Sunday, August 28, 2011

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:

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.

Thursday, August 4, 2011


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.