The first of many Black Swans took flight this week in the shape of the simmering Dubai Debt Crisis. It appears that it's not enough to build fancy high rises, shopping malls, and man-made islands, there's this "sustainable economy" thing that is also important to the overall prosperity equation.
Although as I wrote here I am not a big believer in "Black Swan Theory", it seems that Wall Street has a way of constantly being caught off guard by these pesky critters. The problem is that most on Wall Street suffer from a distinct form of myopia, that I will hereby label "Bonus Relevancy Syndrome" characterized by an incapacity to absorb or even care about any information not deemed relevant to the current year's bonus. Therefore, with only a handful of weeks left in the year, for many hedge funds, their attention deficit disorder has now shrunk to a mere ~22 trading days.
This set-up bears out several observations:
1) The average hedge fund manager is as strung out and giddy as a crack addict coming off of a 9 month binge. Fund managers overall were not well paid last year (by their standards) and many funds are just getting back to their high water marks. The high water mark is the crucial level that must be exceeded in order to allow bonus payouts. Considering we have just had one of the best 9 month rallies in the history of the stock market, suffice to say, the "boyz" are praying with all might that the market stays up between now and 12/31.
2) Yet not withstanding these at-risk bonuses, the technical indicators are all (continuing to) line up on the side of bullish complacency: Vix at a year-low 20 on Wednesday (90 last fall), ISE call/put ratio above 175 twice last week, Investors Intelligence Sentiment Index showing only 17% bearish sentiment (lowest level in several 5 1/2 years) i.e. the dry tinder is set, all we need now is the match...
3) The Dubai Debt Crisis is only one of MANY looming Black Swans (I know, by definition, Black Swans are not supposed to flock...) getting set to take flight directly in front of the metaphorical Wall Street 787 DreamLiner which is straining fiercely toward its golden 12/31 destination. Beyond Dubai, there are many other sovereign and corporate financial participants on the brink of default (Latvia, Hungary, Bulgaria, Ukraine, Spain, Greece, Ireland, UK, Japan, etc. etc. etc....)
4) Wall Street's current short-term bonus fixation combined with multiple looming INTER-LINKED geofinancial crises could create a potentially highly volatile shit storm at a most untimely juncture. For while the dollar carved out a new marginal low against the Euro on Wednesday, the dollar then proceeded to SCREAM higher vs. the Euro on Thursday when news of the Dubai crisis hit. Stay tuned for future events, because the markets will not withstand an abrupt unwinding of the dollar carry trade and the resulting flight from risk that would ensue...
How did gold perform as a promised safe haven you ask? Well, gold promptly tanked $50 on Thursday on news of the Dubai crisis (recovering somewhat on Friday). I will say it again: at this juncture, gold is not a safe haven, it is a greed haven that will get violently unwound along with the rest of the anti-dollar trade.
What say you? Would a December panic collapse off of a 666 March low in the S&P be a hellatiously sinister event, or just a burnt offering to the God of Financial Justice (assuming such a God even exists...)
Saturday, November 28, 2009
Friday, November 6, 2009
The Ascent of Money (aka. Deflation)
I was wandering through Borders (book store) tonight and stumbled upon a pile of "The Ascent of Money", Niall Ferguson's latest book, marked 50% off. Having months ago purchased and read the book, I couldn't help but feel ripped off, yet the irony of the title, juxtaposed with the discounted price, could not be overstated. I guess today money really was ascending...
Coincidentally, Niall was going toe to toe with Charlie Rose the other night on the topic of America's perilous economic situation. It was an interesting interview, chock full of facts and data. The general theme was a common one these days - the U.S. economy is toasty toast and Asia is about to pick-up the baton and run with it - dollar repudiation is imminent.
And then there is Peter Schiff who is looking to run for a Senate position by capitalising on his glorified anti-dollar stance. Never mind that he has been betting that way for years and last year he cost his followers dearly by having them betting on foreign stock markets and (by extension) against the dollar. Both of which assets moved massively against his asinine positions i.e. foreign stock markets fell more than the U.S. AND the dollar rallied. Jim Rogers is basically betting the same way and for all the same reasons...$$$ Or should I say ¥¥¥.
So unbeknownst to the "best and brightest", here we stand atop the largest bubble in human history - the 40- year Monetary policy credit bubble. A house of cards built upon a small of base of paper currency, piled to the sky with multiples of borrowing, generating that ephemeral kind of money called "credit". Ephemeral, because this system, known as fractional reserve lending has a mountain of credit secured by a fractional base of physical cash. It is secured ONLY by our confidence in the system and collective belief that all debts will be paid and all checks will clear. Until, comes that inevitable day, when confidence is breeched and everyone reaches for physical cash at the same time - which precipitates the moment of recognition that there are not enough real dollars for everyone.
Coincidentally, Niall was going toe to toe with Charlie Rose the other night on the topic of America's perilous economic situation. It was an interesting interview, chock full of facts and data. The general theme was a common one these days - the U.S. economy is toasty toast and Asia is about to pick-up the baton and run with it - dollar repudiation is imminent.
And then there is Peter Schiff who is looking to run for a Senate position by capitalising on his glorified anti-dollar stance. Never mind that he has been betting that way for years and last year he cost his followers dearly by having them betting on foreign stock markets and (by extension) against the dollar. Both of which assets moved massively against his asinine positions i.e. foreign stock markets fell more than the U.S. AND the dollar rallied. Jim Rogers is basically betting the same way and for all the same reasons...$$$ Or should I say ¥¥¥.
So, how can it be that all these "smart" people still cling to this fear of imminent dollar collapse and inflation? The answer is obvious: GREED. Quite frankly, no one has figured out how to make money from deflation, so no one wants to believe in it much less bet on it, because betting on it means having your money parked in short-term treasury bills that yield zero %. Alternatively, the inflation trade is yummy - buy gold and/or short the dollar and hold on to collect your massive pay check. So, this entire reflation trade/charade has nothing to do with reality, it's all about yet another fantasy, destined to end badly...All these greed-addled inflationistas are looking around for the "next big bubble" - where will it be? how can we trade it? Believing of course that they will be the lucky few to get off the bullet train before it crashes.
Moreover, if it seems like deja vu, that's because it is - this currently popular "reflation" trade of being long commodities/gold and short dollar was all the rage two years ago - and we saw how that turned out. Now these same "savants" have put the same trade right back on, amazingly despite the fact that the economic fundamentals are far weaker now (unemployment, spare capacity etc, GDP) than they were two years ago. It just goes to show you that facts and data cannot compete with greed and wishful thinking.
In the case of Ferguson, I don't know for sure, what guides his belief in the unfounded, perhaps his motivation is not greed after all. He is clearly recycling the "decoupling" theory that the U.S. economy can continue to collapse but that emerging markets can continue to grow, not withstanding their largest customer going bankrupt. Nevermind that this was the exact same theory marketed in the years prior to the 2008 crash and that turned out to be complete bullshit. As we know, the Shanghai stock market led the entire world down, losing over 70% of value and emerging markets in general suffered larger percentage losses than the U.S. Therefore, this *new* decoupling that Ferguson talks about must have just taken place recently...say in the past couple of months. Yeah, that's the ticket...If he honestly believes that then despite all of his fancy degrees, apparently he still can't find his ass with both hands.
And ironically, as reality would have it, it looks like the lowly U.S. dollar took a stand this week (amid abysmal employment data), and appears to have put in a multi-month if not multi-year low. The ONLY asset that has yet to have confirmed the top now in RISKY ASSETS is gold, as stocks, oil, commodities all look to have put in their tops days and weeks ago. I expect gold will follow any day now...
You be the judge (click to enlarge). Is this a dollar reversal?
- break out above 6 month downtrend
- massive volume on breakout (lower right)...
So unbeknownst to the "best and brightest", here we stand atop the largest bubble in human history - the 40- year Monetary policy credit bubble. A house of cards built upon a small of base of paper currency, piled to the sky with multiples of borrowing, generating that ephemeral kind of money called "credit". Ephemeral, because this system, known as fractional reserve lending has a mountain of credit secured by a fractional base of physical cash. It is secured ONLY by our confidence in the system and collective belief that all debts will be paid and all checks will clear. Until, comes that inevitable day, when confidence is breeched and everyone reaches for physical cash at the same time - which precipitates the moment of recognition that there are not enough real dollars for everyone.
So, you ask, what could cause just such a point of "recognition"? It just so happens that according to the Elliot Waves, we appear poised for a once in a millenia event - a 3rd wave DOWN in the U.S. stock markets at ALL degrees of trend (century, yearly, monthly, weekly, daily, hourly, minute)...
Sunday, October 18, 2009
Update
This is a brief update assuring that I have not changed my disposition towards the markets or economy in the past month.
Overall, nothing has changed. If I am correct (as I have been for the past 3 years), then what is directly in front of us is the largest economic decline in U.S. history. This collapse will cause widespread chaos and calamity, resulting in total loss of confidence in the government and Federal Reserve.
I know, the market has continued to rally since my last posts, however, that only makes me more certain that the next leg down is straight ahead of us and it will be brutal. Had the market stair stepped slowly upward or had it retested the March low a few times, as it did in 2002-2003, then I would be somewhat less confident about the timing of the collapse. However, ironically a market that bolts higher off of a low in a V-shaped rally without any significant pullback is actually tipping its hand. Its sinister goal is to suck as many people in as possible before reversing hard down and never looking back - what better way to do that than to run higher without hesitation.
Many commentators believe that this market is very similar to the 2002-2003 market that eventually lurched higher through 2007. Although the market charts are similar at this juncture, the underlying fundamentals of the economy are completely different. As is well documented, the 2003-2007 expansion was fuelled by massive consumer borrowing - primarily against home values. In addition, the unemployment rate back then never rose above 6.4% (currently at 9.8%). As I have stated many times, the belief that we can apply the same low interest rate policy in this recession to grow the economy is predicated on the idea that we can borrow our way to prosperity, indefinitely, with no consequences. Many otherwise intelligent people know this is not true, yet they still cling to the belief that the day of reckoning has once again been postponed.
Look at the updated chart (below). The market has continued its relentless ascent and is now back at the trendline originating from the October 2007 high two years ago. Notice, there was a brief pullback in the 90 vicinity (~S&P 900) which fullfills the Elliot Wave configuration for a typical a-b-c retracement of a larger move: "a" was the move from 66-90; "b" was the brief pullback; "c" is the rally from 90 until 110. According to EW analysis, an a-b-c move is a counter-trend move in a larger degree trend i.e. DOWN. In addition, volume has continued to taper off and investors are generally as complacent as they were at the highs two years ago (based on the low .VIX, low put/call ratios, and the Daily Sentiment Index). Likewise, many other markets (commodities, junk bonds, gold, emerging market currencies) are similarly bearishly configured. In my opinion, the catalyst for an explosion lower will likely come from a currency crisis originating either from the UK, which is totally insolvent, or Eastern Europe (Latvia, Hungary, Ukraine etc.). The stampede back to the much-hated U.S. dollar will cause major dislocations across the markets, as many hedge funds have been borrowing in dollars to buy emerging market financial assets...
Overall, nothing has changed. If I am correct (as I have been for the past 3 years), then what is directly in front of us is the largest economic decline in U.S. history. This collapse will cause widespread chaos and calamity, resulting in total loss of confidence in the government and Federal Reserve.
I know, the market has continued to rally since my last posts, however, that only makes me more certain that the next leg down is straight ahead of us and it will be brutal. Had the market stair stepped slowly upward or had it retested the March low a few times, as it did in 2002-2003, then I would be somewhat less confident about the timing of the collapse. However, ironically a market that bolts higher off of a low in a V-shaped rally without any significant pullback is actually tipping its hand. Its sinister goal is to suck as many people in as possible before reversing hard down and never looking back - what better way to do that than to run higher without hesitation.
Many commentators believe that this market is very similar to the 2002-2003 market that eventually lurched higher through 2007. Although the market charts are similar at this juncture, the underlying fundamentals of the economy are completely different. As is well documented, the 2003-2007 expansion was fuelled by massive consumer borrowing - primarily against home values. In addition, the unemployment rate back then never rose above 6.4% (currently at 9.8%). As I have stated many times, the belief that we can apply the same low interest rate policy in this recession to grow the economy is predicated on the idea that we can borrow our way to prosperity, indefinitely, with no consequences. Many otherwise intelligent people know this is not true, yet they still cling to the belief that the day of reckoning has once again been postponed.
Look at the updated chart (below). The market has continued its relentless ascent and is now back at the trendline originating from the October 2007 high two years ago. Notice, there was a brief pullback in the 90 vicinity (~S&P 900) which fullfills the Elliot Wave configuration for a typical a-b-c retracement of a larger move: "a" was the move from 66-90; "b" was the brief pullback; "c" is the rally from 90 until 110. According to EW analysis, an a-b-c move is a counter-trend move in a larger degree trend i.e. DOWN. In addition, volume has continued to taper off and investors are generally as complacent as they were at the highs two years ago (based on the low .VIX, low put/call ratios, and the Daily Sentiment Index). Likewise, many other markets (commodities, junk bonds, gold, emerging market currencies) are similarly bearishly configured. In my opinion, the catalyst for an explosion lower will likely come from a currency crisis originating either from the UK, which is totally insolvent, or Eastern Europe (Latvia, Hungary, Ukraine etc.). The stampede back to the much-hated U.S. dollar will cause major dislocations across the markets, as many hedge funds have been borrowing in dollars to buy emerging market financial assets...
As I said over a year ago, here, the market is tracing out a similar pattern as it did in 1929/1930 with a strong rebound that will convince everyone that the worst is over. I predicted most people would use 1987 as their false roadmap forward, so the only difference is they appear to be using 2003 instead...
Sunday, September 13, 2009
The Smart Money has left the Building
According to this article at CNN.com, corporate insiders recently have been selling their shares at a 31:1 rate ($31 in stocks sold for every $1 in stocks bought). Selling really picked up during August as you can see via the bar chart to the right of the article. These insiders are the ultimate "smart money" and they are now selling their stocks at a level last seen at the stock market's all time highs two years ago.
Beyond the obvious bearish implications of this data, certain observers have rightly pointed out that the motives behind this "manufactured" stock rally are bordering on fraudulent. The story goes like this: The Fed (Wall Street's stooges) throws a wall of money at the financial markets, a big chunk of that money ends up in the stock market, corporate insiders (the "smart money") take the opportunity to sell down and slip out through the back door right before the economy collapses for good aka. false rally as insider exit strategy.
This revelation comes as no surprise though, because I made the point several posts ago that all this rally would do is temporarily propagate the illusion of financial solvency and economic recovery. Economists have speciously pointed to the rise of the stock market and improvement in consumer sentiment as "leading indicators" that the recession is nearing an end; however, it's long been known (obvious) that consumer sentiment is linked to the performance of the stock market and in turn the performance of the stock market is linked both to consumer sentiment (duh!) and to Central Bank monetary policy. So, as you see, the Fed is conveniently at the front-end of this financial daisy chain / circle jerk.
And as can be expected the illusion has been propagated just long enough to not only guarantee the smart money safe egress, but of course to assure the sheeple that their money is safe and sound in their stock mutual funds - don't worry, go back to your mind numbing ESPN and American Idol, everything is perfectly fine... Therefore, once again renewing faith in the buy and hold fantasy just long enough to lock the general public into their seats for the long ride into the abyss.
Beyond the obvious bearish implications of this data, certain observers have rightly pointed out that the motives behind this "manufactured" stock rally are bordering on fraudulent. The story goes like this: The Fed (Wall Street's stooges) throws a wall of money at the financial markets, a big chunk of that money ends up in the stock market, corporate insiders (the "smart money") take the opportunity to sell down and slip out through the back door right before the economy collapses for good aka. false rally as insider exit strategy.
This revelation comes as no surprise though, because I made the point several posts ago that all this rally would do is temporarily propagate the illusion of financial solvency and economic recovery. Economists have speciously pointed to the rise of the stock market and improvement in consumer sentiment as "leading indicators" that the recession is nearing an end; however, it's long been known (obvious) that consumer sentiment is linked to the performance of the stock market and in turn the performance of the stock market is linked both to consumer sentiment (duh!) and to Central Bank monetary policy. So, as you see, the Fed is conveniently at the front-end of this financial daisy chain / circle jerk.
And as can be expected the illusion has been propagated just long enough to not only guarantee the smart money safe egress, but of course to assure the sheeple that their money is safe and sound in their stock mutual funds - don't worry, go back to your mind numbing ESPN and American Idol, everything is perfectly fine... Therefore, once again renewing faith in the buy and hold fantasy just long enough to lock the general public into their seats for the long ride into the abyss.
Monday, August 10, 2009
MAX BEARISH II
Back in October 2007, I came out with my first MAX BEARISH posting in which I stated that the market was making an imminent major multi-year top:
..."So what can the market do now that would inflict max pain on max people? Reverse hard down and never look back..."
Exactly 10 days later (October 11th), the market topped out and started the beginning of the two year mega-collapse from 1576 (S&P 500) down to 666 i.e. a 58% decline - the worst since 1930-1932.
Here again, I am going out on a limb and saying that I am once again Maximum Bearish and believe that we are at or very near the top of this counter-trend move. Last month, I allowed that there could be one more run higher, and there was, but there are several signs now that this move has been exhausted:
1) Near unanimous belief that the economy is improving - just this past Friday, the jobs report showed "only" 250,000 job losses and the market rallied on the "good news". Two years ago, a jobs report that bad would have crashed the market, but now it is taken as an unambiguous sign that recovery is on the way. In a perverse way, I actually agree with the dolts who see this as a good jobs report, because this is likely the best jobs report we see for years.
2) Near unanimous (misguided) belief in inflation. Today I read that the gurus at PIMCO, the world's largest bond manager, said yesterday on CNBC: "...the next Fed's move has to be tighter as a tautology" (Paul McCauley). And the commentator quoting Paul (Tom McGraff at RealMoney.com), rejoins with "Which is true. But when is the real question..." i.e. everyone expects the economy to improve, to bring with it obvious inflation, and for the Fed to have to tighten. This is why I have said that the reflation trade is very crowded to say the least i.e. long commodities, short dollar etc. As I have said (too) many times, we are in a deflationary collapse, there is no sign of inflation and there will be no inflation until the majority of outstanding debt has been wiped away through defaults and bankruptcies.
3) Fibonacci 38.2% retracement it the stock market (S&P 500) - achieved last week.
4) Overwhelmingly bullish sentiment towards the stock market, both the AAII and the DSI polls registered bullish readings last seen in October 2007
5) Speculative stocks ramping - AIG doubled in two days last week; Citigroup ramped 55%. There were a number of other small junk stocks blowing off last week as well - which has been a very reliable indicator in the past that the move is over...
6) The Shanghai market which is up almost 100% since last October now looks to have left the party. Remember that was the index that led the way down last year as well...
7) Low volatility index (.VIX). I said last year several times that the .VIX would explode, well it did from 10 in 2007 up to 95 last fall ! Now the .VIX is back in the mid-20s and it looks like it could be carving out a bottom here i.e. the market has been going higher for the past several weeks, but the Vix has not made a new low since early July, signaling that risk tolerance is waning...
8) Bob Prechter from EWI now believes the rally is either over or very near over. Bob has been early on many of his other predictions, but overall he is the master who said this deflationary collapse would happen and how it would happen in scientific detail. Bob also made a great (and timely) call at the March low this year, saying we would have this huge rally - fantastic call.
Finally, in my opinion, the most damning piece of evidence is the long-term view of the market itself, because as they say, "a picture is worth a thousand words" (see below - click to enlarge). Notice the steepness of the current rally since March - what better way to suck everyone in to think the worst is over. Notice how volume has systematically tapered off since the rally started (lower pane):
..."So what can the market do now that would inflict max pain on max people? Reverse hard down and never look back..."
Exactly 10 days later (October 11th), the market topped out and started the beginning of the two year mega-collapse from 1576 (S&P 500) down to 666 i.e. a 58% decline - the worst since 1930-1932.
Here again, I am going out on a limb and saying that I am once again Maximum Bearish and believe that we are at or very near the top of this counter-trend move. Last month, I allowed that there could be one more run higher, and there was, but there are several signs now that this move has been exhausted:
1) Near unanimous belief that the economy is improving - just this past Friday, the jobs report showed "only" 250,000 job losses and the market rallied on the "good news". Two years ago, a jobs report that bad would have crashed the market, but now it is taken as an unambiguous sign that recovery is on the way. In a perverse way, I actually agree with the dolts who see this as a good jobs report, because this is likely the best jobs report we see for years.
2) Near unanimous (misguided) belief in inflation. Today I read that the gurus at PIMCO, the world's largest bond manager, said yesterday on CNBC: "...the next Fed's move has to be tighter as a tautology" (Paul McCauley). And the commentator quoting Paul (Tom McGraff at RealMoney.com), rejoins with "Which is true. But when is the real question..." i.e. everyone expects the economy to improve, to bring with it obvious inflation, and for the Fed to have to tighten. This is why I have said that the reflation trade is very crowded to say the least i.e. long commodities, short dollar etc. As I have said (too) many times, we are in a deflationary collapse, there is no sign of inflation and there will be no inflation until the majority of outstanding debt has been wiped away through defaults and bankruptcies.
3) Fibonacci 38.2% retracement it the stock market (S&P 500) - achieved last week.
4) Overwhelmingly bullish sentiment towards the stock market, both the AAII and the DSI polls registered bullish readings last seen in October 2007
5) Speculative stocks ramping - AIG doubled in two days last week; Citigroup ramped 55%. There were a number of other small junk stocks blowing off last week as well - which has been a very reliable indicator in the past that the move is over...
6) The Shanghai market which is up almost 100% since last October now looks to have left the party. Remember that was the index that led the way down last year as well...
7) Low volatility index (.VIX). I said last year several times that the .VIX would explode, well it did from 10 in 2007 up to 95 last fall ! Now the .VIX is back in the mid-20s and it looks like it could be carving out a bottom here i.e. the market has been going higher for the past several weeks, but the Vix has not made a new low since early July, signaling that risk tolerance is waning...
8) Bob Prechter from EWI now believes the rally is either over or very near over. Bob has been early on many of his other predictions, but overall he is the master who said this deflationary collapse would happen and how it would happen in scientific detail. Bob also made a great (and timely) call at the March low this year, saying we would have this huge rally - fantastic call.
Finally, in my opinion, the most damning piece of evidence is the long-term view of the market itself, because as they say, "a picture is worth a thousand words" (see below - click to enlarge). Notice the steepness of the current rally since March - what better way to suck everyone in to think the worst is over. Notice how volume has systematically tapered off since the rally started (lower pane):
Wednesday, July 1, 2009
Batten Down The Hatches
The biggest part of this stock market rally/economic "bounce" is now over. I don't know if we will have one more surge higher that lasts days/weeks or even months, but the initial target I cited for this rally S&P 500 (900-1000) has already been met and therefore the greatest part of prudence dictates preparing for what comes next...
400 foot Tsunami now on the horizon
Call this next phase the "recognition" phase, the panic phase or the liquidation phase - it's all the same thing. It's the point at which this economic decline accelerates into an unstoppable panic collapse. When I started this blog, the economic crisis had not yet started so there was an excuse not to believe my predictions; however, now the weight of evidence is all around us and no excuse remains. Do you honestly believe the Mainstream Media, Government bureaucrats and Wall Street hustlers when they tell you that the economy is getting better when they didn't even predict this crisis would occur in the first place? If so, ask yourself - what has changed? The same factors that precipitated last year's collapse are still in place - massive debt levels, unrelenting job losses, ongoing credit contraction, housing collapse. Now we can add to the list unprecedented government deficits, as public debt is desperately exchanged for private debt, hence shifting the burden from the financially weak to the financially strong and putting the system more at risk. There is over $50 trillion in private debt in existence, do you think the Government can possibly offset losses against all of that potentially bad debt? What if they succeed in doing so, what would that accomplish (other than obliterating the U.S. dollar) - will it create any new jobs or industries? The answer is clearly no - as there have been six million jobs lost so far since this depression started. All the government is doing at this point is maintaining the illusion of fiscal solvency, purely based on smoke and mirrors and not based on any sound economic fundamentals. This economy is Wile Coyote running in place in mid-air...
Irrational exuberance is back, as the the "reflation" trade is the most crowded trade on Wall Street. Everyone is looking down the left side of the tracks expecting hyperinflation when the deflation train will be coming from the other direction and catch everyone by surprise. Apparently these fools have no concept how the economy works. There is absolutely no sign of inflation anywhere, because the Fed is not printing cash, they are increasing credit, which assumes consumers are willing to borrow; however, all indications are that reserves are piling up at banks as lending standards have increased, shutting out the people who really need the money but are no longer solvent. Meanwhile, solvent consumers are starting to save and pay down their existing debts - i.e. the 40 year Monetary Policy ponzi scheme is officially over. The Nouveau Misian movement still doesn't get it and are openly embracing deflation. However, as I have said before, this is not going to be a gentle deflation, this will be a deflationary crash in which the value of assets and incomes fall hard while nominal debts remain intact. Some foolish observers have noted that if prices fall that will free up discretionary income, however, when prices fall fast (due to liquidation vs. productivity gains) then profit margins fall which means increased layoffs. So if I lose my job and my house loses half its value, then seeing low prices at Wal Mart is likely to be small comfort.
Prepare now or forever hold your peace
Those who fail to heed the signs of impending collapse and take immediate action will be "left behind", literally. Once the collapse begins there will be no time to move your financial assets to safer ground (short-term U.S. Government Treasuries), as it will come without warning and decimate ALL RISKY assets (stocks, corporate bonds, municipal bonds and likely even precious metals). Risk spreads will widen and stay wide, giving no one a chance to get out. There will be no buyers - only sellers, and markets will not function properly, leading to "discontinuous price discovery" aka. crashes. There will be extreme counter-party risk, meaning companies and individuals will be defaulting on their obligations causing further turmoil and illiquidity in markets.
Position your assets accordingly.
400 foot Tsunami now on the horizon
Call this next phase the "recognition" phase, the panic phase or the liquidation phase - it's all the same thing. It's the point at which this economic decline accelerates into an unstoppable panic collapse. When I started this blog, the economic crisis had not yet started so there was an excuse not to believe my predictions; however, now the weight of evidence is all around us and no excuse remains. Do you honestly believe the Mainstream Media, Government bureaucrats and Wall Street hustlers when they tell you that the economy is getting better when they didn't even predict this crisis would occur in the first place? If so, ask yourself - what has changed? The same factors that precipitated last year's collapse are still in place - massive debt levels, unrelenting job losses, ongoing credit contraction, housing collapse. Now we can add to the list unprecedented government deficits, as public debt is desperately exchanged for private debt, hence shifting the burden from the financially weak to the financially strong and putting the system more at risk. There is over $50 trillion in private debt in existence, do you think the Government can possibly offset losses against all of that potentially bad debt? What if they succeed in doing so, what would that accomplish (other than obliterating the U.S. dollar) - will it create any new jobs or industries? The answer is clearly no - as there have been six million jobs lost so far since this depression started. All the government is doing at this point is maintaining the illusion of fiscal solvency, purely based on smoke and mirrors and not based on any sound economic fundamentals. This economy is Wile Coyote running in place in mid-air...
Irrational exuberance is back, as the the "reflation" trade is the most crowded trade on Wall Street. Everyone is looking down the left side of the tracks expecting hyperinflation when the deflation train will be coming from the other direction and catch everyone by surprise. Apparently these fools have no concept how the economy works. There is absolutely no sign of inflation anywhere, because the Fed is not printing cash, they are increasing credit, which assumes consumers are willing to borrow; however, all indications are that reserves are piling up at banks as lending standards have increased, shutting out the people who really need the money but are no longer solvent. Meanwhile, solvent consumers are starting to save and pay down their existing debts - i.e. the 40 year Monetary Policy ponzi scheme is officially over. The Nouveau Misian movement still doesn't get it and are openly embracing deflation. However, as I have said before, this is not going to be a gentle deflation, this will be a deflationary crash in which the value of assets and incomes fall hard while nominal debts remain intact. Some foolish observers have noted that if prices fall that will free up discretionary income, however, when prices fall fast (due to liquidation vs. productivity gains) then profit margins fall which means increased layoffs. So if I lose my job and my house loses half its value, then seeing low prices at Wal Mart is likely to be small comfort.
Prepare now or forever hold your peace
Those who fail to heed the signs of impending collapse and take immediate action will be "left behind", literally. Once the collapse begins there will be no time to move your financial assets to safer ground (short-term U.S. Government Treasuries), as it will come without warning and decimate ALL RISKY assets (stocks, corporate bonds, municipal bonds and likely even precious metals). Risk spreads will widen and stay wide, giving no one a chance to get out. There will be no buyers - only sellers, and markets will not function properly, leading to "discontinuous price discovery" aka. crashes. There will be extreme counter-party risk, meaning companies and individuals will be defaulting on their obligations causing further turmoil and illiquidity in markets.
Position your assets accordingly.
Wednesday, May 27, 2009
Reality Check (May 2009)
Time for another reality check as it's been over a year since the last reality check.
As I said last year, the majority of economists and commentators are clueless about the severity of the economic decline (and of course we now know for certain that they were), once again, we now find the majority of economists still totally out to lunch. Just today, AP tells us that more than 90% of economists predict that the recession will end this year ! Yes, these are the same "gurus" who were telling us last year there wouldn't even be a recession !!!
WTF?
As I often say, don't let the facts get in the way of a good story, but just for fun, let's review the factors I discussed last year to see where we stand:
1) Savings Rate: Contrary to the past several years, the savings rate has now turned positive, which is good for retirement accounts, but not so good for the economy. Clearly, there is a new shift towards frugality, that is not likely to be short-lived. After all, the Boomers are getting ready to retire and they have seen some hefty 40% declines in their overall wealth portfolios that need to be made up somehow. Economists clearly expect consumers to immediately shift back to their spendthrift ways, which is totally unfounded. As I indicated before, the consumer is roughly 70% of the U.S. economy, so each 1% increase in the savings rate shaves about .7% from GDP. Right now the savings rate is hovering around 4% whereas the long-term historical rate is closer to 8%. I know, last year I said that a negative savings rate is bad and now I am saying that a high savings rate is bad, but it's more a question of speed of adjustment. As an analogy, exercise is great, but if you weigh 400 pounds and haven't worked out in 40 years, it's not a good idea to attempt a marathon i.e. something might just stop working.
2) Housing Market: According to this week's Barron's, the next leg down in housing is right around the corner...Here are a few key snippets from the article:
"We're out of the eye of the hurricane, but here comes the back half of the storm"
"Law firms for banks are once again lining up to file foreclosures"
"All of the Obama Administration's attempts to revive, resuscitate and shock the housing market into recovery have failed."
"Unfortunately, there are no signs of recovery, despite the hype and the twisting of numbers in many media reports"
3) Credit/Banking crisis:
The Fed has squandered trillions of dollars on this issue, but guess what, they only scratched the surface (subprime). As I predicted two years ago, subprime was the tip of the iceberg and now prime is starting to be the next source of problems i.e. every prime borrower who just lost his job is now the new subprime. Also, as expected, bank failures are starting to accelerate...
4) Unprecedented levels of debt: Guess what? The debt is still out there! Apparently we need to pay off all of the old useless junk we bought before we can go out and borrow to buy some new useless junk - go figure. In addition, 500k+ job losses per month, hiring freezes, salary freezes and the worst job market in 30 years haven't done anything for household balance sheets either.
5) Trade Deficit: Good news ! The trade deficit has been reduced, because...Bad News ! nobody can afford to buy anything anymore...
6) Two Never-ending Wars: Enough said...
7) Energy Crisis: Good news ! Oil has come down in price...Bad News ! Alternative energy projects have been shelved en masse and if the economy starts to recover, oil will shoot back up again ...
8) Fed out of ammo (Not!): Last year I said the Fed was out of ammo (short of printing money), so I was kind of wrong and kind of right. I was wrong, because the Fed was not out of ammo, as they invented the TARP, the TALF and twenty other new programs to give away money. I was right however, because then they did start to print money !!!
As a next step they will likely drop money out of helicopters as Ben Bernanke has promised he will do, so I correct myself to say that the Fed will NOT be out of ammo until we are all carrying our money around in wheel barrows (my apologies for being wrong about this).
In summary, more than 90% of economists do not understand all of the above basic facts, which is truly mind-boggling. This isn't Econ 101, this is Econ for Fucking Morons. I have no doubt these dolts lost a big chunk of their assets in the recent market decline and therefore believe that the coming collapse will see them duly stripped of the remainder.
As I said last year, the majority of economists and commentators are clueless about the severity of the economic decline (and of course we now know for certain that they were), once again, we now find the majority of economists still totally out to lunch. Just today, AP tells us that more than 90% of economists predict that the recession will end this year ! Yes, these are the same "gurus" who were telling us last year there wouldn't even be a recession !!!
WTF?
As I often say, don't let the facts get in the way of a good story, but just for fun, let's review the factors I discussed last year to see where we stand:
1) Savings Rate: Contrary to the past several years, the savings rate has now turned positive, which is good for retirement accounts, but not so good for the economy. Clearly, there is a new shift towards frugality, that is not likely to be short-lived. After all, the Boomers are getting ready to retire and they have seen some hefty 40% declines in their overall wealth portfolios that need to be made up somehow. Economists clearly expect consumers to immediately shift back to their spendthrift ways, which is totally unfounded. As I indicated before, the consumer is roughly 70% of the U.S. economy, so each 1% increase in the savings rate shaves about .7% from GDP. Right now the savings rate is hovering around 4% whereas the long-term historical rate is closer to 8%. I know, last year I said that a negative savings rate is bad and now I am saying that a high savings rate is bad, but it's more a question of speed of adjustment. As an analogy, exercise is great, but if you weigh 400 pounds and haven't worked out in 40 years, it's not a good idea to attempt a marathon i.e. something might just stop working.
2) Housing Market: According to this week's Barron's, the next leg down in housing is right around the corner...Here are a few key snippets from the article:
"The Housing Hurricane will Howl Again"
by Mike Morgan"We're out of the eye of the hurricane, but here comes the back half of the storm"
"Law firms for banks are once again lining up to file foreclosures"
"All of the Obama Administration's attempts to revive, resuscitate and shock the housing market into recovery have failed."
"Unfortunately, there are no signs of recovery, despite the hype and the twisting of numbers in many media reports"
3) Credit/Banking crisis:
The Fed has squandered trillions of dollars on this issue, but guess what, they only scratched the surface (subprime). As I predicted two years ago, subprime was the tip of the iceberg and now prime is starting to be the next source of problems i.e. every prime borrower who just lost his job is now the new subprime. Also, as expected, bank failures are starting to accelerate...
4) Unprecedented levels of debt: Guess what? The debt is still out there! Apparently we need to pay off all of the old useless junk we bought before we can go out and borrow to buy some new useless junk - go figure. In addition, 500k+ job losses per month, hiring freezes, salary freezes and the worst job market in 30 years haven't done anything for household balance sheets either.
5) Trade Deficit: Good news ! The trade deficit has been reduced, because...Bad News ! nobody can afford to buy anything anymore...
6) Two Never-ending Wars: Enough said...
7) Energy Crisis: Good news ! Oil has come down in price...Bad News ! Alternative energy projects have been shelved en masse and if the economy starts to recover, oil will shoot back up again ...
8) Fed out of ammo (Not!): Last year I said the Fed was out of ammo (short of printing money), so I was kind of wrong and kind of right. I was wrong, because the Fed was not out of ammo, as they invented the TARP, the TALF and twenty other new programs to give away money. I was right however, because then they did start to print money !!!
As a next step they will likely drop money out of helicopters as Ben Bernanke has promised he will do, so I correct myself to say that the Fed will NOT be out of ammo until we are all carrying our money around in wheel barrows (my apologies for being wrong about this).
In summary, more than 90% of economists do not understand all of the above basic facts, which is truly mind-boggling. This isn't Econ 101, this is Econ for Fucking Morons. I have no doubt these dolts lost a big chunk of their assets in the recent market decline and therefore believe that the coming collapse will see them duly stripped of the remainder.
Sunday, April 26, 2009
Something Wicked This Way Comes
Something I mentioned in a recent post is the inherent yet unquantifiable 'event risk' which pervades the socioeconomic environment at this critical juncture. I mentioned the inevitability of a global currency crisis likely starting in Eastern Europe. However, in addition to the well known and oft discussed economic catastrophe we are facing, there is a wide array of other seemingly unrelated risks that will more than likely feed off of one another creating a lethal catastrophic firestorm of historic proportions. It turns out that the same greed, stupidity, laziness and denialism that got us into this economic catastrophe, played a starring role in several other simmering catastrophes as well - go figure...
Geopolitical/anarchic Risk:
Latent geopolitical risk has been simmering for quite some time in the usual places: Iran, North Korea, Pakistan etc. However, now other countries such as Mexico are seeing dramatic increases in violent crime as the fallout from the economic collapse causes various unforeseen dislocations. Even in my home country of Canada (British Columbia) there has been a spasmodic increase in gang-related crime the likes of which that Province has never seen. And then of course there are the myriad protests going on around the world fuelled by burgeoning unrest from the economic crisis. Expect those to become a lot more violent in the days ahead. Here in the U.S. the "tea parties" being staged as a protest against government intervention in the crisis are just the first signs of simmering anarchy and unrest in this, the most heavily armed country in the history of the world... And while we have just come through a relatively calm period from a human historical standpoint, as I have said before, expect that the ongoing explosion in economic volatility will produce a concomitant explosion in geopolitical anarchy, that we are only just now starting to witness...
Environmental Risk:
Thanks to decades wasted and billions spent on obfuscation and disinformation we of course are way behind the curve in addressing latent environmental issues. Expect that these too will find their way into the brewing catastrophic firestorm, as climatic temperature increases will bring rising sea levels, drought, earthquakes (from tectonic shifts, due to melting ice caps), tsunamis, floods and myriad other crises at a most inopportune time.
Peak Oil:
Peak oil will ultimately do more to reduce human consumption of fossil fuels than we could ever accomplish with a climate treaty. So from that standpoint, this is the one crisis that could ultimately bring great benefit to the human race, assuming that we survive the transition to viable alternatives. Expect the adjustment process from oil to renewable energy sources to be halting and turbulent to say the least. The price of oil will continue fluctuating wildly over time, accentuating the duration, severity, and frequency of economic recessions. Every time we look to be climbing out of a recession, expect the price of oil to leap ahead, thereby putting an automatic damper on economic growth. As growth slows, oil prices will eventually fall back again, thus putting the brakes on renewable energy projects that will be deemed economically unviable - just as many projects have now been shelved since oil fell below 50 (after having hit 150 only about 9 months ago). In short, it will be yet another repeating loop of short-sightedness and stupidity. Check - been there, done that.
Health and Disease:
Simply put, impoverished people can't take good care of themselves. And since the vast majority on this planet - including most in the heretofore 'wealthy' nations - will be poor, then expect preventive health maintenance to be reduced, putting us all at increased risk of sickness and disease. On top of that , health resources will be stretched and inadequate to cope with burgeoning pandemics, like the Swine Flu epidemic that is just now getting started. Suffice to say it's not a good time for the largest segment of our population (The Boomers) to be heading for retirement putting further strain on public health resources. It's also not so timely that we squandered the Medicare "trust fund" (i.e. the money coming out of your pay check every month) to pay for unaffordable tax cuts to fund conspicuous consumption and not one, but two ill conceived wars of misadventure....
Disaster Cocktail:
Put it all together and what do you have? You have a volatile cocktail of crises, each of which will accentuate and resonate off of one another in ways that policy-makers have not even begun to consider. After all, we have silos of "experts" fiddling around with the economy (rearranging deck chairs, really); health experts focusing on pandemics; scientists considering the environment; geologists considering peak oil etc. However, who is looking at the big picture? All of these crises are all coming together at the same time in both deadly and unforeseen ways. The economic connection is easy to make i.e. fewer resources to address any and all types of crises. However, how will geopolitical realignments affect the impacts of peak oil ? How will the environmental crises affect health and geopolitical stability? You get the idea.
The Complete Triumph of Laziness and Stupidity
Overwhelmed with unparalleled amounts of information, disinformation, propaganda and data in all forms, human beings have fallen back on blind faith and delusion as our standard mode of thinking and operation. Legions of "smart" people have told us that we can in no way predict the future and therefore it is a fool's errand to even try. I readily admit, there are many coincident crosscurrents that make absolute predictions virtually impossible, however understanding the general vector of human progress is not difficult in the least. So, while I can't say with absolute certainty what events will take place when, there can be little doubt to anyone with a shred of commonsense or honesty that the path we are taking on economic, environmental, energy and humanitarian related issues is spiraling downward. Yet we are constantly tempted by false prophets to believe that the laws of cause and effect have been suspended. Moreover, short-term side-effects can easily be obfuscated or rationalized away. Everyone from Nassim Taleb (Black Swan theory), Robert Prechter (EWI) - and countless others - have offered up sophisticated book-selling con jobs for why there are "unseen" forces at work (luck, social mood etc.) exerting absolute control over human destiny. Of course these theories only serve to contribute to the general sense of confusion and futility, thereby restraining our progress towards straightforward solutions to solvable problems. Worse, there are myriad others anchoring themselves to such pathetically glib fallacies as "we have been through worse before" and "the American economy always comes back". All I can offer as a fittingly glib rejoinder is "Past performance is no guarantee of future results". In short, the outcomes of cause and effect have not been permanently suspended, they have only been delayed such that the accumulated imbalances will only ensure that the inevitable devastating outcomes will be vastly magnified and uncontrollable...
Wave C Destruction
Finally, getting back to my favourite topic around the markets and economy, Prechter recently reinforced a critical observation the other day in the latest version of the "Elliot Wave Theorist", which is that 'C' waves, such as the one that we are in, are steeper and therefore far more destructive than 'A' waves. Recall under Elliot Wave Theory, the first leg down was 2000-2002, which was Wave 'A' in a 3 wave correction of the stock market (A-B-C) going back 300 years (i.e. the biggest correction we have had since the founding of the United States). Wave 'B' was a retracement rally that coincided with the George Bush fantasy years where people leveraged their homes like they were ATMs, we raided Social Security and Medicare to pay for a tax cut for the ultra wealthy, started two ill-conceived wars, and otherwise did our level best to prove that human beings are as dumb as a door knob. So, that puts us in Wave 'C', which started in October 2007 and has already brought the market lower than 'A' wave which ended in 2002. How do I know that Wave 'C' hasn't ended? Because if, Prechter is right (and I believe he is), then Wave C won't end until we retrace much of the stock market rise that has taken place since 1932 i.e. putting the Dow back below 1000. Accordingly to that theory which is by the way supported by all of the current economic data available (regardless of what your government is telling you)...then, once this little stock market rally ends (weeks, months from now - who knows?), we can expect the most devastating segment of Wave 'C' to begin in full force...
----------------------------------------------------------------------------------------------
NOTE: One may wonder why I quote Prechter's charting of the markets while I dismiss his social mood theories. He believes that prevailing social mood (which is cyclical) drives events whereas I believe events primarily drive social mood. While I can go so far as to believe that social mood is a contributing factor in human "change", I am not so fatalistic to believe in an exogenous (uncontrollable) theory of human progress/regress. That said, regardless of how we got to this pivotal juncture - events driving mood or other way around, the inevitable outcome is agreed to be the same...
Geopolitical/anarchic Risk:
Latent geopolitical risk has been simmering for quite some time in the usual places: Iran, North Korea, Pakistan etc. However, now other countries such as Mexico are seeing dramatic increases in violent crime as the fallout from the economic collapse causes various unforeseen dislocations. Even in my home country of Canada (British Columbia) there has been a spasmodic increase in gang-related crime the likes of which that Province has never seen. And then of course there are the myriad protests going on around the world fuelled by burgeoning unrest from the economic crisis. Expect those to become a lot more violent in the days ahead. Here in the U.S. the "tea parties" being staged as a protest against government intervention in the crisis are just the first signs of simmering anarchy and unrest in this, the most heavily armed country in the history of the world... And while we have just come through a relatively calm period from a human historical standpoint, as I have said before, expect that the ongoing explosion in economic volatility will produce a concomitant explosion in geopolitical anarchy, that we are only just now starting to witness...
Environmental Risk:
Thanks to decades wasted and billions spent on obfuscation and disinformation we of course are way behind the curve in addressing latent environmental issues. Expect that these too will find their way into the brewing catastrophic firestorm, as climatic temperature increases will bring rising sea levels, drought, earthquakes (from tectonic shifts, due to melting ice caps), tsunamis, floods and myriad other crises at a most inopportune time.
Peak Oil:
Peak oil will ultimately do more to reduce human consumption of fossil fuels than we could ever accomplish with a climate treaty. So from that standpoint, this is the one crisis that could ultimately bring great benefit to the human race, assuming that we survive the transition to viable alternatives. Expect the adjustment process from oil to renewable energy sources to be halting and turbulent to say the least. The price of oil will continue fluctuating wildly over time, accentuating the duration, severity, and frequency of economic recessions. Every time we look to be climbing out of a recession, expect the price of oil to leap ahead, thereby putting an automatic damper on economic growth. As growth slows, oil prices will eventually fall back again, thus putting the brakes on renewable energy projects that will be deemed economically unviable - just as many projects have now been shelved since oil fell below 50 (after having hit 150 only about 9 months ago). In short, it will be yet another repeating loop of short-sightedness and stupidity. Check - been there, done that.
Health and Disease:
Simply put, impoverished people can't take good care of themselves. And since the vast majority on this planet - including most in the heretofore 'wealthy' nations - will be poor, then expect preventive health maintenance to be reduced, putting us all at increased risk of sickness and disease. On top of that , health resources will be stretched and inadequate to cope with burgeoning pandemics, like the Swine Flu epidemic that is just now getting started. Suffice to say it's not a good time for the largest segment of our population (The Boomers) to be heading for retirement putting further strain on public health resources. It's also not so timely that we squandered the Medicare "trust fund" (i.e. the money coming out of your pay check every month) to pay for unaffordable tax cuts to fund conspicuous consumption and not one, but two ill conceived wars of misadventure....
Disaster Cocktail:
Put it all together and what do you have? You have a volatile cocktail of crises, each of which will accentuate and resonate off of one another in ways that policy-makers have not even begun to consider. After all, we have silos of "experts" fiddling around with the economy (rearranging deck chairs, really); health experts focusing on pandemics; scientists considering the environment; geologists considering peak oil etc. However, who is looking at the big picture? All of these crises are all coming together at the same time in both deadly and unforeseen ways. The economic connection is easy to make i.e. fewer resources to address any and all types of crises. However, how will geopolitical realignments affect the impacts of peak oil ? How will the environmental crises affect health and geopolitical stability? You get the idea.
The Complete Triumph of Laziness and Stupidity
Overwhelmed with unparalleled amounts of information, disinformation, propaganda and data in all forms, human beings have fallen back on blind faith and delusion as our standard mode of thinking and operation. Legions of "smart" people have told us that we can in no way predict the future and therefore it is a fool's errand to even try. I readily admit, there are many coincident crosscurrents that make absolute predictions virtually impossible, however understanding the general vector of human progress is not difficult in the least. So, while I can't say with absolute certainty what events will take place when, there can be little doubt to anyone with a shred of commonsense or honesty that the path we are taking on economic, environmental, energy and humanitarian related issues is spiraling downward. Yet we are constantly tempted by false prophets to believe that the laws of cause and effect have been suspended. Moreover, short-term side-effects can easily be obfuscated or rationalized away. Everyone from Nassim Taleb (Black Swan theory), Robert Prechter (EWI) - and countless others - have offered up sophisticated book-selling con jobs for why there are "unseen" forces at work (luck, social mood etc.) exerting absolute control over human destiny. Of course these theories only serve to contribute to the general sense of confusion and futility, thereby restraining our progress towards straightforward solutions to solvable problems. Worse, there are myriad others anchoring themselves to such pathetically glib fallacies as "we have been through worse before" and "the American economy always comes back". All I can offer as a fittingly glib rejoinder is "Past performance is no guarantee of future results". In short, the outcomes of cause and effect have not been permanently suspended, they have only been delayed such that the accumulated imbalances will only ensure that the inevitable devastating outcomes will be vastly magnified and uncontrollable...
Wave C Destruction
Finally, getting back to my favourite topic around the markets and economy, Prechter recently reinforced a critical observation the other day in the latest version of the "Elliot Wave Theorist", which is that 'C' waves, such as the one that we are in, are steeper and therefore far more destructive than 'A' waves. Recall under Elliot Wave Theory, the first leg down was 2000-2002, which was Wave 'A' in a 3 wave correction of the stock market (A-B-C) going back 300 years (i.e. the biggest correction we have had since the founding of the United States). Wave 'B' was a retracement rally that coincided with the George Bush fantasy years where people leveraged their homes like they were ATMs, we raided Social Security and Medicare to pay for a tax cut for the ultra wealthy, started two ill-conceived wars, and otherwise did our level best to prove that human beings are as dumb as a door knob. So, that puts us in Wave 'C', which started in October 2007 and has already brought the market lower than 'A' wave which ended in 2002. How do I know that Wave 'C' hasn't ended? Because if, Prechter is right (and I believe he is), then Wave C won't end until we retrace much of the stock market rise that has taken place since 1932 i.e. putting the Dow back below 1000. Accordingly to that theory which is by the way supported by all of the current economic data available (regardless of what your government is telling you)...then, once this little stock market rally ends (weeks, months from now - who knows?), we can expect the most devastating segment of Wave 'C' to begin in full force...
----------------------------------------------------------------------------------------------
NOTE: One may wonder why I quote Prechter's charting of the markets while I dismiss his social mood theories. He believes that prevailing social mood (which is cyclical) drives events whereas I believe events primarily drive social mood. While I can go so far as to believe that social mood is a contributing factor in human "change", I am not so fatalistic to believe in an exogenous (uncontrollable) theory of human progress/regress. That said, regardless of how we got to this pivotal juncture - events driving mood or other way around, the inevitable outcome is agreed to be the same...
Wednesday, March 18, 2009
ALL IN
"There is no means of avoiding the final collapse of a boom brought by credit expansion" - Ludwig Von Mises
In my post from just two days ago, I indicated that the Fed would soon start buying Federal Treasuries, which is tantamount to "printing money". It appears that soon just got here, as the Fed announced today that they are going to start buying Federal Treasuries in order to drive interest rates down across the entire credit market.
In the long-term of course, this won't do anything to derail the deflationary economic collapse, however, in the short-term this is very significant and indicates that the Fed is now "All in" in its bid to stop deflation. Essentially what the Fed is trying to do is to induce the capital markets to take on more risk by making the "risk free" yield (i.e. U.S. Treasuries) relatively low and unattractive. Of course, the stock market took off on this news and rightly so, as stocks should be one of the primary beneficiaries of this historic policy (as far as I can ascertain, the U.S. Government has never monetized its debt on a significant basis). Therefore, I think the stock market could have a significant multi-month rally back to the 200 day moving average which is an important demarcation line that stymied all of the rally attempts during the last bear market (2000-2003). We have yet to have a rally back to the 200 DMA in this bear market, so we are long overdue. In percentage points from here, based on the S&P 500 (currently 800) and depending on the trajectory of the rally, I would hazard a range between 900-1000 (~12-25%) is possible sometime between now and the summer. Bearing in mind that the market is already up 20% off of last week's lows (!), so a pullback is due any time now. As always, take all stock market predictions with a grain of salt...
As I mentioned however, in the grander scheme of things, this monetization policy will not alter the deteriorating economic fundamentals. Think of it as similar to pouring gasoline on a dying fire - yes there is a great, seemingly impressive burst of flame, but then almost as quickly as it started, the fire burns down, as there is no underlying "fuel" to keep it burning. Similarly here, stocks will rally and become more expensive, and then everyone will realize that there are no underlying fundamentals (aka. profits) to support the higher valuations. Households will still be massively in debt (and falling further behind every day), and there will be no long-term driver for economic growth. As I wrote recently, the (latest) stimulus package is a joke relative to the size of the overall economy and the magnitude of this crisis. Last year's stimulus package didn't do anything, and yet they apparently think we are stupid enough to believe that this time will be different. It's starting to feel a lot like Ground Hog Day around here...
Event Risk
There is one major risk to the near-term rally scenario, and that is event risk. The specific event I have in mind is a looming global currency crisis that will most likely begin in Eastern Europe and then spread worldwide from there. I don't think it's a question of if there is a crisis, only when. And while short-term the market typically trades off of technical supply/demand factors (moving averages, overbought/oversold indicators etc.). Should we see some sort of "black swan" (unpredicted, though far from unpredictable) currency event, then whatever "up trend" (if any) is in place, will surely be curtailed. Suffice to say a truncated rally at this juncture would be EXTREMELY bearish to this economy and the markets, as the Fed has now played its last card. This is it, as I said at the beginning, we are ALL IN now, and if the casino (market) calls the Fed's bluff, it will be panic time...
Fortunately, and contrary to Bernanke's wishes, I see this Fed program to buy Treasuries as a good thing for those who prefer to ride out this crisis in "risk free" assets. After all, basically what the Fed is doing is to put a floor underneath Treasury prices which even further reduces risk for those who want to hide out in Treasuries and leave the short-term stock market speculation to the gamblers...Imagine an asset class (Treasury bonds) that won't go down, because the Government is the buyer of last resort and yet has upside potential in the event of an "adverse event" and ensuing safe haven buying. Sounds like a great idea to me...
What of Gold?
Despite today's historic decision to monetize the debt, on top of the $7+ trillion the Government has thrown at this economic fiasco to date, gold still is lower today ($940) than it was in January 2008 (albeit not by much). Suffice to say if gold can't decisively break $1000 and stay above $1000 on this (supposedly hyperinflationary) news, then it has a long way to fall...
Position your assets accordingly...
In my post from just two days ago, I indicated that the Fed would soon start buying Federal Treasuries, which is tantamount to "printing money". It appears that soon just got here, as the Fed announced today that they are going to start buying Federal Treasuries in order to drive interest rates down across the entire credit market.
In the long-term of course, this won't do anything to derail the deflationary economic collapse, however, in the short-term this is very significant and indicates that the Fed is now "All in" in its bid to stop deflation. Essentially what the Fed is trying to do is to induce the capital markets to take on more risk by making the "risk free" yield (i.e. U.S. Treasuries) relatively low and unattractive. Of course, the stock market took off on this news and rightly so, as stocks should be one of the primary beneficiaries of this historic policy (as far as I can ascertain, the U.S. Government has never monetized its debt on a significant basis). Therefore, I think the stock market could have a significant multi-month rally back to the 200 day moving average which is an important demarcation line that stymied all of the rally attempts during the last bear market (2000-2003). We have yet to have a rally back to the 200 DMA in this bear market, so we are long overdue. In percentage points from here, based on the S&P 500 (currently 800) and depending on the trajectory of the rally, I would hazard a range between 900-1000 (~12-25%) is possible sometime between now and the summer. Bearing in mind that the market is already up 20% off of last week's lows (!), so a pullback is due any time now. As always, take all stock market predictions with a grain of salt...
As I mentioned however, in the grander scheme of things, this monetization policy will not alter the deteriorating economic fundamentals. Think of it as similar to pouring gasoline on a dying fire - yes there is a great, seemingly impressive burst of flame, but then almost as quickly as it started, the fire burns down, as there is no underlying "fuel" to keep it burning. Similarly here, stocks will rally and become more expensive, and then everyone will realize that there are no underlying fundamentals (aka. profits) to support the higher valuations. Households will still be massively in debt (and falling further behind every day), and there will be no long-term driver for economic growth. As I wrote recently, the (latest) stimulus package is a joke relative to the size of the overall economy and the magnitude of this crisis. Last year's stimulus package didn't do anything, and yet they apparently think we are stupid enough to believe that this time will be different. It's starting to feel a lot like Ground Hog Day around here...
Event Risk
There is one major risk to the near-term rally scenario, and that is event risk. The specific event I have in mind is a looming global currency crisis that will most likely begin in Eastern Europe and then spread worldwide from there. I don't think it's a question of if there is a crisis, only when. And while short-term the market typically trades off of technical supply/demand factors (moving averages, overbought/oversold indicators etc.). Should we see some sort of "black swan" (unpredicted, though far from unpredictable) currency event, then whatever "up trend" (if any) is in place, will surely be curtailed. Suffice to say a truncated rally at this juncture would be EXTREMELY bearish to this economy and the markets, as the Fed has now played its last card. This is it, as I said at the beginning, we are ALL IN now, and if the casino (market) calls the Fed's bluff, it will be panic time...
Fortunately, and contrary to Bernanke's wishes, I see this Fed program to buy Treasuries as a good thing for those who prefer to ride out this crisis in "risk free" assets. After all, basically what the Fed is doing is to put a floor underneath Treasury prices which even further reduces risk for those who want to hide out in Treasuries and leave the short-term stock market speculation to the gamblers...Imagine an asset class (Treasury bonds) that won't go down, because the Government is the buyer of last resort and yet has upside potential in the event of an "adverse event" and ensuing safe haven buying. Sounds like a great idea to me...
What of Gold?
Despite today's historic decision to monetize the debt, on top of the $7+ trillion the Government has thrown at this economic fiasco to date, gold still is lower today ($940) than it was in January 2008 (albeit not by much). Suffice to say if gold can't decisively break $1000 and stay above $1000 on this (supposedly hyperinflationary) news, then it has a long way to fall...
Position your assets accordingly...
Monday, March 16, 2009
Blind (Deaf, and Dumb) Faith
It was about a year ago that I rendered my assessment here, that the average financial "expert" (i.e. economist, financial advisor) is as dumb as a post and that just about all of the "experts" are wrong in their assessment of the economy. After the fact, it turns out they were wrong, and one can only presume (hope?) that they too were relieved of 30-50% of their wealth along with the general public who trustingly believed their advice. However, far from being contrite, many of these same "experts" are now saying "nobody saw it coming", which besides being an outright lie, conveniently avoids the question as to why didn't they see it coming? Suffice to say, no market is collapsing faster than the market for Wall Street's Ph.D "savants" and who knows, maybe one day in the distant future, common sense will come back into fashion.
Fast forward one year and now we have a new batch of "experts" to help solve our problems, however unfortunately it appears that this current batch is no more intelligent than the last crop. Sadly my only hope at this juncture is to believe that Bernanke, Geithner, Obama, Summers et al. (i.e. the current stewards of this economic debacle), are simply outright lying to the public at this point. After all, there is tremendous pressure on each of them to be as optimistic as possible and hide as much of the facts and reality as possible. The public has little stomach for more truth than is already being crammed down their throats by their own economic realities; meanwhile the infotainers across the Mainstream Media came down on Obama recently for being too negative (i.e. realistic) about his views on the economy, so he recanted and has been pushing "happy talk" ever since. Just last night Ben Bernanke said on "60 Minutes" that he thinks the economy will begin to recover by the end of 2009. Based on what job and business creation fundamentals, he didn't say. But he did say that recovery is conditional upon getting the banking system stabilized. Apparently his plan is to get banks to start lending once again to people who borrowed too much in the first place, then we can get on with the business of borrowing and spending our way out of this mess. That should work. And the public believes this nonsense - the media believes this nonsense - almost everyone believes this nonsense. Somehow, a 30 year borrowing and spending binge is going to resolve itself without any permanent change in our standard of living, virtually in a period of a few months - presto ! The alternative to believing that Bernanke and Co. are "obfuscating", is to simply conclude that they are as dumb as a doorknob not to realize that we can no more borrow and spend our way out of a multi-decade borrowing and spending problem than an alcoholic can drink his way out of a drinking problem.
Let the Flat Tax begin!
This week the British started their campaign of "quantitative easing" aka. monetizing the debt, wherein, one branch of the government (the Central Bank) buys the bonds of another branch of the government (The Treasury) by printing money out of thin air. Bernanke has said recently that the U.S. is going to do the same thing soon - both to drive down long term interest rates and to help liquidate this year's $1.75 trillion deficit. Meanwhile, the Chinese said recently that they "hate" (their words) having to buy U.S. government bonds, but they will likely continue to do so (as it's their best means of devaluing their currency and inducing us to buy their cheap junk). Apparently they deem nothing in the U.S. to be of more value than paper IOUs which are paid for with yet more paper IOUs! Tellingly, despite all of this obstensibly "hyper-inflationary" news, long-term U.S. Treasury bond interest rates (yields) are still near multi-decade lows. So lest you think the U.S. is becoming the new Zimbabwe, bear in mind that the bond market has already voted, and it thinks that Obama & Company don't have a snowball's chance in hell of getting this economy restarted, much less generating any inflation.
What of this nascent stock market rally?
The short answer, is I don't know and neither does anyone else. Last fall's "nascent rally" only lasted a few weeks and then rolled over like a sick turtle. Some believe this current rally has legs and could last a few months. Others even believe that last week was a multi-year low in the market. Anything is possible, but all I know is that the steepness and severity of this stock market decline is on par with the early 1930's market and there are many people just waiting for a rally so that they can sell into it. Meanwhile the economic decline appears to be accelerating with job losses for March expected to approach 1 million ! So, the only way one can believe in an enduring rally is to believe that the economic fundamentals (i.e. job and business formation) are going to improve sometime over the next 6 months. Unfortunately, just like last year's predictions and despite Government's assertions to the contrary, there are no facts upon which to base that fantasy...
As I have said many times since this fiasco started, we are in a relentless deflationary collapse of unprecedented proportions.
And to think, we haven't had any real panic...YET.
Fast forward one year and now we have a new batch of "experts" to help solve our problems, however unfortunately it appears that this current batch is no more intelligent than the last crop. Sadly my only hope at this juncture is to believe that Bernanke, Geithner, Obama, Summers et al. (i.e. the current stewards of this economic debacle), are simply outright lying to the public at this point. After all, there is tremendous pressure on each of them to be as optimistic as possible and hide as much of the facts and reality as possible. The public has little stomach for more truth than is already being crammed down their throats by their own economic realities; meanwhile the infotainers across the Mainstream Media came down on Obama recently for being too negative (i.e. realistic) about his views on the economy, so he recanted and has been pushing "happy talk" ever since. Just last night Ben Bernanke said on "60 Minutes" that he thinks the economy will begin to recover by the end of 2009. Based on what job and business creation fundamentals, he didn't say. But he did say that recovery is conditional upon getting the banking system stabilized. Apparently his plan is to get banks to start lending once again to people who borrowed too much in the first place, then we can get on with the business of borrowing and spending our way out of this mess. That should work. And the public believes this nonsense - the media believes this nonsense - almost everyone believes this nonsense. Somehow, a 30 year borrowing and spending binge is going to resolve itself without any permanent change in our standard of living, virtually in a period of a few months - presto ! The alternative to believing that Bernanke and Co. are "obfuscating", is to simply conclude that they are as dumb as a doorknob not to realize that we can no more borrow and spend our way out of a multi-decade borrowing and spending problem than an alcoholic can drink his way out of a drinking problem.
Let the Flat Tax begin!
This week the British started their campaign of "quantitative easing" aka. monetizing the debt, wherein, one branch of the government (the Central Bank) buys the bonds of another branch of the government (The Treasury) by printing money out of thin air. Bernanke has said recently that the U.S. is going to do the same thing soon - both to drive down long term interest rates and to help liquidate this year's $1.75 trillion deficit. Meanwhile, the Chinese said recently that they "hate" (their words) having to buy U.S. government bonds, but they will likely continue to do so (as it's their best means of devaluing their currency and inducing us to buy their cheap junk). Apparently they deem nothing in the U.S. to be of more value than paper IOUs which are paid for with yet more paper IOUs! Tellingly, despite all of this obstensibly "hyper-inflationary" news, long-term U.S. Treasury bond interest rates (yields) are still near multi-decade lows. So lest you think the U.S. is becoming the new Zimbabwe, bear in mind that the bond market has already voted, and it thinks that Obama & Company don't have a snowball's chance in hell of getting this economy restarted, much less generating any inflation.
What of this nascent stock market rally?
The short answer, is I don't know and neither does anyone else. Last fall's "nascent rally" only lasted a few weeks and then rolled over like a sick turtle. Some believe this current rally has legs and could last a few months. Others even believe that last week was a multi-year low in the market. Anything is possible, but all I know is that the steepness and severity of this stock market decline is on par with the early 1930's market and there are many people just waiting for a rally so that they can sell into it. Meanwhile the economic decline appears to be accelerating with job losses for March expected to approach 1 million ! So, the only way one can believe in an enduring rally is to believe that the economic fundamentals (i.e. job and business formation) are going to improve sometime over the next 6 months. Unfortunately, just like last year's predictions and despite Government's assertions to the contrary, there are no facts upon which to base that fantasy...
As I have said many times since this fiasco started, we are in a relentless deflationary collapse of unprecedented proportions.
And to think, we haven't had any real panic...YET.
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