Ayn Rand would be proud. These past 50 years have been an unprecedented orgy of consumption and self-interest that would make even her blush. Granted, the economy has devolved into a Frankenstein's monster of crony capitalism with a dash of pseudo-socialism. Unfortunately the system of "pure capitalism" that she envisioned currently only exists in Milton Friedman's text books and in those parts of Latin America where it wiped out entire economies and impoverished millions. Here in America, we will get there, but these things take a bit of time.
She would be pleased to see Wall Street firms back at work, following a (very) brief hiatus, busily securitizing and liquidating the country. She would nod approvingly at a growing gap between rich and poor now back to historic levels last seen in the 1920s - further proof that altruism is indeed dead and long buried. She would note the 3 billion plus people across the globe living on less than $1/day and the 50k+ children dying each day for want of a few dollars of food and medicine. She would give a nod to our fortitude to allow these indolents to suffer the inevitable consequences of their laziness and inefficiencies.
She would highly approve of the populist tea party movement enthusiastically railing against its own interests and the "profligacy" of the current Administration, not withstanding the 30 previous years of squandered resources and deficits. Talk about closing the barn door after the horses are out. I cannot fathom the average individual taking to the street to oppose the extension of health care benefits to the unemployed, yet implicitly supporting tax cuts for the ultra wealthy, copious handouts for the Beltway bandits, troops in 140 countries, 18 aircraft carrier groups and 2 totally pointless wars. Go figure.
I also can't reconcile those who seemingly profess a belief in Judeo-Christian values while enthusiastically embracing Ayn Rand's decadent ideology of "rational self-interest". After all, Ayn Rand considered altruism to be immoral, thereby not only bastardizing the term "moral", but also taking a diametrically opposite view to that other well known Jewish philosopher.
All sarcasm aside, I don't think even Ayn Rand could get her demented mind around this current fiasco we call the economy. The fact remains that any economic system that is systematically dismembered by special interest groups will fail, be that Capitalism, Socialism, Communism or any other system we conjure up. Political operators believe that the status quo is sustainable and even desirable - this endless oscillation between one political ideology and then another, each allowing its constituent crony special interests to feast at the public trough. Yet just an ounce of honesty and decency reveals that to be a false and self-serving belief. We could completely swap out and replace the entire current batch of jokers on Capitol Hill with a completely new crew and yet obtain the same deleterious outcome, as long as special interest groups have unfettered access to public money and power.
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The rest of this entry is a time capsule for the future, as a testament against the burgeoning if not fully realized Idiocracy. Following is a list of *some* of the more egregious widespread ideas and practices that years from now the survivors (if any) of the impending Dark Ages will not believe are commonly accepted both here in the U.S. and across much of the developed world:
1) Running fiscal and trade deficits for 30 years straight
(Except for a couple of years during the Clinton Administration when tax receipts from the tech bubble caused a temporary fiscal surplus )
2) Using cheap loans and low interest rates to "grow" the pseudo-economy via over-consumption and misallocation of capital, conveniently sidestepping each financial crisis by adding yet more monetary stimulus, until the entire system finally collapses in a deflationary credit collapse on a scale unprecedented in history
3) Spending Social Security and Medicare tax receipts as general revenues, thereby bankrupting the system and leaving future generations (and the Boomers) with no social safety net
4) Outsourcing an entire manufacturing base to foreign countries along with all of the accompanying managerial and engineering skills and intellectual capital, replacing these industries with Starbucks baristas, mortgage brokers, and bar tenders
5) Using homes like ATM machines
6) Paying Wall Street twenty-somethings millions of dollars to day-trade pieces of paper back and forth in a zero sum game while the real economy and real jobs are outsourced to foreigners
7) Injecting 80 million barrels of oil per day into the atmosphere and then ignoring the advice of the overwhelming number of climate scientists; preferring instead to follow the hack advice of infotainment talk show hosts, oil industry owned pseudo-scientists or Billy Bob next door who has been faithfully assimilating the Op/Ed section of the Wall Street Journal on his way to the Sports section:
- Despite hurricanes growing in force by 50% over 40 years
- Polar ice caps melting at unprecedented rates
- Acceleration in temperatures and growth in atmospheric carbon occurring at fastest rate in all of Earth's history
- Mass extinction of species occurring at fastest rate in Earth's history
8) Funding terrorist enemies in the Middle East via their wealthy oil sponsors who pretend to be our so-called allies in the war on terror, while we pretend not to notice...
9) Fighting two endless and pointless wars in the same region.
(Small hint for policy-makers: The war on terror can't be won; terrorism is a method of warfare, not a specific instance of war, uh duh!)
10) Electing a drug-addled, alcoholic, 'C' student, draft dodging dilettante and Alzheimer-ridden B-actor to the most powerful political office on the planet. More generally, electing smooth talking salesmen with no history of accomplishment who spend half their time campaigning and the other half of the time making fancy speeches promising the impossible.
11) Pumping our children full of factory junk food toxic waste while obesity and diabetes rates skyrocket amongst the young, all in the name of "consumer choice" i.e. the trojan horse for selling more corporate crap
12) Vastly overpaying country club CEOs tens and hundreds of millions of dollar to layoff millions of workers, outsource the most productive part of the economy, and otherwise drive the country into depression. Meanwhile, minimum wage is a measly $7.25, lower than it was in 1974 adjusted for inflation (i.e. 1974 equivalent is ~$10).
13) Producing an overwhelming preponderance of ESPN-addled boy-men too preoccupied with sports games and Xbox to notice the world disintegrating around them.
14) Using 5x as much resources as the average person on the planet and believing this to be a sustainable and scalable way of life, even when confronted with $147/barrel oil
Tuesday, May 25, 2010
Friday, May 7, 2010
Tsunami Alert
This week was a harbinger for the near future. The financial crisis and riots in Greece are just the canary in the coal mine for the impending global credit panic and ensuing anarchy that will make 2008 seem like a picnic. Just as the collapse of New Century financial and two Bear Stearns hedge funds was the harbinger of the subprime crisis (totally ignored by Wall Street and the media) so too, Greece is advance warning of this next much deadlier stage of the unrelenting credit crisis. It will likely only take one sovereign default to trigger an avalanche of defaults among all countries that have borrowed heavily and rely on accommodating credit markets to rollover their debt e.g. Spain, Portugal, Italy, Ireland, UK, Japan and a host of Eastern European countries.
The Elliot Waves now show that we are at the forefront of the biggest market decline in U.S. history, aka "Primary 3" (P3). Primary 1 was the market decline that started in 2007 and ended in March 2009 wiping out over 55% of market value. Primary 2 was this past year's countertrend rally. P3 will reassert the downtrend and take the markets far below the P1 low, potentially erasing the past 40 years of stock market gains, according to EWI. Before you dismiss these folks and Elliot Wave Theory itself out of hand as "financial astrology", bear in mind that while their timing was early, they called for a major top in 2007, they precisely called the low in 2009 (to the week), and now have been early (as have I) for calling a top here in 2010. If they are right now again, then that would prove the overwhelming majority of financial forecasters to be drastically wrong once again, and the early timing of the call will be rendered wholly irrelevant by the sheer magnitude of the decline.
Initially here the markets *may* stair-step their way down, as investors continue to "buy the dip", however, the inevitable flight from risky assets will likely cause a cascading panic crash. Yesterday was a small taste of just such a crash, as the market lost ~7% in about 10 minutes and then quickly recovered. We were told that this was a "trading glitch", except there is still no proof of any erroneous trade. The fact is there was no glitch, the mini-crash was simply a function of sellers overwhelming buyers. It was a one-sided market to the downside, which is exactly what we should expect after a year long Fed sponsored liquidity-driven rally intended to prop up Wall Street and propagate the illusion of recovery. Computer trading programs further contributed the problem as up to 70% of market trading volume is now controlled by automated trading programs. Many of these programs use technical (price) indicators to determine the current direction of the market and then drive momentum in the direction of the prevailing trend. Now that the trend has turned down, these programs are clearly exacerbating downside momentum.
Contributing to the inevitable panic will be the realization that the Fed and Governments are powerless to do anything, since they already squandered their resources in 2008 bailing out the investor/speculator class at the expense of the Middle Class. This time there will be no bailouts, not only because they will be politically unobtainable, but also because the scale of the market collapse will dwarf government/Fed resources.
As expected, U.S. Government Treasuries were a safe haven and long-dated Treasuries massively outperformed even beyond my expectations. Already Nassim Taleb's "no brainer" strategy of shorting Treasuries has turned out instead to be a "no brain" strategy. I can't imagine recommending shorting an asset that has proven to be a safe haven throughout the past weeks' turmoil. That is a boneheaded move, even by Ph.D standards. Yes, Gold held up well also, but as I have explained before, I don't see gold being a liquid safe haven during extreme deflation, as the amount of dollars in circulation will collapse, causing the prices of all things dollar denominated to fall. Further to the point, the U.S. dollar screamed higher against all other major currencies (except JPY), which caused further turmoil in the markets, as Wall Street's hot money (hedge funds etc.) are still clearly positioned for the "reflation" trade (short dollar, long commodities, cyclicals, emerging markets).
In short, if you have not already stocked up on food and ammunition, now would be a good time to do so, post haste.
The Elliot Waves now show that we are at the forefront of the biggest market decline in U.S. history, aka "Primary 3" (P3). Primary 1 was the market decline that started in 2007 and ended in March 2009 wiping out over 55% of market value. Primary 2 was this past year's countertrend rally. P3 will reassert the downtrend and take the markets far below the P1 low, potentially erasing the past 40 years of stock market gains, according to EWI. Before you dismiss these folks and Elliot Wave Theory itself out of hand as "financial astrology", bear in mind that while their timing was early, they called for a major top in 2007, they precisely called the low in 2009 (to the week), and now have been early (as have I) for calling a top here in 2010. If they are right now again, then that would prove the overwhelming majority of financial forecasters to be drastically wrong once again, and the early timing of the call will be rendered wholly irrelevant by the sheer magnitude of the decline.
Initially here the markets *may* stair-step their way down, as investors continue to "buy the dip", however, the inevitable flight from risky assets will likely cause a cascading panic crash. Yesterday was a small taste of just such a crash, as the market lost ~7% in about 10 minutes and then quickly recovered. We were told that this was a "trading glitch", except there is still no proof of any erroneous trade. The fact is there was no glitch, the mini-crash was simply a function of sellers overwhelming buyers. It was a one-sided market to the downside, which is exactly what we should expect after a year long Fed sponsored liquidity-driven rally intended to prop up Wall Street and propagate the illusion of recovery. Computer trading programs further contributed the problem as up to 70% of market trading volume is now controlled by automated trading programs. Many of these programs use technical (price) indicators to determine the current direction of the market and then drive momentum in the direction of the prevailing trend. Now that the trend has turned down, these programs are clearly exacerbating downside momentum.
Contributing to the inevitable panic will be the realization that the Fed and Governments are powerless to do anything, since they already squandered their resources in 2008 bailing out the investor/speculator class at the expense of the Middle Class. This time there will be no bailouts, not only because they will be politically unobtainable, but also because the scale of the market collapse will dwarf government/Fed resources.
As expected, U.S. Government Treasuries were a safe haven and long-dated Treasuries massively outperformed even beyond my expectations. Already Nassim Taleb's "no brainer" strategy of shorting Treasuries has turned out instead to be a "no brain" strategy. I can't imagine recommending shorting an asset that has proven to be a safe haven throughout the past weeks' turmoil. That is a boneheaded move, even by Ph.D standards. Yes, Gold held up well also, but as I have explained before, I don't see gold being a liquid safe haven during extreme deflation, as the amount of dollars in circulation will collapse, causing the prices of all things dollar denominated to fall. Further to the point, the U.S. dollar screamed higher against all other major currencies (except JPY), which caused further turmoil in the markets, as Wall Street's hot money (hedge funds etc.) are still clearly positioned for the "reflation" trade (short dollar, long commodities, cyclicals, emerging markets).
In short, if you have not already stocked up on food and ammunition, now would be a good time to do so, post haste.
Wednesday, April 28, 2010
Ayn Rand Gone Wild
This Goldman Sachs inquiry is beyond sickening. The usual Ayn Rand/Gordon Gecko-like apologists are out in force telling us that what they did was just business as usual and standard operating procedure for the financial markets. Just this week, "The Economist" (4/24, page 13) is saying that Goldman was greedy, but not guilty. That may be technically correct, but this is not just a legal issue, this is a fundamental moral issue, and anyone who does not think that what these pigs did was unconditionally wrong is morally bankrupt. "The Economist" argument is that various market participants go to market for various reasons and seller views of an asset by definition are opposite of buyer views. That is all well and good in a secondary market between parties of relatively equal information. However, these securities were sold in the primary market in which Goldman was the originator of a product certified to be high quality (AAA rated). To not make a distinction between Goldman's role as a market maker v.s. its role as an underwriter is amateur reporting. The underwriter role conveys a fiduciary duty that was clearly abrogated.
The Big Short (if you haven't read it, I highly recommend it)
By creating synthetic CDOs, Goldman essentially created a casino which allowed speculators (including themselves) to place billion dollar bets against the U.S. housing market. It wasn't enough to create plain vanilla CDOs which were layered packages of real mortgages and therefore had a modicum of investment purpose however foolish and ill-fated, no these "synthetic" CDOs were for pure speculation, a hand picked set of reference mortgages known to be particularly toxic and hence prone to failure. Bear in mind that the entire motivation for buying CDOs was to provide diversification by pooling a random set of mortgages from across the country of varying degrees of risk. Goldman did the exact opposite, they handpicked a pool of the most highly correlated, lowest quality mortgages they could find to guarantee the CDOs would fail. As soon as they sold these CDOs, they then bought insurance against them so they could profit from the inevitable failure. Moreover, by creating synthetic CDOs Goldman inflated a secondary (derivative) market that actually dwarfed the underlying mortgage market, thereby putting the entire system at risk when the whole pyramid inevitably collapsed. In all of this of course there were two main patsies, one of which was the overseas investors who were told these pieces of garbage were "AAA" rated securities which is how Goldman represented them to investors (thanks to the rubber stamp of the corrupt Ratings agencies). The other patsy of course was AIG who actually sold insurance guaranteeing these CDOs would not fail, much of which was not bought by investors to hedge their exposure, but by speculators hoping they would fail. The ultimate patsy however was the American taxpayer who ended up having to bail out AIG to the tune of $180 billion for the most part to pay off the speculators who had been betting against the U.S. middle class. What sick irony that the U.S. middle class tax payer was forced to bail out the scum bags who were betting that ordinary people would lose their homes. Were it not for the bailout of AIG, most of the speculators against the CDO market would have lost their bets and Goldman Sachs might not even exist right now. The fact remains that in the fall of 2008 there was a run on all of the investment banks - not just Lehman Brothers. Goldman Sachs was just a little further up the chain and rescued by the massive Bernanke/Paulson give-away.
So what did Goldman get for all this? In addition to getting $13 billion of the taxpayer AIG bailout money, for the bets they made against the very products they had created, they also "earned" roughly $3.7 billion in fees to originate these "crap products" (their own words from an email); products which had an average shelf life of about 18 months before self destructing and hence jeopardizing the entire financial system. Bear in mind, these were not trades in the secondary market. These were not junk bonds after-the-fact, trading for cents on the dollar, these were junk bonds at the point of origination that were marketed as high quality/high price (low yielding) securities. I submit, in what other industry can a company manufacture what is by their own admission a shit product, take out insurance against its failure and then still be in business two years later making record profits and paying out record bonuses? The analogy would be like Ford manufacturing fire-prone Pintos in the 1970s AND taking out life insurance on the buyers !!!
That there are still cheerleaders in the press and on Wall Street defending this type of destructive rent seeking and greed addled behaviour is a sign of the times and shows that the age of nihilism has reached a new all time low.
The Big Short (if you haven't read it, I highly recommend it)
By creating synthetic CDOs, Goldman essentially created a casino which allowed speculators (including themselves) to place billion dollar bets against the U.S. housing market. It wasn't enough to create plain vanilla CDOs which were layered packages of real mortgages and therefore had a modicum of investment purpose however foolish and ill-fated, no these "synthetic" CDOs were for pure speculation, a hand picked set of reference mortgages known to be particularly toxic and hence prone to failure. Bear in mind that the entire motivation for buying CDOs was to provide diversification by pooling a random set of mortgages from across the country of varying degrees of risk. Goldman did the exact opposite, they handpicked a pool of the most highly correlated, lowest quality mortgages they could find to guarantee the CDOs would fail. As soon as they sold these CDOs, they then bought insurance against them so they could profit from the inevitable failure. Moreover, by creating synthetic CDOs Goldman inflated a secondary (derivative) market that actually dwarfed the underlying mortgage market, thereby putting the entire system at risk when the whole pyramid inevitably collapsed. In all of this of course there were two main patsies, one of which was the overseas investors who were told these pieces of garbage were "AAA" rated securities which is how Goldman represented them to investors (thanks to the rubber stamp of the corrupt Ratings agencies). The other patsy of course was AIG who actually sold insurance guaranteeing these CDOs would not fail, much of which was not bought by investors to hedge their exposure, but by speculators hoping they would fail. The ultimate patsy however was the American taxpayer who ended up having to bail out AIG to the tune of $180 billion for the most part to pay off the speculators who had been betting against the U.S. middle class. What sick irony that the U.S. middle class tax payer was forced to bail out the scum bags who were betting that ordinary people would lose their homes. Were it not for the bailout of AIG, most of the speculators against the CDO market would have lost their bets and Goldman Sachs might not even exist right now. The fact remains that in the fall of 2008 there was a run on all of the investment banks - not just Lehman Brothers. Goldman Sachs was just a little further up the chain and rescued by the massive Bernanke/Paulson give-away.
So what did Goldman get for all this? In addition to getting $13 billion of the taxpayer AIG bailout money, for the bets they made against the very products they had created, they also "earned" roughly $3.7 billion in fees to originate these "crap products" (their own words from an email); products which had an average shelf life of about 18 months before self destructing and hence jeopardizing the entire financial system. Bear in mind, these were not trades in the secondary market. These were not junk bonds after-the-fact, trading for cents on the dollar, these were junk bonds at the point of origination that were marketed as high quality/high price (low yielding) securities. I submit, in what other industry can a company manufacture what is by their own admission a shit product, take out insurance against its failure and then still be in business two years later making record profits and paying out record bonuses? The analogy would be like Ford manufacturing fire-prone Pintos in the 1970s AND taking out life insurance on the buyers !!!
That there are still cheerleaders in the press and on Wall Street defending this type of destructive rent seeking and greed addled behaviour is a sign of the times and shows that the age of nihilism has reached a new all time low.
Wednesday, February 17, 2010
Slow...Motion...DISASTER
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 !
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, 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...
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