so the market is dumb and i am smart  

don't matter, wrong is wrong. and wrong is me.

somewhere in the swamp we posted our forecasts for the dow, for the end of the year 2009. mine was somewhere below the march low of around 6700 (666 on the s+p). with the dow soaring upward toward 10,000, this is as good a time as any to admit:

i was wrong.

barring a big global event (nuke attack on tel aviv or qom, collapse of the euro following defaut and a coup in latvia, something wild), my target will be missed and the trend is in the opposite direction.

i remain very confident that this is an intermediate uptrend, and that the markets are not reflecting the economic realities. i am sure the dow and the other equity markets will turn south strongly. i am just off with the timing. but, there is something they call someone who is absolutely correct on the price and the trend of the markets, yet misses on the timing.

wrong. and, (usually), broke.

props to those who called it better than me. basically, everyone. particularly brian and ed (apologies to whomever i forgot). now, the rationalizations, excuses, explanations, and tons of words about how i was not really wrong, but it is the world that has gone crazy.

well, not exactly. in retrospect, there are some important lessons i have learned. and the questions i am asking are sharper today. there are two huge factors that have correlated with this market move since march.

one--market liquidity provided by the fed. in english, cash shoveled out the door of the federal reserve bank, into the hands of the primary dealer banks. the big players on wall street. the fed claimed to 'hope' the big players would use that cash to lend into the real economy. they haven't. instead, they have used a lot of that cash to boost the stock markets. this is a gross oversimplification. but on a weekly basis, the fed actively intervenes in the treasury bond, bill and note markets, buying and selling instruments, rolling over expiring instruments, to fund the debt of our government. not only over the past six months, but consistently for the past three years since i've been learing about this stuff, and i am told for years before, the net flow of this cash is a great clue to the direction of the stock markets.

and, as we know, in the past year, the fed has been qualitatively easing, purchasing mortgage backed securities and fannie/freddie debt at higher prices than they are worth, and 'printing' money. gobs of it. and many gobs of this money has found it's way into the stock market.

two--the fall in the value of the dollar, relative to other world currencies, and relative to an ounce of gold. this is closely related to #1. and this is where i get confused. something that is not confusing is the straight up trend of the dow, and the straight down trend of the dollar index since march. head-slapping obvious.

where i get confused is figuring how the value of a dollar fits with the terms inflation, deflation, and the quantity of dollars out there in the world.

i have asked the smartest people i know in the finance/banking/economics world variations of the question, "can you have a deflation in total money supply, simultaneous with a weakening of a currency?" the answers i have gotten have been unsatisfactory (i'm looking at you, coz and bttg). maybe because i phrased the questions badly, maybe because i was unable to comprehend the answers, maybe because assumptions of the meanings of various terms were at odds between me and my wise friends.

well, i wish i hadn't asked, cause i think the economy is giving the answer.

at the risk of repeating annoyingly, here are the definitions i use:

money supply--all of the outstanding base money (dollars in circulation, in various accounts and physical currency) plus all outstanding credit, plus all outstanding debt.

inflation/deflation--growth or shrinkage of the money supply. as uncle miltie preached, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

so, if the supply of base money is greatly increased, if the amount of credit/debt that is destroyed (default, foreclosure, et cetera) is larger, you get yer deflation.

price levels of a single item, of a basket of items, or of all items together, are a symptom of inflation/deflation. and they are influenced by supply and demand of the particular items, as well as the supply and demand of the dollars. yeah, it gets complicated.

but

our money, the dollar, is a fiat currency. it is backed by nothing more than the full faith and credit of the usa. and/or the prospects for future industrial output of the usa. the value of a dollar is not influenced merely by the number of dollars out there; but also by intangibles, like hustle, grittiness, oh, wait. wrong rant. intangibles like trust, worry about default, deficits, tax revenues, words spoken by leaders, faith of the rest of the world in their willingness to use that dollar to price their oil, or their cheap poisoned goods they import to the usa.

quality matters, as well as quantity in the value of a dollar.

so, does that matter wrt inflation/deflation? does it matter in individual decisions regarding debt/savings, investment, expectation of future wages? does it matter if the country printing the dollars has more nukes than every one else as well as the biggest army, and is not shy about using it? or if that arsenal is contributing mightily to the borrowing needs and the ultimate weakness of those dollars?

i don't know. it makes my head hurt.

but, i do know what i see. that the numbers of dollars has gone up, and the number of dollars in the hands of the big boys who control the stock markets has gone up. and their credit/debt destruction has been slowed mightily by various government programs and accounting tricks. i know the quality of the dollars flying around the world has dropped steadily in the past two quarters. and i know the stock market has gone up, coincident with these prior two observations. and i think they are quite closely related.

what next? ok, everything above in this post is facts as i see them. if i am incorrect, please correct me. it is quite likely i don't know what i am talking about. as for the following, it is assured i do not know what i am talking about, and this is the opinion part of our program. by opinion, i mean wild-assed guess. if you take it as investment advice, you can expect to do as well as you did over the last six months if you took my ramblings as investment advice. not well. not well at all.

wgt money supply? i will watch the fed, and pay attention to what they do, not what they say. already, their balance sheet has been shrinking recently; the alphabet soup programs of buying crap debt from the marketplace have slowed; and the one quantitative easing program has not been extended; it had kept to the limits announced in the late winter/early spring, and it is due to end by january. they have not printed more than they said they would so far, and they are due to end printing soon.

i keep on top of the fed machinations by reading a great newsletter, the professional edition fed report from http://wallstreetexaminer.com/ which is worth it's weight in gold. $90 a quarter; 30 day no strings attached money back guarantee. i buy all of lee's reports, not just the fed report, even though i have been out of the market all year, save for a couple of trades here and there. it has been a wonderful educational tool, but an essential investment tool to understand the liquidity flows everyone on tv babbles about but clearly do not fathom.

when the fed moves, the wall street examiner tells me. and my head hurts less.

/plug. but it is so worth it.

as far as the dollar index. when so many voices are braying about the demise of the dollar, i gotta think the opposite is gonna happen. but more importantly (and this is my own unvarnished opinion, so it is really backed by nothing, not even my full faith and credit), i keep in mind who is really in charge. and what is in their best interests.

the powers that be have a shitload of dollars. they do not have a shitload of debt. sure the us government has a shitload of debt. but that is our problem the suckers who pay the taxes. sure, a weak dollar and significant inflation would help us poor suckers pay back all that national debt at lower real levels. but do they want to help us out?

fuck no.

deflation, and a strong dollar, helps the big boys. the managing directors of the surviving wall street firms, the biggest hedge fundies, the biggest private equity funds, the dudes who live in greenwich and bank in the carribbean. they don't have big mortgages; they buy their homes in cash. they don't pay much in taxes; they buy national and corporate bonds, and collect the interest. they want their dollars to remain strong, to be able to purchase more, not less.

they've been getting every thing else they want, to date. they are calling the shots. i try to think like a criminal, anticipate what suits them best in the long run. in the short run, they make money by being ahead of the turns, ahead of the suckers, and up or down, they are gonna collect. they dictate the timing of the turns.

(sorry if i am getting too conspiratorial. but the policies of the fed, the treasury, and of the other central banks that matter are set by a small handful of people. and their loyalty is to themselves, and to one another. not to the masses of people. this has been proved to my satisfaction over and over in the course of the last two years. the last thirty years too.)

let me stop there. i almost made it through a long essay without railing about fraud, unpunished and uninvestigated criminality, deceit, regulatory capture, selling out the middle class and making debt and wage slaves of the majority of working americans. all that stuff matters too, tremendously. but today i'm trying to just keep my eye on the money. and re-examine just what does 'money' mean.

(what, you thought i could just say 'i was wrong' and leave it at that?)