Are we on the verge of the depression we had to have to correct the gross imbalances in the global economy? Bill Gross, the bond king of Pimco, thinks we might be. “Because demand in the form of consumption has been artificially and fictitiously stimulated in recent years by financial engineering run amuck, there is a legitimate question as to whether its black hole imploding destructiveness can be totally countered with another dose of lower yields and deficit spending packages.”
In other words, he is deeply skeptical that the Fed rate cuts can cure what ails the global economy. “An artificially low, 1% short-term interest rate was an elixir during the days of a burgeoning shadow banking system,” he wrote to clients on Pimco’s website. “It cannot be the solution now.”
So what is the solution, according to Bill Gross? “The U.S. economy and its somewhat coupled global companion will sleepwalk for some time and a resumption of prosperity as we knew it will be dependent on reforms of monetary and fiscal policy resembling the 1930s more than our past decade.”
Welcome to the 1930s dear reader, the era of massive government spending. The government spent when businesses wouldn’t and individuals couldn’t. How spending will get us out of this problem, we’re not quite sure. It got us into it to begin with. But if Bill Gross is right, expect a much weaker U.S. dollar and much higher inflation, and higher oil and gold prices.
On cue, out trading analyst Gabriel Andre says something is afoot in the crude futures market. “The crude oil for March 2008 delivery contract has been traded since last July roughly. Yesterday, it closed slightly higher yesterday (92.33) as it extended the rally off last week’s low. As you can see from the chart, it closed just above its 50 day Moving Average, which seriously confirms the short-term bullish momentum.
“It would definitely be a ‘buy’ signal if the first resistance of the 20-day Moving Average is cleared (92.69). It would then indicate clearly that a short-term low has been posted. Indeed, after the rise towards $100 in early January and the following pullback move, the prices found a solid support at December’s low level, around 85.40, drawing a double bottom.”
Markets and Money