The Year of the W

I was browsing through tonight and saw this story from Todd Harrison.  If you’re unfamiliar with Todd, he’s the founder of, and he caused an uproar in the trading community last year when he announced that he had moved 100% of his long term money into cash.  The Dow was at 11, 346 when he said that.

Back to the story.  Today Todd says that he thinks a chart of 2009 is going to look like a “W”, and that “We’re currently dancing around the middle spike“.  In other words, the current spike in stocks is just a spike, and it’s going to head lower again.  I agree.

To explain his reasoning, Todd says “The market has room to run in the context of the lower highs that define a bear market. The first test will arrive around S&P 950, which is dual resistance in the form of the 200-day moving average and the one-year downtrend.

The flies in the sustained recovery ointment are two-fold, which is why I’m of the view that this is a bear-market bounce. First, rampant inflation requires legitimate demand for goods and services coupled with the healthy velocity of money, neither of which can be artificially manufactured by the litany of government acronyms or tough talk from the Beltway.

Second is the unavoidable reality that the cure for an imploding debt bubble isn’t the inducement of more debt but rather the destruction of it. That is the single greatest flaw in the “all-clear” thesis; we’re swimming backwards against a growing tide of credit dependency and the cumulative imbalances that have built since the turn of the century.

Employment is still dropping, housing prices are still dropping, earning are still declining.  I see no reason to buy back in at this time.



3 Responses

  1. Effor – we are constantly missing your presence on the web. Being a nitpick (is that even a word?? I meant the kind of person who nags about small details anyway), I would have to disagree with the first statement :

    “First, rampant inflation requires legitimate demand for goods and services coupled with the healthy velocity of money, neither of which can be artificially manufactured by the litany of government acronyms or tough talk from the Beltway”

    If this was true, then I wouldn’t be so worried. The problem is that with enough money, even record-low demand and money moving through sludge can cause inflation. Maybe not so much because people buy things, but the excess money is constantly crippling the productive part of the economy which means that in terms of efficiency, time is virtually moving backwards. Also, there is the neverending demand from the government, which seems to be growing exponentially these days.

    Whether or not we get a “W”-shaped market this year will be interesting. Right now, I would actually like the markets to dive because it may give inflation more time to show up on the central bank radar.

  2. Yeah, I really need to start writing more. I’ve been pretty lazy lately.

    I happen to agree with you. That part of Todd’s statement is Keynesian BS. It can be shown to be BS by the fact that in the late 70’s we had rampant inflation, and there wasn’t a healthy velocity of money back then – or much demand for goods and services – with the exception of commodities such as oil and gold. According to Keynesian economics, the stagflation of the 70’s (inflation AND a stagnant economy) is impossible. But since it happened, it must be possible.

    I’m agree with the Austrians – inflation is always and everywhere a monetary phenomenon. Inflation/deflation is simply a function of the size of the money supply, and it will eventually show up regardless of the tinkering by the Fed.

    The reason I quoted that statement is that I wanted to be sure to quote him in context, and since the part I really wanted to quote (in bold) started with “Second”, I thought it would best to include the “first”. 🙂

  3. Gary

    Todd’s assessment is very similar to Jeremy Grantham’s and Nouriel Roubini’s. Grantham thinks there is a possibility of a retrenchment, but believes the longer the rally persists, the second wave of the stimulus will kickin, and we will rise much higher. Roubini believes the rise in earnings is unsustainable and the second wave of the stimulus will not have the impact that analysts are building in to their models.

    I think either scenario could unfold at this point. I do believe the risk of inflation is slight, because like you, I do not believe consumer demand will return like most expect.

    In February, Goldman’s new analyst predicted earnings in 2009 for the S&P500 would be $40. I believe this “estimate” will lower expectations for all of 2009, which is more supportive of Grantham’s scenario. The big issue will be earnings. In Q1 they came in around $10. If we get deterioration in the $7 range, then I believe we will head back down. If we get close to $10 ($8 – $10), then I believe you will see a significant rise in the indexes as it will in the minds of many support Grantham’s scenario.

    However, October could be the turning point. If like you & I think, consumers don’t get on board, then earnings will not continue to rise, and I believe people will lose faith in the stimulus. Plus, having worked in government for many years, “the stimulus” will go on holiday until February 2010, as government workers turn their attention to Thanksgiving, Christmas and New Years, since the Federal Government is largely immune to the effects of a recession, and as such the worker bees are obtuse and see no reason to push things through.

    I do believe that we will see an uptick in 2010 as the remaining stimulus gets back on track, which at that time could cause an inflationary bubble.

    At the end of the day, I think we are Japanese, and this will play out like Japan in the ’90’s. We’ll go up when the Federal government puts in a stimulus package, and we’ll revisit the lows, when the money goes away. Late 2010 will be a very ugly time, and I think, will result in Obama losing the re-election.

    Like HPX, I appreciate your opinion, and would enjoy hearing your opinion more (probably because it is in line with mine).

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