The Last Bull Market

According to Jim Cramer, there is always a bull market in something, somewhere.  Instinctively, I typically  hew to the polar opposite view from Cramer, but in this case I have to agree, we are in the mother-of-all-bull markets - that is for BULLSHIT.  24/7 we are relentlessly bombarded by glassy-eyed bullshit purveyors who are too bought-in to the status quo to imagine anything different. let alone reality.

Meanwhile, as I mentioned in my last post, we were potentially setting up for a down up sequence, which has now played out in spades.   As you can see in the chart further below, the S&P undercut its August low, bottomed out on Oct. 4th at 1075 and has since ramped ~225 points in 3 weeks or about 19% in absolute percentage terms - that's ~1800% when compounded annually.  The steepest full month rally since 1974 and for its timeframe of 3 weeks, the steepest rally I can find for any time frame - in history.

But like Dotcoms, real estate, silver, gold, oil etc. etc. trees don't grow to the sky.  This rally was brought to you by hedge fund short covering and by equity mutual funds desperate to make up for losses prior to their fiscal year-end which for most mutual funds is 10/31 i.e. 2 days from now.  Coincidence?  Sure.  

Meanwhile, simmering unrest continues to spread globally and here in the U.S. with the nascent Occupy Wall Street movement, which is just a playful version of what is to come.  Bloated comfort seekers across the Lamestream Media continually ask, what do these young troublemakers want anyway?  It's a mystery!  Here's a hint - how about a job, a future and relief from the debt burden accumulated by these self same jackasses who question the goals of these protests.  Let's start there and see where that takes us.  Every time I hear one of these tone deaf idiots say this movement has no goals, I just laugh and think - give it time, it's coming - reality knows where you live, Faux News Retard. 

Miraculously, those looking to protect themselves financially get one more shot, right now.  Although these vertical rallies have a way of convincing everyone that once again everything is A-OK.  As EWI just indicated, once we start the next move down, these levels in the stock market, first reached in 1998, will not be seen again for another age - years, if not decades.

Fortunately the Treasury bond play continues to massively outperform every other asset class this year.  Long-dated Treasuries as indicated by the TLT ETF exceeded even my bullish expectations, running to 125.  They have since backed off to ~111 which is a 38.2% retracement of the entire run - a perfectly normal retracement level.  The outsized move in Treasuries was compliments of the copious fools who had shorted Treasuries and then subsequently got their faces ripped off.   Suffice to say, the Zero Hedge/Peter Schiff/Marc Faber/Nassim Taleb/Jim Rogers hyper-ventilated hyperinflation trades (long gold/emerging markets/short treasuries) are once AGAIN leading to the downside, this time for good.  It's been a who's- who of fools on this crowded ship.

These were the ones who told us that the Debt Ceiling debacle would kill Treasuries - Treasuries rallied.  Then the U.S. debt downgrade was going to kill Treasuries - again they rallied.  Then the Fed. ending QE2 and not initiating QE3 was the death knell - so Treasuries responded by going parabolic.  All of which merely augurs for a persistent and deep deflation of unprecedented proportions.  Come to find out, it will be ok to gain 0% on your money when prices for everything are soon-to-be falling 10% year over year and the Euro is collapsing like a cheap tent.  

Below is the current disposition of the again artificially levitated market, courtesy of short covering and the reach for end-of-year performance.  Bear in mind that while most Mutual Funds have a 10/31 year-end, most hedge funds have a 12/31 year-end.  So the HF 1%ers desperately need to keep this party going for another 2 months !  Anything is possible, but given the vertical disposition of the chart below, one has to assume that some HFers will be edging out of the door sooner, trying to gain advantage on the rest.  Given the unspoken herding nature of the HF community, one can see early exit yielding to stampede and then to panic...

The reason for being ultra-bearish at this juncture is not short-term stock market manipulation - that's standard practice, it's the position of the stock market on a long-term basis, as indicated by technical analysis and Elliot Wave Theory.  I am not a hardcore adherent of EWT, but I do find it very useful as a broad frame of reference and as way of understanding and evaluating potential scenarios - scenarios far outside the boundaries of most stock market prognosticators.  For those who prefer a more fundamentals/economics based view, in any case, nothing has changed in the past 3 weeks to all of a sudden warrant or sustain higher markets.  That's evident even by reading the local newspaper.

Turning to the technical/EWT set-up, what makes this situation highly critical, is the fact that market is attenuating - with each rally of shorter and shorter duration.  That sets up what is called a Third Wave event i.e. alignment of third waves at all degrees of trend (timeframes).  Third (out of a possible five) waves are always the strongest waves and when they align at all degrees of trend it means retracement failure at all degrees of trend.  Picture the far right side of that rally pictured above, who is the marginal buyer?   Those who bought the market since the March 2009 low were fat and happy until they were scorned at the August top shown above i.e. they were in the money for max. ~2.5 years and they never reached the prior 2007 high of 1575.  Those who bought the most recent bottom (Oct. 4th) have been right for about 3 weeks.  Technically speaking, we are making lower highs (downtrending) with each rally attempt of shorter duration.  That in a nutshell is attenuation and indicates that the bulls are running out of firepower and headroom.

EWI went ALL IN bearish last Friday, and I strongly concur.

Position Accordingly.

Class Warfare - The 10,000 Day War

Excellent article on the true state of affairs in America - that is, for the subset of humanity that still cares about facts, data and reality:

http://www.huffingtonpost.com/larry-womack/30-years-of-real-class-warfare_b_932279.html

I therefore don't expect the glassy-eyed Tea Party Ayn Randers to assimilate any of these facts.  They are too busy buying gold, excoriating Bernanke (can't say I disagree on that point), and otherwise dreaming of the imminent return to Little House on the Prairie.

Dude, where's my Economy?

The new Tea Party vernacular is to speak in terms of the top % of Americans as the job creators v.s. all the rest of us, lowly and unworthy job holders.  Unfortunately, facts and reality dictate that the country club class have destroyed far more jobs than they could ever hope to create.   Capital in the digital age moves at the speed of light to wherever it can gain the highest return, totally oblivious to any notion of patriotism.  Likewise plants and manufacturing facilities uproot and move from one sweatshop third world locale to another in the mere prospect of squeezing pennies from ludicrously low wages.  

The true story is that through pervasive and relentless outsourcing these "job creators" liquidated the American middle class.  And they didn't just outsource the jobs, they outsourced entire industries.  Firms such as Nike for example, do not make shoes.  They design, market and sell shoes, leaving the manufacturing to firms in other countries.  It was the path of least resistance, and the path of highest profits to swap out $15/hour labour in the U.S. for $.50/hour labour in China.  Likewise for just about every other manufacturing-based industry in America.  The Nikes of the world take a product that costs $7 to manufacture and turn around and sell it for $70, reaping a massive windfall profit.  That makes firms like Nike, Starbucks, Apple etc. mere middle-men between the ultimate producer and the ultimate consumer.  In other words, instead of slapping a swoosh on the side of that shoe, the manufacturers can just slap a generic white bar on the side and cut costs by 80% - voila, welcome to the new new economy.  Once the new era of consumer thrift fully takes hold and consumers balk at paying $70 for over-hyped shoes that are no better than those in the bargain bin, expect S&P profits to fall off a fucking cliff, taking millions of redundant middle management jobs along with them.  And yet, the Great Bernank is constantly scratching his head, saying he does not know why so few jobs are being created - really, you have no idea?  Can someone with three degrees really be so oblivious to the fact that we just outsourced the entire fucking economy?

Speaking of which, not withstanding the advice of Goldman Sachs, at last week's annual Fed Jackson Hole Circle Jerk, Bernanke capitulated to the fanatical gold bugs and Tea Partiers by foregoing the much anticipated launch of yet another round of market manipulation aka. QE3.  It turns out that leading Republican candidate Rick Perry's accusing Bernanke of treason and indicating he should be hanged if he launches QE3, made the Bernank somewhat circumspect.  And as I have said before, the only thing gold bugs fear more than QE3, is no QE3 i.e. without further monetization of debt their entire thesis of hyperinflation goes out the window, along with their rationale for piling into gold.  Let's see how the yellow metal holds up in the face of a long overdue dollar rally...What was really odd about Friday, is that gold, stocks and Treasuries all rallied after the QE3 non-news was announced, meaning there were a lot of hedges unwinding causing traditional correlations to break down.  Longer term (i.e. coming weeks), someone is going to be on the losing side of this monetary policy capitulation and (full disclosure) my money is on gold and stocks to be the real losers once the smoke clears from Friday's massive unwind. 

The Elliot Waves indicated that we are likely going to see at least one more decent sized tanking in the stock market in coming weeks before we see any major counter-trend rally.   That counter-trend rally, if it occurs, will be the last chance to sell stocks anywhere near recent highs, prior to all hell breaking loose.

MELTDOWN

The long anticipated financial meltdown is now underway.  

This leg down is Primary 3 that will draw prices well below the 2008 crash low, as depicted below (off by a few months, but the overall trend is clear):

What is truly amazing is that as you can see in the chart below, we are already well into this crash and yet the average pundit is still in denial as to whether or not we are even in a bear market !  There is also debate as to whether or not we are in recession.  This is deja vu of 2008 when these moronic debates were occurring even as the markets were signalling economic collapse.  

Current market position: S&P @ 1200:

Further market rationalizers tell us that we are told that the market is deeply "oversold" by several measures and due to bounce back at any time - code word for opportunity to sell on a bounce and cut their losses.  Unfortunately, as we saw for the past two years, markets can remain irrational far longer than many investors can remain solvent.  So while betting against the trend was a fool's game on the upside these past two years, now it's equally likely that betting against the trend will be a fool's game on the downside.  What is even more amazing about this latest selloff is that the options measures of investor anxiety are still relatively sanguine.  To wit, the volatility index (.VIX) is just today at the level (~32) it reached in March during the Japanese Tsunami, but well below the level (47) that it reached at last year's flash crash in May 2010.  Moreover, VIX futures are almost as flat as a pancake indicating that investors expect short-term volatility but are not concerned enough to hedge longer term.  Meanwhile the put/call options ratios are well below where they were in mid-June when the market had a minor sell-off !!! 

Meanwhile, gold which has also been had a great rally to-date, reversed down today on massive volume, similar to the reversal in silver back in April.  As I have said, these trades are "risk on" trades highly correlated to Bernanke's QE2 program which ended this past June.  Speaking of QE2, it's only been a month since it ended and yet the Greedbots on Wall Street are already begging the Fed for a dose of QE3 !  And wasn't the end of QE2 (bond purchasing) going to lead to much higher interest rates and lower Treasury prices?  Well, as it turns out, bonds have had their sharpest rally since 2008 these past couple of weeks - go figure.  

Unfortunately, the vast majority are too young, naive or otherwise oblivious to history to understand credit deflation.  Credit deflation means the money supply is shrinking as risk assets collapse and loans are liquidated via default.  All risk assets denominated in dollars will eventually fall in a credit deflation scenario.  Fortunately, we now know with 100% certainty that the debt ceiling self-induced fiasco was all just a political game and a giant head fake to get people to sell Treasuries.  Too bad, since as expected Treasuries are turning out to be the only safe haven.  Constantly I hear from the inflationists such as Ron Paul, that hyperinflation is around the corner and the U.S. is the Weimar Republic reincarnate.  Unfortunately that is the uninformed view of history, because the Weimar hyperinflation occurred in 1923 - a full 5 years after the end of World War 1.  And what conditions transpired in the intervening 5 years?  Crushing debt-induced deflation - as the reparation conditions from the Versailles Treaty decimated the economy.   In other words, Weimar hyperinflation wasn't the problem, it was the solution, because it allowed the currency to inflate relative to the fixed cost of the debt, it also induced the Allies to renegotiate the terms of the reparations.  Not to say I welcome hyperinflation, only to say that even the Austrian School economists who are the ultimate advocates of hard money admit that:

"There is no means of avoiding the final collapse of a boom brought by credit expansion" - Ludwig Von Mises

Yet, derided as the "boy who cried wolf", us "perma bears" have repeated our warnings often enough that the average comfort seeking denialist has convinced himself that nothing untoward can happen - certainly nowhere near as bad as 2008 which is constantly labelled a "once in a lifetime event".  They are happy to assume that because we doomsayers have been wrong so far, that we will never be right.  Which explains a lot as to why no one predicted the intensity of this selloff and more to the point why no one is panicking...yet.

Moral Depravity

It's hard in words to depict the total moral depravity of Western Society at this juncture.

Daily now we are bombarded with the faux angst surrounding the Democratic/Republican self-imposed cluster fuck over the debt ceiling.  This debate is so pointless that it makes every politician involved look foolish, including Ron Paul.  This is not about taxes or even fiscal responsibility - the government already borrows almost half its annual budget !  Basic math indicates not one dime of debt will ever get paid back.  There is no point whatsoever in defaulting on any spending obligation when interest rates on U.S. debt are at 3% (i.e. ridiculously low by historical standards).  No one involved in this, including the Tea Party hypocrites is willing to give up the smallest amount of spending or contribute any additional taxes, let alone give up 10% of GDP or touch Social Security, Medicare or Defence.

Meanwhile, two totally unrelated articles appeared this week in the Economist, illustrating the stark dichotomy facing various constituents in the have/have not economy.  These two scenarios are so bizarrely incongruous, that one can hardly believe these two scenarios pertain to the same country:

The one article focused on the ongoing fiasco of the most expensive military project in world history.

Key facts: 

1) This fighter was intended to be low cost 

2) The project is 6 years late

3) The U.S. is planning to buy 2,443 at a cost of $382 billion i.e. $156 million apiece

4) The long-term cost of supporting the aircraft will be $1 trillion

5) The plane may well be technologically obsolete only a few years after entering service !

6) It only carries 2 missiles and does not have adequate range to allow carriers to standoff at safe distance from latest generation Chinese surface-to-surface missiles

I have no doubt that there are many ageing Cold Warriors who believe that having the latest and greatest fighter jet is a sign of strength and military prowess.  Unfortunately, it's not, it's a sign of weakness - one that America's de facto and potential enemies will not overlook.  It's weak financially, that's obvious - half of strength in warfare is strength and sustainability of resources.  It's also weak with respect to the complexity and limited capabilities of the platform and it crowds out other more basic and cost effective technologies, something pointed out in the article.

Juxtapose that article with another regarding the rising use of food stamps in the same country:

1) The program costs $65 billion a year, which is less than 10% of the annual defence budget

2) It feeds 45m people per month, half of whom are children

3) Average "benefit" is $133/month

4) Many of the people on the program have exhausted their unemployment benefits and can't find a job
- There are currently 14 million "officially" unemployed (many more in reality), of which 6 million have already lost their unemployment benefits and by the end of the year a staggering 4 million more will lose their benefits.

Of course, Godless Republicans posing as Christians, want to cut the program, because it's "unsustainable", unlike a fucking Joint Strike Fighter costing $156 million/per aircraft that can be shot down with a well placed .50 caliber bullet, costing $10.

As usual, it's a false dilemma, debated by elitist fools, because there is no long-term option to not feed the poor and impoverished.  History dictates that you either give them what they need, or they rise up and take what they want.

Batten down the hatches.

Reality Check 2011

(Barely) time for one more reality check.

The days of extend and pretend are dwindling, with the point of recognition near at hand.  Peak Debt and Peak Stupidity are reaching their apex at the exact same time, although I believe Peak Stupidity will reinflate itself rather quickly and soar to all new highs as the Idiocracy goes into Clockwork Orange meltdown mode.  As for Peak Debt, when that ends, it will mark the end of borrowing and lending for generations.

If you ask "when" I say who knows exactly, but tomorrow is as good a time as any.  Maybe we play charades for more weeks and months, but of this I am certain - 99.99% of people alive today will be overwhelmingly affected by what happens next.  So, unless you are someone who is 100 years old and on life support, then you are in the fallout zone.

So while the Idiocrats play parlour games with the debt ceiling, it's time to make an honest assessment of the magnitude of the economic crater that is about to be created.  

To be sure, this is no game, the vast majority of Americans (and Westerners in general), will lose their job, their house and their retirement savings all at the same time.  

My central thesis has been, and continues to be that the economy is only now supported by overwhelmingly MASSIVE and unprecedented doses of Fiscal and Monetary policy.  Moreover, both these policies are running out of jet fuel and are now running on fumes, which means the spaceship U.S. economy is about to fall back to earth.  

On the monetary side, monetary policy is still being applied at near full throttle with interest rates at 0%, however there are already abundant signs that it is losing momentum i.e. the latest unemployment report, bank lending reports etc.  We have reached the quintessential definition of a liquidity trap in which no one is willing to lend and no one is willing to borrow.  Who would have thought that following two years of injecting almost $3 trillion of new money into the economy via two rounds of quantitative easing, that inflation would be contained?  Back in the 1970s we had inflation rates in the teens at a time when Fed interest rates were much higher (less stimulatory) than they are now (at 0%), and Quantitative Easing was never even suggested, much less attempted.  There was no $3 trillion of new money back then.  So any thought that monetary policy is moving the needle anymore is sheer bullshit.  The Fed is boxed in and can no longer encourage borrowing to solve a debt problem.

Fiscal policy meanwhile has gone totally parabolic in the past few years to $1.6m, now comprising 10% of the entire U.S. economy.  It has reached ludicrous proportions that were unthinkable 8 years ago, let alone 30 years ago when the deficit first became an issue.  For a glimpse into the U.S. future, cast an eye to Europe as multiple sovereigns teeter on the precipice and interest rates ratchet ever higher.  No one today honestly believes that the U.S. will be saved from the same default/bankruptcy fate, yet few ponder the magnitude of the economic impact from such an event.  10% of the fucking economy !  Gone, overnight.

Life after heroin

Herein I attempt to quantify the economic impact that will result as a result of both fiscal and monetary policy failing over the course of the next few months, years:

First the baseline and assumptions - the official unemployment rate is 9.2%, while the unofficial rate is 16%, so to be conservative, I will use 10% as a baseline.  I will also assume that each 1% drop in GDP, translates into roughly 1% drop in employment which is more or less consistent with past recessions, if not slightly conservative.  

First take out the deficit which as indicated above equals 10% of the economy.  

Now on the monetary side, imagine a run on the banks and resultant liquidity crisis culminating in a "cash only" economy in which all payments are made in cash.  Credit is the lifeblood of the economy, so imagine a situation where businesses can no longer borrow to expand.  Where consumers can't/won't borrow to buy a car, a fridge a house.  How much will that take out of GDP?  I will say very conservatively for the sake of argument, 10%, although it is likely much higher.

Now increase the savings rate, because the first thing consumers do is retrench and stop spending.  Conservatively, that could take another 5% out of the economy.

All told, that equals a 25% reduction in GDP, assuming a 1:1 economic multiplier i.e. no downstream ripple effects.  Generally when a $1 of income is added or subtracted exogenously to an economy, there is a multiplier effect as that dollar gets spent and then the receiver of the dollar spends it again etc.  

So, under the above relatively conservative scenario, GDP is reduced by at least 25%, leading to a total unemployment of (10+25) = 35%, which definitely gets us to the no job, no house, no retirement scenario for the vast majority.  Don't worry about Social Security and Medicare, they will be obliterated.  This is No Country for Old Men.

Not a Game

My point in doing this exercise was not to scare the hell out of everyone, although I am sure I did.  The point is that this is not a game.  The consequences of this current economic fiasco will be devastating to the majority of us, in our lifetimes.   Clearly the goal is to survive, not to thrive.  This blog is not intended to show the way to undiminished riches while we watch neighbour chilren eating out of our garbage cans, as we stand in the comfort of our well guarded castles.  There are plenty of blogs around telling us how to mint coin while everyone else is going bankrupt, however, I question the veracity of their claims let alone their motives.  

And the goal here is not to plan out the next 30 years, but to literally survive the next 5 years, because for most that will be the critical make or break period of time.  Those wiped out early will not "survive" economically to get to the other side of this fiasco where one could arguably begin to prosper again.  The economic consequences and fallout - health, family etc. will be far too devastating.

Survival Strategies (Invest at your own risk)

There are no guaranteed safe assets at this juncture.  I have written in detail about my preference for U.S. Treasuries, so I won't elaborate here, but suffice to say that during the deflationary phase, I still believe Treasuries to be the safest investment.  I am not advocating a buy and hold approach to any asset class, so while Treasuries may work for a while (months? years?) at some point they will fail catastrophically.  For those, who say my above default thesis is inconsistent with holding Treasuries, I say it's about a question of timing and surely making the wrong move at the wrong time could be fatal.

Holding plain hard cash is a good option, but is not viable in large quantities or to protect retirement assets and it's risky from a storage standpoint.    Some amount though makes sense.

For those who want to hedge against the stock market, one must consider counter-party risk; however, a long term put option against the stock market or ETF (e.g. QQQ) can be a good way to hedge large amounts of assets.  The counter-party risk of an option is the options clearinghouse (e.g. CME), not the moron who sold you the put option.  Just hope that the CME  does not go bust.  You also need a brokerage account to trade options.

A way to hedge 401k retirement accounts is to use inverse ETFs (QID, BGZ etc.), although these reset constantly, so in back and forth volatile markets, over long periods of time you can actually lose money, even while being directionally correct.  This phenomenon is called beta slippage.

A very good strategy for maintaining short exposure is to use leveraged ETFs in tandem e.g. 60% long QID (ultra short) and 40% long QLD (ultra long), this gives you 20% net double short exposure.  The advantage v.s. owning 20% QID and 80% cash, is that the 60:40 strategy has convexity around the buy price meaning that gains compound positively while losses compound negatively.  This is a fancy way of saying you can make a lot and only lose very little.  With this strategy, you should rebalance 60:40 after big moves, otherwise you will give up much of your gains on retracements.

Same thing for buying a put option - when you are in the money, you need to sell, as bear market rallies can erase gains very quickly leaving options worthless.

As for gold, always some is advisable.  The easiest way to play is buying GLD or one of the other gold  ETFs.  

Don't forget a multi week supply of food, as there could come a time when store shelves are empty and the supply chain breaks down; although I believe shortages will be intermittent.

Good luck, we all need it.

Fiddling While Rome Burns

No surprise, today's jobs report for the month of June came in at only 18k against Wall Street expectations for jobs north of 100k.  The stock market puked on the news, yet remains near multi-month highs, as the billionaire jet set continue to turn a blind eye to the total disintegration of the Middle Class.  Despite all of the hyperbole though, stocks remain at levels first achieved back in January, 1999, 12 years ago.  Ho hum, what's new - anyone heard from the Backstreet Boys lately?

Meanwhile, in other news, the Wizard of Bernank recently declared victory for Monetary policy and wrapped up Quantitative Easing (v2.0) as of June 30th.  Unfortunately, as indicated by the punk job number, the economy is now sliding back into recession, giving lie to the assertion that "Quantitative Easing" did anything other than shaft the Middle Class, further enrich Wall Street, and otherwise propagate the illusion of bank solvency for the past two years.  At this juncture, short of dropping cash from helicopters, monetary policy is essentially out of ammo and more importantly out of credibility, considering that interest rates at 0% for two years straight and two rounds of money printing have culminated in a net 18,000 new jobs for June.  More than any other policy measure, Monetary Policy is the catalyst for renewed economic collapse, following 40 years of monetary expansion, leading to an accumulation of debt to 4xGDP when summed across all constituents in the U.S. economy.  Mission Accomplished.

Over in fiscal policy fantasy land, the Idiocrats of the day continue to rearrange deck chairs on the Titanic as Democrats and Republicans pretend to care about the size of the debt and deficit.  No one is really paying attention to this latest drama, least of all the Treasury market which is holding its own, albeit off recent highs (low interest rates), yet only slightly above historic lows in interest rates.  No one really believes these prostitute politicians will stop borrowing money to pay their special interest groups, much less fuck around with Wall Street by raising the "risk free rate" which would tank the stock market and obliterate mortgage interest rates.   Given that the debt ceiling has been raised 74 times since 1962, one gains some perspective around this latest theater of the absurd.  Obama is toastie toast for 2012, as 18k jobs is his death knell, a la Bush Senior circa 1992.  There are 7 million fewer jobs now than there were in 2007 ! That sets up an any-Republican-who-can-fog-a-mirror scenario, giving the right-wing base full leeway to turf the genteel Mitt Romney's of the field and go with a more "extreme" candidate.  Think about it.

Over in Euroland things only get progressively worse, despite Greece receiving its Bailout v2.0.  Reminiscent of last year, now Portugal is next in line for yet another bailout.  Meanwhile credit insurance (credit default swaps) for all of the debt-impaired Euro zone nations remain at record highs, meaning the market is calling the bluff on Europe's extend and pretend bailout strategy of throwing good money after bad.

Yet, for all that, apparently we are now on the verge of a new "super bubble" .  This article perfectly captures the zeitgeist of the moment, especially for the Greedbots on Wall Street.  Cody admits that the economy is in shambles, current policies will be a disaster in the long run, and the average household is essentially a non-performing asset, yet dammit there is still a ton o'money to be made !  Apparently, these disconnects from reality can go on for quarters, years, ney decades!  (Let's ignore the fact that there has been a disconnect from reality for years already).   So this GenX former hedge fund manager says to the 2% of Americans who still have any discretionary capital available - get out there and take full advantage of this fucked up situation!  Or, in his words, current conditions are "WILDLY BULLISH" for the stock market.  Unfortunately, he does not elaborate on any sort of exit strategy, but that is assumed to be a detail.  Nor does he quite explain how the 5th generation of iPhones will bring about the next Tech bubble a la Nasdaq 2000, but aside from that, one is to assume it's a plausible scenario...?

Unfortunately, the only bubble right now is in greed, stupidity, and denial, and yes it is the Mother of All Bubbles (MOAB).

Deflation is Dead, Long Live Deflation

Today was the Federal Reserve's scheduled meeting to set interest rate policy.  The meeting itself was largely a non-event i.e. interest rates will remain at 0% indefinitely - same as the past 2 years.  With respect to Quantitative Easing aka. printing new money without an exit strategy, the Fed stood firm on winding down QE2 at the end of this June.  Bear in mind that all of the assets that the Fed purchased during QE1 and QE2 will remain on the Fed's Balance sheet indefinitely (forever).

Much more important was the Wizard-of-Bernank's Press Release following the formal meeting, during which he stated that "we no longer have a deflation risk" (i.e. thanks to QE2).  

There you have it, the ultimate capitulation - the Fed is giving in to the Tea Party Inflationist Gold Bugs who are convinced that hyperinflation is imminent.   This is a political capitulation, because from an economic standpoint, by its own admission, the Fed has no clue when or if the weakening economy will recover and also admits that the Housing sector is in renewed decline !  How do they then reconcile these two view points, that the economy and key sector is weakening and yet that deflation has been averted ?  It's logically impossible to maintain these two beliefs simultaneously.  More importantly, in stating this position, the Fed is saying "Mission Accomplished" and hence ensuring that the extraordinary measures taken to avert deflation (QE1 and QE2) will not be repeated.  This is a major nail in the coffin for the economy, for housing and for the risk markets.

Unfortunately, not withstanding the Great Wizard, the three generations since the Great Depression have forgotten the risks of too much debt and the inevitable deflationary consequences.   There is absolutely no exit strategy for a debt laden economy in which total debt has reached a multiple of GDP, as it has for most of the Western nations (U.S., Canada, Europe, Japan etc.), other than via liquidation, bankruptcy, foreclosure and default.  All of our accumulated debt represents years of inflated consumption and hence inflated GDP giving us all a sense of financial well being that is totally unsustainable.  And of course, beyond Peak Credit at the point of recognition, the economy will revert back to its sustainable level which will be many percentage points lower than it was at the apex of spending and debt accumulation.  Adding in the devastating effects of outsourcing and the liquidation of locally owned businesses, and any transition strategy becomes even more unattainable.

Up until now, all Central Bank machinations - interest rate manipulations, various lending programs, asset-buying programs etc. have had one goal which was to save the credit markets and prevent lenders from pulling back from the markets.  However, the global credit market is roughly $50 trillion in magnitude and therefore well beyond the scope of any Central Bank to manipulate indefinitely.

In the age of "Wrong is Right and Right is Wrong", therefore, we need to invert the Wizard-of-Bernank's statement to understand its true meaning, that deflation has not been averted, and is in fact already underway.

Clowns to the Left, Jokers to the Right

Anyone who for a moment doubts my overall Collapse thesis, is in COMPLETE denial.  One need only look at the assembled corrupt morons running the U.S. these days to realize the depth of the looming abyss.  The salesman-in-chief Obama spent the day running around with his birth certificate trying to prove that he really is American.  And these Birther morons never stop to think of the outward impression given of a country that is hell bent on proving their own duly elected leader is a foreigner.  Imagine if he were impeached for being foreign, after having served an entire term as President - there is absolutely no upside in that scenario for anyone, not even a fucking banjo playing, hill billy, slave owner.  The Taliban would take one look at the U.S. and say ok, the American Idiocracy has collapsed, time to sack Rome.

Speaking of Birthers, the mere fact that Donald Trump is now the front-runner for the Republican Presidential nomination is a sad testament to the dearth of leadership talent at hand.  No one has bankrupted more businesses than this self-promoting, wind bag dilettante.  

As far as total incompetence and corruption, no one can beat the Federal Reserve and its bullshit-spewing Chairman, Bernanke.  Today he gave a press conference during which he declared that Quantitative Easing (Monetization of Debt) has been an unmitigated success.  After that, reporters threw softball questions at him, assiduously avoiding any question that would definitively prove that the Chairman is either a liar, a moron, or likely both.  As proof of the success of QE2, Bernanke did not offer any benefit to the economy itself, only saying that the stock market had gone up.  You mean to say that the stock market benefited from interest-free loans made available for short-term financial speculation?  Who would have guessed?   He also expressly denied any connection between QE2 and commodity prices - in other words the Chairman of the Federal Reserve claims no practical knowledge of supply/demand and futures arbitrage.  The most mind-boggling thing the Bernank said though is that he won't raise interest rates until wages start going up i.e. He is ok with the cost of living going up, but dammit, once the Middle Class starts making more money, then the party is over !!!  What a jackass.  And of course everyone in the room just nodded in agreement with the Great Bernank - not one person questioned his contorted logic.  

Based on their lack of basic financial literacy, one must assume that the media in this country are equally incompetent or dimwitted for not holding these corrupt Idiocrats accountable.  So here are a few graphs to illustrate poignantly just how badly QE2 has damaged the real economy and the average Middle Class taxpayer.

All of these graphs illustrate the net price change since QE2 was announced in late August, 2010 including the subsequent period when it was implemented in November, 2010.

Crude Oil:

Gasoline:

Interest Rates (Including Mortages which are tied to Treasury yields)

Food:

So by his own admission, the only thing not allowed to go up in Bernanke-Land, is wages.

Monetary Policy has systematically destroyed the Middle Class, by inflating asset bubbles and encouraging debt accumulation.  Case closed.  Bernanke is just another Wall Street Bukkake whore, and the media are the chimps watching the show.

Geopolitical Anarchy and Strife Surging

As the financial markets ratchet ever higher powered by high risk leveraged carry trades and sponsored by Fed liquidity, the real game for the moment isn't the markets or economy (yet), it's on the geopolitical side where things are really heating up.  Here I thought it would take the Mother of All Crashes (MOAC) to bring on geopolitical anarchy, but now it looks like the reverse - geopolitical anarchy will spark the MOAC.

Let's see, turmoil across the Middle East - most notably Yemen, Bahrain, Syria.  The Palestinians and Israel are going at it again - ok, that's not really news.  Let's not forget Iraq and Afghanistan, though they seldom appear in the news anymore (Mission Accomplished).  And yet, 2010 was the bloodiest year in the past decade in Afghanistan.  In a sign of how the geopolitical deck is getting reshuffled, Iran just sent warships through the Suez Canal for the first time in 30 years, to rendezvous in Syria. 

North Africa has seen major uprisings and "regime change" in Tunisia, Algeria, Egypt and of course Libya.

Nuclear armed Pakistan is an UNMITIGATED DISASTER and arguably the most dangerous country on the planet.  An estimated 30,000 people have died in the past four years due to terrorism.  That's the equivalent of ten 9/11s for that country...

What's going on with North Korea these days?  They shelled South Korea last Fall but lately they've been so quiet...

Today we can add in Chinese food riots, blocking Shanghai's main shipping port...

Mexico has devolved into an ultra-violent narco-state with new victims and killing fields springing up daily.  

Japan, amazingly, despite its triple disaster, seems to be calm, cool and collected for the moment.  As much as I respect the Japanese for their stoicism, I think in some ways they are too complacent, as the handling of this nuclear disaster has been an unmitigated fiasco.  No surprise, the Paid-to-be-Optimistic Industry "experts" have been consistently wrong in underestimating the severity of the crisis.  I can't imagine what it's like to live in Tokyo only 250km from four out-of-control nuclear reactors.  Comfort Seekers, no less than 8,800 km away in California, were shitting their pants and loading up on iodine.   Unfortunately, the stoic Japanese are like frogs in boiling water, and as the British would say, the water is "hotting up".

I know, there are plenty of other skirmishes going on in other parts of the world, but these are the highlights.  Taken in isolation, any one of these issues, might not be so bad, however, what we are witnessing in real time is the inevitable global trend towards increasing anarchy and strife as the Globalized Ponzi Scheme begins to unravel.

Unfortunately, most of these peoples and countries vying for regime change have no experience with implementing or maintaining a stable democracy and its corresponding institutions.  Which likely means many will be soon overrun by military strongmen, religious fanatics, violent anarchists or some Frankenstein's hybrid of all three.

The interconnected globalized supply chain has only made this geopolitical dry tinder box that much more lethal.  It used to be that food supply and distribution were localized and jobs were less specialized - most people had a variety of skills that were conducive to basic survival.  Not any more.  It's hard to imagine how the average urban/suburban dweller will deal with multi-day, multi-week potential disruptions in the food supply.

Despite the Idiocracy's prevailing sentiment of oblivious complacency ("where's the remote?"), we have entered the most dangerous time in human history.  But you don't have to take my word for it, because the signs are everywhere.  Lest we think our policy-makers can handle what is coming, one need only recall the anarchy that ensued after Hurricane Katrina and then magnify by 1000.

 

Humpty Dumpty - Reality Delayed, Not Denied

Via Quantitative Easing (Monetization of Debt) the Federal Reserve has continued to delay the inevitable Deflationary Collapse.  Every week, the Fed enters the market to buy Treasury bonds and thereby incentivize speculators to take more short-term risk.  Bernanke is the prototypical Baby Boomer - willing to propagate any mechanism of instant gratification, regardless of longer-term consequences and inevitable consequences.

Welcome to the Hotel California

Similar to the Nasdaq in 2000, Housing in 2005 and Commodities in 2007, the additional Fed liquidity is funding speculation, which by definition disconnects prices from their underlying fundamentals.  Any time the price of an asset, financial or tangible is inflated beyond its intrinsic value, then the day of price "re-adjustment" becomes inevitable.  The Fed has absolutely no exit strategy for all of this liquidity.  When the inevitable moment arrives when the last fool has bought the last share, then everyone will be exiting out the same door at the same time in a stampede to take "Risk Off".  Hedge funds don't care, because their incentive is to take risk with other people's money.  They don't get paid to sit in "cash" earning 0% interest.

Echo Bubble

The latest manifestation of speculation is in precious metals - gold and silver - as gold is at a historic high and as I write, silver is closing in on its $50 all time high (~$44 currently).  Some commodities have also hit new all time highs (e.g. cotton), but most are below their 2008 highs, when they were also driven by speculation and loose monetary policy.  Amazingly, crude oil (WTI) is still well below its 2008 high of $147/barrel despite spreading unrest in the Middle East and ever-tightening supply/demand dynamics that become progressively worse over time.  Last week, the Saudis announced they are cutting oil output and the price of oil DROPPED on the news - showing the huge disconnect between supply/demand fundamentals.  Essentially, the Saudis were calling the market's bluff and the market folded. i.e. due to futures arbitrage there is a tsunami of crude waiting to come onto the spot market.  Of course stocks (S&P 500), in their own mini echo bubble - and despite all of the CNBS hyperbole, are still only at prices first crossed 12 years ago back in April 1999.

Deja Vu

We already know how this all ends, because we've been through several iterations.  The cycle of stupidity is repeating in an ever-tightening noose - each iteration shorter and shorter in duration.

Current events are eerily similar to the events leading up to the 2007 market peak and 2008 crash.

Back then, I said that the inevitable credit/price deflation was temporarily pre-empted by a bout of stagflation.  Then as now, Federal Reserve machinations had caused a spike in commodities and interest rates that was strangling the Middle Class:

"It seems that my Liquidity Trap scenario has already been preempted by a transitory Stagflation scenario, which has rendered the Fed's latest round of rate cuts impotent..."

...

"These higher borrowing costs in combination with higher costs for food, energy, clothing, medicine, tuition...i.e. everything, is putting the squeeze on already highly leveraged consumers."

...
"As a post script, I would add, don't worry about this recent bout of stagflation. The deflationary spiral will soon enough obliterate commodities and any other bloated remnants of the great credit bubble."

Hindsight being 20/20, we now know the economy was already well into recession.  We also know that inflation/stagflation was as indicated, very much transitory soon to be followed by the hyper-deflationary 2008 credit collapse.  

I expect the exact same sequence of events this time around, except the Fed will not be able to re-instantiate the illusion of solvency i.e. banks and brokerages will be obliterated with no attendant bailouts.

Road Map Revisited

A few months ago I published my roadmap for Deflationary collapse.  This model is still very much intact.  Below is an updated version showing our progress to date we are at step (3), as interest rates have indeed risen, albeit nowhere near the extent to which one would have expected:

So the next likely set of events is a wave of sovereign defaults, as interest rates across Europe continue to rise, increasing the debt burden on struggling economies (Greece, Ireland, Portugal etc.).  This wave of defaults will make 2008's credit crisis seem like a picnic.

Contrary to my prior concerns, I now see the prospects for an outright U.S. debt default to be essentially zero.  These newly minted Tea Party politicians have now proven they cannot even cut $60 billion out of a $3.7 trillion budget i.e. a mere 1.6% !  Outright default means foregoing that portion of the budget (~$1 trillion) funded by the deficit i.e. 30%.  How the hell are these politicians going to part with 30% of their beloved Special Interest feed bag (aka. budget) when they can't even scrape together 1.6%?
 All of this budget hand wringing is strictly political posturing.  The continued Fiscal Stimulus paired with Quantitative Easing is in place for the foreseeable future, especially when the "Big One" takes us back into the realm of Extreme Deflation, as indicated on the roadmap above.

Threading the needle

There are NO 100% SAFE INVESTMENTS at this juncture.  There is no guaranteed store of value.  The dollar as we know is worthless paper that can be printed at will.  Gold and silver have whatever value the next fool is willing to pay for them - they have no intrinsic value or utility (silver has some industrial use, but not enough to justify current valuations).  I see silver and gold being the new Nasdaq, circa 2000 i.e. we don't know when they will crash, only that they WILL crash and that most greed-addled speculators will lose their money.  If/when hyperinflation becomes a true concern, then gold and silver will be key assets for wealth preservation, however, per the model above, we first need to dispense with all of this debt (via credit deflation) because it is weighing down the economy and making sustained hyperinflation essentially impossible.  Farm land, assuming you know how to farm (I don't), has perhaps the best enduring value, but that does not mean its price can't fluctuate wildly, or that you want all of your money tied up in an illiquid asset, or that you want to live in the sticks surrounded by demented hillbilly Militia Men.

Treasuries are the nearest form of cash short of dollars buried in your backyard
Treasuries which also can be printed in seemingly "infinite" supply are still the most liquid investment, and in a credit deflation, liquidity and nimbleness will be critical.  From an institutional standpoint, U.S. treasuries are still the only viable safe investment.  Institutions cannot "go to cash", because taking $400 at a time from an ATM machine is not an option.  Most people who think they are "in cash" in their retirement accounts are actually holding Money Market funds which consist of a variety of short-term credit instruments, many of which have inherent, if not acknowledged, default risk.  There is no option to hold physical cash in a brokerage account i.e. no stash of dollars sitting in a vault with your name on them.