Second Half Of 2010: Sudden Intensification Of Global (Economic) Crisis

Geab N°42:
Second Half Of 2010: Sudden Intensification Of The Global (Economic) Crisis.
Strengthening Of Five Fundamental Negative Trends.

By Leap/E2020 (February 16, 2010)— | 3 March 2010

[ Normxxx Here:  WARNING: The authors of this piece are noted anglophobes who have predicted the utter demise of the US dollar (USD) and British pound (GBP) for over a year now!?! …with the ascendency of the Eurozone and euro accordingly, of course! However, outside of this "blind spot", they frequently are quite prescient about world economics.  ]

LEAP/E2020 is of the view that the effect of [sovereign] States' spending trillions to "counteract the crisis" will have fizzled out. These vast sums had the effect of slowing down the development of the systemic global crisis for several months but, as anticipated in previous GEAB reports, this strategy will only have ultimately served to clearly drag States into the crisis caused by the financial institutions. Therefore our team anticipates, in this 42nd issue of the GEAB, a sudden intensification of the crisis in the second half of 2010, caused by a double effect of a catching up of events which were temporarily "frozen" in the second half of 2009 and the impossibility of maintaining the palliative remedies of past years.

As a matter of fact, in February 2010, a year after we stated that the end of 2009 would mark the beginning of the phase of global geopolitical dislocation, anyone can see that this process is well established: [[maybe so; but their prediction was also for at least two states, namely, the US and UK to have already defaulted on their debt! : normxxx]] states on the edge of bankruptcy, remorseless rise in unemployment, millions of people coming to the end of their social security benefits, falling wages and salaries, limiting of public services and disintegration of the global governance system (failure of the Copenhagen summit, growing Chinese/US confrontation, return of the risk of an Iran/Israel/USA conflict, wars worldwide (1)). However, we are only at the start of this phase for which LEAP/E2020 will supply a likely timeframe in the next GEAB issue.

The sudden intensification of the global systemic crisis will be characterised by the acceleration and/or strengthening of five fundamental negative trends:

•  the explosion of the bubble in public deficits and a corresponding increase in [sovereign] state defaults;
•  the fatal [effect on] the Western banking system with mounting debt defaults and the wall of debt coming to maturity;
•  the inescapable rise in interest rates [[as lenders disappear and borrowers proliferate, seemingly 'ad infinitum';: normxxx]]
•  the increase in issues causing international tension [[which, in less troubled times, could have been 'handled';: normxxx]]
•  a growing social insecurity [[primarily among the— up to now— growing 'middle class': normxxx]].

In this GEAB issue our team expands on the first three trends of these developments— including an anticipation on Russia's position in the face of the crisis, as well as, of course, our monthly suggestions.

In this public announcement, we have chosen to analyse the "Greek case", on the one hand because it seems [pre]dicative of what 2010 has in store for us, and on the other because it is a perfect illustration of the way in which news and information on the world crisis is moving towards "make-believe news" between blocs and interests which are increasingly in conflict. Clearly it is a "must" to learn how to decipher the worldwide news and information, which will be a growing means of manipulatory activity, in the months and years to come.

Progression of the percentage of net new U.S. debt bought by China, net new U.S. government borrowing, percentage of outstanding U.S. Treasuries owned by China (2002-2009)— Sources: US Treasury, Haver Analytics, New York Times

The five characteristics which make up the "Greek case" into the tree with which one tries to hide the forest:

We look at the Greek case which has concerned the media and experts for several weeks now. Before entering into the details of what is happening, there are five key points to our anticipation on the subject:

1. As we stated in our anticipations for 2010, which appeared in the last GEAB issue (GEAB N°41), the Greek problem will have disappeared from the international media's radar several weeks from now. It is the tree [being] used to hide both a forest of much more dangerous sovereign debt (to be precise that of Washington and London) and the beginning of a further fall in the world economy, led by the United States (2).

2. The Greek problem is an internal issue[!?!] for the Eurozone and the EU, and the current situation provides, at last, a unique occasion for the Eurozone leaders to require Greece (a case of "failed enlargement [expansion?]" since 1982) to leave its 'feudal' political and economic system behind. The other Eurozone countries, led by Germany, will do the necessary to make Greek leaders bring their country into the XXIst century in exchange for their help, at the same time making use of the fact that Greece only represents 2.5% of Eurozone GDP (3) to test the stabilisation mechanisms that the Eurozone needs in times of crisis (4).

3. Ango-Saxon leaders and media are using the current situation (just as last year with the so-called banking tsunami coming from Eastern Europe which was "going to carry the Eurozone away with it" (5)) to hide the catastrophic progression of their [own] economies and public debt and attempt to weaken the attractiveness of the Eurozone[!?!] at a time when the USA and the United Kingdom have increasing difficulty in attracting the capital which they so desperately need. At the same time Washington and London (which, since the coming into effect of the Lisbon Treaty is completely excluded from any management of the Euro) would be overjoyed to see the IMF, which they control completely (6) ?[[and not without reason, since the overwhelming/lion's share of IMF funds are from the US: normxxx]], brought into Eurozone management.

4. Eurozone leaders are very happy to see the Euro fall to 1.35 against the Dollar. They well know that it won't last because the current problem is the fall in the value of the Dollar (and the Pound Sterling), but they appreciate this "whiff of oxygen" for their exporters. [[But, nevertheless, the exact opposite of what LEAP/E2020 predicted scarcely 6 months ago! Do we detect a note of 'sour grapes' or chagrin here?: normxxx]]

5. The speculators (hedge funds and others) and banks heavily involved with Greece (7), have a common interest in trying to bring about rapid Eurozone financial support for Greece, since otherwise the rating agencies will, unintentionally, pull a fast one on them if the Europeans refuse to dig into their pockets (like the scandalous actions of Paulson and Geithner over AIG and Wall Street in 2008/2009): indeed a lowering of Greece's rating will plunge this small world into the throes of serious financial losses if, for the banks, their Greek loans are similarly devalued, or if their bets against the Euro don't work out in due course (8).

2008 comparison of the deficits and Eurozone GDP of Portugal, Ireland, Greece, Spain, France and Germany— Source: Der Spiegel / European Commission, 02/2010
Goldman Sachs' role in this Greek tragedy… and the next sovereign defaults

In the "Greek case", just as in every suspense story, a "bad guy" is needed (or, following the logic of an old-style tragedy, a "deus ex machina"[[sic; a 'deus ex machina' is the very opposite of a 'bad guy', since it refers to a 'providential event/miracle' which rescues our hero at the very last moment: normxxx]]. In this phase of the global systemic crisis, the role of the "bad guy" is usually played by one of Wall Street's big investment banks, in particular by the leader of the gang, Goldman Sachs. The "Greek case" is no different as indeed this New York investment bank is directly implicated in the budgetary conjuring tricks which allowed Greece to qualify for Euro entry, whilst its actual budget deficits would have disqualified it. In reality it was Goldman Sachs who, in 2002, created one of its cunning financial models of which it holds the secret (9) and which, almost [invariably] resurfaces several years later, to blow up the client. But what does it matter, since GS (Goldman Sachs) profits [in the meantime] were the beneficiary!

In the Greek case what the investment bank proposed was very simple: raise a loan which didn't appear in the budget (a swap agreement which enabled a ficticious reduction in the size of the Greek public deficit (10). The Greek leaders at the time were, of course, 100% liable and should, in LEAP/E2020's opinion, be subjected to Greek and European political and legal process for having cheated the EU and their own citizens within the framework of a major historic event, the creation of the single European currency.

But, let's be clear, the liability of the New York investment bank (as an accomplice) is just as great, especially when one is aware of the fact that Goldman Sachs' vice-president for Europe was, at the time, a certain Mario Draghi (11), currently President of the Italian Central Bank and a candidate (12) to succeed Jean-Claude Trichet at the head of the European Central Bank (13).

Without wishing to pre-judge Mr. Draghi's role in the affair of the loan manipulating Greece's statistics (14), one should ask oneself if it wouldn't be worthwhile to question his involvement in the affair (15). In a democracy, the press (16), like parliaments (in this case Greek and European), are expected to take on this task themselves. Considering the importance of GS in world financial affairs these last few years, nothing that this bank does should leave governments and legislators indifferent.

It is Paul Volcker, current head of Barack Obama's financial advisors, who has become one of the strongest critics of Goldman Sachs' activities (17). We already had the occasion to write, at the time of the election of the current US President, that he is the only person in his entourage having the experience and skills to push through tough measures (18) and who, at this moment, knows what, or rather whom, he is talking about.

With this same logic, on the issue of transparency in financial activities and state budgets and using the ill-fated role of Goldman Sachs and of the large investment banks in general as an illustration, LEAP/E2020 takes the view that it would be beneficial for the European Union and its five hundred million citizens, to exclude former managers of these investment banks (19) from any post of financial, budgetary and economic control (ECB, European Commission, National Central Banks). The mixing of these relationships can only lead to even greater confusion between public and private interests, which can only be to the detriment of European public interests. To begin with, the Eurozone should immediately require the Greek government to stop calling on the services of Goldman Sachs which, according to the Financial Times of 01/28/2010, it still uses.

If the head of Goldman Sachs believes he is "God"— as he described himself in a recent interview (20)— it would be prudent to consider that his bank, and its lookalikes, can behave like devils, and it is therefore wise to draw all the [necessary implications]. This piece of advice, according to our team, is valid for the whole of Europe, as well as every other continent. There are "private services" which clash with "public interests": just ask Greek citizens and American real estate owners whose houses have been repossessed by the banks!

To conclude, our team suggests a game to convince those who seek where the next sovereign debt crisis will surface: simply look for those states which have called upon Goldman Sachs' services in the last few years and you will have a serious lead (21)!

— -—
Notes:

(1) The recent statements of G. W. Bush's Secretary to the Treasury, Hank Paulson, about the fact that Russia and China plotted to bring down Wall Street in the autumn of 2008 show the extent of the big global players' paranoia. Source: Daily Mail, 01/29/2010.

(2) During the last four years our team has regularly exposed the anomalies in calculating US GDP. We will make no further comment here on this very "Greek" aspect of American statistics. As to the development of the American economy over the next few months, it is sufficient to note that the Truck Tonnage Index went into freefall in January 2010, just as it did at the end of the first half of 2008. Source: USAToday, 02/11/2010.

(3) See the chart below which puts the "Greek problem" into [perspective with respect to] Eurozone GNP.

(4) For which GEAB has emphasized the necessity for four years, as well as the wide public support (an average of more than 90% according to GlobalEurometre monthly polls) that a Eurozone economic governance could count on.

(5) As a reminder here, GEAB N°33 was one of the rare media sources which, in Spring 2008, revealed the dishonest and manipulative aspects of the big fear of a "banking tsunami" coming from Eastern Europe which was supposed to carry away the Eurozone banking system. At the time, the Euro had fallen to much lower levels than those seen today…only to rise again several weeks later. For those who wish to understand the current media position, we suggest a re-read of the GEAB N°33 public communiqué.

(6) The fact that a Frenchman is its head changes nothing.

(7) Source: Le Figaro, 02/12/2010.

(8) That said, media manipulation in this area is remarkable. These last few days one has seen/read/heard almost everywhere that 'huge sums' have been bet on a fall in the Euro, some eight billion US Dollars. In fact this "huge sum" is only a drop in the ocean of the world currency markets which turn over several hundred billion USD a day. Source: Financial Times, 02/08/2010

(9) With the same highly constructive 'regard' for the countries where it operates as that which led it, in the United States in 2006/2007, to provoke a fall, for its own benefit, in the value of real estate based financial products which it had sold to its own clients.

(10) Sources: Spiegel, 08/02/2010; Le Temps, 13/02/2010; Reuters, 09/02/2010.

(11) During Italy's preparation for Euro entry, he was Director General of the Italian Treasury. Sources: Bank of Italy; Wikipedia; Goldman Sachs.

(12) Very strongly supported by the London and American financial milieux, to which we have already alluded several months ago in one of our reports and, of course, by Silvio Berlusconi. Source: Sharenet/Reuters, 02/10/2010.

(13) His strongest adversary is Axel Weber, current head of the Bundesbank.

(14) What would be surprising is that the European head of the bank making a loan intended to hide a portion of a country's public deficit, and himself the former Treasury head of a neighbouring country, should not be aware of such an undertaking.

(15) And, considering his past positions, one can only appreciate his sense of humour when he calls for a reinforcement of Eurozone economic management. Source: Les Echos, 02/13/2010.

(16) Which, for the present, satisfies itself by copying articles from the Anglo-Saxon press casting the Greek case in the role of "wrecker of world markets" repeating at length that the Euro will fall whilst it trades at a level which the same media thought it impossible to achieve only four years ago.

(17) Source: Reuters, 02/12/2010.

(18) He belongs to that generation of Americans who built the "post-WWII US (economic) empire", who know its weak points and exactly how it works, contrary to Summers, Geithner and others like Rubin. Our team rarely compliments Barack Obama, but if he continues to listen to the likes of Paul Volcker, he is definitely moving in the right direction.

(19) Our team knows, from first-hand knowledge, that there once was a time, thirty years or so ago, when investment bankers would take action having the long term interests of their clients at heart. This period is long gone and now banks and bankers only act in their own short-term interests [[often to the detriment of their own clients, the national and international banking systems, including their own future prospects, and society at large: normxxx]]. From this, we should draw the inevitable conclusions and exclude them from access to key posts in the public service, rather than try to reform their behavior. If there were 'child' investment bankers (as there are 'child soldiers') one could, perhaps, hope to save a number of them from their addiction to short-term[[, selfish: normxxx]] profits, but for 'adult' investment bankers, it's far too late.

(20) Source: Times, 11/08/2009.

(21) For the private sector, ask Lehman Brothers, AIG… they will confirm its accuracy.

Harvard’s Rogoff Sees Sovereign Defaults

Harvard’s Rogoff Sees Sovereign Defaults, ‘painful’ Austerity

By Aki Ito and Jason Clenfield | 3 March 2010

Feb. 24 (Bloomberg)— Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks. Following banking crises, "we usually see a bunch of sovereign defaults, say in a few years," Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. "I predict we will again."

The U.S. is likely to tighten monetary policy before cutting government spending, sending "shockwaves" through financial markets, Rogoff said in an interview after the speech. Fiscal policy won't be curbed until soaring bond yields trigger "very painful" tax increases and spending cuts, he said. Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s.

The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast. "Most countries have reached a point where it would be much wiser to phase out fiscal stimulus," said Rogoff, who co— wrote a history of financial crises published in 2009. It would be better "to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation."

Failed Marriage

Rogoff, 56, said he expects Greece will eventually be bailed out by the IMF rather than the European Union. Greece will probably announce an austerity program "in a few weeks" that will prompt the EU to provide a bridge loan which won't be enough to save the country in the long run, he said. "It's like two people getting married and saying therefore they're living happily ever after," said Rogoff. "I don't think Europe's going to succeed."

Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S., he said. The IMF forecast in November that gross U.S. borrowings will amount to the equivalent of 99.5 percent of annual economic output in 2011. The U.K.'s will reach 94.1 percent and Japan's will spiral to 204.3 percent.

"In rich countries— Germany, the United States and maybe Japan— we are going to see slow growth. They will tighten their belts when the problem hits with interest rates," Rogoff said at the forum, which was hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France's largest retail bank. Japanese fiscal policy is "out of control," he said.

Euro Concerns

So far concerns about the euro zone's ability to withstand the deteriorating finances of its member nations have outweighed the U.S.'s deficit woes, propping up the dollar. "The more they suck in Greece, the lower the euro goes, because it's not a viable plan," Rogoff said. "Clearly the dollar is going to go down against the emerging markets— there's going to be concern about inflation and the debt."

The dollar has surged more than 9 percent against the euro in the past three months. Ten-year Treasuries yielded 3.72 percent as of 10:16 a.m. in New York. The U.S. government will delay any efforts to contain the deficit until Treasury yields reach around 6 percent to 7 percent, Rogoff said. "The U.S. is in a state of paralysis in its fiscal policy," he said. "Monetary policy will tighten first, and I don't think it's the right mix."

Fed Exit

The Federal Reserve last week raised the discount rate charged to banks for direct loans, and plans to end its $1.25 trillion purchases of mortgage-backed securities in March. President Barack Obama's administration is proposing a $3.8 trillion budget for fiscal 2011 to spur the recovery. "When they start tightening monetary policy even a little bit, it's going to send shockwaves through the system," Rogoff said.

In an interview a month before Lehman Brothers Holdings Inc. went bankrupt in 2008, Rogoff said "the worst is yet to come in the U.S". and predicted the collapse of "major" investment banks. His 2009 book "This Time Is Different," co— written with Carmen M. Reinhart, charts the history of financial crises in 66 countries. "We almost always have sovereign risk crises in the wake of an international banking crisis, usually in a few years, and that's happening," he said. "Greece is just the beginning."

Greece's debt totaled 298.5 billion euros ($405 billion) at the end of 2009, according to the Finance Ministry. That's more than five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001. The cost of protecting Greek bonds from default surged in January, then declined this month as concern eased over the country's creditworthiness.

Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That's up from 171 at the start of December. "Greece just highlights that one of those risks is sovereign default," said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. Still, "it doesn't justify the situation where we're all in a panic and going back to cash as in the post-Lehman shock."

ߧ

Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

What Will The Market Look Like Over The Next 17 Years?

What Will The Market Look Like Over The Next 17 Years? October, 2001.
Click here for a linkto ORIGINAL article:

[ Normxxx Here:  So far, right on target.  ]

By Sy Harding, Streetsmartreport

The stock market is, always has been, and probably always will be, the best investment area available, better than real estate, bonds, collectables, etc. But to keep it so, it's very important that investors pay attention to reality, and factor in a market strategy that will take advantage of the type of market that can be expected looking forward, not backward. Let's have a look from another perspective at what kind of market we can expect in the future, by looking at a breakdown of the market's patterns over the last 100 years, at how strong periods were repeatedly followed by weak periods, and vice versa. Basically, the last hundred years can be divided into six periods:

1901-21: 20 years of a sideways to down secular bear market.

The market made zero gains or losses for a buy and hold investor who held through the entire 20-year period. Expressed that way it sounds like a profitless but easy period to hold through. However, it was far from that, since there were six bear-markets, in four of which the Dow lost more than 40%.

A horrible time for buy and hold investors. But then there were few, if any of those. Market-timing and intermediate-term trading was the only acceptable strategy, made popular by the big-names of the time. Joseph P. Kennedy, Walter Chrysler, Bernard Baruch, Vanderbilt, J.P. Morgan, and hundreds of others who became extremely wealthy [[§oor not! §c: normxxx]] following that latter strategy, taking profits as rallies became over-extended, buying back at the low prices after a decline and, even more so, selling short to make additional gains from the downside.


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

That period was followed by:

1921-29: 8 Years of a strong secular bull market.

The market averaged 25% gains per year for eight years without a serious correction, causing investors to adopt a buy and hold approach (just in time for the 1929 crash, and the worst bear market in history— 1929-32— in which the Dow had lost 90% of its value at its low). The period was very similar to the recent 1991-2000 bull market which broke the 1921-29 record for longevity by one year, and also allowed Wall Street to convince investors, once again, that a buy & hold strategy would work.

The 1921-29 period was followed by:

1929-49: The worst 20-year period in the last 100 years.

Only market-timers like Joseph P. Kennedy, Bernard Baruch, and the other famous names, whose strategy had always been to take their profits near the rally tops and sell short for declines, emerged unscathed from the 1929 crash and 1929-32 bear market. In fact not only unscathed, but much more wealthy thanks to shorting the bear market. During the entire 20 year period of 1929-1949, the market remained well below its 1928, 1929 levels. But again, while it was a poor investing time for buy and hold investors, it was a great time for market-timers.

There were six bear markets in those 20 years, including the 1929-32 bear in which the market lost 90% of its value at its low, and five others in which the Dow lost from 23% to 49%. (They don't look like much in this chart due to the devastating plunge from 1929 to 1932.) Meanwhile, market-timers had opportunities to make huge gains from both the upside and downside. (For buy & hold investors the market didn't 'come back' to its 1929 level for 26 years.


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

That period was followed by:

1949-66: 17 years of a strong secular bull market.

The market returned to a positive period. It averaged annual gains of 14% per year over this 17-year period.

This strong 17 year period was followed by:

1966-1982: 16 years of a sideways to down secular bear market.

During this 16-year period, as the following chart shows, the market again made no gains for buy and hold investors, who were devastated by the inflation of that period. (Adjusted for inflation, the stock market plunge in the early '70s matched that of the 1929-32 bear.) But for market-timers and traders there were again serious corrections and bear markets of up to 45%, ample opportunities to make gains over and over again from both the upside and from short-sales on the downside. In the end, market-timing strategies were just about the only strategies considered by investors, so seriously burned were they by their occasional sojourns into buy and hold investing. And Gold was king— at least until 1980.


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

That 16-year period of no gains for buy and hold investors was followed by:

1982-2000: 18 years of strong secular bull market.

And here we had an 18 year period of the last secular bull market, when the S&P 500 averaged sizable annual double-digit gains. During the period there was the 1987 crash, the 1990 cyclical bear market, and a decline in 1998 of 19% for the S&P 500 and 35% for the Nasdaq. However, from the 1990 low, the market treated investors to a long, unidirectional bull market, during which there was not even a 10% pullback until 1998, setting an all-time record for one-sided volatility.

And that, coupled with the record setting gains as the 1995-99 bubble continued to expand, enticed investors in as never before. The S&P 500 gained from 20% to 25% a year for four years in a row in the final four years. Investors were again enticed to adopt a buy and hold strategy, just in time for the 2000-2001 bear market plunge.

And that 17-year period will be followed by:

2000— ? : Most likely a 10 to 18 year period of sideways to down secular bear market, within which there will be numerous cyclical bull markets like that of 2002-2007.

The last completed period, 1982-2000, was an 18 year strong period. If history, and the above record of positive perioids being followed by negative periods is any guide, the next period from 2000-? will be one like those of 1901-1921, 1929-45, and 1966-82, when buy and hold investors made zero, but market-timers and those willing to take intermediate-term trades, could benefit big-time, with few stagnant periods when the market is not moving one way or the other.

  M O R E…

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Don't Go Wobbly On Us Now, Ben Bernanke

Don't Go Wobbly On Us Now, Ben Bernanke

Barack Obama's home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget."

By Ambrose Evans-Pritchard | 28 February 2010

The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. "It's a catastrophe", said the Schools Superintedent.

In Alexander County, the sheriff's patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid. Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5%, and imposed a 5% levy on pension fees.

The Economic Policy Institute says states face a shortfall of $156bn in fiscal 2010. Most are banned by law from running deficits, so they must retrench. Washington has provided $68bn in federal aid, but that depletes the Obama 'stimulus' package.

This is not to pick on America. Belt-tightening is the oppressive fact of 2010-2012 for half the world. Hungary, Ukraine, the Baltics and the Balkans are already under the knife. Latvia's economy may contract by 30% from peak to trough as it carries out an "internal devaluation", ie wage cuts, to hold its euro peg.

The eurozone's fiscal squeeze is well advanced in Ireland. Brussels has told Greece to cut by 10% of GDP in three years, Spain by 8%, Portugal by 6%. Britain must slash soon, or face a gilts strike.

The Bank for International Settlements says Britain needs a primary surplus of 5.8% of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4% for Japan, 4.3% for the US and France. It warns of "unstable dynamics", posh talk for a debt spiral. "Action is needed now."

Indeed, though cutting too fast would tip the West back into slump and kill tax revenues, solving nothing— a risk that austerity priests rarely acknowledge. Pacing is everything. Mervyn King, the Bank of England's Governor, seems strangely alone in facing the implications of this for central banks, and in seeing the absurdity of a recovery strategy where everybody tightens at once and surplus states keep on dumping excess capacity abroad.

"I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can't be true of everybody," he said.

The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus— QE, of course— to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract. Bank loans in the US have fallen at a 14% rate this year, caused in part by Basel III rules pushing banks to raise capital ratios.

The M3 money supply has fallen at a 5.6% rate since September. The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week. The contraction of eurozone bank credit to firms accelerated to 2.7% in January, while M3 fell by a further €55bn. Japan's GDP deflator has dropped to a record low of -3%.

These are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11% in January to 309,000 units, the lowest since data began, and 24% of mortgages are in negative equity.

Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press". Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our 'debt bubble'. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1% in January. They plummet from here.

So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt?

Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench— as they must— their central banks must stay super-loose to cushion the blow. Otherwise, all sink into the deflationary quicksand.

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Present Conditions

Hussman Investment Trust: Present Conditions

[ Normxxx Here:  TheIntermediate to LongTermPerspective.  ]

By John P. Hussman, Ph.D. | 1 March 2010

As we enter 2010, the most important headwinds facing the U.S. stock market are rich valuation and continuing credit risks. Market valuations are certainly better than they were at the market peak in 2000. However, the S&P 500 Index ended 2009 at valuations which are characteristic of those found at prior market peaks including 1972 and 1987. From such valuations, durable market returns have typically not emerged, so whatever merit there might be in accepting market risk is decidedly speculative and short-term.

While near term market returns are extremely difficult to project, it is possible to calculate fairly reliable projections of long-term total returns for the S&P 500, because over the long-term, stock prices track "smooth" fundamental measures such as revenues, cash flows, and normalized (cyclically-adjusted) earnings. For example, over the past century, S&P 500 earnings have fluctuated widely due to economic expansions and recessions, yet they have followed a very well-behaved growth trend when measured from peak-to-peak across economic cycles.

One historically reliable method of projecting longterm market returns is to apply a reasonable range of price/earnings multiples to those future "normalized" earnings. Even assuming that the long-term trend of S&P 500 earnings will remain intact despite deleveraging pressures and a continuing collapse in bank lending, we estimate that the S&P 500 is currently priced to deliver annual total returns averaging just 6.1% over the coming decade. This is certainly better than the similar calculation in 2000, which correctly projected a negative total return.

Unfortunately, it is also the lowest projected return that has historically been observed outside of the late-1990's stock market bubble and a handful of previous market peaks such as 1987. This is not an argument that stocks must decline in the near-term, but it presents a difficult obstacle to risk-taking, because it suggests that further market advances may not be durable. Meanwhile, the U.S. currently faces a predictable wave of resets on Alt-A and Option-ARM mortgages, of approximately the same size as the wave of sub-prime resets that ended in early 2009.

These Alt-A and Option-ARM structures were specifically designed as "teasers" with low interest rates and temporarily optional principal payments— allowing loans to be made without documentation of creditworthiness, in return for post-reset interest terms that were generally higher than a documented lender would have paid. This "yield spread premium" tends to be particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume that they now sport very high loan-to-value ratios.

From our perspective, the combination of deeply underwater mortgages, tepid employment conditions, and a heavy mortgage reset schedule creates a large threat of further credit losses. The loose-handed government bailout of financial institutions in early 2009 had the result of driving up the values of a wide variety of risky investments, driving the the yields of junk bonds and other low-grade debt to levels that existed in 2008, prior to the onset of major difficulties. While it might be considered natural for investors to bid up risky assets when they feel confident that the government will bail them out if they are incorrect, investors have now placed themselves in a position of relying on such bailouts, while at the same time earning low returns as compensation for the probable volatility.

Stagnant personal income and depressed corporate cash flows appear no more capable of servicing record amounts of debt today than they were at the beginning of this crisis. As a result, consumer credit and bank lending have continued to collapse, despite widespread perceptions of a fresh economic recovery. The depth of this collapse in credit is unprecedented in post-war data.

Historically, sustained economic expansions have commenced with rapid growth in debt-financed classes of spending such as housing, automobiles, durable goods, and capital spending. Recent economic growth has instead been driven primarily by temporary government stimulus, which has offset the erosion in private lending in recent quarters. In the credit markets, the past two years have seen an enormous issuance of new government liabilities.

The amount of U.S. Treasury debt held by the public (outside of agencies such as the Social Security Administration and the Federal Reserve) has already surged by more than 50%, from $5.05 trillion to $7.55 trillion, and record fiscal deficits continue to mount. Meanwhile, the Federal Reserve has expanded the U.S. monetary base from $850 billion to $2.02 trillion, fueled by aggressive purchases of Fannie Mae and Freddie Mac's mortgage-backed securities. As Fannie Mae and Freddie Mac have deeply insolvent balance sheets, their securities can be gradually made whole only with bailout funds obtained by issuing more U.S. Treasury debt.

It is in this context that we should consider inflation risks over the coming decade. At present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the next few years, that complacency is probably well founded, as fresh credit concerns are likely to create additional "safe haven" demand for default-free government liabilities. From a longer-term perspective, however, I believe that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years. [[Even allowing for compensating adjustments in income sources, that's likely to represent about a 25% 'haircut' in the standard of living, with those on 'fixed-income' suffering the most.: normxxx]]

While the near-term case for inflation hedges appears fairly weak, I expect that we will gradually accept greater exposure to commodities and inflation-protected securities in the Strategic Total Return Fund in the coming years, particularly in response to occasional price weakness. Historically, inflation has been much better correlated with the growth of government spending than with the growth of the monetary base itself. This is particularly true over horizons of four years and beyond.

Ultimately, a massive expansion in government liabilities can do little but undermine the value of the U.S. dollar relative to real goods and services. Our willingness to accept market risk is essentially proportional to the expected return that we anticipate as compensation. Accordingly, we look to adopt a greater exposure to market risk when the expected return from accepting risk increases, or when the expected range of outcomes becomes narrower. The past decade has been challenging in that the S&P 500 has delivered a great deal of volatility, but no net return at all.

That environment has made it difficult to accept substantial market risk for any extended period of time. Presently, two things would improve this situation. One is clarity, the other is better valuation. First and foremost, over the next few quarters, we are likely to discover the extent to which "second wave" credit risks materialize. It is not necessary for the nation to work through all of its economic problems in order for us to accept a constructive position.

However, the most hostile market declines have often been associated with problems (overvaluation, credit strains) that were developing for some time but whose risks were dismissed or underestimated. Presently, what we need most is for several latent problems to become more observable, so that we can have greater clarity about their extent. Among these are the likelihood of surging delinquencies tied to Alt-A and Option-ARM loans, the requirement beginning in January that banks and other financials bring "off balance sheet" entities onto their books, and clarity about the disposition of a mountain of mortgages that are already seriously delinquent, but where foreclosure has been temporarily delayed.

Improved valuations, combined with better clarity, can be expected to move us to a more constructive investment stance. I expect that we will resolve the "two states of the world" issue during the coming quarters, which itself will narrow the range of possible outcomes and— especially if prices retreat— allow us to accept greater amounts of risk in response to improvements in valuations and market action. I look forward to greater optimism as we move through 2010. In any event, I remain focused on our goal of outperforming the major indices over the complete (bull-bear) market cycle, while reducing the impact of periodic market losses. We continue to achieve our objective in that regard.

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Normxxx     ______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Be Conservative Not Conventional

Investment Strategy: "Be Conservative Not Conventional"

By Jeffrey Saut | 1 March 2010

We think 2010 is a transitional year where being "conservative not conventional" is the preferred investment strategy. Accordingly, we like high quality "growth" over "value" and are avoiding companies with highly leveraged balance sheets. We are also looking for companies whose earnings forecasts are being revised upwards, as well as companies with dividend yields. We prefer large capitalization stocks because the drag on relative performance from narrowing credit spreads is waning.

Moreover, the current economic, and credit, environments are worse for small/mid-caps; and, large caps tend to outperform when the economic momentum peaks as it appears to be doing. Further, large capitalization companies' P/E multiples are 20% below those of the small/mid-cap complexes. That said, we are always interested in special situations, no matter what their capitalization flavor.

If indeed this turns out to be a transitional year, we think investors should employ a more dynamic strategy in part of their portfolios. This does not mean we favor the "rapid fire" strategy of trying to day-trade, or even trade on a week-to-week basis. Rather, we favor waiting until the risk/reward ratio is tipped so far in our favor that if we are wrong, we will be wrong quickly with a de minimis loss of capital. For example, we entered 2010 in a pretty cautious mode, worried that the first few weeks of the new year have historically been tricky.

Subsequently, we determined the equity markets had fallen into a "selling stampede". Knowing that such stampedes tend to last 17 to 25 sessions we remained cautious, but continue to add stocks to our "watch list". Following the climatic downside deluge of February 4th and 5th, we opined the stampede was abating and recommended tranching into (read: buying partial positions in) some of the stocks on our various lists. We still feel that way.

That positive view was reinforced last week when the 10-day exponential moving average (EMA) crossed above the 30-day EMA. Additionally, the 50-DMA is turning up and on February 5th the number of S&P 500 stocks above their respective 50-DMAs had shrunk from 92% to ~19%. While that oversold reading has been somewhat corrected by the ensuing rally, roughly 50% of the S&P 500 stocks still remain below their 50-DMAs. Then there was this insight from Minyanville professor Tony Dwyer:

"One indicator that has proven to be an excellent short and intermediate-term buy signal for the S&P 500 is when the percentage of NYSE issues trading above their 10-DMA drops below 10%. The most recent signal was (on) 2/18/10, which represents only the 8th unique instance (rapid multiple signals following the first signal are ignored) in the past 30 years. The average one month gain following the first signal was 5.4%, with a maximum gain of 11.2% and the worst case (and only) loss of 1.31% in 1991."

Hence, we continue to believe the "selling stampede" is over. To us the question then becomes, will we extend the current rally off February's "hammer lows," or will the pattern resemble that of the 1978 and 1979 "October Ouches" whereby the DJIA lost between 10 - 12% in a few short weeks and then based for a month, or two, before giving investors a decent rally. Worth noting is that the DJIA never went decidedly below those "hammer lows," as can be seen in the attendant chart.

In past missives we have suggested many names for your consideration like CVS (CVS), Cenovus Energy (CVE), Home Depot (HD), Alpha Natural Resources (ANR), and numerous others that can be retrieved from previous reports. And as an aside, China reported last week that it has spent record sums on the importation of coal and liquefied natural gas, which is clearly positive for coal names like Walters Energy (WLT). This morning we give you yet another special situation, namely Goodrich Petroleum (GDP) using its 7.5%-yielding convertible preferred (GDPAN/$35.60). As always, terms and details should be vetted before purchase.

The call for this week: Recently, various economic reports have softened. Why this should come as a surprise is a mystery to us given the stock market's decline, the employment situation, a political environment that is disgusting on both sides, and a winter that is now legend. However, "Life isn't about waiting for the storms to pass. It's about learning to dance in the rain"! Clearly, we are currently "dancing," thinking the "selling stampede" is over with the only question being, "do we extend the rally off of the February 4th and 5th 'hammer lows,' or do we base for awhile as in the aforementioned 1978/1979 examples"? What does concern us was best written by East Shore Partner's creditable Joan McCullough. To wit:

"George Will said it best when he talked about the equality of opportunity vs. the equality of outcomes. Where the former requires self-determination, the latter requires dependence on the government. Make no mistake about it, we are now all about the 'equality of outcomes,' where it only matters, for example, that all adults by age 21, will have 4-year college degrees regardless of ability to write a coherent sentence or multiply 3 x 2."

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

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Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Markets Poised To Punish Spain

Markets Poised To Punish Spain

By Victor Mallet, FT | 28 February 2010

Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, needed only one sentence to summarise the daunting scale of the challenges facing his country. "Unfortunately," he told a conference last week, "we find ourselves at a historic moment". With characteristic tartness, he was referring to Spain's urgent need to curb public spending and liberalise a labour market that has left more than 4m people unemployed. Reforms are needed to make the economy more competitive and give the Socialist government's austerity plan at least a chance of success.

Whatever happens in Athens, and regardless of whether stronger economies such as Germany are finally obliged to rescue the crisis-stricken Greeks, it is all but certain that the markets will soon turn their icy gaze once more on the other vulnerable economies of the eurozone. Spain's economy is four times the size of Greece's. It is by far the largest of the budgetary laggards that will be facing renewed scrutiny, and probably higher financing costs, in the sovereign debt markets.

The crucial issue for Spain and its European neighbours is the credibility of its "stability plan". Spain's government outlined sharp cuts in government spending, including a near-freeze on hiring civil servants. It aims to reduce the deficit from 11.4 per cent of gross domestic product last year to 3 per cent of GDP in 2013. Although it will have no short-term impact, Madrid has also proposed increasing the retirement age to 67 from 65 to secure the financial health of the pensions system.

José Luis Rodríguez Zapatero, prime minister, faces an uncomfortable spring, for very few economists, analysts or foreign investors are convinced either that the plans are plausible or that the government has the will or ability to implement them. "It is all air," said Luis Garicano, professor of economics and strategy at the London School of Economics, "just ideas that for the most part the government cannot put in place by itself, particularly on pensions or public employees". Nomura said it was "not convinced" that the austerity plan could be implemented. Standard & Poor's, the rating agency, predicted that the budget deficit would stay above 5 per cent of GDP until 2013, well above the eurozone's widely abused 3 per cent limit.

Critics of the austerity plan, which has been sent to Brussels for approval, point to three main obstacles. First, its economic forecasts are over-optimistic. Second, central government has direct control over only about a quarter of expenditure, with the rest disbursed by autonomous regional governments and the social security system. Third, the Socialists lack the necessary will. When they talk to foreigners, Spanish ministers say they are determined to do whatever it takes to restore order to their public finances. But when they address their supporters at home, they emphasise plans to maintain social spending.

The result is confusion and disarray. While José Manuel Campa, deputy finance minister, was sweet-talking bond investors in London with talk of budget discipline, José Blanco, public works minister and a senior Socialist, was back home berating foreign "speculators" and hinting at a foreign media plot against Spain and the euro. And a day after another deputy minister suggested the possibility of a public sector pay freeze to bolster the budget plans, Elena Salgado, finance minister, ruled out any such thing.

Mr Zapatero and his ministers, like their foreign peers, deserve some sympathy for their post-Keynesian hangover. At a meeting in London this month Mr Zapatero recalled that the same organisations and markets that had demanded massive fiscal stimulus to avert an economic depression were now complaining about the resulting fiscal deficits. "What a paradox. What a contradiction," he said.

The bad news for Mr Zapatero and other deficit-burdened European prime ministers is that the markets, impersonal yet fickle, do not give a damn about paradoxes or who was to blame yesterday for a problem today. Spain must, for its own sake and that of the eurozone, implement the measures announced with unwavering determination— and make them even tougher if the recession lasts longer than expected. Ms Salgado and her colleagues say they will do just that. The problem is that not enough people believe them.

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Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.