That Minsky Moment

As my depiction of the Idiocracy would predict, today's thought dealers (politicians, economists, media infotainers) have an infantile obsession with avoiding the truth and reality.  So we ask, what would it take to get our policy-makers to face reality and begin to craft some realistic long-term solutions to these economic problems?

Waiting for the Minsky Moment
We have what I would call a Wile E. Coyote economy that has run off the cliff and is suspended (temporarily) only by Central Bank liquidity programs.  All we are waiting for now is the Minsky Moment.

Fools and their Money

[Updated: March 25th] I had to update this post, because I just read Barry Ritholtz's comments in Barron's and I almost shit a brick.  He says that the Bears need to "put up or shut up" i.e. the onus is now on us bears to prove why this rally could end.  Excuse me?  Are we living in some sort of parallel universe here?  All you have to do is look at the first chart below to see that the market is still lower than it was 13 years ago.

Idiocracy Mortgages Its Own Grandchildren

This just in, the Idiocracy just mortgaged its grandchildren to pay for (the past) four years of Extend and Pretend.


And now for the price tag:

Deflation #Winning !

(Sorry couldn't resist the Charlie Sheen reference.  Now, he would be the perfect official spokesman of the Idiocracy).

As you know, I like charts a lot, because they are objective, and therefore preclude me from for example having to watch CNBC with the sound turned on, and other excruciating experiences.  In my last post, I mentioned some key divergences in the markets that bear watching closely.  As always, I am looking for data points that either confirm or refute the deflationary crash thesis.  Right now, stocks are pointing strongly toward a reflation of the economy.  However, more than any other market, the stock market is the key (short-term) barometer of social mood, therefore it's volatile, emotional and prone to manipulation.  Other markets are less speculative and therefore can serve as reliable indicators of what is really going on in the economy.

Dispatches from the Idiocracy

Anyone assimilating the facts from this blog or any other source of reality has to find some way to reconcile society's pervasive complacency in the face of economic annihilation.  The only way this is possible is to dissect and understand the zeitgeist of the time - or what I call The Idiocracy.

Hotel California

Excellent article on ZeroHedge regarding the total amount of liquidity added to the markets just in the past 3 months.  Once one adds in the effects of earlier Central Bank monetizations, the total figure is $7 trillion of newly printed money having levitated the markets!  And everyone thinks that the markets are going up because the economy is getting better.  The economy is not getting better.  The U.S. government is borrowing 10% of annual gdp to obtain a 2% growth rate !  Yet the Idiocracy at large, which can no longer do basic math, has bought into the fantasy.  From economists, to the media, to the general public - no one questions this strategy.  Borrowing 10% of income to grow the economy by 2% - where the hell did the other 8% go?  It went to pay for a way of life that is no longer (never was) sustainable. It's also being used to get Obama re-elected, by supporting the illusion formerly-known-as-the-economy for yet one more year.   But don't worry, because Mitt Romney says he will cut taxes even further, because apparently paying for 2/3 of the Federal Government (borrowing the rest) is too much for taxpayers.  You can't make this shit up.

Credit Collapse Is Inevitable

While watching Bloomberg Asia this evening, I realized that every other message on the news ticker bore some connection to the impending (2nd) Greece bailout.

"Gold, stocks may fall once Greece deal approved"

"Bombay stock futures fluctuate ahead of Greece deal"

"U.S. stock futures up on word of pending deal" (I know, somewhat contradicts the first headline above)

"Soybean futures volatile ahead of Greece deal"

You get the idea.  With headlines like that, anyone who doesn't acknowledge the breadth and interconnectivity of the global Ponzi economy, is in major denial.  Greece is a country of a mere 11 million people out of 6.8 billion, yet the solvency of just that one tiny country is literally driving global asset price fluctuations, valued in the trillions of dollars.  And the primary reason for that power is leverage.  The globalized system is now so leveraged from Central Bank liquidity injections (QE1, QE2, ECB LTRO, Chinese RRR etc.) that small fluctuations and repricing in the nether regions of the global risk markets can cause massive, outsized reverberations across the entire globe.  Imagine, a global financial system that now requires the ongoing fiscal prudence of the Greeks, in order to maintain its stability!!!  (no offense to any Greeks, but that's a lot of responsibility).

In a liquidity driven environment, disconnected from underlying fundamentals, all asset correlations move to 1:1 and asset allocation decisions become binary:  Risk on.  Risk off.

And the real problem therefore is that Greece is not alone.  Greece is just one of dozens of countries globally that has borrowed itself beyond the point of no return (including the U.S. which is somewhere along that line).  Meanwhile, the fiscal cut backs (austerity measures) being forced on Greece make default absolutely inevitable, by exacerbating the economic downturn and reducing tax revenues.  (Not to say that there is any long-term option, other than default).  So Greece is only the first domino in a long series.  Once that domino holds or falls, the markets will rush towards the next domino (Italy? Portugal? Spain? Hungary?) and await the fate of that country's bail out.  Like a gun pointing at the head of the entire financial system.

Therefore, if global asset markets valued in the trillions of dollars are now so fragile as to be heavily influenced by some of the smallest and least fiscally prudent nations on the planet, then we have truly reached a stage where it won't take much more than for a butterfly to flap its wings in <Insert Country Here> to set off a global credit run.

ICARUS

Some may be wondering if I am reconsidering my overall doom and gloom stance given the spate of recent good news.

No chance.  Recent events and the crowd's group think bullish/denialistic interpretation thereof, have me only further emboldened.

First the (perceived) "Good news":

1) U.S. economic recovery perceived to be picking up steam

2) DOW back at the highest level since 2008

3) European issues, seemingly resolved for the moment

4) Occupy Wall Streeters settled down for a long winter's nap

1) Economy:

First, this can't possibly be considered a sustainable recovery from a debt crisis, when we are adding ever more debt to the pile to sustain that illusion.  This time, instead of consumer debt it's Federal government debt, but it's still money we are borrowing  from the future to pretend that we are wealthy today.

Suffice, to say that if policy-makers since World War II had been willing to borrow as much money (10% of GDP/year) as the current crop of clueless buffoons, then there would have been no recessions in the past 60 years !  Think about that, we could have just papered over every single recession with massive government borrowing and pretended they never happened.  So, any notion that the 2008 recession ever ended is complete denialism.  Believing that the U.S. will be the first nation in history to borrow its way to prosperity is a fool's errand of the highest order.

Meanwhile, on the jobs front, there are still 5.6 million fewer jobs today than there were in 2008, in the face of ongoing population growth.  Only an economist would say we are in a recovery when the average family is worse off now than it was 4 years ago.  

2) Stock Market:

This has been a purely liquidity driven market since 2009.  It's like a race car on nitrous oxide -  good for a few seconds and then it blows the engine.  First QE1 powered the market, then it was QE2 and now it's the ECB's "bazooka". All of these Fed/ECB programs are just central banks adding trillions of dollars and Euros of liquidity into the markets by buying government bonds.  This in turn drives down interest rates and sets off a global "hunt for yield" aka. rally in stocks and other risk assets.  It's a temporary illusion driven by liquidity but not supported by solvency.  Case in point, these Greek "bailouts" will do nothing to improve solvency.  The German government lends the Greek government ~100b euros and forces the Greeks to cut spending.  The Greek Gov't then turns around and uses the money to repay German banks on existing loans.  All the while, the Greek people are now on the hook for another 100b euros and their economy is spiraling into the abyss as the paradox of thrift takes a death grip on their economy.  The only ones being bailed out are the German and other European lenders.

Exhibit A: Effect of Fed/ECB on stock prices

Exhibit B: Apple - the bellwether stock of our time.

As you can see below, this past two weeks, Apple's stock went parabolic and surpassed $500/share and the half trillion market cap mark.  The last technology stock to surpass the half trillion mark was Cisco in March 2000.  I remember it well, because it occurred within days of the all time high in the Nasdaq.  It's not to say that there is anything magical about 500 billion market cap, but Apple's vertical stock price and the valuation accorded to the pending Facebook IPO (100x earnings) are harking back to the lunacy of the Dot Com era.  No thanks.  Been there.  Done that.

3) Europe Resolved

As I said above, "Extend and Pretend" are the order of the day.  The Exhibit A chart above shows the ECB just juiced the market to buy itself some time.  The only question on the table is how long will this rally last?

4) Occupy Wall Street settled down for a long winter's nap

Spring is around the corner...

The Idiocracy Swings

To fully gauge the Zeitgeist of the Idiocracy, just mash-up Wikipedia with South Park.  It's phony knowledge a mile wide and an inch deep, married with a crass cynicism that can't get out of it's own fucking way.

Daily we are pounded with contradicting messages, dulling the mind and senses.  Nihilism and subjectivity are the orders of the day.

Attenuation

The (very) temporary lessening in volatility.  I talked about it here.  Since then, the risk markets have ground higher, giving us this latent cluster fuck:

As you see, I moved the green "2" to the right.  Elliot Wave purists may disagree with this labelling, but the conclusion is the same - a low volume rally, wedging higher, with no underlying support.  Look at volume in the bottom pane - no conviction.  These are hedge funds that missed their year last year, and have to make up for it this year.  The general consensus is go "all in" now, because if you don't, you may lose your investors, whereas if if the market tanks, you have 11 months to make up the losses.  Like I said, a hedge fund is a giant call option - heads they win, tails you lose.

The low volume backs up the fact that the average (real) investor no longer trust the market, hence mutual fund outflows for multiple months in a row now.  

Meanwhile, we have geopolitical risk at its highest level in history - across the globe, a tinderbox.  We have politicians who lie non-stop and a general public that desperately wants to be lied to, about the future, the economy, the environment - basically anything requiring effort to fix.  You see, the Baby Boomers are in their final approach to retirement, and they don't want anything, including reality, to delay their golden years.  Meanwhile, the latest economic theories have been duly reconfigured to advise us that printing money really is the best way to fix the economy.  I guess the Founding Fathers forgot to mention - "Fellow Americans, when in doubt, print more currency...the Constitution is hereby complete".  Sounds really stupid, until you realize that it's what the Fucktards of the day have been doing and are now looking to increase.

Riskiest time in human history, bar none.

Yet for all that, Barry Ritholtz, tells all of us ("apocalyptic") bearish forecasters to stop blogging - we are too repetitive and more importantly it's a new bonus cycle i.e. time for Barry and his hedge fund brethren to Tebow another fat pay check.  Therefore, all of us realists doomers, need to settle down and get with the program.  Barry's claim to fame is riding around the Hampton's checking out all of the stores firsthand to see how the American economy is faring.  It's hard to see how this guy could be out of touch with reality.

Ok Barry, I will make this deal - I will stop blogging until my market prediction bears out and the Ponzi collapses like a cheap tent.  After which, I fully expect you and all of the other bloated 1% Comfort Seekers to run and hide away and shut the fuck up for good.  Whether you want to, or not...

2012 - The Year of Living Dangerously

I should start by saying Happy Holidays, but I know that most working Americans (i.e. the ones in retail) no longer get holidays.  They work before, during and after each holiday.  But as long as the top 1-10% can take time off without working, then I guess it all makes sense...???

Meanwhile, I am starting to think the Mayans got it right.  Coincidentally, I was at a Mayan temple on Wednesday last week, during a family cruise vacation (yes, I suppose I am in the 10%...).  According to our taxi driver, most of the indigenous Mayans believe the 2012 prophecy, so I have to evince sympathy for the typical five year old Mayan who is told this will be his/her last year to live.  In any event, it was certainly eerie to be in and around the temples a week after the beginning of Mayan 2012.

The cruise itself was a microcosm of the global economy that I so endearingly liken to a late stage Ponzi Scheme.  There were several thousand bloated Westerners having every whim attended to by legions of underpaid slaves from the Third World.  "Budi" our cabin attendant from Indonesia works 8 months on and 2 months off.  He gets zero time off during the 8 working months.  Each cruise is back to back, Saturday to Saturday and each day is a 12 hour shift.  Like me, Budi has 3 kids, except he sees his about once a year.  It's a no win situation - either to work like a slave and make a "decent" sum (by Indonesian standards) but only see his family once a year - or, live locally and subsist, at best.  What a great economic model we've evolved to at this modern age of 2012.  The robber barons of old had nothing on the current economic fiasco we call the global economy.

Meanwhile, I have never seen so many fat fucking lumbering elephants in my life as were on this cruise.  Fat kids, fat teenagers, fat 20-somethings and fat every other age.  Human toxic waste dumps.  One "fat back" even had a toxic waste symbol tattooed in the middle of his back, so I had to give him points for at least being honest.  Each of these mammoths would eat in one sitting what the average African villager would eat in 3 weeks - then wash it all down with gallons of alcohol.  If I could some way chart the obesity epidemic, the chart would be going parabolic.

Speaking of stocks, to no big surprise, Wall Street finished the year without major collapse, ensuring once again decent bonus pay packets for the banksters and speculators.  Bizarrely, the market (S&P 500) finished at exactly the same level as last year i.e. it was flat year over year.  And for those calling for my resignation for having been too bearish this past year (and the one before), you can forget about it.  The market is still at a level it first passed in 1999, so it's been 13 years to nowhere.   At this rate, I can just keep going on huffing and puffing, because at best the market just gyrates up and down going nowhere - and at worst it will eventually conform to my expectations and drill for China.  In other words, contrary to the copious optimists of the day, time is on my side, not on their side.

The Emperor Has No Clothes
I also admit that I never thought that the Fed and ECB would openly print money/monetize debt in broad daylight without the credit markets having a major conniption (i.e. sovereign interest rates have remained sanguine).  This is the ultimate case of the Emperor having no clothes and no one wanting to openly admit it.  As I have said many times before, everyone is in extend and pretend mode - politicians, banksters, investors, media, economists.   Those few who are not in extend/pretend mode, apparently can't do basic math.

Like all Ponzi schemes, this one will eventually collapse.  Will we be sitting here 5 years from now still printing money to propagate the illusion of an economy ?  It seems improbable.  Like all Ponzi schemes, this one has the same attributes, it's neither sustainable nor scalable.  It's dependent upon an insane transfer of wealth from developing (aka. poor) nations to the wealthier nations - which are now consuming 110% of their own GDP.  The scheme is dependent upon the illusion of future prosperity for the poor at the bottom of the pyramid who dream of one day attaining a better way of life.  But that illusion is already frayed, and is fraying more with each passing day.  We are in overtime.

My predictions for 2012:

1) Final collapse of the Euro currency leading to unprecedented global economic turmoil

2) Deep credit deflation, price deflation, economic deflation

3) Gold/silver/commodity collapse

4) Flight to U.S. dollars/U.S. Treasuries (invest at your own risk)

5) Global unrest/anarchy - no place to hide

Advice: Follow the ZeroHedge/Anonymous Survival Guide

Happy New Year.