Monday, August 31, 2009

Dow Fire Starts.

Dow Fire Starts. Buy Gold & Stay Strong

By Stewart Thomson | 11 August 2009

1. Fund manager Paul Tudor is not human. He's superhuman. He's the greatest money manager in the history of the world, and in my opinion, nobody is even close to him. The man uses massive leverage, yet he's never had a losing year since he started his fund 20 years ago. His biggest drawdown, ever, was only 13%. Massive performance combined with microscopic drawdowns is what defines the greatest fund managers.

2. Paul was quoted by Bloomberg yesterday in a rare public statement. He says the stock market advance since March is a "…bear-market rally. We are not inclined to aggressively chase the market here."

3. I translate that statement as "We're going to new lows, and the public should prepare for their financial deaths". The Dow longs are in the banksters' toaster. And one of their kids is just now making his way to the kitchen. Question: What happens when the kid presses the start button on the toaster? I hope none of you get to find out. Here's the Dow chart. I've layered in the RSI and MACD. What I see here is fund manager Wile Coyote smoking a big dynamite stick, that he thinks is a cigar:

Click Here, or on the image, to see a larger, undistorted image.

4. If we take out the lows on the Dow at 6500, I've got to wonder about Warren Buffett. His bizarre move to write a zillion OTC derivative put options on the Stock Market could be the end of him. My numbers could be off, but if the Dow fell to around 4000, I think Warren goes into the hole for about $50 billion. If he is wiped out or badly harmed financially, the public will lose all hope, and begin a complete liquidation of all their stock market holdings. [[Actually, Warren sold a long-term European type put which cannot be exercised until the final day— which is 10 years from the date it was sold (in 2008, I believe), ie, in 2018.: normxxx]] I will cover the shorts I've been piling on into this strength, and then reverse to the buy while the public permanently exits the risk arena. The public is still "all in" on the stock market. They believe the market exists to make them money.

5. The market exists to take the public's money. Meantime, Mark Mobius, successor to Sir John Templeton, says the global stock markets could take a huge 30% hit. Most of you know I began shorting the stock market about two weeks ago around 9000. I thought we might get up towards 9500-10,000. (You may remember I was almost alone in the gold community buying into the lows of 6500.) You should also remember my postings into gold 905, again virtually alone on the buy.

6. I don't care about calling tops and bottoms. But because of my buy and sell tactics, my largest buys always come at the exact bottom of every market move and my largest sells at the exact top[!?!]

7. I mention all this because I need your attention now. The bankers plan to watch you blow yourselves up again. They want you to start selling your gold now. The carrot will be "you'll back get in cheaper" later. Don't do it. You have to get rid of thoughts like, "If support breaks, we're heading lower," and start laying in your buy orders at those lower prices.

8. I doubt if more than 10% of the gold community have any buy orders for gold at lower prices in the market right now. Probably 50% of you have stoploss (takeloss) orders instead. Throw your stops in the garbage and replace them with buy orders. Don't sell the world's lowest risk investment into weakness as a loser. Buy it into weakness side by side with the bankers. As a winner.

9. In the past couple of weeks I've really emphasized the importance of separating where you think the market is going from tactics. The Dow has been strong, so it must be sold. That's a reality not open to discussion.

10. Now we have the first "shots across the Dow bull's bow" with the Tudor and Mobius blockbusters. Sadly, those of you who recently bailed on failed Dow shorts and switched to long are probably now feeling somewhat ill as you wonder, "What does Tudor know, am I about to fry again?" To answer that question, ask yourself this: "Did I make a mistake buying general equity stocks after they jumped 300% in 5 months, after the Dow itself leaped a mind-boggling 43% in 5 months?" You know the answer.

11. Most of you are still placing far too much emphasis on charts and analysis. I'm not joking when I mention following Granny in the grocery. Price goes up a little, sell a little. Price goes up a lot, sell a bigger amount. Do the reverse on the buy. It really is this simple. Charts are interesting. Making money is a lot more interesting. Follow charts yes, but not when they go against Granny.

12. When does the gold community and the hedge fund community, en masse, break the chains to the bankers? Answer: When price going up sees you on the sell and price going down sees you, as a group, on the buy. Also: put down the home run bats, forget about swinging for the fences. Keep the buys small. Smaller than you think is rational.

13. If you are fully invested, use price strength to take a modest amount of risk capital off the table— at a profit— so you can function in the market when weakness comes, whether that weakness is now, or 5 years from now. Be prepared.

14. I sense substantial fear coming into the gold market, right now, amongst the technical analysts. Too bad for them. I was a buyer of yesterday's $30 price weakness in gold. If we get more weakness today I buy more than I bought yesterday. I've spoken about what I believe is the ideal 70-30 gold mix, where you allocate 70% of your gold risk capital to longs, 30% to shorts. NEVER let your short position exceed your long position at any point in time. I personally never let it exceed 1/3 of my existing long position and suggest those of you who are playing gold super timer to think hard about what I'm telling you.

15. When you play with leveraged ETFs, I'd rather see most of the acting in the currency markets. First, currency and physical gold markets are likely to remain open during a stock and perhaps even a bank "holiday". Second, you need to be able to execute dozens of buys on leveraged ETFs to stay in the game when price moves against you, or you can be wiped out.

Gold could rise 20% while your bear gold ETF falls 90%. If gold falls, the US dollar rises, generally. Rather than buying a bear gold ETF with 30% of your risk capital, allocate 30% to the US dollar. Here's a look at the US dollar. The number two currency in the world. Number one, of course, being Gold.

I've been a buyer of the US dollar into last week's weakness. The cash register is starting to ring this week already. Remember, you don't have to be a dollar bear if you are a gold bull. When you are booking profit on gold, you should be buying USD. One money-making party is good, but two are better! This is a trade on USD.

When the USD drops into the 60s on the index, that should be like buying gold at $400. If you could buy gold at 400 today, would you? Don't try to pick the bottom for the USD. We're likely soon going to enter the final stage of the USD bear market. I suggest you buy into it. Again, what I'm talking about here is a trade. I expect the USD to become a massive buy later on, probably as gold crosses $1500-2000.

Click Here, or on the image, to see a larger, undistorted image.

16. China. When the US dollar is re-backed with gold via Jim Sinclair's gold certificate ratio [[forget it— it'll never happen— it's the goldbugs' Shangri-La: normxxx]], a huge USD bull market will commence and the Chinese economy and markets will likely have a horrific crash. I believe this is part of the bankers' scheme hatched decades ago, stage one of which was to move the global manufacturing centre from the USA to China. [[Yet another conspiracy theory!: normxxx]]

The banksters' game is unchanged: Let the public build a massive economy with money you loan to them. Once it's all built up, then you crash the whole show and buy, the bulk of it, for pennies on the dollar. The global bankers have exactly the same game in play for the Chinese markets.

17. I bought the FXI, the Chinese "Dow" into the meltdown lows last October, and I've been booking profit all through this strength. Currency markets tend often to make intermediate tops in line with stock market tops.

18. As an example, the Dow peaked out around when the Canadian dollar did in the fall of 2007. Anybody listening? Rather than getting involved in leveraged ETFs, where you don't really understand the mechanics of these items, consider trading currencies as a play against your stock market and gold plays.

19. You can maintain bull plays on the Euro, the USD, the Cbone, the Aussie, and gold. I believe it is a massive error to be shorting the USD while being long gold.

20. Currency markets have tremendous liquidity. The trading hours are fantastic, and ETFs are available on most of the majors.

21. Currency trends last a long time, generally much longer than stock market trends. You can make money buying the Aussie and the USD, both in bull plays, using buy programs for both.

22. While one moves up against the other, you are booking profit on one while buying the other.

23. Gold of course is the ultimate currency, but the others should not be ignored. The biggest investors focus on currencies, not stocks. What kills most investors in the currency markets is trade size. Most investors trade in $100,000 lot increments, but you can trade in any size, even 10 dollars!

24. You can go a long time failing to make money in the market. Like the saying "there's a fine line between genius and insanity", there's a very fine line between profit and loss in the market. That line is defined far and away by trade size and the decision to buy only weakness and sell only strength. While you may have spent years or even decades losing money in the market, if you take the steps of chopping your trade size drastically and buying weakness/selling strength, you'll soon cross over the line to consistent profits! [[Boring, but consistent!: normxxx]]

Moving On To Q3 Earnings

Moving On To Q3 Earnings

By Bespoke Investing Group | 31 August 2009

Now that the second quarter earnings season is behind us, we look ahead to the third quarter to see where expectations stand. Below we highlight the consensus estimate for Q3 year-over-year earnings growth for the S&P 500 and its ten sectors. As shown below, the Financial sector is expected to see earnings grow by a whopping 617.8% from Q3 '08 to Q3 '09! For those that remember Q3 '08, it wasn't a pretty sight for the Financials, so the starting point shouldn't be too tough a number to grow on.

But 617.8% is still nothing to laugh it, and it is indicative of the significant turnaround the Financials have seen in less than a year. The S&P 500 as a whole is expected to see earnings decline by 21.8% in the third quarter. Consumer Discretionary is the only other sector expected to see year-over-year growth in the third quarter. Materials and Energy have the worst estimates at -69.2% and -66.7%, respectively.

Estinated Q3 '09 S&P 500 Earnings Growth

Top Performing Financial Stocks Year To Date

The average stock in the S&P 500 Financial sector is up 17.28% year to date. For those interested, below we provide a list of the top 25 performing stocks in the sector in 2009. As shown, XL Capital, Genworth Financial, and CB Richard Ellis are all up more than 100% year to date, and just after them come the big boys— Goldman Sachs, Morgan Stanley, and American Express. The bounce that these Financials have seen since their March lows is almost as extreme as the declines they saw in 2008 and early 2009— almost.

Saturday, August 29, 2009

The Whole Chinese Economy Is A Bubble

Forget About The Chinese Stock Market, The Whole Chinese Economy Is A Bubble Waiting To Burst

By Vitaliy Katsenelson | 29 August 2009

Financial commentators are obsessively debating whether the recent rise in the Chinese stock market means there's a bubble— and if so, when it's going to burst. My take? Who cares! What happens to the broader Chinese economy is what we should really be watching. It will have a far-reaching impact on the rest of the world— much more far-reaching than a decline in stocks.

Despite everything, the Chinese economy has shown incredible resilience recently. Although its biggest customers— the United States and Europe— are struggling (to say the least) and its exports are down more than 20 percent, China is still spitting out economic growth numbers as if there weren't a worry in the world. The most recent estimate put annual growth at nearly 8 percent. [[Its imports are even supporting much of Asia, including Japan.: normxxx]]

Is the Chinese economy operating in a different economic reality? Will it continue to grow, no matter what the global economy is doing? The answer to both questions is no. China's fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s.

Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups— and its growth became slightly artificial. These dot-coms were able to buy Lucent's equipment only by raising money through private equity and equity markets, since their business models didn't factor in the necessity of cash-flow generation.

Lendable funds to buy Lucent's equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.

The United States, of course, isn't a dot-com. But a great portion of its growth came from borrowing Chinese money to buy Chinese goods, which means that Chinese growth was dependent on that very same borrowing. Now the United States and the rest of the world is retrenching, corporations are slashing their spending, and consumers are closing their pocket books.

This means that the consumption of Chinese goods is on the decline. And this is where the dot-com analogy breaks down. Unlike Lucent, China has nuclear weapons. It can print money at will and can simply order its banks to lend. It is a communist command economy, after all. Lucent is now a $2 stock. China won't go down that easily.

The Chinese central bank has a significant advantage over the U.S. Federal Reserve. Chairman Ben Bernanke and his cohort may print a lot of money (and they did), but there's almost nothing they can do to speed the velocity of money. They simply cannot force banks to lend without nationalizing them (and only the government-sponsored enterprises have been nationalized). They also cannot force corporations and consumers to spend. Since China isn't a democracy, it doesn't suffer from these problems.

China's communist government owns a large part of the money-creation and money-spending apparatus. Money supply therefore shot up 28.5 percent in June. Since it controls the banks, it can force them to lend, which it has also done.

Finally, China can force government-owned corporate entities to borrow and spend, and spend quickly itself. This isn't some slow-moving, touchy-feely democracy. If the Chinese government decides to build a highway, it simply draws a straight line on the map. Any obstacle— like a hospital, a school, or a Politburo member's house— can become a casualty of the greater good. (Okay— maybe not the Politburo member's house).

Although China can't control consumer spending, the consumer is a comparatively small part of its economy. Plus, currency control diminishes the consumer's buying power. All of this makes the United States' TARP plans look like child's play. If China wants to stimulate the economy, it does so— and fast. That's why the country is producing such robust economic numbers.

Why is China doing this? It doesn't have the kind of social safety net one sees in the developed world, so it needs to keep its economy going at any cost. Millions of people have migrated to its cities, [[and now, with employment rapidly deccelerating, they are back-migrating, but: normxxx]] now they're hungry and unemployed. People without food or work tend to riot.

To keep that from happening, the government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system stabilizes. It's forcing banks to make loans— which will create a huge pile of horrible loans on top of the ones they've originated over the last decade. But don't confuse fast growth with sustainable growth. Much of China's growth over the past decade has come from lending to the United States. [[This has kept U.S. (and, indeed, world) interest rates artificially low, inducing artificially stimulated consumer spending, eg, on Chinese exports, …: normxxx]]

China now suffers from real overcapacity. And now its growth comes from internal borrowing— and hundreds of billion-dollar decisions made on the fly don't inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.

This growth will result in a huge pile of bad debt— as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much.

Another casualty of what's taking place in China is the U.S. interest rate. China sold goods to the United States and received dollars in exchange. If China were to follow the natural order of things, it would have converted those dollars to renminbi (that is, sell dollars and buy renminbi). The dollar would have declined and renminbi would have risen.

But this would have made Chinese goods more expensive in dollars— making Chinese products less price-competitive. China would have exported less, and its economy would have grown at a much slower rate. China chose a different route.

Instead of exchanging dollars back into renminbi and thus driving the dollar down and the renminbi up— the natural order of things— China parked its money in the dollar by buying Treasuries. It artificially propped up the dollar. And China is sitting on 2.2 trillion of them.

Now, China needs to stimulate its economy. It's facing a very delicate situation indeed: It needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Its currency would skyrocket— meaning the loss of its competitive low-cost-producer edge.

Or, U.S. interest rates would go up dramatically— not good for its biggest customer, and therefore not good for China. This is why China is desperately trying to figure out how to withdraw its funds from the dollar without driving it down— not an easy feat. And the U.S. government isn't helping: It's printing money and issuing Treasuries at the fastest clip in history, and needs somebody to keep buying them. [[Besides the Fed, that is.: normxxx]]

If China reduces or halts its buying, the United States may be looking at high interest rates, with or without inflation. (The latter scenario is most worrying.) All in all, this spells bubble trouble— a big, big Chinese bubble. Identifying such bubbles is a lot easier than timing their collapse. But as we've recently learned, you can defy the laws of financial gravity for only so long. Put simply, mean reversion is a bitch. And the longer excesses persist, the harder the financial fall that will bring China's economy back to Earth.

Wednesday, August 26, 2009

Inflation Ahead!?!

Porter Stansberry Explains The Forces Behind The Current Rally

By Porter Stansberry In The Daily Crux: | 24 August 2009

Lots of folks are scratching their heads, wondering why the stock market seems to want to go straight up. Can it last much longer? No, we haven't seen inflationary pressures leak into most commodities or consumer goods yet. But that's normal. Big monetary inflations, like the one going on right now, always hit the banks first. Look at the chart below of the Financial Sector ETF (XLF):

As long as the banks and the brokers are making money, the stock market will keep going up. And as long as the government keeps printing trillions of dollars each year, while holding short-term interest rates at nearly 0%, financial stocks are going to keep going up, too. I call what's happening the "run up".

At the beginning of a big inflation, it feels good to everyone. Everything starts going up— stocks, real estate, agriculture, metals, etc. People begin to believe the government's inflation was the correct answer to all of our problems. They say: Just print more money— that way nothing bad has to happen.

Of course, the good times don't last. The purchasing power of the currency eventually collapses. But at the beginning… everything soars. I think we're in that period. There's a huge wave of money surging into the market, and it's blowing past all of the regular limits.

More evidence of my "run up" theory: Sales of previously owned homes jumped 7.2% in July. That's the fourth month in a row sales increased. And July's number was the biggest increase since they started keeping track of these statistics in 1999. The last time sales rose four consecutive months was July of 2004— smack dab in the middle of the real estate boom.

What accounts for this good news? Why should home sales be soaring when home prices are plummeting and mortgage defaults are rising? There's only one explanation— the "run up". And as if on cue, the financial pundits are already claiming the government's inflationary policies are what saved us. Wrote Paul Krugman last week: "We appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why."

Sure, if you're willing to ignore every single historical example of big government's runaway deficit spending and the impending bankruptcy of our entire country, then catastrophe no longer seems likely. But if you know anything about economic history and the compounding nature of interest, then you know catastrophe is now assured. The "run-up" will feel great. And the big government folks will claim they've saved the day. But just watch what happens to the value of our currency over the next two to three years.

Tuesday, August 25, 2009

Notes On Residential Real Estate

Nine Notes On Residential Real Estate

By David Merkel | August 17, 2009

On to tonight's topic, real estate and its effect on the real and financial economies.

1) Principal forgiveness— it is what underwater homeowners want, and what they are least likely to get. Principal forgiveness means that a loss has to be taken by someone now. Adjust the rate, adjust the term, adjust the amortization— it is all tinkering, even if it lowers the payment slightly, because the owner is still inverted on his mortgage. [[Reminds me of "East Side Al", who lost a $1 on each shirt he sold… but made it up in volume!: normxxx]]

Ideas like lowering the principal, but giving the bank a large chunk of the price appreciation at sale, or say 30 years out, would be cute, but still, the bank (or juniormost MBS certificate holder, who usually directs the servicer) would take a loss now. [[So, fugedaboudid— banks are not about to do any business that means taking a present loss— even for huge profits down the road.: normxxx]]

So, I'm not surprised when I read articles like these:
Governments have power, but it is very difficult to fight the economics of the situation [[People tend to be rather irrational about their economic survival— often second only to their biological survival, if that: normxxx]]. One further note, as is mentioned by a few of the above articles, is that the most profitable situation for the lenders/servicers, is [when] the present property owner teeters on the edge of solvency, not only paying the mortgage slowly, but paying additional [eg, late] fees in the process.

2) Will there be a second foreclosure wave? Maybe. First American CoreLogic argues that it will be the existing wave continuing. I tend to agree with CoreLogic for the following reason: when you have enough of the mortgaged homes of the country underwater, it is difficult to slow the rate of foreclosure, because foreclosures happen to properties that are underwater where one of the following occurs:
  • Death

  • Divorce

  • Unemployment

  • Disability

  • Disaster

  • Strategic default (buy a nicer home cheaper, then stop paying off on this overpriced piece of garbage)

  • Debt reset/recast

3) The GSEs, despite the rally, are still in lousy shape. Fannie lost $14.8 Billion, and tapped the Treasury for liquidity. Freddie earned less than $1 billion, but only because they revalued assets $5 billion higher. Their regulator believes that they won't be able to repay all of the aid that the US has granted them. My verdict: the common of each company is an eventual zero. Stay away. Thrillseekers that like zero shorts, don't do it; the odds are good for a zero, but the payoff is asymmetric.

4) What percentage of homeowners are or will be upside-down or underwater?
I favor the estimates of First American CoreLogic. First, they have great data. Second, my view is that properties with greater than 90% LTVs are likely upside-down in a sale due to closing costs. The inflection point in mortgagee behavior occurs between 90-100% LTVs, not at 100%+.

That's why we are in such deep trouble. With 32% of all mortgages inverted, there will be many more foreclosures, and prices should still head downward, even on the low end.

5) But maybe things aren't so bad, at least on the low end.
6) All that said, the high end isn't seeing much action, and prices continue to sag. There aren't many move-up buyers.

7) What characterizes the underwater borrower? Cash-out refinancing, and home equity loans. The home as an ATM always relied on the "greater fool" theory implicitly— that there would always be a greater fool willing to buy out the home at a greater price than the new amount of leverage. On the home equity loans— banks are doing all that they can to avoid recognizing losses. With home equity loans, losses are usually total. The only thing that surprises me here is that it has taken this long to get to realizing the losses. [[Not if you delay the foreclosing process long enough!: normxxx]]

8) So you want appraisers to be honest, but not just yet? Appraisers, auditors, etc.— third party evaluators are conflicted— he who pays the piper calls the tune, and no one is willing to have the buyer pay for the appraisal. So now the appraisers try to be honest and business can't get done?! Those who hire appraisers, make up your minds; do you want a few short term deals, or do you want reliable long term business?

9) On the dark side, many option ARMs will default even before the payments recast. [[Yes, even Prime ARMs.: normxxx]] That means the next recast 'wave' will be more gradual, but it won't be any less troublesome in aggregate.


Property Values— Eight Key Charts
Click here for a link to supplementary article with bigger/better visuals:

By Michael David White | 19 August 2009

AFFORDABILITY (8/5/09): The affordabilty of real estate is shooting through the roof— ie, in the right direction— in a great way. The important questions are: Do buyers have the down payment? Does affordability justify taking on the other risk factors listed below?

DEBT BE NOT PROUD (8/11/09): One school of thought says excess debt must be paid off or written off before we will achieve dynamic growth. This "Low Debt" and "High Debt" chart shows that the magnitude of the excess debt could be far beyond reasonable. If this school is correct, then we may have years or decades of slow growth unless we take radical steps to massively reduce debt issued during the credit bubble. The outlook for real estate investment is negative based upon this school of thought.

NEGATIVE EQUITY— TEN-TON GORILLA (8/13/09): How many homeowners would make money by walking away from their mortgage? Whether the number is 11 million or 25 million, the low and the high estimates in this graph, the risk factor is wildly high. It's exactly like Cheech & Chong on Spring Break in Cancun and they are going in to rehab after this last hurrah.

Click Here, or on the image, to see a larger, undistorted image.

NEGATIVE EQUITY (8/5/09): Negative equity is a major risk factor for which no good research has been done. It's reasonable to suspect that we may experience a foreclosure wave as this variable worsens. Some owners will not pay on their mortgage if it will take five or ten years [[or maybe never? : normxxx]] to get to break even. Social factors are believed to play a major role. And we could hit a tipping point— after which all hell breaks loose. Bet your bottom dollar that the Fed and the Treasury have this at the top of their "freak patrol" chart.

NEGATIVE EQUITY (8/6/09): The graph shows half of all mortgages issued in 2006 have a balance greater than the value of the house securing the loan. What will happen to loan performance if 50% of all mortgages are worth more than their collateral? Nobody knows, and if nobody knows, then a wildly massive risk factor cannot be forecast. If you think that that is impossible, please note that Deutsche Bank issued a report in early August saying that 48% of all mortgages would be worth more than their collateral by 2011. This is unchartered territory adjacent to the galaxy beyond the next universe.

SALES— PRICE (8/5/09): THE FALL IN PRICES: There is a lot of good news in the stock market today, but sentiment would turn 180 degrees if it was known that property values would eventually fall 60% from their peak. They have already fallen 30%. If values fall according to the estimates in this graph, it is a certainty that banks and financial companies will fail en masse. There has been some good news about real estate prices lately, but the vast majority of indicators are still negative.

SALES— UNITS (8/5/09): Looking at the long trend, there has never been a serious problem in terms of the number of units sold. The quality of the sales is another question.

SALES— UNITS (8/5/09): NEW vs. USED: A wide gap between sales of new homes and existing homes suggests the stress level in the property market remains elevated. [[And continues to bode ill for the homebuilders.: normxxx]]

(Corporate) Bond Issuance Bursts Through $1 Trillion

(Corporate) Bond Issuance Bursts Through $1,000bn

By David Oakley and Ed Hammond, FT | 18 August 2009

[ Normxxx Here:  Well, I guess the corporate honchos, at least, are not banking on (pun intended) forward earnings!  ]

Global corporate bond issuance has risen above the $1,000bn mark— the first time it has broken through this threshold in a single year— with four months remaining of 2009.

The boom is because of the difficulty companies face in obtaining bank loans and strong demand from investors, who can gain a big yield pick-up on corporate paper compared with government bonds. Investors have switched more of their cash into corporate bonds because they offer better returns than the low interest rates on bank deposits and savings accounts. Corporate bond issuance has risen to $1,103bn so far this year, beating the annual record of $898bn in 2007, according to Dealogic, the data provider.

The jump in issuance has been seen in dollar, euro, yen and sterling-denominated deals. Volumes in dollar, euro and sterling have risen to record annual highs, only eight months into the year, while volumes in yen are close to record levels. Dollar issuance has risen to $487bn, euro issuance to $299bn, yen issuance to $64bn and sterling issuance to $53bn.

In contrast, volumes of syndicated bank loans this year are down 52 per cent vs. 2008 and 69 per cent down vs. 2007, as banks are more reluctant to lend as they repair their balance sheets. So far this year, syndicated bank lending has risen to $1,052bn compared with $2,182bn over the same period in 2008 and $3,369bn over the same period in 2007. Richard Batty, investment director at Standard Life Investments, said: "Corporate bonds are the number one asset choice. We are very overweight in corporate bonds. This is because the spread of corporate bond yields over government bond yields more than compensates for any company default risk."

However, investors are much more choosy over the bonds they buy than they were before the credit crisis, parking most of their money in the big, established investment grade companies in sectors such as utilities and oil and gas. Of the $1,103bn raised this year, $989bn, or 90 per cent, has been in investment-grade bonds, with 30 per cent issued by companies in the utilities and oil and gas sectors.


Insider Buying Remains Near Record Lows

By ThePragmaticCapitalist/InsiderCow | 24 August 2009

24 August 2009 By 11 Comments

One of the most confounding components of the 50% rally in stocks since March has been the extraordinarily low levels of insider buying compared to insider selling. As we've been reporting for months, the negative trend in insider buying and selling continues today. The latest insider buying and selling statistics continue to show a vote of no confidence from corporate insiders. In the last two weeks insiders purchased just over $17MM versus sales of over $700MM. All of this makes you wonder what corporate insiders are seeing that the investment community isn't. The following chart from insidercow shows just how skewed the data has been in recent months:

Click Here, or on the image, to see a larger, undistorted image.

Click Here, or on the image, to see a larger, undistorted image.

Monday, August 24, 2009

The Bounce Is Aging, But The 'Depression' Is Young

The Bounce Is Aging, But The 'Depression' Is Young
Click here for a link to ORIGINAL article:
By Robert Prechter, President, Elliott Wave International | August 21, 2009

The following is an excerpt from Robert Prechter's Elliott Wave Theorist.

On February 23, EWT called for the S&P to bottom in the 600s and then begin a sharp rally, the biggest since the 2007 high. The S&P bottomed at 667 on March 6. Then the stock market and commodities went almost straight up for three months as the dollar fell. On March 18, Treasury bonds had their biggest up day ever, thanks to the Fed's initiating its T-bond buying program. The next day, EWT reiterated our bearish stance on Treasury bonds. T-bond futures declined relentlessly from the previous day's high at 130-15 to a low of 111-21 on June 11.

That's when there were indications of impending trend changes. The June 11 issue called for interim tops in stocks, metals and oil and a temporary bottom in the dollar. The Dow topped that day and fell nearly 800 points; silver reversed and fell from $16 to $12.45; gold slid about $90; and oil, which had just doubled, reversed and fell from $73.38 to $58.32. The dollar simultaneously rallied and traced out a triangle for wave 4. Bonds bounced as well. As far as I can tell, our scenarios at all degrees are all on track.

Corrective patterns can be complex, so we should hesitate to be too specific about the shape this bear market rally will take. But from lows on July 8 (intraday) and 10 (close), the stock market may have begun the second phase of advance that will fulfill our ideal scenario for a three-wave (up-down-up) rally. In concert with rising stocks, bonds have started another declining wave, and the dollar appears to have turned down in a wave 5, heading toward its final low.

Although commodities should bounce, their wave patterns suggest that many key commodities will fail to make new highs this year in this second and final phase of partial recovery in the overall financial markets. Meanwhile, our forecast for a change in people's attitudes to a less pessimistic outlook is proceeding apace. Here are some of the reports evidencing this change:

More than 90 percent of economists predict the recession will end this year. [The] vast majority pick 3rd quarter as the time. (AP, 5/27)
Manufacturing and housing reports this week may offer signs that the recession-stricken U.S. economy is within months of hitting bottom, economists said. (USA, 6/15)
[[It certainly will, for manufacturing at least, thanks the the "clunker buy-back" program. But, as FDR proved, government largesse cannot alone kick-start a sustainable recovery. Maybe a hot war? : normxxx]]

Fewer people say they've prospered over the past year than in decades, a USA TODAY/Gallup Poll finds. Over the past two months, however, expectations for the future have brightened significantly amid rising optimism about a stock market rebound and economic turnaround. "I think the administration is going in the right direction…" Now 36% of those surveyed in the Gallup-Healthways well-being poll say the economy is getting better.

That's not exactly head-over-heels exuberance, but it is double the number who felt that way at the beginning of the year and a notable spike in the nation's frame of mind. Thirty-three percent say they're now satisfied with the way things are going in the United States; in January, just 13% did. (USA, 6/23/09) If only to confirm the socionomic causality at work, an economist quoted in the article above muses, "The one anomaly in the puzzle is that people shouldn't be feeling better because the jobs market is so terrible and unemployment is likely to keep rising."

Of course it would be an anomaly, and people should not feel better, if mood were exogenously induced. But it is endogenous, and it precedes social actions, which produce events such as job creation and elimination. That people feel better is evident in our rising sociometer, the stock market. If the rally continues, economists will soon agree that the Fed's "quantitative easing" and Congress' massive spending are "working."

Those predicting more inflation and hyperinflation will have the last seeming confirmation of their opinions. Then, a few months from now, some economists will probably express similar puzzlement when the stock market starts plummeting again despite the fact that the economy has 'improved'. But all of these considerations are temporary. Conditions are relative, and behind the scenes, the depression has been, and still is, grinding away.

For more information, download the FREE 10-page issue of Bob Prechter's recent Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You'll find out why the worst is NOT over and what you can do to safeguard your financial future.

Thursday, August 20, 2009

All About Confidence And Gullibility

Why Today's Stock Markets Are All About Confidence And Gullibility

By J. S. Kim | 11 August 2009

Historical precedents illustrate that the public is easily deceived, but I still have a difficult time comprehending how any intelligent person can possibly buy into Abby Joseph Cohen's statement that "We do think the new bull market has begun". (Cohen is chair of Goldman Sachs' investment policy committee.) Given that global stock market behavior seems to reflect so well the Consumer Confidence Index with particularly close correlation between the US Conference Board CCI and the behavior of the US S&P 500 index, perhaps the CCI should be renamed the Consumer Gullibility Index.

The last time I specifically wrote an article about an imminent US market crash titled, "Will US Markets Crash Now— or Later?" on April 23, 2008, the S&P 500 peaked just 17 business days after I made that call, at about 1,440, and then proceeded to fall until it bottomed at 666 in early March of the following year. I think that we would all agree that a plunge of more than 50% aptly qualifies as a crash, yet if you visit that article, you will see that the bulk of comments that followed my article ridiculed my prediction back then, even though I was supremely confident that my prediction would manifest itself. Today, by my estimation, there are just two possible dénouments to a global stock market rally that has occurred on the backs of government deception and financial industry executive prevarication. [[But, of course, financial industry executives are paid to lie! : normxxx]]

(1) Once the low summer volume trading ends and the computerized trading programs of Goldman Sachs et al cannot manufacture fake rallies, the market will crash; or
(2) The bulls will be right about US and other global markets rallying another 10% to 20% higher from this point, as anything is possible given markets that are driven by fraud; but this surge higher will ultimately end in a crash as well.

So which scenario do I think is more likely? At this point, I believe scenario (1) is more likely, though it is entirely plausible that scenario (1) may coincide with scenario (2)[!?!] Though Abby Cohen calls for a new bull market, any intelligent person will tell you that a sustainable bull market is not possible when unemployment in the US is hovering at about 20% and likely going to worsen, at least in the near future; when foreign institutions have not only stopped buying US Treasuries, but have been dumping Treasury debt on a net basis for many months now; when the US manufacturing base has contracted and exports of real goods have fallen at the quickest rate in decades. [[And this after contracting for decades now, through bull and bear.: normxxx]]

Of course, there are "official" government statistics that will refute what I just stated here, but since I have already written extensive and detailed articles about why the bulk of all key economic indicators released by governments worldwide are fake and unreliable, I'm not going to re-hash these issues here. To understand why people like Abby Cohen make such bold public predictions as of a new bull market developing now, just refer to the Consumer Gullibility Index chart below and it should be immediately apparent why fraud and deception is the number one export of governments and financial executives worldwide. And should this market eventually crash as I believe will happen, I am also quite sure, despite Abby Cohen's very public call of a new bull market, that Goldman Sachs will be on the right side of this trade and make significant profits from the downside as well.

A true bull market should produce a sustained rally for several years with periods of moderate, not steep, corrections. If, when I dug well beneath the surface of the mindless "expert" banter that broadcasts 'signs of economic recovery are everywhere', and I had seen significantly improving economic fundamentals, I would be the FIRST PERSON to state that the economic crisis is over and a new bull run is on its way. Unfortunately, I cannot make this call because this is NOT what I see right now. I see a 'confidence bubble' forming that when reality causes it to burst, will drag down stock markets once again.

In the above chart, the solid red line represents the CCI and the jagged S&P500 chart has been superimposed over it.

Steep corrections in markets happen after Central Banks create huge 'bubbles', i.e., distortions, in markets through the creation of artificially low interest rate/easy money environments and when investment firms use TARP [[and other freely created Fed: normxxx]] money and computerized trading programs to manipulate markets against their normal tendencies. We live in an investment environment of unprecedented and systemic fraud, and one can quite successfully argue that it is foolish not to account for how this fraud will affect the behavior of stock markets.

Furthermore, it is prudent to predict that the majority of the public will be fooled by this activity. For now, deceptive earnings reports allowed by deceptive accounting techniques [[in accordance with 'relaxed' GAAP standards, i.e., no Mark to Market required for the foreseeable future…: normxxx]], combined with dishonest statements from government and financial executives [[both of whom are motivated to keep market prices high while the Hummongous Banks and Brokers (HB&B) 're-capitalize' on the backs of unsuspecting investors: normxxx]], and manipulative actions undertaken by large commercial investment firms [[eager to avoid that last walk down the aisle to BK: normxxx]] have created a massive rally. In fact, on June 2nd, 2009, I wrote an article whereby I expressed my belief of how the current fraudulent activity would affect US stock markets titled, "Telltale Signs that a Significant US Market Correction Won't Happen in the Immediate Future".

Though we are getting much closer to the next crash, I still need to see more signs and conditions develop before I will say that we are on the brink of the next crash. And sure, this rally could continue even beyond the expectations of the bulls. But is this scenario likely?

Again, the failure of the general investing public to realize that they were being fleeced in early 2008 was quite evident from the reaction to my "Will US Markets Crash Now— or Later?" article written in late April, 2008. In response to Goldman Sachs' alumnus Abby Cohen's prediction of a new bull market, the only way I can assign any credence to her prediction is if you define a bull market as one that is driven higher by market manipulation bordering on, if not actually, fraud— and one that will certainly end in massive failure. If that's your definition of a 'bull' market, then it is possible we may have a new bull market.

However, if your definition of a bull market is a strong market built on a solid foundation of a healthy, recovering economy that doesn't wipe out the wealth of its participants with a big future crash, I guarantee you that what we have today is not that situation. If you wonder why Abby Cohen predicted a new bull market, just sneak another peak at the CCI chart above and realize that financial executives and high government officials are the biggest purveyors of deceit-manufactured 'confidence' in the world today.

But one thing you must realize is that though HB&B are the biggest purveyors of deceit, they are also the biggest profiteers of this deceit, and will once again be properly positioned to take advantage of the bursting of this "confidence bubble". Since they manufacture these confidence bubbles, they are the best positioned to know when they will burst as well. That is the irony of this whole game. They benefit on the upside and downside because they help create the upside and downside.

If you are interested in seeing just how the financial elites manufacture false confidence bubbles that inevitably must burst, watch US Congressmen grill ex-Goldman Sachs' CEO Hank Paulson about his behavior when he was US Treasury Secretary at this video blog.

To reiterate, I can only see two future outcomes of this current rally: (1) a big failure or (2) a massive failure. I just don't think the odds of a moderate correction in the midst of an ongoing rally that takes markets to significantly higher heights are favorable or likely unless somehow (1) Wall Street has figured out how to use their computerized trading systems to permanently rig markets on an unending path higher; or (2) economic fundamentals drastically change in an unforeseen fashion by the end of this year. And if this rally continues unabated (especially in US markets), the steeper it climbs, the [harder] it will likely fall.

As I stated above, it is foolish not to consider how manipulative financial behavior can cause a disconnect between stock markets and economic reality and thus produce irrational rallies that last for an irrationally long period of time. [[The year 2007 comes to mind.: normxxx]] However, it is equally foolish not to consider and account for the multiple factors that can and eventually will cause a sharp reversal in the same aforementioned irrational market behavior. Account for and closely watch these factors, and if you've been on the long side of this rally, you will know with a fair degree of certainty when it is appropriate to bail out of this hot-air balloon ride.

The last time I called a market crash in April, 2008 and it happened, I basically made the call because I saw nothing fundamental that could sustain that rally despite the load of hot air that the financial media was distributing throughout the mass media about "recovering" fundamentals (sound familiar?) This time around, I'm quite certain that the same people that were fooled and hurt in Round One will be fooled and hurt in Round Two of this iteration of the investment and monetary deception game.

It is a shame that those that purposefully fuel such games of deception and fraud, and ruin the financial lives of millions, end up on TV instead of in jail. Yet, it is truly up to each individual investor to dig deep enough to discover the facts for oneself. The truth about this economic and monetary crisis will never be freely offered through the mainstream media. When considering what to do at this point, if I were an investor that still believed in investing in the major indexes of world markets, I'd rather be on the sidelines now and miss that last irrational 15% higher climb (if it happens) rather than remain on board and experience that initial plunge during the scary ride down. [[Alternatively, you can buy enough puts to hedge most, if not all, of any gains you have realized since March… But buy at least 6 month puts; and don't be greedy, buy out of the money puts.: normxxx]]

Sunday, August 16, 2009

There's No Quick Fix

There's No Quick Fix To The Global Economy's Excess Capacity

By Ambrose Evans-Pritchard | 16 August 2009

There is one overwhelming fact about the world economy that cannot be wished away. Excess capacity in industry is hovering at levels not seen since the Great Depression.

Too many steel mills have been built, too many plants making cars, computer chips or solar panels, too many ships, too many houses[[, too many malls: normxxx]]. They have outstripped the spending power of those supposed to buy the products. This is more or less what happened in the 1920s when electrification and Ford's assembly line methods lifted output faster than wages. It is a key reason why the Slump proved so intractable, though debt then was far lower than today.

Thankfully, leaders in the US and Europe have this time prevented an implosion of the money supply and domino bank failures. But they have not resolved the elemental causes of our (misnamed) Credit Crisis; nor can they. Excess plant will hang over us like an oppressive fog until cleared by liquidation, or incomes slowly catch up, or both. Until this occurs, we risk lurching from one false 'dawn' to another, endlessly disappointed.

Justin Lin, the World Bank's chief economist, warned last month that half-empty factories risk setting off a "deflationary spiral". We are moving into a phase where the "real economy crisis" bites deeper— meaning mass lay-offs and drastic falls in investment as firms retrench. "Unless we deal with excess capacity, it will wreak havoc on all countries," he said.

Mr Lin said capacity use had fallen to 72% in Germany, 69% in the US, 65% in Japan, and near 50% in some poorer countries. These are post-War lows. Fresh data from the Federal Reserve is actually worse. Capacity use in US manufacturing fell to 65.4% in July.

My discovery as a journalist is that deflation is a taboo subject. Those who came of age in the 1970s mostly refuse to accept that such an outcome is remotely possible, and that includes a few regional Fed governors and the German-led core of the European Central Bank. As a matter of strict fact, two-thirds of the global economy is already in "deflation-lite".

US prices fell 2.1% in July year-on-year, the steepest drop since 1950. Import prices are down 7.3%, even after stripping out energy. At almost every stage over the last year, in almost every country (except Britain), deflationary forces have proved stronger than expected.

Elsewhere, the CPI figures are: Ireland (-5.9), Thailand (-4.4), Taiwan (-2.3), Japan (-1.8), China (-1.8), Belgium (-1.7), Spain (-1.4), Malaysia (-1.4), Switzerland (-1.2), France (-0.7), Germany (-0.6), Canada (-0.3). Even countries such as France and Germany eking out slight recoveries are seeing a contraction in "nominal" GDP. This is new outside Japan, and matters for debt dynamics. Ireland's "nominal" GDP is shrinking 13% annually: debt stands still.

Global prices will rebound later this year as commodity costs feed through— though that may not last once China pricks its credit bubble after the 60th anniversary of the revolution in October. My fear— hopefully wrong— is that we are being boiled slowly like frogs, complacent until it is too late to jump out of the deflation pot. The sugar rush of fiscal stimulus in the West will subside within a few months.

Those "cash-for-clunkers" schemes that have lifted France and Germany out of recession— only just— change nothing. They draw spending forward, leading to a cliff-edge fall later. (This is not a criticism. Governments did the right thing given the emergency).

The thaw in trade finance has led to a V-shaped rebound in East Asia as pent up exports are shipped. But again, nothing fundamental has changed. Deficit countries in the Anglo-Sphere, Club Med, and East Europe are all on diets. People talk too much about "liquidity"— a slippery term— and not enough about concrete demand.

Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a "credit event" that could have been avoided by a monetary blast (helicopters/QE). Under that schema, this time we should be safely clear of trouble before long. Mr Livingston's "Left-Keynesian" view is that a widening gap between rich and poor in the 1920s incubated the Slump.

The profit share of GDP grew: the wage share fell— just as now, in today's case because globalisation lets business exploit "labour arbitrage" by playing off Western workers against Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.

I reserve judgment on this thesis, which amounts to an indictment of our economic model. But whether we like it or not, Left or Right, we may have to pay more attention to such thinking if Bernanke's credit fix fails to do the job. Back to socialism anybody?

The Market's Beginning A Final Blastoff

The Market's Beginning A Final Blastoff

By Dr. Steve Sjuggerud | 12 August 2009

"Hey Steve, my old day-trading buddies just called… The market's up… They're back into it again!" I couldn't believe my ears… "What day-trading buddies?" I asked politely.

"Back in the late nineties, I got into day-trading with some other guys. I turned three thousand bucks into fifteen grand!" "Then what?" I said… I knew that couldn't be the end of the story. "Then I lost it all…"

That's a real conversation I had this week. This friend was so mesmerized by the idea that he could turn $3,000 into $15,000 again, he'd put the outcome of his trading a decade ago out of his head. The stock market's up 50% since March. Apparently, some of the old dot-com traders are getting back in.

Back in March, when I was saying "buy," those traders were nowhere to be found. But now that the market has run farther faster than anyone can remember, they're getting in. They're late to the party… but that doesn't mean the party is over just yet.

If you are nervous, you can bail now. But here's what I suggest instead: Change seats. Move to a seat that's closer to the theater exit. I believe we'll see a rush for the exits sometime in the next two months. Sentiment is simply too optimistic.

The trend is near its end. So we need to position ourselves close to the exits. What I mean by that is, we need to set our trailing stops and follow them… tighten them up if you must.

Do what you can to keep your upside potential here… but ensure that your downside risk is minimized. The best tool for this job is trailing stops. You might wonder, "Steve, why even bother hanging around in stocks now, when you know sentiment is so bullish… when you know investors are so optimistic again."

The short answer is, you can potentially make a lot of money if a "blast off" stage materializes. You don't want to miss that. I learned the longer answer from the writings of legendary hedge-fund manager George Soros.

Soros says, find "the trend whose premise is false, ride that trend, and step off before it is discredited." That's the goal here. Another thing Soros said (according to fund manager Stan Druckenmiller) is "It takes courage to be a pig". OK, then that's what we're doing, too.

The stock market is up 50%. From this point, the trend is "false"— it's just speculative money piling in from here. We don't believe in it… but we'll ride the trend as high as we can. Through our trailing stops, we hope and expect to step off without a bit of stress when the time comes, before the crowd runs for the theater exits. Also, the statistics back up what I'm describing.

My friend Jason Goepfert at SentimenTrader tracks investor sentiment. His data suggests the potential for what I've described. For example, his "dumb money" confidence index recently jumped above 70— a very high level… which in itself is a danger sign. And whenever the difference between the "dumb money" confidence and the "smart money" confidence gets wide, Jason gets interested… Right now, both of these are happening.

Jason crunched the numbers for when those two things happen together and found that stock market history shows what I've described… Whenever the crowd gets this optimistic, the market can run higher for a while… before it gives all those gains back.

Times felt terrible in March. As we said here in DailyWealth, that was the time to buy. Things feel much better out there now. So the end of the rally is closer. But don't bail [yet]. Have courage. Keep holding your positions, as there could still be significant upside in the next few months… Just make sure you have a close eye on the exit door (through trailing stops), and pull the plug without hesitation when your trailing stops are hit.

We have the potential for a blastoff, before a bust. Position yourself accordingly.

Good investing,


Are You The Smart Money Or The Dumb Money?

By Dr. Steve Sjuggerud | 14 August 2009

Corporate insiders are selling… The ratio of insider sellers to buyers reached "the second-highest extreme of the past six years," my friend Jason Goepfert reported yesterday on his website. Who knows more about a business and its prospects than the 'insiders'? Nobody. So when corporate-insider selling hits an extreme, it's a danger sign for the market.

Meanwhile, individual investors typically know less about investing than larger investors. And Jason also reported yesterday that individual investors are particularly excited about stocks again: "The percentage of respondents in the American Association of Individual Investors survey moved to… one of the most extreme [bullish] readings yet of the bear market." The message here is simple… The smart money (corporate insiders) is selling. Meanwhile, the dumb money (individual investors) is excited about stocks. The dumb money is buying.

Which group are you in now? Are you selling stocks, or buying them? Are you with the smart money or the dumb money? Me? I'm with neither group… Here's why: Corporate insiders often sell too early [[actually, they usually sell too early! They invariably sell into rising markets and buy from falling markets— that way they can't be accused of 'insider' trading: normxxx]]. They [may also sell heavily] when they're scared… but the market usually continues higher for a few more months afterwards. As I described two days ago here in DailyWealth [see above], I believe I can catch those few more months (if they happen)— as I know they can lead to "blastoff" type gains. I hope to keep most of my gains by using tightened trailing stops.

Meanwhile, individual investors have been buying… and they've been right so far. Yes, we've now reached an extreme level of optimism for individual investors. But the trend in the market is still up. The trend is a powerful thing that can (and often does) go to a yet more extreme level than anyone imagines possible. The old saying is true… Don't fight the trend. So I won't.

We've had a fantastic bull run since March. And we're seeing the classic signs that it's near its end. The smart money is selling and the dumb money is buying. You shouldn't ignore those facts.

But we do have an incredible situation… The Fed cut interest rates to zero (which helps just about all assets soar in price) and we have a strong uptrend in stocks. You can't ignore those facts, either.

Right now, the Fed and the uptrend are trumping the reality of the smart and dumb money. So I'm staying in stocks. But as I explained two days ago, I'm moving a lot closer to the exit door…

Good investing,



The Fight Between Inflation And Deflation Is Over

By Porter Stansberry | 15 August 2009

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
— Ludwig von Mises

For most of 2009, I've had a friendly disagreement with several colleagues who believe a big deflation will be the end result of the 2008 financial crisis. I knew they were wrong. I knew inflation would become a problem sooner, rather than later. And in the past several months, I believe I've been proven right.

[ Normxxx Here:  Maybe; maybe not!  ]

The mortgage and banking collapse of 2007-2009 saw [[the highly inflated: normxxx]] total [[asset— housing, the stock market, etc.: normxxx]] collateral values collapse between $5 trillion and $10 trillion. The response from our politicians and central bankers was massive: the largest creation of "wholly new" money since the Civil War.

The Federal Reserve created roughly $2 trillion in additional credit and lent it against all kinds of dubious collateral, things like Bear Stearns' mortgage book. (There's a handy and simple guide to estimating the Fed's credit quality: The greater the number of acronyms in the lending programs, the worse it gets.)

The Federal government responded with a record annual deficit of at least $1.8 trillion. In the second half of 2008, the outstanding federal debt grew by roughly a 40% annualized pace (24% for the entire year). Thus, in only a few months' time, the roots— the money and credit— underlying our economy expanded at a record pace.

In the second half of last year and the first quarter of 2009, the main question in the world's financial markets was: Can the world's government print enough money, fast enough, to forestall a deflationary collapse?

I knew it was no contest. There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit.

Let's look at the numbers. Let's assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that's a huge hit— roughly half the output of our economy each year. It's the equivalent of sending every American household a bill for $50,000— due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months.

The fight between inflation and deflation is over. Deflation was knocked out in the first round.

The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama's budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy.

The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There's no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn't have the resources or the knowledge to escape the dollar.

This Chart Is the Simplest, Best Reason to Own Gold
The Greatest Currency Trade of the Millennium
Our Exploding Money Supply

How can you "escape"? First off, make sure you own plenty of gold bullion. I also recommend owning assets that will run higher in an inflationary environment, like vital transportation and energy assets. Also, own some good farmland. Food and land prices will go higher. Yes, the news is grim… but if you own gold and strategic assets, you'll survive and prosper in the coming inflation.

Good investing,



New Bull, New Bubble, New Meltdown By 2012

New Bull, New Bubble, New Meltdown By 2012
Brutal 'Collateral Damage' Will Follow Recovery

By Paul B. Farrell, Marketwatch | 11 August 2009

ARROYO GRANDE, Calif. (MarketWatch)— Something's in the air. You can feel it. A new bull. Hype? Maybe, but also a roaring new bull— and eventually another meltdown.
Television is a metaphor for our cycles, so see how America's becoming a huge ratings competition:
  • "America's Got Talent." Complete with kooky judges like "The Hoff" (ex-Baywatch lifeguard David Hasselhoff), Ozzy's wife, and Piers Morgan (no relation to JP). And you've got to love those wacky contestants going mano-a-mano for Nielsen ratings against those noisy "disrupters" being sent to health-care town hall meetings by the GOP crew. A sure sign America's employment picture is improving and the economy is in recovery.

  • "Who Wants to Be a Millionaire?" Regis Philbin, the original moderator, is back for 11 fabulous nights in August. Why? A cover-up? Maybe it's tied to all the TARP money paybacks and hot earnings that let the "too-greedy-to-fail" banks make more Wall Street insiders millionaires. Wall Street loves Regis upstaging Goldman's giveaway of bonus billions from taxpayers.

  • "Cash for Clunkers". The Chicago school of behavioral purists might say this program is a perfect example of economist Joseph Schumpeter's "creative destruction" in action. It's also great television, rivaling Nascar, Chopper Mania, Monster Trucks and the local demolition derby.

Yes, folks, America loves talent, wants to be a millionaire, loves to destroy stuff, and then rebuild. Cars, jobs, careers, retirement portfolios, the economy, the stock market. You can see this metaphor in other great television programs: "Big Brother," "Hell's Kitchen," "Lie to Me," "Criminal Minds," "Are You Smarter Than a Fifth-Grader?" The point is, TV's a great barometer for the American soul, and it's screaming "bull!"

Yes, Americans want another bull, another bubble, even another meltdown. Guess what? It's already here, folks. The next big market-economic-business cycle has arrived ahead of schedule. This is what makes us America. We love challenges, risk-takers and winners. The nobody who suddenly becomes a big somebody is the biggest of all TV metaphors for who we are.

America's got talent. Where else can you see The Hoff screaming "You got talent!" to Grandma Lee, a craggy 75-year old comedian? Or Piers rooting for a bunch of half-time acrobats back-flipping off trampolines? Or Sharon Osbourne cheering for Kevin Skinner, an unemployed chicken farm-hand who looked like a hobo but wowed us with a voice like Randy Travis.

New, Bigger Bubble— And A Meltdown Ahead

Yes, folks, a new bubble cycle is already in motion. You can feel the energy building, the kind that fueled the meltdowns of 1998, 2000 and 2007. We never resolved the problems fueling the dot-com insanity. We made matters worse feeding the subprime credit-derivatives disaster with cheap money, Reaganomics ideology and two costly wars. Lessons were never learned, nothing was ever resolved. [Everyday] matters continue deteriorating [from before cy2000].

Behind the hoopla, the Wall Street conspiracy has dumped $23.7 trillion new bailout debt on taxpayers. The bill will come due. But for now, we're getting their wish: A new bubble is accelerating, thanks to America's "too-greedy-to-fail" Wall Street banks.

Folks, you can bet on it, sure as Regis is hosting "Who Wants to be a Millionaire?" The bull, a bubble, and another meltdown are virtually certain and accelerating faster than earlier cycles, coming by 2012. How to profit? Ride it up for a couple years, then pray you'll have enough brain left to bail out in time before the crash (most don't) because at that point the euphoria is blinding, like a cocaine addiction.

Want more proof of inevitability? Here are some visionaries who aren't working for Wall Street's hype machine: Michael Lewis, former Wall Street trader and author of "The Big Short: Inside the Doomsday Machine," recently told Newsweek: "There's a false sense that it's over, that the crisis is passed". …But the bailouts have merely postponed the inevitable. "We are in for another day of reckoning down the road."

The next one will be bigger, "badder," a real demolition derby. Several months ago, in a Vanity Fair article, "Wall Street Lays Another Egg," Harvard financial historian Niall Ferguson sounded more like a shrink: "Markets are mirrors of the human psyche". Like individuals "they can become depressed … even suffer complete breakdowns."

The five stages of a bubble popping

In the 400-year history of stock markets
"there has been a long succession of financial bubbles," Ferguson says.
"Time and again, asset prices have soared to unsustainable heights only to crash downward again". It's an all-too-familiar cycle, in fact, so familiar is this pattern— as described by the economic historian Charles Kindleberger— that it is possible to distill it into five stages:
  1. Displacement: "Some change in economic circumstances creates new and profitable opportunities". Last year's historic bailout, election, new ideology.

  2. Euphoria or overtrading: "A feedback process sets in whereby expectation of rising profits leads to rapid growth in asset prices". Goldman is proof.

  3. Mania and bubble: Prospects of "easy capital gains attract first-time investors and swindlers eager to mulct them of their money". More bubbles: 2010-2011.

  4. Distress: "Insiders discern that profits cannot possibly justify the now exorbitant price of the assets and begin to take profits." Wall Street replays 2007-2008.

  5. Revulsion or discredit: "Asset prices fall, the outsiders stampede for the exits, causing the bubble to burst." Yes, 2008's brutal meltdown repeats in 2012.

The culprit? The Fed, Ferguson says: "Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks". So the next bubble (and meltdown) is virtually certain, thanks to Washington's $23.7 trillion explosion in debt.

Revolution Coming With Next Meltdown

Americans are not going to put up with the "Wall Street Conspiracy" ripping off investors and taxpayers [indefinitely]. Wall Street got rich sticking us with mountains of debt for generations to come.

Expect a major house-cleaning, a second American Revolution. We predicted the "Great Depression 2" around 2012. Well, we doubt taxpayers will passively sit still one more time, as in the 1930s, in 2000, and the past few years.

Next time voters will take a page from the history books about past revolutions in the American Colonies, France and Russia. A perfect storm will erupt in a massive global credit meltdown, bringing down Wall Street and the clandestine $670 trillion 'shadow central banking system'. And the collateral damage will be massive and widespread, in areas such as these:
  • Lobbyists' power is lethal to our values. The 'special interests' running and destroying American democracy, will self-destruct.

  • Derivatives: Cap 'n trade will crash worse than subprime. The Goldman Conspiracy's spending millions lobbying for trillion-dollar derivatives.

  • "Too-greedy-to-fail" big banks will trigger harsh backlash. Banks pay huge bonuses yet modify only 9% of 4 million stressed home loans.

  • America's wealth gap will trigger grass-roots rebellion. Wall Street's greed is so pervasive, gluttonous and obvious the rest will rebel.

  • The "Goldman Conspiracy" will be a target for retribution. Goldman's hubris is most egregious and flagrant. Their arrogance will backfire.

  • A wave of 'creative destruction' will revive commercial banking. Investment bankers are killing commercial banking, Glass-Steagall will return.

  • Secrecy protecting Wall Street's unethical behavior to end. Wall Street's control over Washington's lawmaking will come to an end.

  • The Fed's 'shadow banking' will collapse under excess debt. Central bank balance sheets overdrawn, feeding new bubble with cheap money.

  • "Black Swans" of huge, unintended consequences. Next bubble, highly unpredictable, huge collateral damage on Wall Street.

Make the most of this new bull. Then get out— before you're the collateral damage.