It was good (for some) while it lasted

What follows is an updated version of my very first post from late 2006.  Clearly, in hindsight, the events that followed that original post during 2007/2008 were bad, but did not collapse the global Ponzi Scheme.  The market has a way of testing us to separate the truly greedy and stupid from those who have learned their lesson.  That's what I believe 2008 was - a test.  It was a wake up call, and a last chance for all of us to accept reality.  For those who heeded the warning and otherwise changed their ways by paying down debt and adopting a more sustainable lifestyle, then likely they will survive what comes next.  For those who did not heed the warning, i.e. those still worshipping at the altar of greed or otherwise "bought in" to the status quo, they are going to be what we referred to in 2001 as  - "FC.com".  The most important point is that the over-leveraged structure and incentives of the Global Financial Ponzi have not been resolved one iota, except to become ever more leveraged by shifting the onus for debt accumulation from private citizens to  sovereign governments in addition to global Central Bank monetization programs injecting $3 trillion+ of "hot money" into the financial markets.  Unfortunately, the Idiocracy of the day can't complain that they had no advance warning that a collapse could happen...because one already occurred and they simply ignored it.

The Best Rally $7 trillion can Buy
Granted, it has been one hell of a market rally since 2009 - recovering 85% of the previous 2007 high.  Staggeringly, the price tag here in the U.S. alone when combining fiscal and monetary stimulus comes to roughly $7 trillion.  That equates to around $23,000 for every man, woman and child in the U.S.  Add in the elimination of 5 million jobs which fell straight to the corporate bottom line, and soon you are talking real money.  As one would expect of a Ponzi Scheme, the benefits of the past 3 years of Extend and Pretend accrued to only a fraction of people, while the remainder struggled under ever increasing debt loads and diminishing job prospects.  Nevertheless, I must apologize for having been consistently premature in forecasting the demise of Extend and Pretend.  I clearly had no clue how much money policy-makers would be willing to throw away in a vain attempt to sustain the unsustainable.  That said, on a historical time scale, this forecast will be considered real time...

Which Gets Us Back to My Original Post (with minor updates)
The global Ponzi Scheme is unraveling and the rate of decline will accelerate exponentially. The first leg down was from 2000-2002, and the second leg down was 2008, but that was just a minor taste of what is yet to come. I am compelled to write now to describe the coming phase for two reasons: 1) because I think the pieces are now in place for an imminent decline 2) In case there is anyone, even one person, who reads this and benefits from the conclusions.

At this juncture, what most take for granted as the "status quo" is largely an illusion propagated by unprecedented ongoing fiscal and monetary stimulus.  The global economy is nowhere near being self-sustaining and therefore debt levels are non-amortizing meaning additional borrowing is needed to refinance prior borrowing plus new spending.  Therefore, what most people take for granted as the standard way of life, is neither scalable nor sustainable.  Once other nations decided they wanted a seat at the big table, then the clock started ticking on our consumption-oriented lifestyle.

From a longer-term perspective, the U.S. economy peaked in the late 1960s and early 1970s in terms of industrial output (manufacturing), real median wages, and innovation. This trend was very apparent during the 1970s, but since the early '80s has been obscured by the massive "blowoff top" the Elliot Wave folks call a (terminal) fifth wave. Unable to rely upon innovation and manufacturing capability, starting with Reagan, the U.S. has been financing the last 30+ years' prosperity with debt and outsourcing (aka. estate sale). Debt at all levels (personal/household, local government, federal government), relative to income levels, is at the highest levels in U.S. history.  Meanwhile organic job creation when adjusted for ongoing debt accumulation, is virtually non-existent.

The party looked to be stalling out in 2000-2001, but the Fed engineered another "recovery" by taking interest rates down to 1% (lowest level in history) and encouraging consumers to borrow yet more money to finance the current pseudo-recovery. The latest 3+ year Obama economic illusion is a pseudo-recovery, because it is not self-sustaining. How else to explain that in the 3rd year of an economic "expansion" government deficits equate to 10% of GDP?   All of this debt, used to finance consumption, the Bush tax for the ultra wealthy, two wars etc. etc. severely limit the Fed's ability to stimulate the economy.  Apparently very few economists, let alone people, comprehend how debt shifts consumption from the future to the present. Only debt that is spent to build/buy productive assets will enhance the growth of the economy. Debt spent to finance consumption is a burden on the future economy.

Meanwhile, the global 'economy' resembles a classic Ponzi (pyramid) scheme, in that a lucky few at the top are prospering at the expense of the majority at the bottom. In order to continue however, a Ponzi pyramid requires unrelenting growth. Meanwhile, the short-sighted wealthy sponsors of this Ponzi scheme are eagerly commoditizing every factor of production and job function so that they can package and sell the income streams and move the money to offshore cash accounts.  This year, even as the minimum wage stands at a mere $7.25/hr and is lower (inflation adjusted) than it was in 1973, Wall Street is still taking home massive bonuses, despite almost collapsing the global economy back in 2008.  Meanwhile the jobs of the majority at the bottom are being commoditized and rationalized, both through outsourcing and automation. Land fills are topping up with cheap junk and destroying the physical environment, while developing nations are competing to see who can offer the lowest wages and worst working conditions, in their bid to get a ticket to this insane lottery. Don't get me wrong, I understand that economic rationalization is a crucial part of capitalism, and I am not against private enterprise, however all levels of government have been induced to look the other way to ensure high returns on capital at the expense of returns on labour. This is classic 'Supply Side' economics aka. 'favour the employer over the wage earner'.

All of the above last point is moot, however, because all Ponzi schemes eventually fail. They fail because there are diminishing marginal returns to growth. Also, the scheme requires ever-increasing numbers of low income workers to expand the bottom of the pyramid. This constant flow of low wage workers into the world economy has increased profit margins to the highest levels in history, as high income workers in developed countries are swapped out for low income workers in developing countries. Beleaguered American workers, in a bid to maintain their lifestyles, have turned to debt in all forms. It's becoming ever more apparent that this strategy has now reached its predictable bad ending.  Once we fall off that cliff into the depression, Dr. Bernanke won't have the tools to rescuscitate the patient. The American middle class will be dead on arrival (as will the middle class across most Western nations).

Here is what happens next:
The stock market has been in a bearish rising wedge since 2009, supported only by enormous amounts of ongoing monetary and fiscal stimulus.  This is a dangerous market, because volatility is near recent years' lows and most investors are lulled into a false sense of security. Once the move to the downside begins, it will go far lower, far faster than the vast majority predict.

Once the stock market tanks, the economy will stall out and fall into severe depression, accompanied with massive layoffs. The Fed is now out of ammo, therefore prices of all risk assets are set to decline, including stocks, corporate bonds, commodities and precious metals. The Fed will eventually panic because their credibility is spent.  Bernanke's approval rating is 70% going into this debacle, but he will soon be the number one blamegoat for this fiasco.  Monetary policy is without doubt the biggest ponzi scheme ever invented and it's shelf life is quickly dwindling.  The Fed will likely eventually resort to printing and distributing hard currency, meanwhile governments worldwide are already engaging in competitive debasement of their currencies. Therefore, beyond the initial deflationary credit collapse, I will eventually be looking to be a buyer of gold and silver (via CEF - Central fund of Canada) or GLD.  Eventually could be measured in years...

Looking out further, people will lose their homes and jobs en masse and discontent will rise to levels last seen in the Great Depression. The major difference however, is that Depression-era people were hardy folk with useful manual labor skills. Also there were still a large proportion of family farms and farm jobs that were largely self-sustaining. Today's population of IT managers (me), accountants and Starbucks baristas won't have any useful skills to fall back on in a basic survival-based economy. Therefore, crime and violence will sky-rocket and personal security will become a high priority for everyone.

Looking out a couple of years:

1) The U.S. will abandon Iraq and Afghanistan to the terrorists

2) The Middle-East will descend into chaos beyond anything heretofore imagined

My strategy:

1) Avoid the stock market, invest in short-term Treasuries

2) Look for a large pullback in gold/silver and then start averaging in to CEF/GLD

3) Invest in personal security

Good Luck.  We all need it.

This Time Will Be Different

[Update: August 27th, 2012]

Central Banksters meet in Jackson Hole this week to debate another round of monetary dopium.  Wall Street is making the usual (self) destructive threats as to what will happen if they don't get their next fix on time.

Historically the Fed doesn't act this close to an election, so the junkies on Wall Street may be forced to go cold turkey...

When I say things will be different, I am talking about the public's inevitable "response" to the ongoing greed-orgy at Main Street's expense.  No surprise, the overpaid gamblers on Wall Street and their proxies in Washington are oblivious to the seething rage lurking just below the surface - a dry tinderbox that they keep feeding...merely in need of a random spark...

Nothing has Changed
Just last week (under the radar), it was announced that the Volcker Rule, intended to put an end to banks speculating with depositors' money, has now been pushed back to the end of this year.  Meanwhile, full implementation won't be due until July, 2014, almost two years from now !  In other words, best case scenario (assuming it ever happens), it will take over 5 years from the depths of the largest bailout in U.S. history to finally get Wall Street to stop gambling with public money.  Wow, anyone who calls me a pessimist  at this juncture, either has a frontal lobotomy or is free-basing Prozac...

[Original Post: May 10, 2012]

iPhoney Rally and Recovery - Price: $666

Four years ago, Wall Street due to its infinite greed and malfeasance, crashed world markets and almost destroyed the global economy.  In the event, government stepped in and used taxpayer resources to save the day.  The entire bailout put hundreds of billions of taxpayer (middle class) dollars at risk.

Fast Forward Four Years, and What Has Changed?

For Wall Street:

- Four year stock market rally

- Corporate profits off the charts

- Business as Usual 

For Main Street:

- $5 trillion of additional Federal Government debt added since early 2009

- $2 trillion of additional Federal Reserve Debt ("balance sheet expansion") 

- 5 million FEWER jobs

- Economy fully outsourced with no sign of real job creation whatsoever
- Middle Class net worth back at 1989 levels

Never Save a Snake From Drowning - It Will Bite

In other words, since the crash in 2008, the Middle Class has been stuck with an additional $7 trillion of TOTAL debt, courtesy of "extend and pretend", all the while being outsourced at the behest of the financial services industry that the Middle Class itself bailed out.  

Twisted Irony: Wall Street's HFT (High Frequency Trading) Monster is Off the Leash...

Due to HFT levitation of the stock market, Wall Street's benchmark is moving out of reach.  Now the fate of Wall Street's end-of-year bonanza rests not just on one stock, but on one product - iPhone 5.  Fortunately, iPhone 5 is "1" better than iPhone 4, so the Idiocracy will have to get one.  

Today Apple hit 666: Wall Street's Lucky Number

And, Right On Time: The "Gifted Minority" aka. those who created this latent clusterfuck, now expressing "disdain" at the burgeoning indolents piling up on their door step
http://www.zerohedge.com/news/art-cashin-new-normals-new-populism-165-million-state-dependents

This is the Angel Heart school of Management - run around "right sizing" people to oblivion and then disavow any impact on the broader economy.  And just wait until these toolbags realize that they are next in line at the soup kitchen.  Oh Shit !!! I thought we were screwing over everyone else - not me !!!  History will not be impressed by a generation of overpaid salesmen who outsource their nation's economy and unwittingly their own jobs with it.  And I have no doubt in the fullness of time, they will get the story straight on who is the grasshopper and who is the ant.

Tool Time Award: Barry Ritholtz
Barry today was joining the ground and pound on Niall Ferguson for writing this week's cover article on Newsweek telling Obama to "Hit the Road".  Ritholtz claims that Ferguson inaccurately interpreted government payroll numbers by not adjusting for census workers - good point Barry - Yahtzee!  Meanwhile, in coming out swinging, Ritholtz makes a major amateur mistake (or deliberate oversight?) of his own, that other Obama apologists have made these past years when comparing this recovery to past ones i.e. he claims that relative private job growth has been better than the past two recessions, but he doesn't adjust for debt (deficit) accumulation.   The real story is that if past policymakers had been willing to run a MASSIVE 10% of GDP deficit over the past 60 years, there would not have been ANY prior recessions for Barry to compare to in the first place...

Then There Were None 
Lastly, debating "relative recoveries" using self-selected parameters is merely a callous parlour game for fat and happy academics who still have a job.  The fact is that this "recovery" has been an abysmal failure which should come as no surprise given that the overwhelming beneficiary of government deficit spending has been Corporate profits.  How the hell can there be an economic recovery when the entire deficit is falling straight to the bottom line and bypassing the Middle Class?  The only thing the average person sees is the fucking tab at the end of the day.  As fully expected, the Globalized Ponzi Scheme is unraveling and hence benefiting fewer and fewer people, until eventually there will be no one left to take the other side of the debate.

P.S. This One Goes To Eleven
Per above, for those who say that the deficit does not fully equate to 10% of GDP - first, adjust GDP for the amount of the deficit and it's darn close i.e. An honest man doesn't assume that borrowed money is real GDP (although economists do), because once you assume debt is income, then it's only a matter of time before someone comes along and says we can borrow to infinity - oh wait, Larry Summers already did.

Brown Swans Flocking [Again]

I just read this timely article "The Perils of Overconfidence" in which a Wall Street sophist once again tells us that predicting the future is a fool's errand (scroll down past all the bullshit to the bottom of the article).  Apparently trying to avoid being ass raped by Wall Street for the fifth time in a row, is the *new* overconfidence.  This "no one can predict the future" bullshit is exactly the mentality engendered by "Fooled by Randomness" (aka. the Black Swan Event), as described in the original post below.  I say it's timely, because from a contrarian standpoint, this is also the type of mindset we should expect Wall Street to adopt at a critical juncture when facing overwhelming (and highly obvious) risk.  Let's be clear, Wall Street greedbots have to believe the Black Swan theory in order to keep their eye on the prize, which is the end of year bonus.  That is their overriding incentive, because after all, hedge funds are just call options - heads they win and score a big bonus - tails they underperform the market/crash the fund, and walk away.

BTFD: Take It To the Limit One More Time

As one would expect at a critical juncture, the markets are eerily calm.  Volume and volatility are at multi-month and multi-year lows.  It's times like these when it's tempting to doze off, wander aimlessly at the beach, or otherwise assume everything is A-OK.

Meanwhile, as usual, the financial pundits at large are pontificating upon all of the various 'indicators' du jour to parse the tea leaves and determine what it all means.  And of course, they are ignoring the bigger picture context and the looming Tsunami that bears down upon us with each passing minute.

So while not one to dwell on the minutia, I will nevertheless lay out some key indicators at this juncture that have me less than sanguine, not withstanding the flatlining market.

Attenuation

This current flat lining of the market is exactly what we would expect at a critical top in the market.  It's the concept of attenuation (loss of signal) writ large.  As I have shown for some time now, the Russell 2000 small cap market is attenuating in tighter and tighter fractals.  And the German DAX is clearly doing so as well:

R2K

DAX

Junk Rally:

This latest rally leg, which represents the tiny far right "v" in the two charts above was led by the worst performing stocks of the past year e.g. Research In Motion, Caterpillar, Cummins and First Solar.  Meanwhile, the top performing stocks of the past several months i.e. the high dividend paying stocks such as Philip Morris, Kimberly Clark and yes WalMart were all rolling over.  So when considered relative to the the non-existent volume, clearly it was a short-covering rally, not the start of a new bull market in Blackberries. The high dividend, consumer non-discretionary "safe haven" stocks always hold up the longest...

New Highs Diverging

The following chart shows the New Highs - New Lows (black line) against the market.  Most of the time, the line tracks the stock market well - as it should.  Look to the far right.  This divergence indicates a narrowing of breadth, as one would expect as fewer and fewer stocks are participating in the rally.

Transports Still Lagging Industrials

A lot of people have noted that there has been a major Dow Theory non-confirmation for months now - wherein the Industrials are trending higher and the Transports are trending lower.  The key point I would make is that at the recent top in April, the Transports were the last sector to "tick higher" before the whole market rolled over.  What did Transports do today?  They outperformed the market...

The Dollar Wrecking Ball is Coiling

They call the much maligned U.S. dollar the "wrecking ball" on Wall Street because when it rallies it takes away all of Wall Street's treats and goodies.  Two ways:  First it kills earnings for multinationals which have to translate foreign earnings back to U.S. dollars at a steeper conversion rate.  Secondly, it kills the beloved carry trades in which dollars are borrowed at 1% in the U.S. and "invested" abroad at 5x the interest rate.  Add in copious leverage, wait 12 months and shit a massive bonus on Dec. 31st.

The dollar is in an uptrend off of a well-established base:

Gold

It's a shame about gold.  It's the most beloved trade of our time - the Dotcom trade of the 2000s.  There are more ads on the internet for gold than for car insurance and boner pills put together.  The markets have been in "risk on" mode since early June yet as you see below gold is going nowhere, despite the fact that Hedge Funds and China are are once buying gold in quantity.  Shouldn't that mean that gold is going up?  Hedge funds buying gold during "risk on" just means that they will be puking it out under "risk off", as margin calls force them to sell anything that isn't bolted down.  And gold is not a liquid asset.  Also, gold is priced in dollars, meaning any dollar rally automatically lowers the price of gold, so gold would have to outperform the the dollar in a flight to safety.  As for EWI, they say that gold will either go up or down from here - ok, thanks...Lastly, gold tanked 30% in 2008, so again, am I to believe this time will be different?  Other than that, gold is great...

Those Terrible Treasuries 

If we think the dollar is maligned, well Treasuries are outright despised.  Mostly because despite all of the great 'reasons' treasuries should tank, they refuse to do so.  Just the other day the greatest bond guru of all time (according to CNBS), Bill Gross, indicated he was shorting Treasuries.  Well, he was wrong last year, so I am not sure why we would believe him this year, unless we had the attention span of a coked up flea...  He readily admits in the LA Times article that you have to own treasuries in a slowing economy.  Well, guess what's coming.   Clearly, the main (unspoken) reason why Treasuries are universally "hated" by Wall Street is because no one can make any money off of them (income-wise).  What other reason can there be to short the one and only asset class that held its value through 2008 unless you assume 2008 can't happen again ?  

So what are Treasuries doing now?  They are correcting off of a multi-year high i.e. they are trading inverse to stocks, exactly as one would expect of a safe haven.  My overall Treasury thesis is here (Invest at your own risk).

Long-term (30 year) Treasury ETF: TLT

Rio 2016: What to Expect

The Olimpycs (once again) sponsored by Coke and McDonald's:

Simple Jack - Newly elected President of the IOC
I'm Lovin' It !!!

As was strictly enforced in London, Coke and McDonald's are the only brands allowed.  Security will be provided by the TSA who are the "Official Gropers of 2016".  According to the IOC, the TSA was automatically selected due to their unparalleled efficiency at throwing away things we need.  So anyone caught with real food will have it ripped out of their hands by a TSA agent.  

The Official Condom: "Usain's Bolt"

Also as in London, only official condoms will be allowed.  The official condom of 2016 will be the new brand "Usain's Bolt" part of a line of products that includes boner pills (Warning: If you experience an erection lasting more than 17 days, it may just mean that you are in fact Usain Bolt - #1, The Best, The World's Greatest, The Fastest, The Hardest etc. etc...). 

All condoms will be inspected by the TSA before, during and after use.

New Sport: Nude Women's Beach Volleyball

Yes, the sport we (men) have all been waiting for.  First it was real volleyball, then it was scantily clad women on a beach volleyball, now finally, the real deal.  Many fans had complained in London that the women were overdressed in the beach volleyball events, so the IOC came up with a solution.  This of course, will be an exhibition-only event and only men and bearded lesbians will be permitted in the stands.  The only permitted competitors will be large-breasted Swedish women.

Other new sports being considered:

1) Handball:  No, not the sport seen in London that no one has ever seen before, the real hand ball we played as kids hitting a ball against the wall

2) Leap Frog: This will be borrowed from the gay Olympics.  IOC officials are confident there will be fewer delay of game penalties as in the GO

3) Drinking booze while running cross-country: Borrowed from the Hash House Harriers

4) Synchronized Walking

5) Standing on One Leg 

6) Synchronized standing on one leg

7) Basket Weaving

8) Watching TV

9) My Kids' Favourite: Playing 'Call of Duty' for 16 hours straight

The Last Bull Market: Machine Guns

Invest at Your Own Risk

The ROI on an M16 A2 (that's a .50 cal above), since 2004 has been 50% and as you can see below, the price has risen on a slow but steady basis.  No asset class has held its value better than the machine gun in the past 25 years - not stocks, bonds, gold or real estate.

[Via machinegunpriceguide.com}

Supersized Idiocracy

Full Retard: The Olympics, sponsored by McDonald's

Comfortably Numb

You don't Say...(Bernanke on the long-term effects of Quantitative Easing):

"One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public."- Ben Bernanke [October 2010]

BTFD: Deja Deja Deja...Vu

Compliments of Central Bank Dopium, HFT computers, and delta hedgers (aka. volatility sellers), the markets have now carved out what can only be described as the mother of all bearish rising wedges.  This pattern which has developed since the low in 2009 is obvious to even a blind man, although likely not obvious at all to the recursive computer algorithms generating this attenuating fractal.  Volume is duly collapsing (lower pane), per the text book definition of a rising wedge.  We have been back and forth through this 1375-1400 level about 10 times since 2007, so mark this area, because it's where most of the bodies are likely to be buried - metaphorically speaking, of course...

As I have said before, selling options volatility into a multi-year top is analogous to selling fire insurance right before fire season - it works great, until it fails catastrophically i.e. it's just Wall Street's latest sky dive without a parachute.  Clearly, as this article confirms, some people didn't nearly get the message from 2008.  So, the market will just have to try harder this next time.

(p.s. to be fair, the above article does end with bankruptcy guidance, so at least it gives people assistance for when the strategy fails - as always, you can't make this shit up...).

Dr. Copper Prescribes Ritalin for Stocks

Copper, which is far less prone to emotion, speculation, and Central Bank manipulation, has a different out look on the global economy than stocks.  In the chart below, in both prior instances when copper topped out, stocks continued on briefly to new highs but then succumbed ultimately in the direction of copper (down).  Now, on the other side of point (3), the divergence between stocks and copper is enormous compared to the prior instances.  Meanwhile, the fact that copper has gone from the upper left to the lower right quadrant is yet another roundly ignored sign of global deflation and impending recession.

Spectacle 2012: Peak Denial

What good is a collapsing global financial system without spectacle to distract the masses from the catastrophe unfolding in plain view.  Something for everyone...except reality of course.

But we have to thank politics for giving us our best spectacle of 2012 - Robama v.s. Obamney.  The world breathlessly awaits to see which of these Harvard drones will be chosen as the face and voice of the 14,000 special interest groups operating in D.C.