Markets Will Resume Downward Spiral After Labour Day

By James West
MidasLetter.com
September 1, 2011

Don’t be fooled by the apparent strength evident in markets during the last week. Besides being completely inconsistent with fundamental drivers of normal market direction, the notion that all this buying is coming on the heels of Bernanke’s remarks that the economy is insufficiently weak to warrant further stimulus is just plain ludicrous.

First of all, his statement asserting that “we have the tools” to stimulate the economy while not actually doing so suggests a drunk who tells the cop who pulls him over that he could drive sober if he wanted to, but he doesn’t see the need for it. In the Bernanke fantasy world, the cop would contragtulate the driver with a shot of whiskey and send him on his merry way.

First of all, lets tally up the “economic prospects” that do not warrant further stiumuls:
1) Jobs growth is stagnant, and more likely, negative;
2) European debt deterioration will resume post- Labour Day as delusional leaders return from ill-deserved vacations in August. If there was any hope of a real solution, vacations would have been cancelled and round-the-clock negotiations would have been conducted. But since they, like the assembled bankers at Jackson Hole, realize that the situation is terminal and there’s nothing anybody can do except wait for the implosion.
3) China’s growth engine is starting to seize up, which is going to send both copper and oil plummeting.
4) As the U.S. issues billions in new stimulus, gold and silver will resume the upward trajectory that will see it break through $2200 and $50 repsectively before the end of 2011.
5) Home prices continue falling…no end in sight.

So on the one hand, Ben is right, in that the current economic outlook does not justify further stimulus, which in retorspect, only compounds the debt problem, and the main barrier to economic growth: too much capital in the global system chasing too few commodities and manufactured products in the absence of real demand. On the other hand, it will be interesting and ultimately predictable that the only tool in his toolbox is an electronic money printer.

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Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the Portfolio and Investment Advisor to the fund.

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