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Under the Macro-Scope



Perception meets Reality.

The 'perception' is ... that reflation has taken hold and become inexorably 'imbedded' in the U.S. economy.

The Fed WANTS this perception to dominate.

Thus, the Fed DARE NOT admit that the labor market is simply NOT responding to signs of price reflation as applied to OUTPUT data.

The REALITY of the situation is:

• Income has accelerated its trend towards deflation.
• Petroleum has accelerated its trend towards inflation.

At the end of the day, against a secular backdrop dominated by OMINOUS consumer debt and household leverage ... and ... miniscule savings ...

... consumption is severely CRIMPED, as evidenced by the troubling decline in personal consumption expenditures in June.

At the end of the day ... perception-induced increases in output, against flagging final demand, is causing inventories to RISE, rapidly and 'unexpectedly'. From Housing to Autos to Retail on down to Producers, rising inventories have become a thorn in the theme of reflation, perhaps enough so down the line to POP the perception 'bubble'.

The Fed WANTS to promote the perception that June-July is merely an oil-slick induced 'slippery-patch' ... a TRANSITORY slippery-patch, with an easy evil-villian scapegoat to point the finger at ... when ... reality bites.

And, worse yet ... U.S. savings-wealth stands directly in HARM'S WAY.

So, when reality bites, the RISK is ... that it sparks a fire, and paper wealth begins to BURN once again.

Short-covering by speculators provided yesterday's post-Fed fireworks, based on the PERCEPTION promoted within the FOMC Monetary Policy Statement.

Selling since, on the REALITY offered by Cisco (CSCO:NASD) ... has made the Fed party short-lived for the Bulls ...

... as BOO the BEAR has spent all night PARTYING, from Asia, into Europe, Boo is having a ball, dancing the night away with his bearish psychedelic spin dominating the club-scene, especially in Europe.

We note ... simply ... the SLAM-DANCE performed by Boo in Germany this morning, as the DAX slips to a new low for the YEAR.

Germany, where the REALITY is more EVIDENT ... and ... MORE OMINOUS on a near-term basis, considering the continued erosion in the labor market, new LOWS in the yr-yr pace of Retail Sales ... er, we should say, NEW HIGHS, in the PACE OF DECLINE, posted by June Retail Sales.

Indeed, the German retail scene is looking increasingly 'Japanese' ... meaning that it appears headed towards becoming a bottomless pit of perpetual decline.

Hence, we observe the NEW LOW in the DAX, set this morning, as seen in the daily chart on display below. Indeed, not only is the DAX executing a classic technical breakdown ... price pattern wise ... it is also powering to the downside in terms of the directional reversal (lower) in the long-term moving average.

At the very least, this marks an END to the 'reflation' of the German equity market.

At worst ... this marks a trend REVERSAL ... and thus, we might be willing to take it so far as to suggest that today's breakdown in the DAX represents a TECTONIC shift back towards disinflation dominance within the capital markets ... especially since it comes hard on the heels of ...

... Fed tightening.

So, what is the German word for ... BOO ???

DAS BEAR is DANCING ... as seen within the longer-term weekly chart.

Considering the dramatic divergence in eco-performance as pertains DIRECTLY to the labor market, between Germany (disinflating wages, and contracting job market) and the UK (expanding job market, and rising wages) ... we are intrigued by the action in the two stock markets, relative to one another. Indeed, with the fundamental case in hand, and since Germany LED the way to the downside in Europe during the last bear leg ... we find it MOST interesting to note the breakdown in the DAX, against the UK FTSE, as seen in the chart below.

This is not just an academic exercise, as we observe our final chart of the day, which takes our DAX-FTSE Ratio (red line) and plots it over the action in the US S+P 500 Index (blue bars). Rather, in practical terms as applies to the REALITY of the situation exhibited within our charts ... the charts strongly suggest that today's breakdown in the DAX is a PRELUDE to similarly bearish action to come in the U.S.

The macro-message to be gleaned from the psychedelic chart tapestry ???

Boo the Dancing Bear is BACK in the 'lead role'.

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