George Soros and the Next Financial Crisis
Source: Clif Droke (4/26/10)
Speculation has been rife in the financial press lately about the possibility of another financial market meltdown. . .
Even the president of the United States has jumped on the fear bandwagon. On Thursday, President Obama was stumping in New York as he attempts to win favor for his proposed financial overhaul legislation. Playing the fear card, Obama said it was "essential that we learn the lessons of this crisis, so we don't doom ourselves to repeat it. And make no mistake; that is exactly what will happen if we allow this moment to pass."
There is also the latest announcement from the International Monetary Fund, which said that Greece's financial crisis could be the start of a "new phase" of global financial crisis, one focused on uncertainties over sovereign debt. According to the IMF, "Higher debt levels have the potential for spillovers across financial systems, and to impact financial stability." The IMF also noted that current levels of debt in advanced countries have already risen to levels not seen since the end of World War II.
Retail investors, politicians and bureaucrats aren't the only ones speculating on the likelihood of another financial market crash. They're in good company as billionaire hedge fund manager George Soros has recently weighed in on the subject. In his latest book, Soros discussed the handling of the 2008 financial crisis and drew attention to the handling of the crisis by the major countries involved, particularly the U.S. Regarding the bailouts he said, "These measures have been successful, and the global economy appears to be stabilizing. There is a growing belief that the global financial system has once again escaped collapse and we are slowly returning to business as usual."
Soros then drops the bomb on this assumption as he offers his opinion: "This is a grave misinterpretation of the current situation. Humpty Dumpty cannot be put together again."
Elsewhere in the book Soros writes, "I regret to tell you that the recovery is liable to run out of steam and may even be followed by a 'double dip,' although I am not sure whether it will occur in 2010 or 2011." Yet on the same page Soros also admits that "Others—including me—failed to anticipate the extent of the rebound."
Many investors look to a financial oracle such as Soros for guidance as to what the financial future may hold. Others are content to place their faith in the pronouncements of the president or even the proclamations of the financial press. But the one source of "inside" knowledge that hasn't yet failed to provide correct guidance is the stock market itself. Since rebounding in dramatic fashion in March 2009, the market has been forecasting economic recovery for the U.S. Many investors have refused to listen to Mr. Market's optimistic message in the face of widespread headline pessimism, but the message is undeniable: more recovery is on the way.
As we have pointed out many times since last March, the "Stock Market Barometer," made famous by Charles Dow, is known for predicting improvement in the business outlook. It has been screaming at investors and anyone who cares to listen for over a year now. That message has been one of steady improvement and already we see signs of its partial fulfillment. Various segments of the economy have already started on the road to recovery but the last area in need of major improvement is obviously the job market. This is always the last segment to show improvement following a recession, however, but improvement will be seen for employment before all is said and done. In its entire history, the Stock Market Barometer has not yet failed.
Another strong indication that more recovery is on the way to the business economy can be seen in the New Economy Index (NEI). This index is a simple average of the share prices of the five leading representative companies of the domestic retail economy. When the NEI and its 12-week and 20-week moving averages are in an established uptrend and making higher highs on a sustained basis, it forecasts sales growth for the retail economy in the months that lie ahead. As the latest chart shows, NEI has now completely recovered its losses since 2007 (when it was forecasting economic weakness) and is now at a three-year high.
Turning our attention to the gold market, earlier this month we looked at our favorite proxy for the gold price, the SPDR Gold Trust ETF (GLD). We noted that the silver ETF (SLV) had broken out ahead of gold and this was interpreted as a positive leading signal for the gold price as we concluded that GLD would likely test its January trading range high. Since then GLD has gone on to test the intermediate-term trading range high at about the 114 level and has been consolidating for the last couple of weeks as you can see here in the daily chart.
The gold price, while not as vibrant as it was last year, still has a couple of important factors going for it. One is that any tendency toward strength in the broad market for equities has had a residual benefit for the gold price in pushing it higher. Another is that the "fear factor" concerning the economic outlook that we've been discussing is still supportive of the bullion price. These combined influences argue in favor of the gold price pushing out of its interim trading range and moving above the January 2010 high.
Support and Resistance
One of the most important skills traders and investors can possess is the ability to distinguish between important price levels in stocks, commodities and market indices. When a benchmark price level is approached by a stock you're trading in, for instance, it helps to know if the level is technically important, and if so, what are the chances it will keep the stock's price from moving any further ahead in its current direction. This is the basis behind support and resistance analysis in a nutshell.
Beyond the classical way of looking at support and resistance is an entirely new way of evaluating important price levels for stocks and commodities. These groundbreaking techniques were discussed by the famous market forecaster, the late great PQ Wall. Among the many techniques Wall employed in predicting price movements was the use of what he called "Magic Midpoints," which was a revolutionary way of looking at trading ranges. He also introduced the use of parabolic curves in market analysis, breaking the traditional reliance on rigid trend lines heavily used by practitioners of technical analysis.
Back in 2000, I published the first edition of the book, New Concepts in Support and Resistance, which to my knowledge was the first manual of technical analysis to explain and expound upon the techniques of PQ Wall. Now in its second printing, the book contains an easy-to-understand summary and detailed explanation of the many unique and profitable forecasting and analytical methods when approaching support and resistance in the markets. The book was written so that retail traders might be able to understand and practically apply these useful methods of market analysis. The book is now available for sale here.
Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment. He is also the author of numerous books, including New Concepts in Support and Resistance. For more information visit www.clifdroke.com.