Calling All Traders: Get Ready to Make Money Shorting the Market (Part 3)

05/28/2009 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Let's look at two other charts that will show you why I am so worried that the already poor economic outlook may soon get decidedly worse.

First, this is a chart of 30-year US bond yields. If you look at the chart, you will see that although our government has spent several trillion dollars and supposedly pumped a great deal of liquidity into the banking system to stabilize it and lower interest rates, in truth, interest rates have gone straight up all year! This does not translate into helping the average citizen with his troubled home loan or mortgage payment. There has been lots of talk, but the charts show little action, and in truth, the charts show a worsening condition!

chart

Does anyone really want to buy our bonds and finance our growing debt? The price of the US 30-year bonds, as the increase in the yield clearly shows on the chart above, has gone down all year. We even sent the Secretary of State to China to ask them buy more US bonds. Their official response: They would wait to see if the value of the bonds held up, as well as monitor the value of the US dollar, because our government was growing our national debt at such an alarming rate!

Let's now look at the US dollar and see if it is helping the outlook for our economy:

chart

The last article I wrote concerning the state of the economy pointed out that in my opinion, the bellwether indicator to watch would be the US dollar. I said that if the dollar began to weaken, I would expect US interest rates to follow higher, and the two coupled together would likely precede the next down leg in the US stock market. The chart above clearly shows that the dollar has declined dramatically against the euro and is currently showing no signs of life, and despite higher interest rates, investors and traders are flocking away from the US dollar as fast as they are flocking away from US bonds.

There are continuing rumors that the Chinese have begun to try to manage a small, controlled floating currency exchange within Hong Kong, probably as a prelude to openly floating their currency on the world market once they are sure the internal mechanisms are in place within their government infrastructure. If the Chinese do indeed let their currency float freely, there will be a huge outflow from the US dollar into the new, floating Chinese currency. This can only make things worse for the US dollar, US bonds, and the US stock market if it does happen.

I did not add a gold chart, oil chart, or a chart of one of the grain markets to this article. But if you look at those charts currently, you'll see that all of them are exploding in price again. The Fed did a good job trying to focus people's attention on deflation, but at the moment, it looks like the pressure is right back to the fight against inflation. And you would expect that, with the US government adding untold amounts of money to our mountain of debt.

If you don't want to buy the US dollar or US bonds, why would you be interested in holding US stocks? Would the last buyer please turn out the lights?

I wish you all good trading.
My heart goes out to those of you suffering in these difficult times.
Read Part 1 | Read Part 2

Timothy Morge

timmorge@gmail.com
www.medianline.com
www.marketgeometry.com

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