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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Greg Jung who wrote (44071)	3/25/2000 12:36:00 AM
From: pater tenebrarum	Read Replies (2) \| Respond to of 99985

Greg, thanks, yes i'm aware of the contribution schedule. as to 'broad' market advances, they just can not be durable at this point, due to the fact that total market cap vs. the total money stock is at an all time high. therefore, either the big cap stocks rally, or certain sectors rally, but a durable advance with broad participation is just not possible. the occasional attempts by the a/d line to recover will all come to naught, unless a bear market brings the total market cap vs. money stock back into a more healthy relationship. only a meaningful downturn, or years of moving sideways in a trading range would achieve that. since the bull market has been based on a historically unprecedented credit expansion, the multi-year sideways scenario looks somewhat less probable to me. this is also unlikely when looking at the way in which the market progresses: the upward moves occur at ever steeper trajectories...and that makes a soft landing resolution all the more unlikely. it can once again all be traced back to how quickly credit in the economy expands. the first and second weeks of March saw M3 rise by 45bn. and 31bn. respectively, and immediately this excessive money supply growth found its way into the market. once credit stops expanding at this torrid pace, or God forbid, even contracts, the market will come down on an even steeper trajectory. since the Federal reserve is an avid money printer, it is hard to say when that will happen...however, the fact that $5,30 in new credit are created for every $1 in (official, distorted through hedonic measurements) GDP growth, it is clear that a natural limit will be reached no matter what the Fed does. there is some evidence that the credit markets themselves are beginning to grow wary about this possibility, as evidenced by the rise in swap spreads to near panic levels. admittedly this has been exacerbated by the treasury's debt buyback announcements and in the case of agency debt by the recent assertions that it is not guaranteed by government. an additional hard to predict factor is the confidence of foreign investors, who have to stump up over $1bn. daily to keep the current account deficit financed. the often re-iterated pet mantra of Larry Summers about a strong dollar policy being in the interest of the US, is not just idle chatter. rather it betrays the administrations growing concern with the financing of the current account being at the mercy of foreign investors. i actually think that even the debt buybacks have to be seen in this light. they were as much a confidence boosting measure directed at foreigners as they were an attempt to keep the party going in spite of the Fed's (anyway completely ineffective) baby step rate hikes. Japan plays a big role in providing the funds that keep the party going. as long as Japan meanders in and out of recession, no problem will arise from that quarter. a total collapse, or respectively an economic recovery would put the capital flows from Japan at risk. the latest game in town is of course the Euro carry trade...it is easy to see that it only works as long as the dollar keeps rising against the Euro. in short, fundamentally speaking two things have to be watched carefully to determine the market's fate: the pace of credit creation in the US, and the value of the dollar. take one of these props away, and the bubble will meet up with judgment day. regards, hb