Inflation of Biblical Proportion ~ The Risk Averse Alert

Friday, February 20, 2009

Inflation of Biblical Proportion

We sure do live in interesting times. Regular readers know I believe our contemporary financial era goes by the mantra called "Inflate or Die."

So, here is something to think about.

Did you know that, if you could have lived and made $1,000,000 a day since the time Jesus walked the earth, you still would not have a trillion dollars? Two thousand years ... a million dollars a day ... and you are still well-shy of $1 trillion. Unbelievable!

Well, these days Uncle Sam is passing out trillions like it were candy. In the game of Inflate or Die the U.S. Treasury has been converted into one giant sugar factory. Let's not overlook this fact. It lends perspective to moments like this past week when the dynamic of the arrangement apparently was prime for testing writers of long hedges (i.e. near-the-money Put options), allowing players choking on inventory an opportunity to offload shares to those writers who would protect their exposure in a falling market.

This, I believe, explains this past week's trading more than all the hysteria on CNBC.

OEX weekly

So, here we are ... right at the same point where things stood in 1997 when Asian financial systems were pillaged to propel an explosion of asset-backed securities tied to increased trade in goods we no longer produce. It's the same point where began the decimation of the regulated financial system supporting the mortgage market (i.e. FNM, FRE) engineered post-9/11 to facilitate the next round of inflationary juice fueling Wall Street's unregulated MBS money machine. And now here we are at the very same point again ... with parasites of physical economies across the globe now moving in with a vengeance on the U.S. Treasury.

Last call for an overflowing shot of AAA-rated alcohol necessary to support an orgy of securities leveraging to the teeth economies whose fundamental means of sustaining vital physical functions have been neglected for decades. Anyone supposing that, trillions of dollars Uncle Sam is pouring down the rat hole will prove insufficient for the stock market to find meaningful support likely is not thinking straight.


The noteworthy bump in the volume of shares exchanged at this critical moment in the life of a precariously leveraged, securities-based global financial system suggests buying support, indeed, is entering the stock market. Uncle Sam's opening the Treasury for the sake of supporting quadrillions of dollars in derivative securities apparently finds believers willing to bet stocks will catch a bid.

This does not get a lot of air play, but there is strong fundamental basis for maintaining a positive near-term outlook toward the stock market. It lies with institutional commitment to contain a monster. The choice has been made to inflate at all costs.

Technically speaking, that indexes again trade in the vicinity where bottom twice has been set over the course of the past twelve years does not escape notice among the investment community. You can be sure of this: plenty of seasoned professionals understand the technical dynamic making bottoming a process. Thus, should underlying conditions continue improving as this process further develops, then one of these days buying interest could turn quite serious. Pros who are pacing the market's ongoing bottoming process won't miss a beat once things begin turning up.

What this might bring in the grand scheme is difficult to say with any certainty. I mention this because it is not outside the realm of possibility the present area in which indexes trade could act as a floor for another 5-10 years or more.

But for the here and now my outlook is quite the same as it has been. Despite the last couple weeks not at all unfolding as I had anticipated, the market should soon find legs and turn higher in a fairly big way, taking indexes to the upper end of trading ranges established over the past 4-5 months. More on this next week.

Fast Money
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