|US Federal Reserve chairman Alan Greenspan states that he is of the opinion that the US economy is on "reasonably firm footing" despite the "uneven character of the expansion over the past year." He has indicated that the US central bank is not done raising interest rates--at least, not just yet. He also intimated that it is "very difficult" to know what level of interest rate is optimum for the economy, although "we probably will know it when we are there." |
Since June last year, the Federal Reserve has raised its short-term interest rate target from 1% to 3%, while at the same time 10-year Treasury rates have declined from 4.7% to below 4%. This flattening of the yield curve is what many are calling the "bond market conundrum."
|When long-term interest rates fall below short-term interest rates (this is referred to as an inverted yield curve), there is a very good chance that a recession lies ahead. Sir Alan, however, differs. He does not believe that falling long-term interest rates indicate economic troubles ahead. He and other officials at the Fed are upbeat on the economic outlook, and he has remarked that even if the yield curve did invert, they would "not automatically assume it will mean what it meant in the past" -- meaning that he does not think an inverted yield curve implies the economy will slow down. I remember the talk of a "New Economy" before the bubble burst in 2000. To have Alan Greenspan say that things are different this time around surprises me.|
|Readers know that I have been long-term bearish, and that at the moment I believe that the Dow is in a short-term bull market correction. However, after Greenspan's recent remarks, I felt that I had to have another look at my short-term charts. I asked myself what the chart would look like were the market in a bull run. Here's what it would look like (Figure 1).|
|Figure 1: A positive for the Dow?|
|Graphic provided by: AdvancedGET.|
|The chart is suggesting a target for the top of wave V as being 11843, 12569, or 13018. This looks feasible, but only if the Dow breaks above the long-term resistance line. Note also that it will be a fifth-wave top, with a bear market, A-B-C trend to follow, so whichever way we look at it, the short-term trend is up, but the long-term trend is down. |
Let us hope that Sir Alan's optimism is correct.
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