In a Nutshell

Here is a guy telling it like it is:
http://www.youtube.com/watch?v=koY6kXhQDQo&feature=player_embedded

This gent raises some good points around who did and did not benefit from this ongoing fiasco.  Apologists for the status quo (ardent crony capitalists, CNBS infotainers etc.) tell us that homeowners are equally responsible for having leveraged their homes to the maximum and otherwise taken too much risk.

All along these same jackass disinformers have been extolling the virtues of the (supply side) capitalist model based on incentives.  So I find it a tad hypocritical to blame homeowners for taking advantage of cheap and abundantly available credit which at the height of things was shoved down their throats 24x7.  No sooner did they respond to these "incentives" than the entire scheme started unravelling.  In any other market, we are told that it is normal behaviour for consumers to respond to low prices by increasing their consumption i.e. the demand curve.   Yet, in the case of capital demand, when the price (interest rate) was lowered substantially, we are told that households were foolish for having consumed more debt !  Is the average household now supposed to be a macroeconomic forecaster, able to predict the overall trend in housing prices and interest rates?  Meanwhile, I have no doubt that the average economist has lost money via stocks or real estate during this fiasco.

Gut check.  Let's review the distribution of impacts so far:

1) Government/Regulators:
Role in fiasco:
-Failure to regulate
-Easing of regulations to accomodate banksters (Glass Steagall repeal)
-Overlooking ongoing deficits and trade imbalances
Retribution: None - business as usual

2) Banksters:
Role in fiasco: 
-Extension of credit to those who could not afford it;
-Outright fraud while securitizing  garbage loans;
-Over-leveraging of banks
-Insider Trading on a pervasive scale
-Collapsed investment funds, leaving investors holding the bag
-Leading entire economy to brink of disaster
Retribution:
- Massive $10 trillion+ Industry bail out courtesy of Turbo Flat Tax
- Massive bonuses before, during ("retention" bonuses), and after crisis
i.e. business as usual

3) Federal Reserve:

Role in fiasco:  

-Lowered interest rates to engineer bogus "recovery" and create incentives for households to borrow way beyond their means; 

-Provide leverage to speculators, under-regulate banks 

-Turn blind eye to securitization frauds; 

-Allow banks to become "too big to fail", requiring massive taxpayer bailouts

Retribution: None.  No oversight whatsoever; now via Quantitative Easing finding new ways to increase systemic leverage

4) "Irresponsible" households:
Role in fiasco:  Overconsumption, overleverage on housing and other forms of debt
Retribution:
- Foreclosure/loss of personal residence
- Bankruptcy (divorce)
- Fund taxpayer bailout of banksters
- Top Ramen for Christmas dinner


Is this a great fucking system or what?

Dr. Bernanke or: How I Learned to Stop Worrying and Love the Bust

This week I observed a very rare Double Top fractal at three degrees of trend.  A fractal is a repeating pattern - in this case a double-top.  Each of these double tops attends extreme bullish sentiment towards the stock market and an inverted head and shoulders (triple) bottom between the tops:

The graph below shows the numbered red lines indicating each double-top.  Red up arrows show the head and shoulder bottoms (I only show the largest two fractal bottoms).

Extreme sentiment refers to the AAII and II sentiment surveys which are at similar extremes reached in October 2007 and April of this year.  As well, the ISEE call/put ratio printed 183 yesterday, the highest level since April 15th (just prior to the top).  

The below close up view of this year's action shows the (2) and (3) fractals:

To summarize, the first double-top rally (from 2003-2007) took ~5 years to reach extreme sentiment and a peak.  The rally from March 2009 to April 2010 lasted just over one year and reached a similar extreme in sentiment and a market peak.  The rally from the low this past August to this November's high, lasted 2.5 months, peaked, triple-bottomed earlier this week and is now straight vertical, having already again reached an extreme in sentiment. 

Each rally is of shorter and shorter duration than the last yet attends the same level of investor enthusiasm.  Why are investors equally bullish as October 2007 when the market is 20% lower?  Why are they equally bullish as last April when the market has gone nowhere?  

This effect is called attenuation, the same concept used in electrical engineering to describe a loss of signal.  Or the term used in cardiology to denote the heart's pattern immediately prior to a heart attack...

By the way, for those who do not subscribe to EWI (literally or figuratively), their most recent "December Financial Forecast" sees as the most likely scenario higher prices going into year end, leading to a final top above current levels.  For the most bearish of all published forecasters to have now switched from being full on bearish since April expecting the market to top out imminently, to now being bullish (at least intermediate) term, I regard that as capitulation.  Maybe they will be right this time, but since they have been wrongly bearish for the better part of a year, I am not betting that they will now get it right.  More likely they will be the last fools sucked in at the top, too focused on their ever-changing wave counts and ignoring all other flashing indicators including their own capitulation.  Given that they alter their wave counts continuously after-the-fact, we can be confident they will be "right" eventually, that's guaranteed.

Dr. Bernanke in the house: When all you have is a hammer, everything starts to look like a nail

Meanwhile, in other news, today's jobs report was far worse than "expected".  With 39,000 net new jobs created v.s. 150,000 expected and 250,000 minimum needed to offset new entrants to the labour force.

Copious disinformers still abound to support Bernanke's QE2 (Money printing) scheme, which has done nothing for the real economy to date (hence the v.2 nomenclature, soon to be 3,4,5...)  Those supporting this scheme tend to be of the Wall Street ilk and thereby the primary beneficiaries of being able to borrow at 0% and lend at 4%, risk free - via the various carry trades enabled by this "policy" of basically giving out free money to select wealthy investors at the public expense.  As we have seen before, all of this extra financial leverage makes for extremely spectacular busts when these carry trades are unwound.  

Speaking of which, we learned this week that the Fed extended a total of $9 trillion in loans to the banks during the banking crisis - $9 fucking trillion !  Do you remember all of the hand wringing, Tea Partying, letters to Congressmen that abounded when the Treasury initiated the TARP program in Sept. 2008?  Yet, for all that, the $700 billion TARP was less than 10% of what the Fed doled out - it was chump change.  The Fed on the other hand, faced absolutely zero oversight or intervention while extending the U.S. balance sheet several times beyond historic levels.

2008 was a tremor, next comes the earthquake
What has the Fed done in the meantime to correct the imbalances and mal-incentives that led to the 2008 financial crisis?  All they have done is to further leverage the system by inventing new ways (Quantitative Easing) to put money in the hands of leveraged speculators and thereby kicked the can a few yards down the road towards the next much larger catastrophe.  The odds that the Fed can kickstart the economy and engineer a successful exit strategy by applying even more of the same easy money that caused the first crisis, is exactly fucking zero.
The Fed is run by a bunch of overeducated moronic stooges toiling feverishly at the behest of their moneyed puppetmasters on Wall Street.  Harvard and the University of Chicago do not teach any courses on judgement and commonsense, which is why there are so many fucking morons in high places pissing all over themselves while the fire burns out of control.

The stock market chart below illustrates the only true beneficiaries of Monetary Policy.  On the far left, Greenspan's 1% interest rate policy [June 25th, '03] (at the time, the lowest in U.S. history), that propelled the 2003 "Mission Accomplished" rally and led to the parabolic housing boom that is still negatively impacting a large number of households.  On the right side, Bernanke's Moon Shot showing Stage 1 [QE1], Stage 2 [QE2] and our current juxtaposition, once again in Outer Space.  Oddly, charts like this don't make me optimistic:

The other beneficiaries of Bernanke's doomed munificence are silver and gold investors, who will ride that bullet train until it crashes and burns:

So, do you feel lucky, punk?

These silver investors are seeking shelter from "inflation" even as the core CPI prints its lowest reading ever (since data collecting started in 1957).  Check out this chart.   Wow, that's inflation all right !  Silver investors tell us that core CPI is inaccurate and does not reflect true costs of commodities and precious metals.

Let's see, inflation is "going up", so buy silver.  Silver is going up, therefore inflation is going up !  Buy more silver!

Hi Ho Silver, Away !!!!

;-)

Point of no Return

This week's edition of the The Economist featured an article on Japan and its demographic (ageing) crisis.

Voodoo Economics

Not surprisingly, the article missed out on by far the most important point regarding Japan and a key point that is instructive for all nations currently running deficits.  The point is that once a country starts running structural deficits to fund operating expenditures, it soon becomes mathematically and politically impossible to ever pay off the debt.  Economists like to point to the ability of countries to "out grow" their debt and deficits via Supply Side Economics.  A third grader is smart enough not to believe such a load of rubbish, but not so today's average economist/politician/bankster.

One can easily construct a financial model to indicate the impact to the Japanese economy were it to even attempt to start paying down its debt.

Assumptions:

 - Current Federal debt at 200% of GDP (which it is)

 - Average Duration of debt: 30 years (this is a VERY generous assumption)

 - Average interest rate on debt: 1% (The rate on JGBs fluctuates, but is currently very low)

Now we see why it was so easy to ignore this problem in Japan for so long.  With interest rates at 1%, the conventional wisdom is that "Debt Service Costs" are extremely low, so there is no harm in taking on more debt.  Unfortunately for the purveyors of this "load", there is more to debt service than simply the current interest i.e. principal.

Plug the above figures into Excel and now assume that all of this debt needs to be paid off in 30 years time.  In this model, we are solving for the Payment (a blend of principle + interest) i.e. the true debt service cost and the one that would have saved "The Economist" from devoting a lengthly article to evading the simple truth.

Over 30 years, as a percent of GDP, the payment is: 8%  !!!

Wait, it gets worse.  Obviously in order to pay down debt, a country needs to first stop accruing new debt i.e. first eliminate the annual recurring deficit.  Japan's fiscal deficit for 2010?  10%

The Bottom Line for Japan:

In order for Japan to START paying down its current level of debt over a 30 year period it would have to incur a 16% hit to GDP immediately and that figure will only grow into the future.  (NOTE: 2% of GDP is interest and already included in the deficit).

U.S. Example:

Variables for the U.S.:

 - Current Federal debt at 100% of GDP 

 - Average Duration of debt: 20 years (average duration is currently 5 years, so this is very generous)

 - Average interest rate on debt: 3% 

 - Current annualized deficit for 2010: 10%

Level of GDP that would be removed by paying off debt over 20 years:

[Ongoing debt service cost, amortized over 20 years: 6.7% of GDP] 

Including 10% Deficit: ~14% (after taking out the 3% interest due to double-counting) 

Keep in mind, both countries are applying unprecedented fiscal and monetary stimulus at this juncture and yet there is minimal growth in either country i.e. no sign whatsoever that either country could possibly remove the bulk of stimulus while at same time maintaining a positive economic growth rate MUCH LESS pay down a $1 of debt.

Definition of Recession is Totally Bogus
Officially, according to NBER, the U.S. is out of recession, and has been since June 2009.  Of course, that is totally bogus because the "official" definition of recession does not take into account fiscal deficits, so it is meaningless.  Whether, the deficit was at 0% or 10% of GDP (as it is now), the U.S. would still be deemed to be out of recession.  Currently, as I write, GDP growth is running at ~2% year over year, so in reality, the true economy is running at a negative 8%.  When a country can borrow 10% of its GDP and then declare that the economy is "growing" at 2%, that's the trifecta - bad math, denialism and stupidity all rolled into one.

Legacy of the Baby Boomers
That 14% represents the hole in the economy left behind by the most greed-addled, self-indulgent generation in world history.  Not only are the Boomers spending the wealth inherited from their parents, they've underfunded and raided their own 401k retirement funds, bankrupted Medicare and Social Security, and on top of all that left A GAPING 14% SMOKING CRATER where the economy used to be, for their children and grandchildren to inherit.

As I have said before, GAME OVER, MAN.  We just need Wall Street and the morons with the fancy degrees to wake up and smell the fucking napalm.

Roadmap for Collapse Part II

In the first installment of the Roadmap, I discussed the market implications of the collapse.  With this installment, I gaze further into the abyss to discuss the potential economic outcomes of the collapse.   For this purpose, I created the hypothetical decision model (below).

As you see, I divided the map into three main areas: reflation (economic normalcy), deflation (price, asset, economic), hyperinflation (mainly price).

As far as assumptions, I suppose the fundamental assumption is that without Government stimulus (fiscal/monetary) the economy is not self-sustaining and therefore would quickly succumb to the deflationary forces of the total debt burden.

Therefore, the pollyanna scenario of a self-sustaining economy without ongoing fiscal and monetary intervention is not represented in this model, and I assume anyone reading this blog in the first place, gets that.  

Most likely scenario: Deflation then Hyperinflation
As depicted by the blue lines and as described vividly throughout my posts, I expect another even stronger market event than the one we experienced in 2008, which would be extremely deflationary.  Those who believe it would not be deflationary, forget that both oil and gold tanked during the turmoil two years ago.  Where I indicate that a policy is "blocked", I mean politically blocked.  Given the newly elected Republican-dominated Congress, the likelihood of either the Gov't or the Fed continuing to add "stimulus" unfettered, is highly unlikely.

As you see, I have represented a "Default" scenario under which the U.S. Gov't repudiates its debts, as a potential scenario, given the new political backdrop - a scenario I thought highly unlikely until recently.  I still think that an outright default is unlikely, making the "middle scenario" of MASSIVE fiscal stimulus combined with massive monetization, essentially devolving into de facto currency printing (via FDIC payouts, stimulus checks etc.), as the most likely scenario.

Less likely scenario: "Status Quo", leading directly to Hyperinflation
This is a very popular scenario these days, causing the big run up in gold.  In order to believe this chain of events, you must make certain unlikely assumptions:
1) Assumes no adverse market "event" similar to 2008, which as indicated was extremely deflationary
2) Assumes that an inevitable backup in interest rates, would itself not cause the economy to stall and the markets to collapse
3) Assumes there would be no political intervention in the current stimulus trajectory and that fiscal and monetary stimulus would continue unfettered (seems very unlikely)

Pollyanna (impossible) scenario: Self-sustaining economy and removal of all stimulus
This scenario is extremely unlikely, given:
1) Overall magnitude of Government stimulus, now baselined into GDP
2) No sign of sustainable economic growth, especially in a low/no leverage environment
3) Massive outsourcing which has caused long-term secular unemployment and removed entire industries and skillsets from the U.S. economy i.e. the unemployed have skills that are no longer in demand in the U.S.
4) Massive debt overhang that will continue to put deflationary pressure on the economy
5) Unresolved Social Security and Medicare deficits

Threading the Needle->All paths lead to hyperinflation...Eventually
While, as indicated in the model, all paths lead to hyperinflation, it could take some time to get there.  Keep in mind, there are a whole lot (most) of other countries that will go bust before the U.S., which in the "short-term " will increase deflationary pressures and demand for U.S. dollars as a safe haven.  Any country that does not issue debt in its own currency (i.e. entire Euro area and Eastern Europe) will highly likely default.
A U.S. default, were it to eventually occur would "collapse" the U.S. dollar - relative to what, is the question i.e. other currencies would be similarly debased.  Relative to gold and silver is the likely answer.  Inevitably, what is left of the already-weakened banking system would be obliterated.  That part of the economy supported by borrowing and lending would be gone, along with a substantial negative economic multiplier.  Residual private debts and fixed contracts would be a crushing weight on the economy and likely lead to the "Weimar" scenario of printing currency to eliminate the residual debt burden.  I do not believe any Government on the planet has the will power to keep from printing its way out of a deflationary depression on the order of magnitude we will face, while confronting mass social unrest on an unprecedented scale.
Printing and distributing enough physical currency to even partially offset the amount of derivative "money" in the credit-based system, will not be a trivial ordeal...As one would expect in our Fractional Reserve Banking Model, physical currency currently represents only about 10% of the total "money supply" (M3).  So imagine a world where (even temporarily) the majority of money in circulation, is eliminated  i.e. a cash-only economy - the Euro too, long since having been abandoned.  In this scenario, inflation would build over time, likely very slowly initially and then accelerating.

Timing is Everything
All of this is highly speculative, as the scale of monetary collapse described above will be unprecedented and accompanied by substantial geopolitical strife and domestic anarchy.  Sequence is hard enough, timing is impossible to predict accurately, however, I see the overall scale of the model below in the 3-5 year range, perhaps ten years maximum.  Some things will likely occur faster than expected, whereas other phases will likely drag out much longer than expected.

Invest at your Own Risk

Therefore, given all of the potential paths and scenarios, it's not at all clear how one would successfully navigate a crisis of this magnitude.  Surely some amount of hard cash, gold, rice and ammunition is in order.  For the time being, I still like U.S. Treasuries (all durations) here.  I would also view a (large) pullback in gold as an initial buying opportunity with the goal of scaling in to a substantial position eventually...

For those in Canada, I like 3+ year duration Government of Canada bonds, which you can buy through a brokerage account (NOT Canada Savings Bonds, which are totally illiquid - can't be traded).

Waiting for Godot, in the Pet Sematary

"Clowns to the left, and jokers to the right...Stuck in the Middle with you"- Stealers Wheel

Ho Hum, just another week in the markets:

- Just another European economy on the brink of insolvency 
- Just another brawl between Central Bankers regarding Mercantilist policies
- Yet again, the same fucktard Fed, excoriating U.S. Gov't deficits, while at the same time financing these deficits by printing more U.S. dollars.  That is like a crack dealer telling his customer he has a drug problem.
- The Chinese angry at the U.S. over the fact that inflation is running between 4-10% (depending on who you believe), yet continuing to peg the Yuan to the U.S. dollar to ensure ongoing trade imbalances (guaranteeing inflation).
- And note the accompanying asinine comment from Faber, telling us that the underlying issue is [beleaguered] American consumers borrowing too much, even as their jobs and incomes are systematically being eliminated i.e. nothing to do with China's currency policy !

I could not make up this much self-contradicting stupidity if I sat down for hours and tried...
-----------------------------------------------------------------------------------------------
Overall, on the "left", we have the usual Tools and Fools trying to propagate the illusion of recovery via yet another Fed prop, QE2.  We have had umpteen Fed actions these past few years now: interest rates at 0%, monetization of mortgage debt (MBS), no less than three rounds of monetizing public debt - QE1 was round 1, then the Fed started rolling MBS security repayments into Treasuries starting this past August, now another $600 billion just in time for Wall Street bonus season, what a coincidence!  Nothing but desperate fools thinking that more cheap money can solve a debt problem brought on by cheap money.  Let's see, if we can only make crack cocaine cheaper, then we could solve the drug problem...that's the ticket !!!  Anyone who defends Monetary policy at this point is an Intellectually bankrupt jackass .  Book smart morons, indicative of the comfort seeking class of Baby Boomers (not all, surely) who lack the intellectual honesty and courage to face reality, much less gaze into the fucking abyss.

On the right -  well, you know, Palin & Co's. demented hillbillies, hellbent on creating the new Fascist state, that surely-be-to-God will rise from the ashes.  An American Taliban that will dispense with the liberal nihilists and Limousine liberals with a sweep of the hand.

Wait for it!  Be patient, it's coming....Rome was not burned in a day...

According to the latest EWT, the markets are at a sentiment extreme exceeding the 2007 high, despite being 20% lower in price and attending a punk, Pet Sematary version of the "Goldilocks" economy, that is rolling over by the minute...

Stuck in the Middle With You. 

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.

Citizen Kane on China

We are constantly bombarded with propaganda regarding the Chinese economic "miracle".  Just last week Bill Gates and Warren Buffett both went to China to tour the "miracle" in person.  Also, this week there was an interview in Barron's pleading the case for why the U.S. should NOT impose trade or currency sanctions.  If you read between the lines, this article in a nutshell, indicates why the China/U.S. "relationship" is a latent catastrophe, yet most of the "big boys" are too busy counting their millions and billions to notice.
 
I took the liberty of paraphrasing the interview, both to save time and to cut out all of the extraneous bullshit and get down to the key message.  If you want to read the obfuscated (actual) version, it's here.
 
What you read below is FICTIONAL (Kind of).  I changed the name of the interviewee to protect the "innocent"...
 
Barron's: Mr. CF Kane is an expert in Chinese affairs, having racked up 1.2 million frequent flyer miles  observing the economy from 80,000 feet and from the comfort of the First Class Lounge at Shanghai International.
 
He also teaches at Yale, so he has his head firmly planted up his ass and therefore wears night vision goggles at all times...
 
Barron's: What is your overall thesis regarding China?
 
Mr. Kane: China has sucked America dry and now needs to find a new source of demand for its cheap junk
 
Barron's: A lot of Americans think the U.S. should force China to revalue its currency and/or impose trade sanctions
 
Mr. Kane: That won't fix anything.  The problem for the U.S. is that consumers have too much debt and no jobs
 
Barron's: If the Yuan is raised and trade sanctions are imposed, won't that protect American jobs?
 
Mr. Kane:  No.  All of the jobs have already been outsourced, so that would be closing the barn door after the horses are out.  Besides that would hurt "consumers" and WalMart
 
Barron's: Don't consumers need jobs in order to consume?
 
Mr. Kane:  No.  They just need credit cards and a strong inclination towards delusion.  Listen, you are changing the subject.  The bottom line is that we need to find a new country to buy all of this useless junk from China.
 
Barron's: Can't the Chinese buy their own junk?
 
Mr. Kane: Get serious.  How stupid do you think they are anyway?  Besides, they don't have a Middle Class that can be milked dry
 
Barron's: But what about those 8% economic growth rates for the past decades, didn't that create a middle class?
 
Mr. Kane: Of course not.  That was 8% overall economic growth.  Employment has only grown a measly .5% per year.   China has 350 mega-billionaires and the rest live on 80 cents per day
 
The Chinese intentionally specialized in manufacturing so that they wouldn't have any labour issues and could swap out workers at will.

Barron's: So wouldn't raising the Yuan actually help the Chinese by increasing workers' purchasing power and helping to create a middle class?  At the same time, wouldn't that reduce their reliance on exports and redress the trade imbalances with the U.S.?

Mr. Kane:  Well, that's one way of doing it, but I don't endorse that method.  After all, that would increase costs for the jobless U.S. consumers I was mentioning earlier, but worse yet, it could lower returns on investment and hence stock market prices.  I prefer to hang my hat on this yet undefined and totally fantastical delusion that endogenous (internal) demand will appear out of nowhere.

Barron's:  So, if there is no middle class, then why is there so much investment in infrastructure?

Mr. Kane:  That's stimulus.  After the 2008 debacle, it became clear the U.S. could no longer support the Chinese economy on its own, so the Chinese Government invested its trillions of reserves gained by manipulating its currency, on infrastructure.

You know - bridges to nowhere.  repaving new roads.  Similar to the Obama stimulus.

Barron's: And what happens when investors realize that there is way too much capacity in commercial and residential property units?

Mr. Kane: As long as no one runs for the exits, everything will be just fine.  At the .5% growth in the labour market that I mentioned previously, it will only take about 25 years to work off the excess capacity, assuming the economy stays strong during that entire time..
 
Barron's:  So remind us again why the U.S. should continue to sponsor the Chinese "miracle"?
 
Mr. Kane: Obviously, because if sanctions are imposed or the currency is raised, that would lead to the "nuclear' scenario:
 
1) Everyone will realize that the Chinese economy and the trade relationship with the U.S. is (one of) the biggest Ponzi Schemes ever created
 
2) The Chinese will stop buying dollars and Treasuries, the dollar will tank, and U.S. markets will collapse
 
3) Chinese markets will collapse, there will be mass unemployment and China will revert from Fascism back to Communism, which is not one of the "isms" America endorses
 
The worst part of course is that Wall Street won't get its full 2010 bonus...
 
Barron's:  So basically China has a gun to America's head
 
Mr. Kane: No.  China and America have economic ICBMs pointed at one another with enough delay to ensure Mutual Assured Destruction
 
Barron's:  Is China an environmental catastrophe?
 
Mr. Kane:  It's not as bad as it's made out to be.  As long as you wear a fully enclosed gas mask with oxygen tank, a lead radiation shielding suit, eat only imported food, and sleep in a hyperbaric chamber, your chance of contracting severe carcinoma is roughly 45% over 5 years...
 
Barron's: What about all of these workers at manufacturing plants who are committing suicide.  Does that concern you at all?
 
Mr. Kane:  No, not at all.  We gave everyone a 20 cents per day raise - which is 25%!  Then we had trampolines installed around all of our manufacturing plants, so workers can no longer jump to their deaths.  The bonus is that they have something fun to do during their 10 minute lunch break
 
Barron's:  In all of your time in China, what surprised you the most?
 
Mr. Kane:  The thing that surprised me the most was the breadth of the progress...
 
Barron's:  But I thought they don't have a middle class and most people are wage slaves
 
Mr. Kane:  Right.  I meant the breadth of progress across the top .1% of wealthy University students

Barron's: So, to wrap up, in a nutshell what you are saying is that the politicians - Obama and company, should continue to ignore the trade and currency imbalances that have been accumulating for years, and pretend that everything will work itself out ok in the end?

Mr. Kane:  Well, at least until December 31st, bonus time.  I haven't really thought through what should happen after that...

Barron's:  Alrighty then.  Thanks for your time.

.

A Clockwork Orange

"...our wisdom, too, is a cheerful and a homely, not a noble and kingly wisdom; and this, observing the numerous misfortunes that attend all conditions, forbids us to grow insolent upon our present enjoyments, or to admire any man's happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with every possible variety of fortune..." - Solon

Amazing to believe that this incredibly astute and honest observation was from 2500 years ago.  The majority of the "elite" running the present day Idiocracy never stop long enough to question the hubris of their own inane decisions - bad assumptions built on a pyramid of other bad assumptions.  Similar to conditions that attended during the Dark Ages after the Fall of Rome, science and culture are now entering secular decline, as subjectivity and theology are on the rise.  The only known antidote for anarchy is religion (i.e. mind control), and therefore we will soon receive both (anarchy/theology) in large doses.

We are on the verge of experiencing a monumental transfer of power from the 50+ Baby Boomer generation which has presided over the age of decadence, greed and hedonism that started in the late 1960s.  Consider this last forty year period the Age of Greed.  What we are now entering is the Age of Fear.  What is needed in this new age is a set of tools far different than those found valuable in the prior age.  Power in this age will be held by young men between the ages of 18 and 35 who have copious amounts of testosterone, an underdeveloped conscience, and tremendous cardio capacity, attributes amply exhibited in the UFC generation.  Historically, these have been the Wild Boys who have ruled (violently) during ages of turmoil, for obvious reasons.  The Boomers will quickly yield control albeit unwillingly, having long since grown soft and decadent.   These 50-70 year old over-fed comfort seekers raised during the longest stretch of prosperity in human history will be no match for the new younger breed that ironically the Boomers themselves will have raised.  In short, the Boomers were raised to believe in the triumph of optimism over reality, "vision" over commonsense. Poor qualities to bring to a knife fight.

Combined with the predilection towards messianism and religion described above, there will be new "Taliban" springing up everywhere across the globe.  Be they Muslim, Christian, Sikh or otherwise, they will all exhibit very similar goals and methods.  This process is already well underway not just in the Middle East, but here in the U.S. with the burgeoning militia movement.

The bottom line is that some people are prepared for what comes next, others, not so much...

Faux News

I am constantly amazed by the hypocrisy of all of these hard Right Wingnuts reincarnating themselves as Free Market Libertarians.

From Larry Kudlow, to Michelle Caruso Cabrera, Glenn Beck and all of the hypocritical, wingnut demagogues in-between, these newly minted Libertarians have all put their (very) recent past

behind them to jump on the burgeoning Tea Party bandwagon. Beck, Limbaugh, and the various CNBC propagandists (Kernen, Caruso-Cabrera, Kneale, Kudlow etc.) prove daily that there is nothing quite as rabid as a man (or woman) seeking to protect his own pocketbook regardless of who else may be affected. Granted we should not be surprised in the least to see these newly converted Libertarians wanting to put distance between themselves and their profligate Supply Side past, but their 180 degree about face on spending policy is enough to induce whiplash and takes hypocrisy to all new levels.

To review, the central tenets of the Tea Party are:

1) Fiscal conservatism/Reduced Deficits

2) Return to hard money (gold standard)

- Abolishing the Federal Reserve

3) Smaller government/less regulation

4) International Isolationism

- Downsize U.S. military commitments

5) Dismantling and/or Privatization of Social Programs (e.g. Social Security)

6) Anti-immigration

Some of these are good ideas, which should have never been discarded, that I won't deny. What is galling however, is the fact that the very people who now embrace these newfound ideals are the ones who have been undermining them for the past 30 years.

Take fiscal conservatism as the primary example. It's all well and good to talk about fiscal conservatism when the "other party" is in power. The reality is that up until Obama was elected, these newly minted Libertarians were all ardent "Supply-Siders". For all of the past 30 years, starting with Reagan, the key Supply Side mantra has been "Deficits Don't Matter" (a direct quote from Dick Cheney), and as such they spent accordingly. The Supply Siders have always been closely or directly aligned with the Neo Conservatives (Neo Cons) who advocated for a strong American presence on the International stage - a "Pax Americana", if you will. The Neo Cons were the behind-the-scenes architects of the failed Iraq "Strategy" and the egregious over-commitment of U.S. military resources worldwide. It was an asinine policy that went into overdrive during the Bush Administration leading to two simultaneous wars AND a massive tax cut for the ultra-wealthy. That unsustainable tax cut alone increased the national debt by $2.5 trillion !, yet even as I write this is Congress debating whether or not it should be extended! That's like being bankrupt and debating whether or not to take the annual trip to Club Med. The cost of the two failed wars meanwhile, now exceeds $1 trillion in direct costs. Of course this does not count the coming costs from the downstream fallout as these failed nations turn the entire Middle East into a terrorist safe haven and jeopardize the world oil supply. The bottom line is that as long as the ultra-wealthy and Military Industrial Complex are the primary beneficiaries, then the Right Wingnuts really have had no problem with unlimited Federal Government spending.

Clearly, the Neo Con agenda, supported by most conservatives over the past 30 years is at extreme odds with the Libertarian Tea Party agenda, especially with respect to overseas military commitments and fiscal and monetary conservatism. After all, without the unprecedented fiscal and monetary expansion of the past 30 years, the accompanying military buildup would have never been possible. Ironically, it was another venerated conservative, Milton Friedman who was a key proponent for the U.S. severing the last remaining ties to the gold standard in the early 1970s. That closing of the gold exchange window is what set off the past 30+ years of monetary hyper-expansion culminating in this nascent Deflationary Depression. To a hardcore Libertarian advocating any form of currency other than a gold standard is purely heretical, as indicated by this diatribe against Friedman dating back to 1971. In this battle of ideologies, the Tea Party has the benefit of fiscal sanity and reality working for it, so one can reasonably expect the Neo Con thought dealers to be relegated to the historical dust heap of self-important morons masquerading as intellectuals.

Just as likely, the Neo Cons will merely join their conservative brethren as new born Libertarians. After all, it would not be the first time the Neo Cons reinvented themselves. The fascinating book "They Knew they were Right"Neo Cons starting all the way back in the 1930s when they were Trotskyite Communists (yes, you read that right). Not only that, they opposed U.S. involvement in World War II because it was an "Imperialist War" (whatever that means). You can't make this shit up - somehow the "intellectual" founders of the Neo Con movement migrated from the Far Left to the Far Right over the span of several decades, basically reinventing themselves along the way. Talk about pseudo-intellectualism reduced to basically a meaningless parlour game. The U.S. faces off daily against Taliban fanatics who live in caves, shit in buckets and risk their lives daily for their "cause". Meanwhile, the U.S. side is led by shape shifting thought dealers who change their ideologies like a teen girl changes her hair style.

Objectivity is as dead as a door nail

Before you get the idea that I am some sort of Left Wing Liberal nihilist, I don't regard watching CNN and BBC in one ear and Fox News in the other as some form of moderation. I get it that objective journalism is dead on all sides, which is why traditional media is in a death spiral. As the content of newspapers, television news becomes more degraded and biased, viewership becomes polarized and sectarian, with limited outreach. That in turn feeds back into content cuts leading to more hyperbolic propagandists and even less traditional research and journalism. It now literally takes about only about 5 minutes to read the Wall Street Journal once you skip past the three Opinion/Editorial sections, the Letters to the Editor and the Lifestyle section - basically you are left with about 3 pages of hardcore business content, including the front page.

My overall point is that you can't solve a problem unless you objectively face a problem. Yet, with the overall low quality thought dealership we get from all sides, conveniently reinventing history every four years, and pushing simple answers to complex issues, the U.S. is a LONG WAY from ever finding its way out of this mess.

And lest you think this is a politically motivated diatribe, I do not underestimate the Tea Party movement in the least. They will undoubtedly be the dominant political force for the next decade, if not longer. And either Sarah Palin will be the next President or it will be a demagogue just like her, that is a foregone conclusion.

Those Damn Unions

The latest manifestation of escalating social acrimony is in the form of union bashing, especially public sector unions. Certain blogs and far right journalists have taken upon themselves to launch a vindictive crusade against a sector of the economy that is the last bastion of the American Middle Class. We've hollowed out the private sector middles class, so why not get to work on the public sector as well? Amazingly and appallingly, these "journalists" (to the extent such a profession still exists) and bloggers who attack the public sector unions are seeking to blame the sorry state of the economy on organized labour.

I am not a union member, never have been in one and do not personally have use for one. That said, to blame the perceived or real union bureaucratic inefficiencies in any way for this current economic debacle is absolute and total disinformation. Basic commonsense indicates that the incidence of some nurses, teachers and police officers earning $100k/year after 25 years of service is not at the root of this economic disaster. I fully understand that state and local governments are de facto bankrupt. After all, I predicted that scenario 3 years ago and I am constantly amazed that so few have officially declared bankruptcy at this juncture. Therefore, I also understand that public sector unions will no doubt bear their share of the economic pain, however, that does not mean that they share a proportionate share of the blame for this ongoing fiasco, nor should we think that adding more job losses and salary cuts is going to fix the economy.

Here are a few facts to correct the purveyors of this line of bullshit:

1) Unions and their members did not create the Subprime/financial debacle

Remember, that was Wall Street and their well heeled minions who on average make as much in a month as the average American family earns in a year. That's a lot of pay for adding exactly zero value to the economy and yet being permitted to fuck it (the economy) up all at the same time. Wall Street made tens of billions securitizing garbage loans of all types and then stuck the American Tax Payer with the clean-up bill of roughly $11 trillion. How much is $11 trillion dollars you ask? Well, it's enough to pay all 6 million teachers in the U.S. $60k per year for the next 30 years ! i.e. according to the union-bashing bloggers, we can't afford to pay teachers, but Wall Street can get the equivalent of 30 years of teacher salary basically overnight. Is this a great system or what ! There are some serial disinformers who think that $11 trillion is way overestimated because it includes all of the "assets" (shitty loans) that the Federal Reserve purchased and will eventually sell back to the markets. Ok, whatever...I happen to own this bridge over here...

2) Public sector union members make more money than the average worker: This became true only very recently, since for most of U.S. history it was the other way around. This "crossover" in pay scales is more a function of declining private sector pay as it is from rising public sector pay.

Total (private/public sector) union membership has declined steadily for the past 60 years from a peak of around 36% in 1945 to where it is now at around 12%. During this time, public sector union membership has actually risen from 10% to 36% i.e. public sector union membership is the last holdout of what's left of the American Middle Class. Those who decry "high" union wages apparently want public sector employees to suffer the same fate as their private sector brethren i.e. outsourcing, relentless job turnover/job insecurity and stagnant or declining wages. Contrary to popular assertions, forcing all Americans to have their pay checks slashed in half is not going to fix the economy. Back in the Roaring '90s when Dot Coms were all the rage and many private sector employees were enjoying the fruits of their stock options and bonuses, I don't recall too many people wanting to become a teacher at a $30k/year starting salary. Now that the shoe is on the other foot, public sector employees who have been steadfastly working with little or no upside relative to the economy will be obliged to share in the economic pain of the private sector i.e. no upside, all downside.

3) Public Sector Unions did not outsource millions of jobs to China and India and otherwise liquidate the private sector middle class.

Remember, that was the country-club salesmen CEOs (at the behest of Wall Street), who knew nothing about engineering or manufacturing and took the easy way out by handing all of this country's IC (Intellectual Capital) to America's competitors.

Now we have official unemployment stuck at 10% (unofficially at 16%) with absolutely no sign whatsoever of robust job creation on the horizon. Total debt equating to 350% of GDP is just too big a burden to offset, despite having thrown unprecedented fiscal and monetary stimulus at the economy - way beyond anything attempted during the Great Depression ! So, you can full well expect that unemployment will only continue to rise inexorably from here.

I have said it before and will say it again, any country that trades openly with nations that do not have a labour or environmental standard, will itself substantially degrade its own labour and environmental standards. That my friends is called industrial arbitrage.

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Again, I personally don't care about unions, but behind these big bad unions are every day people trying to make ends meet, who do not need to be vilified by half-baked bloggers and pseudo-journalists who are just redirecting vast bottomless reservoirs of rage at the last vestige of the middle class.