The Bag Holders Are Fully In Place

The Chinese manipulation of their market didn’t last long. 20 days. Now they have run out of buyers and they cannot attract foreign capital because it’s a one way “roach motel”.

Centralized decision making never works when it comes to capitalistic marketplaces. The world is seeing a lot of centralized decision making today.  Programs like Obamacare centralize decision making.  During the Great Depression, FDR used government power to centralize the pricing of many things. That decision has turned out to be long run pretty poor for everyone.  FDR used Keynesian economic theory to try and create demand to lift America out of the Great Depression.  The truth is, it worked until about 1937-38, and then the market fell apart again.

The decisions made to keep interest rates on 0%, increase the breadth of government programs, and be highly manipulative of the market has created more bubbles. Bubbles pop.  Maybe this time they will learn but I feel like Keynesians are Lucy with a football when it comes to facts.  They look at markets as puppets they can manipulate.  Pull a string, and a hand waves.  Pull another, and a leg moves.  Eventually Mr. Market wins.

Anyone notice commodity prices over the last few months? Here is a 6 month CRB chart.  It’s a weighted index that tracks commodities.

^CRB data by YCharts

The easy answer to the drop is, “Chinese demand is waning”. I think it’s a lot more than that. Things can’t go up forever.  I think it’s telling you that central banks world wide have screwed the pooch and the US Dollar is a lot stronger. QE forever doesn’t work.  It’s deceptive because you feel richer even though you aren’t.

Here is a weighted average of the foreign exchange value of the U.S. dollar against a subset of currencies from the broad index whose currencies commonly circulate outside of the country of issue. This subset is composed of the Euro Area, Canada, Japan, the United Kingdom, Switzerland, Australia, and Sweden.   The Federal Reserve leaked a memo last week that showed they wanted to raise rates this fall.  They are in their own version of a Roach Motel.  If they raise, the dollar gets stronger relative to other currencies and makes it very tough for American companies to export.  Conversely, imports get cheaper.  China, Japan, and the Eurozone are all trying to decrease the value of their currencies.

Real Trade Weighted US Dollar Index: Major Currencies data by YCharts

The technical guys I know all are bearish. The guys on Tastytrade all have their bear claws out.  Tim Knight is a long time technical trader and chartist.  Here is a video of what he thinks.  “Last December was the end of the bull market.  The bag holders are fully in place.”