According to EWI, the top in the stock market occurred on January 19th. I believe they are correct. If so, then we have also seen tops in oil, gold and "risk" currencies. The safe currencies are therefore now the US dollar and Swiss Franc. The Japanese Yen perhaps as well, but I wouldn't bet that way due to that country's enormous debt load, which on a relative-to-GDP basis makes the U.S. debt look puny by comparison.
Humpty Dumpty
Therefore, the long anticipated 3rd wave meltdown is (very likely) underway. This next leg down in the ongoing financial crisis is starting as a slow motion train wreck, but will soon accelerate as the point of recognition occurs and panic spreads. Panic is inevitable, because everyone will come to realize that the government authorities are completely powerless to stop the meltdown. All of the stimulus, liquidity, credit and facilities put in place in 2008 will fail catastrophically. In the end, the only thing the 2008 bailout will have done is leverage up Wall Street one last time, and give the Greedbots one more bag of easy bonus money just before the house of cards collapses and stays collapsed.
Tallest Midget in the Circus
As expected, the dollar has been rallying for weeks now, especially vis-a-vis the Euro, because the Eurozone (Greece, Spain, Portugal, Italy, Eastern Europe) is likely the next source of financial chaos. So, for likely the last time, the unloved U.S. dollar will once again be the safe haven of choice during the ensuing panic. This will no doubt come as a great surprise to many people, especially the "tea baggers" and the Peter Schiff acolytes, but as EWI have carefully explained, a dollar shortage is exactly what we should expect in a credit deflation, as the supply of dollar-based credit collapses. I say for the LAST TIME, because this will likely be the dollar's last and greatest hurrah, as we eventually transition through deflation to the great printing of paper dollars that will undoubtedly lie somewhere down the road...
From an investment standpoint, EWI/Prechter has long advocated moving the majority of one's assets to short-term Treasuries, and I have advocated the same position on this blog. However, just this week, the self-anointed god of Finance and Economics, Nassim Taleb, recently told Blooomberg that it is a "no brainer" to short (sell) U.S. Treasuries. You may recall, that Taleb is most famous for his "Black Swan" theory, which postulates that rare and unpredictable events cause most Wall Street investment strategies to fail over the longer-term (I paraphrase). Obviously from an outcome standpoint, he has been proven correct, however, I disagree that the turmoil in the financial markets is at all rare or unpredictable i.e. these are more white swan events than black swan events. If anything, extreme volatility has become much more common in the past decade(s) and the inherent short-term/highly leveraged nature of Wall Street strategies makes the inevitable catastrophic outcomes very predictable. The reality is that most Wall Street trading strategies (hedge funds etc.) are like call options - heads I win and take home a massive bonus - tails I walk away and leave the investors, tax payers and system at large holding the bag. Taleb is very naive to think that Wall Street bankers are unaware of the underlying risks they take, considering the short-term incentives that are in place to take huge risks with other people's money i.e. they don't care. Therefore not withstanding Taleb's penchant for profound insight, I was not fazed when he made the "no-brainer" comment, because to believe Treasury interest rates will rise, is an implicit belief in reflation, which as I stated recently, is extremely improbable, if not impossible. If we have learned only one thing in the past 10 years it should be that any time a Ph.D tells us that an investment strategy is a "no brainer", you should run the other way, quickly, before a Black Swan swoops out of nowhere and shits on your head. Yet, magnanimous as always, I will agree to call Taleb's a "no brain" strategy.
Back to investing, the reason for advocating a long Treasury position is the same reason for being long the dollar - as a safe haven during deflation. When money flows out of risk assets and carry trades it will come back to dollars (the funding currency) and it has to be "parked" somewhere. It won't be parked in risky assets such as stocks or "spread products" (corporate bonds, municipals) etc. so that leaves Treasuries. Yes, the national debt and deficit are large, but relative to other countries (e.g. Japan) the debt load is still manageable (short-term) and in addition, the U.S. has options that the Euro countries do not have (e.g. monetizing the debt), explained in more detail below.
There are 3 major types of risks related to owning Treasuries:
1) Default Risk: Risk that the borrower (U.S. Government in this case) will simply not repay bonds at face value. I see Default Risk for Treasuries as being ZERO. The U.S. government's debt is all dollar denominated, which gives it the option to monetize its debt by having the U.S. Fed buy Treasury debt directly. If you think this can't happen, you are wrong, because it already happened last year to the tune of $300 billion under the aegis of "Quantitative Easing".
Keep in mind that if there is default risk, then it should be the same for all maturities of debt i.e. if the U.S. government decides not to repay its bonds, then logic dictates that all bonds will be affected not just select maturities. If anything, short-term bonds "could" be more at risk, since they need to be "rolled over" (re-paid) far more often than long-term debt.
2) Purchasing Power Risk: aka. inflation risk. The risk that market yields will rise, causing bond prices to fall. In a deflationary environment, inflation risk will be ZERO and if anything, nominal interest rates could be negative and still provide a positive real return. Imagine a scenario where GDP is down -20% year over year and prices decline by the same amount -20%. In that case, a market yield of -15%, would still net the holder 5% adjusted for "inflation" (deflation).
3) Rollover Risk: Rollover risk is the opposite of inflation risk, it's actually deflation risk. As indicated under the hyper-deflationary scenario above (-20% inflation) it's very possible that yields would go negative across the entire yield curve (all maturities). At that point you would be PAYING the U.S. government to borrow your money !!! At one point during the Lehman crisis in 2008 T-bills went briefly negative, so this is more than a hypothetical scenario. Now, would short-term yields go 15% (annualized) negative? That seems unlikely, but who wants to pay the Government to borrow their money? Fortunately, there is an easy way to protect against rollover risk, by simply buying longer dated maturities that do not roll over as often. Also, longer dated bonds will actually increase in value (potentially substantially) as yields fall, and you don't have to hold longer-dated bonds through to maturity (nor would you want to), you can sell them at any time i.e. they are highly liquid...
In summary, though I have long "advocated" the EWI party line of owning only short-term Treasury debt only during the deflation phase, I personally also own longer dated maturities to guard against Rollover Risk and provide some upside in the event of an anticipated major move down in yields. Given that Default Risk is assumed to be zero and/or at least the same for all maturities, Inflation Risk is zero (assuming deflation), and Rollover Risk favours long-dated, maturities, I cannot explain EWI's preference for short-dated Treasuries.
That said, the easiest way to own Treasury debt of all maturities is through the iShare ETFs which trade like stocks:
SHY: 1-3 year maturities
IEI: 3-7 year (probably the best compromise between long and short-term)
IEF: 7-10 year
TLT: 20+ year (most volatile/speculative, but most upside if yields fall)
Good luck !
Wednesday, February 17, 2010
Wednesday, January 13, 2010
MELTDOWN is INEVITABLE
Looks like the boyz on Wall Street got paid after all. So while the lucky few count their million dollar '09 bonuses compliments of the 2008 tax payer bailout, let us reflect on the year ahead.
One thing that I am continuously amazed by is the general widespread ignorance of history or insight that predominates current thinking about the economy and the ongoing crisis. This is true of the Mainstream Media, the Government and even to much extent the "alternative" (blogosphere) media that seems to have absolutely no consensus on how we got here or what is likely to happen next. As I have stated before, part of the reason for the conflicting viewpoints is purely due to greed and the never-ending desire to find some way to profitably "trade through" this fiasco - be it in gold, stocks, emerging markets etc. Another key reason seems to be that people extrapolate from their own past into the future which precludes them from envisioning any type of economic paradigm shift occurring in their lifetime, regardless of overwhelming facts and data all pointing in that direction. As an example, even Nouriel Roubini who is constantly being derided as "too bearish" and "Dr. Doom" is really not that bearish in the grand scheme of things. He is by no means predicting a deflationary depression or an event that would put in question the Western economic system as we know it. Compared to EWI, Roubini's predictions are outright tame yet both parties often reference the exact same data. Clearly, someone has to be wrong in this equation, and my money for being wrong is on those pseudo-bears (Roubini, Ritholtz, Shedlock etc.) who somehow conclude that one plus one can equal three.
Therefore, in an effort to maintain my own sanity and to prove that the rules of cause and effect have not been permanently suspended, I will elucidate what I believe at this juncture are the plainly evident and immutable facts which will lead to the inevitable if not imminent economic meltdown:
Fact #1: Monetary Policy is a latent catastrophe that has reached its predictable bad ending
The use of Monetary policy to stimulate the economy by encouraging debt accumulation was a stupid fucking idea in the first place and doomed to fail from the very beginning. Thanks to this officially sanctioned Ponzi Scheme, all Western nations are now saddled with enormous debts by all constituents: households, corporations, governments. Still, as evidenced by widespread and increasing foreclosures and bankruptcies, the marginal ability to stimulate the economy by tempting households to take on still more debt has reached its physical limit. The Zero Interest Rate Policy (ZIRP) used between 2001-2003 led to the housing bubble, subprime meltdown and the financial collapse of 2008. Now we witness a renewed preponderance of leveraged speculation, carry-trades and narrowed risk spreads evidencing that the current ZIRP policy will lead to a similar meltdown, only likely much sooner and of MUCH GREATER MAGNITUDE. Moreover, all of the debt-related jobs that were created during the Bush years (construction, mortgage finance) have evaporated, yet the debts accumulated during that period still remain. So, this time around the Bernanke Fed has all it can do to stimulate the economy in the short-term let alone pretending to create a sustainable economy in the longer-term.
Careful what you ask for: The reason why the Monetary Policy Ponzi Scheme was able to become the largest Ponzi Scheme in world history, is because the U.S. dollar is the reserve currency. It's every central banker's and politician's dream to control a reserve currency, because then they can collect seigniorage which is a fancy term meaning revenue derived by printing money. Government is the primary beneficiary of seigniorage, because it takes time for prices to adjust to the new level of money supply i.e. those parties closest to the printing press benefit while the majority at large suffer the effects of inflation. And while seigniorage seemed like a good idea at the time, maintaining the U.S. dollar as reserve currency allowed U.S. policy-makers to ignore the growing fiscal, monetary and trade imbalances to the point that they have grown to totally uncontrollable and lethal proportions, where they are right now. In other nations this could never happen. In Canada during the early 1990s, that government was forced to adopt austerity measures to defend the C$ which was losing substantial value due to concerns over the sovereign debt load. By contrast in the U.S., China and Japan have been more than willing to finance the trade imbalances and inevitable debt build-up to keep the dollar relatively stable and thereby give U.S. policy-makers the cover they needed to bankrupt their nation. What did China and Japan get in return for their inevitably worthless US dollar reserves? They got the majority of the U.S. manufacturing base and all of the related R&D and intellectual capital that goes along with it.
Fact #2: Fiscal (Keynesian) policy has been overused and is no longer effective
In Econ 101 we learned that Fiscal policy (government deficit spending) is intended to provide a source of counter-cyclical demand to mitigate reduced private sector demand during a recession, thereby reducing unemployment and keeping businesses solvent. No, it was not intended as a funding source for wars of misadventure nor to buy votes during elections. In addition, common-sense dictates that a nation must run surpluses during expansions to offset the deficits accumulated during recessions and thereby keep debt levels manageable. However, since Reagan took office with his gang of Neocons and Supply-side Fucktards, the U.S. has run deficits non-stop throughout recessions and expansions (except for a few of the Clinton years). Not surprisingly, now that the U.S. really needs a fiscal stimulus, the marginal impact of fiscal stimulus is substantially muted by the continuous deficits which have become baselined into GDP i.e. the 3% drop in GDP experienced in 2009 occurred despite Bush's $400 billion war deficit which was carried forward from 2008!!! So the Obama Administration was left to dig a hole within a hole in order to keep the economy out of depression in 2009. This is how $2 trillion dollar deficits occur. In addition, the accumulated debt and debt service costs are another source of permanent drag on the economy as money spent on debt service does not boost the economy. Of course there are all sorts of disinformers out there now saying that Fiscal (Keynesian) policy does not work at all (and never did), which is a lot like taking antibiotics for 30 years straight and then declaring that they don't work.
Fact #3: Reported GDP has been massively inflated
All of the approximately $50 trillion of actual debt that has been accumulated by households, corporations and government AND the money raided from social security and medicare has massively inflated recent years' GDP to an overall tune of around $100 trillion in total liabilities. With annual GDP of around $13 trillion, that gives an idea of the extent to which all of the debt and borrowing from the future has inflated past years' GDP. Clearly the "gap" between the GDP we have become accustomed to and long-term sustainable GDP is enormous. More to the point, once the credit deleveraging cycle goes into high gear, that gap is going to get closed rapidly, causing severe economic "dislocations". Many people underestimate the impact of raiding Social Security and Medicare, but its a lot like losing your job, taking a part time job, and then raiding your 401k retirement plan to prop up your lifestyle. It seems like a good idea at the time...
Fact #4: The U.S. outsourced its manufacturing base and ate its seed corn
One of the dislocations that will be caused by the GDP gap getting closed, will be the need to rebuild the economy from the ground up and to create new industries and real jobs that last longer than one election cycle. Unfortunately much of the U.S. manufacturing sector and its associated managerial skill base, R&D capability, engineering mind-share, and intellectual property has been outsourced or retired. This is the biggest tragedy of the past 30 years - that one generation could literally sell-off an entire nation's collective intellectual and manufacturing capital that took hundreds of years and tremendous amounts of hard work and determination to build. This fire sale was an inevitable consequence of a nation too lazy and greedy to confront its declining global competitiveness and a declining standard of living. In fact, most Americans did face reality through their stagnant wages, foreclosed homes and recurring job losses; however, the 20% or so of Americans who own and run the U.S. opted to trade the entire manufacturing sector for a 30 year consumption binge that in the final accounting will leave nothing left to show for it.
Suffice to say, the days of the multinational reaping massive profits by building toys in Asia for $2 and selling them in the U.S. for $30 are soon-to-be-over. This entire strategy was supported by a global vendor-take-back financing scheme in which the Chinese were willing to recycle their profits back to U.S. consumers to borrow to buy more junk.
Fact #5: Likelihood of inflation extremely remote if not impossible
Those who are betting on inflation, apparently do not understand how money is created under the current system. Money is created when the Federal Reserve lends money to the banks who in turn lend to consumers and businesses. However, at this juncture most banks are in survival mode, using operating profits to offset relentless loan losses that are bleeding their balance sheets. So the banks as a whole cannot take any additional loan losses and therefore are in capital preservation mode. On the other side of the coin, most borrowers are already underwater on their mortgages and consumer loans and/or have impaired credit ratings, so the demand for new loans is extremely low, except by those who have impaired credit ratings and can't get approved anyway. All indicators show that reserves at banks are piling up instead of being lent, so the likelihood of expanding the money supply is extremely remote, making the prospect for sustained inflation likewise remote. Back in the 1970s when inflation took off, overall debt levels were low and the U.S. labour market was relatively rigid - prior to the advent of widespread outsourcing. Today, circumstances are the exact opposite, debt levels are at a historic extreme and labour markets are wide open. Domestic labour is under constant deflationary pressures from outsourcing and foreign import competitors.
Ironically, we have already been through 100 years of inflation and the dollar has lost 95% of its value since 1913, so those holding out for hyperinflation remind me of a man in the middle of the ocean looking for water. Considering that price inflation is dependent upon further credit expansion, the bet now is whether the credit bubble will keep growing or burst. I am clearly in the ready-to-burst camp and we all know that when a bubble bursts it does not get bigger it gets a whole lot smaller.
Fact #6: Hyper-Deflation is likely imminent
A final bursting of the credit bubble is likely imminent at this point, as the system is very fragile and the Fed can only keep so many balls in the air at one time. The collapse will be precipitated by a sudden loss of confidence in the financial markets and a stampede away from risky assets. As I have mentioned before, there are many potential catalysts for a near-term panic, but the largest one is the threat of sovereign debt default and an associated currency crisis which would start in one corner of the globe and quickly spread worldwide. Once that happens, credit will be withdrawn from the markets, risky financial assets will fall, demand will collapse, prices will deflate, profits will deflate, unemployment will rise, loan defaults will rise, more credit will be withdrawn - i.e. it will be an inexorable downward spiral. And prices won't be cheaper as in "hey, let's go buy a new computer" cheaper. Prices will cheaper be as in "hey, I don't have a job and can barely afford to eat" cheaper. At that point, it will become painfully clear just how far ALL prices for all goods, services and assets have been overinflated by the Monetary Ponzi scheme, as there will be way too little money chasing way too many goods.
This deflationary collapse will usher in the era of the cash-only economy in which everyone will trust only physical cash even though it still won't be backed by anything tangible such as gold. It's not clear how long this next phase will last as there will be many cross-currents and severe geopolitical dislocations to occupy policy-makers. Also, expect that the Federal Reserve's role and powers will be modified if not curtailed entirely which will only greatly exacerbate the crisis. As always, human beings will do the exact wrong things at the wrong time in over-reacting to the crisis, which will only make the crisis a lot worse.
In summary, all talk of economic recovery and the end of the recession is totally premature and unfounded. That the "best" and "brightest" minds of the day have all been fooled into thinking that the worst part of the crisis has passed is beyond staggering. When one considers the basic facts I laid out above, along with the key fact that we are now applying the same monetary and fiscal "fix" that actually created the problems in the first place then the truth is self-evident. As they say, you can't patch a dam with water, yet here we are trying to solve a debt problem by encouraging more borrowing. How many times do we have to see this movie before we remember the ending? Even in the just the past 10 years, we had the Nasdaq/dotcom bubble and crash, the housing bubble/crash, the commodity bubble/crash (remember oil at $150?), the 2008 subprime/Lehman clusterfuck/crash and now here we go again thinking this time it will be different. One can only conclude that we are due for one hell of a hard lesson that won't soon be forgotten.
Yes, you should hope that I am wrong about all of this.....but don't count on it.
One thing that I am continuously amazed by is the general widespread ignorance of history or insight that predominates current thinking about the economy and the ongoing crisis. This is true of the Mainstream Media, the Government and even to much extent the "alternative" (blogosphere) media that seems to have absolutely no consensus on how we got here or what is likely to happen next. As I have stated before, part of the reason for the conflicting viewpoints is purely due to greed and the never-ending desire to find some way to profitably "trade through" this fiasco - be it in gold, stocks, emerging markets etc. Another key reason seems to be that people extrapolate from their own past into the future which precludes them from envisioning any type of economic paradigm shift occurring in their lifetime, regardless of overwhelming facts and data all pointing in that direction. As an example, even Nouriel Roubini who is constantly being derided as "too bearish" and "Dr. Doom" is really not that bearish in the grand scheme of things. He is by no means predicting a deflationary depression or an event that would put in question the Western economic system as we know it. Compared to EWI, Roubini's predictions are outright tame yet both parties often reference the exact same data. Clearly, someone has to be wrong in this equation, and my money for being wrong is on those pseudo-bears (Roubini, Ritholtz, Shedlock etc.) who somehow conclude that one plus one can equal three.
Therefore, in an effort to maintain my own sanity and to prove that the rules of cause and effect have not been permanently suspended, I will elucidate what I believe at this juncture are the plainly evident and immutable facts which will lead to the inevitable if not imminent economic meltdown:
Fact #1: Monetary Policy is a latent catastrophe that has reached its predictable bad ending
The use of Monetary policy to stimulate the economy by encouraging debt accumulation was a stupid fucking idea in the first place and doomed to fail from the very beginning. Thanks to this officially sanctioned Ponzi Scheme, all Western nations are now saddled with enormous debts by all constituents: households, corporations, governments. Still, as evidenced by widespread and increasing foreclosures and bankruptcies, the marginal ability to stimulate the economy by tempting households to take on still more debt has reached its physical limit. The Zero Interest Rate Policy (ZIRP) used between 2001-2003 led to the housing bubble, subprime meltdown and the financial collapse of 2008. Now we witness a renewed preponderance of leveraged speculation, carry-trades and narrowed risk spreads evidencing that the current ZIRP policy will lead to a similar meltdown, only likely much sooner and of MUCH GREATER MAGNITUDE. Moreover, all of the debt-related jobs that were created during the Bush years (construction, mortgage finance) have evaporated, yet the debts accumulated during that period still remain. So, this time around the Bernanke Fed has all it can do to stimulate the economy in the short-term let alone pretending to create a sustainable economy in the longer-term.
Careful what you ask for: The reason why the Monetary Policy Ponzi Scheme was able to become the largest Ponzi Scheme in world history, is because the U.S. dollar is the reserve currency. It's every central banker's and politician's dream to control a reserve currency, because then they can collect seigniorage which is a fancy term meaning revenue derived by printing money. Government is the primary beneficiary of seigniorage, because it takes time for prices to adjust to the new level of money supply i.e. those parties closest to the printing press benefit while the majority at large suffer the effects of inflation. And while seigniorage seemed like a good idea at the time, maintaining the U.S. dollar as reserve currency allowed U.S. policy-makers to ignore the growing fiscal, monetary and trade imbalances to the point that they have grown to totally uncontrollable and lethal proportions, where they are right now. In other nations this could never happen. In Canada during the early 1990s, that government was forced to adopt austerity measures to defend the C$ which was losing substantial value due to concerns over the sovereign debt load. By contrast in the U.S., China and Japan have been more than willing to finance the trade imbalances and inevitable debt build-up to keep the dollar relatively stable and thereby give U.S. policy-makers the cover they needed to bankrupt their nation. What did China and Japan get in return for their inevitably worthless US dollar reserves? They got the majority of the U.S. manufacturing base and all of the related R&D and intellectual capital that goes along with it.
Fact #2: Fiscal (Keynesian) policy has been overused and is no longer effective
In Econ 101 we learned that Fiscal policy (government deficit spending) is intended to provide a source of counter-cyclical demand to mitigate reduced private sector demand during a recession, thereby reducing unemployment and keeping businesses solvent. No, it was not intended as a funding source for wars of misadventure nor to buy votes during elections. In addition, common-sense dictates that a nation must run surpluses during expansions to offset the deficits accumulated during recessions and thereby keep debt levels manageable. However, since Reagan took office with his gang of Neocons and Supply-side Fucktards, the U.S. has run deficits non-stop throughout recessions and expansions (except for a few of the Clinton years). Not surprisingly, now that the U.S. really needs a fiscal stimulus, the marginal impact of fiscal stimulus is substantially muted by the continuous deficits which have become baselined into GDP i.e. the 3% drop in GDP experienced in 2009 occurred despite Bush's $400 billion war deficit which was carried forward from 2008!!! So the Obama Administration was left to dig a hole within a hole in order to keep the economy out of depression in 2009. This is how $2 trillion dollar deficits occur. In addition, the accumulated debt and debt service costs are another source of permanent drag on the economy as money spent on debt service does not boost the economy. Of course there are all sorts of disinformers out there now saying that Fiscal (Keynesian) policy does not work at all (and never did), which is a lot like taking antibiotics for 30 years straight and then declaring that they don't work.
Fact #3: Reported GDP has been massively inflated
All of the approximately $50 trillion of actual debt that has been accumulated by households, corporations and government AND the money raided from social security and medicare has massively inflated recent years' GDP to an overall tune of around $100 trillion in total liabilities. With annual GDP of around $13 trillion, that gives an idea of the extent to which all of the debt and borrowing from the future has inflated past years' GDP. Clearly the "gap" between the GDP we have become accustomed to and long-term sustainable GDP is enormous. More to the point, once the credit deleveraging cycle goes into high gear, that gap is going to get closed rapidly, causing severe economic "dislocations". Many people underestimate the impact of raiding Social Security and Medicare, but its a lot like losing your job, taking a part time job, and then raiding your 401k retirement plan to prop up your lifestyle. It seems like a good idea at the time...
Fact #4: The U.S. outsourced its manufacturing base and ate its seed corn
One of the dislocations that will be caused by the GDP gap getting closed, will be the need to rebuild the economy from the ground up and to create new industries and real jobs that last longer than one election cycle. Unfortunately much of the U.S. manufacturing sector and its associated managerial skill base, R&D capability, engineering mind-share, and intellectual property has been outsourced or retired. This is the biggest tragedy of the past 30 years - that one generation could literally sell-off an entire nation's collective intellectual and manufacturing capital that took hundreds of years and tremendous amounts of hard work and determination to build. This fire sale was an inevitable consequence of a nation too lazy and greedy to confront its declining global competitiveness and a declining standard of living. In fact, most Americans did face reality through their stagnant wages, foreclosed homes and recurring job losses; however, the 20% or so of Americans who own and run the U.S. opted to trade the entire manufacturing sector for a 30 year consumption binge that in the final accounting will leave nothing left to show for it.
Suffice to say, the days of the multinational reaping massive profits by building toys in Asia for $2 and selling them in the U.S. for $30 are soon-to-be-over. This entire strategy was supported by a global vendor-take-back financing scheme in which the Chinese were willing to recycle their profits back to U.S. consumers to borrow to buy more junk.
Fact #5: Likelihood of inflation extremely remote if not impossible
Those who are betting on inflation, apparently do not understand how money is created under the current system. Money is created when the Federal Reserve lends money to the banks who in turn lend to consumers and businesses. However, at this juncture most banks are in survival mode, using operating profits to offset relentless loan losses that are bleeding their balance sheets. So the banks as a whole cannot take any additional loan losses and therefore are in capital preservation mode. On the other side of the coin, most borrowers are already underwater on their mortgages and consumer loans and/or have impaired credit ratings, so the demand for new loans is extremely low, except by those who have impaired credit ratings and can't get approved anyway. All indicators show that reserves at banks are piling up instead of being lent, so the likelihood of expanding the money supply is extremely remote, making the prospect for sustained inflation likewise remote. Back in the 1970s when inflation took off, overall debt levels were low and the U.S. labour market was relatively rigid - prior to the advent of widespread outsourcing. Today, circumstances are the exact opposite, debt levels are at a historic extreme and labour markets are wide open. Domestic labour is under constant deflationary pressures from outsourcing and foreign import competitors.
Ironically, we have already been through 100 years of inflation and the dollar has lost 95% of its value since 1913, so those holding out for hyperinflation remind me of a man in the middle of the ocean looking for water. Considering that price inflation is dependent upon further credit expansion, the bet now is whether the credit bubble will keep growing or burst. I am clearly in the ready-to-burst camp and we all know that when a bubble bursts it does not get bigger it gets a whole lot smaller.
Fact #6: Hyper-Deflation is likely imminent
A final bursting of the credit bubble is likely imminent at this point, as the system is very fragile and the Fed can only keep so many balls in the air at one time. The collapse will be precipitated by a sudden loss of confidence in the financial markets and a stampede away from risky assets. As I have mentioned before, there are many potential catalysts for a near-term panic, but the largest one is the threat of sovereign debt default and an associated currency crisis which would start in one corner of the globe and quickly spread worldwide. Once that happens, credit will be withdrawn from the markets, risky financial assets will fall, demand will collapse, prices will deflate, profits will deflate, unemployment will rise, loan defaults will rise, more credit will be withdrawn - i.e. it will be an inexorable downward spiral. And prices won't be cheaper as in "hey, let's go buy a new computer" cheaper. Prices will cheaper be as in "hey, I don't have a job and can barely afford to eat" cheaper. At that point, it will become painfully clear just how far ALL prices for all goods, services and assets have been overinflated by the Monetary Ponzi scheme, as there will be way too little money chasing way too many goods.
This deflationary collapse will usher in the era of the cash-only economy in which everyone will trust only physical cash even though it still won't be backed by anything tangible such as gold. It's not clear how long this next phase will last as there will be many cross-currents and severe geopolitical dislocations to occupy policy-makers. Also, expect that the Federal Reserve's role and powers will be modified if not curtailed entirely which will only greatly exacerbate the crisis. As always, human beings will do the exact wrong things at the wrong time in over-reacting to the crisis, which will only make the crisis a lot worse.
In summary, all talk of economic recovery and the end of the recession is totally premature and unfounded. That the "best" and "brightest" minds of the day have all been fooled into thinking that the worst part of the crisis has passed is beyond staggering. When one considers the basic facts I laid out above, along with the key fact that we are now applying the same monetary and fiscal "fix" that actually created the problems in the first place then the truth is self-evident. As they say, you can't patch a dam with water, yet here we are trying to solve a debt problem by encouraging more borrowing. How many times do we have to see this movie before we remember the ending? Even in the just the past 10 years, we had the Nasdaq/dotcom bubble and crash, the housing bubble/crash, the commodity bubble/crash (remember oil at $150?), the 2008 subprime/Lehman clusterfuck/crash and now here we go again thinking this time it will be different. One can only conclude that we are due for one hell of a hard lesson that won't soon be forgotten.
Yes, you should hope that I am wrong about all of this.....but don't count on it.
Wednesday, December 23, 2009
The Last Pump and Dump
Only 5 trading days left (the 24th and 31st are half days) until Wall Street's big pay day. The only question left is will Wall Street once again get paid the big bucks, leaving Main Street behind to hold the bag? Even as Wall Street is once again eyeing massive end-of-year bonuses, millions on Main Street remain jobless and financially decimated. Throughout the past year, with each bad jobs report, the stock market leaped higher on the basis that fewer jobs meant lower interest rates (more juice for stocks) and higher profits, as companies cut back on costs. Only with the December jobs report showing a mere 11,000 lost jobs, did the rally finally slow. Coincidence? I think not, because everyone on Wall Street knows that once interest rates start going up, the party is over.
World's Biggest Pump and Dump:
Many want to believe that we are in a repeat of 2003 when the Greenspan Fed sponsored a 4 year borrowing bonanza that ultimately culminated in last year's crash, because everyone believes they will be the guy who is smart enough to take profits before the new Fed-sponsored Ponzi Scheme implodes. By driving interest rates down to zero, the Bernanke Fed is encouraging the same type of risky speculation that led to the 2008 crash, be it in so-called "carry trades" (borrowing in US$ to buy foreign assets), yield curve "arbitrage" (borrow short-term, lend long-term) or plain old leveraged speculation. Have we not learned anything from the past decade? There is no such thing as true yield curve arbitrage or risk-free carry trade. All of these types of trades involve substantial risk and eventually have to be unwound, usually under considerable duress. However, once again, as long as a trade works for one bonus cycle (one year), Wall Street appears to be once again willing to embrace the strategy, regardless of the longer-term consequences. Wall Street greed is boundless, I understand that, but from the Fed's standpoint, do they really believe that this liquidity driven strategy will lead to a sustainable economy? All of the jobs created during the Bush/Greenspan pseudo-recovery have evaporated. You may recall that most of those temporary jobs were in construction, mortgage finance and bar-tending. I am sure some bartenders have stayed busy for obvious reasons, yet who needs a bar-tender when you can get a cheap bottle of tequila and stay in bed at the homeless shelter? The U.S. has had a decade of lost job growth, yet here we go again attempting the same Ponzi-financing strategy that blew us up last year.
Man of the Year
And to add insult to injury, Time Magazine just nominated Ben Bernanke as Man of the Year for 2009!!! Are you kidding me? That's like giving the Chief of the Fire Department an award for saving (half) your house, knowing full well that he started the fire in the first place. Can we really be this stupid? People decades into the future will not comprehend how it's possible for people of today to be this dumb.
Culture of Consumption
As predicted by Paul Kennedy twenty years ago, the ascendant culture of consumption has become all-pervasive and brought with it a frightening new predisposition towards deceit and laziness. More effort is now put into confusion and denialism than is put towards facing reality or coming up with constructive solutions to most of the world's pressing issues. The same short-sightedness, greed, and gluttony underlying the financial crisis has made its way into all nature of pressing realities, not the least of which is Climate Change and its associated denialism movement. For example, The Economist (12/5) estimates that a viable solution for carbon-control would cost 1% of global GDP per year as compared to last year's banking crisis which cost 5% of global GDP (albeit many believe last year was a one time event). One would think that 1% of GDP would be a small price to pay as an insurance policy against future catastrophe, to say nothing of side benefits such as less pollution, energy independence, and reduced funding for international terrorism. However, the Denialism culture would rather spend its time to confuse and obfuscate and run well-timed smear campaigns than to admit the problem and participate in the solution. Similarly, the Millenium Development Goals project from 10 years ago, was intended to make significant steps towards eradicating world poverty. The cost of that program was pegged at just over 1% of OECD GDP, yet only Denmark made the goal. All other nations fell well short of the 1% goal - many (which will remain nameless) to an embarassing degree. As for the climate situation, I have no doubt, that the coming economic collapse and Peak Oil (another widely-denied reality) will do more to reduce carbon emissions than any convention in Copenhagen could ever accomplish. Nothing like falling economic output, and a sky-rocketing cost of capital to put high risk, multi-year oil exploration projects on hold for years if not permanently. Similarly, the economic contraction is going to soon put an end to the brilliant strategy of funding terrorists via their Middle East oil sponsors (Saudi, Iran etc.) while at the same time squandering billions fighting those terrorists in the same region. One way or another we are going to be forced by circumstances to adopt a downscaled way of life more in line with economic and environmental realities.
Nothing matters, until it matters
I admit that having been a bearish prognosticator for most of this year, I am bowed and bloody, yet far from broken. The market is still substantially lower than it was when I made my first predictions of dire financial collapse over 3 years ago. Meanwhile, I am not fooled by Wall Street's latest attempts to manipulate this market higher by every trick in the book, as evidenced by ever-declining breadth and fading strength rotating from one sector to another on a thin volume rally designed solely to fatten end-of-year bonus checks.
I have indicated several times recently that the same red flag markers that were present at the top in 2007 and again before the crash in 2008 are flashing EXTREME warning signs now: low options volatility (.VIX), overwhelming bullish sentiment surveys (AAII/IIS), options put/call ratios indicating investors taking on too much risk and not hedging. In addition, as you see Wall Street is fully willing to ignore the impending signs of catastrophe emanating from Dubai, Vietnam, Greece and Spain, as the next saga to the credit crisis - sovereign defaults and a global currency crisis - waits in the wings. That latent catastrophe will seemingly have to wait a few more days though until Wall Street gets paid, because the Boyz are not ready to panic just yet, what with so much payola on the line. Better to wait until January when its mostly client money at risk and therefore leaving the general public as the usual bagholder. How many times have we seen in the past decade Wall Street ignore the blatant early signs of a crisis (Dotcom bust, housing bust, subprime etc.) only to inexplicably panic a few weeks/months later on basically re-release of the same news? On Wall Street, nothing matters until it matters.
Fool me Twice...
If you are reading this BEFORE the collapse, then be honest with yourself as to whether the latest Obama/Bernanke Ponzi scheme is going to work out. Or, do you think you can ride the rally and perfectly time the next collapse? Bear in mind, that in a currency crisis, there will be a total lack of liquidity, so you could easily wake up one morning and find that half your portfolio is gone and never coming back. The only safe investment is mid-term and short-term treasuries and the easiest way to own them is via the IEF and SHY exchange traded funds.
So, from my standpoint, whether the Boyz on Wall Street panic early and all start rushing to the exits at the same time, tripping over each other to get out the same door prior to 12/31, or somehow they continue to levitate the markets through 12/31 only to have it fall off the cliff in early January, either way, THIS ALL ENDS BADLY AND I STILL BELIEVE SOONER RATHER THAN LATER...
HAPPY HOLIDAYS
World's Biggest Pump and Dump:
Many want to believe that we are in a repeat of 2003 when the Greenspan Fed sponsored a 4 year borrowing bonanza that ultimately culminated in last year's crash, because everyone believes they will be the guy who is smart enough to take profits before the new Fed-sponsored Ponzi Scheme implodes. By driving interest rates down to zero, the Bernanke Fed is encouraging the same type of risky speculation that led to the 2008 crash, be it in so-called "carry trades" (borrowing in US$ to buy foreign assets), yield curve "arbitrage" (borrow short-term, lend long-term) or plain old leveraged speculation. Have we not learned anything from the past decade? There is no such thing as true yield curve arbitrage or risk-free carry trade. All of these types of trades involve substantial risk and eventually have to be unwound, usually under considerable duress. However, once again, as long as a trade works for one bonus cycle (one year), Wall Street appears to be once again willing to embrace the strategy, regardless of the longer-term consequences. Wall Street greed is boundless, I understand that, but from the Fed's standpoint, do they really believe that this liquidity driven strategy will lead to a sustainable economy? All of the jobs created during the Bush/Greenspan pseudo-recovery have evaporated. You may recall that most of those temporary jobs were in construction, mortgage finance and bar-tending. I am sure some bartenders have stayed busy for obvious reasons, yet who needs a bar-tender when you can get a cheap bottle of tequila and stay in bed at the homeless shelter? The U.S. has had a decade of lost job growth, yet here we go again attempting the same Ponzi-financing strategy that blew us up last year.
Man of the Year
And to add insult to injury, Time Magazine just nominated Ben Bernanke as Man of the Year for 2009!!! Are you kidding me? That's like giving the Chief of the Fire Department an award for saving (half) your house, knowing full well that he started the fire in the first place. Can we really be this stupid? People decades into the future will not comprehend how it's possible for people of today to be this dumb.
Culture of Consumption
As predicted by Paul Kennedy twenty years ago, the ascendant culture of consumption has become all-pervasive and brought with it a frightening new predisposition towards deceit and laziness. More effort is now put into confusion and denialism than is put towards facing reality or coming up with constructive solutions to most of the world's pressing issues. The same short-sightedness, greed, and gluttony underlying the financial crisis has made its way into all nature of pressing realities, not the least of which is Climate Change and its associated denialism movement. For example, The Economist (12/5) estimates that a viable solution for carbon-control would cost 1% of global GDP per year as compared to last year's banking crisis which cost 5% of global GDP (albeit many believe last year was a one time event). One would think that 1% of GDP would be a small price to pay as an insurance policy against future catastrophe, to say nothing of side benefits such as less pollution, energy independence, and reduced funding for international terrorism. However, the Denialism culture would rather spend its time to confuse and obfuscate and run well-timed smear campaigns than to admit the problem and participate in the solution. Similarly, the Millenium Development Goals project from 10 years ago, was intended to make significant steps towards eradicating world poverty. The cost of that program was pegged at just over 1% of OECD GDP, yet only Denmark made the goal. All other nations fell well short of the 1% goal - many (which will remain nameless) to an embarassing degree. As for the climate situation, I have no doubt, that the coming economic collapse and Peak Oil (another widely-denied reality) will do more to reduce carbon emissions than any convention in Copenhagen could ever accomplish. Nothing like falling economic output, and a sky-rocketing cost of capital to put high risk, multi-year oil exploration projects on hold for years if not permanently. Similarly, the economic contraction is going to soon put an end to the brilliant strategy of funding terrorists via their Middle East oil sponsors (Saudi, Iran etc.) while at the same time squandering billions fighting those terrorists in the same region. One way or another we are going to be forced by circumstances to adopt a downscaled way of life more in line with economic and environmental realities.
Nothing matters, until it matters
I admit that having been a bearish prognosticator for most of this year, I am bowed and bloody, yet far from broken. The market is still substantially lower than it was when I made my first predictions of dire financial collapse over 3 years ago. Meanwhile, I am not fooled by Wall Street's latest attempts to manipulate this market higher by every trick in the book, as evidenced by ever-declining breadth and fading strength rotating from one sector to another on a thin volume rally designed solely to fatten end-of-year bonus checks.
I have indicated several times recently that the same red flag markers that were present at the top in 2007 and again before the crash in 2008 are flashing EXTREME warning signs now: low options volatility (.VIX), overwhelming bullish sentiment surveys (AAII/IIS), options put/call ratios indicating investors taking on too much risk and not hedging. In addition, as you see Wall Street is fully willing to ignore the impending signs of catastrophe emanating from Dubai, Vietnam, Greece and Spain, as the next saga to the credit crisis - sovereign defaults and a global currency crisis - waits in the wings. That latent catastrophe will seemingly have to wait a few more days though until Wall Street gets paid, because the Boyz are not ready to panic just yet, what with so much payola on the line. Better to wait until January when its mostly client money at risk and therefore leaving the general public as the usual bagholder. How many times have we seen in the past decade Wall Street ignore the blatant early signs of a crisis (Dotcom bust, housing bust, subprime etc.) only to inexplicably panic a few weeks/months later on basically re-release of the same news? On Wall Street, nothing matters until it matters.
Fool me Twice...
If you are reading this BEFORE the collapse, then be honest with yourself as to whether the latest Obama/Bernanke Ponzi scheme is going to work out. Or, do you think you can ride the rally and perfectly time the next collapse? Bear in mind, that in a currency crisis, there will be a total lack of liquidity, so you could easily wake up one morning and find that half your portfolio is gone and never coming back. The only safe investment is mid-term and short-term treasuries and the easiest way to own them is via the IEF and SHY exchange traded funds.
So, from my standpoint, whether the Boyz on Wall Street panic early and all start rushing to the exits at the same time, tripping over each other to get out the same door prior to 12/31, or somehow they continue to levitate the markets through 12/31 only to have it fall off the cliff in early January, either way, THIS ALL ENDS BADLY AND I STILL BELIEVE SOONER RATHER THAN LATER...
HAPPY HOLIDAYS
Thursday, December 3, 2009
LAST IN
Last night the Elliot Wave International Short-term update (published 3 times weekly) issued a bullish market call through year end. Both their top prediction and their top alternate prediction now call for higher prices into year end. This despite, by their own admission, the fact that investor bearish sentiment is now at a 6.5 year low ! Yet, despite being bearish for the better part of last 3 months and telling us that the next major wave down "P3" was just around the next corner, EWI are now telling us that the next intermediate sized move will be up through year end, not down.
Frustrating? Yes. It would have been nice had they issued this bullish call two months ago, at around S&P 950-1000, so we could have saved some pain and suffering on this last 10% leg higher. In fairness, Prechter issued a monthly interim report on 11/23 saying he is now recommending 200% short (bearish) positions, but this only causes further confusion because there is now a clear disconnect between the big man himself (Prechter) and the Short-term update (STU).
Been there, done that
As frustrating as this disconnect may seem, I have seen this movie before and I know how it ends. I keep a checklist of "factors" that I look for before a major turn in the market and truth be told, I now expect EWI STU to be leaning wrongly as one of the key factors I look for prior to a major turn in trend. To know why this is so, let's go back to the all time high in the stock market two years ago in 10/2007. At that time, an eerily similar series of events played out in which EWI's STU had been leaning bearish and then inexplicably issued a bullish multi-week forecast. Out of massive frustration, I was forced to "go it alone" and I went so far as to issue this tirade here, indicating that any thoughts about a "running triangle" into year-end, were pure bullshit and marked capitulation at the highest levels. Who was right in the end? As it turns out, the market did what I said it would do - it made its top 10 days later, rolled over, and never looked back.
What does this all mean? It means that if you are now "long" (owning) stocks now, just bear in mind one thing, that the Investors Intelligence Advisor's Survey shows the number of bears at 16.5%, which by EWI's own admission is a 6.5 year low. In addition, the all-time bearish investor newsletter service, none other than EWI itself, has now capitulated to the bullish camp (at least intermediate term) and is also now bullish into year-end despite having been bearish for the better part of the past several months. Therefore you might ask, just how bearish is EWI overall? Suffice to say, they begin each monthly Financial Forecast newsletter telling us that the next leg down will be a "SURVIVAL LEVEL EVENT". Therefore, their turning bullish, even for the intermediate term is a sign of complete capitulation by all things bearish.
Now ask yourself this one thing, if you want to sell stocks (Corp. bonds, Muni bonds, gold), who is left to buy?
Frustrating? Yes. It would have been nice had they issued this bullish call two months ago, at around S&P 950-1000, so we could have saved some pain and suffering on this last 10% leg higher. In fairness, Prechter issued a monthly interim report on 11/23 saying he is now recommending 200% short (bearish) positions, but this only causes further confusion because there is now a clear disconnect between the big man himself (Prechter) and the Short-term update (STU).
Been there, done that
As frustrating as this disconnect may seem, I have seen this movie before and I know how it ends. I keep a checklist of "factors" that I look for before a major turn in the market and truth be told, I now expect EWI STU to be leaning wrongly as one of the key factors I look for prior to a major turn in trend. To know why this is so, let's go back to the all time high in the stock market two years ago in 10/2007. At that time, an eerily similar series of events played out in which EWI's STU had been leaning bearish and then inexplicably issued a bullish multi-week forecast. Out of massive frustration, I was forced to "go it alone" and I went so far as to issue this tirade here, indicating that any thoughts about a "running triangle" into year-end, were pure bullshit and marked capitulation at the highest levels. Who was right in the end? As it turns out, the market did what I said it would do - it made its top 10 days later, rolled over, and never looked back.
What does this all mean? It means that if you are now "long" (owning) stocks now, just bear in mind one thing, that the Investors Intelligence Advisor's Survey shows the number of bears at 16.5%, which by EWI's own admission is a 6.5 year low. In addition, the all-time bearish investor newsletter service, none other than EWI itself, has now capitulated to the bullish camp (at least intermediate term) and is also now bullish into year-end despite having been bearish for the better part of the past several months. Therefore you might ask, just how bearish is EWI overall? Suffice to say, they begin each monthly Financial Forecast newsletter telling us that the next leg down will be a "SURVIVAL LEVEL EVENT". Therefore, their turning bullish, even for the intermediate term is a sign of complete capitulation by all things bearish.
Now ask yourself this one thing, if you want to sell stocks (Corp. bonds, Muni bonds, gold), who is left to buy?
Saturday, November 28, 2009
CAUTION: Black Swans Approaching
The first of many Black Swans took flight this week in the shape of the simmering Dubai Debt Crisis. It appears that it's not enough to build fancy high rises, shopping malls, and man-made islands, there's this "sustainable economy" thing that is also important to the overall prosperity equation.
Although as I wrote here I am not a big believer in "Black Swan Theory", it seems that Wall Street has a way of constantly being caught off guard by these pesky critters. The problem is that most on Wall Street suffer from a distinct form of myopia, that I will hereby label "Bonus Relevancy Syndrome" characterized by an incapacity to absorb or even care about any information not deemed relevant to the current year's bonus. Therefore, with only a handful of weeks left in the year, for many hedge funds, their attention deficit disorder has now shrunk to a mere ~22 trading days.
This set-up bears out several observations:
1) The average hedge fund manager is as strung out and giddy as a crack addict coming off of a 9 month binge. Fund managers overall were not well paid last year (by their standards) and many funds are just getting back to their high water marks. The high water mark is the crucial level that must be exceeded in order to allow bonus payouts. Considering we have just had one of the best 9 month rallies in the history of the stock market, suffice to say, the "boyz" are praying with all might that the market stays up between now and 12/31.
2) Yet not withstanding these at-risk bonuses, the technical indicators are all (continuing to) line up on the side of bullish complacency: Vix at a year-low 20 on Wednesday (90 last fall), ISE call/put ratio above 175 twice last week, Investors Intelligence Sentiment Index showing only 17% bearish sentiment (lowest level in several 5 1/2 years) i.e. the dry tinder is set, all we need now is the match...
3) The Dubai Debt Crisis is only one of MANY looming Black Swans (I know, by definition, Black Swans are not supposed to flock...) getting set to take flight directly in front of the metaphorical Wall Street 787 DreamLiner which is straining fiercely toward its golden 12/31 destination. Beyond Dubai, there are many other sovereign and corporate financial participants on the brink of default (Latvia, Hungary, Bulgaria, Ukraine, Spain, Greece, Ireland, UK, Japan, etc. etc. etc....)
4) Wall Street's current short-term bonus fixation combined with multiple looming INTER-LINKED geofinancial crises could create a potentially highly volatile shit storm at a most untimely juncture. For while the dollar carved out a new marginal low against the Euro on Wednesday, the dollar then proceeded to SCREAM higher vs. the Euro on Thursday when news of the Dubai crisis hit. Stay tuned for future events, because the markets will not withstand an abrupt unwinding of the dollar carry trade and the resulting flight from risk that would ensue...
How did gold perform as a promised safe haven you ask? Well, gold promptly tanked $50 on Thursday on news of the Dubai crisis (recovering somewhat on Friday). I will say it again: at this juncture, gold is not a safe haven, it is a greed haven that will get violently unwound along with the rest of the anti-dollar trade.
What say you? Would a December panic collapse off of a 666 March low in the S&P be a hellatiously sinister event, or just a burnt offering to the God of Financial Justice (assuming such a God even exists...)
Although as I wrote here I am not a big believer in "Black Swan Theory", it seems that Wall Street has a way of constantly being caught off guard by these pesky critters. The problem is that most on Wall Street suffer from a distinct form of myopia, that I will hereby label "Bonus Relevancy Syndrome" characterized by an incapacity to absorb or even care about any information not deemed relevant to the current year's bonus. Therefore, with only a handful of weeks left in the year, for many hedge funds, their attention deficit disorder has now shrunk to a mere ~22 trading days.
This set-up bears out several observations:
1) The average hedge fund manager is as strung out and giddy as a crack addict coming off of a 9 month binge. Fund managers overall were not well paid last year (by their standards) and many funds are just getting back to their high water marks. The high water mark is the crucial level that must be exceeded in order to allow bonus payouts. Considering we have just had one of the best 9 month rallies in the history of the stock market, suffice to say, the "boyz" are praying with all might that the market stays up between now and 12/31.
2) Yet not withstanding these at-risk bonuses, the technical indicators are all (continuing to) line up on the side of bullish complacency: Vix at a year-low 20 on Wednesday (90 last fall), ISE call/put ratio above 175 twice last week, Investors Intelligence Sentiment Index showing only 17% bearish sentiment (lowest level in several 5 1/2 years) i.e. the dry tinder is set, all we need now is the match...
3) The Dubai Debt Crisis is only one of MANY looming Black Swans (I know, by definition, Black Swans are not supposed to flock...) getting set to take flight directly in front of the metaphorical Wall Street 787 DreamLiner which is straining fiercely toward its golden 12/31 destination. Beyond Dubai, there are many other sovereign and corporate financial participants on the brink of default (Latvia, Hungary, Bulgaria, Ukraine, Spain, Greece, Ireland, UK, Japan, etc. etc. etc....)
4) Wall Street's current short-term bonus fixation combined with multiple looming INTER-LINKED geofinancial crises could create a potentially highly volatile shit storm at a most untimely juncture. For while the dollar carved out a new marginal low against the Euro on Wednesday, the dollar then proceeded to SCREAM higher vs. the Euro on Thursday when news of the Dubai crisis hit. Stay tuned for future events, because the markets will not withstand an abrupt unwinding of the dollar carry trade and the resulting flight from risk that would ensue...
How did gold perform as a promised safe haven you ask? Well, gold promptly tanked $50 on Thursday on news of the Dubai crisis (recovering somewhat on Friday). I will say it again: at this juncture, gold is not a safe haven, it is a greed haven that will get violently unwound along with the rest of the anti-dollar trade.
What say you? Would a December panic collapse off of a 666 March low in the S&P be a hellatiously sinister event, or just a burnt offering to the God of Financial Justice (assuming such a God even exists...)
Friday, November 6, 2009
The Ascent of Money (aka. Deflation)
I was wandering through Borders (book store) tonight and stumbled upon a pile of "The Ascent of Money", Niall Ferguson's latest book, marked 50% off. Having months ago purchased and read the book, I couldn't help but feel ripped off, yet the irony of the title, juxtaposed with the discounted price, could not be overstated. I guess today money really was ascending...
Coincidentally, Niall was going toe to toe with Charlie Rose the other night on the topic of America's perilous economic situation. It was an interesting interview, chock full of facts and data. The general theme was a common one these days - the U.S. economy is toasty toast and Asia is about to pick-up the baton and run with it - dollar repudiation is imminent.
And then there is Peter Schiff who is looking to run for a Senate position by capitalising on his glorified anti-dollar stance. Never mind that he has been betting that way for years and last year he cost his followers dearly by having them betting on foreign stock markets and (by extension) against the dollar. Both of which assets moved massively against his asinine positions i.e. foreign stock markets fell more than the U.S. AND the dollar rallied. Jim Rogers is basically betting the same way and for all the same reasons...$$$ Or should I say ¥¥¥.
So unbeknownst to the "best and brightest", here we stand atop the largest bubble in human history - the 40- year Monetary policy credit bubble. A house of cards built upon a small of base of paper currency, piled to the sky with multiples of borrowing, generating that ephemeral kind of money called "credit". Ephemeral, because this system, known as fractional reserve lending has a mountain of credit secured by a fractional base of physical cash. It is secured ONLY by our confidence in the system and collective belief that all debts will be paid and all checks will clear. Until, comes that inevitable day, when confidence is breeched and everyone reaches for physical cash at the same time - which precipitates the moment of recognition that there are not enough real dollars for everyone.
Coincidentally, Niall was going toe to toe with Charlie Rose the other night on the topic of America's perilous economic situation. It was an interesting interview, chock full of facts and data. The general theme was a common one these days - the U.S. economy is toasty toast and Asia is about to pick-up the baton and run with it - dollar repudiation is imminent.
And then there is Peter Schiff who is looking to run for a Senate position by capitalising on his glorified anti-dollar stance. Never mind that he has been betting that way for years and last year he cost his followers dearly by having them betting on foreign stock markets and (by extension) against the dollar. Both of which assets moved massively against his asinine positions i.e. foreign stock markets fell more than the U.S. AND the dollar rallied. Jim Rogers is basically betting the same way and for all the same reasons...$$$ Or should I say ¥¥¥.
So, how can it be that all these "smart" people still cling to this fear of imminent dollar collapse and inflation? The answer is obvious: GREED. Quite frankly, no one has figured out how to make money from deflation, so no one wants to believe in it much less bet on it, because betting on it means having your money parked in short-term treasury bills that yield zero %. Alternatively, the inflation trade is yummy - buy gold and/or short the dollar and hold on to collect your massive pay check. So, this entire reflation trade/charade has nothing to do with reality, it's all about yet another fantasy, destined to end badly...All these greed-addled inflationistas are looking around for the "next big bubble" - where will it be? how can we trade it? Believing of course that they will be the lucky few to get off the bullet train before it crashes.
Moreover, if it seems like deja vu, that's because it is - this currently popular "reflation" trade of being long commodities/gold and short dollar was all the rage two years ago - and we saw how that turned out. Now these same "savants" have put the same trade right back on, amazingly despite the fact that the economic fundamentals are far weaker now (unemployment, spare capacity etc, GDP) than they were two years ago. It just goes to show you that facts and data cannot compete with greed and wishful thinking.
In the case of Ferguson, I don't know for sure, what guides his belief in the unfounded, perhaps his motivation is not greed after all. He is clearly recycling the "decoupling" theory that the U.S. economy can continue to collapse but that emerging markets can continue to grow, not withstanding their largest customer going bankrupt. Nevermind that this was the exact same theory marketed in the years prior to the 2008 crash and that turned out to be complete bullshit. As we know, the Shanghai stock market led the entire world down, losing over 70% of value and emerging markets in general suffered larger percentage losses than the U.S. Therefore, this *new* decoupling that Ferguson talks about must have just taken place recently...say in the past couple of months. Yeah, that's the ticket...If he honestly believes that then despite all of his fancy degrees, apparently he still can't find his ass with both hands.
And ironically, as reality would have it, it looks like the lowly U.S. dollar took a stand this week (amid abysmal employment data), and appears to have put in a multi-month if not multi-year low. The ONLY asset that has yet to have confirmed the top now in RISKY ASSETS is gold, as stocks, oil, commodities all look to have put in their tops days and weeks ago. I expect gold will follow any day now...
You be the judge (click to enlarge). Is this a dollar reversal?
- break out above 6 month downtrend
- massive volume on breakout (lower right)...
So unbeknownst to the "best and brightest", here we stand atop the largest bubble in human history - the 40- year Monetary policy credit bubble. A house of cards built upon a small of base of paper currency, piled to the sky with multiples of borrowing, generating that ephemeral kind of money called "credit". Ephemeral, because this system, known as fractional reserve lending has a mountain of credit secured by a fractional base of physical cash. It is secured ONLY by our confidence in the system and collective belief that all debts will be paid and all checks will clear. Until, comes that inevitable day, when confidence is breeched and everyone reaches for physical cash at the same time - which precipitates the moment of recognition that there are not enough real dollars for everyone.
So, you ask, what could cause just such a point of "recognition"? It just so happens that according to the Elliot Waves, we appear poised for a once in a millenia event - a 3rd wave DOWN in the U.S. stock markets at ALL degrees of trend (century, yearly, monthly, weekly, daily, hourly, minute)...
Sunday, October 18, 2009
Update
This is a brief update assuring that I have not changed my disposition towards the markets or economy in the past month.
Overall, nothing has changed. If I am correct (as I have been for the past 3 years), then what is directly in front of us is the largest economic decline in U.S. history. This collapse will cause widespread chaos and calamity, resulting in total loss of confidence in the government and Federal Reserve.
I know, the market has continued to rally since my last posts, however, that only makes me more certain that the next leg down is straight ahead of us and it will be brutal. Had the market stair stepped slowly upward or had it retested the March low a few times, as it did in 2002-2003, then I would be somewhat less confident about the timing of the collapse. However, ironically a market that bolts higher off of a low in a V-shaped rally without any significant pullback is actually tipping its hand. Its sinister goal is to suck as many people in as possible before reversing hard down and never looking back - what better way to do that than to run higher without hesitation.
Many commentators believe that this market is very similar to the 2002-2003 market that eventually lurched higher through 2007. Although the market charts are similar at this juncture, the underlying fundamentals of the economy are completely different. As is well documented, the 2003-2007 expansion was fuelled by massive consumer borrowing - primarily against home values. In addition, the unemployment rate back then never rose above 6.4% (currently at 9.8%). As I have stated many times, the belief that we can apply the same low interest rate policy in this recession to grow the economy is predicated on the idea that we can borrow our way to prosperity, indefinitely, with no consequences. Many otherwise intelligent people know this is not true, yet they still cling to the belief that the day of reckoning has once again been postponed.
Look at the updated chart (below). The market has continued its relentless ascent and is now back at the trendline originating from the October 2007 high two years ago. Notice, there was a brief pullback in the 90 vicinity (~S&P 900) which fullfills the Elliot Wave configuration for a typical a-b-c retracement of a larger move: "a" was the move from 66-90; "b" was the brief pullback; "c" is the rally from 90 until 110. According to EW analysis, an a-b-c move is a counter-trend move in a larger degree trend i.e. DOWN. In addition, volume has continued to taper off and investors are generally as complacent as they were at the highs two years ago (based on the low .VIX, low put/call ratios, and the Daily Sentiment Index). Likewise, many other markets (commodities, junk bonds, gold, emerging market currencies) are similarly bearishly configured. In my opinion, the catalyst for an explosion lower will likely come from a currency crisis originating either from the UK, which is totally insolvent, or Eastern Europe (Latvia, Hungary, Ukraine etc.). The stampede back to the much-hated U.S. dollar will cause major dislocations across the markets, as many hedge funds have been borrowing in dollars to buy emerging market financial assets...
Overall, nothing has changed. If I am correct (as I have been for the past 3 years), then what is directly in front of us is the largest economic decline in U.S. history. This collapse will cause widespread chaos and calamity, resulting in total loss of confidence in the government and Federal Reserve.
I know, the market has continued to rally since my last posts, however, that only makes me more certain that the next leg down is straight ahead of us and it will be brutal. Had the market stair stepped slowly upward or had it retested the March low a few times, as it did in 2002-2003, then I would be somewhat less confident about the timing of the collapse. However, ironically a market that bolts higher off of a low in a V-shaped rally without any significant pullback is actually tipping its hand. Its sinister goal is to suck as many people in as possible before reversing hard down and never looking back - what better way to do that than to run higher without hesitation.
Many commentators believe that this market is very similar to the 2002-2003 market that eventually lurched higher through 2007. Although the market charts are similar at this juncture, the underlying fundamentals of the economy are completely different. As is well documented, the 2003-2007 expansion was fuelled by massive consumer borrowing - primarily against home values. In addition, the unemployment rate back then never rose above 6.4% (currently at 9.8%). As I have stated many times, the belief that we can apply the same low interest rate policy in this recession to grow the economy is predicated on the idea that we can borrow our way to prosperity, indefinitely, with no consequences. Many otherwise intelligent people know this is not true, yet they still cling to the belief that the day of reckoning has once again been postponed.
Look at the updated chart (below). The market has continued its relentless ascent and is now back at the trendline originating from the October 2007 high two years ago. Notice, there was a brief pullback in the 90 vicinity (~S&P 900) which fullfills the Elliot Wave configuration for a typical a-b-c retracement of a larger move: "a" was the move from 66-90; "b" was the brief pullback; "c" is the rally from 90 until 110. According to EW analysis, an a-b-c move is a counter-trend move in a larger degree trend i.e. DOWN. In addition, volume has continued to taper off and investors are generally as complacent as they were at the highs two years ago (based on the low .VIX, low put/call ratios, and the Daily Sentiment Index). Likewise, many other markets (commodities, junk bonds, gold, emerging market currencies) are similarly bearishly configured. In my opinion, the catalyst for an explosion lower will likely come from a currency crisis originating either from the UK, which is totally insolvent, or Eastern Europe (Latvia, Hungary, Ukraine etc.). The stampede back to the much-hated U.S. dollar will cause major dislocations across the markets, as many hedge funds have been borrowing in dollars to buy emerging market financial assets...
As I said over a year ago, here, the market is tracing out a similar pattern as it did in 1929/1930 with a strong rebound that will convince everyone that the worst is over. I predicted most people would use 1987 as their false roadmap forward, so the only difference is they appear to be using 2003 instead...
Sunday, September 13, 2009
The Smart Money has left the Building
According to this article at CNN.com, corporate insiders recently have been selling their shares at a 31:1 rate ($31 in stocks sold for every $1 in stocks bought). Selling really picked up during August as you can see via the bar chart to the right of the article. These insiders are the ultimate "smart money" and they are now selling their stocks at a level last seen at the stock market's all time highs two years ago.
Beyond the obvious bearish implications of this data, certain observers have rightly pointed out that the motives behind this "manufactured" stock rally are bordering on fraudulent. The story goes like this: The Fed (Wall Street's stooges) throws a wall of money at the financial markets, a big chunk of that money ends up in the stock market, corporate insiders (the "smart money") take the opportunity to sell down and slip out through the back door right before the economy collapses for good aka. false rally as insider exit strategy.
This revelation comes as no surprise though, because I made the point several posts ago that all this rally would do is temporarily propagate the illusion of financial solvency and economic recovery. Economists have speciously pointed to the rise of the stock market and improvement in consumer sentiment as "leading indicators" that the recession is nearing an end; however, it's long been known (obvious) that consumer sentiment is linked to the performance of the stock market and in turn the performance of the stock market is linked both to consumer sentiment (duh!) and to Central Bank monetary policy. So, as you see, the Fed is conveniently at the front-end of this financial daisy chain / circle jerk.
And as can be expected the illusion has been propagated just long enough to not only guarantee the smart money safe egress, but of course to assure the sheeple that their money is safe and sound in their stock mutual funds - don't worry, go back to your mind numbing ESPN and American Idol, everything is perfectly fine... Therefore, once again renewing faith in the buy and hold fantasy just long enough to lock the general public into their seats for the long ride into the abyss.
Beyond the obvious bearish implications of this data, certain observers have rightly pointed out that the motives behind this "manufactured" stock rally are bordering on fraudulent. The story goes like this: The Fed (Wall Street's stooges) throws a wall of money at the financial markets, a big chunk of that money ends up in the stock market, corporate insiders (the "smart money") take the opportunity to sell down and slip out through the back door right before the economy collapses for good aka. false rally as insider exit strategy.
This revelation comes as no surprise though, because I made the point several posts ago that all this rally would do is temporarily propagate the illusion of financial solvency and economic recovery. Economists have speciously pointed to the rise of the stock market and improvement in consumer sentiment as "leading indicators" that the recession is nearing an end; however, it's long been known (obvious) that consumer sentiment is linked to the performance of the stock market and in turn the performance of the stock market is linked both to consumer sentiment (duh!) and to Central Bank monetary policy. So, as you see, the Fed is conveniently at the front-end of this financial daisy chain / circle jerk.
And as can be expected the illusion has been propagated just long enough to not only guarantee the smart money safe egress, but of course to assure the sheeple that their money is safe and sound in their stock mutual funds - don't worry, go back to your mind numbing ESPN and American Idol, everything is perfectly fine... Therefore, once again renewing faith in the buy and hold fantasy just long enough to lock the general public into their seats for the long ride into the abyss.
Monday, August 10, 2009
MAX BEARISH II
Back in October 2007, I came out with my first MAX BEARISH posting in which I stated that the market was making an imminent major multi-year top:
..."So what can the market do now that would inflict max pain on max people? Reverse hard down and never look back..."
Exactly 10 days later (October 11th), the market topped out and started the beginning of the two year mega-collapse from 1576 (S&P 500) down to 666 i.e. a 58% decline - the worst since 1930-1932.
Here again, I am going out on a limb and saying that I am once again Maximum Bearish and believe that we are at or very near the top of this counter-trend move. Last month, I allowed that there could be one more run higher, and there was, but there are several signs now that this move has been exhausted:
1) Near unanimous belief that the economy is improving - just this past Friday, the jobs report showed "only" 250,000 job losses and the market rallied on the "good news". Two years ago, a jobs report that bad would have crashed the market, but now it is taken as an unambiguous sign that recovery is on the way. In a perverse way, I actually agree with the dolts who see this as a good jobs report, because this is likely the best jobs report we see for years.
2) Near unanimous (misguided) belief in inflation. Today I read that the gurus at PIMCO, the world's largest bond manager, said yesterday on CNBC: "...the next Fed's move has to be tighter as a tautology" (Paul McCauley). And the commentator quoting Paul (Tom McGraff at RealMoney.com), rejoins with "Which is true. But when is the real question..." i.e. everyone expects the economy to improve, to bring with it obvious inflation, and for the Fed to have to tighten. This is why I have said that the reflation trade is very crowded to say the least i.e. long commodities, short dollar etc. As I have said (too) many times, we are in a deflationary collapse, there is no sign of inflation and there will be no inflation until the majority of outstanding debt has been wiped away through defaults and bankruptcies.
3) Fibonacci 38.2% retracement it the stock market (S&P 500) - achieved last week.
4) Overwhelmingly bullish sentiment towards the stock market, both the AAII and the DSI polls registered bullish readings last seen in October 2007
5) Speculative stocks ramping - AIG doubled in two days last week; Citigroup ramped 55%. There were a number of other small junk stocks blowing off last week as well - which has been a very reliable indicator in the past that the move is over...
6) The Shanghai market which is up almost 100% since last October now looks to have left the party. Remember that was the index that led the way down last year as well...
7) Low volatility index (.VIX). I said last year several times that the .VIX would explode, well it did from 10 in 2007 up to 95 last fall ! Now the .VIX is back in the mid-20s and it looks like it could be carving out a bottom here i.e. the market has been going higher for the past several weeks, but the Vix has not made a new low since early July, signaling that risk tolerance is waning...
8) Bob Prechter from EWI now believes the rally is either over or very near over. Bob has been early on many of his other predictions, but overall he is the master who said this deflationary collapse would happen and how it would happen in scientific detail. Bob also made a great (and timely) call at the March low this year, saying we would have this huge rally - fantastic call.
Finally, in my opinion, the most damning piece of evidence is the long-term view of the market itself, because as they say, "a picture is worth a thousand words" (see below - click to enlarge). Notice the steepness of the current rally since March - what better way to suck everyone in to think the worst is over. Notice how volume has systematically tapered off since the rally started (lower pane):
..."So what can the market do now that would inflict max pain on max people? Reverse hard down and never look back..."
Exactly 10 days later (October 11th), the market topped out and started the beginning of the two year mega-collapse from 1576 (S&P 500) down to 666 i.e. a 58% decline - the worst since 1930-1932.
Here again, I am going out on a limb and saying that I am once again Maximum Bearish and believe that we are at or very near the top of this counter-trend move. Last month, I allowed that there could be one more run higher, and there was, but there are several signs now that this move has been exhausted:
1) Near unanimous belief that the economy is improving - just this past Friday, the jobs report showed "only" 250,000 job losses and the market rallied on the "good news". Two years ago, a jobs report that bad would have crashed the market, but now it is taken as an unambiguous sign that recovery is on the way. In a perverse way, I actually agree with the dolts who see this as a good jobs report, because this is likely the best jobs report we see for years.
2) Near unanimous (misguided) belief in inflation. Today I read that the gurus at PIMCO, the world's largest bond manager, said yesterday on CNBC: "...the next Fed's move has to be tighter as a tautology" (Paul McCauley). And the commentator quoting Paul (Tom McGraff at RealMoney.com), rejoins with "Which is true. But when is the real question..." i.e. everyone expects the economy to improve, to bring with it obvious inflation, and for the Fed to have to tighten. This is why I have said that the reflation trade is very crowded to say the least i.e. long commodities, short dollar etc. As I have said (too) many times, we are in a deflationary collapse, there is no sign of inflation and there will be no inflation until the majority of outstanding debt has been wiped away through defaults and bankruptcies.
3) Fibonacci 38.2% retracement it the stock market (S&P 500) - achieved last week.
4) Overwhelmingly bullish sentiment towards the stock market, both the AAII and the DSI polls registered bullish readings last seen in October 2007
5) Speculative stocks ramping - AIG doubled in two days last week; Citigroup ramped 55%. There were a number of other small junk stocks blowing off last week as well - which has been a very reliable indicator in the past that the move is over...
6) The Shanghai market which is up almost 100% since last October now looks to have left the party. Remember that was the index that led the way down last year as well...
7) Low volatility index (.VIX). I said last year several times that the .VIX would explode, well it did from 10 in 2007 up to 95 last fall ! Now the .VIX is back in the mid-20s and it looks like it could be carving out a bottom here i.e. the market has been going higher for the past several weeks, but the Vix has not made a new low since early July, signaling that risk tolerance is waning...
8) Bob Prechter from EWI now believes the rally is either over or very near over. Bob has been early on many of his other predictions, but overall he is the master who said this deflationary collapse would happen and how it would happen in scientific detail. Bob also made a great (and timely) call at the March low this year, saying we would have this huge rally - fantastic call.
Finally, in my opinion, the most damning piece of evidence is the long-term view of the market itself, because as they say, "a picture is worth a thousand words" (see below - click to enlarge). Notice the steepness of the current rally since March - what better way to suck everyone in to think the worst is over. Notice how volume has systematically tapered off since the rally started (lower pane):
Wednesday, July 1, 2009
Batten Down The Hatches
The biggest part of this stock market rally/economic "bounce" is now over. I don't know if we will have one more surge higher that lasts days/weeks or even months, but the initial target I cited for this rally S&P 500 (900-1000) has already been met and therefore the greatest part of prudence dictates preparing for what comes next...
400 foot Tsunami now on the horizon
Call this next phase the "recognition" phase, the panic phase or the liquidation phase - it's all the same thing. It's the point at which this economic decline accelerates into an unstoppable panic collapse. When I started this blog, the economic crisis had not yet started so there was an excuse not to believe my predictions; however, now the weight of evidence is all around us and no excuse remains. Do you honestly believe the Mainstream Media, Government bureaucrats and Wall Street hustlers when they tell you that the economy is getting better when they didn't even predict this crisis would occur in the first place? If so, ask yourself - what has changed? The same factors that precipitated last year's collapse are still in place - massive debt levels, unrelenting job losses, ongoing credit contraction, housing collapse. Now we can add to the list unprecedented government deficits, as public debt is desperately exchanged for private debt, hence shifting the burden from the financially weak to the financially strong and putting the system more at risk. There is over $50 trillion in private debt in existence, do you think the Government can possibly offset losses against all of that potentially bad debt? What if they succeed in doing so, what would that accomplish (other than obliterating the U.S. dollar) - will it create any new jobs or industries? The answer is clearly no - as there have been six million jobs lost so far since this depression started. All the government is doing at this point is maintaining the illusion of fiscal solvency, purely based on smoke and mirrors and not based on any sound economic fundamentals. This economy is Wile Coyote running in place in mid-air...
Irrational exuberance is back, as the the "reflation" trade is the most crowded trade on Wall Street. Everyone is looking down the left side of the tracks expecting hyperinflation when the deflation train will be coming from the other direction and catch everyone by surprise. Apparently these fools have no concept how the economy works. There is absolutely no sign of inflation anywhere, because the Fed is not printing cash, they are increasing credit, which assumes consumers are willing to borrow; however, all indications are that reserves are piling up at banks as lending standards have increased, shutting out the people who really need the money but are no longer solvent. Meanwhile, solvent consumers are starting to save and pay down their existing debts - i.e. the 40 year Monetary Policy ponzi scheme is officially over. The Nouveau Misian movement still doesn't get it and are openly embracing deflation. However, as I have said before, this is not going to be a gentle deflation, this will be a deflationary crash in which the value of assets and incomes fall hard while nominal debts remain intact. Some foolish observers have noted that if prices fall that will free up discretionary income, however, when prices fall fast (due to liquidation vs. productivity gains) then profit margins fall which means increased layoffs. So if I lose my job and my house loses half its value, then seeing low prices at Wal Mart is likely to be small comfort.
Prepare now or forever hold your peace
Those who fail to heed the signs of impending collapse and take immediate action will be "left behind", literally. Once the collapse begins there will be no time to move your financial assets to safer ground (short-term U.S. Government Treasuries), as it will come without warning and decimate ALL RISKY assets (stocks, corporate bonds, municipal bonds and likely even precious metals). Risk spreads will widen and stay wide, giving no one a chance to get out. There will be no buyers - only sellers, and markets will not function properly, leading to "discontinuous price discovery" aka. crashes. There will be extreme counter-party risk, meaning companies and individuals will be defaulting on their obligations causing further turmoil and illiquidity in markets.
Position your assets accordingly.
400 foot Tsunami now on the horizon
Call this next phase the "recognition" phase, the panic phase or the liquidation phase - it's all the same thing. It's the point at which this economic decline accelerates into an unstoppable panic collapse. When I started this blog, the economic crisis had not yet started so there was an excuse not to believe my predictions; however, now the weight of evidence is all around us and no excuse remains. Do you honestly believe the Mainstream Media, Government bureaucrats and Wall Street hustlers when they tell you that the economy is getting better when they didn't even predict this crisis would occur in the first place? If so, ask yourself - what has changed? The same factors that precipitated last year's collapse are still in place - massive debt levels, unrelenting job losses, ongoing credit contraction, housing collapse. Now we can add to the list unprecedented government deficits, as public debt is desperately exchanged for private debt, hence shifting the burden from the financially weak to the financially strong and putting the system more at risk. There is over $50 trillion in private debt in existence, do you think the Government can possibly offset losses against all of that potentially bad debt? What if they succeed in doing so, what would that accomplish (other than obliterating the U.S. dollar) - will it create any new jobs or industries? The answer is clearly no - as there have been six million jobs lost so far since this depression started. All the government is doing at this point is maintaining the illusion of fiscal solvency, purely based on smoke and mirrors and not based on any sound economic fundamentals. This economy is Wile Coyote running in place in mid-air...
Irrational exuberance is back, as the the "reflation" trade is the most crowded trade on Wall Street. Everyone is looking down the left side of the tracks expecting hyperinflation when the deflation train will be coming from the other direction and catch everyone by surprise. Apparently these fools have no concept how the economy works. There is absolutely no sign of inflation anywhere, because the Fed is not printing cash, they are increasing credit, which assumes consumers are willing to borrow; however, all indications are that reserves are piling up at banks as lending standards have increased, shutting out the people who really need the money but are no longer solvent. Meanwhile, solvent consumers are starting to save and pay down their existing debts - i.e. the 40 year Monetary Policy ponzi scheme is officially over. The Nouveau Misian movement still doesn't get it and are openly embracing deflation. However, as I have said before, this is not going to be a gentle deflation, this will be a deflationary crash in which the value of assets and incomes fall hard while nominal debts remain intact. Some foolish observers have noted that if prices fall that will free up discretionary income, however, when prices fall fast (due to liquidation vs. productivity gains) then profit margins fall which means increased layoffs. So if I lose my job and my house loses half its value, then seeing low prices at Wal Mart is likely to be small comfort.
Prepare now or forever hold your peace
Those who fail to heed the signs of impending collapse and take immediate action will be "left behind", literally. Once the collapse begins there will be no time to move your financial assets to safer ground (short-term U.S. Government Treasuries), as it will come without warning and decimate ALL RISKY assets (stocks, corporate bonds, municipal bonds and likely even precious metals). Risk spreads will widen and stay wide, giving no one a chance to get out. There will be no buyers - only sellers, and markets will not function properly, leading to "discontinuous price discovery" aka. crashes. There will be extreme counter-party risk, meaning companies and individuals will be defaulting on their obligations causing further turmoil and illiquidity in markets.
Position your assets accordingly.
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