This blog will be used to express my views on the financial market. The focus will be the application of technical analysis through of the lens of long term secular trends.
My macro view is that the world economy has reached a point where strong headwinds threaten to hold us to substandard or no growth for many years to come. This macro belief is founded in two main areas:
(1) The global economy is over levered to a point where it has become dangerously destabilizing. Both private and public debts are much too high. Even with the massive debt transfer from the private sector to the public section, the private sector continues on a path of deleverging (and rightfully so). Public promises in the US now far exceed our capability to make good on those promises. This will have a negative impact on long term growth, either through (a) austerity (sadly it probably can only be forced by the "bond vigilantes" as has recently been shown in Europe), (b) money printing and utter reckless hyperinflation (god help us all), and/or (c) massive cuts to entitlements (difficult to do considering those receiving those benefits are the strongest voting block...the old folks / boomers ). With the exception of the hyperinflation route, the other routes are all deflationary in nature. I do not believe a mature economy like the US can grow its way out of it debts as the supply side folks would have you believe (no dice Summers).
(2) Fossil fuel energy resources, especially crude oil have reached a point where global production cannot keep pace with global demand (e.g. peak oil). It is my belief that much of the industrial revolution and the growth witness over the last 150 years is a direct result of cheap abundant energy (ALL of which has been derived from fossil fuels). This cheap energy is the life blood of capitalism. The majority of production advancement of the last century has been the pursuit of technologies that use more energy and less labor; essentially advancement of the machines. The law of supply and demand dictates that stable supply and increasing demand will be come to equilibrium through higher prices. These higher prices cause demand destruction thus pricing out portions of economic production. It is my belief that until an alternative source of energy is found (highly unlikely it will be easy or cheap) that every economic advance will be met rising energy prices that will choke the economic growth. It is also my belief that the deep drop in global economic production starting in 2008 was correlated with oil reaching $147 a barrel and not the sole result of the failure of Lehman Brothers as the history of the "Great Recession" has been rewritten. Of course the housing bubble with it corresponding over leverage and therefore mountain of bad debt at the banks also did major damage.
OK, now on to some charting. We might be on the eve of something very big. Has the grandiose Keynesian dream of "something for nothing" turned into a nightmare? If we can't print our way to prosperty what other choice do the central bankers have?
I am going to start with a look at the 5 year chart of the EFA ETF. It represents the holdings of the developed world stocks ex USA. You can see in the chart below that we have failed the first attempt at downtrend line that began at the start of the 2008 bear market. After rallying all the way back to the point of the October 2008 crash the market we have seen a sharp sell off that has broken the February 2010 low. This a bearish looking chart. The volume increase on the recent sell off is especially troubling. In the short term we are oversold, but if we are entering a bear market (or maybe never left the last one) then things can remain oversold for quite a long time.
EFA 5 Year Chart
Much more to come!
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