p.s. You Can't Stop a Ponzi Scheme from Collapsing

I guess I should have mentioned that fact earlier, but I thought it was obvious.  Apparently our child-like policy-makers didn't get the memo.  Sure, they can, and have, slowed the initial rate of collapse, but eventually the crushing weight of accumulated debts becomes overwhelming and collapses the economy.

High Frequency Infotainment

And I realize that all of these High Frequency Bureaucrats (HFBs) need to get re-elected;  however, all that time they waste running around day after day inventing new hopium ideas to pump up global markets is the clearest indication that no one is spending any time rebuilding the real economy.

China: Polishing the Rotten Apple

The major news this morning was that overnight, China had cut interest rates for the first time in four years i.e. the last time was during the Lehman debacle.  Markets rallied strongly on the news, but then the rally fell off in late afternoon as gold in particular tanked following Bernanke's press conference in which he did not hint at another round of debt monetizations (aka. QE3).

Globalization is Dead

Updated  5/1/2012:  Of all my posts over the past 5 years, this one gets the most consistent hits, no doubt because it becomes ever more relevant with each passing day.  So, I am dusting it off and moving it to the top of the list again, as time is running out on the Grand Ponzi...

The Illusion Formerly-Known-As-The-Economy

One chart to rule them all

This chart (below) of U.S. Federal Government debt says it all.  

It took 229 years, from the founding of the country to 2005, for U.S. Federal debt to reach the $7.75 trillion mark (which by coincidence is roughly half of GDP).  In just the 7 years since that date, the debt has doubled again to $15.5 trillion (as of this writing): 

And as you can see above, the red extrapolation into the future shows that the debt will be triple the 2005 level within just 4 more years.  So the debt accumulation ratio is 229:7:4 [single:double: triple] i.e. the debt accumulation rate is still accelerating and yet the economists tell us that the economy is recovering !  Politicians at the behest of their rent seeking special interest groups are borrowing the country into oblivion.  

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The chart below shows long-term debt history (extrapolated to 2016), which as you can see is going parabolic:

Postscript:

I realize that some Economists use "net" debt figures v.s. the "gross" debt figures that I used.  Because they assume that money a country owes itself doesn't count.  This is why (to date), no one has gone Minsky over the fact that Japanese debt exceeds 200% of GDP, by far the highest in the world - because economists rationalize that most of the debt is held by the Japanese.  Imagine what it will feel like to be a Japanese pensioner and find out that you just lost your life savings because the global bond market decided one day enough is enough.  At that point, bullshit rationalizations about "just owing oneself" will seem pretty stupid.  And the economists will all say, "oh, I guess we were wrong"...

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.

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.

Ponzi Supernova

The global Ponzi scheme is now going All In.  

The definition of Ponzi Borrowing is borrowing the interest to pay back existing debt.  This is what dozens of sovereign nations (including the U.S.) have been doing for the past several years.  Due to the paradox of thrift, none of these nations could stop spending and borrowing, because austerity would mean economic collapse.  Therefore a complicit compact was formed between borrower and lender to propagate the illusion of solvency as long as possible (or at least until bonus time).  Why would lenders be willing to throw good money after bad?  Because the alternative was immediate default and 100% loss on their portfolios of shit debt.  So it was better to buy time by attending the recurring debt auctions and keeping interest rates under control (i.e. facilitating the auctions by buying more debt).  All that started to unravel over this past summer in Europe, because yields (interest rates) on various nations' debt started to rise above levels considered commensurate with solvency.  

Hence, like the U.S. Federal Reserve before it, the European Central Bank stepped into the open debt markets and became the marginal buyer of otherwise worthless debt, to keep interest rates low and keep the illusion of solvency alive.  Bear in mind that both Central Banks used FRESHLY PRINTED money to buy up this sovereign debt, thereby levying an implicit tax on all of us, given that there are now that much more dollars/euros now in circulation.  Did we give the Bennie Bernank taxing authority?  I wasn't aware of that.  Getting back to the story - in becoming the marginal buyer of debt, the ECB went ALL IN and showed its hand - snake eyes - nothing, nada, zilch - because now everyone knows that the normal debt market is not functioning and everyone who owns said worthless debt has to get out ASAP.

At that point, the clock started ticking on the Global Financial Ponzi's ultimate collapse i.e. when, not if.  Yet, bonus payout is a mere 3 weeks from now, so financial markets need to maintain calm at all costs.  Therefore, it was by no small coincidence that global central banks (including the Federal Reserve) entered the markets on a coordinated basis last week to calm the credit markets.  The stock market was up 6.4% in 3 days because apparently a fortunate few insiders were leaked the information early.  Just think,  6.4% is over half of the historical average annual return for the stock market - in just 3 days.  Imagine with short-term call options - 10 years of return in 3 days - NICE !   And imagine the brass you have as the Bennie Bernank, to take overt action to support markets during the same week that it was revealed that the Fed lent no less than $7.7 trillion (half of U.S. annual GDP) to banks during 2008, all in secret.  Now that is true brass, and a big middle finger to the U.S. general public - latest proof that the Bernank is Wall Street's most loyal water boy.

So now the markets are already back at the trough waiting for the really big feed bag from the ECB, because the clock is ticking and they have to get out before someone blinks and heads for the exits early.  What they need is for the ECB to pull out the "bazooka" and agree to monetize trillions in debt - essentially a blank check - one that will stimulate the risk markets through Dec. 31 bonus time AND let them unload the shit debt on the general public.  And by all accounts the big bazooka (if it comes) should cause one hell of a parabolic rally as speculators front run (buy up) any and all risk assets.  You see, those big funds that hold all of that worthless debt are going to unload it on the ECB and then they will take those freshly minted Euros and buy anything that is not nailed down.  But don't worry about hyperinflation, because not one dime of that money is ever going to trickle down the middle class. Just as when the Fed was monetizing debt (QE'n'), inflation will be constrained to commodities (gas, food) and therefore further impoverish the average citizen.

Bear in mind, that anything short of the big bazooka will cause the Global Ponzi scheme to collapse immediately.  Don't pass GO.  Don't collect $200.

Why the Bazooka will Fail Regardless

Here is why the Big Bazooka (ECB debt buyback) is GUARANTEED TO fail.  Any fund manager who is holding on to insolvent debt will sell that debt back to the ECB.  It will start with Greek debt, then Italian, Spanish, Portuguese, Irish - you get the idea.  Why?  Because they know for 100% certain this is the last chance to unload that worthless shit, and therefore it will all come to market.  Therefore, according to the law of unintended consequences, the ECB will essentially kill the very same credit markets they are trying to save.  In other words, going forward, who is going to be the marginal buyer of Greek/Italian/Spanish debt?  The answer is no one.  Markets are not stupid.  This will be the biggest pump and dump in world history.  Furthermore, none of this bond buying solves the underlying solvency issue.  In fact in exchange for the big bazooka, rumour has it that the ECB will require even more austerity from these struggling nations, which would further undermine their ability to service their debt.  In addition, while the ECB will buy the debt and hence bail out the existing lenders, the ECB will not forgive/retire the debt therefore, let's be clear, this would be yet another bailout of the 1% at the expense of the general public who will continue to be burdened by the debt until their economies collapse irrevocably.

GLOBAL PONZI COLLAPSE - CHAIN OF EVENTS

All it takes for the Global Ponzi to collapse now is for ONE sovereign debt rollover auction to fail.  Once that auction fails, then that country will be in DEFAULT.  It's debt will become worthless on bank balance sheets and in the various funds that hold that debt.  The losses will destroy equity, and trigger various credit covenants which require a certain level of quality of debt and equity to be maintained, which will lead to wholesale shedding of the next lower quality country's debt, so forth and so on.  Meaning it will be a race for quality and out of risk assets i.e. everyone trying to get out the same door at the same time.

Compounding this stampede is the fact that the dollar will go parabolic, mostly because, in his infinite wisdom, the Wizard-of-Bernank has created the largest carry trade in the history of the planet by taking interest rates to 0%. i.e. Everyone borrowed in U.S. dollars and leveraged up to buy assets around the world - free money after all.  So when the stampede occurs, all of that money will come back to the U.S. like a fucking Tsunami, causing massive hedge fund losses in the process.

But Europe Doesn't Matter, right?

Now we hear the Fucktards in the Idiocracy telling us that it's no big deal if Europe goes belly up, because exports to Europe are only a small part of U.S. GDP.  Unfortunately, exports are not the problem.

Let's review:  Back in 1997, there was a run on the Thai Bhat of all currencies (who cares about Thailand, right?).  The Thai currency collapse quickly spread across Asia: Korea, Singapore, Philippines etc. decimating those risk markets.  Next thing you know, you had a near collapse of the global financial system which in the event had to be stabilized by the IMF.  Fast-forward one year and you had the echo collapse of just ONE highly leveraged macro hedge fund, LTCM, that had big investments in Russia that were affected by the Thai Baht implosion.  Due to the amount of leverage, that one fund's collapse, managed to trigger another global financial crisis/collapse/cluster fuck and required the Federal Reserve to take actions to forestall complete collapse.  Meanwhile, I would hope some of the amnesiacs extending the Europe-doesn't-matter thesis at least remember 2008 when the failure of just two investment banks in the U.S. (Bear Stearns and Lehman) caused the worst collapse since the 1930s.  

Ok, so now picture THIS impending scenario: 

- MULTIPLE countries in Europe defaulting in sequence

- Dozens if not hundreds of banks failing globally 

- Dozens if not hundreds of hedge funds failing

- ALL of the remaining investment banks failing
- The Bennie Bernank afraid to show his face in public ever again, much less bail out any financial institutions

ALL at the same time.

So the clock is ticking, and the only question on the table is whether Wall Street is going to make it to Dec. 31st bonus time and leave the general public as the bag holder, yet again.

Or not...

Borrowed Time

[Dec. 5, 2011] I got the Elliot Wave numbering wrong (reversed 1s and 2s) on the original version of the chart below; so this is a re-posting.

[Original Post Nov. 30, 2011]
Another day, another hope-filled parabolic stock rally based on desperation, wishful thinking and Central Bank machinations.  This time it's an overnight China rate cut combined with a better-than-expected ADP jobs forecast on top of globally coordinated Central Bank interventions in credit markets.  Regardless, it's just more of the same "elixirs" that have at best just kicked the can down the road a bit and at worst are the root cause behind this ongoing economic fiasco.  I am not talking about the good jobs number which is always a welcome sign, I am speaking of the ongoing monetary policy manipulation that so obviously is meant to fuel the markets and otherwise perpetuate the illusion of recovery for yet another few hours or days.

I have mentioned before the concept of attenuation - a series of lower highs in the stock/risk markets, each of shorter and shorter duration.  The trend actually started in 2000, but even since 2007, as indicated in the chart below, the downtrend is acutely apparent.  The 2007 high was followed by a collapse to 666 (I know) in the S&P 500 market index.  The 2009/2010 rally retraced 77% of the former high, culminating in a high this past May.  The 3 week rally in October retraced 74% of the May high and this latest spike is now at ~67% of the October high and running on fumes as I write.  These steep upward retracements have a way of lulling everyone into a sense of complacency.  It's a truly diabolical market with a goal to lock in as many greedy fools and fools' dollars as possible.  By all accounts it's succeeding mightily.

The coloured 1s and 2s, starting with blue on the left, are Elliot Wave notation indicating degrees of trend and wave structure.  If this labeling is correct or near correct, then we are heading for a 3rd wave down at multiple degrees of trend, euphemistically known as "The Point of Recognition" - a very rare occurrence, and likely portending the largest collapse in risk assets, in U.S. history.  In any case, you don't have to be a market technician or an Elliot Wave believer, to see that we are in a downtrend and the market is losing upside momentum, not withstanding Bernanke flailing around like a cub bear playing with his dink.

About those Fundamentals

Despite today's improved ADP report, which is inherently volatile, there is no reason whatsoever to believe that the fundamentals of the economy are improving.  While watching CNBC the other day, it struck me  that Wall Street, having ass raped the rest of the world, has finally gotten around to screwing itself.  In one segment, there was a discussion by James Altucher the most clueless 1%er this side of Kudlow, talking about "record high profit margins", only to segue directly into another segment as to why revenue growth is so anemic, and likely will be for the foreseeable future.  The connection between these two seemingly incompatible occurrences is called the "paradox of thrift", which means that if one person saves more money he becomes wealthier, whereas if we all try to save more money, the economy tanks.  As usual, you can't make this shit up - imagine being an overpaid MBA consultant out there telling your umpteenth client that by cutting costs, you can grow your business;  wouldn't you eventually have some sort of epiphany that in aggregate the strategy is not going to work?  

Likewise, one of my favourite anecdotes is of Henry Ford parading through one of hist newest plants ~70 years ago...  he stops at one point to embarass the one union leader in attendance, by pointing at the nearest assembly line and saying: "See those people working over there?  Eventually, they will all be replaced by machines".  To which the union leader, not skipping a beat, says "Sure, but then who will buy your cars?".  In the end they were clearly both right, yet I have a sense that old Henry was rolling over in his grave when his company's stock traded for the cost of a $1 Oh Henry! bar at the nadir two years ago.  Nor would he be consoled to know that neither machines nor underpaid foreigners buy his cars, therefore the stock will likely be trading back below the candy bar level in the not-too-distant future.

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That leaves the most important question of all i.e. who the hell will lead us out of this mess, and rebuild the economy?

Is it a President who spends 50% of his time campaigning and otherwise has no business experience whatsoever?  A Congress that likewise campaigns non-stop and otherwise spent us into this fiasco ?  A Federal Reserve that keeps trying to lower the cost of borrowing so we can pile up ever more debt?  Or the 1% self-nominated "best and brightest" country club who outsourced all of the jobs and yet can't figure out why profits are so high and revenue growth so low ?  The fact is that none of the fools who got us into this mess, will be the ones who can get us out.

Let's face it, the real "Point of Recognition" will not just be when Wall Street shits another brick and gets pink slips instead of bonuses in the Christmas stocking this year - it will come when everyone finally realizes that today's "best and brightest" are neither.

Zero Unemployment In Sight

Good news !  Unemployment will soon be at zero for the first time in U.S. history.  

Allow me to explain...

On Friday, the Government announced that 120,000 net new jobs had been created and that the unemployment rate (U3) had dropped from 9% to 8.6% - so far, so good.

Unfortunately, the primary reason that the unemployment rate dropped to 8.6% is that 487,000 people decided to quit looking for work.  In other words, for every one person who found a job, four people gave up looking.

Now, I have no idea what these 487,000 people are doing to get by right now, and part of me doesn't even want to know.  Suffice to say, we can expect a lot more ad hoc meth labs and volunteers to the French Foreign Legion to crop up in the coming months.

Also, don't ask me by what fucked up math the Government arrives at a reduced jobless rate when people give up looking for work.  Suffice to say, someone in the Idiocracy decided that as the unemployment situation goes from bad to worse, that the unemployment rate should go down instead of up.  And everyone just went along with the *new* math, especially the Lamestream media which is always fully on board with printing the (U3) number in the headline as good news.  

The real story is that given all of the discouraged job seekers, the labor force participation rate - at 64% -  has dropped to a level last seen in 1984, back when there were a lot fewer women in the workplace.  So, it's Back to the Future to Mr. Mom, I suppose.  If I had to stay at home and watch my kids I would jump off the nearest bridge - one less seditious blogger for the Government to fret about...

The real unemployment rate (U6) which gets buried at the back of the report is 15.6%, reflecting the reality of the current situation i.e. not what Big Brother wants us to dwell upon.  

So back to my main point, extrapolating that 4:1 ratio above into the future, I will give it about 2 more years until unemployment, as indicated by the headline (U3) statistic, goes to zero.  Watch the lamestream media spin masters start scratching their heads like Chimpanzees as the unemployment rate drops like a stone while the streets burn like it's the Fourth of July.

You read it here first.

Depression 2.0

Time for a reality check on my original Depression prediction to see where we are relative to the various factors I argued pointed to unavoidable depression.  Granted, the full scale depression I predicted is taking longer to manifest itself than I had guessed at the time, but nevertheless, the overall fundamentals continue to deteriorate, not withstanding the unprecedented levels of government intervention in the economy.  In other words, reality is rapidly catching up with delusion and will soon take the lead, obviating the need for blogs like this one to keep reiterating the undeniable.

My original list of factors borrowed heavily from Paul Kennedy's Rise and Fall of the Great Powers, which was published over 20 years ago and is the quintessential guide book for how empires "change" over time.  I also added some contemporary factors:

1) Peak Debt: 
My original post discussed the unprecedented overall debt levels and cited the subprime crisis which was yesterday's version of today's sovereign debt crisis.  And while the subprime debt crisis was widely discussed and analyzed well before the Lehman collapse in 2008, clearly that knowledge did not prevent the inevitable crash from occurring.  Fast forward to today and in addition to still having near-record high levels of household debt, sovereign debt has also reached similarly insane proportions due to two well known factors 1) the global bailouts of the lenders/banks 2) massive fiscal deficits which are still propping up global economies and propagating the illusion of solvency.  And so while we are all getting tired of the Greek debt drama (pun intended), the reality is that Greece is only somewhat ahead of the curve in its debt problem than most Western nations which have similar or in some cases higher levels of debt and/or deficit.  Every time I turn on CNBC (before can hit mute), and hear stunted infotainers deriding the profligate Europeans, I just have to laugh at the hubris of it all.  Be patient !  Every dog will have it's day.  Actually, this guy said it best.

2) Real Estate Meltdown
Been there done that.  The only major countries that have yet to experience a full fledged real estate meltdown are China, Canada and Australia.  No surprise, these countries are all inextricably linked via their trades ties and more specifically commodities - Australia and Canada being two of the world's largest commodities producers, and China being the world's largest commodity consumer.  Throughout China's long economic expansion, the Chinese have traded investments in real estate in exchange for commodities - which matches precisely the story in Canada and Aussie, where the marginal real estate buyer is Asian.  So unlike ROW (the Rest of the World), after the 2008 meltdown, citizens in these 3 countries continued to over-invest in real estate under the general presumption that while real estate can collapse in every other part of the world, "it can't happen here".  Unfortunately, I can't have sympathy for my Canadian brethren who apparently eschew reality for realty.


3) China Trade aka. Mercantilism aka. "Beggar thy Neighbour" policy
This is actually the most egregious aspect of this ongoing fiasco and the one that will have the most lasting  deleterious impact on the American economy, of all these factors listed.  As I have reiterated many times, the U.S. didn't just outsource its jobs, it outsourced entire industries and the associated knowledge and expertise.  Intellectual capital and excellence in engineering and manufacturing does not manifest itself overnight - it accumulates over decades.  And yet this current generation sold it off to Asia in exchange for what will amount to some short-term consumption loans.  Some now say that the U.S. is not good at manufacturing and should not try to compete due to cost disadvantages.  This is a loser's mentality. Japan and Germany both have structurally higher wage costs than the U.S. and they still compete very successfully in manufacturing.  Ultimately, the American 1%ers of the day decided it was cheaper and much more profitable (short-term) to liquidate the manufacturing sector and hand the keys to Asia; meanwhile, the corrupt and addled policy-makers and economists who should have known better, looked the other way, or even worse endorsed the strategy.

Have I reiterated the "wisdom" of borrowing from the Chinese to build weapon systems designed to fight the Chinese?  That was my point in this posting.  Who is the Simple Jack at the Pentagon war gaming that strategy?  I think they need to get together with the accounting department.  Clearly the Chinese have that scenario covered - it's called stop buying U.S. dollars and watch the U.S. economy go tits up for good.  No need to launch one missile, just wait for the Idiocracy to go into Clockwork Orange mode.

4) Energy Shortage
Not much to add here, other than to reiterate the obvious that relatively cheap and abundant energy is paramount to economic growth and vitality.  With each passing day, the U.S. surrenders more control of its energy supply to unstable regimes in the Middle East, and for all that, even now the U.S. is not one step closer to adopting a coherent long term plan for reducing its dependence on ever-dwindling and more expensive fossil fuels.  It's been 40 years since the U.S. became a net importer of energy - and still no plan !  Major strategic mistake.  Picture having to negotiate with the Taliban one day to buy oil...

5) Financial Derivatives/Hedge Funds/High Frequency Trading - All that Crap
No change here.  Still the tail wagging the dog, as Wall Street's financial WMDs continue to dictate terms to the global economy.  Economically it's said to be a zero sum game (my loss is your gain), but it's actually a massive lesion on the world economy, one that leaks tens of billions of bonus profits for the privileged few rent seekers who command insider access.  Worse yet, it's a massively leveraged out-of-control latent catastrophe that should have been dismantled in 2008, but has since been allowed to continue to grow in size and complexity.  The Federal Reserve went all in during 2008/2009 to save the Machine, and in doing so, squandered their assets and their credibility, so who will save the system this time?

6) Fiscal and Monetary Policy - "this one goes to 11"
What can I say about a  plan to borrow our way out of a debt crisis?   We've had 0% interest rates for three years.  Who exactly is the marginal buyer at these rates?  Is it someone who just came out of a fucking coma for three years and now wants a new Suburban?  How about some more QE (printed money) Bennie?  What round are we on - is it QE3? ..I've lost track now.  How about we just jump to QE11, I am sure that will be 8 notches better...

And on the fiscal side, what are we at: borrowing ~40% of the U.S. federal budget now?  Who are we fooling at this point.  Let's forget about taxes, because apparently paying $.60 on the dollar is too much for Republicans.  Let's cut to the chase and borrow the Fully Monty !

At $1.3 trillion, the current U.S. deficit is enough to create 13 million new jobs each paying $100k/year.  And yet, for all that, the number of new jobs added in October was a mere 88k !  Fiscal policy is DOA - no return on investment.

On a related note, we hear all the time that Wall Street paid back its bailout money...really?  That is pure bullshit of course.  The trillions in QE money used to juice the stock market, is still out there and sitting on the Fed's balance sheet.  The likelihood of that money ever getting paid back is 0.  And the $4.5 trillion in deficits that have stacked up since the 2008 meltdown?  Never getting paid back.  Who benefited from all of that deficit spending?  As indicated above, wages and jobs are still well below 2007 levels.  Corporate profits - ALL TIME HIGH BABY !!!  Now, what do those hippy Occupy Wall Street types want again?

7) Complacency and Mass Delusion - Never go Full Retard...
Ah yes, the Idiocracy, my favourite subject.  Here we are, every other TV show is now a cartoon - not targeted at kids mind you, but for Xbox addled Boy-men living in their parents basement and wondering what they will be when they grow up.  Just the thought of my grandfather in his middle age watching a cartoon is unthinkable and ludicrous.


Ultimately successful countries unravel and fail because the population at large becomes overfed and complacent and can no longer stand to delay consumption gratification to make long term investments in infrastructure, education and R&D.  That's the ultimate root cause of this fiasco and the root cause of every once-great nation that has failed.

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.

MORAL FAILURE

So far I have explained at length the various economic root causes for this historic economic breakdown that we are witnessing, many of which are due to the mismanagement of the United States' economy.

Beyond the relative decline of one country however, the current "Globalized" economy was doomed to fail regardless, as much from MORAL failure as economic failure.

From a moral standpoint, the vast majority of people on this planet do not get paid under the current "pyramid" model, nor do they stand any reasonable chance of ever getting paid. One of the central tenets of a successful Ponzi Scheme is that the people at the bottom of the pyramid must absolutely hold faith that they too will one day attain an improved lifestyle. This is why trade barriers have been falling around the world, as country after country has put its faith in the globalized pyramid scheme.

Unfortunately, as we are now witnessing in real-time, the Westernized lifestyle is not SUSTAINABLE, to say nothing of being SCALABLE. The model is not sustainable because it is massively resource intensive i.e. 5% of the World's population (U.S.) use roughly 25% of the current output of natural resources. Simple mathematics indicates that this model can only be maintained if U.S. incomes rise as fast or faster than prices of natural resources. With the explosion of commodity prices in the past several years (e.g. oil has increased 1000% since 1998), this is clearly not the case.

If the model cannot be sustained across the current base of consumers in North America and Europe, then the scalability of this model is not even remotely possible, as the 5%/25% figures above make it mathematically impossible for the majority on this planet (or even a decent sized minority) to ever achieve a Westernized consumption-oriented lifestyle.

Once the leaders of the various developing countries around the world actually wake up to this most obvious fact, then the trade barriers will go back up and the global Ponzi will be officially over - for good.

Where does that leave the world economy? It means for one thing that the race is on to find the next great source of energy, as it's not possible for oil to be the same enabler of growth in the next century that it was in the past century. In fact, those economies rigidly tied to the use of fossil fuels, will inevitably experience sub-optimal growth. More importantly, however, for developing and developed nations alike, there will be a forced migration to an entirely new economic model and away from the Westernized lifestyle. Some of the key aspects of this new economic model will be (among others):

- Reduced resource footprint / end of the mass consumption based life style
- Quality of goods over quantity. Renewed emphasis on reusability and repairability
- Shared services: public transportation; rent vs. own etc.
- Focus on quality of life vs. wealth and material aggregation
- Focus on community life over individualistic lifestyles
- Reduced role and size of Government

Needless to say, for those in the developing world who already practice most of the habits described above, the adjustment will be relatively easy. For those in the developed world, the adjustment will be wrenching, difficult, AND LONG OVERDUE.

Of the Imminent Vertical Collapse and the Path Least Travelled

The stage was set several decades ago. The secular (recurring) trade deficit first occurred vis-a-vis Japan in the 1970s. Astute policy-makers should have woken up to the obvious and crucial fact that the United States was no longer competitive. A choice was to be made: consumption vs. savings and investment. However, the United States does not have an industrial policy, nor a long-term economic strategy, so the easiest path was taken. Thanks to the Nixon Administration's rejection of the Gold Standard, the Japanese took their profits in dollars and used that money to start buying chunks of the United States - primarily real estate. Therefore the U.S. started selling off pieces of itself to fund consumption. Yet, not withstanding this new ominous trend, by the close of the 1970s the United States was still the world's largest creditor...

Fast forward a few decades and the Japanese have been replaced by the Chinese, as the vendor of choice. Throughout the intervening period U.S. policymakers have failed to address the competitiveness issue, and the combined National debt now stands at 4xGDP ($48 trillion)!!! i.e. the U.S. is now the world's largest DEBTOR nation. But the Ponzi has gone into overdrive in the past decade. U.S. Corporations have found a unique one-time way of massively increasing their profit margins. It's a widely used trick that has leveraged the world's economy to an unprecedented degree of risk, yet has deceptively lulled everyone into believing that it's actually a good idea. The concept: Lay off workers in the U.S. and outsource to China. Cut labor costs by 90%. Every major Corporation has done this in the past 10 years and realized phenomenal profit margins. This is Industrial arbitrage: buy low in China and sell the same goods in the U.S. at high prices, for enormous profits. Unfortunately it's a short-term strategy, as those workers (aka. customers) laid off in the U.S. have been forced into lower and lower paying jobs. The majority of American workers now have no protection, because the minimum wage is at a decades' low, unionization membership is at a decades' low and the trade policy is wide open - come in and take what you want. But don't despair, because the Chinese, like the Japanese before them, have been propping up their largest customer by recycling their profits back into the U.S. economy, funding mortgages, home equity lines of credit - all manner of debt instruments. The American consumer has been given all of the money he needs to leverage up to the maximum extent possible, regardless of (in)ability to repay.

The stage was set decades ago. The policymakers came to a fork in the road. One was a difficult little travelled path of long-term re-education and retrenchment to regain national competitiveness to the benefit of the majority of Americans. The other was the road of continued uninterrupted pleasure and consumption on an ever-more concentrated and grotesque scale, that would eventually benefit a small minority of Americans, and then none at all.

And of course, they took the path most easily travelled...AND IT WILL MAKE ALL THE DIFFERENCE...