually think we are very far away from that point anymore - and that is part of why I put up this website. 

A note about inflation.  Central banks all over the world are talking about "monetary easing" in the meantime - even "extraordinary monetary easing" - and many people are worried that that will generate massive inflation.  I do not agree - and the link "Inflation vs. deflation" on this website explains why. 

But a quick summary is as follows.  All of the easing is being done by way of debt instruments - in other words, it is not cash-in-hand, it is borrowed money.  Borrowed money has to be paid back - and the problem is that more and more defaults are happening.  Defaults have to be written off - and the result is a decrease in the money supply, not an increase.  So we will end up with a deflation, not an inflation, and a depression (not just a recession, when this process of trying to keep the economy going ends), in other words, a deflationary depression. 

And the beginnings of that have already played themselves out in terms of America - in the previous downturn, America's central bank increased its balance sheet by about $2.5 trillion in an effort to flood the system with money ("quantitative easing") - but the actual money supply in the economy itself decreased by about $250 billion, due to the credit crunch.  In other words, once the credit crunch hits, it is simply impossible to increase the money supply out in the economy anymore by way of bank lending because the banks simply refuse to lend at the level they did before.  And, in fact, that has been happening in America - lending to people in the economy continues to go down, both because higher credit scores are now required and because fewer and fewer people have good credit scores (a house foreclosure, for example, trashes it), and the banks are taking the money that they got from the Fed for the quantitative easing and are investing it instead in what they have historically regarded as a guaranteed return ("the full faith and credit of the U.S. government"), that is to say, invested it in government debt instead.  The rate of return on it is not as high as it would be if they were to lend the money out to private companies and individuals, but they regard it as a guaranteed return - and that is how Obama has been able to finance his over-$1 trillion annual deficits (I am sure that is not how it was intended, but that is how it has worked out). 

So the money has simply not made it into the private economy - and it will continue not to, the credit crunch will not go away (just as I have predicted for a long time already that it would not once it got started).  So the Federal Reserve is stuck - but they keep trying anyway, with no real results to show for it.  It remains to be seen how long this can still go on before the system simply gives up, but I do not think it will be for more than a few more weeks or months anymore, and certainly not for more than another year or two, that is simply impossible, given the totality of what is going on in the big picture. 

By the way, I note that people are still talking now about expecting massive inflation shortly.  Given how long the massive "quantitative easing" has been going on in the meantime - years (about 2), not just months - wouldn't one think that one should be seeing it already in the meantime?  But one is not.  Sure, prices of commodities are going up, but that is not a "massive" inflation, and we are certainly not seeing it in the "retail" economy as a whole.  In fact, what we are seeing is deflation, especially in housing, during the last couple of years.  Anything that requires credit (housing most of all) took a hit - and that is exactly what I am talking about; we have a credit crunch that is causing the (additional) money not to make it into the real economy. 

Where has the money been going over the years?  Just look at what is going up a lot at the time - in other words, what is experiencing "massive" inflation.  During the 1990's (especially the late 1990's), it was the stock market (the Kondratieff wave in combination with the law against recessions explains why - see this website).  In the earlier 2000's it was the real estate market - but that ended when the real estate market hit a brick wall due to running out of buyers at the margin.  And in the meantime, it is Obama's deficits, which are much, much bigger than even George W. Bush's deficits (but Bush's deficits, not Obama's, were responsible for putting us past the knee of the exponential in the national debt, that happened before Obama even took office as president).  In other words, the money is now going into the banks and then they are investing it in Treasury debt (as noted above), thus financing Obama's huge deficits - but note that the money is not actually getting into the real economy (in any major way), so it is, in fact, not generating inflation in the consumer economy.  Quite the opposite is happening. in fact, because the consumer economy is still being starved of cash due to the credit crunch.  And I predict that that will continue (despite the Fed's best efforts - the Fed is powerless to stop it) and will, in fact, lead to the downfall of the economy because there is no way to eliminate the credit crunch once it has started (Austrian economics explains why, the Keynesians are clueless) and in an economy that is as dependent on credit as the modern American one is, that is deadly, it is toxic. 

One other note - I have a link on this website "Why the price of gold will fall" and I stick to that.  Currently, the people in the gold market are different people from those in the stock market - and the gold bugs are expecting massive inflation (see discussion above) and are piling into gold and driving the price up, but they are misreading what is going on.  The large credit contraction has not started yet - only the preliminary phases have - and once the large credit contraction gets going, the dollar will go way up (for the time being) and the price of gold (in dollars) will correspondingly go way down, at least for the time being.  So I think that because of all the central bank pushing to keep things going, but using the credit system as the conduit for the money, two groups of people are going to be hurt in the end, the people in the stock market (either directly or indirectly) and the people in the gold market.  That will not leave many people in America who won't be hurt - unless something can be done to make more people aware of what is really going on.