[Last Update: 11/14/2010]
We have all seen this movie before - Nasdaq 2000, the post-9/11 boom/bust (~2002/2003), the Housing market debacle (2005/2006), the Commodities melt-up/melt-down (2007), the Lehman/subprime fiasco (2008). Each of these debacles, was aided and abetted by trade imbalances and cheap money (Fed policy). In the aftermath of each crash, the Fed was able to rescue the economy by applying even more monetary stimulus than the last time (in conjunction with ever increasing government spending). Therefore, investors have been lulled into a sense of confidence that the Fed is infallible and can fix any economic problem. Yet, only a total fool would assume that they can keep the Ponzi pyramid intact forever. Applying additional monetary easing to solve a debt problem is like drinking to solve an alcohol addiction.
One should bear in mind that the vast majority of money managers are not concerned with the Fed's exit strategy. Their only concern is what happens between now and 12/31 bonus time. As for individual investors, everyone rides the market bullet train thinking they can be the first off before it crashes. Amazingly, even Bill Gross, Manager of the world's largest bond fund, admitted this week that the Fed's policies are "somewhat of a Ponzi Scheme !!!"
Why Bernanke is either really stupid, a Tool for Wall Street, or most likely both...
The Fed's hopeless goal right now is to propagate the illusion of recovery long enough for a real economic recovery to take hold, essentially the game plan for every recession since WWII. After all, when the stock market is going up, that gives the illusion of recovery. Aided and abetted by 30 years of outsourcing and globalization, the Fed has long been able to manipulate interest rates to encourage consumption and debt, without generating hyperinflation. Back in the 1950s total debt levels were at 50% of GDP, now total debt is at 360% of GDP i.e. 7 times higher. Unlike all of those previous economic recoveries we are now post facto millions of jobs having been outsourced while having overall debt levels at 360% of GDP, so this time, there is no underlying economic fuel (new businesses, jobs) to sustain the economy. Essentially, the Fed is just pouring gasoline on a dying fire. Yes, there is a short-term burst of monetary "stimulus" that juices the stock market, but the real economy just keeps rolling over. Only a delusional optimist assumes that the debt pyramid will continue to grow and that lenders will accept new debt for repayment of old debt (aka. Ponzi borrowing) indefinitely, into an imploding economy. When confidence collapses and lenders realize that the goal is return of capital (principal) not return on capital (interest), then the markets will collapse, DEFLATION will take hold BIG TIME, and the Fed will be totally impotent.
The Global Ponzi Scheme is Going SUPER NOVA
Under "QE2", The Bernanke Fed has committed an additional $600 billion to buy up Treasury bonds and further leverage the system. With each purchase, the Fed pushes investors further and further out on the risk curve. To that point, risk markets around the world - stocks, bonds, commodities, gold - went parabolic this week. The Hang Seng (Hong Kong) is gapping up vertically ! We are reaching end game. Like a dying sun, the global credit-based Ponzi Scheme is actually accelerating, as it goes SUPER NOVA, first expanding outward in one last gasp of frenzied speculation, only to ultimately collapse inward upon itself. It will be a crash heard around the world, as investors wake up to the fact that they are all on the same side of the boat holding too much risk.
Fool me Six Times, Shame on Me...Under "QE2", The Bernanke Fed has committed an additional $600 billion to buy up Treasury bonds and further leverage the system. With each purchase, the Fed pushes investors further and further out on the risk curve. To that point, risk markets around the world - stocks, bonds, commodities, gold - went parabolic this week. The Hang Seng (Hong Kong) is gapping up vertically ! We are reaching end game. Like a dying sun, the global credit-based Ponzi Scheme is actually accelerating, as it goes SUPER NOVA, first expanding outward in one last gasp of frenzied speculation, only to ultimately collapse inward upon itself. It will be a crash heard around the world, as investors wake up to the fact that they are all on the same side of the boat holding too much risk.
We have all seen this movie before - Nasdaq 2000, the post-9/11 boom/bust (~2002/2003), the Housing market debacle (2005/2006), the Commodities melt-up/melt-down (2007), the Lehman/subprime fiasco (2008). Each of these debacles, was aided and abetted by trade imbalances and cheap money (Fed policy). In the aftermath of each crash, the Fed was able to rescue the economy by applying even more monetary stimulus than the last time (in conjunction with ever increasing government spending). Therefore, investors have been lulled into a sense of confidence that the Fed is infallible and can fix any economic problem. Yet, only a total fool would assume that they can keep the Ponzi pyramid intact forever. Applying additional monetary easing to solve a debt problem is like drinking to solve an alcohol addiction.
One should bear in mind that the vast majority of money managers are not concerned with the Fed's exit strategy. Their only concern is what happens between now and 12/31 bonus time. As for individual investors, everyone rides the market bullet train thinking they can be the first off before it crashes. Amazingly, even Bill Gross, Manager of the world's largest bond fund, admitted this week that the Fed's policies are "somewhat of a Ponzi Scheme !!!"
Why Bernanke is either really stupid, a Tool for Wall Street, or most likely both...
The Fed's hopeless goal right now is to propagate the illusion of recovery long enough for a real economic recovery to take hold, essentially the game plan for every recession since WWII. After all, when the stock market is going up, that gives the illusion of recovery. Aided and abetted by 30 years of outsourcing and globalization, the Fed has long been able to manipulate interest rates to encourage consumption and debt, without generating hyperinflation. Back in the 1950s total debt levels were at 50% of GDP, now total debt is at 360% of GDP i.e. 7 times higher. Unlike all of those previous economic recoveries we are now post facto millions of jobs having been outsourced while having overall debt levels at 360% of GDP, so this time, there is no underlying economic fuel (new businesses, jobs) to sustain the economy. Essentially, the Fed is just pouring gasoline on a dying fire. Yes, there is a short-term burst of monetary "stimulus" that juices the stock market, but the real economy just keeps rolling over. Only a delusional optimist assumes that the debt pyramid will continue to grow and that lenders will accept new debt for repayment of old debt (aka. Ponzi borrowing) indefinitely, into an imploding economy. When confidence collapses and lenders realize that the goal is return of capital (principal) not return on capital (interest), then the markets will collapse, DEFLATION will take hold BIG TIME, and the Fed will be totally impotent.
The Financial Liquidators (America's "Best and Brightest")
Beyond the failed monetary and fiscal policy contributions to this ongoing fiasco, the deeper underlying root cause is apparently something no one wants to discuss let alone confront. Over the past ~30 years, a new culture of financial "liquidators" took control in the U.S. and securitized/monetized all aspects of the Supply Chain from design and engineering through manufacturing. These financiers who became ubiquitous not only on Wall Street but in every major Corporation, displaced the predominant culture of engineers and scientists who had presided over the ascendancy of the U.S. as a manufacturing and engineering powerhouse. The Financial Liquidators have neither the training nor the inclination to design, build or create anything. Instead they have presided over the fevered process of selling off the entire U.S. manufacturing base and the Middle Class along with it. Schooled (and willfully ignorant) in the Anglo/American pollyanna bullshit of Ricardian comparative advantage, and therefore conveniently naive with respect to export mercantilism, they were fully empowered by the fiat currency regime imposed by Richard Nixon and Milton Friedman. What would have happened had the gold standard been maintained, is that the recurring trade deficits would have brought about a run on gold reserves, thus preventing the Idiocracy of the day from outsourcing their entire fucking country. These were the key reasons - to accommodate ongoing trade imbalances, as well as to enable Friedman's Monetary policy to become the Ponzi scheme of choice - why the gold standard was dropped in 1971.
Essentially these short-sighted greedbots were not willing to accept lower returns on capital for even one millisecond to allow U.S. manufacturing to retool vis-a-vis foreign competitors. Leveraged buyouts, securitization, outsourcing, offshoring, union busting are the tools of the trade for the liquidators. A class of salesmen, and speculators v.s. engineers and investors. Self-nominated "dealers" of industry who have inevitably created a self-cannibilizing economic pyramid scheme. A pyramid scheme that has foolishly liquidated its own customer base. Clearly, America's current cohort of "Best and Brightest" are neither the best nor the brightest, nor have they been for quite some time. The self-aggrandizing schools that are spawning these newly minted jackasses need to be held accountable, to say nothing of the entire economics profession which is morally, intellectually, and soon-to-be, quite literally bankrupt.
Of course, this is what the average person in America already knows, so all we are doing is standing around waiting for Wall Street to realize the party is over. Will they make it to 12/31 bonus day before the day of reckoning? They did last year, but as we've been told - Past performance is no guarantee of future results...
For those looking to protect their assets through a deflationary credit collapse. I still recommend Treasuries, as explained here (invest at your own risk):
The Treasury ETFs:
SHY: 1-3 year maturities ("safest" with respect to interest rate movements)
IEI: 3-7 year - probably the best compromise between long and short-term
IEF: 7-10 year - these are the bonds the Fed is buying :-)
TLT: 20+ year - most volatile/speculative, but most upside if yields fall (i.e. deflation)
IEI: 3-7 year - probably the best compromise between long and short-term
IEF: 7-10 year - these are the bonds the Fed is buying :-)
TLT: 20+ year - most volatile/speculative, but most upside if yields fall (i.e. deflation)
-------------------------MARKET SUMMARY ------------------------------
Key fundamental Risks:
Fiscal AND monetary stimulus starting to wear off:
- The economy is slowing despite unprecedented Fiscal and Monetary intervention
- Fiscal and Monetary policy are now one and the same i.e. the Treasury writes a check and the Federal Reserve prints the money. There is no longer any difference between these two policy approaches.
- Yet despite all of this unprecedented "stimulus" the economy is still heading lower which can mean only one thing - the Ponzi scheme is ending.
Key technical risks:
1) Mutual fund cash levels at historic lows
2) Excessive speculation in Emerging Markets (Bombay Sensex), Metals (Silver/gold) and growth stocks Apple, Baidu, Netflix, TravelZoo...all in vertical blowoff mode
3) Market at most overbought level since October 2007 top (Based on the "Open Trin")
- Open Trin is a smoothed moving average of the Trin (ARMS Index)
4) Bullish investor sentiment (AAII) at highest level since October, 2007 all-time top
5) Stocks having highest correlation since 1987 (not a good time to be buying stocks)
7) "Safe" haven bonds uptrending (yields falling) - indicating flight to safety and liquidity
- 2 year Treasury yields at lowest level ever...
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The below chart indicates the market's position from a long-term Elliot Wave standpoint. According to EW Theory, the market is viewed to be correcting the past ~80 years of rally since the 1932 low. Corrections generally take an a-b-c pattern. The "a" wave is the first wave down, in this case the decline from 2000-2003. The "b" wave is a correction of the "a" wave, in this case the rally that lasted from 2003-2007. Note it is very unusual for a "b" wave to actually retrace an entire "a" wave, however, when that occurs it is deemed to be particularly bearish for the "c" wave which as one would expect, comes as major surprise to those who believe that the worst is over. We are now in wave "c", which itself will be comprised of 5 wave segments (wave "a" and "b" were also comprised of 5 segments). Therefore, wave "1" down was the decline from 2007 that lasted through the Lehman crisis and bottomed in March 2009. Wave 2 is just now completing, as we see with a parabolic spike higher ~1200. That will bring to bear the third wave of wave "c" which will be the strongest wave of the entire secular bear market and eventually bring the market back down to multi-decade lows. After wave "c" a new stock market rally can begin.
As always, take market predictions with a grain of salt, especially with regards to timing. I am highly confident the above scenario (or something similar) will play out, but the timeframe for each of the declines and counter-trend bounces is highly speculative.
For those who deride Elliot Wave Theory as "financial astrology", I would be careful. Granted, their short-term charting is often too early on calling tops and bottoms, however, their overall thesis for a deflationary credit collapse is spot on and playing out entirely as expected.
In addition, EWI has been correct at anticipating the big picture stock market movements i.e. the "a" wave, the ensuing "b" wave rally and now the "c" wave decline, so far... Moreover, not withstanding the past year's rally, at this juncture, safe, low-yielding money market funds are still outperforming the stock market on a 12 year basis (back to 1998). By the time "c" wave bottoms out, short-term funds will have outperformed on a multi-decade basis.
For those who deride Elliot Wave Theory as "financial astrology", I would be careful. Granted, their short-term charting is often too early on calling tops and bottoms, however, their overall thesis for a deflationary credit collapse is spot on and playing out entirely as expected.
In addition, EWI has been correct at anticipating the big picture stock market movements i.e. the "a" wave, the ensuing "b" wave rally and now the "c" wave decline, so far... Moreover, not withstanding the past year's rally, at this juncture, safe, low-yielding money market funds are still outperforming the stock market on a 12 year basis (back to 1998). By the time "c" wave bottoms out, short-term funds will have outperformed on a multi-decade basis.
According to EWI, we are seeing an "All the Same Market" phenomenon similar to 2008 in which ALL risk assets (stocks, Corporate bonds, Municipal bonds, commodities, emerging markets) are becoming highly correlated to the downside, leaving few if any alternatives to U.S. Treasuries.
