View from the top, April 2011

The consensus now is that economic recovery in the U.S., as anemic as it is, is underway.  People with far more data at their fingertips than I possess have sifted through it and this is their conclusion.  I don't beg to differ.

But those who concern themselves with forecasts should not let themselves be led by the nose by others who merely extrapolate current trends into the future.  The stock market and the economy are living organisms, not inanimate objects; they do not conform to Newton's First Law of Motion.

The best forecasters I know of are not economists, but rather psychologists who have made their careers as both forecasters and teachers.  Here's a glimpse of what they are saying today:

Dr. Van Tharp, International Institute of Trading Mastery:

The Federal Reserve is printing money like crazy and the banks are not lending it. Instead, it’s probably going into the stock market. The bond bubble burst and that money has also been flowing into the stock market. Those inflows are holding up the stock market.

It is a crazy world.

I've studied under Van myself; he is hardly crazy.  For him to make such an extreme remark is in itself telling. Van's newsletters are available at no cost on the Web BTW.

Analysts at Elliott Wave International attune themselves to prevailing sentiment: is there a bullish or bearish bias prevailing among participants in a market?  If so, is it extreme?  In this month's edition of the Elliott Wave Financial Forecast Short Term Update, editor Steven Hochberg highlighted the results of a survey conducted by Investors' Intelligence. II polls investment managers for their opinions about the market: is it a good time to buy or sell or hold?  The reading as of now is at a bullish extreme, which has reliably portended a decline in the market.  One such extreme presaged Black Monday of October 1987.

The founder of Elliott Wave International, Bob Prechter, has noted that we have been for a while in an "all the same market" phase: as a rule, prices of stocks and commodities are varying inversely with that of the U.S. dollar.  Headlines lately have been lamenting the slide of the dollar since a major top in mid-2010.  There are very few investors to be found who are bullish on the dollar, paralleled by the extreme bullish sentiment in the stock market.  The current sentiment in both markets is ripe for a reversal, implying a fall in the Euro versus the dollar to accompany a drop in the stock market.  Back in 2008 when our economy was collapsing, the dollar began a strong rise versus other major currencies, which reversed its course circa March 2009 when our stock market began its impulsive advance from a major low.

In the markets for precious metals the bulls are running wild.  The price of silver in particular has been soaring.  Today, April 8, saw it rise a whopping 3.5%, as frenzied buyers bid up the May contract on the COMEX.  The metals enjoyed a similar meteoric streak in 1980 before the bottom fell out and sentiment flipped to bearish.

Meanwhile in Europe, Portugal has joined other failing economies, appealing to the European financial community for relief from the unfolding crisis in its sovereign debt.

All these are portents of a deflationary scenario, quite the opposite of the inflation that so many fear.