It was good (for some) while it lasted

What follows is an updated version of my very first post from late 2006.  Clearly, in hindsight, the events that followed that original post during 2007/2008 were bad, but did not collapse the global Ponzi Scheme.  The market has a way of testing us to separate the truly greedy and stupid from those who have learned their lesson.  That's what I believe 2008 was - a test.  It was a wake up call, and a last chance for all of us to accept reality.  For those who heeded the warning and otherwise changed their ways by paying down debt and adopting a more sustainable lifestyle, then likely they will survive what comes next.  For those who did not heed the warning, i.e. those still worshipping at the altar of greed or otherwise "bought in" to the status quo, they are going to be what we referred to in 2001 as  - "FC.com".  The most important point is that the over-leveraged structure and incentives of the Global Financial Ponzi have not been resolved one iota, except to become ever more leveraged by shifting the onus for debt accumulation from private citizens to  sovereign governments in addition to global Central Bank monetization programs injecting $3 trillion+ of "hot money" into the financial markets.  Unfortunately, the Idiocracy of the day can't complain that they had no advance warning that a collapse could happen...because one already occurred and they simply ignored it.

The Best Rally $7 trillion can Buy
Granted, it has been one hell of a market rally since 2009 - recovering 85% of the previous 2007 high.  Staggeringly, the price tag here in the U.S. alone when combining fiscal and monetary stimulus comes to roughly $7 trillion.  That equates to around $23,000 for every man, woman and child in the U.S.  Add in the elimination of 5 million jobs which fell straight to the corporate bottom line, and soon you are talking real money.  As one would expect of a Ponzi Scheme, the benefits of the past 3 years of Extend and Pretend accrued to only a fraction of people, while the remainder struggled under ever increasing debt loads and diminishing job prospects.  Nevertheless, I must apologize for having been consistently premature in forecasting the demise of Extend and Pretend.  I clearly had no clue how much money policy-makers would be willing to throw away in a vain attempt to sustain the unsustainable.  That said, on a historical time scale, this forecast will be considered real time...

Which Gets Us Back to My Original Post (with minor updates)
The global Ponzi Scheme is unraveling and the rate of decline will accelerate exponentially. The first leg down was from 2000-2002, and the second leg down was 2008, but that was just a minor taste of what is yet to come. I am compelled to write now to describe the coming phase for two reasons: 1) because I think the pieces are now in place for an imminent decline 2) In case there is anyone, even one person, who reads this and benefits from the conclusions.

At this juncture, what most take for granted as the "status quo" is largely an illusion propagated by unprecedented ongoing fiscal and monetary stimulus.  The global economy is nowhere near being self-sustaining and therefore debt levels are non-amortizing meaning additional borrowing is needed to refinance prior borrowing plus new spending.  Therefore, what most people take for granted as the standard way of life, is neither scalable nor sustainable.  Once other nations decided they wanted a seat at the big table, then the clock started ticking on our consumption-oriented lifestyle.

From a longer-term perspective, the U.S. economy peaked in the late 1960s and early 1970s in terms of industrial output (manufacturing), real median wages, and innovation. This trend was very apparent during the 1970s, but since the early '80s has been obscured by the massive "blowoff top" the Elliot Wave folks call a (terminal) fifth wave. Unable to rely upon innovation and manufacturing capability, starting with Reagan, the U.S. has been financing the last 30+ years' prosperity with debt and outsourcing (aka. estate sale). Debt at all levels (personal/household, local government, federal government), relative to income levels, is at the highest levels in U.S. history.  Meanwhile organic job creation when adjusted for ongoing debt accumulation, is virtually non-existent.

The party looked to be stalling out in 2000-2001, but the Fed engineered another "recovery" by taking interest rates down to 1% (lowest level in history) and encouraging consumers to borrow yet more money to finance the current pseudo-recovery. The latest 3+ year Obama economic illusion is a pseudo-recovery, because it is not self-sustaining. How else to explain that in the 3rd year of an economic "expansion" government deficits equate to 10% of GDP?   All of this debt, used to finance consumption, the Bush tax for the ultra wealthy, two wars etc. etc. severely limit the Fed's ability to stimulate the economy.  Apparently very few economists, let alone people, comprehend how debt shifts consumption from the future to the present. Only debt that is spent to build/buy productive assets will enhance the growth of the economy. Debt spent to finance consumption is a burden on the future economy.

Meanwhile, the global 'economy' resembles a classic Ponzi (pyramid) scheme, in that a lucky few at the top are prospering at the expense of the majority at the bottom. In order to continue however, a Ponzi pyramid requires unrelenting growth. Meanwhile, the short-sighted wealthy sponsors of this Ponzi scheme are eagerly commoditizing every factor of production and job function so that they can package and sell the income streams and move the money to offshore cash accounts.  This year, even as the minimum wage stands at a mere $7.25/hr and is lower (inflation adjusted) than it was in 1973, Wall Street is still taking home massive bonuses, despite almost collapsing the global economy back in 2008.  Meanwhile the jobs of the majority at the bottom are being commoditized and rationalized, both through outsourcing and automation. Land fills are topping up with cheap junk and destroying the physical environment, while developing nations are competing to see who can offer the lowest wages and worst working conditions, in their bid to get a ticket to this insane lottery. Don't get me wrong, I understand that economic rationalization is a crucial part of capitalism, and I am not against private enterprise, however all levels of government have been induced to look the other way to ensure high returns on capital at the expense of returns on labour. This is classic 'Supply Side' economics aka. 'favour the employer over the wage earner'.

All of the above last point is moot, however, because all Ponzi schemes eventually fail. They fail because there are diminishing marginal returns to growth. Also, the scheme requires ever-increasing numbers of low income workers to expand the bottom of the pyramid. This constant flow of low wage workers into the world economy has increased profit margins to the highest levels in history, as high income workers in developed countries are swapped out for low income workers in developing countries. Beleaguered American workers, in a bid to maintain their lifestyles, have turned to debt in all forms. It's becoming ever more apparent that this strategy has now reached its predictable bad ending.  Once we fall off that cliff into the depression, Dr. Bernanke won't have the tools to rescuscitate the patient. The American middle class will be dead on arrival (as will the middle class across most Western nations).

Here is what happens next:
The stock market has been in a bearish rising wedge since 2009, supported only by enormous amounts of ongoing monetary and fiscal stimulus.  This is a dangerous market, because volatility is near recent years' lows and most investors are lulled into a false sense of security. Once the move to the downside begins, it will go far lower, far faster than the vast majority predict.

Once the stock market tanks, the economy will stall out and fall into severe depression, accompanied with massive layoffs. The Fed is now out of ammo, therefore prices of all risk assets are set to decline, including stocks, corporate bonds, commodities and precious metals. The Fed will eventually panic because their credibility is spent.  Bernanke's approval rating is 70% going into this debacle, but he will soon be the number one blamegoat for this fiasco.  Monetary policy is without doubt the biggest ponzi scheme ever invented and it's shelf life is quickly dwindling.  The Fed will likely eventually resort to printing and distributing hard currency, meanwhile governments worldwide are already engaging in competitive debasement of their currencies. Therefore, beyond the initial deflationary credit collapse, I will eventually be looking to be a buyer of gold and silver (via CEF - Central fund of Canada) or GLD.  Eventually could be measured in years...

Looking out further, people will lose their homes and jobs en masse and discontent will rise to levels last seen in the Great Depression. The major difference however, is that Depression-era people were hardy folk with useful manual labor skills. Also there were still a large proportion of family farms and farm jobs that were largely self-sustaining. Today's population of IT managers (me), accountants and Starbucks baristas won't have any useful skills to fall back on in a basic survival-based economy. Therefore, crime and violence will sky-rocket and personal security will become a high priority for everyone.

Looking out a couple of years:

1) The U.S. will abandon Iraq and Afghanistan to the terrorists

2) The Middle-East will descend into chaos beyond anything heretofore imagined

My strategy:

1) Avoid the stock market, invest in short-term Treasuries

2) Look for a large pullback in gold/silver and then start averaging in to CEF/GLD

3) Invest in personal security

Good Luck.  We all need it.

Greedbook: Just a Wafer Thin Ton of Bricks

This is a depiction of Wall Street attempting to take down the massive facebook IPO.  Friday's debut was just the rumblings of indigestion:

Faceplant: Wall Street's Biggest Pump and Dump

facebook went public today and the IPO debut was a total flop.  Once again, retail investors were conned into another massive internet pump and dump.

Russian Roulette - Full Auto

"The man who wants everything, ends up with nothing"

The drama in Greece is getting to be very interesting.  It's a microcosm of the choices that EVERY major Western nation currently faces, whether our media propaganda machines will admit it or not.

COLLAPSE-o-NOMICS

Now presenting, The Idiocracy's guide to collapsing your own economy.  Now on display anywhere near you: 

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.

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...

Roadmap for Collapse Part I

[Last Update: 11/14/2010]

The Global Ponzi Scheme is Going SUPER NOVA
Under "QE2", The Bernanke Fed has committed an additional $600 billion to buy up Treasury bonds and further leverage the system.  With each purchase, the Fed pushes investors further and further out on the risk curve.  To that point, risk markets around the world - stocks, bonds, commodities, gold - went parabolic this week.  The Hang Seng (Hong Kong) is gapping up vertically !  We are reaching end game.  Like a dying sun, the global credit-based Ponzi Scheme is actually accelerating, as it goes SUPER NOVA, first expanding outward in one last gasp of frenzied speculation, only to ultimately collapse inward upon itself.  It will be a crash heard around the world, as investors wake up to the fact that they are all on the same side of the boat holding too much risk.

Fool me Six Times, Shame on Me...
We have all seen this movie before - Nasdaq 2000, the post-9/11 boom/bust (~2002/2003), the Housing market debacle (2005/2006), the Commodities melt-up/melt-down (2007), the Lehman/subprime fiasco (2008).  Each of these debacles, was aided and abetted by trade imbalances and cheap money (Fed policy).  In the aftermath of each crash, the Fed was able to rescue the economy by applying even more monetary stimulus than the last time (in conjunction with ever increasing government spending).  Therefore, investors have been lulled into a sense of confidence that the Fed is infallible and can fix any economic problem.  Yet, only a total fool would assume that they can keep the Ponzi pyramid intact forever.  Applying additional monetary easing to solve a debt problem is like drinking to solve an alcohol addiction.
One should bear in mind that the vast majority of money managers are not concerned with the Fed's exit strategy.  Their only concern is what happens between now and 12/31 bonus time.  As for individual investors, everyone rides the market bullet train thinking they can be the first off before it crashes.   Amazingly, even Bill Gross, Manager of the world's largest bond fund, admitted this week that the Fed's policies are "somewhat of a Ponzi Scheme !!!"  

Why Bernanke is either really stupid, a Tool for Wall Street, or most likely both...
The Fed's hopeless goal right now is to propagate the illusion of recovery long enough for a real economic recovery to take hold, essentially the game plan for every recession since WWII.   After all, when the stock market is going up, that gives the illusion of recovery.  Aided and abetted by 30 years of outsourcing and globalization, the Fed has long been able to manipulate interest rates to encourage consumption and debt, without generating hyperinflation.  Back in the 1950s total debt levels were at 50% of GDP, now total debt is at 360% of GDP i.e. 7 times higher.  Unlike all of those previous economic recoveries we are now post facto millions of jobs having been outsourced while having overall debt levels at 360% of GDP, so this time, there is no underlying economic fuel (new businesses, jobs) to sustain the economy.  Essentially, the Fed is just pouring gasoline on a dying fire.  Yes, there is a short-term burst of monetary "stimulus" that juices the stock market, but the real economy just keeps rolling over.  Only a delusional optimist assumes that the debt pyramid will continue to grow and that lenders will accept new debt for repayment of old debt (aka. Ponzi borrowing) indefinitely, into an imploding economy.  When confidence collapses and lenders realize that the goal is return of capital (principal) not return on capital (interest), then the markets will collapse,  DEFLATION will take hold BIG TIME, and the Fed will be totally impotent.

The Financial Liquidators (America's "Best and Brightest")
Beyond the failed monetary and fiscal policy contributions to this ongoing fiasco, the deeper underlying root cause is apparently something no one wants to discuss let alone confront.  Over the past ~30 years, a new culture of financial "liquidators" took control in the U.S. and securitized/monetized all aspects of the Supply Chain from design and engineering through manufacturing.  These financiers who became ubiquitous not only on Wall Street but in every major Corporation, displaced the predominant culture of engineers and scientists who had presided over the ascendancy of the U.S. as a manufacturing and engineering powerhouse.  The Financial Liquidators have neither the training nor the inclination to design, build or create anything.  Instead they have presided over the fevered process of selling off the entire U.S. manufacturing base and the Middle Class along with it.  Schooled (and willfully ignorant) in the Anglo/American pollyanna bullshit of Ricardian comparative advantage, and therefore conveniently naive with respect to export mercantilism, they were fully empowered by the fiat currency regime imposed by Richard Nixon and Milton Friedman.  What would have happened had the gold standard been maintained, is that the recurring trade deficits would have brought about a run on gold reserves, thus preventing the Idiocracy of the day from outsourcing their entire fucking country.  These were the key reasons - to accommodate ongoing trade imbalances, as well as to enable Friedman's Monetary policy to become the Ponzi scheme of choice -  why the gold standard was dropped in 1971.

Essentially these short-sighted greedbots were not willing to accept lower returns on capital for even one millisecond to allow U.S. manufacturing to retool vis-a-vis foreign competitors.  Leveraged buyouts, securitization, outsourcing, offshoring, union busting are the tools of the trade for the liquidators.  A class of salesmen, and speculators v.s. engineers and investors.  Self-nominated "dealers" of industry who have inevitably created a self-cannibilizing economic pyramid scheme.  A pyramid scheme that has foolishly liquidated its own customer base.  Clearly, America's current cohort of "Best and Brightest" are neither the best nor the brightest, nor have they been for quite some time.   The self-aggrandizing schools that are spawning these newly minted jackasses need to be held accountable, to say nothing of the entire economics profession which is morally, intellectually, and soon-to-be, quite literally bankrupt.

Of course, this is what the average person in America already knows, so all we are doing is standing around waiting for Wall Street to realize the party is over.  Will they make it to 12/31 bonus day before the day of reckoning?  They did last year, but as we've been told - Past performance is no guarantee of future results...

For those looking to protect their assets through a deflationary credit collapse.  I still recommend Treasuries, as explained here (invest at your own risk):


The Treasury ETFs:

SHY: 1-3 year maturities ("safest" with respect to interest rate movements)
IEI: 3-7 year - probably the best compromise between long and short-term
IEF: 7-10 year - these are the bonds the Fed is buying :-)
TLT: 20+ year - most volatile/speculative, but most upside if yields fall (i.e. deflation)

-------------------------MARKET SUMMARY ------------------------------

Key fundamental Risks:

Fiscal AND monetary stimulus starting to wear off:

- The economy is slowing despite unprecedented Fiscal and Monetary intervention

- Fiscal and Monetary policy are now one and the same i.e. the Treasury writes a check and the Federal Reserve prints the money. There is no longer any difference between these two policy approaches.

- Yet despite all of this unprecedented "stimulus" the economy is still heading lower which can mean only one thing - the Ponzi scheme is ending.

Key technical risks:

1) Mutual fund cash levels at historic lows

2) Excessive speculation in Emerging Markets (Bombay Sensex), Metals (Silver/gold) and growth stocks Apple, Baidu, Netflix, TravelZoo...all in vertical blowoff mode

3) Market at most overbought level since October 2007 top (Based on the "Open Trin")

- Open Trin is a smoothed moving average of the Trin (ARMS Index)

4) Bullish investor sentiment (AAII) at highest level since October, 2007 all-time top

5) Stocks having highest correlation since 1987 (not a good time to be buying stocks)

6) Bifurcated market i.e. some stocks making new highs, many making new lows

7) "Safe" haven bonds uptrending (yields falling) - indicating flight to safety and liquidity

- 2 year Treasury yields at lowest level ever...

------------------------------------------------------------------------------

The below chart indicates the market's position from a long-term Elliot Wave standpoint.  According to EW Theory, the market is viewed to be correcting the past ~80 years of rally since the 1932 low.  Corrections generally take an a-b-c pattern.  The "a" wave is the first wave down, in this case the decline from 2000-2003.  The "b" wave is a correction of the "a" wave, in this case the rally that lasted from 2003-2007.  Note it is very unusual for a "b" wave to actually retrace an entire "a" wave, however, when that occurs it is deemed to be particularly bearish for the "c" wave which as one would expect, comes as major surprise to those who believe that the worst is over.  We are now in wave "c", which itself will be comprised of 5 wave segments (wave "a" and "b" were also comprised of 5 segments).  Therefore, wave "1" down was the decline from 2007 that lasted through the Lehman crisis and bottomed in March 2009.  Wave 2 is just now completing, as we see with a parabolic spike higher ~1200.  That will bring to bear the third wave of wave "c" which will be the strongest wave of the entire secular bear market and eventually bring the market back down to multi-decade lows.  After wave "c" a new stock market rally can begin.

As always, take market predictions with a grain of salt, especially with regards to timing. I am highly confident the above scenario (or something similar) will play out, but the timeframe for each of the declines and counter-trend bounces is highly speculative.

For those who deride Elliot Wave Theory as "financial astrology", I would be careful.  Granted, their short-term charting is often too early on calling tops and bottoms, however, their overall thesis for a deflationary credit collapse is spot on and playing out entirely as expected.  
In addition,  EWI has been correct at anticipating the big picture stock market movements i.e. the "a" wave, the ensuing "b" wave rally and now the "c" wave decline, so far...  Moreover, not withstanding the past year's rally, at this juncture, safe, low-yielding money market funds are still outperforming the stock market on a 12 year basis (back to 1998).  By the time "c" wave bottoms out, short-term funds will have outperformed on a multi-decade basis.  

According to EWI, we are seeing an "All the Same Market" phenomenon similar to 2008 in which ALL risk assets (stocks, Corporate bonds, Municipal bonds, commodities, emerging markets) are becoming highly correlated to the downside, leaving few if any alternatives to U.S. Treasuries.