MSN Money reported that another alleged fraud has taken place (sorry, no link):

The markets took it on the chin yesterday with all major indexes heading sharply south and honing in on last November’s lows. Actually, the Dow came within 31 hundredth of a point of taking out the November 20th level.

The November low of 752 of the S&P; 500 held up so far, but we have moved within striking distance. Causing this ruckus was the fear and worry that the stimulus package most likely won’t eliminate any recession pains.

In addition, Wall Street traders may have finally woken up to the fact that there is a recession going on around the world that seems to be increasing in speed as well as in magnitude and that other stimulus packages may not work either.

To readers of this blog, this should come as no surprise as I have questioned the wisdom of any stimulus or bailout program from the very beginning. It now remains to be seen if there is more follow through to the downside. If the 752 level on the S&P; is violated, you could see some indiscriminate selling, since this bottom has been hailed as the real thing.

To be clear, a break below it could bring the widely forecast 600 to 650 level into play, which would be absolutely devastating to the buy-and-hold crowd. Being safely on the sidelines is the only appropriate position during these times of madness.

MarketWatch featured a story titled “Seven Years of Wealth Gone.” Here are some highlights:

The nest egg of the typical American family is smaller now than it was seven years ago, according to Federal Reserve data released Thursday.

“But a lot has happened” since the end of 2007, a Fed economist said. As of October, median net worth had fallen to $98,900, down 3.2% from the end of 2007 and 2% below the level reported in the 2001 survey that was conducted after the dot.com bubble burst. Since October, stock prices have fallen another 15%, while home prices have fallen at least 2%.

These facts simply support my argument that consumers have reached a dead end and are in for some changes. No matter how much stimulus is being pushed via various packages, most families are forced to make the switch from spending to saving with easy access to credit now being history, as I pointed out yesterday.

Lost wealth will need to be rebuilt via stringent savings programs and elimination of unnecessary expenditures. With many retirement accounts having been cut in half last year, I can only hope that investors have learned their lesson and run away in droves from anyone preaching buy and hold combined with a canned asset allocation program.

I for one will continue on the path of spreading the word about trend tracking as it seems to have been the only investment method which was validated last year.

The last couple of days I talked about the long-term impact of last year’s market collapse. The dark side of the burst credit bubble will be with us for a long time and most people have no idea yet how their lives will be changed forever.

Wishful thinking by the Fed and the government that we can continue with a consumer driven economy will be a fallacy. Stimulus packages will not have the desired effect and will do nothing but burden future generations with debt. For the past 30 years, the American consumer has been the proverbial hamster on the wheel stuck in a rush of an ever increasing spending spree.

Those times are over as this busted credit bubble was the final nail in the coffin. No more housing ATM, or overloaded debit cards along with easy access to credit. The impact of the now deceased consumer has had a worldwide impact as the Asian export economies are in a freefall as Mish at Global Trends reported.

Something has to fundamentally change in the way the future economy will function. I am not sure exactly how it will turn out, but I agree with Steve Ballmer, CEO of Microsoft who described the world economy in these terms:

Ballmer said that economic growth in the last 25 years was fueled by innovation, globalization, and debt–and that the current levels of debt were unsustainable. “In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent,” he said. “Last year, private sector debt as a percentage of the GDP: 300 percent, far more leverage.”
…
“In my view, what we now have will be a fundamental economic reset,” he said. “The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.”

While this fundamental reset is something that I have been thinking about for a while, it’ll take some time until the policy makers of this country realize that we will not return to the old “buy now and pay later” system at any time soon.

This maybe a dire view to you, but keep in mind that change also offers great opportunities for the creation of new concepts and companies. Investment wise, you can get a head start by patiently following the trends in the market place and making your decision when upside breakouts occur.

With so much uncertainty upon us, I firmly believe that trend tracking is the only way to keep your head above water and your portfolios safe. If you followed along last year, and avoided the sharp losses that many suffered, then you’re way ahead of the investing public.

There is a good possibility that this volatility will continue and lower lows will be made at sometime. Do your fellow man a favor and pass on the link to my free newsletter and this blog. Millions of people are not familiar with these concepts; you can make a difference, which could save someone’s portfolio from further destruction.

It’s very rare that I get any comments on my blogging efforts in general and not just on specific articles. This week was different as reader Larry sent in this courteous critique:

I have a lot of respect for you and your work and enjoy your weekly FREE letter, but lately I am losing interest in your blogs. I am very aware that I don’t have to read them if I choose not to, but the fact is I want to read them.

My complaint is that they aren’t your views any longer, but you are copying someone else’s hard work. The articles are becoming much to lengthy for me as compared to the ones where you personally used to write some good stuff, which was much more original. I like your opinions and views not someone else’s all the time. I believe I am speaking for my friends as well. Please don’t be upset with me as I am only sharing my feelings with you hoping you will get a feel as to what your readers might be thinking.

I am very aware that this is your project not mine, but if I am not satisfied probably many others aren’t either.

Please take a look at where you are going with this and maybe reconsider doing some of the writing yourself about what you see going on in the market environment and make the blogs much shorter as we are all busy and need to read them quickly.

There are two aspects to my ideas of writing this blog:

1. It is my intention to enhance the understanding of my trend tracking methodology and to supplement the information contained in my free weekly newsletter and StatSheet. I will write about these issues as they come up based on reader feedback and market events.

2. The financial markets went through a collapse last year with long lasting effects. Most investors portfolios’ were devastated and lives changed forever. With the world now hovering on the dark side of the burst credit bubble, it is important to hear different viewpoints from other bloggers or those qualified to write about it. So I reference the work of others because I think they present important viewpoints you need to know.

Reading a blog is not unlike reading a newspaper or other reference material. Just because you bought a copy of the WSJ does not mean that you have to read every article or that every section resonates with you. Be aware that others may like those articles that you don’t care for. Pick those topics that interest you and skip over the rest; it’s as simple as that.

Whether you agree with reader Larry or not, I like to hear your viewpoint. Please click on the comment icon below and type in your message.

Many readers are concerned about the long-term consequences of the stimulus package and the various bailout programs. Reader Chris had this to say:

Great posting of the comment on the car maker bail-out.

What is an investor to do expecting deflation?
What steps to take in case of massive inflation?

Correct; Congress, the Fed and the Treasury have not given any evidence that they have any idea how to deal with the current economic situation. The usual solution of throwing good money after bad is simply doomed to fail.

My view is that, given enough time, we will experience both scenarios: First deflation and then Inflation.

Right now we are in a bear market along with tremendous deflationary forces. Trillions of financial assets have been destroyed around the world, housing is in a prolonged downward price spiral, unemployment is soaring and commodity prices have dropped sharply.

Stimulus packages and bailout programs will do nothing to stop this trend and will only cause more money to be poured down the drain in a vain attempt to quickly reverse the course.

I am not an economist, but if I assume that, say, $3 trillion in assets have been destroyed then it would seem that the Fed could conceivably increase money supply, by whatever means, by about the same amount before any threat of inflation would become reality. It would take some time to affect that change, which is why I believe that the inflation scenario is a number of years away.

This is not a forecast that is chiseled in stone; it’s merely my view right now. If some of the current facts change, I will change my mind as well.

As investors, how do we deal with it?

First, as noted in my weekly updates, my domestic and international Trend Tracking Indexes (TTIs) are in bear market territory, so we won’t take any action there until the major trends change.

Second, it is not necessary to try to determine exactly as to whether we are still in a deflationary mode or have crossed over into inflationary territory.

When following trends, all you need to do is look at the sector fund/ETF listings in the weekly StatSheet. Those will give you the best clue as to where the upward momentum is and in which areas you might want to deploy some of your assets.

Nobody can look into the future, but following trends that cover all major sectors of an economy is as good of a guide as you can find to see which direction we are headed. As time goes on, you will notice that leadership in certain sectors changes, so it’s imperative that you use trailing sell stops to either limit your losses or lock in any profits.

Trends in the market place are the only thing that is real because it can be measured. Stay away from hype and especially canned asset allocations promoted by commissioned salesmen. My old standby line is still valid: Never ever do business with someone who does not offer an exit strategy!