Financial topics

[vincecate]

To say that the CCP is "mostly rational and methodical and not really scared" is absurd.

I see the coming "world financial crisis" as Brenton Woods II coming to an end. So the end of the US dollar's time as the world reserve currency. I think China understands this better than Washington or Wall Street and is taking rational and methodical steps to prepare for this coming financial crisis. I did not mean they are not scared about internal or other problems.

You seem to think that every country is worse than America. You praise the Europeans, when their fiscal policies are just as bad as (or worse than) those of the U.S., and you praise China for being "rational and methodical," when they're actually much worse off than America. Why is that?

Europeans are making some cuts in government. The US Federal government has not started belt tightening yet. The US is printing money like crazy. Europe is not. I don't mean to imply I have confidence in the EU, I don't. I agree they may well break up or crash their currency. I just think that the US has an even higher chance of ruining the currency, so it is rational for China to diversify some of its dollars into Euros. If Europe lets countries default, then there is no risk of hyperinflation and destroying their currency. It seems easier for me to imagine this than to imagine the US deciding to default on their debt when they can print money. Ireland defaulting in the EU is like California defaulting in the US. Neither can print money so they may default. But the US government is different. Again, I know of no case where a country that printed its own currency defaulted on debts in their own currency when they could have printed to pay the debt. So I fully expect the US to print its way into hyperinflation as people stop buying bonds or rolling over bonds and many short term bonds come due.

China is not in debt. So while Japan, UK, and USA could easily go to hyperinflation, and the Euro if the central bank ends up bailing out the countries, I don't see that as a possibility for China. Hyperinflation needs both debt over 80% of GNP and deficit over 40% of spending and China has neither of these. Bilateral trade agreements and buying up real resources seems like prudent moves when the worlds paper money is at risk. Again, I only meant methodical and rational about steps taken related to the possible end of the dollar as the worlds reserve currency.

[Higgenbotham]

An outline of the next sequence of events is beginning to form. It's starting to look like there can be a repeat of events from last year. As we've said, 2007 was about housing debt and 2010 was about sovereign debt. The 2007 crisis started in subprime debt in February 2007 and the 2010 crisis started in European debt in April 2010 (dates are debatable).

I had posted about previous manic runs in the stock market of 521 days and the comparison to the 2007 debacle. Those comparisons indicated the mania might die out around December 10 or 13, but things became even more manic. In December, many indicators such as the ISEE All Equities Index hit levels above the July and October 2007 highs and above the even more manic April 2010 high. Today we see prominent bear and deflationist Mish Shedlock posting about being in agreement with prominent bear David Rosenberg that a double dip recession is not likely to happen in 2011. A consensus seems to be forming that the worst is over and blue skies are ahead for the forseeable future, perhaps similar to April 1930. Elaine Garzarelli, the analyst who predicted the 1987 crash, has stated that the current situation bears no resemblance to 1987 and that Fed money printing and her indicators show the stock market will move up 25%. I would agree that the current situation bears no resemblance to 1987. I was in business that year and had absolutely no concern about what the stock market would do - it was irrelevant.

At the same time, red flags are showing up in the market. Gold dropped $40 one day this week. The Euro is dropping like a stone and that seemed to accelerate today. The dollar is knocking on the door of multi month highs. Today's ISEE Indices and ETF Only value made a multi month low.

What does the Euro and Europe have to do with the US stock market? The obvious answer to that is Europe comprises something like 25% of S&P 500 sales and profits.

(Fact check - this guy says 14%.)

http://www.businessweek.com/investing/i ... _have.html

By many measures, the Eurozone is the largest economy in the world, not the US or China.

The other day a friend asked me what I thought about Alcoa (AA) stock. He didn't say, but apparently he was thinking about buying some. We exchanged a couple e-mails because he really didn't believe what I was saying. Here's what I told him about Alcoa and the Euro:

Regarding AA and the Euro, it could be a very telling study. On the chart of the Euro, there is a time lag from the November 2009 peak in the Euro until AA peaked. I would look at the Euro as possibly making a wave 1 down from there, then AA followed with a wave 1 down. Then the Euro came up in a second wave that topped in November 2010. Again, AA lagged by an almost identical number of days if it just turned over.

The other really important point I see here is more general. AA topped ahead of the stock market and the market went on to a higher high in April, while AA did not. Right now, a lot of pros are looking for a correction like we had last year, then a higher high. I think these guys know their market stuff too well. What I think is going to happen is instead of the S&P being down 110 like it did in January/February of last year, it is going to go down by more like 400. Reason being, as you know, it's probably a wave 3 instead of a wave 1 and it will be very strong. Then once the first part of the wave 3 is done, the market will bounce, but it will not get to a new high like it did last April. It might get back to 1000 on the S&P and that's it.

I'm not saying the above has to happen, but I think the probability of it happening is much higher than anyone thinks.

Another point I would make, and I never noticed this before, is that the wave 2 peak of the larger wave is what put the nail in the coffin. The wave 2 peak on FXE was the week ending January 15, 2010. Now the wave 2 peak on FXE has been this week. AA is dancing with that. You can also see on the weekly chart of FXE how much stronger the movement has been this time around. As the FXE and Europe start to weaken in the first small wave down, there is a rush into the safety of US stocks. Then when it turns over from the small wave 2, everything goes down. I think what will cause everything to be so much worse than it was last year is the US will finally get caught up in it as a lot of state and municipal budgets in the US will collapse this summer like Greece did last year. The subtlety in AA is the earnings haven't been reported yet and I don't see AA doing too much until that happens. But if we see an island top, then a gap down on the earnings announcement that will be an important sign that all of this is going to come to pass.

The market always gets confused at the tops but especially on a wave 2 top. This employment thing this morning puts Bernanke in a box. If he tries to continue pumping money, the Republicans are going to hammer on him to get a few hits in on Obama. They can use that 9.4% number as their tool, even though it is meaningless.

It may look ambiguous, but when the Euro collapses the dollar rises and that has everything to do with speculation and inflation. There is a time lag though. The Euro has been leading everything else, so goods prices are the lagging result of the huge run in the Euro from September to November. All of that has now been wiped out.

Bottom line is the Euro is showing patterns that preceded earlier market cycles within the same context.

At the same time, I noted another red flag today. The ISEE has 2 options ratios, an Equities Only and an Indices and ETF Only ratio. Today the Indices and ETF Only ratio hit a very low 24. This is the type of value that precedes highs and/or crashes in the market with pretty good regularity, especially when the Equities Only is a high number, which it was today. This can be verified by going to the ISEE web site and inputting the various data into the chart at the bottom of the page. It can be noted that the lowest Indices and ETF Only value in 2010 occurred on April 13, 2 days before a high in the stock market and 13 days before the subsequent higher high which was the high for the year. Also, one of the lowest values for the year happened one day before the flash crash.

[Higgenbotham]

Regarding China's government, it would be rational for China's government or any government today to be paranoid.

As far as currencies go, Europe and the world can survive without the Euro. The individual European countries have long experience in managing their own currencies, so getting rid of the Euro will be a huge bump, but nothing compared to what will happen if the dollar system collapses. Naturally, any weakness or demise of the Euro will benefit the dollar. This is happening now and it appears it will continue. Of course, the benefit won't be long lasting; it's just another stage of the longer run collapse.

If what's happening in Europe continues, the world stock markets will get hit again and the dollar will strengthen even more due to that. It looks to me like the world economy is no longer strong enough for the commodities boom to continue after the stock markets roll over. The commodities boom continued for several months after stock markets peaked out in 2007. The world economy still had much underlying strength then. Now it appears everything might peak at roughly the same time.

When the debt crisis spreads to the US states and municipalities, that will be the critical time to evaluate the potential for hyperinflation because that crisis is going to force political action to be taken. My best guess is that the stock market will crash before that crisis hits and Bernanke will be removed and measures will begin to be taken to shut the Fed down. At that point, austerity is possible because the politicians can blame Bernanke for the ensuing pain and they can blame Obama if he gets voted out of office. I had previously said the bottom of the deflation would be 4 to 5 years from the Fall of 2010, or sometime around early 2015, let's say. I believe if Bernanke is allowed to continue destroying the dollar when the US debt crisis hits the states and municipalities (money is printed to fill the gap rather than austerity measures being taken) then the timetable for hyperinflation will be moved up considerably. That remains to be seen, though.

[Higgenbotham]

I found that Cobra did a very nice job of illustrating the point I made 2 posts above about the ISEE. From an October 26, 2010 post on his blog and an accompanying chart, note that today's ratio is even higher than the very high ratio he cited on that day.

http://cobrasmarketview.blogspot.com/20 ... x-and.html

Somehow that eluded him tonight - his post doesn't mention it - even though today's ratio is higher than any value on his chart.

[vincecate]

I believe if Bernanke is allowed to continue destroying the dollar when the US debt crisis hits the states and municipalities (money is printed to fill the gap rather than austerity measures being taken) then the timetable for hyperinflation will be moved up considerably. That remains to be seen, though.

With the latest tax cuts I think the Federal government deficit will be like $1.5 to $2 trillion for the year. For at least the next 6 months Bernanke will be monetizing around $100 billion Federal government debt per month. So in some sense the total for all 50 states of $113 billion for the year is chump change to Bernanke. And if those banks were too big to fail then clearly California is too big to fail. And not having the authority to buy toxic assets for full face value did not stop him. However, if states are bailed out by the Fed then it sets a precedent. The only reason to do it is that the central government can't bear to see states go bankrupt. So even if they say it was a one time thing, the reality will be that the states can all go into debt as much as they want and the Fed will cover for them. Whichever state has the biggest deficit gets the most from the Fed. The states will be off to the spending races.

So I agree. If the Fed bails out the states hyperinflation moves closer.

[weak stream]

It's interesting that Bennie has indicated to the pols that a bailout of states is unwise and that the Fed will not fund it. They have bailed out the banking industry in oh so many ways, oh so many times. It's clear to all where the Fed's allegiances lie and also the very sad fact that they do not know what they're doing. The closed circuit between the Fed and elite academia has created an intellectually inbred and dysfunctional approach to economics. Nowhere in the Federal reserve do you see anyone of the Austrian school or classical (adam smith, david recardo, etc.) persuasion. Clearly, other economic schools of thought would have long since ended this nonsense and put us back into forward gear. The Fed's school of thought has created a morally and mathematically impossible situation. No worries, though, just double down and pray, right? Bailing out anyones private business arrangements is a violation of private property rights and individual economic freedom, generally. These maneuvers were, once upon a time, in this great nation, a capital offense. Understanding generational theory has made me feel like I have a crystal ball, seeing many things so far in advance that it's almost amusing. Anyways, I've been reading John's blog for years and really like his "daily updates" format. I know it's a lot of work but I think John is just compulsive enough to keep trudging forward for our benefit. Thanks John and keep up the fantastic work.

[Higgenbotham]

I believe if Bernanke is allowed to continue destroying the dollar when the US debt crisis hits the states and municipalities (money is printed to fill the gap rather than austerity measures being taken) then the timetable for hyperinflation will be moved up considerably. That remains to be seen, though.

However, if states are bailed out by the Fed then it sets a precedent. The only reason to do it is that the central government can't bear to see states go bankrupt. So even if they say it was a one time thing, the reality will be that the states can all go into debt as much as they want and the Fed will cover for them. Whichever state has the biggest deficit gets the most from the Fed. The states will be off to the spending races.

So I agree. If the Fed bails out the states hyperinflation moves closer.

That's just it. One check to any state is equal to funding all states in perpetuity. My guess is the dollar would collapse overnight, maybe down 20% in one day.

Now let's talk the scenario where the Fed drags their feet and doesn't immediately bail out the states. The states will say, "You used OUR money to bail out YOUR crony bankster pals - where is OUR money?" Then if the politicians haven't already removed Bernanke or taken steps to shut down the Fed, things will get very ugly very fast. I think several state governors could order all Federal tax payments sent to their capitals and begin secession. Strauss and Howe, page 272, their first Fourth Turning scenario. Tick, tick, tick...

[vincecate]

It's interesting that Bennie has indicated to the pols that a bailout of states is unwise and that the Fed will not fund it.

Central banks always talk like they are not going to print money. They all say they want a strong currency. Or if they print money they say that they have an "exit strategy" to take it back. Bernanke has even said, while printing $600 billion in QE2, that he is not printing money. But what they do is what is really important, not what they say. They don't really have an exit strategy. The money is not coming back. They are going to keep printing like crazy. He is right about one thing though. It is unwise.

[burt]

A consensus seems to be forming that the worst is over and blue skies are ahead for the forseeable future, perhaps similar to April 1930.

Yes and NO, people say they are optimistic BUT as soon as you have a small crash (as a few months ago) they become ULTRA pessimistic, so based on what I can observe, people WOULD LIKE to be optimistic BUT IN FACT are VERY anxious.

In that context, stock market CANNOT make a new low within the next months. So pnanicking is a bad idea.

Elaine Garzarelli, the analyst who predicted the 1987 crash, has stated that the current situation bears no resemblance to 1987 and that Fed money printing and her indicators show the stock market will move up 25%. I would agree that the current situation bears no resemblance to 1987. I was in business that year and had absolutely no concern about what the stock market would do - it was irrelevant.

Media try to compare things that CANNOT be compared.
1930: there was no social blanket and the governments had NO experience on how to "solve" a financial crisis, at that time this was a SMALL financial crisis, but it was no badly resolved that it had huge consequences. Today this is much more tricky and the impacts will be (on my point of view) much more tricky and log term.
Governments CAN, and in the real world ARE, taking money from the pension funds, so just pushing the next crisis to a later date.
Governments REACTS, they try to do reasonable things (putting money inside the banking system to give it time fo restructuration)
My one thinking is that we are in the middle of a SYSTEMIC CRISIS.
This is something very special in which NO government has experience, they just prey (as I do) that it will pass over our heads by miracle.
The best analysis I read was made by the previous director of the Swiss National Bank (M. Roth) who wrote (middle of 2010) that as the bank problem was not resolved, he waited for a new financial crisis within the next 5 years.
I think this is a good non paranoid timing: almost no important risk before 2012, as governments can produce the money the banks need.

1987: this was an inflationary period, today we are in the midst of a deflationary period, so forget about the comparison.

A Systemic crisis (with the meaning is has within the theory of the SYSTEMS, is something so bad, that you have only to prey not to be within it).
It has nothing to do with the value of the dollar (too much panic YET about that problem because most people don’t understand what is a Money), or with the survival of the Euro (a big problem, but I think that Europe will find an original solution for that, within the next 3 years (forget about short time evaluation, Europe Is a true monster, with very, very, very low timing for decision and which has STRICTLY no information from the banks on which state they are, on the contrary of the US)), it is indirectly related with the size of the market for derived products (see BIS statistics).

What does the Euro and Europe have to do with the US stock market? The obvious answer to that is Europe comprises something like 25% of S&P 500 sales and profits.

Good remark, I had no idea of the percentage (so thank you for the information), but today, the main companies do business on all over the world, so when you buy IBM, you also buy an Asian market stock and an European market stock.
Thinking locally is wrong, but it is hard to have a non biased view of all the markets together.

By many measures, the Eurozone is the largest economy in the world, not the US or China.

Yes, but at the same time you have VERY different form of the capitalism system in the 3 continents.
It looks like the actual world is going to “topple over” into the China system, which refute all kind of human relationship or rights, if it is true, ALL the social systems are going to be destroyed in the West within 10 years, and this could build a base for a revolution… we’ll see.

Again don’t be paranoid, things are going to move in a VERY slow timing, no main risk within the next 5 years, in Europe (and even in the US) people have too much money to have the desire to make a revolution (and they are much too fat to be able, even, to think), or a war (AT THE SAME TIME the US and China are VERY paranoid countries, WITHOUT rational, who could start a stupid war at any time, both want POWER and NOTHING else.... this is dangerous). European people are "Jellyfish", they do not even try to have opinion, they just want to go to bed quietly... SOME Arabs (NOT the governments, and not the majority of them) want war, because the feel humiliation, if you solve the humilation (which is an emotion) you solve the proble (but I think it is too late, I hope not, but I think it is), again we'll see, but no risk within the next 5 years, or as long as the UN has some power and is upported by the main countries.

Regarding AA and the Euro…

Very interesting note, that anyone should read, thank you.

My own remark is that there is NO known possibility for a true crash YET (it is much too early), but, at the same time ALL technical indicators mean that a correction of 5-10% is due right now.
We’ll see, I think that if we have a 10% correction, people will be so panicked that they will become so pessimist that the market will be ready to move higher, and much higher.
But if they stay optimist, then we will be ready for a crash (mid 2011, not yet).
I do NOT think we are ready for a crash in 2011… and I’m not optimist, stock market game is a poker game (and only a poker game) you have to think in such a way, and not to believe the rational or the medias… Very hard because we are all emotional… and that today, making trading is fighting the best computers which can take into account much quicker that us ANY kind of “law”, so again don’t believe the rational or the PER ratio or ANY ratio.

Gook luck to anyone, I think we are entering in a very wild world.

Burt

[John]

Dear Bertrand,

> My own remark is that there is NO known possibility for a true
> crash YET (it is much too early), but, at the same time ALL
> technical indicators mean that a correction of 5-10% is due right
> now.

> We’ll see, I think that if we have a 10% correction, people will
> be so panicked that they will become so pessimist that the market
> will be ready to move higher, and much higher.

Your words appear to contradict each other. If there's a 10-20%
correction, and the "people will be so panicked," then there will
indeed be a stock market panic and crash.

John